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Five Below Stock Down 58% From its 52-Week High: Buy or Sell FIVE?
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Shares of Five Below, Inc. (FIVE - Free Report) closed at $89.75 yesterday, down 58.5% from its 52-week high of $216.18 reached in early January 2024. The stock's dramatic fall suggests potential underlying issues, raising concerns about its long-term growth. Investors are left wondering, should they hold on in hopes of a turnaround or is it time to sell and move on? Let's delve deeper.
Five Below stock has fallen below its critical technical thresholds, including the company’s 200-day moving average of $139.86. The moving average is a key indicator for gauging market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
Shares of Five Below have dropped nearly 15.5% in the past three months against the industry’s growth of 0.3%.
Image Source: Zacks Investment Research
FIVE Witnesses Soft Comparable Sales
FIVE has been struggling with a decline in comparable sales, a key indicator of a retailer’s health. The metric dropped 5.7% in the second quarter of fiscal 2024, following a decline of 2.3% in the first quarter. The current quarter’s decrease was due to a 5.4% reduction in transactions and a slight 0.3% dip in the average dollar value of transactions, as customers remained cautious with their discretionary spending. The decrease in transaction size resulted from fewer items being purchased per visit.
Five Below foresees a mid-single-digit decline in comparable sales in the third and fourth quarters. For fiscal 2024, management expects a 4-5.5% decrease in comparable sales.
Weak Gross Margin a Concern for FIVE
Another significant challenge for Five Below has been the rising impact of shrinkage, which has led to gross margin compression. In the second quarter of 2024, gross margin decreased 220 basis points to 32.7%. This decline was due to deleveraging of fixed costs amid negative comps and a higher year-over-year shrink accrual, partially mitigated by a decrease in inbound freight expenses.
With already narrow margins in the retail sector, any further erosion will severely impact the company’s bottom line, making it difficult to sustain long-term profitability. On an adjusted basis, the midpoint of Five Below’s full-year guidance projects a gross margin decline of 40 basis points.
FIVE Grappling With Elevated Operating Expenses
Five Below has been struggling with higher selling, general and administrative (SG&A) costs for some time now. In the quarter under discussion, SG&A expenses, as a percentage of net sales, rose about 60 basis points to 27.7% compared with the prior-year quarter’s level. This increase was mainly due to fixed cost deleveraging resulting from negative comparable sales and the effect of new retention awards. However, this was partially offset by a reduction in incentive compensation expenses.
The rising expenses hurt the company’s operating income, which declined to $41.5 million from $58.6 million in the second quarter of 2023.
Management expects SG&A expenses at the midpoint to deleverage by 290 basis points in the third quarter and 170 basis points in fiscal 2024. On an adjusted basis, the company expects operating margins to be 8.6% or deleverage 210 basis points on a 52-week basis in fiscal 2024. This projected decline is primarily caused by fixed cost deleverage resulting from the anticipated negative comps despite some cost optimization initiatives.
The outlook for the crucial fourth quarter of 2024, which typically includes the holiday shopping season, is also not promising. The company expects further gross margin pressure and an adjusted operating margin decline of 200 basis points.
What to Expect From FIVE in Fiscal 2024
To take a more conservative approach, management revised the fiscal 2024 outlook downward on its last earnings call. FIVE now expects net sales to be in the range of $3.73-$3.80 billion compared with the previous estimate of $3.79-$3.87 billion.
For fiscal 2024, adjusted net income is expected to be $241-$261 million compared with previous guidance of $277-$299 million. Earnings are envisioned in the band of $4.35 to $4.71 per share, lower than the earlier guided range of $5.00 to $5.40.
How the Consensus Estimate Stacks Up for Five Below
FIVE is currently in a tough spot. In the past 60 days, the Zacks Consensus Estimate for earnings per share has been revised downward by 34 cents and 68 cents for the current and the next fiscal year, respectively, now standing at $4.55 and $4.86.
Image Source: Zacks Investment Research
Can FIVE Jump Back?
While challenges persist, Five Below remains focused on reviving its performance. The company's renewed focus on its core customer base - preteens and teens - represents a critical pivot that can enhance revenues. By streamlining product assortments to align with the preferences of this demographic, Five Below aims to create a more compelling shopping experience. The company plans to reduce SKU breadth to pre-pandemic levels, emphasizing high-impact price points of $5 and below.
Improving the in-store shopping experience is another vital component of Five Below’s strategy. By simplifying store operations and optimizing labor allocation, the company intends to enhance customer engagement and satisfaction.
Five Below has moderated its store target and now plans to open 150 to 180 stores in fiscal 2025. This will allow it to select profitable locations, optimize capital expenditure and execute store operations efficiently.
