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Five Below Stock Crashes after Earnings but Jefferies Says Buy the Dip

five below

Five Below stock was trading sharply lower today after its fiscal second-quarter earnings disappointed markets. Jefferies sees the post-earnings dip as a buying opportunity.

Five Below released its fiscal second-quarter earnings yesterday after the close of US market. The company’s revenues increased 51.7% as compared to the corresponding quarter last year. The sales increased 54.9% from the corresponding quarter in the fiscal year 2019. Due to the COVID-19 related restrictions last year, the performance in 2021 is not comparable to 2020 for several companies including Five Below.

Five Below earnings

Five Below reported an operating income of $86.2 million in the quarter as compared to $33.1 million in the corresponding quarter last year. The operating income increased 139% from the fiscal second quarter of 2019.

During the quarter, the company opened 34 new stores and had a total of 1,121 stores spread across 39 states at the end of July. “We had another strong quarter, with the team executing well in a dynamic operating environment. Sales increased 55% and earnings per share increased 125% versus the second quarter of 2019. Once again, the strength was broad-based throughout our worlds,” said Five Below CEO Joel Anderson.

Guidance

Five Below said that it expects to post revenues between $550-$565 million in the fiscal third quarter. The guidance assumes that the company would open between 40-45 new stores in the quarter while the comparable sales would increase in the mid-single digits. It expects to post net income between $12.8-$16.7 million in the quarter. Commenting on the guidance, the company said “Given the uncertainty related to COVID-19, potential future shifts in consumer spending, and ongoing global supply chain disruption, the Company will not be providing sales or earnings guidance for the full year of fiscal 2021.”

Jefferies advises buying the dip in Five Below stock

The company’s earnings and guidance failed to please markets and the stock was trading sharply lower today. Meanwhile, Jefferies believes that the fall is a buying opportunity. “FIVE shares reacting negatively to sales trends that slightly missed Street but are difficult to model in a COVID world. What matters is 1) comps were up big (+21% vs. ’19), 2) new store growth remains high (near mid-teens% YoY), and 3) Q3 outlook appears inline to slightly better,” said Jefferies analyst Randal Konik while reiterating his overweight rating on the stock.

Jefferies has a $300 target price on Five Below which is the street-high target price for the stock. Five Below has a median target price of $230 which is a premium of almost 20% from these levels. Of the 24 analysts covering the stock, 15 rate them as a buy while eight rate them as a hold. One analyst has a sell rating.

Supply chain issues

Five Below also talked about supply chain issues but Jefferies does not see that as a major challenge.” Management noted that the supply chain environment remains difficult to navigate. This is plainly an issue for all retailers, but the impact on FIVE seems to be fairly minimal at present, which speaks to the flexibility in the company’s supply chain and good execution,” said Jefferies in its note.

Five Below stock currently trades at an NTM (next-12 months) PE of 43.2x which is not far from the 40.7x that it has averaged since the listing. Looking at the strong growth outlook for the company, the valuations seem reasonable.

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Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.