Five Below bullish as Q2 profit, sales beat the Street

Five Below celebrated its fifth anniversary as a public company with an exceptionally strong second quarter performance that topped expectations.



Revenue rose 28.7% to $283.3 million in the quarter ended July 29, topping analysts' estimates of $276.6 million. Same-store sales jumped 9.3%, the highest since the chain's IPO in June 2012.



Five Below reported net income of $16.8 million, or 30 cents a share, compared to $9.8 million, or 18 cents a share, in the year-ago period. Analysts had expected earnings of 26 cents a share. Operating income increased by 67.4% to $26.3 million from $15.7 million.



"Our strong second quarter results demonstrate the amazing appeal of the Five Below brand," said Joel Anderson, CEO. "We exceeded the high end of our sales, comp and earnings outlook. Our top line results were accompanied by strong margin expansion, resulting in over 70% net income growth.”




On the company's quarterly call with analysts, Anderson noted that, since Five Below's IPO, it has nearly tripled its store count, more than tripled its revenue, and quadrupled its net income.



"What makes us even more remarkable is how consistent our growth and results have been," Anderson said. "It definitely feels great to celebrate this milestone anniversary with one of our best quarters of sales, comp and earnings growth ever as a public company."




Anderson noted that the retailer saw solid broad-based performance across all its worlds (key merchandise departments), with notable contribution from the spinner trend. Neil Saunders, managing director of GlobalData Retail, commented that there are many reasons for Five Below's success, including improvements in its merchandise mix. Categories such as technology now have more authority, he said, and include far more 'must have' lines. An updated store format, which includes greater visual appeal, brighter lighting, better signage and better defined worlds, is also proving a boon.



"The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial," Saunders said. "This is helping to improve the return on investment from new stores and is aiding productivity at older stores where it has been applied. Again, there is much more runway here, so Five Below will likely accrue further benefits as the year progresses."



Five Below opened 31 new stores in the quarter, giving it a total 584 stores in 32 states. The company has said it sees the potential for 2,000 stores plus, a number analyst Saunders called "reasonable."



"One of the more encouraging aspects of Five Below's store expansion program is its ability to flex across different types of markets," he said. "The company now comfortably operates stores in rural, suburban, and urban locations. This allows much more headroom for growth and puts it ahead of other discount operators, many of which are still experimenting with urban shops." (For more, click here.)



For the third quarter, Five Below estimates earnings of 11 cents to 13 cents a share on revenue of $241 million to $246 million. Analysts had forecast earnings of 12 cents a share on revenue of $242.8 million.



"We are focused on the all-important fourth quarter and executing our strategic initiatives, which include continuing to provide a differentiated in-store experience, offering amazing, trend-right, quality merchandise at value prices, introducing new customers to our brand and increasing awareness while building out our infrastructure to support our 2,000+ store opportunity," Anderson said.