Despite moderating the store growth target for fiscal 2025, Five Below is committed to opening about 230 new stores in fiscal 2024. This expansion into high-traffic locations allows the company to enhance its footprint and capitalize on underserved markets.
Five Below Stock Currently Looks Overvalued
Despite the decline in stock price in the past three months, Five Below's valuation looks stretched. FIVE’s forward 12-month price-to-earnings ratio stands at 18.86X, higher than the industry’s ratio of 16.39X. This elevated valuation indicates that investors may be paying a high price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
What Should Be Your Approach for FIVE?
Investors are at a critical spot regarding Five Below's future. Although the company is implementing strategic initiatives to spur growth, like expanding its product offerings and focusing on high-potential areas, but reaping benefits will take some time. Ongoing challenges, such as weak comparable sales, rising input costs and changing consumer preferences, present significant obstacles. For now, investors may consider exploring other opportunities. FIVE currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
Here, we have highlighted three better-ranked stocks, namely Abercrombie & Fitch Co. (ANF - Free Report) , Nordstrom, Inc. (JWN - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) .
Abercrombie & Fitch is a global, digitally-led, omnichannel specialty retailer of apparel and accessories catering to kids through millennials with assortments curated for their specific lifestyle needs, currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
ANF has a trailing four-quarter earnings surprise of nearly 28%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current fiscal year’s sales and earnings indicates growth of 13.1% and 63.4%, respectively, from the year-ago reported numbers.
Nordstrom, a fashion retailer, that provides apparel, shoes, beauty accessories and home goods, currently carries a Zacks Rank #1. JWN delivered an earnings surprise of 29.7% in the last reported quarter.
The Zacks Consensus Estimate for Nordstrom’s current financial year’s sales implies growth of 0.6% from the year-ago reported number.
Boot Barn Holdings, the nation’s leading lifestyle retailer of western and work-related footwear, apparel and accessories, currently carries a Zacks Rank #2 (Buy). BOOT has a trailing four-quarter earnings surprise of around 7.1%, on average.
The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year’s sales and earnings suggests a rise of 11.5% and 10.5%, respectively, from the year-earlier reported figures.
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Five Below Stock Down 58% From its 52-Week High: Buy or Sell FIVE?
Shares of Five Below, Inc. (FIVE - Free Report) closed at $89.75 yesterday, down 58.5% from its 52-week high of $216.18 reached in early January 2024. The stock's dramatic fall suggests potential underlying issues, raising concerns about its long-term growth. Investors are left wondering, should they hold on in hopes of a turnaround or is it time to sell and move on? Let's delve deeper.
Five Below stock has fallen below its critical technical thresholds, including the company’s 200-day moving average of $139.86. The moving average is a key indicator for gauging market trends and momentum. The breach of this threshold heightens investor concerns about the stock’s short-term outlook and signals the potential for further downside if these levels are not reclaimed.
Shares of Five Below have dropped nearly 15.5% in the past three months against the industry’s growth of 0.3%.
Image Source: Zacks Investment Research
FIVE Witnesses Soft Comparable Sales
FIVE has been struggling with a decline in comparable sales, a key indicator of a retailer’s health. The metric dropped 5.7% in the second quarter of fiscal 2024, following a decline of 2.3% in the first quarter. The current quarter’s decrease was due to a 5.4% reduction in transactions and a slight 0.3% dip in the average dollar value of transactions, as customers remained cautious with their discretionary spending. The decrease in transaction size resulted from fewer items being purchased per visit.
Five Below foresees a mid-single-digit decline in comparable sales in the third and fourth quarters. For fiscal 2024, management expects a 4-5.5% decrease in comparable sales.
Weak Gross Margin a Concern for FIVE
Another significant challenge for Five Below has been the rising impact of shrinkage, which has led to gross margin compression. In the second quarter of 2024, gross margin decreased 220 basis points to 32.7%. This decline was due to deleveraging of fixed costs amid negative comps and a higher year-over-year shrink accrual, partially mitigated by a decrease in inbound freight expenses.
With already narrow margins in the retail sector, any further erosion will severely impact the company’s bottom line, making it difficult to sustain long-term profitability. On an adjusted basis, the midpoint of Five Below’s full-year guidance projects a gross margin decline of 40 basis points.
FIVE Grappling With Elevated Operating Expenses
Five Below has been struggling with higher selling, general and administrative (SG&A) costs for some time now. In the quarter under discussion, SG&A expenses, as a percentage of net sales, rose about 60 basis points to 27.7% compared with the prior-year quarter’s level. This increase was mainly due to fixed cost deleveraging resulting from negative comparable sales and the effect of new retention awards. However, this was partially offset by a reduction in incentive compensation expenses.
