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The Most Important Number You Probably Missed in Five Below's Q3 Earnings Report

By Neil Patel – Dec 14, 2021 at 6:50AM

Key Points

  • Five Below's latest quarterly numbers were well-received by Wall Street, as the business crushed forecasts.
  • A key part of the company's growth strategy centers on rapidly opening more stores.
  • The stock has been a huge winner, showing that great investments can be found even in troubled segments like brick-and-mortar retail.

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The discount retailer's business has been humming along, and there's good reason to expect the growth to continue.

Five Below (FIVE -0.08%) reported fiscal third-quarter results on Dec. 1, and based on the 10% price pop that followed, the market was satisfied with the numbers. Sales of $608 million and earnings per share of $0.43 easily beat Wall Street's estimates, and both the top and bottom lines were up meaningfully from the prior-year period. 

Although shareholders should certainly be happy with the results for the period, which ended Oct. 30, it's possible that many might have overlooked a key figure that was only mentioned once during the earnings call. It's a data point that speaks volumes about Five Below's future. 

exterior of a Five Below store

Image source: Five Below.

Adding stores at a rapid clip

During the past five fiscal years (2016 through 2020), the kids and teens specialty retailer opened 583 stores -- essentially doubling the chain's size. And management hasn't eased up on this aggressive growth strategy -- its target for the current fiscal year is to add 170 net new locations. As of Oct. 30, Five Below operated 1,173 stores in 40 states. 

As impressive as that is, the company's long-term ambitions may be more important to shareholders. "As we look ahead, we are confident that we will continue to drive sustainable long-term growth while realizing our 2,500-plus store potential in the U.S.," Chief Executive Officer Joel Anderson said in a statement. Based on that comment, the company expects to more than double its retail footprint yet again. That would provide a massive growth runway, assuming management can continue executing its strategy.  

It makes plenty of sense for the company to direct its capital toward opening new stores. The average Five Below location costs roughly $300,000 to build, with an expected return in the first year (earnings before interest, taxes, depreciation, and amortization) of $450,000. That's a remarkable return on investment. 

Even more impressive is that Five Below has increased sales, profits, and its store count throughout the years without taking on any debt. 

Focused on selling to the younger crowd

The brick-and-mortar retail sector has been under immense pressure during the past decade thanks to the rise of e-commerce behemoth Amazon and its smaller peers. But by focusing on a specific niche within the broader industry, Five Below has found its groove. Anderson credits his company's success partly to the demise of Toys R Us. 

"There is no other national retailer out there that is specifically targeting teens and tweens and kids," he said on the third-quarter earnings call, addressing the bankruptcy of the once-popular toy-store chain. Five Below appeals to its target demographic by selling a broad assortment of merchandise ranging from home furnishings and games to tech and beauty products, often for less than $5. Providing a fun, vibrant shopping experience and trendy items helps, too. 

Five Below has already received most of its holiday inventory, so it's poised to deliver superb results this quarter. Management expects revenue will approach $1 billion, which would be a record quarter. And for its full fiscal year, Five Below has forecast a sales gain of 45%.

A winning investment 

If you're a long-term Five Below shareholder, I applaud you. The stock has soared by more than 380% during the past five years, while the S&P 500 only doubled. This type of performance proves that great investments can be found even in troubled industries, particularly if the business in question is targeting a niche successfully, as Five Below has done. 

Based on management's plan to eventually hit 2,500 stores in the U.S., the company's growth story is far from over. As such, now might be a great time to consider buying the shares. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel owns Five Below. The Motley Fool owns and recommends Amazon. The Motley Fool recommends Five Below and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $115 calls on Five Below, short January 2022 $1,940 calls on Amazon, and short January 2022 $120 calls on Five Below. The Motley Fool has a disclosure policy.

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