On Thursday, Citi maintained a Neutral rating on Five Below (NASDAQ:FIVE) but increased its price target for the company's shares to $125 from $96. According to InvestingPro analysis, the company, currently valued at $5.77 billion, appears undervalued based on its Fair Value metrics.
The stock has shown remarkable momentum with a 12.86% gain over the past week, despite being down nearly 50% year-to-date. The change comes after Five Below reported a notably solid third quarter, with comparable store sales (comps) rising by 0.6%, which was significantly ahead of consensus and market expectations.
This marked a 600 basis point improvement compared to the second quarter, primarily due to enhancements in product offerings and the price/value equation across the company's assortment. The company maintains strong fundamentals with a healthy current ratio of 1.63 and impressive revenue growth of 14.23% over the last twelve months.
The analyst noted that despite management's guidance indicating a potential deceleration in comparable store sales for the fourth quarter, with expectations of a 3-5% decline, current trends are tracking in line with plans.
The analyst believes management's forecast includes a cautious stance considering the shorter holiday season, which could suggest the possibility of an upside for the fourth quarter.
With Five Below's improved product positioning, there is increased optimism that the company can achieve positive comparable store sales in fiscal 2025, and it is expected that the market will eventually reflect the company's long-term store growth potential more accurately.
However, there remains some uncertainty regarding the potential impact of higher tariffs on goods sourced from China, which account for 60% of Five Below's sourcing. The analyst pointed out that while the company has strategies to mitigate some of the negative effects of these tariffs, such as vendor negotiations and pricing adjustments, it may be challenging to fully avoid margin pressure if such tariffs are implemented.
In conclusion, Citi sees a balanced risk/reward for Five Below at the current pre-market levels, acknowledging both the company's recent positive performance and the looming uncertainties that could affect future margins and profitability.
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