Source: Five Below

March 26, 2014 is turning out to be a pretty good day for shareholders of discount retailer Five Below (NASDAQ:FIVE). After the company announced fiscal fourth-quarter revenue and earnings results, shares soared 14%, suggesting that investors couldn't be happier with management's work. Even after rising so far so fast, can Five Below continue trending higher and surpass rivals like Dollar General (NYSE:DG), Dollar Tree Stores (NASDAQ:DLTR) and Family Dollar Stores (NYSE:FDO.DL)? Or is now a good time to consider selling out?

Five Below smashed forecasts
For the quarter, Five Below reported revenue of $212 million. This represents an impressive 22% gain compared to the $173.6 million the company reported in the year-ago quarter and is 2% higher than the $207.8 million forecast by analysts.

In its earnings release, management attributed the sales increase to a 25% jump in the retailer's number of locations in operation compared to the fourth quarter of 2012. This brings Five Below's store count from 244 to 304, with an extra 62 openings slated for 2014.

  Estimate Actual Surprise
Revenue $207.8m $212m +2%
EPS $0.45 $0.47 +4.4%

Source: Five Below and Yahoo! Finance

Another driver behind the company's jump in sales was its comparable-store sales growth of 0.3%. This isn't something to be wooed over. Nonetheless it's noteworthy that the business was capable of growing existing-store sales at a time when severe winter weather negatively affected other retailers.

In terms of profits, the retailer performed even better. With earnings of $0.47 per share, the company surpassed the $0.45 analysts hoped to see and beat last year's earnings of $0.35 per share by 34%. In addition to benefiting from rising sales, management informed investors that Five Below's earnings were positively affected by lower costs.

For the quarter, the company saw its selling, general, and administrative expenses fall from 21.9% of sales to 20.7%, while interest expenses declined from 0.3% of sales to 0.1%; management paid off some of the company's debt. This was partially offset by an increase in the business' cost of goods sold from 59% of sales to 60.3%.

Can Five Below rise above its peers?
Over the past four years, Five Below's performance has crushed its larger competitors. Between 2010 and 2013, the company's revenue leapt 172% from $197.2 million to $535.4 million, while its net income increased 353% from $7 million to $31.7 million.

  Revenue Growth Rate Net Income Growth Rate
Five Below 172% 353%
Dollar General 35% 63%
Family Dollar 32% 24%
Dollar Tree 33% 50%

Source: Five Below, Dollar General, Family Dollar, and Dollar Tree

In its annual report, management chalked up the company's top-line growth to a rise in store count as well as an increase in the business' comparable-store sales. Over this time frame, Five Below's aggregate comparable-store sales growth amounted to 39%, while its locations in operation swelled by 198%, from 102 to 304.

Meanwhile, Five Below's bottom line benefited from the sales increase but also from falling costs. During the past four years, the company's cost of goods sold fell from 66.4% of sales to 64.9%, while its selling, general, and administrative expenses declined from 27.5% of sales to 25.1%. Both of these are likely due to the company's growing size and, in turn, economies of scale.

When it comes to top- and bottom-line growth, none of Five Below's competitors are even close to replicating its success. During the past four years, Dollar General saw its revenue rise 35% from $13 billion to $17.5 billion.

Both Family Dollar and Dollar Tree came close to this growth rate; Family Dollar's top line expanded by 32% from $7.9 billion to $10.4 billion, while Dollar Tree grew its revenue by 33% from $5.9 billion to $7.8 billion. All three companies attributed their sales increase to higher store counts and comparable-store sales growth.

In terms of profits, all three retailers continue to fall short of Five Below's growth rate. Over the same time frame, Family Dollar saw its net income rise 24% from $358.1 million to $443.6 million. This growth fell shy of the company's revenue growth due to an increase in its core costs.

Dollar Tree did slightly better, as evidenced by the 50% jump in net income from $397.3 million to $596.7 million. The closest peer, once again, is Dollar General, whose bottom line increased 63% from $627.9 million to $1 billion; but even this can't quite measure up to Five Below's metrics.

Foolish takeaway
Based on the data provided, it's pretty clear that Five Below has been a tremendous engine of growth. Admittedly, this performance is mostly due to its small size when placed next to its peers, but shareholders should not disregard the fact that growth is growth.

Moving forward, it's difficult to tell how well the business will perform. But if the past is in any indication of the future, there's plenty of opportunity for the Foolish investor to make money. Probably the only issue that investors should be worried about is the fact that Five Below's shares are currently trading at 73 times earnings. This is a steep price to pay for the company; but if management can replicate its past success, holding the company's shares may prove worth the risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.