Bank of America has reinstated coverage on Five Below (NASDAQ:) with a Neutral rating and a price objective of $125, which implies an upside of around 10% from current levels.
The bank’s analysts project a low double-digit sales compound annual growth rate (CAGR) driven by store growth but believe that the current weakness in comparable sales is not solely due to macroeconomic factors.
While optimistic about recent initiatives aimed at reaccelerating comps, they caution that it may take a few quarters for these efforts to yield results.
“With the stock down 47% YTD & the multiple compressed, risk/reward is balanced,” analysts said.
BofA thinks that the divergence between Five Below’s comparable sales and its peers indicates deeper underlying issues, such as competition and cannibalization. While off-price retailers posted positive low single-digit comps in the first quarter, Five Below saw a decline of 2.3%.
The analysts forecast fiscal 2024 comps to be down 4%, compared to peers with positive low single-digit comps, and project fiscal 2024 EPS to decrease by 4%, versus a peer average increase of 9%. Their fiscal 2025 EPS estimate of $6.00 assumes a comps growth of 1.7%.
Meanwhile, shrink has been a persistent issue for the discount store chain, but the company is making progress following chainwide mitigation efforts, BofA noted.
“We think there could be gross margin upside potential this year given mgmt maintained expectations for no improvement in shrink y/y for F24,” analysts wrote.
“However, upside could be offset by investments in SG&A as FIVE hires more security guards and increases overall staffing at checkout, limiting overall operating margin upside potential.”