The rising expenses hurt the company’s operating income, which declined to $41.5 million from $58.6 million in the second quarter of 2023.
Management expects SG&A expenses at the midpoint to deleverage by 290 basis points in the third quarter and 170 basis points in fiscal 2024. On an adjusted basis, the company expects operating margins to be 8.6% or deleverage 210 basis points on a 52-week basis in fiscal 2024. This projected decline is primarily caused by fixed cost deleverage resulting from the anticipated negative comps despite some cost optimization initiatives.
The outlook for the crucial fourth quarter of 2024, which typically includes the holiday shopping season, is also not promising. The company expects further gross margin pressure and an adjusted operating margin decline of 200 basis points.
What to Expect From FIVE in Fiscal 2024
To take a more conservative approach, management revised the fiscal 2024 outlook downward on its last earnings call. FIVE now expects net sales to be in the range of $3.73-$3.80 billion compared with the previous estimate of $3.79-$3.87 billion.
For fiscal 2024, adjusted net income is expected to be $241-$261 million compared with previous guidance of $277-$299 million. Earnings are envisioned in the band of $4.35 to $4.71 per share, lower than the earlier guided range of $5.00 to $5.40.
How the Consensus Estimate Stacks Up for Five Below
FIVE is currently in a tough spot. In the past 60 days, the Zacks Consensus Estimate for earnings per share has been revised downward by 34 cents and 68 cents for the current and the next fiscal year, respectively, now standing at $4.55 and $4.86.
Image Source: Zacks Investment Research
Can FIVE Jump Back?
While challenges persist, Five Below remains focused on reviving its performance. The company's renewed focus on its core customer base - preteens and teens - represents a critical pivot that can enhance revenues. By streamlining product assortments to align with the preferences of this demographic, Five Below aims to create a more compelling shopping experience. The company plans to reduce SKU breadth to pre-pandemic levels, emphasizing high-impact price points of $5 and below.
Improving the in-store shopping experience is another vital component of Five Below’s strategy. By simplifying store operations and optimizing labor allocation, the company intends to enhance customer engagement and satisfaction.
Five Below has moderated its store target and now plans to open 150 to 180 stores in fiscal 2025. This will allow it to select profitable locations, optimize capital expenditure and execute store operations efficiently.
Despite moderating the store growth target for fiscal 2025, Five Below is committed to opening about 230 new stores in fiscal 2024. This expansion into high-traffic locations allows the company to enhance its footprint and capitalize on underserved markets.
Five Below Stock Currently Looks Overvalued
Despite the decline in stock price in the past three months, Five Below's valuation looks stretched. FIVE’s forward 12-month price-to-earnings ratio stands at 18.86X, higher than the industry’s ratio of 16.39X. This elevated valuation indicates that investors may be paying a high price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
What Should Be Your Approach for FIVE?
Investors are at a critical spot regarding Five Below's future. Although the company is implementing strategic initiatives to spur growth, like expanding its product offerings and focusing on high-potential areas, but reaping benefits will take some time. Ongoing challenges, such as weak comparable sales, rising input costs and changing consumer preferences, present significant obstacles. For now, investors may consider exploring other opportunities. FIVE currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
Here, we have highlighted three better-ranked stocks, namely Abercrombie & Fitch Co. (ANF - Free Report) , Nordstrom, Inc. (JWN - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) .
Abercrombie & Fitch is a global, digitally-led, omnichannel specialty retailer of apparel and accessories catering to kids through millennials with assortments curated for their specific lifestyle needs, currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
ANF has a trailing four-quarter earnings surprise of nearly 28%, on average. The Zacks Consensus Estimate for Abercrombie & Fitch’s current fiscal year’s sales and earnings indicates growth of 13.1% and 63.4%, respectively, from the year-ago reported numbers.
Nordstrom, a fashion retailer, that provides apparel, shoes, beauty accessories and home goods, currently carries a Zacks Rank #1. JWN delivered an earnings surprise of 29.7% in the last reported quarter.
The Zacks Consensus Estimate for Nordstrom’s current financial year’s sales implies growth of 0.6% from the year-ago reported number.
Boot Barn Holdings, the nation’s leading lifestyle retailer of western and work-related footwear, apparel and accessories, currently carries a Zacks Rank #2 (Buy). BOOT has a trailing four-quarter earnings surprise of around 7.1%, on average.
The Zacks Consensus Estimate for Boot Barn Holdings’ current financial year’s sales and earnings suggests a rise of 11.5% and 10.5%, respectively, from the year-earlier reported figures.