Discount retailer Five Below (NASDAQ:FIVE) announced better-than-expected results in Q3 FY2023, with revenue up 14.2% year on year to $736.4 million. Revenue guidance for the full year also exceeded analysts' estimates but next quarter's guidance of $1.34 billion was less impressive, coming in 0.3% below expectations. It made a GAAP profit of $0.26 per share, down from its profit of $0.29 per share in the same quarter last year.
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Five Below (FIVE) Q3 FY2023 Highlights:
- Revenue: $736.4 million vs analyst estimates of $728.4 million (1.1% beat)
- EPS: $0.26 vs analyst estimates of $0.23 (13.3% beat)
- Revenue Guidance for Q4 2023 is $1.34 billion at the midpoint, roughly in line with what analysts were expecting
- Full year guidance raised for same-store sales, revenue, and net income
- Free Cash Flow was -$192.9 million compared to -$155 million in the same quarter last year
- Gross Margin (GAAP): 30.3%, down from 32.2% in the same quarter last year (miss vs. expectations of 30.8%)
- Same-Store Sales were up 2.5% year on year (beat vs. expectations of up 1.5% year on year)
- Store Locations: 1,500 at quarter end, increasing by 208 over the last 12 months
Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ:FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.
Discount General Merchandise RetailerBroadline discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.
Sales GrowthFive Below is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.
As you can see below, the company's annualized revenue growth rate of 17.4% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was excellent as it added more brick-and-mortar locations and increased sales at existing, established stores.
This quarter, Five Below reported robust year-on-year revenue growth of 14.2%, and its $736.4 million in revenue exceeded Wall Street's estimates by 1.1%. The company is guiding for a 15.9% year-on-year revenue decline next quarter to $1.34 billion, a reversal from the 12.7% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts expect sales to grow 17.8% over the next 12 months.
Number of StoresA retailer's store count often determines on how much revenue it can generate.
When a retailer like Five Below is opening new stores, it usually means it's investing for growth because demand is greater than supply. Five Below's store count increased by 208 locations, or 16.1%, over the last 12 months to 1,500 total retail locations in the most recently reported quarter.
Over the last two years, the company has rapidly opened new stores, averaging 12.9% annual growth in its physical footprint. This store growth is among the fastest in the consumer retail sector and gives Five Below an opportunity to become a large company over time. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
Same-Store Sales Five Below's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 1% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Five Below is reaching more customers and growing sales.
In the latest quarter, Five Below's same-store sales rose 2.5% year on year. This growth was a well-appreciated turnaround from the 2.7% year-on-year decline it posted 12 months ago, showing the business is regaining momentum.
Key Takeaways from Five Below's Q3 Results Sporting a market capitalization of $10.66 billion, more than $162.9 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Five Below is attractively positioned to invest in growth.
This was a beat and raise quarter for the company. Same-store sales, revenue, and EPS came in ahead of expectations, although gross margin missed and was down year on year. While next quarter's revenue guidance was roughly in line (the other thing to pick on in addition to the gross margin miss), full year guidance was raised for same-store sales, revenue, and EPS. Zooming out, we think this was still a solid quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $187 per share.