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Should Long-Term Investors Buy FIVE Stock Prior to Earnings?

Philadelphia-based Five Below (NASDAQ:FIVE) is expected to release quarterly earnings in the coming days. Year-to-date, FIVE stock is down about 19%, hovering at $104. But that number tells only half the story. In early January, it was about $125. As markets went into freefall, on March 19, it hit a recent low of $47.53. Put another way, since the lows seen in March, the stock price has more than doubled.

five stock
Source: Jonathan Weiss /

Now investors are wondering if June may be a good time to buy into the FIVE share price. If you are not currently a shareholder, you may want to wait to analyze the earnings results before committing new capital into the company.

Much of the good news regarding the opening of our economy may already be priced into the stock price. You may consider investing in the retailer if the share drops to $90 or below. Here’s why.

What to Expect from Q1 Earnings

Five Below defines itself as “a leading high-growth value retailer.” With over 900 stores in 36 states, it mainly targets tweens and teens who are price-conscious. Most retail items are priced between $1-$5. Its stores carry a wide range items from bejeweled smartphone cases to backpacks, beach towels, clothing, games, basketballs, and nowadays hand sanitizers.

When the group announced fourth quarter and fiscal 2019 financial results on March 18, it beat estimates. Quarterly EPS increased 24% to $1.97. Similarly, revenue was up 14% to $687.1 million from $602.7 million in the fourth quarter of fiscal 2018. However, comparable sales decreased by 2.2%.

The retailer opened six new stores during the quarter, an increase of 20% in the number of stores from Q4 FY 2018. CEO Joel Anderson was quite upbeat as he summed up, “Fiscal 2019 marked our fourteenth consecutive year of positive comps. I am very pleased with our teams’ execution and accomplishments in 2019.” However, he acknowledged the pandemic uncertainty and said the group would not be providing guidance for Q1 FY 2020.

In the days after the Q4 results, like so many other retailers, the group had to close down its stores. Although it has an online presence, most of the revenue comes from its 900 stores. No foot traffic means very little sales.

Q1 results will likely reflect this grim reality that the group’s revenue would have dropped to levels management could not have foreseen in March. Coupled with cash that comes with operating retail stores that bring in no revenue, investors may find the upcoming numbers quite dire.

What Could Derail FIVE Stock in the Short Run?

Over the years, many analysts have been impressed with Five Below’s business model. And the long-term price of FIVE stock reflects the way management has rewarded shareholders. In July 2012, it had had its Wall Street debut at an IPO price of $17. If you had invested $1,000 in the stock then, now it would now be close to $6,000.

And until the COVID-19 outbreak became a reality of our lives, investors were quite hopeful that its high-growth rate would continue. But we now live in a rather different world. Retailers are among the industries that have been the worst affected in the past several months.

According to a recent study that appeared in the Journal of Retailing, “retailers of non-essential goods, such as apparel and footwear, are facing a significant drop in sales and are having to adopt new ways to reach and engage customers who are shopping from their home, just to sustain themselves.”

On May 29, management announced that it has reopened over 75% of the stores in all but four of the states it operates in. Although both consumers and investors are encouraged by the actual opening of the stores, it is still too soon to tell if shoppers will be fully returning to the stores any time soon.

Furthermore, economists are debating if we will enter a recession in the rest of the year. In case of declining income levels, many people, including teens and young adults, may also trim down shopping budgets.

And if customers do not return or do not spend much when they return, FIVE stock cannot be priced like a fast-growing stock any more.

So Should You Buy Now?

Hardly any retailer is immune to the new normal. And that fact would eventually catch up with a given stock’s fundamentals and price. The specialty retailers forward P/E and P/S ratios currently stand at 47.62 and 3.1x respectively. These metrics mean that FIVE stock is not cheap.

For example, in June 2017, P/S ratio and the share price were around 2.4x and $48, respectively. Unless there is considerable upswing in revenue in the summer months, the current metrics may not be able to justify a stock price over $100.

Are you an investor who also follows technical charts? Then you may be interested to know that the its short-term oscillators are in overbought territory. Although they could stay overbought for quite some time and FIVE stock price can continue to stay up, it is likely that some profit-taking is around the corner.

Investors would like to see it go and stay above $110 and even $120. Yet short-term traders are likely to push the stock toward the $90 level.

If you currently own the stock, you may consider riding the wave. Alternatively, you may consider initiating an ATM covered call position. For example, a July 17 expiry covered call would decrease the volatility in your portfolio, offer some downside protection, and enable you to participate in a potential up move.

The Bottom Line on FIVE Stock

With fears of an economic contraction or even a recession around the corner, most retailers like Five Below are facing the possibility that their sales levels may take years to return to pre-coronavirus levels. For many consumers, money will be tight for the rest of the year. And management’s aggressive growth strategy may have to take a pause.

Therefore, if you are not yet an investor in FIVE stock, you may want wait for a pullback that may happen around the earnings release date.

In the short run, volatility with a downward bias is likely in the stock. In the long run, I expect management to rise to the challenge due to the outbreak and economic slowdown.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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