Once one of the darlings of retail growth plays, Five Below (NASDAQ: FIVE) has taken quite the haircut in share price in recent months, with concerns that expectations for the retailer were overly optimistic, and that the business environment for them is far from ideal.
Today we’re going to be looking at the company through the perspective of the lower share price and whether it is now worth taking a look at as a growth play, even if the growth is a bit lower and the risks are mounting. We’ll also, of course, be looking at what Five Below offers to return value to shareholders.
Understanding Five Below
Five Below is a specialty value retailer, with over 1,600 locations in the United States. The company has been growing by a few hundred locations per year, and one of the big draws is how merchandise is generally priced below $5.
The stores offer dynamic merchandise, and mainly targets tweens and teens as its customers.
The company puts a lot of effort into presenting itself as a growing business, and says it not only expects to expand the number of locations, it believes that they will improve operating margins going forward.
Roughly Inline Q2 Earnings
This week, Five Below came out with its second quarter earnings release. The earnings per share were 60¢, in line with expectations, and the revenue also came in just a hair better than expectations at $830 million.
Given how pessimistic the market has gotten on Five Below, there was something of an aftermarket bounce after the release, though it does not appear to have sustained into the next trading day.
Consolidated Balance Sheet
|
Cash and Equivalents |
$209 million |
|
Total Current Assets |
$1.12 billion |
|
Total Assets |
$4.01 billion |
|
Total Current Liabilities |
$685 million |
|
Total Liabilities |
$2.40 billion |
|
Total Shareholders’ Equity |
$1.61 billion |
(source: press release on financial results, Five Below website)
Five Below has a relatively sensible balance sheet, and currently is trading at a price/book ratio of 2.69. That’s a bit worse than industry average, but for a growth-minded company it is not so terrible.
The thing I like is that the company has managed its considerable growth in recent years without amassing a huge amount of debt. Whether they can continue this trend remains to be seen.
The Risks
Unsurprisingly, any company that combines the traits of value retailer and high growth is going to have considerable risks to contend with, which potential investors need to be aware of.
As with all value retailers, one of the big concerns is the inflationary environment they find themselves in. The company has had to increase prices to keep up with rising costs, and already concedes that pricing items over $5 each may have been a mistake, potentially undercutting the company’s reputation.
Keeping its all-important target audience means that they need to select attractive merchandise which they can provide at appealing prices in their stores.
In continuing their planned expansions, the company also has to expand its distribution capacity to support more stores than it presently has. That will mean finding new, affordable locations for distribution centers. The company is also trying to expand its online retail presence, which has its own potential difficulties.
Five Below is a unique type of store, but that doesn’t mean it doesn’t face the intense competition all retailers face. Their merchandise is generally discretionary spending, and while they have something of a reputation for being a low-price retailer, they will still have to compete on both price and foot traffic with all sorts of stores.
Statement of Operations – Continuing Growth
|
2021 |
2022 |
2023 |
2024 (1H) |
|
|
Net Sales |
$2.85 billion |
$3.08 billion |
$3.56 billion |
$1.64 billion |
|
Operating Income |
$380 million |
$345 million |
$385 million |
$77 million |
|
Net Income |
$279 million |
$261 million |
$301 million |
$64 million |
|
Diluted EPS |
$4.95 |
$4.69 |
$5.41 |
$1.17 |
(source: most recent 10-K from SEC and press release on financial results, Five Below website)
Five Below has definitely seen as a growth retailer for good reason. As the company expands its number of stores, net sales are clearly continuing to rise.
That’s good news, but less good is that the income broadly isn’t growing at the same rate. The company has established quite a foothold across the United States, excluding the Pacific northwest, where they don’t appear to have nearly the footprint.
Estimates are that the trend will continue going forward, with this year’s revenue coming in at $3.79 billion with earnings of $4.56, and next year will grow to $4.21 billion with earnings of $5.08. That would give us a P/E ratio of 17.27 and a forward P/E of 15.50. That’s not a terrible ratio, again a bit higher than peers, but not totally unjustifiable as a growing company.
The big question with the estimates is how reliable they are given the company’s troubles, as Five Below’s new stated guidance for the rest of the fiscal year are that the revenue estimate is very much the high end, guiding to $3.73 billion up to $3.80 billion, while earnings per share are generally below what the estimates would suggest, at $3.98 to $4.41.
Conclusion
After losing so much of its share price in the recent months, Five Below seems a lot more sensibly valued. That said, the company is facing a lot of headwinds in growing at the level they want to, and there is no guarantee that the growth in sales will come with a growth in earnings that would justify even the present share price.
I’m viewing Five Below as a hold, and keeping a close eye on how the market reacts to an increase in prices in response to inflationary troubles. The company has established itself as a player in the value retail market, but turning that into a high profit company is another matter entirely.
To make matters somewhat worse, Five Below pays no dividends, and has no intention of paying any. It’s understandable that they’re not playing for an income stock with money dedicated to growth, but the company is profitable enough that I think some dividend, even a small one, would be a statement of confidence from management.
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