On Thursday, Citi updated its stance on Five Below (NASDAQ:FIVE), a popular discount retail chain, by adjusting the shares price target. The firm reduced the target to $210 from the previous $227 while sustaining a Buy rating on the shares.
This change comes in response to the company's fourth-quarter earnings per share (EPS) falling short of consensus estimates. Five Below reported a Q4 EPS of $3.65, which was below the expected $3.78, primarily due to higher-than-anticipated shrinkage, or inventory loss.
The reduction in the price target reflects challenges faced by Five Below, including a surprise increase in shrinkage costs that affected the fourth quarter's gross margin. The company encountered an unexpected additional headwind of approximately 125 basis points in shrinkage after completing their inventory count in January, which included a one-time adjustment.
Looking ahead, Five Below has provided guidance for fiscal 2024, projecting an EPS range of $5.71 to $6.22, which falls below the consensus estimate of $6.46. The lower forecast is attributed to anticipated increases in shrinkage and selling, general, and administrative expenses (SG&A), as the company plans to invest in additional payroll to address shrink at self-checkout stations.
The first quarter has started slower than anticipated, partly due to lower year-over-year tax refunds. However, Five Below has observed some improvement in March compared to February. Consequently, the company's guidance for the first quarter EPS is set between $0.58 and $0.69, which is also below the consensus of $0.77.
Despite these setbacks, Citi remains optimistic about Five Below's long-term growth potential. The firm believes the issues related to inventory shrinkage are solvable and temporary. With Five Below currently operating at around 40% of its goal of 3,500 stores, Citi views the retailer as one of the most compelling growth narratives in the retail sector.
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