Five Below's (FIVE) Q1 Earnings & Sales Top, FY18 View Up

Five Below, Inc. (NASDAQ:FIVE) delivered better-than-expected top and bottom–line results for the sixth and 11th straight quarter, respectively, when it reported first-quarter fiscal 2018 results. The figures not only surpassed analysts’ expectations but also beat management’s guidance range. This prompted the Philadelphia, PA-based company to raise fiscal 2018 projection.

Sturdy performance and encouraging outlook drove the stock roughly 17% during after-market trading hours on Jun 6. The stock also rose more than 3% during the trading session yesterday. Notably, the stock has surged 21% in the past six months compared with the industry’s growth of 5%.

Let’s Delve Deep

Adjusted earnings of 35 cents a share beat the Zacks Consensus Estimate of 32 cents and more than doubled year over year. Additionally, the bottom line exceeded the company’s guided range of 31-34 cents a share. Management highlighted that healthy performance of new outlets, sturdy comparable sales, margin expansion and favorable tax rate propelled the bottom line.

Net sales grew 27.2% to $296.3 million from the year-ago quarter and also came ahead of the Zacks Consensus Estimate of $291.8 million. Further, the top line surpassed the company’s guided range of $290-$294 million.

Comparable sales increased 3.2% in the reported quarter and came within the company’s previously provided guidance of 3-4%. However, the rate of growth decelerated from 5.9% in the preceding quarter. Transactions were down marginally on account of unfavorable weather.

Gross profit improved 31.8% year over year to $97.2 million, while gross margin expanded 110 basis points to 32.8%. Meanwhile, improved gross profit led operating income to jump 93.3% to $24.7 million, in spite of higher SG&A expenses. Further, operating margin increased 280 basis points from the year-ago quarter to 8.3%. As a percentage of sales, SG&A expenses contracted approximately 170 basis points to 24.5% in the quarter.

Financials

Five Below, which carries a Zacks Rank #4 (Sell), ended the quarter with cash and cash equivalents of $84.4 million and short-term investment securities of $189.8 million. Notably, the company had no debt and total shareholders’ equity was $477.9 million at the end of the reported quarter.

During the quarter under review, the company generated net cash from operating activities of $33 million and incurred capital expenditures of $22.5 million.

Management expects to incur capital expenditures of roughly $137 million during fiscal 2018 on the opening of new stores and distribution center, and in systems and infrastructure.

Store Updates

During the quarter, the company opened 33 new stores taking the count to 658 stores in 32 states. The company plans to open 125 new stores during fiscal 2018 with 50% expected to be opened in the first half.

Outlook

Management remains impressed with quarterly performance. Going forward, the company remains committed to strategic initiatives such as enhancement of digital and e-commerce channels, improvement in customers’ shopping experience, store openings as well as marketing efforts.

Management aims to attain top-line increase of 20% and bottom-line growth of more than 20% through 2020. The company also sees a potential of 2,500 plus stores in the long run.

Five Below now envisions fiscal 2018 net sales in the range of $1.502-$1.517 billion with comparable sales expected to increase in the band of 1-2%. Net sales represent an increase of 19-20% year over year. For the second quarter, management anticipates net sales between $332 million and $335 million with comparable sales expected to remain flat versus 9.3% in the year-ago period. Net sales reflect an increase of 17-18% year over year.

The company forecast second quarter and fiscal 2018 earnings in the range of 36-38 cents and between $2.42 and $2.48 per share, respectively. Analysts polled by Zacks expect earnings of 34 cents and $2.40 for the second quarter and fiscal 2018, respectively.

Five Below had earlier guided fiscal 2018 net sales in the range of $1.495-$1.510 billion and earnings between $2.36 and $2.42 per share.

The company expects second-quarter operating margin to contract 100 basis points. This may be due to deleverage in fixed expenses on account of lower comparable sales and the timing of the $7.5 million in Tax Reform related investments. It expects the metric to contract 200 and 100 basis points during the third and fourth quarter, respectively.

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