With inflation still at elevated levels, the Federal Reserve still hiking interest rates, and the economy still in a state of increased uncertainty, investors certainly have a lot to think about when putting their money to work in the stock market. Growth stocks in particular have been under pressure, but investors can still find solid opportunities in this category.
Five Below (FIVE -1.90%) is one such business. The company has grown at a remarkable clip over the past several years. And as a result, investors have been rewarded, even though shares are down about 10% in just the last month. With that being said, here's why Five Below is a top growth stock to buy right now.
Great value for customers
As its name suggests, Five Below sells merchandise primarily for under $5. While it offers products above this price point, its bread and butter is still on the lower end of the spectrum. And in the current economic environment of high inflation, finding bargains is a top priority for consumers. Five Below's product assortment is broad, with items ranging from tech gadgets and apparel to pet supplies and beauty products.
In the most recent fiscal quarter (Q4 2022, ended Jan. 28), revenue rose 13% year over year to $1.1 billion, a healthy gain. This is a clear sign that customers are still flocking to Five Below's 1,340 stores nationwide. And for good reason. The company really focuses on creating vibrant and energizing shopping destinations with a treasure-hunt atmosphere, not unlike what Costco Wholesale is well-known to provide. This helps to drive foot traffic.
What's really impressive about Five Below is that more than half of customer households have annual incomes greater than $50,000. That's a worthwhile demographic to be able to target as they can provide some downside protection for the business in a possible recessionary scenario. But investors should also appreciate a company that can continue performing well in times like now.
Remarkable past growth and future potential
Five Below's growth has been tremendous. Over the past five fiscal years, revenue and diluted earnings per share (EPS) have increased at compound annual rates of 19.2% and 20.6%, respectively. This was driven mainly by a rapidly expanding store count. As I mentioned, Five Below currently operates 1,340 stores. Five years ago, this figure was just 625. This business certainly bucks the trend of the death of brick-and-mortar retail.
This outstanding historical growth has resulted in Five Below shares climbing 176% over the past five years and 411% over the past 10 years, easily crushing the broader S&P 500 index by a wide margin. As a result, the stock isn't cheap. Its price-to-earnings (P/E) multiple, a popular metric used by investors, is 42. While that's below its five-year average of 48, it is far higher than the multiple of 24 that the shares carried as recently as July of last year. Investors have certainly bid up the stock.
Achieving solid past growth is one thing, but Five Below's long-term outlook remains robust as well. And this might be enough for investors to look past the seemingly elevated valuation. According to the management team, Five Below's store count will nearly triple to 3,500 by 2030. Executives see opportunities for expansion in states such as California, Texas, and Florida. This isn't too surprising given that those states are the three most populated in the country.
In addition to significantly growing its physical footprint throughout the rest of the decade, the leadership team also sees revenue and diluted EPS doubling between fiscal 2021 and 2025. More stores should obviously lead to greater sales. And with ongoing leveraging of key areas like marketing and distribution capabilities, margins could expand even more in the years ahead.
With a market capitalization of $11 billion, Five Below is a stock that many investors might not yet know. But this is definitely a stock to consider.
