Morgan Stanley upgraded Five Below to ‘overweight’: here’s why

Five Below Inc (NASDAQ: FIVE) has tanked about 20% since late August after it reported lower-than-expected quarterly revenue on rising inflation and supply chain constraints.

Analyst Simeon Gutman sees upside to $230

While the risks still persist, Morgan Stanley is convinced the dip makes up for a buying opportunity with an upside to $230.

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In a note this morning, Morgan Stanley’s Simeon Gutman upgraded the stock to “overweight”, saying it’s a “good compounded growth story” that is trading at a discount and is well-positioned to weather inflationary costs.

Five jumped more than 6.0% today on the bullish call – its best day since June. The $10.44 billion company has a price to earnings ratio of 40.49.

Gutman defends his bullish call on CNBC’s “The Exchange”

On CNBC’s “The Exchange”, Gutman appreciated that Five Below was no longer limiting its inventory to a $5 cap citing the “environment called for it”. He said:

They’ve broken their $5 threshold for higher quality or more aspirational items. As long as they’re delivering value to customers within that $5 to $10 range, they’ll keep coming back.

According to Gutman, investors are concerned if smaller retailers would be able to “manage costs” and “get inventory” amidst inflation. But Five Below, he added, has “shorted out those fears”.

In our meeting with the company yesterday, Five Below delivered a surprisingly good, benign inventory picture. They’ve been planning for this environment for a while. They’ve been buying forward, they’re very connected to their merchants and have great visibility.