Deutsche Sees Five Below's Store Growth Driving Top, Bottom Line

Deutsche Bank remains Hold on Five Below Inc FIVE shares, but sees the double-digit store growth could drive 20 percent plus EPS and top-line growth for the company. "[W]hile we acknowledge that new management is executing well against their plans that has resulted in upside since 3Q15, we prefer to be on the sidelines given valuation," analyst Paul Trussell wrote in a note. Five Below has 458 stores open in 28 states, as of the end of the first quarter. FIVE sees the potential for more than 2,000 stores within the U.S. over time, while the analyst sees the company will be able to maintain about 20 percent store growth for the foreseeable future. In addition, Trussell expects the new management team to drive consistent comp growth in the 3 percent range via merchandise and marketing initiatives. Trussell expects "EBIT margin expansion through greater scale as the company opens stores along with delivering SG&A leverage as FIVE continues to improve its supply chain and control advertising spend." Commenting on the new store productivity, the analyst said it still remains strong in the 90-100 percent range on a yearly basis. Trussell highlighted that the company's new store productivity was strong in the first quarter at 107.9 percent, showing sequential improvement since the second quarter of 2015, where new store productivity was at 90.9 percent. Also, the analyst noted that company's average net sales per store increased from $1.7 million in FY11 to $2.0 million in FY15. The retailer targets teen/pre-teen customers with right kind of merchandise and cost-effective marketing. For the second quarter, Trussell expects EPS of $0.17 (versus the Street at $0.17 and guidance of $0.16 - $0.17) based on SSS up 3.8 percent (vs. prior 3.0 percent, the Street at 3.4 percent, and guidance of about 3 percent). The analyst also raised his price target to $46 from $39 while the stock is currently down 0.96 percent to $50.52.