Here's Why Five Below Gains More Than 65% in Past Six Months
Five Below, Inc. FIVE continues to impress investors with its robust business strategies. Certainly, the company’s digital strategy, expansion of supply-chain network, enhancement of stores and distribution capabilities, and focus on merchandise assortment, including essential items, bode well. A robust second-quarter fiscal 2020 performance is further adding sheen to the stock. This Philadelphia, PA-based company’s shares have appreciated 66.2% over the past six months, rallying ahead of the Retail-Wholesale sector’s 50.7% growth and the broader S&P 500’s 33.6% increase. Meanwhile, the industry registered a 60.3% increase.
Markedly, Five Below’s comparable sales have been gaining traction since the stores started reopening in late April, and subsequently all of its stores were opened by the end of June. In fiscal second quarter, comparable sales for the reopened period grew roughly 6%, with stores increasing approximately 4% and e-commerce contributing approximately 2% to the improvement. Management also informed that so far in the third quarter through Sep 2, total comparable sales are tracking up approximately 6%.
Let’s Analyze Further
Five Below’s omni-channel endeavors to drive growth are quite appealing. The company has been working on digitizing vendor transactions and implementing a core merchandizing platform. Further, it rolled out curbside pickup, launched the app and looks to accelerate the buy-online, pick-up-in-store (BOPUS) business model. Notably, e-commerce sales grew more than four times in the second quarter of fiscal 2020, representing a low-single-digit percentage of total sales.
Now talking of its store-related efforts, the company recently achieved a major milestone by opening its 1000th store at Brookhollow Marketplace in Houston, TX. Besides, it announced that it has begun shipping merchandise from a new distribution center in Conroe, TX. This 850,000 square feet center currently employs 115 workers and offers services to more than 170 Five Below stores across Texas, Southwest and West Coast markets.
For fiscal 2020, management plans to open 110-120 net new stores with the expectation to end the year with 1,010-1,020 stores or unit growth of 12-13%. As customers consolidate trips and prioritize health, safety and convenience, Five Below has been adding more essential households and wellness products at compelling prices. In addition to the hand sanitizers, wipes and masks, the company now offers new home and personal-care essentials, including kitchen and bath products. These are expected to keep fueling comparable sales ahead.
In general, stiff competition and a highly promotional environment, coupled with evolving consumer behavior owing to the coronavirus outbreak, might act as headwinds for the company. Margins have also been soft for a while. While occupancy-cost deleverage and the timing of certain merchandise costs that shifted from the second quarter to the third quarter in the prior year hurt gross margin in fiscal second quarter, lower gross margin solely marred the operating margin. Management anticipates third-quarter operating margin to decline marginally. After containing and delaying expenses in the first half of fiscal 2020 owing to the pandemic, the company is restoring expenses in the back half of the year. Nevertheless, management informed that it expects to return to a more normalized gross margin in the final quarter of fiscal 2020.
Wrapping Up
Given the impressive prospects including prudent digital and store-growth strategies, we expect Five Below to be poised well to deliver growth. A VGM Score of B is further highlighting this Zacks Rank #3 (Hold) stock’s upside story.
Key Picks in Retail
Zumiez ZUMZ delivered an earnings surprise of 41.2% in the last four quarters, on average. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Sportsman's Warehouse Holdings SPWH, also a Zacks Rank #1 stock, delivered an earnings surprise of 64.8% in the last four quarters, on average.
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