On Tuesday, JPMorgan revised its outlook on Five Below (NASDAQ:FIVE), a specialty discount retailer listed on NASDAQ:FIVE. The firm downgraded the stock from Overweight to Neutral and lowered the price target to $170.00 from the previous $215.00.
This change follows a comprehensive review that included a consumer survey of over a thousand participants and discussions with company executives at JPMorgan's 10th Annual Retail Round-Up Conference.
The downgrade was influenced by JPMorgan's analysis which suggests a shift in Five Below's growth dynamics. The firm's research indicates a projected earnings per share (EPS) growth rate in the low-to-mid-teens percentage range over multiple years post a recovery of about 100 basis points in operating margin through fiscal year 2026. This forecast is a departure from the over 20% bottom-line growth profile observed before 2019.
JPMorgan's findings include expectations of mid-teens unit growth for Five Below, with a potential market saturation of 3,500 stores by fiscal year 2029. However, new store productivity is anticipated to be at 85%, which is below the pre-pandemic levels of 90% and above. The analysis attributes this to a higher densification effect, which impacts the denominator in productivity calculations.
Regarding comparable store sales, JPMorgan projects low single-digit increases. The core comparable sales, excluding the Five Beyond concept, are expected to rise by only 0.6% in fiscal years 2023 and 2024. This comes after eight consecutive quarters of average basket decline. Additionally, the annual lift from the Five Beyond concept is estimated to moderate to approximately 90 basis points in fiscal years 2025 and 2026, down from around 150 basis points in the previous two years.
The research also addresses margin growth, suggesting that Five Below could achieve fixed cost leverage with 2.5% to 3% comparable store sales. The company's management has set a target for a 12% margin by fiscal year 2026, which would align with the margin model from fiscal year 2018, despite a historical performance of 4-5% comparable store growth over approximately eight years.
InvestingPro Insights
In light of JPMorgan's recent revision of Five Below's stock, investors may find additional context in the latest data and insights from InvestingPro. As of the last twelve months leading up to Q4 2024, Five Below has maintained a market capitalization of approximately $8.21 billion, with a P/E ratio of 27.22, signaling a premium valuation compared to near-term earnings growth. The company's revenue growth has been notable at 15.7%, contributing to a solid gross profit margin of 35.79%.
InvestingPro Tips highlight that while Five Below is trading near its 52-week low, its liquid assets exceed short-term obligations, suggesting a degree of financial stability. Analysts also predict the company will remain profitable this year, with profitability sustained over the last twelve months. However, 15 analysts have revised their earnings expectations downwards for the upcoming period, reflecting the concerns echoed by JPMorgan's downgrade. For investors seeking a deeper dive into Five Below's financials, InvestingPro offers additional tips on their platform, providing a comprehensive analysis of the stock's potential.
For those interested in leveraging these insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro. With 13 additional tips available, investors can gain a more nuanced understanding of Five Below's financial health and market position.
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