The pandemic has provided an opportunity for certain differentiated retailers to further separate themselves from the pack. We believe Five Below (FIVE) will ultimately emerge from Covid-19 with its attractive growth prospects intact and potentially enhanced, suggests Doug Gerlach, editor of Investor Advisory Service.
The company is the leading high-growth value retailer marketing merchandise generally priced $5 or less to teens and tweens, particularly Generation Z (ages 8 to 14). The company also ends up selling to Generation Z’s parents, which include Millennials and late Generation X (ages 24 to 44).
The beauty of Five Below’s merchandise strategy is that teens and tweens have disposable income because their basic needs are met by their parents and goods $5 or less are easily affordable. In 2020, the company’s overall sales breakdown was 47% from leisure products, 36% from fashion and home, and the balance from party and snack goods.
The first Five Below store opened in the greater Philadelphia area in 2002 and the company has since expanded throughout the U.S. Stores are typically located in high traffic centers, with only 5% of stores located in malls.
Store economics are compelling. Stores average approximately 9,000 square feet and generate first full year sales of about $2 million. For a net investment of about $300,000, the first year EBITDA of a new store is $450,000, a 150% return on investment. We rarely see this kind of rapid payback on invested capital.
Five Below has been a public company since 2012. Even so, the company is relatively early in its growth phase. It currently operates more than 1,100 stores across 39 states. Management believes it can grow its base to more than 2,500 stores over time.
Though store growth slowed in 2020 due to the pandemic, the company has historically generated high-teens unit growth. In 2021 it plans to open 170-175 new stores in a return to trend growth levels.
Prior to the pandemic, Five Below generated positive comparable store sales growth every year since 2007. Though the pandemic disrupted comparable store sales results in 2020, results have snapped back in 2021. Going forward, the company anticipates it will be able to post low-single digit comparable sales growth.
We anticipate Five Below can grow its EPS 22% per year. A combination of high-teens unit growth, low-single digit comparable sales growth, and modest leverage lead to this expectation. Five years of annual earnings growth of 22% would imply EPS of $12.41, and, when coupled with a high P/E of 40.0, shares could reach $496.
For the low price estimate, we use a low P/E of 20.0 and trailing twelve month earnings per share of $4.59 to generate a low price of $92. The upside/downside ratio is 3.4 to 1 and its compounded annual return potential is nearly 22%.
