Shares of specialty discount retailer Five Below (FIVE) got hammered Thursday and Friday after reporting a weak fourth quarter. Just like last year, it's time to once again recommend shares of this long-term retail play with a buying opportunity from the weakened share price.
Five Below turned in a stellar third quarter. Total sales increased 28% to $110.7 million, led by the opening of new stores and strong comparable same store sales. Comp sales increased 9%, marking the 30th consecutive quarter of positive same store sales growth. Adjusted operating income increased 35% and earnings per share came in at $0.05.
One of the keys to the strong quarter was the opening of 28 stores in the third quarter. At the end of the quarter, Five Below had 304 stores around the country. One key area investors should focus on is Five Below's strong entry into the Texas market. In the third quarter, the company opened 11 stores in the Dallas market on the same day. This unorthodox approach went well for the company and could be the sign of things to come. Five Below continues to expand its brand west and needs success in key markets.
In the fourth quarter, Five Below now sees sales in a range of $214 to $217 million. Same store sales are expected to grow 4%. Earnings per share are expected to come in a range of $0.49 to $0.51. For the full year, Five Below now sees revenue hitting a total of $538 to $541 million. This guidance fell shy of analysts' targets and sent shares down. Analysts on Yahoo Finance see Five Below posting revenue of $543.0 million for the current fiscal year, an increase of 30%. In fiscal 2015, analysts see revenue increasing 28% to $694.0 million. Earnings per share are expected to hit $0.73 and $0.97, respectively, over the next two years.
Let's not forget where we were back in June. I wrote about Five Below's strong first quarter and their raised guidance. At that time, the company saw revenue hitting $522 to $529 million. Analysts at the time saw the company posting revenue of $530.7 million. Five Below's year-end number should come in above original guidance from the company and estimates from analysts. My original estimate last year was for fiscal year revenue to hit $523.6 million.
The company's weak forecast is due to a shorter holiday shopping season. Five Below is also up against some strong comparable same store sales for the fourth quarter. However, with increased store traffic and a higher store count, Five Below should be able to deliver on these updated figures and may even provide a beat.
Shares of Five Below dropped all the way down to $22.00 in after-hours trading Thursday. On Friday, shares closed at $45.29. Over the last 52 weeks, shares have traded between $30.82 and $55.28. In 2013, shares have increased 34%. Five Below shares remain up 71% since their July 2012 IPO.
Nothing has changed from my original bullish take on Five Below's IPO. Shares are now up 71%, but the long term bullish case remains. The company has goals of 20% unit growth, 4% same store sales growth and 25% to 30% annual net income growth. Five Below's goal remains 2,000 stores in the next 20 years. With a current base of 304, Five Below has only met 15% of its potential market. As the Texas expansion showed, the company has plenty of opportunity to expand West into large cities and surrounding areas. In that original bullish article, I called for annual sales hitting $3.5 billion by the time it has 2000 stores. Five Below is a niche retailer and has a great potential ahead of it. Investors should buy on the current dips under $46 and hold for the long term.