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.
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 (
) andTarget (
) 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 (
),Dollar General (
), and Dollar Tree (
) 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
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.
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
"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."