Five Below (NASDAQ:FIVE) delivered the worst results that it has ever produced - and probably ever will. Revenues fell off a steep cliff: down 45% YOY. The top-line decline would have been worse, if not for an increase of 20 in the total number of stores. The sales drop was substantially worse than analysts had been expecting.
In great part due to the loss of scale (i.e. operational deleverage), margins evaporated. As a result, a more benign estimated net loss of 30 cents per share gave way to an adjusted net loss of $0.93 in 1Q20.
But not all was bad news, far from it. As I projected in my earnings preview, the focus of attention would quickly turn to the recovery process, after the shock of terrible financial results wore off. With Five Below on track to return to something close to business as usual in the second quarter, the share price increased by about 10% in after-hours trading.
Credit: The Street
Looking strong so far in 2Q20
First quarter P&L results need no more than a brief paragraph to be analyzed. Five Below shut down all of its stores on March 20 and reopened them slowly at the end of April. Therefore, the retailer kept its doors open for a bit more than half of the quarter, which largely justifies the sharp reduction in revenues. E-commerce did not help sales much, since the company's digital channel accounts for a very small piece of the business.
Five Below went from all stores closed in late April to 75% of them open last week to 90% today. The initial read on shopping activity in these first few weeks of 2Q20 has been overwhelmingly positive. In the earnings call, the management team shared May comps in reopened stores of 8%, which is great compared to the "post-fidget spinner" average of 2.5% (see comp chart below, which excludes the first quarter 2020 outlier).
Source: DM Martins Research, using data from company reports
Not much of a surprise, number of in-store transactions has been low, but ticket size has been much larger than previously witnessed - a consequence of customers consolidating shopping into fewer trips to the store. I believe that the traffic-to-ticket mix shift towards the latter should be supportive of margins, since Five Below has been producing positive comps while operating limited hours in many cases.
To be fair, there is still quite a bit of uncertainty on Five Below's horizon. Management has been unable to commit to guidance or even make high-level projections for the rest of 2020, claiming that the encouraging trends observed lately have not been in place for long enough. I continue to fear about a weaker-than-average back-to-school season in late summer. I also believe that the retailer's performance in the important holiday quarter is still very much a question mark.
Source: company's investor presentation
At least, Five Below seems to have left behind the struggles of the COVID-19 crisis. Should investors be forward-looking beyond the next six to twelve months, I believe they will appreciate the company's long-term growth story, which I think remains unchanged. Footprint expansion plans have been reiterated, and quite a bit of untapped opportunity in new markets west of the Mississippi still exists (see chart above).
Unfortunately, FIVE is far from being a bargain stock once again, after it dipped into unjustifiably low valuations in mid-February (see graph below). Still, I see a compelling buy-and-hold opportunity here, even if shares are likely to flirt with pre-COVID levels during Wednesday's trading session.
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