Investors might not be familiar with this under-the-radar discount retailer.
The Nasdaq Composite index might be in record territory thanks to its impressive run in the past 18 or so months. But that doesn’t mean investors can’t find compelling opportunities to take advantage of.
Shares of Five Below (FIVE 1.73%) are currently down 24% this year (as of April 8). Despite the negative trend, investors might want to take a closer look at this growth stock. Should you buy this discount retailer on the dip?
Disappointing investors
Since the company reported its financial results for the fiscal 2023 fourth quarter (ended Feb. 3), Five Below shares have gotten hammered. The business clearly disappointed Wall Street analysts with its numbers.
However, I don’t think things looked that bad. Five Below reported 19% growth for both revenue and earnings per share (EPS). On the surface, these headline figures, which did miss consensus estimates, were very encouraging. They show that the company is expanding at a brisk pace, despite macro uncertainty.
Perhaps the market wasn’t too happy with management’s outlook. The company predicts fiscal 2024 revenue to rise by 12.9% (at the midpoint), with same-store sales, a key metric for retailers that measures changes in revenue at existing locations, going up by 1.5% (at the midpoint). These forecasts represent a slowdown from previous years.
Focusing on the bigger picture
While it’s easy to get caught up in a single quarter’s results, investors who care about a company’s long-term outlook should zoom out and focus on the bigger picture. This perspective can provide important insights about Five Below.
It’s clear that growth is the key story for this business. Five Below opened 204 net new stores in fiscal 2023, and as of Feb. 3, there were 1,544 locations nationwide. That figure was up from just 552 seven years ago. And it has been a major driver of revenue growth.
But the management team wants more. Management believes that by 2026 and 2030, there will be 2,300 and 3,500 stores open, respectively. That means there is an aggressive plan to open new locations.
Investors might welcome this strategy. The typical Five Below store costs $500,000 to open. In the first year of operations, it generates $2.2 million in sales. Therefore, it makes sense why executives want to open locations at a rapid pace, particularly as they see ample opportunities in highly populated states like California and Texas.
It’s hard to ignore this strategy’s historical success. In the past five years, revenue and EPS have increased at compound annual rates of 17.9% and 15.3%, respectively.
It’s worth pointing out that Five Below faces a ton of competition, as is the case with any enterprise that operates in the retail sector. To its credit, the business has found success catering to lower-income households. But it has to constantly win over customers against formidable industry heavyweights, like Amazon, Walmart, and Dollar General. That calls into question Five Below’s durability over the long run.
Do you care about growth or value?
I believe it’s a smart idea to buy Five Below shares on the dip. But that’s only if you care primarily about growth. The company’s expansion in the last decade is outstanding. And should this trend continue, revenue and earnings can soar.
On the other hand, value investors would certainly hesitate to buy the stock. Five Below trades at a price-to-earnings multiple of 30. That’s expensive. It’s a huge premium to the S&P 500, and it’s in line with the tech-heavy Nasdaq 100 index. That might be the reason to avoid buying shares. Ultimately it depends on your investment style.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
