Revised Marketfy Strategy Hurts Comps At Five Below

• Five Below Inc FIVE shares are down 6 percent year-to-date, after hitting a peak of $43.62 on January 8.
• Credit Suisse’s Christian Buss maintained an Outperform rating on the company, while reducing the price target from $40 to $39.
• Five Below’s 2Q comps missed expectations, as the company’s revamped marking strategy failed to garner the required traction.

Five Below reported its 2Q comps at 3 percent, as compared to its guidance of 4-5 percent and the Credit Suisse estimate of 4.5 percent. Analyst Christian Buss said that the performance is a “significant disappointment” in view of the company’s aggressive commentary and guidance when 1Q results were reported.

The miss appears to be “execution related,” Buss wrote, adding that Five Below’s new marketing strategy “did not resonate with consumers as expected.” The strategy was designed to reduce reliance on newspaper circulars and emphasize digital and TV marketing.

In the report Credit Suisse noted, “The lack of consumer response to this strategy raises questions about the company's ability to drive traffic, a key challenge for sustained comp store sales growth.”

“The company has now missed our comp expectations three of the last six quarters, particularly in key holiday periods in both 2013 and 2014. We take a more cautious approach for comp sales expectations going forwards and lower our target price as a result,” Buss added.

Five Below’s 2Q gross margin contracted 55bp y/y to 32.8 percent, but was higher than the Credit Suisse estimate of 33.3 percent. Operating margin was also down 240bp y/y to 6.3 percent, marginally better than the Credit Suisse estimate of 6.2 percent.

The EPS estimates for 2017 and 2018 have been reduced from $1.33 to $1.30 and from $1.63 to $1.59, respectively.