With the pressures that the consumer economy has faced – namely soaring inflation and the Federal Reserve’s subsequent efforts to tame it – discount retailers like Five Below (FIVE) should represent easy buys. However, the market doesn’t see it that way. With aberrant dynamics impacting the equities space, investors need to be patient with FIVE stock.
Over time, the fundamentals – namely, the trade-down effect of consumers seeking cheaper alternatives to their commonly purchased items – should strongly benefit Five Below. Unlike other discount retailers, Five features an eclectic range of products. Most are priced up to $5. However, a select range of items may be priced anywhere between $6 to $25. Therefore, the company benefits from bargain-hunting dynamics, not just consumer desperation.
However, the severe drop off of Dollar Tree (DLTR) – which lost more than 12% of market value in the trailing one-month period – demonstrates the complexities associated with the post-pandemic consumer economy. Further, while FIVE stock is up over 6% in the year so far, the S&P 500 index during the same period gained nearly 12%.
For now, investors can accrue better rewards and incur lower risks betting on a basket of (boring) blue-chip stocks. At some point, though, FIVE stock can regain its mojo. Below are the factors to consider.
FIVE Stock Attracts Attention in the Options Market
While Five Below brings much-needed discounts to the table, the bulls generally have a lackluster view of FIVE stock recently. For example, following the close of the June 2 session, FIVE stock inked its name on Barchart’s screener for unusual stock options volume.
Specifically, total volume reached 13,807 contracts against an open interest reading of 36,145. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 363.17%. Drilling down, put volume hit 7,162 contracts while call volume could only muster 6,645 contracts.
With the pairing yielding a put/call volume ratio of 1.08, the setup on paper favors the bears but not by an overwhelming magnitude. Nevertheless, the bulls have little reason to celebrate FIVE stock at the moment.
Mainly, in the past one month, shares gave up nearly 7% of equity value, indicating a lack of excitement for the underlying business. It’s unfortunate too because Five Below posted solid results for its fiscal first-quarter earnings report.
According to the AP, the discount retailer posted earnings of $37.5 million. On a per-share basis, the Philadelphia-based company delivered net income of 67 cents. Notably, the figure beat Wall Street’s consensus estimate of 62 cents.
On the top line, Five rang up sales of $726.2 million, which admittedly fell a bit short of the Street’s expectation of $729.2 million. However, for the current Q2, management expects revenue to land between $755 million to $765 million. In contrast, analysts targeted revenue of $634.1 million.
In response, FIVE stock gained nearly 8% of market value on the Friday session. Last week, it netted a return of almost 3%. However, at $182.55, FIVE is also noticeably below the horizontal price range of around $200 that printed between February through the early second half of May.
What gives?
Five Below Requires Patience
According to the Barchart Technical Opinion indicator, FIVE stock rates as a 24% sell. Given the disappointing performance in recent sessions, the pensiveness isn’t surprising. Here, investors shouldn’t fight the tape. Right now, the market at large doesn’t have confidence in FIVE so further downside may be on the horizon.
Fundamentally, the negativity may center on the lack of urgency for the discount retail narrative. As another AP report noted, U.S. hiring jumped sharply last month, adding 339,000 jobs, “well above expectations and evidence of enduring strength in an economy that the Federal Reserve is desperately trying to cool,” remarked journalist Christopher Rugaber.
Put another way, the economy might not be desperate enough to spark intensified demand for Five Below. Yes, its eclectic product mix arguably makes it more attractive than Dollar Tree, which to be frank represents more of a pure economic desperation play. However, the job market is just strong enough for consumers to still elect higher-premium discretionary goods.
Nevertheless, this circumstance may shift over time. As Rugaber mentioned, the economy might not be headed for a recession imminently based on the latest jobs numbers. However, with the length of the average work week and hourly wage growth declining, the employment data isn’t as robust as the headline print suggests.
Therefore, FIVE stock will eventually be relevant. It just may require a little more time than previously thought.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
