Morningstar | FIVE Updated Star Rating from 28 Mar 2019
We anticipate lifting our $91 per share valuation for no-moat Five Below by a low- to mid-single-digit percentage, reflecting the time value of money and solid year-end earnings. While the results fortify our favorable view of management’s ability to balance strong execution and prudent expansion (contributing to our Exemplary stewardship rating), we still believe the intense competitive environment will hold operating margins near fiscal 2018’s 12% over the next decade, despite low-double-digit revenue growth. We suggest investors await a more attractive entry point.In fiscal 2018, revenue rose 22%, capped by 4.4% fourth-quarter comparable sales growth, leading to $2.66 in adjusted diluted EPS. Results slightly outpaced our targets, which were 22%, 3.8%, and $2.63, respectively. Management set its fiscal 2019 EPS target at $3.00 to $3.07, based on $1.865 billion to $1.885 billion in sales driven by 3% comparable-store sales growth. We suspect guidance is somewhat conservative on profitability; our pre-announcement EPS target was $3.15.
Five Below’s success comes against a favorable overall retail backdrop, and we expect strength to continue into fiscal 2019. We believe the firm’s differentiated concept and focus on its core youth market will translate into new markets, propelling our top-line growth forecast. Still, we find it difficult to anticipate meaningful margin expansion even as cost leverage builds, with intense competitive pressure forcing reinvestment into keeping prices low and values high. This conclusion comes despite our view that the low-cost items that Five Below sells can be more difficult for Amazon and other digital retailers to deliver economically, particularly as shipping costs erode profit on a generally small ticket. We believe the challenge comes not only from digital and physical retailers, but also from other sources for younger Americans’ discretionary income (such as mobile apps, movies, and experiences).
Five Below is a retailer providing a range of merchandise targeted at the tween and teen demographic. The company provides an assortment of products, all priced at $5 and below, including select brands and licensed merchandise across eight worlds: Style, Room, Sports, Tech, Create, Party, Candy and Now. The company operates in states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California and Arkansas.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.