By JPMorgan downgraded Five Below Inc. (NASDAQ: FIVE) from Neutral to Underweight on Thursday, citing concerns over its recent performance and challenges anticipated in the coming year.
Despite the downgrade, JPMorgan raised its price target from $89 to $95, reflecting 18 times the 2026 EPS estimate.
According to analyst Matthew Boss, the company’s comparable store sales have declined in 9 out of the past 10 quarters, a clear signal that consumers are tightening their budgets.
Boss also noted that labor investments and executive compensation could further squeeze margins into 2025 as the retailer navigates strategic adjustments.
Five Below’s Q2 performance
Five Below’s Q2 earnings report, released on August 28, presented mixed results.
The company reported $830.1 million in revenue, surpassing consensus estimates and marking a 9.4% year-over-year increase.
However, same-store sales dropped by 5.7%, though this was slightly better than the expected 6.4% decline.
Earnings per share (EPS) came in at $0.54, down from $0.84 in the previous year.
Operating income also took a hit, falling to $41.5 million from $58.6 million in Q2 2023.
The company’s inventory climbed to $639.9 million, signaling slower sales growth.
Despite these challenges, Five Below continued its expansion, opening 62 new stores in Q2 and ending the quarter with 1,667 locations across 43 states—an 18.5% year-over-year growth.
However, the company has moderated its store growth expectations for 2025, now aiming for 150 to 180 new locations, down from earlier projections.
This more cautious approach reflects management’s focus on improving store-level execution and optimizing its product assortment to better align with its core customer base.
Five Below’s stock guidance
Looking ahead, Five Below projects full-year revenue between $3.73 billion and $3.80 billion, with Q3 revenue expected to range between $780 million and $800 million.
However, the retailer anticipates continued declines in same-store sales, forecasting a 4% to 5.5% decrease for the full year.
Compounding the issue are margin pressures from labor investments and pricing strategies as the company works to remain competitive in an inflationary environment while maintaining its value-oriented brand.
FIVE’s inflation challenge
Five Below is grappling with several challenges. Inflation remains a significant concern, particularly as the company has raised prices on many products, undermining its value proposition with its core lower-income customer base, which is highly sensitive to price hikes.
Additionally, investments in labor and executive compensation, while essential for long-term growth, are likely to weigh on margins in the short term.
The macroeconomic environment, characterized by rising interest rates and consumer uncertainty, also presents risks for discretionary retailers like Five Below.
On a positive note, Five Below’s long-term store growth potential remains promising.
The retailer has successfully expanded its footprint across the US and continues to attract customers with dynamic merchandise targeted primarily at pre-teens and teenagers.
Management’s efforts to improve in-store experiences and adapt product offerings to shifting consumer preferences may help the company navigate current challenges.
Reducing SKU assortments and improving merchandise execution are steps in the right direction, though these initiatives will take time to yield results.
Five Below’s stock valuation
From a valuation perspective, Five Below’s price-to-earnings (P/E) ratio is 19.7x, higher than peers like Dollar General, which trades at 13.5x forward earnings.
This premium reflects higher growth expectations for Five Below, but downside risks remain if the company fails to reaccelerate growth and improve margins.
If comparable sales continue to decline, Five Below’s valuation could compress closer to that of its peers, presenting further downside risk for the stock.
FIVE stock: can short-term momentum hold?
Since late 2021, $220 has acted as a major resistance level for Five Below’s stock, which it has struggled to break through multiple times.
Earlier this year, the stock traded near this level but has since experienced a significant downtrend, losing more than half of its value year-to-date.
The only bright spot for the stock in 2023 has been its recent bounce back from $65 to around $100.
While this rebound has provided some short-term strength, the stock remains weak on medium and long-term charts, indicating it is not firmly in the control of either bulls or bears.
For investors with a bullish outlook, it’s advisable to buy only once the stock closes above its 100-day moving average, currently near $103.17.
Short-term traders with a bearish view could consider initiating a small short position at current levels, with a stop-loss at $107.6.
If the short-term bullish momentum fades and the stock dips below $92, they may add to their short positions.
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