Shares of Five Below (NASDAQ: FIVE) jumped 22.5% this week, according to data from S&P Global Market Intelligence. The discount retailer posted improving comparable store sales growth in the third quarter and announced a new CEO to lead the company. Shares of Five Below had fallen big-time this year, and are still off 52% from all-time highs. However, as of this writing at 2:33 p.m. ET on Friday, Dec. 6, the stock is up over 20% this week.
Here's why Five Below stock recovered some losses this week.
Strong Q3 earnings, new CEO
Five Below's Q3 headline numbers were strong. Revenue grew 14.6% year over year to $843.7 million, with comparable-store sales growth of 0.6%. Less than 1% same-store sales growth might seem weak, but this is a big improvement for Five Below compared to previous quarters. In the second quarter of this year, Five Below had a negative 5.7% comparable sales growth, so any positive number is a major step in the right direction.
Management stability is hopefully on the horizon as well. Five Below announced it was hiring Winnie Park as its new CEO. Park previously ran Forever 21, another retailer focused on serving a younger crowd. Park's turnaround of Forever 21 is likely why the board of directors sought her out as its new CEO.
The quarter was not all sunshine and rainbows, however. Gross profit margin dipped in the second quarter, meaning that Five Below was discounting its merchandise in order to move inventory. Gross margin fell to 31%, which was well off its typical seasonal trend. Operating income was actually negative in the quarter, compared to a positive $16.1 million a year ago. While this will likely reverse if Five Below can keep pushing positive comparable store sales growth, it is not a good sign that the company needs to discount so much in order to hit sales figures.
What comes next
The stock is up a lot this week, but still well below its all-time high. The earnings ratio is not radically expensive, either. Five Below's price-to-earnings ratio (P/E) is 23, which is well below the S&P 500 level of 31. Five Below is growing faster than the average S&P 500 stock right now with its double-digit revenue growth.
One key metric for investors to track is operating margin. Operating margin has slipped to 9% over the past 12 months compared to closer to 11% or 12% in prior years. If Five Below can regain this operating margin figure while also growing sales, its P/E will come down in a hurry. If you believe in this business model, there is still a lot of room for Five Below stock to run in the coming years.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
