In the wake of the recent U.S. election, market analysts have been quick to adjust their outlooks on several stocks. Among the notable moves, YETI Holdings (YETI) and Five Below (FIVE) were hit with downgrades at Bank of America in response to Donald Trump’s election victory, largely due to concerns over higher tariffs that threaten to affect businesses with substantial manufacturing and supply chain dependencies in China. For YETI, known for its high-end outdoor products, and Five Below, a discount retailer with broad appeal, elevated tariffs directly impact their bottom lines by increasing costs and squeezing margins.
In this article, we will consider BofA’s rationale behind the downgrades and explore the broader implications for investors. Should investors consider selling these stocks, or do these companies have the resilience to mitigate the risks posed by higher tariffs? Here’s a closer look.
The Case For YETI Holdings Stock
YETI Holdings, Inc. (YETI) designs, markets, and distributes products under the YETI brand for the outdoor and recreation market. Its main products include hard and soft coolers, drinkware, bags, chairs, cooler accessories, and replacement parts. Currently, YETI’s market capitalization is $3.27 billion.
Year-to-date, shares of Yeti Holdings have fallen 25.3%, underperforming the S&P 500 Index’s ($SPX) gain of 25.7% over the same period.
BofA Downgrades YETI on Elevated Tariff Risk After Trump Election
On Nov. 6, YETI shares fell about 3% after BofA analyst Alexander Perry downgraded the company to “Neutral” from “Buy” with a price-target cut to $40, down from $55. The firm said that 80% of YETI’s drinkware is sourced from China, which poses a high tariff risk for the company and is expected to have a “significant” impact on 2025 earnings, as the cost of goods sold (COGS) is likely to increase by $100 million to $150 million.
However, the analyst pointed out that the adverse effects could be alleviated by YETI’s efforts to share higher costs with its suppliers and adjust production to reduce the amount of sourced materials.
Separately, Jefferies believes that the market has not fully accounted for the fact that Yeti has already relocated much of its production for U.S. goods out of China. Therefore, Jefferies recommends aggressively buying the stock and estimates that “Buy”-rated Yeti shares have the potential to surge by over 50%.
YETI Climbs on Upbeat Q3 Results
On Nov. 7, Yeti shares surged over 7% after its strong Q3 earnings report helped alleviate some post-election concerns regarding the impact of tariffs.
Its total revenue grew 10.3% year-over-year to $478.44 million, beating Wall Street’s consensus by $7.14 million. The top-line figure met management’s expectations and was fueled by growth across all categories, channels, and geographies. Notably, coolers and equipment sales rose 12% year-over-year to $193 million, achieving double-digit growth for the third consecutive quarter. This growth was driven by strong sales of bags, hard coolers, and outdoor living products. Also, drinkware sales increased 9% year-over-year to $275 million, bolstered by a wide and diverse product portfolio, continued innovation, and opportunities for global expansion.
YETI reported strong performance across channels during the quarter, delivering growth in both wholesale and direct-to-consumer (DTC), with wholesale expanding by 14%, outpacing DTC’s growth of 8%. In the wholesale channel, the company’s release cadence and innovation strategy have supported strong sell-in with its partners.
Continued innovation is driving the company’s growth. In Q3, the company continued its expansion into barware and tableware by launching pitchers in two sizes and fully releasing flask and shot glasses, following a highly successful limited release in Q2. This brings 18 new products launched in this category over the past 12 months.
Turning to international business, the company recorded its fourth consecutive quarter of over 30% growth outside the U.S., driven by continued momentum and increasing brand awareness. Sales in markets outside the U.S. increased by 30% to $88 million, fueled by remarkable growth in Europe and Australia. Management noted that their brand playbook and go-to-market strategy are gaining traction in Europe, receiving a positive response from retail partners and consumers.
On the profitability front, the company’s gross margin stood at 58.0%, unchanged from the same quarter of the previous year. YETI's adjusted EPS arrived at $0.71, compared to a consensus of $0.66, and up from $0.60 from the previous year.
Notably, Yeti has been diligently working to diversify its supply chain. It began production at its second drinkware facility outside of China during the quarter and is on track to establish a third facility. Yeti is confident that by the end of this year, about 20% of its global drinkware capacity will be situated outside of China, and by the end of 2025, this figure will reach 50%. These investments in logistics and manufacturing are aimed at supporting the company’s ambitions for global expansion.
Looking ahead, Yeti anticipates adjusted sales to increase by approximately 9% for fiscal 2024, compared to the previous forecast of 8% to 10%. Also, adjusted net income per diluted share is expected to be around $2.65, aligning with the higher end of the previous forecast range of $2.61 to $2.65.
YETI Valuation and Analysts’ Estimates
Analysts tracking Yeti project an 18.09% year-over-year increase in its EPS to $2.35 for fiscal 2024, with revenue expected to grow 10.69% year-over-year to $1.84 billion.
In terms of valuation, priced at 14.50 times forward adjusted earnings, the stock is trading at a notable discount compared to the sector median of 17.63x and its five-year average of 24.72x. With steady revenue growth and numerous expansion opportunities regionally and across product categories, YETI appears very attractive from a valuation standpoint. The multiple also provides some margin of safety against potential impacts on the company’s growth from higher tariffs.
What Do Analysts Expect For YETI Stock?
