Five Below’s Modest 2023 Guidance Lags Our Outlook but Doesn’t Alter Our Long-Term View

No-moat Five Below’s FIVE somber outlook for fiscal 2023 overshadowed its fiscal 2022 fourth-quarter earnings report, which aligned with its preliminary announcement Jan. 9. Against the backdrop of macroeconomic uncertainty, the firm expects $3.49 billion-$3.59 billion in sales and $5.25-$5.76 in diluted earnings per share, just shy of our $3.66 billion and $5.93 respective forecasts. While our 2% comparable sales estimate is within the guided range of 1%-4%, 200 projected new store openings falls short of our 230-store estimate. As we intend to adjust our estimates to within management’s ranges, we expect to lower our $149 fair value estimate by a low-single-digit percentage. We continue to view the shares as expensive.

Despite the more conservative outlook, Five Below’s value-oriented offerings resonated with consumers in the fourth quarter. A 2.8% bump in transactions drove comparable sales growth of 1.9%, ahead of our 1% estimate, powered by 250 Five Beyond format conversions and strength in its needs-based selection (candy and seasonal). Additionally, Five Below benefits from its higher-income clientele ($75,000 average) compared with peers like narrow-moat Dollar General ($45,000 average), which should blunt sales volatility. Expense management and moderating freight and distribution expenses in the quarter lifted gross margin by 50 basis points to 40.3%, modestly below our 40.7% estimate.

We continue to view Five Below’s expansion strategy (targeting 3,500 units by 2030, up from 1,340 in 2022) and investments (buy online/pick up in store, data analytics, higher-priced items) as prudent, helping to drive consumer awareness in an intensely competitive retail environment. While we expect near-term headwinds to curb consumer discretionary spending, we view the firm’s long-term economic model as largely intact and continue to view low-double-digit (roughly 12.5%) long-term operating margins as attainable.