It’s a Perfect Day to Look at Five Below

With the temperatues outside sitting right at 13 degrees, today is a good day to look at one of the hottest young retailers in the business, Five Below (FIVE). Five Below is a dollar store that focuses on teenagers who like to drop $5 on things like party supplies, makeup, and gadgets for their room. FIVE was founded in 2002, went public in 2012, and there’s over 280 stores now with plans to grow the store count to 2000 someday.

This is one of the best growth stories around, the only unfortunate thing is FIVE stock is always too high.

One Year Chart

FIVE popped after reporting profits 2QtrsAgo, then dropped after reporting last quarter. The good news 2QtrsAgo was margins were expected to expand in 2014, now the bad news is same store sales will only be around 5% this quarter (down from 9% last quarter).

Profit growth along the bottom has been solid, and estimates look good too. Five Below’s Estimated Long Term Growth Rate of 32% is exceptional. I need to buy this stock.

Fair Value

At the time I computed this data, FIVE had a P/E of 44. I put my Fair Value at 40 times earnings, the stock’s overvalued at this point. Also, profits are expected to climb only 31% in 2015. This is really a 30% grower selling for 44 times earnings. The stock’s too high for me to buy.

Here’s some sales estimates that back this up:

2012 $418m
2013 $541m est (+29%)
2014 $688m est (+27%).

Sharek’s Take

Five Below is a must-own stock for me, but I need to be patient and hope the stock comes down to a better level to get in at. I feel FIVE is worth $38 and don’t want to pay $44 for it. Five Below stays at the top of my radar, I want to buy & hold this franchise for the long-term.