Shares of Five Below (NASDAQ:FIVE) soared 13% to an all-time high on Sept. 7 after the specialty retailer's second-quarter numbers beat analyst estimates. Five Below's revenue rose 23% annually to $347.7 million, beating expectations by nearly $13 million. Much of that growth came from new store openings, but its comparable-store sales also grew 3% -- compared to its 9% comps growth a year earlier.

Five Below's operating income rose 41% to $55.1 million, and its net income surged 86% to $46.9 million. Its diluted EPS jumped 50% to $0.45 per share, but that included a one-time $0.03 benefit from employee share-based payments. Excluding that benefit, its EPS of $0.42 still beat estimates by $0.04 per share.

A group of young shoppers carrying shopping bags.

Image source: Getty Images.

Five Below's growth is incredible for a brick-and-mortar retailer in the age of Amazon (NASDAQ:AMZN). It grew its store count by 18.5% annually to 692 during the quarter, and it expects to hit 2,020 stores by 2020 and over 2,500 stores over the long term.

For the third quarter, Five Below expects its comps to rise 3%-4%, and for its revenue to grow 17% annually as it opens about 50 new stores. However, its EPS is expected to stay roughly flat. For the full year, it expects its sales to rise 19%-20%, and for its EPS to grow 36%-40%.

Those growth figures look solid. But at $130, Five Below's stock trades at over 50 times this year's earnings estimate. Is Five Below still worth buying at these levels, or should investors "look out below"?

How Five Below survived the retail apocalypse

Five Below applies a dollar store model to "fun" products, like fashion accessories, body products, snacks, decorations, books, and novelty items, which all cost under $5. Its stores, which are mostly based in strip malls in college towns, target pre-teens, college students, and young adults with less spending power than older shoppers.

Five Below's business model held up well against Amazon for two reasons. First, its products generally cost less than Amazon's thanks to its bulk purchasing strategies. Five Below sells most of its products for about half the price of Amazon products according to KeyBanc Capital Markets. Yet Five Below's gross margin still rose slightly to 35% last quarter, mostly due to its occupancy cost leverage on higher sales.

Second, Five Below's wide variety of products encourages shoppers to search its brick-and-mortar stores for bargains and make impulsive purchases. This is similar to the "treasure hunt" strategy that off-price retailers like TJX Companies use.

Two young girls go shopping.

Image source: Getty Images.

The bear case against Five Below

Investors once worried that Five Below relied too heavily on new store openings to boost its sales growth. However, Five Below's comps growth remains healthy, which indicates that its older stores are still posting solid year-over-year sales growth.

The bears also claim that Five Below depends too heavily on certain fads to keep a fickle base of young shoppers. Its sales enjoyed a huge boost from fidget spinner sales last year, for instance, but that temporary spike resulted in tougher comparisons in subsequent quarters.

Another concern is Amazon's introduction of a "$10 and under with free shipping" segment, which seemingly targets Five Below, off-price retailers, and dollar stores. If Amazon keeps slashing its prices and mall traffic continues to decline, Five Below could lose younger shoppers to the e-commerce giant.

Most of Five Below's products are also produced overseas, and many of its suppliers are in China, which is heavily targeted by the Trump administration's tariffs. During last quarter's conference call, CFO Kenneth Bull stated that the $50 billion in goods already targeted with tariffs were "not expected to have a material impact" on its business, but that there was still "uncertainty around the implementation of an additional $200 billion in tariffs."

However, Bull noted that those tariffs wouldn't have a "material impact" on its fiscal 2018 results, and that it was "working closely" with its vendor partners to "mitigate the impact of these potential tariffs" by changing its strategies for products, pricing, and sourcing.

My verdict

I considered Five Below to be fairly cheap back in March, but the stock rallied nearly 90% since then. The stock could still climb higher from these levels, but I think the risks now outweigh the rewards. Therefore, investors should wait for this red-hot stock to cool off a bit before starting new positions.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Five Below and The TJX Companies. The Motley Fool has a disclosure policy.