Five Below Stock: Buy or Wait?
Hello, savvy investors! Today, I've brought a fascinating topic to you that's been making waves in the retail world: Five Below (NASDAQ: FIVE).
This discount retailer has seen its shares rocket an incredible 102% in just the past two months, sparking a lot of buzz. But before you jump into buying this stock, there are three crucial facts you absolutely need to understand. Let's dive in!
☆ Topic 1: Expanding at a Brisk Pace – Five Below's Aggressive Growth Strategy
Despite the widespread narrative about the rise of e-commerce, brick-and-mortar retail isn't dead. In fact, a massive 84% of U.S. retail spending still happens in physical stores. This ongoing preference for in-person shopping has been a huge tailwind for companies like Five Below, which are aggressively expanding their physical footprint.
- Rapid Store Growth: As of May 3, Five Below boasted 1,826 stores across the U.S. That's a nearly fivefold increase from just 385 stores a decade ago! This isn't just random expansion; it's a calculated move.
- Ambitious Future Targets: Management has set a bold target, believing there's an opportunity for as many as 3,500 stores in the future. Imagine the revenue potential if they hit that!
- Impressive Unit Economics: Why such aggressive expansion? Because their unit economics are strong. A new Five Below location costs about $500,000 to open, but it's expected to generate an average of $2.2 million in revenue and $500,000 in EBITDA in its first year alone. That's a solid return on investment that few retailers can boast.
- Untapped Markets: There's still significant room for growth in highly populated states like California, Texas, Florida, New York, and Pennsylvania, suggesting that their 3,500-store target isn't just a pipe dream.
Example: Think about how quickly Starbucks expanded globally decades ago, leveraging strong unit economics and consumer demand. Five Below is applying a similar physical expansion model in a different retail niche.
☆ Topic 2: Thriving Against the Odds – Success in a Challenging Retail Sector
The retail industry is notoriously tough. It's a hyper-competitive landscape with thin margins, low barriers to entry, ever-changing consumer preferences, and virtually no "lock-in" for customers. Yet, Five Below is not just surviving; it's thriving.
- Strong Revenue and Same-Store Sales (SSS) Growth: In the first quarter of fiscal 2025 (ended May 3), Five Below reported a robust 19.5% year-over-year revenue growth. This was significantly boosted by a 7.1% jump in same-store sales (SSS), indicating strong foot traffic and customer engagement at existing locations.
- Encouraging Outlook Amid Uncertainty: Even with broader macroeconomic uncertainties, management is confident, expecting SSS to increase by 3% to 5% for the full fiscal year. While this suggests a near-term slowdown from the Q1 surge, any positive SSS growth is a strong indicator of demand, especially when consumers might be tightening their belts.
Example: Many traditional retailers like Macy's or Sears have struggled with declining foot traffic and closing stores. Five Below's ability to consistently grow its same-store sales in this environment speaks volumes about its business model and appeal to its target demographic.
☆ Topic 3: The Valuation Reality Check – Is Five Below Priced Right for You?
While Five Below's operational performance and expansion plans are certainly compelling, the recent surge in its stock price demands a careful look at its valuation. The best investment opportunities often present themselves when shares are attractively priced, offering a "margin of safety."
- Recent Stock Surge: Despite trading 48% below its August 2021 peak, Five Below's stock has surged an incredible 102% in just the past two months. This rapid ascent means prospective investors are looking at a more expensive entry point.
- Current Price-to-Earnings (P/E) Ratio: The stock currently trades at a price-to-earnings (P/E) ratio of 25.9. While this is a notable discount compared to its own trailing three-year average, it's actually a slight premium to the broader S&P 500 index.
- Weak Earnings Forecast: What truly matters is the company's future earnings growth relative to its current valuation. Wall Street analysts project Five Below's earnings per share (EPS) to grow at just a 6% compound annual rate between fiscal 2024 and fiscal 2027. A P/E of 25.9 for a 6% growth rate implies a P/E-to-growth (PEG) ratio of over 4, which is generally considered expensive.
Example: Imagine buying a fantastic new smartphone that just launched. If you buy it on day one, you pay full price. If you wait a few months, it might go on sale, offering the same great phone at a better deal. With stocks, waiting for a lower valuation can be similar to waiting for that sale price.
Given the modest earnings growth forecast, a P/E of 25.9 offers little "margin of safety" for investors. For those interested in Five Below's long-term potential, waiting for a more attractive valuation might be the wiser move.
☆ Questions
Q1. Why is Five Below focusing so much on physical store expansion when online shopping is so prevalent?
A. While online shopping has grown significantly, a large majority (84%) of U.S. retail spending still occurs in brick-and-mortar stores. Five Below's unit economics for new stores are incredibly strong, generating significant revenue and EBITDA in their first year. This indicates that physical locations are highly profitable and there's still ample consumer demand for their unique in-person shopping experience, especially for discount and novelty items.
Q2. What are "same-store sales (SSS)" and why are they an important metric for retailers?
A. Same-store sales (SSS) measure the revenue generated by retail stores that have been open for at least one year. This metric is crucial because it indicates the underlying health and growth of a retailer's existing business, excluding the impact of new store openings. Strong SSS growth, like Five Below's recent 7.1% jump, suggests increased customer traffic, higher average transaction values, or both, signaling that the company's products and marketing efforts are resonating with consumers.
Q3. The stock has doubled in two months. Does this mean it's a "buy" right now?
A. A rapidly rising stock price is exciting, but it doesn't automatically mean it's a good time to buy. As discussed, Five Below's P/E ratio of 25.9 is at a slight premium to the S&P 500, and Wall Street forecasts suggest only 6% annual EPS growth. This combination indicates the stock might be overvalued relative to its expected earnings growth, offering little "margin of safety." While the company's operations are strong, many investors prefer to wait for a more attractive valuation to maximize potential returns and minimize risk.
☆ Conclusion
Five Below is undeniably a strong operational performer in a challenging industry, showcasing impressive physical expansion and solid same-store sales growth. Their business model, focused on affordable fun, clearly resonates with consumers. However, the recent surge in its stock price means its current valuation might be running ahead of its near-term earnings growth prospects.
For long-term investors, patience could be a virtue here. Keep Five Below on your watchlist, celebrate its operational successes, but wait for a more compelling entry point where the valuation aligns better with its projected growth. Making informed decisions means looking beyond just headline gains!