Analysis: FIVE

What do we make of Five Below (FIVE) ? On Wednesday night, the company reported a top and bottom line beat with its fourth quarter earnings release (that you can read about here, however the company's full year earnings and sales guidance came in light compared to expectations. Yet shares are ripping higher on Thursday, gaining nearly 7% using the open price Thursday.

The stock is a curious case right now. On one side, Five Below ended the fourth quarter of its fiscal year with a comparable sales increase of 4.4%, putting its total for the year at +3.9%. It was the 13th consecutive year of positive comp performance - no small feat that is a tribute to the success of its business model and the value proposition of the stores. Furthermore, we know this comp momentum will carry into 2019 with management guiding for a 3% increase. Between successfully (and meaningfully) comping the spinner trend of 2017, which some on the Street thought Five could not thrive without, and forecasting another year of +3% performance, Five Below has now completely ended the debate that its comps are purely driven by fads. Instead, they should be viewed (whenever they occur) as meaningfully incremental to performance in the short-run, and positive in the long-run as management converts those buyers to long-term customers.

But on the other hand, we can't make light of the weaker than expected guidance, which after further digging, comes from a step up in investments to support future growth. The market doesn't like to see earnings come in short, and investors distaste of increased investments should always be top of mind. But Five Below is building a brand and that requires some additional spend.

So why is the stock acting extremely resilient to the guidance miss this morning? What's important here and what has us excited for the years to come is the company's tremendous runway for growth. After opening 125 stores in fiscal 2018, the company ended its year with a total of 750, reflecting roughly one-third of the 2,500+ opportunity management sees in the United States. The expansion is still in its early innings with the company expected to end the 2019 year in only 36 states and District of Columbia. Then there is also the remodeling program that could provide tailwinds down the road, and the $10 or less store concept that could lead to additional upside in the future.

If the stock can act incredibly well on a big guidance miss, we ask what type of stock movement would we see if the company crushes expectations in the future? We'd like to stick around to find out. The extremely visible runway of long-term growth through management's regional to national expansion plan keeps us in the name today. Lastly, after further review of the quarter, we will raise our price target to $135, reflecting roughly 43.5x the midpoint of management's 2019 earnings per share guidance.