The explosion of online shopping has resulted in many brick-and-mortar retailers struggling just to survive. When consumers have an expanding number of choices at lower prices with the added convenience of delivery -- all at their fingertips -- it's no surprise that physical shopping has been under pressure.
There is, however, one top retail stock that has thrived over the past decade by catering to a specific corner of the broader market. And the business is well-positioned to continue performing successfully in the future. I'm talking about discount chain Five Below (FIVE -1.17%), whose shares are up an incredible 230% in the last five years.
A long history of success
It's hard to overstate Five Below's success. At its initial public offering (IPO) in July 2012, the company had 226 stores. Fast forward to today, and there are 1,190 total locations, all in the U.S. The business targets a young customer (ages 10 to 13) with a wide range of merchandise from clothing and toys to tech gadgets and pet supplies, which all mainly sell under $5. Stores are vibrant and colorful shopping destinations that make it an exciting experience for customers.
From fiscal 2016 through 2021, revenue and net income jumped 185% and 288%, respectively. Same-store sales, a key performance indicator, increased 3.4% in the most recent quarter after growing 13.8% in the fourth quarter of 2020. And the gross margin of 36.2% and operating margin of 13.3% in the most recent fiscal year are outstanding for a physical retail business.
While higher gas prices are certainly a near-term headwind for Five Below, as consumers may decide to drive less -- and therefore shop less -- the company's relentless focus on providing value can help. And with inflation at record highs, causing the Federal Reserve to raise interest rates this year, the threat of a looming recession is rising.
Seeking lower-priced options to stretch already-pinched household budgets in an uncertain economic environment could be a boon for Five Below.
A bright future
Shareholders who have achieved market-beating returns by owning Five Below could see more of the same ahead. That's because during a recent investor day presentation, management laid out some key financial and strategic targets that should add plenty of optimism to the picture.
By 2025, Five Below plans to double its annual revenue ($2.8 billion in 2021) and earnings per share ($4.95 in 2021). And if that wasn't enough, the leadership team believes that by 2030, there will be 3,500 Five Below locations nationwide. Not only is this goal 1,000 stores higher than the previous target, but it is triple the current footprint. That is an incredible vote of confidence for the company's prospects.
The typical Five Below store costs approximately $400,000 to build, but generates $2.2 million in annual sales and $550,000 in earnings before interest, taxes, depreciation, and amortization (EBITDA). That's up from $1.6 million in annual sales and $340,000 in EBITDA, respectively, at the time of the company's IPO. Consequently, the average payback period is less than one year, which signals a massive opportunity to continue opening more locations. Returns are superb, so from a financial and strategic perspective, this makes complete sense.
As Five Below executes on this plan, revenue and net income are sure to rise. And with greater leverage, particularly when it comes to marketing expenses and corporate overhead, margins will expand as well. These potential trends support share price appreciation in the years ahead.
At 33 times trailing 12-month earnings, Five Below's stock price doesn't look expensive when you factor in the tremendous growth opportunity during the rest of this decade.