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Research analyst, valuentum
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Teen retailer Five Below (FIVE) reported strong second quarter results Monday. The fast-growing retailer grew revenue 40% year-over-year to $86.8 million. Non-GAAP earnings per share were flat at $0.04 per share, though that was a few cents better than expected. The firm expects $402 million-$407 million in sales for fiscal year 2012 and adjusted earnings per share of $0.45-$0.47 for the year, both forecasts slightly better than expectations.

Same-store sales surged 8.6% during the second quarter as the company continues to drive traffic and higher ticket prices. We're not surprised by the success of the firm, which focuses on price-points between $1 and $5. In a weak economy, younger consumers are flocking to the value-offering, which we think is also driving strong performance at fast-food giants McDonald's (MCD) and Taco Bell (YUM). For our in-depth DCF valuation analysis on McDonald's and Yum Brands, please click here and here, respectively. Items at Five Below are literally so cheap that it doesn't have to focus on fashion nearly as much as other teen retailers.

However, we're not fans of the company's business model. Not only are gross margins relatively weak at 33.1%, but we also don't think they have much room for expansion. Further, the company needs to invest SG&A dollars to grow overall sales, which is hard without much organic cash-flow generation. As a result, the firm's balance sheet is somewhat stretched, and operating margins are a lackluster 5.4%. We're not interested in the shares at this time.

Source: Sales Surge At Five Below