Shares of Five Below(NASDAQ: FIVE) slipped a whopping 25% this week, according to data from S&P Global Market Intelligence. The discount knickknack retailer that caters to kids just had its chief executive officer (CEO) depart and now expects terrible same-store sales growth for 2024. Down 67% from highs, Five Below stock is now in its worst drawdown ever as a public company.
Here's why shares fell yet again this week.
Departing CEO and poor comparable-sales growth
This week, on July 16, Five Below put out a press release that caused its stock price to crater. The company announced that its current CEO Joel Anderson has stepped down as CEO. He has decided to become the CEO of PetCo. Kenneth Bull, the chief operating officer, would assume the role as interim CEO. Investors hate management uncertainty, so it is unsurprising to see the stock falling on this news.
Even worse is the company's update on how its business is doing in 2024. The company now expects comparable-sales growth -- sales growth from existing locations -- to decline by 6% to 7% in the second quarter that ends at the beginning of August. Declining same-store sales is the worst thing that can happen to a retailer. Physical retail needs strong customer traffic and spending to achieve profitability and operating leverage over its fixed costs and real estate costs. Five Below is trending sharply in the wrong direction right now.
It is hard to pinpoint why exactly this slowdown is happening, but some investors think it could be due to the huge influx of discount e-commerce apps such as Temu and its copycats. Families can now buy knickknacks from these online stores, which may be taking traffic away from Five Below.
The stock is down, but is it a buy?
Five Below investors have suffered in 2024. The stock now trades at a cheap-looking, trailing price-to-earnings ratio (P/E) of just 14.5, which is around half the S&P 500 average.
However, it is unclear what trajectory Five Below's earnings will go on in the next few years. Comparable-sales declines of 6% to 7% will likely lead to even worse earnings declines for the rest of 2024 and into 2025. Unless Five Below can fix its traffic issues, earnings will fall in the coming years. And it is unclear when these same-store sales growth woes will subside (if they ever do).
For this reason, it is probably best to avoid Five Below stock for now.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
