The inflation-induced squeeze on consumer spending has come as a double whammy for most retailers, at a time when the virus-hit market is limping back to normalcy. The fact that even discount stores, which are considered people’s preferred shopping destination during financial crises, are struggling to maintain sales volumes underscores the severity of the situation.
The latest quarterly earnings of Five Below Inc. (NASDAQ: FIVE), a specialty discount store based in Philadelphia, missed estimates for the first time in about two years but it doesn’t seem to have disappointed the market, for the stock moved up this week following the announcement. After making steady gains in the first half of 2021, which drove up FIVE to a record high, the stock retreated to the pre-peak levels this year mainly hurt by the market selloff.
As the larger market shifts to recovery mode, it is unlikely that Five Below would be left out. It is already coming out of the temporary slowdown and looks poised to stay on the growth path in the coming months. The majority of analysts following the stock believe it has what it takes to enhance shareholder value in the long term. In short, Five Below is an investment option worth trying.
The company has effectively navigated the supply chain crisis so far, adding new stores to the network at regular intervals despite the market uncertainties. As the back-to-school season enters the final stage, the management is preparing to convert the Now section of its stores for Halloween. Five Blow’s executives are optimistic about the holiday quarter and expect sales and margins to go beyond the pre-pandemic levels.
The continued store addition, as part of the management’s aggressive expansion strategy, would be a key growth driver going forward. That is in line with the positive outlook on the broad retail industry, with experts forecasting an acceleration in recovery starting next year. Margin performance would depend on the company’s ability to avoid inventory overhang, for which efforts are on to enhance promotional activities to keep merchandise moving into customers’ hands.
Speaking on the Q2 results, CEO Joel Anderson said at the post-earnings conference call, “Our unique approach to the consumables business resonated with customers, and we saw outperformance in categories like novelty candy, snacks, travel accessories, pet, and health and beauty. Five Beyond also continued to be a growth driver for us as we introduced our first-ever summer WOW Wall with brand-new Five Beyond products for pets and other items from our eight worlds like an outdoor tent and our giant tumbling tower game.”
Meanwhile, sales remain under pressure from the impact of rising inflation on customers’ shopping behavior, which is likely to persist in the remainder of the year. In the July quarter, poor comparable store sales impacted overall performance. Though sales moved up 3.5% annually to $669 million the bottom line suffered due to elevated operating costs, and earnings dropped 36% to $0.74 per share. The numbers also missed analysts’ forecast. Comparable store sales were down 5.8%.
Shares of Five Below traded lower early Friday after closing the last session higher. They have lost 35% in the first eight months of the year.
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