With a trailing-10-year total return of 310%, it's hard to deny the Nasdaq Composite Index's track record. The tech-heavy benchmark has clearly been a winner in the past.
But some of its constituents have fared better. Look at Five Below (FIVE +0.62%). The discount retail stock has soared 409% in the last decade (as of Feb. 28).
Carrying a market capitalization of just $11 billion right now, Five Below might fly under the radar for most investors out there. But that could change.
Is it time to buy the stock?
All about growth
As the name suggests, Five Below sells a wide assortment of merchandise primarily under $5 per item via its network of 1,481 stores (as of Oct. 28) across the country. This business model seems boring, but the growth is exciting. That store count is up from just 552 at the end of 2016.
This aggressive pace of expansion has resulted in double-digit revenue and earnings per share growth in the past several years. These impressive headline figures are certainly the factors that have propelled the stock price.
In more recent times, Five Below is showing how durable demand can be. About 70% of the business's customers come from households making less than $75,000 in income per year. Even so, the company's revenue through the first three quarters of fiscal 2023 was up 14% compared to the same period a year earlier. That's definitely a positive sign, especially in today's uncertain economic climate.
Looking ahead, don't expect the executive team, all of whom have extensive experience in the retail sector, to let up on the gas pedal. The goal is to have 3,500 stores open by 2030, implying 136% growth from the size of the current footprint. There is ample opportunity to further penetrate populated states like California, Texas, and Florida. At this level of scale, it's easy to believe that sales and earnings will be significantly higher than they are now.
Because unit economics are so superb, this strategy makes complete sense. The typical Five Below location costs $500,000 to build out, but it generates $500,000 of earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first year of operation.
Even more spectacular, Five Below carries zero debt on the balance sheet. Management funds this growth fully with the cash it generates. This reduces financial risk.
NASDAQ: FIVE
Key Data Points
Risk factors to watch
Based strictly on growth and profitability trends, investors might be tempted to go out and quickly buy the stock. But it's best to understand risks that can negatively impact the company.
To its credit, Five Below has carved out a successful niche. However, the retail sector is notoriously competitive. Consumers make purchasing decisions based on location, pricing, quality, customer service, and product assortment, among other factors. This just means that Five Below has its work cut out for it not only to maintain its current industry position, but also to make progress against its target of having 3,500 stores.
Of course, Amazon is a massive enterprise that probably worries most retailers. Given the fast and free shipping of millions of items selling at low prices, Five Below will always have to deal with the tech giant and the unbeaten convenience it provides to shoppers.
Macro conditions might present a risk as well. I mentioned above how Five Below has been holding steady in recent quarters. And during the Great Recession, the business was able to grow net sales rapidly. But should there be a severe recession, I wouldn't be surprised if there were weaker revenue trends.
At a current price-to-earnings ratio of 41.2, maybe the shares don't draw the attention of value investors. But those who prioritize growth above paying the right price should consider buying the stock.
