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Five Below (FIVE) Up 1.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Five Below (FIVE - Free Report) . Shares have added about 1.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Five Below due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Five Below Up on Q2 Earnings & Sales Beat, Raised View

Five Below, Inc. continued with its remarkable streak of positive earnings and sales surprises, when it reported second-quarter fiscal 2018 results. The company also maintained a decent year-over-year improvement in both the top and bottom lines, with the seventh successive quarter of comparable-store sales growth.

The figures not only surpassed analysts’ expectations but also beat management’s guidance. Consequently, better-than-expected results prompted the Philadelphia, PA-based company to raise the fiscal 2018 view.

Let’s Delve Deep

Adjusted earnings of 42 cents a share beat the Zacks Consensus Estimate of 38 cents and soared 40% year over year. Additionally, the bottom line exceeded the company’s guided range of 36-38 cents a share.

Net sales grew 22.7% to $347.7 million from the year-ago quarter and also came ahead of the Zacks Consensus Estimate of $335 million. Further, the top line surpassed the company’s guided range of $332-$335 million.

Comparable sales (comps) increased 2.7% in the reported quarter and surpassed the company’s previously provided guidance of flat comps due to 3.4% jump in the average dollar value of transactions partly offset by a 0.7% fall in the number of transactions. However, the rate of growth decelerated from 3.2% in the preceding quarter.

Gross profit improved 23.6% year over year to $121.8 million and gross margin expanded 20 basis points to 35%. Improved gross profit led operating income to jump 15.7% to $30.4 million in spite of higher SG&A expenses. However, operating margin contracted 60 basis points from the year-ago quarter to 8.7%. As a percentage of sales, SG&A expenses increased approximately 80 basis points to 26.3% in the quarter.

Financials

Five Below ended the quarter with cash and cash equivalents of $133.3 million and short-term investment securities of $131.4 million. Notably, the company had no debt and total shareholders’ equity of $508 million at the end of the reported quarter.

During the 26-week period ended Aug 4, 2018, the company had net cash from operating activities of $44.4 million and incurred capital expenditures of $46.5 million. Management expects to incur capital expenditures of roughly $130 million during fiscal 2018 on new store openings, distribution center, current store base and infrastructure.

Store Updates

During the quarter, the company opened 34 new stores, taking the count to 692 stores across 33 states, reflecting a year-over-year increase of 18.5%. The company plans to launch 125 new stores in fiscal 2018. During the third quarter, the company expects to open about 50 stores. The company also sees a potential of 2,500 plus stores in the long run.

Outlook

Management is quite impressed with quarterly performance. Meanwhile, the company is committed to strategic initiatives such as enhancement of digital and e-commerce channels, improvement in customers’ shopping experience, store openings as well as marketing efforts.

Five Below envisions fiscal 2018 net sales in the range of $1.528-$1.540 billion, with comparable sales expected to increase 2.5-3%. Net sales show a rise of 21-22% year over year. For the third quarter, management anticipates net sales between $301 million and $304 million and comparable sales growth of 3-4% compared with 8.5% in the year-ago quarter. Net sales show an increase of 17-18% year over year.

The company forecast third quarter and fiscal 2018 earnings in the range of 17-19 cents and between $2.51 and $2.57 per share, respectively.

Five Below had earlier guided fiscal 2018 net sales in the range of $1.502-$1.517 billion and earnings between $2.42 and $2.48 per share.

The company expects third-quarter operating margin decline of 100 basis points principally due to tax reform-related investments. It expects the metric to shrink again by 100 basis points in the fourth quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 14.46% due to these changes.

VGM Scores

At this time, Five Below has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Five Below has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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