There’s a lot to like about Five Below (NASDAQ:FIVE). The company appeals to a specific niche and does so at discount prices. FIVE stock has bounced back 110% since hitting a low of $52.27 on March 19. Some of that was due to the fact that the specialty discount chain was able to re-open nearly 90% of its stores by June.
However since the company last posted earnings on June 9, the stock has been flat. And some of the reason for that is that investors are curious as to what’s next for retail in general, and specifically for a company like Five Below that is unapologetically looking to expand its brick-and-mortar business at a time when e-commerce has gained significant traction.
That means investors will be looking closely when the company reports earnings on September 2. Here are three questions that will shape the direction of FIVE stock going forward.
Is It Growing Its E-Commerce Revenue?
On the one hand, investors might say this is not as important because Five Below had 90% of its stores reopened by June. And as the parent of a daughter in the Five Below target segment, I know that the company has a receptive audience for its brick-and-mortar stores.
The tween/young teen audience still thinks shopping in stores is cool. But parents may not share their enthusiasm, particularly since the pandemic has entrenched habits that already existed. Online is here to stay.
Five Below acquired the assets of Hollar.com, an online dollar store. The company has been using this to help build out its e-commerce platform. In its most recent earnings report in June, the company reported e-commerce sales were four times larger on a year-over-year (YoY) basis. However, management also conceded that it made up a very small (single-digit) percentage of overall sales.
I’m not sure that investors have to look for a specific number from the company, but they will want to see that it is establishing an online presence.
Are They On Track For Future Expansion?
As an investor, one of the appealing paths to growth for Five Below is its plans to aggressively expand its brick-and-mortar footprint. Those plans got delayed due to Covid-19, but it still managed to open up 20 new location in the most recent quarter. Investors are seeing this growth through expansion strategy play out with other discount chains, notably Dollar General (NYSE:DG).
Nevertheless, the company has put an aggressive target of 2,500 total stores on its back. Investors will give the company a little wiggle room here, but will want to get a sense that this kind of expansion is still realistic.
What Does the Rest of 2020 Look Like?
If Five Below hits on its revenue forecast for the quarter of approximately $409 million, it will be sitting at around a 20% two-quarter YoY loss. However historically, the quarter ending in January (which corresponds to the end of the company’s fiscal year) is its strongest on both the top and bottom lines.
This isn’t a surprise. The period between Labor Day and New Year’s is one of the best times for retail, and particularly discount chains like Five Below. In addition to back-to-school shopping, there is Halloween and then the holidays. Discount stores are a great opportunity to get those stocking stuffers and other gift ideas at bargain prices.
But in case you needed reminding, 2020 isn’t a typical year. I would expect the retailer to provide some initial guidance on its back-to-school forecast. And more importantly, investors will get some idea of where Five Below stands from an inventory perspective heading into the all-important holiday season.
Is Five Below Stock a Buy?
FIVE stock is up about 1% ahead of earnings which means that investors are probably anticipating a positive earnings report. And the whisper number says the company may deliver earnings per share (EPS) of 17 cents that would be higher than the consensus estimate of 14 cents.
And the fact that consumers are more budget-minded is something that should work in favor of the company. That being said, I’m not sure if investors will get all the answers they want when the company reports earnings. While there is some expectation for companies to begin issuing forward guidance, there are still a lot of unknowns as it relates to the novel coronavirus.
So therefore we have to look at the fundamentals. Right now, the stock looks expensive. It’s trading for an enterprise value that’s around four times its trailing revenue. That’s high for the sector. And the stock price looks about right for what will likely be a year where revenue will be lower on a YoY basis.
For me, FIVE stock is one to hold onto, but I’m not eager to open a buying position without a clearer direction from the company.