MKM Says Take Advantage of FIVE Weakness

• Five Below, Inc. FIVE has seen an increase of almost 20 percent in its share price in the last six months.
• Patrick McKeever of MKM Partners has reiterated a Buy rating and price target of $50 on Five Below.
• The company posted robust 2Q15 results, and McKeever believes that Five Below’s long term growth story remains intact despite the marginal sales miss.

For 2Q15, the company reported its EPS in-line with expected, while the operating margin were better than anticipated. Five Below posted robust early performance in Florida and ended the quarter with lean inventories.

Comps were slightly below expectations, impacted by a lower than expected increase in same store sales. However, Five Below reported positive comps for the 37th consecutive quarter, driven by increased traffic.

Also, while new store productivity was slightly below trend, due to timing issues, “new stores continued to ramp very quickly,” McKeever said, adding that this makes to “it more difficult for Five to generate same-store sales growth than other growth retailers, most of which experience a comp "waterfall" effect in year-2 and beyond.”

The company opened 32 new stores during 2Q15, and is progressing on track to opening 70 new stores this year, in addition to the 366 stores opened by the end of FY14. Five Below intends to open another 85 stores next year.

According to the MKM Partners report, “Store performance continues to be very consistent across markets and class years, which suggests the concept is highly portable,” with potential for at least 2,000 stores.

The 3Q15 estimates have been lowered marginally to reflect the guidance. The full year estimates remain unchanged.