Five Below (FIVE 130.57, +15.06, +13.04%) is trading nicely higher after reporting
impressive Q2 (Jul) earnings/guidance last night.
FIVE is sort of like a dollar store, but instead of pricing wares for a dollar, all the merchandise offered in the store is $5 or less, hence the name "Five Below." It focuses on extreme-value merchandise for 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" products, and seasonal items. While the store’s demographic focus is on teens and pre-teens, the retailer stocks 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 U.S., but it has since entered other regions as well. It grew from 102 stores in 2010 to about 200 stores at the time of its IPO in July 2012. It currently operates over 700 stores in 33 states. FIVE says new store growth remains its number one priority, as it's only about a third of the way to its 2,500+ store potential.
Turning to the Q2 (Jul) results, EPS rose 40% year/year to
$0.42 (excluding a $0.03 accounting benefit) from $0.30 in the prior year
period. This was well above prior guidance of $0.36-0.38. Revenue rose 22.7%
year/year to $347.7 mln, also a good bit above prior guidance of $332-335 mln.
For the important back-to-school Q3 (Oct) period, FIVE expects EPS of
$0.17-0.19 and revenue of $301-304 mln. Both are in-line with market
Same store comps are always a key metric for retailers. FIVE's JulQ comps came in at +2.7%, which was above prior guidance of flat comps. It was pretty comparable to Q1 (Apr) comps of +3.2%. FIVE says it's very pleased with its JulQ results, which exceeded expectations, and which were strong even as it lapped strong results from last year.
Once again, FIVE experienced broad-based performance across its “worlds”, led by performance from Tech, Candy, Create, Style, and Room. Its merchants infused the stores with fresh, trend-right summer products across departments at good values, and customers responded. FIVE generally has three broad types of trends in its business: first, crazes like fidget spinners; second, brands and licenses, like Frozen and Star Wars; and third, what constitutes the very core of Five Below, relevancy. FIVE embraces all types of trends because each can drive transactions and sales, increase brand awareness, and build the customer base. Trends bring in new customers who discover the value of Five Below for the first time and who then make return visits. While there will not be a craze or license trend in every quarter, FIVE will almost always have relevancy trends, examples of which include slime, squishy, spa, and mermaid, which saw continued popularity in JulQ.
Looking ahead to Q3 (Oct) and Q4 (Jan), FIVE says its stores look fantastic and have been merchandised for the back-to-school season with new fashions, as well as dorm, room, and locker got-to-haves to wow customers. Next week, FIVE begins its transition to fall, and it plans to continue to showcase newness and wow across all of its “worlds”. FIVE is also looking to innovate and improve its store experience; recent innovations included honoring Mother's Day by hosting in-store Treat Mom to a Spa Day! events, launching slimetastic! fun with teens and tweens throughout the summer season, and recognizing dads with trendy tech and game gear.
In sum, this was another good quarter for FIVE. A few years ago, FIVE was pretty hit-or-miss around earnings, which frustrated investors. However, a series of strong quarters recently has us thinking FIVE has put its problems in the rear-view mirror. On the new store front, FIVE has been stepping on the gas. With a long-term goal of 2,500+ stores, FIVE still has a lot of growth ahead.