Founded in 2002, Five Below (FIVE) is the leading high-growth value retailer marketing merchandise generally priced $5 or less to teens and tweens, particularly Generation Z (ages 8 to 14), notes Doug Gerlach, editor of Investor Advisory Service.
The company also ends up selling to Generation Z’s parents. The average customer’s household income is approximately $75,000, with 28% having incomes greater than $100,000.
The beauty of Five Below’s merchandise strategy is that teens and tweens have disposable income because their basic needs are met by their parents and goods $5 or less are easily affordable. To keep customers interested in visiting stores, the company offers a dynamic assortment of products.
New store economics are compelling. Stores average approximately 9,000 square feet and generate first full year sales of about $2.2 million. For a net investment of about $400,000, the first year EBITDA of a new store is $550,000, a 138% return on investment. We rarely see this kind of rapid payback on invested capital.
It operates more than 1,250 stores across 40 states. Management believes it can grow its base to more than 3,500 stores over time and has targeted approximately 1,000 new stores by the end of 2025. This implies high-teens unit growth, consistent with its historical pace.
Prior to the pandemic, Five Below generated positive comparable store sales growth every year since 2007. Though the pandemic disrupted comparable store sales results in 2020, comparable store sales grew more than 30% in 2021. We anticipate Five Below can grow its EPS 20% per year.
A combination of high-teens unit growth, low-single digit comparable sales growth, and modest leverage are the drivers. Five years of annual earnings growth of 20% would imply EPS of $10.58 versus management’s expectation for $10.00 in EPS by 2025.
When coupled with a high P/E of 40.0, shares could reach $423. We use a low P/E of 20.0 and trailing twelve-month EPS of $4.25 to generate a low price of $85. The upside/downside ratio is 5.2 to 1 and compounded annual return potential is nearly 25%.
