With both the S&P 500 and Nasdaq Composite Index in record territory, investors might be surprised to learn that not all businesses have benefited from the market's strong rally. Five Below (FIVE 1.48%) fits in the category of underachievers.
As of this writing, Five Below shares are down an eye-watering 46% in 2024. Does this mean it's time to buy this growth stock on the dip?
Disappointing results
After the last two times that Five Below reported its quarterly financials, the stock took a huge hit. Most recently, the company gave an update on its fiscal 2024 first-quarter results. The only positive might have been net sales jumping 11.8% during the 13-week period that ended May 24.
Investors probably sold off the stock because they might have been disappointed by the fact that Five Below's same-store sales dipped 2.3% in Q1. And to make matters worse, executives believe this metric will decline 3% to 5% for the full fiscal year.
The business is facing some pressures in the current macro environment. People are frequenting stores less, as there were fewer comparable transactions in the quarter. And these customers are being more selective with how they spend their money, especially after an extended period of above-average inflation.
NASDAQ: FIVE
Key Data Points
Growth potential
Despite its latest challenges in boosting same-store sales, investors can be somewhat optimistic. That's because historically, the business has still been able to grow its revenue and earnings at healthy rates. It's easy to get caught up in the recent financial data, but it's smart to zoom out and focus on the bigger picture.
Expanding the store base has been management's main strategic objective. After 61 new stores opened in Q1, there are now 1,605 Five Below locations. This figure is up substantially from 552 stores over seven years ago.
That rate of expansion is impressive. However, the leadership team has its sights set on a loftier target. They think that by 2030, the company will have at least 3,500 stores open across the U.S. This implies a roughly 118% expansion from the current footprint. California, Texas, Florida, New York, and Pennsylvania are the five states that were called out as having the most growth potential. There's no doubt that should Five Below reach its store target, its sales and profits will be significantly higher than they are today.
But investors shouldn't just assume that a management team's long-term goals, no matter how encouraging they look, are automatically going to become a reality. There are risks to be mindful of that can get in the way. In this instance, the intensely competitive nature of the retail sector is something we can't ignore.
Five Below is fighting to attract consumer wallet share against the likes of major retailers like Walmart, Amazon, and Dollar General. That won't be an easy task. But if historical trends are any indication, investors might want to give Five Below the benefit of the doubt.
Depressed valuation
Thanks to the stock's massive drop, shares are trading at their lowest valuation in the last three years. The stock can be bought at a price-to-earnings (P/E) ratio of 21.5. This represents a huge discount to the P/E multiple of approximately 50 that the shares carried in late June 2021.
Clearly, the market has soured on this business. But for investors who can look past the latest struggles and have a time horizon that spans the next five years, there looks to be an opportunity here. Buying shares of Five Below today might prove to be a smart financial decision.
