On Thursday, UBS adjusted its outlook on Five Below (NASDAQ:FIVE), lowering the price target to $245 from the previous $270 while sustaining a Buy rating on the stock. The revision follows the retailer's fourth-quarter earnings report, which has ignited discussions about the company's investment potential from various perspectives.
Five Below's new-store productivity (NSP) for fiscal year 2023 was reported at approximately 85%, a decrease from the historical range of 90%-100%. The retailer attributes this moderation to the growing saturation of its addressable market and its recent focus on store renovations, which has improved the productivity of existing stores.
The company also indicated a slower beginning to the first quarter, potentially due to the delayed distribution of tax refunds, forecasting a 0-2% comparable store sales (comp) increase for the quarter. UBS believes that if current trends continue, Five Below could reach the higher end of its guidance, although the timing of Easter may have influenced recent performance.
Additionally, Five Below underestimated the impact of shrinkage, which refers to lost inventory due to theft, error, or damage. The anticipated drag on the full year was initially estimated at 50-70 basis points but ended up at 100 basis points. This discrepancy resulted in a fourth-quarter EBIT of $268 million, which fell short of the consensus estimate of $279 million. Despite the company taking measures to address shrinkage, such as reducing self-checkout usage and enhancing checkout oversight, it does not expect an improvement in 2024.
The current aftermarket stock price of $180, which is around 30 times the midpoint of Five Below's calendar year 2024 EPS guidance, suggests that the stock's risk-reward balance could become more favorable. UBS anticipates that the company's outlook could lead to positive estimate revisions throughout the year.
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