AndreyPopov
AndreyPopov
Shrink. It is a term being cited more and more by retail as a reason why they are raising prices, why they are seeing worse than expected results, and why forward guidance from so many are being impacted to account for this. Believe it or not, there is mass theft even in low dollar item stores like Five Below, Inc. (NASDAQ:FIVE), where items mostly range from $1-$5, with some "more than $5" section, or so-called "five beyond," format stores as well.
As strange as it seems, in today's society where theft largely goes unpunished, or in some cases law enforcement won't respond to up to a certain dollar amount, and in extreme cases where there is little in the way of consequence, we see a huge increase in theft. Today "shrink" was cited as a headwind for the performance of Five Below (FIVE) in its just reported Q4 earnings. In this column, we discuss the results, and initiate here at a neutral rating.
Five Below Q4 results missed consensus expectations on both the top and bottom lines. Here in Q4, Five Below reported net sales that increased by 19.1%. That is a nice increase again, hitting $1.34 billion versus $1.12 billion a year ago. However, it missed expectations slightly by $30 million.
It is worth noting that the gains were impacted by a 53rd week in Five Below's fiscal 2023, so accounting for this, net sales increased 14.9%. This is reliable growth.
Now, the most critical metric we look for in retail is the comparable sales figure. When comps are down, we generally avoid names. In this case, comps were positive. In fact comparable sales increased by 3.1%. In terms of overall sales another reason to like Five Below is that it has consistently grown its store count in strategic locations. Compared to last year, we now have 15% more stores than the start of 2023. With 1,544 stores, the company has expanded its geographic foot print tremendously. Are we reaching a point of saturation? We still see ample room for growth from this base as they operate in 43 states.
But what about this so-called shrink? Joel Anderson, President and CEO of Five Below, stated plainly in the press release:
The benefit of strong sales performance to our profitability was offset by higher than anticipated shrink headwinds, resulting in earnings at the low end of our guidance range.
So there you have it. Operating income, and overall earnings suffered due to more than expected shrink. The theft is weighing on them, and all the company can really do is raise prices to offset the theft. This is exactly what retailers like Walmart (WMT) and Target (TGT) have done.
Still, despite the theft, operating income was $268.4 million, strong gains, compared to $225.8 million in Q4 2022, but below expectations. Overall net income was up $30 million to $202.2 million, or $3.65 on an EPS basis, compared to $3.07 a year ago. This was a noticeable $0.13 miss against expectations, and was at the lower ends of guidance.
So as we look ahead, the company is putting into place mitigation efforts to stop shrink, but it is weighing on guidance. Management indicates that it will "take time" to have a material impact. What will benefit growth is a plan to deliver 225 to 235 new store openings in 2024 which will help sales and income. They will also benefit on the transport and logistics side of the equation by completing the expansion of two distribution centers.
As we look ahead, we like the expansion plans, and think the performance of the company has been strong, but are neutral here. Five Below, Inc. stock, even with today's decline, is expensive. At $178 per share, the midpoint of EPS was guided to be $5.97, so that means we are looking at nearly 30X FWD EPS here. That is rich.
One could argue a rich valuation has been in play for some time and the company will grow into it. However, there was only about a 10% growth in EPS from 2023. This is not the kind of growth you expect with this valuation. And the guidance on comparable sales was too wide for our liking, coming in at flat to up 3% for the year.
Long term, if shrink can be controlled, and the expansion efforts continue along with moving into the new "beyond five" formats, which sell higher margin items, along with balance sheet improvement, there is likely long-term upside. But we think that price you pay matters, so we advocate waiting for even more of a pullback in Five Below, Inc. shares before dipping your toes into this retailer.