EUR 850.00 For Business Accounts Only

Morningstar | After a Solid Quarter, Five Below’s Plans to Tackle Tariffs Seem Reasonable; Shares Appear Rich

With its first-quarter results near our targets and its plans to combat the effect of tariffs striking us as prudent, we do not plan a large change for our $97 per share valuation for no-moat Five Below. We also do not expect to much alter our long-term outlook, calling for mid-teens percentage sales growth and 13% adjusted operating margins on average over the next decade.

Sales rose 23% (on 3.1% comparable store sales growth) against a 6.7% operating margin, versus our 21% and 6.5% respective targets. Management effectively left its full-year guidance intact, raising its range by $0.11 (to $3.11-$3.18) to reflect the first-quarter tax benefit of share-based accounting. Our announcement forecast was $3.04, excluding the accounting impact.

Five Below announced that it plans to mitigate tariff impacts through a multipronged approach, using vendor negotiations and price increases in the near term while diversifying sourcing longer term. We see this as prudent. While we believe Five Below’s scale will limit the degree to which it can split the burden with its vendors, we expect its move to boost prices modestly past the erstwhile $5 barrier (with potential price points including $5.25 and $5.55, subject to testing) should not dilute its value-oriented message. While it will take time to shift sourcing outside of China (with items subject to current tariffs constituting around 15% of receipts, though this does not include contemplated levies on an expanded roster of items), we expect such efforts to reduce its risk from future tariff tiffs even if the current conflict subsides.

While comparable sales grew slightly slower than our 4% target, the firm’s store opening pace was above our forecast (39 units opened versus our 35). We still see significant opportunity for growth, fueled by infrastructure investments (including a new Atlanta distribution center and another facility expected to open in the southwest next year) and an attractive real estate environment.