Five Below Could Be Ready to Make a Run

Stock (Symbol)

Five Below (FIVE)

Stock Price

$45

Sector

Retail & Travel

Data is as of

July 11, 2017

Expected to Report

Aug 29

Company Description

Five Below, Inc. (Five Below) is a specialty retailer offering a range of merchandise for teen and pre-teen customer. FIVE offers a range of products, all priced at five dollars and below, including select brands and licensed merchandise across a range of categories, including Style, Room, Sports, Tech, Crafts, Party, Candy and Now. FIVE operates 366 locations across 21 states. Source: Thomson Financial

Sharek’s Take

Five Below (FIVE) is one retailer that is doing well in this tough environment. Five below is a dollar store for kids and teenagers. The company sells merchandise such as toys, games, party items, sports gear, clothes, candy & electronics for between $1 and $5 each. Since going public in 2012, FIVE has grown profits 27% per year and is expected have 26% profit growth this year. This is one of the last great expansion stories in the dollar chain field. During the past three years Five Below has grown its store count from 366 to 437 and 522 (19% per year). In 2017 the company should open 100 more locations, with a long-term goal of 2000 nationwide. New stores are approximately 8000 sq ft, cost $300,000 in cash to open, deliver sales of $1.6 million in the first year and payback the initial investment in less than one year. Management sees sales growth of 20% a year through 2020, and analysts have an Estimated Long Term Growth Rate of 21% per year on the stock. But I feel profits could continue to grow 25% a year. Five Below is in a long base between $35 and $52. If or when the stock breaks out, it could go on a solid run higher because long bases often lead to big moves higher after a breakout. This is a good stock to buy-and-hold or even trade if you’re nimble enough. I feel the chain will eventually be acquired by a larger dollar store.

One Year Chart

FIVE delivered sales growth of 21% last qtr and profit growth of 25%, which beat views of 8%. The company had only 3% same store sales growth last qtr, which is good but not great, and might prevent the stock from breaking out. 2017 estimates did increase a bit, from $1.59 to $1.64. Profit growth Estimates for the next 4 qtrs are 44%, 20% , 23% and 13%. The P/E of 27 is reasonable for 21% grower.

Fair Value

My Fair Value on Five Below is a P/E of 32, which the stock has had every year since it went public. Thus I feel the stock should be $52 this year and $62 next year.

Bottom Line

Five Below is thriving with its unique brand, but the stock has been held in a trading range for almost four years now. The reason? The P/E was very high in the past and the stock waited for the earnings to catch up. Now FIVE is undervalued and I feel there is good potential for the stock over the next two years. Overall I foresee the chain tripling in size over the next 5-10 years, with the ultimate finish being a buyout by a larger dollar store. FIVE ranks 26th of 33 stocks in the Growth Portfolio Power Rankings.