Five Below: Maybe The Last Quarter Of Pandemic Headwinds (NASDAQ:FIVE)

Following the stock’s ebbs and flows since last earnings season, Five Below (FIVE) is now ready to report fiscal second-quarter results. The Philadelphia-based retailer will be faced with the challenge of not disappointing shareholders, after peers Dollar Tree (DLTR) and Ollie’s Bargain Outlet (OLLI) failed to inspire investors less than a week ago.

Analysts expect to see revenues fall YOY by a timid 1%, which would be substantially better than last period’s 45% unwind. Projected EPS of $0.14, if achieved, would be much lower than 2019 levels, but would also represent a quick return to net profitability following a tough start to the year.

(Image Credit: Philadelphia Children’s foundation)

Will early-quarter momentum persist?

Last time, Five Below delivered numbers that fell well below analysts’ expectations. Stores were closed for just about half of the quarter, and the company did not (and still does not) have a strong digital channel to help it navigate times of COVID-19-related troubles. As a result, the sharp revenue decline of 45% made sense.

But the commentary regarding the early weeks of the second quarter was encouraging enough to spark post-earnings bullishness. For starters, 90% of all stores had been in operation by earnings day, up from 75% in late May. But better yet, the management team reported reopened store comps of 8% in May, which was substantially better than pre-crisis average in the low- to mid-single digits.

Because fiscal 2Q20 started in the first half of May, I still expect Five Below’s revenues to be impacted negatively by store closures this time – perhaps for the last time. I estimate that the YOY top line drag from this factor alone will hover around 15 percentage points. To offset these headwinds and deliver a number close to consensus, the company will need to count on (1) sales from new locations, which I expect to be around 25-30 stores opened this quarter, and (2) continued comps momentum, similar to what had been observed in May.

Once again, the focus will be on outlook

To be clear, I see some risk that Five Below may not be able to live up to top line expectations in fiscal 2Q20. Many other retailers, even if not in the same sub-sector as Five Below, have reported the same intra-quarter trend: strength in the first few weeks, triggered by pent-up demand, and softness in the back half due to COVID-19 resurgence and what I speculate to be uncertainty around the extension of government benefits.

To make matters worse, the current back-to-school season has been severely impacted by the pandemic. While study-from-home trends have been a positive for some companies’ financial results, including Apple (AAPL) and Best Buy (BBY), I doubt that this will be the case for retailers like Five Below.

Still, I think that the focus of attention on September 2 will be Five Below’s forwarding-looking opportunities, not backward-looking performance. Should reopened store comps remain high, at 5% or more, hopes for a much more robust third quarter and holiday season could boost investor sentiment. Even if specific guidance is not offered, as was the case in the past two quarters, I think that the narrative regarding revenue drivers, including foot traffic and ticket size, will matter the most.

Still positive about the long term

My stance on FIVE remains the same: while I worry about short-term headwinds possibly destabilizing the stock for a moment, I think that the retailer has a bright future ahead. Growth from footprint expansion has continued even through the pandemic, suggesting confidence in the business model. As the store fleet increases, I expect to see gains of scale pushing profitability rates higher over time, in a desirable combination of top line growth and improved margins.

ChartData by YCharts

What makes the opportunity even better is the stock price that is still about 14% off the early 2020 peak (see above) – a rare case of low valuation coupled with good fundamentals within a broad market that seems a bit stretched. Since my All-Equities SRG portfolio has enough exposure to both growth and defensive stocks, I like the idea of allocating some of the capital to shares that are more procyclical and sensitive to an improvement in macroeconomic conditions.

Beating the market by a mile

FIVE has been a laggard among my All-Equities Storm-Resistant Growth holdings, but the portfolio continues to handily beat the S&P 500 through bull runs and market corrections. To dig deeper into how I have built a risk-diversified strategy designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.

Disclosure: I am/we are long FIVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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