Five Below (NASDAQ: FIVE), the gimmicky but also hugely popular retail store selling low-priced scarves, bags, posters and other novelties for the tween and teen market, has taken a beating on Wall Street following a mixed second-quarter earnings report.
It’s a rapidly-growing company that operates almost 400 stores, mostly in malls and shopping centers. Five Below reported strong 19.5% growth in quarterly revenue, which rose to $182.5 million. But it said that operating income declined as it invested in marketing and other expenses. The company’s GAAP income fell to $7.1 million or 13 cents per diluted share, from $8.3 million or 15 cents per diluted share in the year-earlier quarter. While earnings were in line with analyst forecasts, revenues came in slightly below.
Five Below’s same-store sales grew by a respectable 3% and the company said that most of the costs that weighed on its income were one-time expenses related to marketing, distribution and related functions that will ultimately position the Five Below for growth.
A Gimmick That Works
The day after the earnings report, Five Below stock lost almost 10% of its value, closing down $3.52 per share to $34.49. This stock price decline seems like a strong reaction for a company that is continuing to grow its business pretty rapidly and aggressively open new stores – 70 this year.
And while the Five Below concept may seem like a gimmick, it’s a gimmick that to a large extent is working. The company’s stores are quite popular with young teens who are just beginning to get a bit of disposable income. At a time when many retailers and many malls are struggling, Five Below is gaining traction. It’s too soon to know if Five Below will become an enduring mall fixture but from the vantage point of today, the future looks promising.
P/E Still Too High
But Five Below stock may still be a little inflated. After peaking above $50 a share back in 2013, it’s had a pretty turbulent run.
Now, even after this week’s selloff that brought the stock price below $35, it still has a price/earnings ratio of about 38. That’s pretty pricey, even for a successful discount retailer that’s rapidly growing. The current P/E ratio exceeds that of several established retailers such as Tiffany and Co. (NYSE: TIF) as well as some other up-and-comers like Lululemon Athletica (NASDAQ: LULU) that have strong growth expectations baked into their value.
Five Below looks poised for more growth but the future of Five Below stock is less certain. For investors who don’t yet own the stock, it may be a good time to sit on the sidelines and see how things unfold over the next couple of quarters.
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