Five Below (FIVE) stock slumped lower Thursday after the discount retailer posted weaker-than-expected first quarter sales and said near-term margins would narrow as shoppers remain cautious heading into the summer months.
Five Below said earnings for the three months ending in April fell 33% from last year to 59 cents per share, topping Street forecasts by a penny, as sales rose 7% to $639.6 billion.
Looking into the current quarter, Five Below said it sees revenues in the region of $675 million to $695 million, with a full-year outlook of around $3.08 billion, both of which missed Street forecasts.
Five Below also said it expects its operating margin to fall by 450 basis points from last year over the current quarter as gross margins are hit by "un-anniversaried freight costs, higher store wages and increased marketing expenses."
"I think the height of the biggest headwinds are behind us in that $1.9 trillion stimulus, but the consumer continues to face a lot of hurdles, most recently being the formula shortage, which for families, it's got to be something that's front and center on their mind," CEO Joel Anderson told investors on a conference call late Wednesday.
Five Below shares were marked 2.11% lower in early afternoon trading Thursday to change hands at $132.42 each, a move that would extend the stock's year-to-date decline to around 36.2%.
Shares may also be pressured by impending discounts from Target (TGT), which cautioned earlier this year that its bigger-than-expected 35% build-up in overall inventories would likely trigger price cuts, adding Tuesday that deeper discounts would be needed to shift the excess goods,.
Target added that operating margins would narrow to around 2% over the current quarter before rebounding into the second half of the year.
Citigroup analyst Paul Lejuez noted that average U.S. retail inventories are outpacing sales gains by around 10 percentage points, the widest gap since the pandemic, as retailers struggle to manage both supply chain disruptions, fuel and freight costs, and rapidly shifting consumer habits.
That effect was no more evident than in the surprisingly solid first quarter results from Macy's (M) and Nordstrom (JWN), both of which saw significant shifts in demand from casual to more formal attire for the spring and summer seasons.
Larger, more diverse retailers, however, might be stuck with bulging levels of unwanted merchandise as a result of their eagerness to get in front of supply chain snarls, and that could mean deeper price discounts for inflation-strapped customers.
"FIVE faces similar consumer challenges we are broadly seeing," said KeyBanc Capital Markets analyst, who lowered his price target on the group by $20, to $210 per share, while holding his 'overweight' rating in place following last night's earnings report.
"While we are disappointed in these near-term challenges, we remain positive on the long-term story, with compelling product, new price points, and improved experience – along with strong store growth – supporting FIVE’s long-term performance," he added.