Analysts have a consensus rating of “Moderate Buy” on Yeti stock, with a mean target price of $45.93, which indicates an upside potential of 18.8% from the stock’s Friday close. Among the 16 analysts covering the stock, five recommend a “Strong Buy,” one suggests a “Moderate Buy,” nine recommend a “Hold,” and one analyst has a “Strong Sell” rating.
The Case For Five Below Stock
With a market cap of $4.75 billion, Five Below (FIVE) is a discount variety retailer specializing in trendy, impulse-buy items typically priced between $1 and $5, though some items are priced above $5. As of July 2024, it has expanded to 1,667 stores across 43 states.
Shares of the retailer have plummeted 59.5% on a year-to-date basis, underperforming the broader market. However, the stock is up about 30% over the past three months.
BofA Downgrades FIVE Amid “Looming” Trump Tariffs
On Nov. 6, shares of Five Below tumbled nearly 10% after BofA analyst Melanie Nunez downgraded the company to “Underperform” from “Neutral” with a price target of $75, down from $98. The firm does not see a clear path to a recovery in comparable store sales growth and anticipates continued margin reduction due to lower sales and additional tariff costs.
BofA pointed out that the company’s significant sourcing exposure to China poses a risk due to the high probability of substantial tariffs being implemented under the Trump administration. Moreover, the analyst believes that Five Below lacks the pricing power to offset hefty tariffs, as its value proposition is not resonating with consumers. BofA lowered its FY25 EPS forecast for FIVE by 12% to $4.43, adding that the company is already focusing on lower-priced items.
How Did FIVE Perform in Q2?
Five Below released its most recent quarterly earnings report on Aug. 28. The company’s second-quarter net sales rose 9.4% year-over-year to $830.1 million, beating expectations by $7.98 million. The increase resulted from the number of locations growing from 1,407 to 1,667. The retailer expressed confidence in its long-term store growth potential.
Comparable sales decreased by 5.7%, though this was still better than the consensus estimate of a 6.4% decline. Notably, the company’s drop in comparable sales was primarily due to a 5.4% reduction in comparable transactions, while comparable ticket value decreased by only 0.3%. This indicates that the decline in comparable sales figures is not due to the company’s renewed emphasis on lower-priced goods.
Five Below has also seen a contraction in its margins. FIVE’s gross margin decreased by 220 basis points year-over-year to 32.7% in the quarter, and its operating margin dropped by 270 basis points to 5%. The company attributed the decline in margins to the impact of constant fixed costs amid falling comparable sales. Other profitability indicators also declined. For example, the company’s EBITDA decreased from $89.5 million to $83 million. Adjusted EPS was $0.54, matching consensus estimates and down from $0.84 a year ago.
The discount retailer repurchased about 85,000 shares during the quarter at a cost of approximately $10 million.
Ken Bull, Interim CEO, President, and COO of Five Below, said, “Our second quarter results fell short of what we know this business is capable of delivering. Our response to the macro pressures of the last few years and the evolving consumer environment has required even greater execution, compelling and differentiated assortments, and focus on the customer.”
In an effort to improve performance, the company has outlined several initiatives. However, it remains uncertain whether these changes will lead to improved financial performance for the company in the near term. For instance, its decision to focus on lower-priced goods could challenge the company’s ability to sustain current margin levels. Also, FIVE revised its store growth forecast for 2025 to a range of 150 to 180 stores, which may hinder earnings growth since new store openings have been a crucial driver of the company’s earnings. Other initiatives include reducing the number of SKUs and refocusing on kids and parents, who represent the company’s primary demographic.
Looking forward, Five Below anticipates full-year net sales between $3.73 billion and $3.80 billion, based on the opening of around 230 new stores, with an expected decline in comparable sales of approximately 4% to 5.5%. Adjusted diluted earnings per share are projected to range from $4.35 to $4.71.
FIVE Valuation and Analysts’ Estimates
Wall Street projects that Five Below will see a 6.44% year-over-year increase in revenue to $3.79 billion in fiscal 2025, while earnings are expected to drop by 15.71% year-over-year to $4.56 per share.
In terms of valuation, FIVE’s price-to-earnings multiple appears excessively high, particularly given the significant uncertainty surrounding comparable store sales and the potential for contracting margins going forward. The stock is trading at 18.84x forward adjusted earnings, above the sector median of 17.70x. However, the cash flow multiple is relatively reasonable, with Five Below’s forward price/cash flow multiple trading close to the sector median at 11.28 times.
What Do Analysts Expect For FIVE Stock?
Five Below stock has a consensus “Moderate Buy” rating. Among the 22 analysts providing recommendations for FIVE, eight recommend a “Strong Buy,” 12 suggest a “Hold,” one advises a “Moderate Sell,” and one has a “Strong Sell” rating. The average price target for FIVE stock is $104.31, which is about 21% above Friday’s closing price.
Should You Sell These 2 Stocks After Post-Election Downgrades?
I don’t think now is the time to sell YETI stock, given that the company recently reported better-than-expected Q3 results and management updated guidance for the full year. Also, the company’s low P/E multiple may offer some protection against further downside. Therefore, I would rate it as a “Hold” at current levels. However, I cannot say the same for FIVE stock.
Uncertainty regarding margins, comparable store sales, and valuation premiums, compounded by concerns over higher tariffs, indicates that Five Below might experience further downward pressure. Nevertheless, I would prefer to hold shares until the company’s Q3 results are released to see if there are any positive signs.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
