Five Below (NASDAQ: FIVE) is a specialty retailer with one of the hottest stocks on the NASDAQ. The company beat second quarter estimates with revenue spiking 23 percent to a yearly total of just under $350 million.
The retailer is growing at a rapid clip thanks to its string of store openings. The company increased its store count by nearly 20 percent this year alone. Five Below’s operating income jumped more than 40 percent while store comp sales continue their steady increase. Net income spiked nearly 90 percent to just under $47 million. Five Below is growing at quite the astonishing rate for a company with a fairly traditional business model.
Five Below’s approach to retail is similar to that of discount stores. The company sells fun items such as body products, fashion accessories, decorations, novelties, books and food. Each item is appropriately priced at $5 or less. Five Below stores are primarily positioned in strip malls near colleges. The company’s target demographics are college students, teenagers, pre-teens and young adults in general.
This business model is excelling even against the likes of Amazon. The company’s success is attributable to the fact that its products are priced lower than the competition’s. However, Five Below’s margins are still increasing by about 30 percent per quarter. Furthermore, Five below sells an array of diverse products. The diversity of offerings keeps customers coming back for more as they seek the next new item for $5 or less. It appears as though Five Below has solved the retail brick-and-mortar puzzle. The company’s stores could remain viable far into the future.
Five Below executives are so confident in the company’s performance that they recently raised the full-year sales aim. Demand is continuing to increase at existing stores. Furthermore, Toys R Us closed, sending that many more toy-seekers to the likes of Five Below. The company will also sell licensed products including Star Wars and Disney merchandise. Look for investors to shrug off a profitability dip this year as the company dumps cash into marketing and store design improvements.
All in all, Five Below will add 50 stores this quarter alone. If the timeline works out, Five Below will have about 750 total stores. Management plans on opening even more locations in the months and years to come. Five Below executives are on record as stating the company has a long-term goal of 2,500 stores.
Those concerned with Five Below argue the company is too reliant on new store openings. If Five Below were to halt store openings, its sales growth would almost certainly stagnate. Event though the company’s comps are respectable, meaning stores that opened years ago are excelling in terms of sales growth, new stores are the primary driver of revenue growth. Bears also argue Amazon is specifically targeting Five Below with its free shipping on $10 and under. It is possible that Amazon will continue decreasing prices, sending mall traffic plummeting and reducing Five Below’s visibility.
Five Below bears insist the company’s margins wills shrink as President Donald Trump’s trade tariffs kick in. The vast majority of Five Below’s offerings are manufactured in other nations. The bulk of the company’s suppliers are located in China. President Trump has zeroed in on Chinese manufacturers in an attempt to offset what he calls unfair trade deals. Though tariffs might not impact Five Below’s 2018 fiscal results, the cost increase will eventually hit the company’s bottom line.
Above all, Five Below critics rightfully argue the company sells cheap items at stores that fewer and fewer people visit as web shopping continues to skyrocket in popularity. Think back to the last time you or someone you know spent a considerable amount of money at a store like Five Below. The truth is the company is reliant on impulse purchases. One has to wonder how long this business can stay in the black selling trinkets and random sundries for a couple bucks a piece.
It is awfully difficult to sell Five Below stock when the company anticipates sales will rise 20 percent per year and earnings per share will increase about 40 percent. Priced at around $126, Five Below trades at about 50 times 2018’s estimated earnings. If you can tolerate this lofty price and are not scared away by a company with a comparably conventional business model, consider adding Five Below to your portfolio. Otherwise, stay away.
Regards,
Ethan Warrick
Editor
Wealth Authority
