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Could Five Below Be the Next Dollar Tree?

Five Below (NASDAQ: FIVE  ) is grouped together with other dollar stores such as Dollar General (NYSE: DG  ) and Dollar Tree Stores  (NASDAQ: DLTR  ) , yet it's clear that it and the latter operate with a certain type of niche. With that said, what exactly is Five Below, and could it possibly become the next Dollar Tree?

What is Five Below?
Dollar General operates as a discounted retailer of household goods, selling a little bit of everything. In a tough retail environment, its operational approach appears to be paying dividends, as the company's 6.9% revenue growth in the first quarter was far better than most large retailers.

Yet, Dollar General doesn't have a niche, or any single philosophy that defines it. Instead, it simply changes based on the demand of consumers and the availability of goods. Meanwhile, Dollar Tree and Five Below are two companies with an established identity, or a niche market.

Specifically, Dollar Tree sells everything in its stores for one dollar, and with nearly $8 billion in 12-month sales, it sells a lot of items. And in remarkable fashion, the company's operating margin of 12.3% is actually higher than Dollar General.

Five Below operates a very similar approach to Dollar Tree but sells everything for $5 or less. With that said, Dollar Tree has continuously proven that it can remain stocked with useful and needed items for a buck and can remain profitable for investors.

Therefore, with a similar approach, investors were very excited about Five Below's IPO in late-2012 and the prospects of it becoming the next Dollar Tree. However, thanks to decelerating growth, investors have become naturally skeptical as to how large it can become.

What can we learn from history?
Currently, Five Below is a $2 billion company with annual revenue of $565 million, many times smaller than the $11.2 billion in revenue for Dollar Tree. Therefore, looking at Five Below compared to Dollar Tree and trying to compare size and growth is almost irrelevant.

However, if we look back at history, we might learn something. Hence, let's go back to 1997 and look at Dollar Tree and then compare it to Five Below's expectations for this year, a comparison that puts two companies of similar size and strategy side by side.


Dollar Tree Full-Year 1997 

Five Below 2014 Expectations


$635 million

$680 million

Revenue Growth


27 %

Comparable Sales Growth



Number of Stores


366 *

Revenue Per Store


$1.85 million

*Number of stores expected at year-end 2014; current store count is 323

As you can see, Five Below looks very much like a younger Dollar Tree, which then grew into becoming the behemoth of a company that it is today. Sure, Dollar Tree's comparable sales growth was twice that of Five Below's, but the latter has some advantages too as it compares to Dollar Tree.

Specifically, Five Below earns significantly more revenue per store. This is likely because it's dealing with higher priced products, which hopefully will translate into higher profits, although it's too early to know for sure. All in all, Five Below is operating at a good pace and with a solid operational philosophy to become a much larger company in the years ahead.

Dollar Tree revenue (annual year-over-year growth) data by YCharts

Final thoughts
With that said, it's far too early to determine that Five Below will be the next Dollar Tree. However, the chart proves that fears regarding Five Below's deceleration of growth -- its first quarter as a public company showcased revenue growth of 40% -- is unwarranted.

In fact, as you can see in Dollar Tree's historical year-over-year revenue growth chart, it's completely normal for a company's growth to decelerate as it grows larger. In regard to Five Below, if we use Dollar Tree as a guide, it's tracking quite well to ultimately become a household name and produce significant stock gains long term.

Five Below is poised to grow big, but this will truly be the next big thing
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Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2014, at 11:50 AM, HoosierNative wrote:

    Dear author, I would be very careful about using the phrase "paying dividends". I have own DG for quite some time and yet have received a single dividend payment.

    Oh, well, I guess Fools will be Fools.

  • Report this Comment On June 08, 2014, at 4:54 PM, BrianNichols wrote:

    It was used as an expression, saying that a particular operating focus has been rewarding

  • Report this Comment On June 09, 2014, at 8:45 AM, obkozranch wrote:

    The expenses for new store openings are in the sales comps. If the initial expenses of opening the stores are backed out, indeed one would see 6.8- 7.8 store comps. Ken Bull specifically said Pre-opening expenses drive down comps and you won't have these toward the second half. Also the margin decline is due to talent hire. And the new Distribution center is running at 33% capacity. As this ramps margin decline will flatten out. He said, "Top and Bottom lines consistently deliver. New and old stores consistently deliver. Growth engine is new stores. Plenty of runway ahead. We tend to be conservative for what we tell everyone."

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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8/28/2015 4:01 PM
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