Dollar Stores Don't Always Have to Be Cheap

Five Below (NASDAQ: FIVE  ) could be one of the best investments in the discount-retail space. While it's generally grouped with the other major discount stores, it's much more than that. All in all, Five Below has done a stellar job of turning the dollar-store industry upside down. Think of Five Below as a big-box retailer with a dollar-store feel.

FIVE Chart

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No true competitor and a number of growth levers
The beauty of Five Below is that there is no apparent direct competitor, given the breadth of products it offers and its focus on the younger demographic. It sells almost any and all items, from sports goods to candy, and the company targets the teen and pre-teen demographics. One of the biggest opportunities for Five Below is that it's yet to tap the e-commerce market. And considering the economy is not rebounding as fast as expected, that's good news for the discount stores.

A couple of top comps include Big Lots (NYSE: BIG  ) and Dollar Tree Stores (NASDAQ: DLTR  ) . However, Five Below definitely appears to have the best growth prospects. Five Below has some 300 stores, but it hopes to have more than 2,000 in the long term. Compare this to Big Lots' 1,400 store base and Dollar Tree's 4,700.

Meanwhile, Big Lots has been struggling lately. This comes on the back of restructuring and general poor performance. As a result, it is discontinuing its wholesale business. The closeout retailer is expected to grow earnings per share at a mere 4% annualized over the next five years, putting its PEG at a high 3.8.

Dollar Tree is the smallest of the major dollar stores by store count. In addition, its same-store sales grew 3.7% in its most recent quarter and it's now trading at new 52-week highs. Even still, it is looking to add as many stores as possible over the interim, while also adding frozen/refrigerated products. Dollar Tree has now installed frozen products in more than 3,000 stores.

Analysts expect Dollar Tree to grow EPS at an annualized 17% for the next five years. Compare this to Dollar General's 15% and Family Dollar's 11%. However, this still pales in comparison to Five Below's expected 32% annualized expected rate.

The future remains bright
Five Below continues to crush the competition. It has posted 30 straight quarters of positive comps. As far as future growth, Five Below is looking to keep up the pace by not limiting its store base. This includes expanding into strip malls and other locations beyond just mall-based locations.

Five Below offers products across eight major categories. And the other big positive that's giving Five Below a leg up is its ability to offer branded merchandise. The positive aspect of this is that that teenagers tend to be more fickle and more concerned with labels. A few of its key brands include Nickelodeon, Hasbro, Monster Energy, MLB, Mattel, Wilson, and Lego.

Foolish bottom line
In preparation for future growth, Five Below is adding a new distribution facility in Mississippi to go with its Delaware facility. This should help the company easily meet its store growth. All in all, Five Below should continue taking market share from dollar stores and major department retailers. Its growth prospects are very robust, and analysts have a mean target price that suggests nearly 15% upside. 

Are dollar stores killing Wal-Mart?
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