Story Stocks^®

Five Below (FIVE +12%) heats up today after crushing Q3 (Oct) earnings estimates on impressive revenue and same-store sales growth. The discount retailer, which primarily offers items priced at $5 and lower, was coming off a string of disappointing earnings results, culminating in a turnaround strategy outlined last quarter. Encouragingly, the strategy has already produced tangible benefits. At the same time, FIVE named a new CEO, appointing the former CEO of Forever 21 Winnie Park to lead the company through its ongoing turnaround initiatives, clearing a hanging uncertainty since FIVE's former CEO Joel Anderson stepped down over the summer.

• FIVE rang up robust comp growth of +0.6% in Q3, significantly outperforming its mid-single-digit decline forecast. Comparable ticket inched 1.2% higher yr/yr while transactions slipped by 0.6%. Management noted that sales improved across a broader group of "worlds" (what the company calls categories) versus Q2 (Jul), with tech, seasonal, style, and candy worlds, which combined comprised over half of all sales in Q3, leading the charge.
• The results stemmed largely from FIVE's past initiatives to add newness to its product assortment. Additionally, the company pointed to having its teams return to the office as another underlying driver, as it has enhanced collaboration and communication, producing greater innovation and speed. These characteristics are what helps to differentiate FIVE from its retail peers as it can better pounce on rapidly changing consumer trends.
  • Management remarked it will also continue to improve its SKU rationalization across worlds, anticipating much of the impact from these changes to occur during 2Q26 (Apr).
• Adjusted EPS ballooned by 61.5% yr/yr to $0.42, cruising past the company's prior $0.10-0.22 guidance. Adjusted gross margins swelled by around 290 bps yr/yr to 33.2%, helped tremendously by lapping significant shrink from the year-ago period as well as some benefits from timing and freight efficiencies.
• FIVE mentioned that the holiday season was already off to a solid start, with the Black Friday weekend meeting internal expectations. However, the economy remains dynamic. As such, FIVE projected Q4 (Jan) numbered in-line with consensus, expecting adjusted EPS of $3.23-3.41 and comps of negative 3-5%. The considerable drop in comps sequentially is due to a unique holiday season, as the calendar includes five fewer shopping days between Thanksgiving and Christmas.

FIVE's Q3 report underpinned early benefits from its recent turnaround initiatives. With these actions already bearing fruit, the incoming CEO will likely stay on the current trajectory, a development we anticipated last quarter after FIVE outlined its turnaround strategy before naming a permanent CEO. There are still possible headwinds on the horizon, primarily revolving around tariffs. However, FIVE has experience with tariffs from 2018 and 2019, commenting that it now has a playbook to deploy in the event of new tariffs. FIVE also cited additional attributes it possesses since the previous tariffs to help offset impacts, including its Five Beyond product assortment, where items are priced above $5, and its India Global Sourcing Office, helping optimize its overseas vendor base.