The discount retailer had a rough first quarter.
Shares of Five Below (FIVE 1.03%) fell by as much as 15% this week, according to data from S&P Global Market Intelligence. The discount retailer for specialty and kids-focused items posted weak growth in the first quarter, leading investors to sell the stock. Over the last five years, the stock is flat while the broad market has soared.
Here’s why Five Below stock was down again this week.
Slowing comparable sales growth, poor guidance
In the first quarter, Five Below’s revenue grew 12% to $811.9 million. While this looks good, more than 100% of this growth was due to Five Below opening new stores. Its comparable sales growth, which measures revenue growth from existing locations, was negative 2.3% in the first quarter. Negative comparable sales is a bad thing for a retailer and can lead to deteriorating profit margins with fewer sales over its fixed cost base and labor.
You can see this with Five Below’s profits. In the quarter, the company’s operating income declined from $42.4 million to $36.2 million despite having a larger overall revenue number. Things will likely look worse throughout 2024. Management is guiding for comparable sales growth of negative 3% to negative 5% for the full fiscal year, which would be a deterioration from Q1.
The discount shopper is clearly struggling right now. Investors are scared that this will get worse and hurt Five Below’s profits in the coming quarters.
Is the stock cheap?
At the moment, Five Below has some ugly looking financials. But is there a positive spin investors can look toward on the horizon?
I think perhaps there is. The stock trades at a price-to-earnings (P/E) ratio of 23 right now, one of its cheapest levels in years. And this is with depressed profit margins with comparable sales growth struggling at the moment.
Historically, Five Below has been able to post double-digit revenue growth as it opens new stores and sees positive comparable sales growth. If you believe 2024 is just a hiccup in the long-term growth opportunity for the retail concept, now could be a good time to scoop up some shares. It is trading at a P/E below the S&P 500 average, which could be cheap if the company keeps growing at its historical rate. Of course, this growth is not guaranteed.
Investors who have had Five Below on their watch list might want to take a second look and buy some shares after they fell yet again this week.