Does Five Below Belong in the Elite Retail Class?

As we've seen with the likes of Michael Kors Holdings (NYSE: KORS  ) , Under Armour (NYSE: UA  ) , and Lululemon Athletica (NASDAQ: LULU  ) , fast-growing new trends in retail are often awarded with pricey premiums compared to the overall market. Five Below (NASDAQ: FIVE  ) is considered by many to be a rising retail star, but is its growth deserving of a premium multiple?

3 explosive retailers
Rather than focusing on margins, balance sheet, and inventory, let's focus on comparable-store sales and total revenue growth. These are important metrics, and are the basis around which premiums in retail are formed.

For companies deemed trendy, explosive growth is often seen. Michael Kors, Under Armour, and Lululemon are three such retailers. Michael Kors sells fashion apparel such as handbags and wallets.

Both Under Armour and Lululemon operate in the sports retail business, although Lululemon's products are primarily for women. The key similarity among these three companies is that all are growing fast in total revenue and comparable sales. Moreover, all three are large companies and have hefty market premiums due to their growth. To better explain, take a look at the chart below.

 

Kors

Under Armour

Lululemon

Market Cap (billions)

$16.15

$8.65

$10.14

Trailing 12 month sales

$2.62 billion

$2.12 billion

$1.49 billion

Price/Sales ratio

6.27

4.02

6.86

Forward P/E ratio

22.93

45.91

28.07

Last quarter revenue growth

38.9 %

25.7 %

21.9 %

Last quarter comparable sales growth

23%

N/A

8%

Three-year annualized revenue growth

62.5%

28.9%

44.6%

We're clearly looking at three explosive companies, and all three are very expensive. As you can see above, each company's trading premium relative to both sales and next year's earnings is significantly higher than market averages.

However, just look at the growth that each company has produced. Kors and Lululemon have both been growth monsters for the last three years, and Under Armour is still growing at the same pace today as it has the last three years.

This fact about Under Armour brings up an important point: growth naturally slows as a company grows larger. It is easier to double sales at $100 million than it is at $10 billion. Still, despite slowed growth for Kors and Lululemon, all are equally impressive given the size of each company's overall business.

Will Five Below join the elite list?
After looking at Kors, Lululemon, and Under Armour, let's transition to Five Below. Many believe that it is the next to join this list.

Five Below operates a business where everything sells below $5. It trades with a very similar gaudy premium as its peers, at 5.5 times sales and 47 times next year's earnings. Our basic understanding of growth and its relation to the size of a business paints a completely different picture, however.

Take a look at the revenue growth for each of Five Below's last six quarters:

Quarter

Year

Revenue growth (year-over-year)

Third

2013

28 %

Second

2013

34.9 %

First

2013

33 %

Fourth

2012

38 %

Third

2012

39.9 %

Second

2012

40 %

As we previously discussed, revenue growth naturally slows as a company grows larger. In the cases of Kors, Lululemon, and Under Armour, each maintained growth of more than 30% until exceeding $1 billion in annual sales.

In Five Below's last quarter, however, it produced sales of just $110.7 million. This is far less than its peers. It seems that Five Below is already seeing a deceleration of growth at a time when it should be growing at 50% plus – or it would if Five Below is to become the next great growth retail company.

Final thoughts
When it comes down to it, Five Below is not deserving of its multiple. It also hasn't proven itself worthy to be mentioned in the same sentence as Kors, Under Armour, or Lululemon.

This is a company that has already sunk below 30% year-over-year growth and has comparable sales growth of only 6.6%. This is not on the levels of its peers, as each of the three noted companies were all producing insane growth when quarterly revenue was $100 million. It would be very hard to validate an investment in Five Below at this time, as investors must wonder how much of a fundamental upside the company has to gain.

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Comments from our Foolish Readers

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  • Report this Comment On December 07, 2013, at 6:01 PM, nofluffjuststuff wrote:

    I am finding that fool and seeking alpha put articles which are favoring the uknown biases of the authors. Many times the authors hold a position on stock or may benefit indirectly. The credibility is kind of lost.

    The author owns Kors and is seen to benefit KORs at expense of flaming five. The author can boast of KORs as much but its not apples to apples comparison.

    Five is clearly NOT in category of KORs which caters for rich while FIVE caters for frugal yet fashionable accessories. And FIVE is also just opened a lot of stores recently where the revenue add will be seen soon.

    Problem with free articles via yahoo is that they do not tend to inform us on 360 but only few areas but perhaps sway public opinion based on biases of authors and fools and perhaps seeking alpha to me personally are no more reliable.. Again IMHO not asking to be sued or litigated for these are some opinions and i am violating any T&Cs then please i am not aware of them and u can delete my comment.

  • Report this Comment On December 09, 2013, at 4:01 PM, Borisbmx wrote:

    B/c Motley Fool and Yahoo are in a partnership to create crappy cheap content of zero value simply to sell ads via wasting your time.

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