Key Points
Five Below had a strong quarter due to store traffic and new store openings.
The guidance for the crucial holiday quarter was satisfactory and possibly cautious.
There is an expectation for revenue and earnings growth to accelerate in the next fiscal year.
5 stocks we like better than Five Below
Some concerns have been raised about Five Below NASDAQ: FIVE being overvalued, as it is trading at 34X this year’s earnings. However, some factors suggest that this stock is still undervalued compared to its peers and its outlook. The company is well-positioned in the off-price retail space and resonates with consumers, positioning itself for robust growth over the next few years. It is valued higher than peer TJX Companies NYSE: TJX, the off-price leader trading at 23X, but only marginally. There is ample room for the company to grow into its value and surpass it.
The consensus estimate for next year’s earnings implies a value of 28X and is likely low given the results in 2023. The company is on track to continue opening stores, entering new territories, and expanding its reach in existing ones. This indicates that Five Below’s revenue and earnings growth is expected to accelerate over the next year or two, compounded by increased leverage and a widening margin.
Shares of Five Below rose after an above-consensus quarter
Five Below had a solid quarter, demonstrating the value of off-price retail and its position within the segment. The company reported $736.4 million in net revenue, marking a 14.2% gain compared to the previous year. This outperformed the consensus estimate by 1000 basis points and surpassed the 9% growth of TJX Companies, the 5% decline of Walmart’s NYSE: WMT, and the 5% decline of Target’s NYSE: TGT.
The revenue gains were driven by a 2.5% comp offset by a slight reduction in the ticket average. Additionally, strong store traffic remained a key driver of the business. The company also opened 74 new stores in the quarter and is on track to surpass the 200-store target for F2023. The margin news is also favorable to shareholders, as the gross margin contracted and SG&A expenses increased YOY but less than expected. This resulted in a $0.03 reduction in YOY GAAP earnings, but the $0.26 reported was $0.03 better than expected and compounded by solid guidance.
The company’s Q4 guidance was raised to a range bracketing the consensus estimate, allowing for potential outperformance. Revenue growth is expected to accelerate to nearly 18% and come with wider margins and earnings growth. Earnings are projected to grow by almost 19%, and the guidance is likely cautious due to economic uncertainties.
Share repurchases and solid financials will support the market
Five Below is among the most financially sound retailers on the market today. The company boasts a strong balance sheet, with cash up more than 4X YOY, solid inventory, and increasing assets. Debt and leverage are remarkably low, with total liabilities accounting for less than 0.7X assets. This provides a healthy free cash flow that can be used to fund growth and repurchase shares.
The company repurchased $80 million in shares during the Q3 and announced a new buyback allotment. The board retired the previous authorization but announced a new one worth $100 million over the next few years. Based on the $80 million repurchased in Q3 and the growth outlook, the company could easily use up the authorization and add to it ahead of schedule.
Analysts are driving Five Below shares to new highs
Analysts’ activity has been mixed over the past year, leading to a bullish trend in the price target. The consensus of 40 ratings is a Moderate Buy with a target of $216. This represents a 25% YOY increase and is 16% above the current action. Furthermore, the technical outlook is promising, as recent action has the stock price breaking out of a Head & Shoulders Bottom pattern to the upside. The market is up about 1.5% now and on track to test resistance at $193; if it surpasses this level, a move into the $200 to $240 range is expected.
Overall, while Five Below currently has a “Moderate Buy” rating among analysts, top-rated analysts believe that there are five other stocks that are better buys.View The Five Stocks Here.Five Below’s future is supported by sound financials, store expansion, and a favorable outlook.
