Goldman Says Expectations For Five Below 'Still Too High'

Five Below Inc FIVE reported its 1Q EPS and SSS ahead of expectations. Goldman Sachs’ Stephen Grambling maintained a Sell rating for the company, while raising the price target from $30 to $31. The analyst believes that the company’s near-term performance would be adversely impacted by ongoing growth investments and incremental advertising needed to drive SSS.

Five Below reported its 1Q EPS at $0.12, beating the GS and consensus expectation of $0.10. Same-store-sales came in at 4.9 percent, ahead of the GS estimate of 3.5 percent. Although the company recorded sequential growth in SSS, the numbers were consistent “on a two-year stack,” analyst Stephen Grambling mentioned.

Five Below’s EBIT beat was driven by better-than-expected topline and gross margin. The company reiterated its EPS and SSS guidance for FY16 at $1.27-$1.31 and 3 percent, respectively. EPS and SSS guidance for 2Q is at $0.16-$0.17 and 3 percent.

Expectations Too Aggressive

“We model 3% SSS in 2Q as FIVE laps a circular removal, which disrupted sales last year, but we expect SSS to slow on tougher compares in 2H, which represents a larger % of annual sales and EBIT,” Grambling wrote.

Sales could decelerate in the longer term, as the store base matures and new competition enters the market. Moreover, ongoing growth investments and incremental advertising needed to propel same-store-sales could exert pressure on near term performance, resulting in Five Below missing consensus expectations.

“Furthermore, we believe FIVE’s e-commerce strategy, CA entrance and higher wages across retail more broadly will prove more costly than expected, limiting margin expansion,” the analyst stated. He added that while management’s 2020 goal seems aggressive, stock valuation is elevated, leaving little room for error.