Five Below: Does Growth Support Its Valuation?

Many thought that Five Below would become the next Dollar Tree, priced with sky-high expectations -- much like Michael Kors. Given its recent fundamental declines, however, the company might still have a long way to fall.

Jan 15, 2014 at 4:24PM

Five Below (NASDAQ:FIVE) had high expectations prior to its IPO, but decelerating growth has caused some to question the company's upside. Therefore, with it priced like Michael Kors (NYSE:KORS) and nowhere near becoming the next Dollar Tree (NASDAQ:DLTR), should investors buy?

A deceleration of growth
Five Below became a public company in 2012, with growth of 40% and a business strategy that was reminiscent of Dollar Tree.

Dollar Tree sells everything for $1, and has surprisingly managed to produce operating margins of 12.5%. In fact, Dollar Tree might just be the most efficient retailer in the market. The company has grown to more than 4,200 stores with $7.85 billion in annual sales, and even to this day maintains growth of 9%.

On the other hand we have Five Below, a retailer that sells everything below $5. As an investor, the idea sounds brilliant. Given Dollar Tree's profitable success, investors had really gotten behind the future of Five Below.

Since the company's IPO, however, growth has decelerated from a 40% rate to a 28% rate. With just $110 million in sales during its last quarter, Five Below is still a relatively small retailer.

By comparison, Dollar Tree had $110 million in quarterly sales back in 1996. The difference was that in its third-quarter report, Dollar Tree was growing at nearly 65% year over year, significantly faster than Five Below.

It was easier to predict that Dollar Tree would continue to explode. With Five Below already seeing such a rapid deceleration of growth, though, investors must consider that anticipated billions in future revenue might not become reality.

More bad news
Since December, shares of Five Below have fallen 25%. Much of this has been a result of speculation followed by disappointing holiday numbers.

Five Below announced that during the nine-week holiday season, its sales increased 25.4%. This showed a further deceleration from the third quarter. The most disappointing statistic is that comparable-store sales are estimated to fall 0.5% to 1.5%, meaning that fewer consumers are coming in the doors of existing stores.

This means that all of Five Below's growth was achieved via store expansion. With traffic declining, margin pressure becomes a real threat.

Is it cheap?
Given Five Below's problems and its recent stock decline, some investors might wonder if it's now presenting value. Although it may never grow to become the next Dollar Tree, Five Below might still be a good investment. The problem with this logic is that valuation must then become a factor, and Five Below is still priced for significant growth.

For example, luxury retailer Michael Kors has soared 230% since its 2011 IPO. It is not what most investors would call a cheap stock, however. In the last 12 months, though, Michael Kors grew 39% year over year for a total revenue of $2.6 billion. Therefore, Michael Kors is significantly larger than Five Below and is growing much faster.

With that said, Five Below and Michael Kors are by no means an equal, nor operate the same business model. However, in this case, we are only looking at growth within retail, and the valuation that is awarded to different levels of growth. Hence, Five Below trades at a whopping 43.5 times next year's earnings. This puts it at a near 100% premium to the faster-growing and larger Michael Kors, which trades at 23 times forward earnings.

Final thoughts
At some point, Five Below might in fact become a value investment. At the moment, though, its valuation and decelerating growth suggests that it could see significant downside pressure before that day occurs.

You might wonder what price would present value. While there is no absolute answer, one might state that Five Below is not presenting value until it trades at a multiple that better reflects its fundamental performance and outlook. Five Below should not be more expensive than Michael Kors, and should perhaps trade closer to Dollar Tree at 17 times forward earnings.

In regards to Dollar Tree and Michael Kors, both are priced attractively with impressive growth. Given the comparison to Five Below, investors might find more upside in either of these two companies instead of Five Below.

Want ultimate growth? You've come to the right place
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Fool contributor Brian Nichols owns Dollar Tree. The Motley Fool recommends Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers