Five Below (NASDAQ:FIVE) is a specialty value retailer operating on similar lines as that of conventional dollar stores like Dollar General (NYSE:DG) and Family Dollar (UNKNOWN:FDO.DL). As the name suggests, Five Below sells items priced at five dollars and below. It concentrates on inexpensive, trendy, and fashion-friendly items that usually are in good demand from teens and tweens.

This business model has helped Five Below post consistently good results. The company has a history of positive earnings surprises over the trailing four quarters , and the recently-reported third quarter was also quite fantastic. But will Five Below continue doing well in the future? Let's find out.

Good moves
Five Below has been expanding its store count aggressively, and in the third quarter it added 28 new stores to end the quarter with 304 stores . During the same quarter, comparable store sales, or comps, registered a bigger-than-expected increase of 9%. This was the 30th consecutive quarter of positive comps.

As a result of strong comps and new stores, revenue jumped 28% as compared to the same quarter in the previous year to $110.7 million. Five Below also reported a 35% increase in net operating income. Adjusted EPS came in at $0.05, as compared to $0.03 in the comparable quarter a year earlier.

But not enough
The quarterly earnings were in line with analyst estimates, but revenue of $110.7 fell short of the $112 million estimate . In addition, management also mentioned that the fourth quarter is off to a weak start, and Black Friday sales weren't as robust as expected.

For the fourth quarter, revenue guidance is in the range of $214 million and $217 million. This is below analysts' mid-point expect ation of $217.21 million. Even the earnings expectation is short of analysts' estimates. This depressing outlook sent the stock crashing.

FIVE Chart

FIVE data by YCharts

This steep drop in the stock price was expected after Five Below's sub-par outlook since the company trades at very high valuations, as seen below. If we look at the forward PE, Five Below is very expensive.

FIVE PE Ratio (Forward) Chart

FIVE P/E Ratio (Forward) data by YCharts

Conventional (and safer) options
In comparison, Dollar General is quite cheaper and is performing well. Its share price followed the opposite trajectory as a result of the company beating earnings estimate in the third quarter. The year-to-date gains of Dollar General are almost same as Five Below, as shown in the chart above.

Dollar General reported a 10.8% jump in revenue versus the same period a year ago to $4.38 billion. The consumables category performed the best with an 11.8% gain versus the year-ago-quarter. The overall gain in revenue was driven by higher traffic and transaction count, which resulted in a comps increase of 4.4%.

Dollar General bought back 3.5 million shares for $200 million during the quarter, and the company's board authorized an additional $1 billion share buyback program, resulting in a total authorization of $1.2 billion. The company posted earnings per share of $0.72, trouncing consensus estimates. This represented an increase of 14.3% in earnings per share versus the year-ago quarter.

During the last nine months, Dollar General opened 577 new outlets, closed 22 stores, and remodeled or relocated 534 stores. In fiscal 2013, it plans to open 650 new stores and remodel or relocate about 550 stores. In addition, it also plans to open 700 new stores and remodel or relocate approximately 525 outlets in 2014. This shall keep the growth momentum intact going forward and this is also evident from the upbeat guidance for fiscal 2013. Dollar General's earnings are expected to be in the range of $3.18 to $3.22 per share, representing an increase in the lower end of the previous guidance of $3.15 to $3.22. This is despite tough economic conditions, budget-constrained consumers and fewer sales days in the last quarter.

Just as in the case of Dollar General, Family Dollar's sales in the last reported quarter were driven by the lower-margin consumables category, which accounted for 74.2% of fourth-quarter sales as compared to 72.5% in the prior-year quarter. Family Dollar reported a 5.8% increase in revenue to $2.5 billion, but fell short of consensus estimates.

Family Dollar is the cheapest of the three companies here, but its same-store sale growth has been slow. The company is looking at a same store sale decline in the present quarter and is being hurt due to competition from the likes of Dollar General. Family Dollar expects its same-store sales to drop in the low single digits in the fiscal first quarter.

But Family Dollar provides a decent dividend yield of 1.50% and has raised its dividend for more than three decades now. This makes it a good dividend stock to hold, and investors can expect capital appreciation as well because Family Dollar is looking to grow its business in the long run. Family Dollar introduced 1,000 new consumable items in the previous fiscal year, and strategies such as this are expected to propel it higher.

Bottom line
Both Family Dollar and Dollar General look like safer investment options than Five Below. Both are trading at lower valuations and are not as volatile as Five Below. Also, it looks like the market is highly optimistic about Five Below's performance, which is why the revenue and earnings estimates were pretty high in the previous quarter. As a result, investors who are looking to limit their downside should consider Family Dollar and Dollar General for their portfolio.

Fool contributor Mukesh Baghel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.