In July 2018, shares of discount retail chain Five Below (FIVE -0.51%) traded at about $100. Today, Five Below stock trades closer to $200 per share, meaning shares have doubled during the past five years, compared to a 60% gain for the S&P 500.
Five Below stock is a long-term market-beating stock. As I'll explain, there's one big reason for this. And it's why I believe Five Below stock could double over the next five years as well.
A five-year review for Five Below
Five Below sells products for kids and teens at low prices. Its stock is doing well because its business is growing sharply. Over the last five years, the company's revenue and earnings per share (EPS) have both more than doubled.
FIVE Revenue (TTM) data by YCharts
Five Below has more than doubled its revenue over the last five years because it more than doubled its number of stores. This is the biggest explanation for its success.
At the end of the first quarter of 2018, Five Below had 650 locations. At the end of the first quarter of 2023 (which ended in April), the company had 1,367 locations, a 110% five-year increase.
When it comes to capital allocation, I don't believe Five Below has a better option than what it's doing already: open as many stores as possible as quickly as possible. According to investor presentations, Five Below stores have about a $400,000 initial investment to open. But these stores profit $550,000 on average in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) during their first year.
In other words, Five Below earns its investment back in less than one year when opening new stores -- that's a powerful compounding opportunity. And this is perhaps why the company is so financially strong. As of Q1, the company had more than $420 million in cash, cash equivalents, and short-term investments and no long-term debt.
To summarize, Five Below is a market-beating stock because it's opened a lot of new stores over the last few years. And the unit economics of these stores are attractive and allow the company to compound its money at a fast rate.
The next five years for Five Below
When looking out over the next five years, the logical question to ask is whether Five Below can continue opening new stores at a rapid pace. And the answer seems to be yes.
Five Below's management intends to exceed 3,500 locations by 2030. The company is on pace to open more than 200 new locations this year. But when looking at its 2030 goal, management will be opening up new stores at approximately a 15% compound annual rate.
At this pace, Five Below's store count will roughly double over the next five years. Assuming for comparable unit economics, the company's revenue and EPS could double over this time. And much of the investment in opening new stores will have already been paid back.
It might be a simple investment thesis: Five Below stock can double over the next five years because it could have twice as many stores by then. But in investing, you don't score any points for complexity. Simple stories are fine.
However, I will put a couple of caveats on Five Below's investment thesis.
First, the company's name implies selling products for less than $5. It's had success at pricing products higher than this in the Five Beyond section of its stores. But keeping prices low and maintaining strong profitability is a challenge for management to navigate as inflation rages on.
Additionally, same-store sales growth is often challenged at Five Below. Here is how the last five full years have played out.
| Year | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|
| Same-store sales growth | 3.9% | 0.6% | (5.5%) | 30.3% | (2%) |
Data source:
When same-store sales growth is strong, it indicates that there's a lot of excess consumer demand, providing a clear path to opening many new stores. But when same-store sales growth is tepid, retail companies do risk opening too many stores. In that scenario, new stores could steal sales from existing stores by being too close together.
Therefore, Five Below stock is not a "set it and forget it" stock -- shareholders will want to monitor its profit margins and its same-store sales as it continues to expand. If these metrics start slipping dramatically, it could indicate that the growth opportunity isn't as good as management expected.
That said, as of right now, the opportunity for Five Below is golden. I believe its ongoing expansion and impressive unit economics can lead to another doubling of the stock over the next five years. And it's why I continue to hold my own position in Five Below stock for the long haul.
