As its name suggests, Five Below (FIVE -0.94%) is a discount retailer that sells merchandise typically below $5 an item. During the inflationary environment that's been worrying everyone in the past couple of years, the company's 1,367 stores appeal to value shoppers. With consumers looking to find any strategies they can to stretch their budgets, this retailer can be a top choice to get some of what they need.
However, Five Below shares are down 20% from their all-time high. Here's why it's still a growth stock that's worth buying right now.
Growth is reaccelerating
While many retail businesses are experiencing slowdowns in recent quarters, Five Below is seeing its growth accelerate. In the third quarter of 2022, the fourth quarter of 2022, and the first quarter of 2023, revenue increased by 6.2%, 12.7%, and 13.5%, respectively, on a year-over-year basis. Dollar General, probably Five Below's most formidable competitor, saw sales jump 17.9% in the fiscal 2022 fourth quarter, gains that shrunk to 6.8% in the latest period.
Five Below is clearly standing out. "Being an extreme value trend-right retailer, we continue to attract and retain more customers and grow our comparable transactions," CEO Joel Anderson said on the Q1 2023 earnings call. The company was able to increase its transactions at the fastest pace since 2017, excluding the pandemic-fueled surge in early fiscal 2021.
The leadership team highlighted how consumers view the company's stores as shopping destinations, especially during times of high inflation and softer economic conditions. Five Below saw strong demand for essentially all of its product categories, which is encouraging for shareholders.
Looking at the rest of the current fiscal year, management expects revenue to rise approximately 15% compared to fiscal 2022, with net income up about 18%. That would be solid growth.
Outstanding growth prospects
Zooming out, it's easy to get excited about Five Below. From the first quarter of 2018 to the latest quarter, a five-year period, the company's store count more than doubled. You'd be hard-pressed to find another brick-and-mortar retailer with this kind of growth, especially during a time when online shopping has become more popular with the dominance of a business like Amazon. In fact, it's even more impressive when you realize that Five Below has a minimal e-commerce presence.
As I just noted, these past gains were no doubt boosted by an expanding store footprint. The average location is more than 7,000 square feet in size, tiny compared to a typical Walmart location, so there is quite literally more space to open these stores across the country.
And the unit economics look good, too. The average Five Below store generates about $2.2 million in yearly revenue but only requires about $400,000 in up-front investment costs. Therefore, investors should applaud the management team for wanting to aggressively open more stores. By 2030, the company expects to have at least 3,500 locations open, which would be almost triple the current count. Not many retailers have this kind of expansion runway.
Should Five Below hit that ambitious store target by the end of the decade, it would still be tiny compared to Dollar General, which operates more than 19,000 total stores across the country. But at this size, Five Below's revenue and profitability will be much improved from where it is now.
Retailers like Walmart, Costco, and Target get all of the attention. And for good reason. Their huge scale and impressive brand awareness help them stay on top of consumers' minds. But investors shouldn't count out the smaller chains, especially ones that focus and thrive in a particular niche. Five Below's stock price, off 20% from its peak, seems like a good entry buying opportunity given its past growth and future prospects.
