Analyst Note| Zain Akbari, CFA |
Considering its disappointing start to fiscal 2022 (including a 3.6% first-quarter comparable sales decline versus our 0.5% growth target), we plan to reduce our $149 valuation of no-moat Five Below’s shares by a mid- to high-single-digit percentage, in line with their dip in after-hours trading. Despite our reduced near-term expectations, our long-term forecast still assumes low-double-digit annual top-line growth rates and low-teens average operating margins. We believe market sentiment is overly fixated on a difficult near-term environment and does not adequately credit the long-term benefits of scale and a now-fully formed distribution network that should enable continued profitable store growth. Consequently, we see some opportunity for long-term investors willing to endure near-term volatility.