Five Below Stock Faces Challenges Despite Strong Revenue Growth

Key Points

• Five Below stock is trading lower after Dollar General issued a cautious outlook on consumer spending.
• The discount retailer is slowing down its store expansion efforts to help address the weak consumer.
• The company may benefit from lower interest rates, but it may take several quarters to see the evidence.  

Things were looking good for Five Below Inc. NASDAQ: FIVE the morning after earnings. FIVE stock moved up nearly 6% in after-hours trading as higher YoY revenue, and in-line earnings were a bright spot in an earnings season when winners among retail stocks have been few and far between. However, the positive vibes were short-lived after another discount retailer gave a sour report on the state of the consumer.

The headline numbers were a mixed bag. Revenue of $830.07 million was 10% higher YoY, but same-store sales fell 5.7%. Earnings per share (EPS) of 52 cents, while down 35.7% YoY, met analysts’ expectations. The company also lowered its guidance for full-year earnings. The new target range between $4.35 and $4.71 is down from $5.00 to $5.40. 

Sector Weakness Sinks FIVE Stock 

By now, investors may be getting tired of hearing about a bifurcated economy. However, it bears repeating. Your experience of the current economy is likely tied to your income level. Consumers above a particular income level are managing through higher inflation. But that’s not the case for low- to middle-income consumers.  

That was supposed to work in favor of the discount retailers. However, Dollar General NYSE: DG delivered disappointing earnings the day after Five Below reported. What made the report particularly ominous was the dollar chain’s gloomy outlook for the consumer. In late afternoon trading, DG stock is down nearly 30%.  

That makes the 4% drop in FIVE stock look a lot better. However, a loss is still a loss, and Dollar General’s sour outlook for the consumer only confirms what many investors, who are also consumers, feel. That is, low- to middle-income consumers who are the backbone of the discount retail sector are hurting.  

Five Below’s Strategic Shift: Focusing on Existing Stores Over Expansion

Five Below acknowledged the consumer's weakened state. One strategy the company is taking to manage this time is to reduce the number of new stores it plans to open while emphasizing the strengthening of its existing stores.  

In the quarter, the company opened 62 new stores. That was an 18% YoY increase in store count, and it increased the company’s footprint to 1,667 stores across 43 states.

Even with the plans to curb the expansion, the company is still forecasting a total of 1,774 stores by the end of the year, which will result in about 15% YoY growth.  

Analyst Sentiment Points to More Losses for Five Below

The Five Below analyst forecasts on MarketBeat are mostly bearish. Five of the seven analysts that issued a price target for FIVE stock have a lower target. Even Craig Hallum, who upgraded the stock to Buy from Hold, lowered its price target to $102. That’s 6.9% lower than the consensus price of $109.63.  

Five Below’s Digital Growth and BNPL Strategy: Keys to Future Success

FIVE stock is now trading near a five-year low set in 2020. At that time, the economy was all but shut down, and retailers like Five Below were the ones that were most affected. However, the company is launching off a significantly higher revenue base than it did at that time. The company has also enhanced its digital capabilities.  

Lower interest rates may make the stock bullish. Five Below typically performs better in the second half of the year, which includes Halloween and the Holiday season. If the consumer starts to feel some relief, even if that’s more perception than reality, it could lead to better earnings in future quarters.  

The company also embraces buy-now-pay-later (BNPL) financing with a program that allows consumers to make four installment payments over six weeks. Affirm Holdings Inc. NASDAQ: AFRM reported stronger-than-expected results that confirm that consumers may be using BNPL as a way to navigate higher prices.  

That being said, in the short term, hope isn’t a strategy. The Relative Strength Indicator (RSI) indicates that FIVE stock may have further to fall before it can be considered oversold. Short interest is up more than 13% in the last month. As noted above, investor sentiment appears to confirm bearish sentiment.