Analysis: FIVE KSS

After the closing bell Wednesday, Five Below, Inc. (FIVE) reported a top and bottom-line beat with its fiscal fourth-quarter earnings results. Sales of $602.7 million (+19.4% year over year) million edged the consensus of $601 million, and earnings per share of $1.59 (+31.4% year over year) beat the consensus by two pennies.

Joel Anderson, President and CEO of Five Below, said in the press release, "Our strong fourth quarter performance capped off a great year for Five Below. Our 2018 store openings are on track to be another record class with first year average unit volumes expected to be over $2 million. For the year, we delivered comparable sales growth of 3.9% on top of last year's record results. We saw broadbased strength across our worlds as our incredible, trend-right value offering and fun in-store experience drove both new and existing customers to Five Below."

Indeed, the results were strong with comp sales increasing 4.4%, topping estimates of 4.2%. The company's result was driven by a 2.3% rise in comp average ticket and a 2.1% increase in comp transactions. Fourth-quarter gross margin was 40.5%, a decline of roughly 60 basis points, primarily due to the outperformance of Toys and Games Sales. Although these products have lower margins, and therefore decreased the company's total gross margin in the quarter, FIVE's toy business outperformed this holiday season and was a main source of the sales upside. That's likely due to the closing of Toys "R" Us stores across the country.

As for some full-year 2018 accomplishments, the company opened 125 new stores over the course of the year, expanding the size of the chain to 750 stores. As you know from our Five Below initiation here, new stores are a large source of growth for the company and are highly profitably with an average return on investment of about 150%. More store openings mean greater profits for the company. But the current lineup of stores performed well too, with comp sales advancing 3.9% in the full year, compared to a comp sales increase of 6.5% in 2018. The comp increase was driven by a 3.1% rise in comp average ticket and a 0.8% increase in comp transactions. While these numbers are lower than the previous year's trend, remember that the previous year's numbers were influenced by the Spinner trend, which FIVE has now successfully comped. By doing so, Five Below should no longer be considered as a "fad-driven" store. Further backing this claim, Five Below has impressively delivered 13 consecutive years of positive comps, a feat that should be well appreciated by investors.

Anderson added in the release, "As we look ahead to 2019, we are focused on elevating our customer experience, delivering even better WOW products, and further enhancing our supply chain as we innovate across the organization. We are excited to continue our high growth with a record number of new store openings and remain confident in our 20/20 through 2020 goals and our ability to reach our 2,500+ U.S. store potential."

Taking a look at guidance, management expects first-quarter sales to be in the range of $361 million to $366 million, in line with the $363 million consensus. The company expects to open 35 new stores during the quarter with comparable sales up 3% to 4% (3.2% consensus). Meanwhile, earnings per share is expected to be in the range of $0.32 to $0.35, which is light of the $0.39 consensus.

For the full year 2019, management expects net sales in the range of $1.865 billion to $1.885 billion, a result that is shy of the current $1.898 billion expectation. Management expects to open approximately 145 to 150 new stores in the year, in line with the 148 analysts had forecasted, and comp sales are expected to increase 3% with the consensus 3.1%. On earnings, FIVE is expected to deliver a range of $3.00 to $3.07 per share over the full year, a result that is short of the $3.13 expectation. All of this guidance assumes the current 10% tariff rate on Chinese goods remains in place. Of the company's new store count, management expects to open approximately 50% of them in the first half of 2019, compared to 53% in the first half of 2018. Total store weeks are expected to grow at approximately 18% to 19%, and the lower cadence of new store openings impacts sales by about $10 million.

As for some other items of note, we like how management has several positive initiatives in place to spur sales, including a redesigned front-end space aimed to increase purchase of impulse items at the checkout, a store remodeling program (a combination of 2019's remodels with the new 145 to 150 new store openings will bring the total stores in the fresh format to nearly half the chain at the end of 2019), products at a higher price point (up to $10), digital advertising with social media influencers, e-commerce growth, and more.

Overall, this is a bit of a mixed read, with strong results to the end of the year, partially offset by the weaker-than-expected 2019 guidance. We aren't terribly surprised to see the first-quarter guidance come in light as we heard similar commentary from other department stores like Kohl's (KSS) , which guided for a soft February month due to poor weather conditions.

The shares are holding up quite well after-hours and are trading a few dollars higher (near our current $125 price target) despite the lower-than-expected guidance, likely because investors are appreciating the consistently positive comps sales growth and how the new store openings, which there will be more of in 2019 compared to 2018, act as a terrific profit engine for the company. That's what makes this regional to national expansion story so special.