The explosion of online shopping has left many brick-and-mortar retailers struggling to survive. When consumers have a growing number of choices at lower prices with the added convenience of delivery – all at their fingertips – it’s no surprise that physical shopping has been under pressure.
There is, however, a peak retail inventory which has thrived over the past decade by catering to a specific corner of the wider market. And the company is well positioned to continue to perform successfully in the future. I’m talking about the discount chain five below (FIVE -1.99%)whose shares have risen 230% over the past five years.
A long history of success
It’s hard to overstate the success of Five Below. At his initial public offering (IPO) in July 2012, the company had 226 stores. Fast forward to today, and there are 1,190 locations in total, all in the United States. The company targets a young customer (aged 10-13) with a wide range of merchandise ranging from clothing and toys to tech gadgets and pet supplies, all of which retail mostly under $5. The stores are vibrant and colorful shopping destinations that make for an exciting experience for customers.
From fiscal 2016 to fiscal 2021, revenue and net income jumped 185% and 288%, respectively. Comparable store sales, a key performance indicator, increased 3.4% in the last quarter after increasing 13.8% in the fourth quarter of 2020. And gross margin of 36.2% and margin of 13.3% over the last fiscal year are exceptional. for physical retail.
While higher gas prices are certainly a short-term headwind for Five Below, as consumers may decide to drive less – and therefore shop less – the company’s relentless focus on creating value may to help. And with inflation at record highs, forcing the Federal Reserve to raise interest rates this year, the threat of impending recession is increasing.
Finding low-cost options to stretch already tight household budgets in an uncertain economic environment could be a boon for Five Below.
A bright future
Shareholders who have earned above-market returns by owning Five Below may see the same in the future. Indeed, in a recent Investor Day presentation, management laid out key financial and strategic objectives that should add a lot of optimism to the picture.
By 2025, Five Below plans to double its annual revenue ($2.8 billion in 2021) and earnings per share ($4.95 in 2021). And as if that weren’t enough, the management team believe that by 2030 there will be 3,500 Five Below locations at national scale. Not only is this target 1,000 stores higher than the previous target, but it represents three times the current footprint. It’s an incredible vote of confidence for business prospects.
The typical Five Below store costs around $400,000 to build, but generates $2.2 million in annual sales and $550,000 in earnings before interest, taxes, depreciation and amortization (EBITDA). This represents an increase of $1.6 million in annual sales and $340,000 in EBITDA, respectively, at the time of the company’s IPO. Therefore, the average payback period is less than a year, which signals a huge opportunity to keep opening more sites. The returns are superb, so from a financial and strategic point of view, it makes perfect sense.
As Five Below executes this plan, revenue and net profit will definitely increase. And with greater leverage, especially around marketing spend and corporate overhead, margins will also increase. These potential trends will support share price appreciation in the years to come.
At 33 times past 12-month earnings, Five Below’s stock price doesn’t look expensive considering the huge growth opportunity over the remainder of this decade.