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Five Below is One of the Best in a Weak Retail Space

Stock (Symbol)

Five Below (FIVE)

Stock Price

$41

Sector
Retail & Travel
Data is as of
October 10, 2016
Expected to Report
Dec 1 – 5
Company Description
fivebelow_frontFive 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. The Company’s stores have over 4,000 stock-keeping units (SKUs) across a range of categories. The Company’s product groups include leisure, fashion and home, and party and snack. Leisure includes items, such as sporting goods, games, toys, tech, books, electronic accessories, and arts and crafts. Fashion and home includes items, such as personal accessories, ‘attitude’ t-shirts, beauty offerings, home goods and storage options. Party and snack includes items, such as party and seasonal goods, greeting cards, candy and other snacks, & beverages. Source: Thomson Financial
Sharek’s Take
David SharekLast qtr I wrote “investors are very enthusiastic about” Five Below (FIVE). But that was then and this is now. Today the Retail sector is getting hit with a bit of weakness as for some reason people aren’t quite spending as much as companies had expected. Thus there’s a selloff going on in Retail stocks, and since you can short retailers in ETFs all stocks in the sector are under selling pressure, including Five Below, which is doing quite well. Five Below is a dollar store for kids and teenagers. The company sells merchandise such as toys, games, party items, sports gear, clothes, candy & things for a kids room for between $1 and $5. This is one of the last great expansion stories in the dollar chain field, as growth opportunity for Five Below is still vast. In 2015 Five Below ended the year with 437 stores, up from 366 in 2014. Management’s goal is 2000 stores nationwide. In 2016 the company is on pace to open 85 more locations and move into Louisiana, Wisconsin, Minnesota and Oklahoma then expand into California in 2017. Five Below has the wind at its back as a strong dollar makes foreign-made products cheaper to buy. Also, low oil prices make it cheaper to have them delivered to the stores. Last qtr the company delivered 38% profit growth. But because the stock had a lofty P/E of 39 since my last research report the stock’s come down from $52 to $41 as it couldn’t shake the sector weakness. This is a solid growth stock with an Est LTG of 24% per year and solid upside to my Fair Values.
One Year Chart
five_2016_q3This stock was looking great last qtr and has now fallen back to the $40 area which I feel is a healthy correction. Last qtr Five Below grew profits 38% on the back of 21% sales growth, including 3% same store sales growth. The SSS were decent, but down from the 5% posted three months earlier. FIVE beat the street by a penny or two the last four qtrs. Annual Profit Estimates stayed mostly in-line. Qtrly profit Estimates also stayed consistent with last qtr and stand at: 25%19%, 25% and 22%.
Fair Value
five_2016_q3_phDuring the last four qtrs Five Below’s P/E has risen from 26 to 30, 39 and now 31. My Fair Value is 35x earnings which is good upside for this depressed stock which is down because (1) it was too high last qtr and (2) the sector weakness is pulling down almost every retail stock. In 2015 the company opened a new distribution center on the East Coast (which hampered profits).
Bottom Line
five_2016_q3_10yrFive Below could quadruple its store count in the next 5-to-10 years and provides investors with a solid retail idea in a weak retail sector. The stock has gone back-and-forth since it went public in July 2012, but that’s because the valuation was high then. I feel this stock now has solid upside from these levels. A strong dollar and low gasoline prices make the environment good for this company. FIVE ranks 22nd of 37 stocks in the Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

22 of 37

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A

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