Retailers have had a rough time during the coronavirus pandemic. Strict lockdown measures to stop the spread of the virus created an extremely difficult operating environment, and many of these businesses (especially the smaller ones) have struggled just to survive. Even as COVID-19-related restrictions eased, ongoing supply chain challenges coupled with soaring inflation have kept the headwinds blowing for many in this sector.
But not all retailers had it tough over the past two years. For instance, Five Below (FIVE -1.77%) has flourished over the past several quarters. The discount chain, which focuses mainly on selling merchandise under $5, just announced a booming holiday shopping period, and management expects financial results for the fiscal 2021 fourth quarter to come in at the high end of guidance.
Let's take a closer look at what has become a booming retail stock.
Five Below is showing no signs of weakness
During the nine-week period from Oct. 31 through Jan. 1, Five Below grew year-over-year revenue by 20.6%. Management forecasts fiscal fourth-quarter sales will approach $1 billion. For the full fiscal year, revenue, same-store sales, and diluted earnings per share are projected to rise 45.6%, 30%, and 120.9% (at the midpoint), respectively, compared to the prior year.
"It was an outstanding holiday for Five Below, with comparable sales growth of 7.7% on top of a record 10.1% last year, resulting in the highest two-year comparable sales growth rate for the holiday season since going public [in July 2021]," CEO Joel Anderson highlighted in the quarterly earnings press release.
From sourcing trendy and seasonal inventory well ahead of the holiday season to securing excess container capacity and adding its own truck fleet, Five Below was well-positioned for the challenges facing the global supply chain.
And when it comes to soaring inflation, consumers are encouraged to shop with value in mind. When budgets are being stretched from rising food, gas, and housing costs, finding bargains becomes even more important. The majority of Five Below's products, ranging from toys and games to beauty products and apparel, sell below $5. And while some items, like a "titan super massager set," sell for far more than $5, they still provide customers with exceptional value.
Five Below is demonstrating impressive strength during what has been an extremely difficult industry backdrop.
Should you buy Five Below stock?
Despite losing nearly 20% of its value so far in 2022, over the past five years Five Below's stock has produced an outstanding return of 326%. And it currently trades at a price-to-earnings ratio of 36, which is toward the low end of the stock's historical valuation.
Owning Five Below isn't as sexy as buying shares in a high-flying tech stock, but this profitable discount-store chain is finding remarkable success in a niche of the broader retail market. And there's a ton of upside if the business executes on its ambitious growth plan in the years ahead.
Management firmly believes that the U.S. has the potential for 2,500 stores one day, more than double the current footprint of 1,173 locations. At this level of scale and operating leverage, Five Below should benefit from higher margins, net income, and free cash flow.
A robust holiday shopping season proves that Five Below's competitive position strengthened at a time when many other retailers barely kept up. Congested supply chains and rising inflation are no match for this business. And I think this is a sign that makes the stock a compelling buy right now.