Five Below Stock Soars 130% From IPO On Growth

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The folks at the newly publicFive Below have had plenty of cause to celebrate the past few months.

The teen-focused discounter's stock price has more than doubled since its market debut on July 19.

Through Sept. 27, it was the year's sixth-best IPO performer, with a 130% gain since it came out of the gate, says Cindy Profaca, managing director of IPOFinancial.com.

What's the big draw for investors? "It's a unique, early-stage growth retailer with an opportunity to grow its store base roughly ten times from where it is today," said MKM Partners analyst Patrick McKeever.

Consumers have also given Five Below a warm reception. In the second quarter, its first reporting period as a public company, sales soared 40% to $86.8 million, ahead of views.

Same-store sales grew 8.6%, vs. a year earlier. It was the 25th straight quarter of same-store sales growth.

Five Below operates in a sweet spot in the retail space at a time when the consumer appetite for bargains is strong. Its namesake stores sell a wide variety of fun, on-trend merchandise for the teen and preteen crowd -- from sporting goods and games to jewelry and gag gifts -- all for $1 to $5.

IPhone Generation

But Five Below is not your run of the mill discounter. Management likens the concept to a toy store for the iPhone generation, McKeever says. It features all sorts of hot new fun items the fickle teen crowd enjoys -- like stickers to decorate a locker, magnets, inexpensive apparel such as t-shirts, board games and low-priced sporting goods like basketballs.

It has no direct competitors, McKeever says, though it does compete with discounters likeWal-Mart ( WMT ) andTarget ( TGT ) and the dollar stores.

The key difference between Five Below and the dollar stores is Five Below's assortment, he adds, which is very discretionary and more of an impulse buy -- with the average ticket price just over $10. In contrast, dollar stores offer more needs-based basic everyday items like food.

Meanwhile the discount niche that Five Below fits into, which includes dollar stores, has been outperforming the rest of the retail space, says Ken Perkins, president of Retail Metrics.

Deep discounters includingFamily Dollar Stores ( FDO ),Dollar General ( DG ), and Dollar Tree ( DLTR ) continue to strike a chord with consumers with ultralow prices on basic necessities.

The environment has also been good for Five Below, adds McKeever, because it sells discretionary merchandise at a "reasonably good value."

But its prices aren't always the lowest. In a recent price survey by McKeever, a 30-item basket of back-to-school items such as colored pencils and markers was 18% more expensive at Five Below than the same items bought at Target.

"The value is in the aggregation work done by the company's merchants, who brought all these items for $1 to $5 under one roof," said McKeever.

Five Below may not necessarily have the "sharpest prices," he adds, but to find all these items at other places would require some work.

And, says McKeever, you can find some great deals at Five Below like laptop covers for $5.

McKeever sees a lot of potential in Five Below's store expansion, with the prospect of it having a national footprint. It had 226 stores at the end of the second quarter. But it's growing fast. Management expects to have opened 52 stores by the end of the year, for a total of 244 stores in 18 states. Its five-year outlook includes growing the company's store base by roughly 20% each year. Over the long term, management sees the potential to have 2,000 or more stores.

New stores have been very profitable, McKeever says. Over the past three years, it's seen a 145% first-year average return on a $275,000 net investment for a new store, among the highest new-store returns in the industry, he says.

Same-Store Sales

Five Below also has been faring well with ongoing operations. Same-store sales increased 7.9% in 2011, 10.4% in the 2012 first quarter, and 8.6% in the second. But McKeever sees a little slower rate of growth in the back half of the year, with a 5% gain in the third quarter and a 4% increase in the fourth quarter as it goes against last year's tough comparison of a 12.1% pop in fourth-quarter same-store sales.

Five Below reported second quarter adjusted net income of $2.2 million, or 4 cents a share, based on 54.1 million adjusted diluted weighted average shares outstanding. That compares to $2.3 million, or 4 cents a share, based on 51.8 shares outstanding the prior year. The decline in net income was driven by interest expense and a deferred financing fee write-off related to a $100 million term loan, the company said on the second-quarter conference call.

Analysts polled by Thomson Reuters expect full-year 2012 earnings to climb 63% to 49 cents a share. They see a 39% pop in 2013 and a 34% gain in 2014.

Perkins says Five Below is well positioned for the holiday season.

"Five Below should be a sweet spot for the holiday season as consumers look to stretch their dollars," Perkins said. "They can buy five or six presents for $30 at Five Below, which you can't do at Target or Wal-Mart and other stores. It's a great location for parents looking for stocking stuffers."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: DG , DLTR , FDO , TGT , WMT

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