This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Greenberg: Look Out Below for Five Below?

SAN DIEGO (TheStreet) -- It happens all the time: Investors get blindsided and wonder why.

Classic case: Five Below (FIVE - Get Report). This is one I've been hearing about as a disaster-in-the-making for months, but hadn't yet focused on or written about.

Still, it's a good case study, and with 21% of its float sold short, it appears investors shouldn't have been surprised by its earnings warning.

What do the shorts see that investors obviously don't?

Must Read: Greenberg: Diamond's Intent to Mislead

I checked with one today who focuses largely on retailers and has been among those sounding the siren on Five Below.

Here's a summary of what he said. If nothing else it provides a good look at why sometimes the shorts know before the company:

"For me it was a number of factors that began with the jailbreak of insider sales. Insiders sell all the time, but to my knowledge I had never seen such a large percentage of shares outstanding sold in such a short period of time. FIVE insiders sold over 50 percent of shares out in, I believe, about 14 months.

"But for me the number one factor is what I saw when I analyze a retailer: The gross margin return on inventory. This metric encompasses both inventory and gross margin. Inventory at FIVE has been increasing faster than either revenue or unit growth.

"That caught my eye and then last quarter gross margin declined. If you get too heavy on inventory right into sagging sales, you will have to discount or get caught with a bunch of bad inventory.

"Also, prepaid asset growth has been well above revenue growth. This is a little-followed metric and I think it's adding to earnings per share."

He also said cash flow is shooting off warnings:

"Investors do not care because they are chasing growth. But FIVE is burning cash to fuel its growth plan -- so much so that I believe it should have sold some primary shares during all these equity deals. It didn't and now did not and now I believe it will be forced to take on debt to grow."

His bottom line:

"FIVE is just too aggressive in its growth plan. It sells faddish products mostly to pre-teen girls. Its accounting is aggressive. And I remain skeptical that its growth into Texas will work as well as it has on the Eastern Seaboard. Remember, comps missed expectations massively but EPS only missed by 5 to 6 cents." 

Reality: He'll be looking at the year-end balance sheet for clues. If he finds what he expects, he believes today's selloff for Five Below could better be called: Look Out Below.

-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.


Chart of I:DJI
DOW 17,667.29 -83.62 -0.47%
S&P 500 2,052.95 -10.42 -0.51%
NASDAQ 4,733.5580 -29.6660 -0.62%

Herb's Tweets

Select the service that is right for you!

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
Real Money Pro

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Trifecta Stocks

Trifecta Stocks analyzes over 4,000 equities weekly to find the elite 1% of stocks that pass rigorous quantitative, fundamental and technical tests.

Product Features:
  • Model portfolio
  • Trade alerts
  • Recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Growth Seeker

Chris Versace, using sophisticated stock screening and fundamental research, identifies potentially explosive small and mid-cap stocks.

Product Features:
  • Model portfolio
  • Small-cap and mid-cap focus
  • Intraday trade alerts
  • Weekly roundups
Daily Swing Trade

Master swing trader Alan Farley uses his sophisticated software screens to review thousands of stocks each day for you, to find just the handful that meet his demanding criteria.

Product Features:
  • Daily commentary and coaching on swing trading
  • Technical charts and analysis
Top Rated Stocks Top Rated Funds Top Rated ETFs