Five Below (FIVE) is trading modestly lower despite reporting Q3 (Oct) impressive earnings/guidance last night. In case you're not familiar, FIVE is sort of like a dollar store but instead of a dollar, all the merchandise is $5 or less, hence the name, "Five Below." It focuses on extreme-value merchandise to the teen and pre-teen market.
Its assortment of merchandise includes everything from sporting goods, games, fashion accessories and jewelry, to hobbies and collectibles, bath and body, candy and snacks, room decor and storage, stationery and school supplies, video game accessories, books, DVDs, iPhone accessories, novelty and "gag," and seasonal items. While the focus is on teens and pre-teens, there are quite a few items for adults as well, particularly cheap accessories for mobile phones.
Five Below is based in Philadelphia and got its start there. It opened its first store in 2002 and started out by expanding aggressively across the eastern half of the US but it has entered other regions as well. It has grown from 102 stores in 2010 to about 200 stores at the time of its IPO in July 2012. It currently operates over 600 stores in 32 states.
FIVE says new store growth remains its number one priority, as it's only about a quarter of the way to its 2,000+ store potential. In fact, its 2016 openings is tracking to be its strongest class ever. It's important to remember that 85% of FIVE's top line growth comes from new store growth, and this remains one of the core drivers of its planned 20% annual sales growth until 2020. Looking ahead to 2017, FIVE plans to enter the California market as it expects to open its initial wave of stores in Southern California in 1H17.
Turning to the Q3 (Oct) results, EPS rose 80% YoY to $0.18 from $0.10 in the prior year period. This was well above prior guidance of $0.11-0.13. Revenue rose 28.9% year/year to $257.2 mln, also a good bit above prior guidance of $241-246 mln. For the all-important holiday Q4 (Jan) period, FIVE expects EPS of $1.09-1.16 and revenue of $491-503 mln. Both are a good bit above market expectations.
Same store comps are always a key metric for retailers. FIVE's OctQ comps came in at a robust +8.5%, well above prior guidance of +3.5-4.5%. It was not quite the +9.3% result seen in Q2 (Jul), but it was still quite strong. Looking ahead, FIVE expects comps in Q4 (Jan) to be +4-6%.
On the call, FIVE said that trends like slime, smiley and mermaid contributed nicely to sales, while as expected, the spinner craze continued to slow. Overall, trends are good for Five Below. They help drive overall brand awareness and introduce new customers to Five Below, who then return to shop throughout the store.
FIVE was also pleased with the performance of back to school and Halloween. Seasonal updates like these keep the Now world fresh and give loyal customers yet another reason to shop Five Below. As FIVE leverages its scale and vendor relationships, the company's overall assortment gets better and better and its merchants reinvest in better products, they create even more, WOW etc.
In sum, this was another good quarter for FIVE. After a series of narrow beats, FIVE has reported nice EPS upside in JulQ and now in OctQ. Also, the comps have been quite strong, which is always important. Not really sure why stock is down on the good report, but the stock had run over the past few days and this may just be a sell-the-news reaction.