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Is Five Below Stock a Buy?

By Rick Munarriz – Jul 25, 2020 at 10:00AM

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The cheap-chic discounter is bouncing back after a pandemic slump.

These are challenging times for brick-and-mortar retailers that don't have a strong online game, but sometimes being cheap, chic, and hip with young shoppers is enough. Five Below (FIVE 0.73%) is one of the more resilient chains dotting suburban strip malls these days. The chain that lives up to its name by offering a wide range of goods priced at $5 or less has seen its stock more than double since bottoming out four months ago.

There's a lot to like in the superstore concept that has proven magnetic to teen and pre-teen shoppers over the years. The valuation isn't for the faint of heart, but is the premium warranted? Let's take a closer look at the trendy retailer to see if Five Below stock is a buy right now.

Exterior of a Five Below store.

Image source: Five Below.

Heating things up

We can start with the bad news. Five Below's latest quarter -- the fiscal period that come to an end in early May -- was rough. Net sales plunged 45%, and that's not much of a shock, as its stores closed down halfway through the quarter. Comps were trending positive before the shutdown. A larger-than-expected loss snapped a healthy streak of landing just above Wall Street profit targets. 

The news should get better at this point. A whopping 90% of its stores were already reopened as of June 9. It also added to its store count during the lull, tacking on another 20 new locations in its latest quarter to push its empire to 920 bargain-satisfying stores. The current fiscal quarter that ends next week will still be weighed down by pandemic shutdowns, but analysts see a return to double-digit top-line growth in the next quarter. 

A knock on Five Below is that e-commerce hasn't moved the needle for the chain, but that should also be changing in the near future. Five Below acquired the assets of fading online dollar store, and it's using the platform as a basis for a renewed dot-com push. 

Five Below has also been rolling out a new section in its stores that sells items for $10 or less. The move will allow Five Below to stock pricier items that have historically been unavailable through its existing categories. Results were promising at the initial test stores offering the $10 items.

There's a lot to like about Five Below, and even in a recession, it should hold up well because it packs a compelling value proposition of trendy goods for pocket change. It held up well in the last major downturn, as annual comps have been positive for 14 years in a row.

The valuation is steep. Five Below trades at an enterprise value that's more than four times trailing revenue, a high multiple for a retail concept. Sometimes, you have to pay up for something good, even if Five Below shoppers may not agree with that sentiment. Five Below stock is a buy at current levels.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $115 calls on Five Below and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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