Expectations were running high heading into Five Below's (NASDAQ:FIVE) second-quarter earnings report. The specialty retailer has been posting strong sales growth that implies it can double its store base over the next few years. Profit margin is jumping, too, thanks to surging customer traffic and a widening assortment of premium merchandise.
This week, the chain extended all of that positive momentum, and also issued an aggressive short-term growth forecast. So let's dive right in.
Image source: Getty Images.
Sales trends are strong
Revenue jumped 52% thanks to the combination of a quickly expanding store base and higher customer traffic at existing locations. That result marked a major slowdown now that Five Below is going up against stronger sales in the year-ago period. Yet it edged past the forecast management had issued just three months ago.
The gains included a contribution from 34 new stores in Q2, plus a 39% spike in comparable-store sales. Revenue is sitting 21% higher than at the same time in 2019, management explained, to cut through the noise presented by COVID-19 shutdowns.
"We had another strong quarter," CEO Joel Anderson said, "with the team executing well in a dynamic operating environment."
Costs and cash
That tough environment included rising shipping costs and higher prices for most products, which normally would pose a big challenge for a brand attached to the $5 price point. However, Five Below's new $10 merchandising niche is proving popular with shoppers. Its supply chain handled the cost and availability challenges well, too.
The gross profit margin was 36% of sales compared to 33% a year ago. Operating margins were over 13% of sales, pushing the chain into new highs on that metric. Net income has more than doubled over the past six months compared to the temporarily depressed demand period a year ago. Five Below has also opened a record 102 new stores so far this year.
Looking ahead
Management said the third quarter is off to a strong start, too, with sales likely to land between $550 million and $565 million. That growth will look similar to what investors saw in Q2, including slower year-over-year gains.
Executives hinted at some developing profit challenges, though, as Five Below works to keep its in-stock levels high. "The teams are working diligently to mitigate the impact of global [supply chain] disruptions," Anderson said.
These issues seem poised to threaten short-term profits -- for example, by raising the cost of shipping ahead of the holiday shopping season. The retailer might have to pay surcharges for things like air freight to secure enough merchandise. Five Below will likely pay up for these products to maintain its sales growth momentum through late 2021.
The good news is that the long-term growth outlook is as strong as ever, and management reiterated its plans to build a store base of at least 2,500 locations across the country compared to just over 1,100 today. Unfortunately, the demand environment is too volatile for management to feel comfortable projecting a full-year forecast. But the chain is entering the second half of 2021 with its strongest sales trends to date, even if profits might lag those gains over the next few quarters.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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