What a fantastic six months it’s been for Five Below. Shares of the company have skyrocketed 107%, hitting $156.28. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Five Below, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Is Five Below Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Five Below. Here are three reasons why FIVE doesn't excite us and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Five Below’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.8% per year.
2. Fewer Distribution Channels Limit its Ceiling
With $4.23 billion in revenue over the past 12 months, Five Below is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers. On the bright side, it can grow faster because it has more white space to build new stores.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Five Below historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.8%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Five Below isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 31.3× forward P/E (or $156.28 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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