Five Below (FIVE) stock could emerge as a rare winner in the battered retail landscape (XRT) after an earnings beat on Wednesday after the market close.
Shares of the Philadelphia-based discount retailer were up about 2% in pre-market trading as the company bested top and bottom line estimates for the first quarter, aided by an accounting change that added $0.11 to the EPS number, which beat the FactSet by $0.12. (The stock later dropped off sharply after the open, driven largely by a retail sector threatened by external macro impacts.)
"We kicked off the year with a solid first quarter. Both sales and earnings were at the high end of our guidance ranges, and new stores continued to exceed expectations and drive our growth," CEO Joel Anderson said. "This quarter's result is a great example of how important new stores continue to be for the Five Below model. They remain the biggest driver of our growth and we plan to open 145 to 150 locations this year."
Comparable sales were noted as slightly below guidance. On Thursday morning, the figure appears to be overshadowed by the beat on first quarter expectations and the raise of full year EPS estimates to the range of $3.11 to $3.18 per share above the consensus of $3.06.
"Overall, we thought this was a pretty good quarter for the company," Jim Cramer's Action Alerts PLUS team said after the print. "It's no secret that retail had a tough first-quarter earnings season due to weather and tariffs, but the Five Below business model with its discount prices and store expansions performed well and overcame the difficult conditions."
Moving forward, Anderson addressed the major headwind still ahead in tariffs which threaten supply chains for discount retailers on multiple fronts. With about 15% of products sold impacted by coming tariffs on China, he noted the company has mitigation strategies in place.
"As a value-driven retailer we are concerned about higher tariffs as they will be impactful to our business and lead to higher prices," he acknowledged. "We expect to mitigate the jump to 25% and are working on a number of options to do so including vendor negotiations, price increases on our $1 to $4 items, process efficiencies and overtime moving production to other countries."
"This dire situation has been so fluid," he added, noting that the company can only deal with tariffs already placed into law, rather than speculation on Mexican and Indian tariffs, for example.
The company's ability to show sustained margins amid the recent pressures has encouraged analyst optimism on the company's ability to mitigate external pressures.
"Five Below has a unique ability to navigate the tariff ping pong game given their go to market strategy and pricing architecture," Barclays analyst Karen Short wrote in a research note. "With this in mind, Five expects to mitigate the $25 billion tariffs and is aggressively looking at all options."
She added that the price increases, which come at a far smaller percentage increase to price tags than competitors like Dollar General (DG) and Dollar Tree (DLTR) , should allow the company to maintain such margins without softening demand significantly.
Overall, the positive results and mitigation strategy on tariffs is expected to carry market confidence through the post-earnings day.
"We expect sentiment to remain positive as FIVE impressed with a solid 1Q, 2Q guidance in line with the Street, and FY19 guidance unchanged despite the increase in tariffs," Deutsche Bank analyst Paul Trussell said. "We believe the company's apparent flexibility and various initiatives should give investors comfort in a very volatile retail space."
(Five Below is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells FIVE? Learn more now.)
