Five Below (FIVE) shakes off headwinds. Is the stock a buy ahead of earnings?

2021 was a transformative year for the retail industry, marked by the widespread adoption of eCommerce that raised speculation that traditional in-store shopping would never be the same again. Contrary to the general view, the performance of retail companies, including discount stores, has been encouraging ever since the market started reopening. Among them, Five Below, Inc. (NASDAQ: FIVE) has managed to navigate through headwinds like the supply chain crisis successfully and is currently expanding its store footprint, encouraged by the stable customer traffic.

The Stock

The company’s stock has been maintaining a downtrend for some time and failed to regain traction despite the company reporting stronger-than-expected results in recent quarters. But most of the weakness it experienced this year can be attributed to the market selloff — in the absence of that, it seems, FIVE would have performed much better. Given the company’s positive performance, the valuation is pretty low and that bodes well for those planning to invest.

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Read management/analysts’ comments on quarterly reports

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As of now, analysts’ consensus rating on the stock is moderate buy, and their average price target points to a 38% gain. But it would be a good idea to wait until this week’s earnings before investing because the results are expected to provide insights into the emerging retail scenario and how the company dealt with short-term challenges like inflation and logistics issues.

From Five Below’s Q3 2021 earnings conference call:

“We believe a key driver of our success is our customer mindset. We think back from the customer and everything we do, which drives our associates to operate and plan with the customer at the top of the list. Flexibility, innovation, and operating discipline are also hallmarks of Five Below, which have served us well, especially in the last several quarters. We remain laser-focused on providing extreme value for our customers and consistently executing our growth strategies while we build for the future with 2,500-plus stores.”

Strong Q3

In the third quarter of 2021, earnings rose aided by an increase in revenues and the record numbers topped expectations. The company opened as many as 52 new stores and debuted in the Mexico market during the quarter. At $607.6 million, net sales were up 27% and comparable store sales moved up 14.8%. Net income increased to $24.2 million or $0.43 per share from $20.4 million or $0.36 per share in the third quarter of 2020. The company will be publishing its fiscal 2021 financial results on March 30, 2022, amid expectations for a 13% increase in fourth-quarter earnings to $2.48 per share. Experts are also looking for a 17% growth in Q4 sales to about $1 billion.

Meanwhile, dollar stores, in general, are concerned about rising inflation, which makes it difficult to maintain their discount retailer status. Elevated operating costs, labor shortage, and the potential impact of COVID-19 resurgence on customer traffic remain a cause for worry.

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Dollar Tree Inc. stock research summary | Q3 2021

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Dollar General Corporation (NYSE: DG), a market leader in this segment, last week reported a decline in fourth-quarter earnings amid muted revenue growth that missed estimates. It posted negative quarterly same-store sales for the fourth time in a row.

Over the past two months, Five Below’s shares mostly traded sideways and languished below their 52-week average price. The stock has declined around 16% since last year and is currently underperforming the sector.