On the morning of Nov. 6, former President Donald Trump was celebrating the results of the U.S. presidential election sending him back to the White House in January. And that’s precisely why Bank of America downgraded Five Below(NASDAQ: FIVE) stock this morning.
As of 10:15 a.m. ET, discount retailer Five Below stock was down about 9% and it had been down by as much as 12% earlier in the morning. Investors are reacting to commentary about how Trump’s proposed economic policies could negatively impact this business.
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Five Below sells products targeted toward teens and preteens, ideally pricing things below $5. It needs cheap merchandise to ensure good profit margins. But according to CNBC, Trump has proposed up to a 60% import tariff on goods from China. And this would dramatically impact financial results for Five Below (and others) if enacted.
This is something Five Below addressed in its most recent annual report. Management wrote, “Increased tariffs as well as any newly imposed tariffs on items imported from China or elsewhere would likely result in lower gross margins on impacted products.” In other words, its cost for those products would go up. Five Below would either have to raise prices, which is hard to do as a discount retailer, or it would have to accept lower gross profit margins.
This potentially negative impact is why Five Below stock is down today. But it’s also why shares of companies including Wayfair(NYSE: W) and Yeti Holdings(NYSE: YETI) are down as well. Some on Wall Street were downgrading this duo along with Five Below today. As of 10:15 a.m. ET, Wayfair stock was down about 11% and Yeti stock was down about 8%.
I don’t wish to suggest that economic policies from the president of the United Sates are inconsequential — they matter a great deal. That said, investors seem to be assuming that Trump’s upcoming term in office will necessarily be bad for business for Five Below, Wayfair, Yeti, and other companies that source products from China. But this isn’t a foregone conclusion.
For reference, consider the long-term chart showing gross margin and operating margin for these three companies. Try to discern from the chart when Trump enacted his economic policies during his previous administration. And try to find a pattern of change once President Joe Biden took office.
FIVE Gross Profit Margin Chart
In reality, elections come and go and the impacts to the stock market usually aren’t as profound as feared. And this is because businesses aren’t static. Every company can adapt to changes in its operating environment in unexpected ways.
I’m not saying that Five Below, Wayfair, and Yeti will all be fine and that their stock prices will go higher and higher. But I’m saying that panicking on Nov. 6 is premature. While there are some clouds on the horizon that directly relate to Trump’s economic proposals, investors need to balance their perspectives with the potential benefits of his plans and the fact that what actually will happen is unknowable.
There are many unknowns with this story. It’s possible that higher tariffs on Chinese goods never happen — it wouldn’t be the first time a political proposal didn’t come to fruition. And even if Trump does increase tariffs, Five Below, Wayfair, and Yeti could raise prices to compensate. After all, the higher tariffs would impact competitors as well. Finally, companies could shift their supply chains to more favorable countries. In fact, that happened a lot during Trump’s first presidency.
To be sure, the management teams for Five Below, Wayfair, Yeti, and more will need to make changes to align themselves with current economic policies. But that’s always the case. And for now, it’s premature to say whether these businesses will navigate the changes successfully or not.
I’d be patient when it comes to Five Below stock and others in the same boat. There are good reasons to sell stocks. But selling because of an election — within 24 hours of an election for that matter — is a move driven more by emotions than business fundamentals.
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Bank of America is an advertising partner of Motley Fool Money. Jon Quast has positions in Five Below. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Five Below and Wayfair. The Motley Fool has a disclosure policy.
