Five Below (NASDAQ:FIVE) reports earnings for the third quarter of 2018 on Wednesday, Dec. 5, after the bell. The Philadelphia-based discount retailer has struck a chord with buyers and investors alike. Its strategy of mixing extreme discount retailing with the teen market has brought massive profit growth to the company and enormous gains for investors in FIVE stock.
However, after seeing the stock in a strong uptrend for most of the year, FIVE has pulled back over the last three months. The upcoming earnings report may or may not halt the downward movement in the stock. Still, I think Five Below stock will become a profitable long-term buy once the stock price stops falling.
Few Surprises Expected From FIVE Stock Earnings
For the third quarter, Wall Street forecasts Five Below earnings of 19 cents per share. If this estimate holds, it will represent a 1-cent increase from the same quarter last year, when the company earned 18 cents per share. Still, the company has beaten estimates in the previous four quarters, so this could easily come in higher.
Analysts expect revenues to see a more substantial increase. They predict revenue of $304.01 million, an 18.2% increase from the $257.18 million seen in the same quarter last year.
Despite the more modest profit increase for this quarter, profit increase and FIVE stock have gone on a tear. For the year, analysts forecast 44.1% profit growth for the company. Over the next five years, they expect this growth to average 28.1% per year.
Profits had also grown by an average of 34.88% per year over the previous five years. Hence, it appears set to become the next growth story of the so-called “extreme discount” retail sector. With its focus on teens, it operates as only an indirect peer to the likes of Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG).
Still, despite targeting a different segment, I see enormous growth potential. Currently, FIVE operates over 750 stores across 33 states. Both Dollar Tree and Dollar General each operate around 15,000 stores. While I do not think the teen niche will support 15,000 locations in the U.S., I think it indicates more room for domestic growth than its extreme discount peers.
FIVE Stock Could Become Further Discounted
However, one company product that does not sell at an extreme discount is FIVE stock itself. Five Below stock saw a run-up and then a decline over the past year. The stock appears in a downtrend since early September, which has placed the stock in a bear market.
The price-to-earnings (P/E) offers few clues. Five Below stock trades at a P/E ratio of over 41. However, with its high-growth that comes in slightly below the equity’s five-year average P/E. Still, before the 2017-18 run-up in FIVE, it traded at around 35 times earnings. Such historical patterns indicate FIVE stock may become a buy if it falls by an additional 15%.
Still, fighting the herd usually becomes a losing proposition for investors. Hence, I would stay away from FIVE stock for now. Admittedly, an impressive earnings report could serve as the catalyst needed to break the downtrend. Either way, investors should probably watch and wait at this time.
Concluding Thoughts on FIVE Stock Earnings
Many investors will look to this earnings report as a possible catalyst that helps establish a floor for FIVE stock. FIVE has posted impressive earnings growth for the last few years. I expect third-quarter earnings will confirm that that trend continues.
The greater question involved the recent drop in Five Below stock. Although that drop causes concern, investors need to consider that the equity more than doubled in value between February and September. Pullbacks tend to occur after such moves.
However, in the long-term, I think FIVE stock will likely become the next great growth story in retail, and new buyers still have time to benefit. Perhaps this quarterly report will offer clues on when that time will come.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
