Five Below Drops After 4th-Quarter Earnings Beat, Strong Guidance

Growth momentum is strong, but the valuation is high for a discount retailer

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Margaret Moran
Mar 18, 2021
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After the markets closed on March 17, Five Below Inc. (

FIVE, Financial) reported earnings results for its fourth quarter and full year 2020, which ended on Jan. 30.

The company beat analyst estimates and revealed strong guidance for the upcoming fiscal year. Following the news, the share price jumped, but even though it opened at a new high the following day, it quickly reversed course and dropped more than 4% as markets push back against the high valuation.

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Earnings results

Five Below brought in revenue of $1.96 billion in full-year 2020, an increase of 6.2% when compared to the previous year. Adjusted earnings per share totaled $2.20, a decrease from the previous year's $3.12. Comparable store sales decreased by 5.5%.

For the quarter, adjusted earnings per share rose to $2.20, an increase of 12% compared to the same period of fiscal 2019. Meanwhile, revenue jumped 25% to $858.5 million and same-store sales climbed 13.8%. Analysts had been expecting adjusted earnings of $2.11 and revenue of $839.65 million. Operating income increased by 17.7% to $169.6 million.

The company was able to open 120 net new stores compared to 150 opened in fiscal 2019, continuing to expand its footprint even in difficult conditions. Although Five Below is a discount retailer, its product focus is on non-essential categories such as games, candy, style, sports and party, which many customers have limited their purchases of during the Covid-19 pandemic.

Despite declines for the year, things did turn up for the company in the fourth quarter. President and CEO Joel Anderson said, "We closed out an unprecedented year with fourth quarter results that were even stronger than we expected, highlighted by a record fourth quarter comparable sales increase of 13.8% with broad-based strength across our world."

Looking forward

For the first quarter of fiscal 2021, Five Below guides for revenue in a range of $540 million to $560 million. It also plans to open 60 new stores. Adjusted earnings per share is predicted to fall between 56 cents and 68 cents. These estimates are certainly higher than the revenue of $201 million and adjusted loss per share of 91 cents in the prior-year quarter, but what is surprising is that they are also higher than analyst consensus estimates of $423 million in revenue and adjusted earnings of 39 cents.

Anderson had the following to say:

"We enter 2021 with this same focus and dedication as we continue to invest in our foundation and in innovation across product, experience and supply chain, while returning to more normalized annual store growth. With plans to open 170 to 180 new stores in our Five Beyond prototype, we are excited to enter the two new states of Utah and New Mexico, bringing the states we operate in to 40."

Valuation

After more than doubling in price after last year's lows, shares of Five Below trade with a price-earnings ratio of 96.05, which is about double its 10-year historical median of 43.98 and surpasses the valuations of 89.35% of industry peers. The company has achieved this valuation through its aggressive growth strategy, which puts the majority of funds toward rapid expansion (the company does not pay a dividend, and its three-year average share buyback ratio is in the negatives at -0.5).

According to the GuruFocus Value chart, the stock is modestly overvalued. While analysts are projecting strong growth, the intrinsic value of shares would not catch up to the market value until 2023 at their expected growth rates for the company. However, if Five Below can achieve or surpass its own loftier expectations, it may turn out to not be quite so overvalued in hindsight.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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