Five Below (NASDAQ:FIVE) has been facing significant hurdles, including inventory issues, climbing inflation, and increased overseas competition. These, along with a major operational transformation, have led to a challenging Q1 performance, marking the first sales decrease in six quarters. The company’s Q1 performance and the subsequent reduction in FY24 guidance have overshadowed the positive impact of its shrinkage control initiatives. The current negative price momentum and valuation suggest that potential investors might consider waiting for a more favorable entry point.
Five Below’s Distribution Strategy
As a prominent player in the value retail market, Five Below caters primarily to tweens, teens, and beyond, offering an array of in-style but not overly trendy, high-quality products.
Five Below’s product lineup, which is divided into eight categories, offers a unique value proposition. Most items are priced between $1 and $5, with an exclusive segment called Five Beyond hosting extreme-value items priced above $5. This pricing structure positions Five Below as an attractive option for those seeking the latest and coolest items without straining their budget, thereby enhancing its competitive edge.
The company boasts a strong presence with over 1,605 stores spread across 43 states and continues to expand, with 61 new stores opened in the first quarter of the year.
Analysis of Five Below’s Financials
Five Below reported unimpressive performance for the first quarter. The company’s net sales of $811.86 million increased 11.8% year-over-year but underperformed the analysts’ projection of $834.29 million. Comparable sales dropped by 2.3%. Also, adjusted earnings per share (EPS) of $0.60 fell short of analyst estimates of $0.63.
Management has issued financial guidance for the second quarter with projected net sales of $830 million to $850 million in the region. This projection takes into account the opening of approximately 60 new stores and assumes a mid-single-digit decrease in comparable sales. The net income is estimated between $32 million and $38 million. Meanwhile, the expected diluted income per common share is targeted to be in the range of $0.57 to $0.69.
Looking ahead to the full Fiscal Year of 2024, the prospects are more extensive. Net sales are expected to be in the range of $3.79 billion to $3.87 billion. This forecast is based on opening approximately 230 new stores and assumes a 3% to 5% decrease in comparable sales. The net income is projected to be between $275 million and $297 million. The anticipated diluted income per common share is earmarked to be between $4.97 and $5.37. Finally, gross capital expenditures are expected to be approximately $345 million to $355 million in Fiscal 2024.
What is the Price Target for FIVE Stock?
Analysts following Five Below have been cautiously optimistic about the stock. For example, BofA analyst Melanie Nunez recently reinstated coverage of Five Below, assigning a Neutral rating and a $125 price target. She noted the firm is “optimistic” on recent initiatives to re-accelerate earnings but could take a few quarters to drive results.
Five Below is rated a Strong Buy based on 15 Buys and five Holds over the past three months. The average price target for FIVE stock is $163.22, which represents a potential upside of 45.02% from current levels.
The stock has been trending downward, shedding over 43% in the past six months. It trades at the low end of its 52-week price range of $106.21 to $216.18 and shows ongoing negative price momentum, trading below its 20-day (124.68) and 50-day (139.33) moving averages. Despite the slide in price, the stock still appears to be richly valued compared to industry peers, with a P/S (price-to-sales) ratio of 1.7x compared to the Specialty Retail industry average of 0.92x.
Final Analysis of FIVE
Five Below has encountered significant challenges that have resulted in a considerable decline in its share price. Despite these challenges, the company maintains a robust presence in the value retail market and continues to expand its geographical reach. However, mixed performance results, downbeat guidance, and ongoing negative price momentum suggest a degree of caution is warranted. Given its current valuation, potential investors might want to hold off until a more attractive entry point emerges.
