Even though Five Below (currently trading at $192.50 per share) has gained 5.7% over the last six months, it has lagged the S&P 500’s 10.9% return during that period. This may have investors wondering how to approach the situation.
Is FIVE a buy right now? Or is its underperformance reflective of its business quality?
Why Does Five Below Spark Debate?
Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ: FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.
Two Things to Like:
1. New Stores Opening at Breakneck Speed
A retailer’s store count often determines how much revenue it can generate.
Five Below operated 1,970 locations in the latest quarter. It has opened new stores at a rapid clip over the last two years, averaging 12.7% annual growth, much faster than the broader consumer retail sector. This gives it a chance to become a large, scaled business over time.
When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.
2. Surging Same-Store Sales Show Increasing Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Five Below has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 8%.
One Reason to Be Careful:
Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Although Five Below has shown solid fundamentals lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.7%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Five Below’s positive characteristics outweigh the negatives. With its shares underperforming the market lately, the stock trades at 21.3× forward P/E (or $192.50 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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