Five Below -- High Five for the Discount Retailer

NEW YORK (TheStreet) -- Shares of Five Below (FIVE) are down about 17% year to date after poor weather impacted February's results. Last quarter, management gave guidance that implied a slow start to the year. Specifically, the company told investors to expect same-store sales of about 3% for the year. Since retail sales are heavily weighted towards the back half of the year, that implies first-quarter same-store sales will probably be less than 1%.

Five Below is spending heavily on infrastructure and back-end systems to support a larger store base. The company is also in the process of building an e-commerce Web site. Some of that investment has put pressure on earnings, which has kept the stock down.

The company's new distribution facility in New Jersey just opened June 1. The slowdown in spending will alleviate the earnings pressure the company has experienced.

Overall, I think the situation will resolve itself this quarter or next. Five Below plans to add an additional 85 stores this year at minimum, which works out to 25% unit growth. It's really hard to find a retailer with that kind of unit growth.

When those new stores open, the company will be able to gain economies of scale from its investments in distribution and back-end technology. Operating margins should begin to expand. Higher operating margins could drive a 25% increase in earnings per share. Recall that Five Below has reported 35 consecutive quarters of positive same-store sales. With a larger store base, earnings should begin to reaccelerate.

Five Below can open as many as 2,000 stores in North America, I believe. Right now the company operates just 360 stores in 21 states.

After the closing bell Wednesday, Wall Street expects the company to report first-quarter revenue of $151 million, up 20%, and earnings per share of 7 cents. For the year, sales are expected to grow 20% to $822 million. By next year, I fully expect the company to exceed $1 billion in revenue.

This quarter should prove to be the catalyst the stock needs to move much higher.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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