Shares of Five Below (NASDAQ: FIVE) have been moving higher in recent weeks. A "beat and raise" quarterly update on Wednesday afternoon and tapping a new CEO should keep gains coming.
The cheap-chic retailer has been a wild ride for investors this year. Five Below shares were trading 70% lower year to date when they bottomed out in August. The chain that is popular with teens and pre-teens looking to find merchandise trading for five bucks or less has seen its stock nearly double since hitting that four-year low.
Rising stock prices come with heightened expectations. With Five Below's turnaround still in the process of coming around and the mystery that is standard with any new outsider CEO, it's easy for bears to argue that the shares have recovered before Five Below has followed suit. But let's hear the optimists out.
Look out below
Net sales increased by 15% to $843.7 million for the three months ending on Nov. 2, well ahead of the 6% to 9% that Five Below was targeting for the quarter just three months ago. It was bracing shareholders to expect a mid-single-digit dip in comps, but it's apparently a deep discounter in more ways than one. Five Below deeply discounted its own prospects, closing out the fiscal third quarter with same-store sales actually rising 0.3%.
Adjusted earnings soared 60% to reach $0.42 a share. This was more than double even the high end of the $5 million to $12 million that Five Below was forecasting in adjusted net income for the quarter. The retailer has now scored back-to-back quarters of bottom-line beats after falling short in recent reports.
The shares are responding to the improving fundamentals, but the recovery is ultimately not just up to Five Below. Its young base of core shoppers needs a decent economy in order to succeed. The chain is also at the mercy of other potentially trendy low-priced retailers including the recent beta launch of Amazon's Haul online platform.
Image source: Five Below.
Park place
Five Below parted ways with longtime president and CEO Joel Anderson in July. With negative comps slowing the rapidly expanding chain, it needed a fresh approach to get back on track. On Wednesday afternoon, Five Below introduced Winnie Park as its new CEO.
Park was CEO at Forever 21 for nearly three years before jumping to Five Below. She was CEO at Paper Source before that. The three concepts -- stationery and gift products, apparel, and big-box discount items -- are different. However, there is some overlap in terms of merchandise with Paper Source and a similar young audience that goes shopping for clothing at Forever 21.
Something that likely factored in Park rising above other potential candidates is that she helped transform her two previous brick-and-mortar retail chains into omni-channel concepts with enhanced social media production. Five Below was slow in launching an e-commerce component to its business. It's aggressive on social media -- with more than 820,000 followers on Instagram alone -- but there's always room for improvement.
Investors should give Park a couple of quarters at the helm before passing judgment, but Five Below is raising its full-year guidance in initiating its outlook for the seasonally potent holiday quarter. The retail stock sees $1.35 billion to $1.38 billion in sales for the current quarter, barely above the $1.31 billion it scored a year earlier, but it did have an extra week in its fiscal reporting year last time. It sees a 3% to 5% dip in comps, but it was expecting an even larger store-level hit in the fiscal third quarter and it managed to generate a positive surprise. Five Below is eyeing an adjusted profit of $3.23 to $3.41 per share.
Five Below has a lot to prove before investors can trust the turnaround is for real. The stock isn't cheap. It's trading at an earnings multiple of 22 based on the midpoint of the $4.78 to $4.96 it's now modeling in adjusted earnings per share for this fiscal year. However, with signs of stabilizing its business as it returns to its discounting roots and new CEO who has a strong track record of taking concepts to the next level you have to like Five Below's chances here.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
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