How Five Below Draws Teens to Go Discount-Shopping

Five Below (FIVE 0.75%) will release its quarterly report on Thursday, and investors have celebrated the teen discount retailer's success by sending the stock to all-time highs. Even as Aeropostale (AROPQ) and many other apparel retailers that cater to the teen demographic have suffered from poor results lately, Five Below has succeeded by tapping into the same impulse to find great bargains that vaulted the broader-based Dollar General (DG -1.17%) to huge growth rates in the past.

Five Below is far from unique in terms of the merchandise it sells, with a variety of accessories, beauty products, party goods, and seasonal goods. But the idea of the store is to sell items priced no higher than $5, and the appeal of discount retail that Dollar General executed to perfection in the all-ages retail market has proven equally successful in Five Below's case. Can the deep-discount teen retailer keep bucking the trends that have held Aeropostale and other teen retailers back? Let's take an early look at what's been happening with Five Below over the past quarter and what we're likely to see in its report.

Stats on Five Below

Source: Yahoo! Finance.

What's in store for Five Below earnings this quarter?
In recent months, analysts have gotten more optimistic about Five Below earnings, raising their October-quarter calls by a penny per share and their full year fiscal 2014 and 2015 projectinos by $0.04 to $0.05 per share. The stock has continued soaring, with gains of 37% since late August.

Coming into the quarter, Five Below kept its momentum going, with solid fiscal second-quarter results that included a 35% jump in sales on positive comps of 6.6%. Adjusted earnings per share nearly tripled, and the company boosted its full-year earnings estimates by $0.03 per share and raised its revenue guidance as well.

Five Below's success is a natural consequence of the shopping trends among millennial-generation shoppers. As an NPD Group analyst noted recently, millennials are both frugal and picky, with dollar stores and second-hand stores capturing a big part of their overall business. Just like Dollar General has based its growth strategy on higher demand for bargains, Five Below has tapped into this ethic with its low-price mantra. By making sure it produces adequate margins on its low-cost merchandise, Five Below can take advantage of millennial trends perfectly.

The main problem for Five Below investors is that the stock is priced almost to perfection. With forward earnings multiples more than triple what Dollar General and other dollar stores trade for, investors seem to be rewarding Five Below simply because it's growing in the challenging teen segment, which has thwarted Aeropostale and other apparel retailers recently. High valuations won't stop Five Below from rising further if the company can support its growth rate well into the future, but if the company reports any sort of slowdown at all, it could prove devastating for recent stock buyers.

In the Five Below earnings report, watch to see what the teen retailer has to say about trends going into the key holiday season. With so much at stake for the company's growth story, Five Below needs to prove once and for all that it's immune to the adverse trends that Aeropostale has seen and instead produce the growth that has powered its success so far in its short history as a public company.

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