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The Street's Reaction To Five Below's Earnings, Tariff Commentary

The Street's Reaction To Five Below's Earnings, Tariff Commentary

Five Below Inc (NASDAQ: FIVE), a retailer that sells all products in store for $5 or less, reported fiscal first-quarter results and a plan to help mitigate any impact from tariffs. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

Bank of America's David Buckley maintains a Buy rating on Five Below with an unchanged $150 price target.

Wells Fargo's Edward Kelly maintains at Outperform, $143 price target.

UBS' Michael Lasser maintains at Neutral, $132 price target.

KeyBanc Capital Markets' Bradley Thomas maintains at Sector Weight.

Shares of Five Below were trading lower by 2.5 percent to $119.88 at time of publication.

BofA: 'Consistent' Start To Fiscal 2019

Five Below reported comparable store growth of 3.1 percent, Buckley said in a note. The company also earned 46 cents per share, which beat the Street's estimate of 35 cents. Gross margins rose 10 basis points which also exceeded management's guidance for a 50 basis point dip.

Buckley said Five Below also benefited from occupancy cost leverage as costs associated with a new distribution center were lower than expected. The company also opened 39 new stores, 12 of which ranked in the top 25 best Spring store openings.

Related Link: BofA: Five Below Has Upside To $150

Wells Fargo: 'Aggressive' Tariff Mitigation Plan

Five Below's management said it will test higher prices in some stores right away to mitigate potential tariff increases, Kelly said. The company will test raising prices on items mostly in the $1 to $4 range although it will also evaluate pricing items above the $5 ceiling.

The tariff update was "certainly front and center" and Kelly said creates a potential risk to Five Below's growth story. Nevertheless, the company looks to be better positioned compared to other retailers to navigate any challenges. He said management does deserve credit for providing the "most transparent and aggressive mitigation defense" to date.

UBS: The Math Behind Tariffs

Five Below could see a $25 million increase in the cost of goods sold (COGS) if tariffs on imports lift from 10 percent to 25 percent, Lasser said. Assuming Five Below is able to recoup 80 percent of the increase, the company would still see a 10-15 basis point operating margin decline and 3-4 cent drag to full-year 2019 earnings.

Assuming 50 percent of Five Below's total products are imported from China and tariffed at 25 percent, it would contribute another 3-6 percent annualized drag to EPS even if 80-90 percent of the increase is passed through to the consumer.

KeyBanc: Valuation And Tariff Concerns

Five Below continues to target a 20-percent average annual sales growth with more than 20-percent average annual net income growth through 2020, Thomas said. While this implies the company is among the highest sales and earnings growth stories, the stock's premium valuation prevents a more positive stance on the stock.

Thomas said Five Below also faces risk from new tariffs although management is executing "admirably" in merchandising, marketing, store remodels and new store productivity.

Photo credit: Mike Mozart, Flickr

Latest Ratings for FIVE

Nov 2020Morgan StanleyMaintainsOverweight
Nov 2020Loop CapitalDowngradesBuyHold
Sep 2020Wolfe ResearchInitiates Coverage OnOutperform

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