Over the last 10 fiscal years, discount-store chain Five Below (FIVE -1.52%) increased revenue, operating income, and its number of locations tenfold, 15-fold, and sixfold, respectively. And the stock price has followed, climbing 500% since April 2012.
The days of market outperformance likely aren't over. During a recent investor day presentation, the booming retailer's management outlined an updated long-term strategy that should really excite shareholders. Let's take a closer look.
By 2025, the leadership team, led by CEO Joel Anderson, expects Five Below's revenue and earnings per share to double. Strong demand for the trendy and cheap (primarily under $5) merchandise the company sells, like popular toys and tech gadgets, as well as candy and apparel, is forecast to continue in the years ahead as consumers remain attracted to affordable products, especially as fears of a looming recession rise.
However, the key pillar of this growth strategy is to rapidly increase the store count. Management boosted the previous goal of 2,500 domestic locations by 1,000, and it now expects that by 2030, there will be at least 3,500 Five Below stores in the U.S. If successful, this would imply a roughly tripling of the current footprint of 1,190 stores. Any way you slice it, that is astronomical growth, even more impressive given the secular downtrend of brick-and-mortar retail over the past decade.
If you look at Five Below's unit economics, it's easy to understand management's optimism. A new location requires a $400,000 investment to build out, but on average generates $2.2 million in annual sales. What's more, the average payback period has been less than one year since the company went public in 2012. As these store-level returns remain strong, Five Below should probably continue opening as many locations as possible.
Further densifying its concentration in metropolitan areas is part of the plan. For example, Five Below opened its first location in its home city of Philadelphia in 2002. But the business plans to eventually have 120 stores open in the area, double the 60 there are today. Additionally, investments to bolster the supply chain, by testing out in-house distribution centers and trucks rather than relying on outsourcing, could help Five Below better manage inventory flow and keep its store shelves stocked.
It's clear that if the leadership team can execute on this strategic goal, then Five Below's business will be worth a lot more than the $8.8 billion market cap it has today.
Does this make Five Below stock a buy?
Even with Five Below's stock producing stellar historical returns, shares are trading hands today at a price-to-earnings (P/E) ratio of just 32, which is near the cheapest the stock has ever been. While this is currently higher than the P/E ratios of direct competitors like Dollar General and Dollar Tree, Five Below possesses much better growth prospects. Investors should simply buy the stock today if they believe management can deliver on its long-term outlook.
That's because at 3,500 stores, Five Below is sure to have far greater sales, margins, and profit. Also, at some point within the next several years, the executive team may once again boost its financial targets, providing investors with even more upside.
Recent developments are certainly a vote of confidence for Five Below's business. It will be exciting to watch the company's expansion going forward.