3 Things to Love About Five Below Stock

In the U.S., there are trillions of dollars currently sitting in savings accounts. This means that people potentially have a lot of money to spend, which could benefit retail companies. Naturally, many investors are looking at e-commerce companies since many did so well in 2020, however, it's important to not overlook great opportunities among brick-and-mortar retailers. 

In this video clip from Motley Fool Backstage Pass, recorded on Sept. 16, Fool contributor Jon Quast explains to fellow contributor Jason Hall three reasons why he thinks Five Below (FIVE 0.51%) stock can be a winner, despite how little e-commerce business the company has.

Jason Hall: I'm going to show you something off the screen here. Before I ask the question. People got a lot of money to spend yo, like a lot of money. This is by far the most money -- and this data is a little old. It's from earlier this year, which you're looking at something like $10 trillion in people's savings accounts.

I tend to think that that bodes pretty well for retail going forward despite cyclicality that we're going to get in that thing. What I wanted to talk about, a stock each of us, in retail, that you think can win from here. Jon, you go first.

Jon Quast: Yeah, Jason. I'm going to bring a different company, little out of the box and let me preface this by saying, retail companies, especially brick-and-mortar retailers, really struggled in 2020. With locations close and they really had to pivot hard to e-commerce.

You might think that I would have a horse in this race with an e-commerce play, but actually, I'm going to go completely brick-and-mortar, hardly any e-commerce, Five Below. Symbol F-I-V-E. And I'm going to share my screen real fast.

Here's why I think that Five Below can be a winner. Here we go. Let me just start by saying, Five Below, they've just reported second-quarter results a couple of weeks ago. And six-month sales, sales so far for 2021, they were $1.2 billion. They were up 6% in 2020, so not a good year for them, but this company has virtually zero e-commerce presence and their sales still rose in 2020, even with a completely lost quarter. Sales up 55% in the most recent quarter. So far this year net income of $114 million.

One of the things that I like with brick-and-mortar retailers, I like, first of all, profitability. Profitability now, not someday, because brick-and-mortar retailers are not a SaaS [Software-as-a-Service] company, they really need to be showing those profits right from the get-go. It has that.

I love comparable-sales growth, because that is how these companies gain operating leverage. This slide right here, shows comparable sales growth. This is sales per location over time. Historically, always trending up. The only exception was the first half of 2020, when they had many of their locations forcibly closed. They were not an essential retailer, so they had to be closed. Aside from that, over a decade now, comparable sales always trending in the right direction.

I also like to see unit growth opportunity, and Five Below has that. They have about 1,100 locations right now. I should have said Five Below for those who don't know, this is a discount retailer that sells mostly items under five dollars to teens and kids.

Hall: Right there in the name.

Quast: Yeah, exactly Five Below. Yeah, it's not typically for you and me, Jason, this is for the kids.

Hall: What are you saying? I am a kid at heart.

Quast: Well, then you can get a couple of things there.

Hall: Thank you.

Quast: Over 1,100, this a little bit old but as you can see here, they are actually planning to grow to 2,500 locations. These little dots right here, are their distribution centers. They are actually building a new one right now in Arizona to support their growth going out West. They're also building another one around in here to support the growth over in this area.

This is a company that should get a lot more profitable as these new stores come online because they're already building up the infrastructure for them right now.

One last thing that I do want to show you about Five Below here and why I really like, as they open up about 1,400 locations from here, the payback period on these stores are tremendous. Cost about $300,000 average net investment, average store four-wall, EBITDA [earnings before interest, taxes, depreciation, and amortization], $450,000. They pay back in under a year.

This is a company that, as they grow quickly, they grow those profits quickly as well.