The recent dip in the shares of Five Below (FIVE), following its earnings report, presents a buying opportunity, says Quo Vadis Capital President John Zolidis.
“Shares are trading lower on modest upside/ in-line guide. No change to the investment case (high ROIC unit growth, cash flow generation) based on our review of fundamentals. We also note a history of conservative guidance. We believe this dip will get bought.”
Five Below is a high-growth value retailer, selling trendy products, generally under $5. Based in Philadelphia, Pennsylvania, the company operates over 1,050 stores in 39 states. I’m neutral on the stock. (See FIVE stock charts on TipRanks)
Q2 Performance Driven by Higher Comps, New Stores
On September 1, Five Below reported a Q2 2021 net operating income of $86.2 million, compared to $33.1 million in Q2 2020. Net sales came at $646.6 million, up from $426.1 million in Q2 2020.
Joel Anderson, president, and CEO of Five Below, cheered the company’s performance, and new store openings.
“We had another strong quarter, with the team executing well in a dynamic operating environment,” he said. “New store growth continued with the opening of 34 new stores across 19 states, bringing our new store count for the first half to a record 102 new stores.
“We are innovating across our three key strategic priorities: product, experience and supply chain, where the teams are working diligently to mitigate the impact of global disruptions.”
Why FIVE Sold off
Sometimes, market expectations are running high for high-growth companies ahead of financial reports. That’s why the shares of these companies sell off if there’s a slight miss in any of the financial metrics closely followed by analysts. Unfortunately, this seems to be the case with FIVE’s financial report.
“FIVE shares were trading lower post 2QFY21 results, which we believe reflects elevated expectations and modest upside,” explained Zolidis. “Comparisons are also more difficult in 2HFY21, and higher freight and labor costs are incremental headwinds (although anticipated).
“While these conditions may weigh on the stock near-term, following a review of fundamentals, we see little reason to fear the longer-term high ROIC unit growth story has changed unfavorably.”
Wall Street’s Take
The 17 Wall Street analysts following the company aren’t as bullish as Zolidis. They have a 12-month average price target of $233.79, with a high forecast of $300 and a low forecast of $185. The average FIVE price target represents a 20.8% change from the last price of $193.56.
FIVE scores an 8 out of 10 on TipRanks’ Smart Score rating system, citing decreased hedge fund activity and insider selling.
Summary and Conclusions
High-flying retailer Five Below had a good Q2, but not good enough to please the inflated expectations of Wall Street’s momentum crowd.
That’s why its shares sold off following its Q2 financial report. Only time can tell whether Zolidis is right to be bullish.
Disclosure: At the time of publication, Panos Mourdoukoutas did not have a position in any of the securities mentioned in this article.
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