MKM 'Incrementally Positive' On Five Below After Meeting With Management

MKM Partners' Patrick McKeever recently met with Five Below Inc FIVE management team and came away "incrementally bullish" for multiple reasons.

First, McKeever noted he was "particularly impressed" with Five Below's Chief Merchant Michael Romanko as he has been "instrumental" in maintaing the company's strong momentum, which includes 40 straight quarters of positive comps.

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Second, McKeever is convinced that a slight decrease in traffic trends seen in the second quarter is weather related. Spceifically, the weather in the East coast in May was cool and wet and more than 70 percent of stores are located in the Mid-Atlantic, Northeast and Midwest regions.

The analyst also believes traffic improved in June and July and "a better trend has continued." As such, McKeever is now modeling a 1.5 percent traffic increase in the third quarter, which translates to 6.3 percent on a two-year basis, "very consistent" with the past few quarters.

Third, McKeever is reassured that the bankruptcy of one of the biggest shipping companies, South Korea-based Hanjin, won't cause any hiccups in its operations. Management told the analyst it doesn't have a direct relationship with Hanjin but does have a "small amount" of indirect exposure as some of the company's freight-forwarders use Hanjin. In addition, the company has its shipping rates locked in through the end of the year as well as delivery guarantees on its merchandise.

Fourth, Five Below's new stores generated a productivity rate of 97 percent in the second quarter and this "strong performance" is expected to continue, especially in California where the first store will open next spring.

Finally, the analyst isn't expecting to see any "protracted P&L hit" from Five Below's e-commerce investments and the company is still a "bricks-and-mortar story."

Shares of Five Below remain Buy rated with an unchanged $60 price target