Is Five Below Stock Overvalued or Just Getting Started?

Five Below shareholders have suffered a truly atrocious year with the retailer down 45% and down 4% over the past 5 years.

But lately, the signs might be pointing to better times ahead with the FIVE share price soaring by 26% in the last month alone.

What is driving the new share price enthusiasm and has the stock run too far too fast or is there more left in the tank?

How Five Below Turned Weakness into Strength

When management came online to announce Q3 results, it’s fair to say they were nothing short of remarkable on both the top and bottom lines.

Net sales were up to $843.7 million, a 15% year-over-year leap, and well above the growth target of between six and nine percent.

Same store sales squeezed out a marginal gain of 0.3%, and this was received very well by the market because it was such a sharp contrast to the mid-single-digit decline the company had forecast earlier in the year.

The bottom line is where the standout figures sat on the P&L with adjusted earnings ballooning higher by 6-% to $0.42 per share, more than double the high end of the company’s guidance.

Clearly, those in charge figured out how to deftly navigate cost pressures and optimize inventory without resorting to heavy discounting, a common pitfall in retail.

Looking forward they are expecting net sales to land just north of $3.8 billion, a big hike from the original $3.5 billion low-end of the range initially forecast and EPS is expected to climb to as high as $5.55 per share, another big leap from the $4.96 previously forecasted.

Winnie Park’s Potential to Elevate Five Below

When Winnie Park took over as CEO from her prior position leading Forever 21, shareholder hopes were high that her proven track record of revitalizing retail brands, particularly in the omni-channel and digital spaces, would translate to Five Below.

And she didn’t disappoint. After leading Forever 21’s efforts to modernize the brand and integrate digital and social media strategies, she’s set to bring those skills to Five Below.

Now the company has just shy of 1 million Instagram followers and is becoming a stronger presence in social media and digital ecommerce. It’s evidence of Park’s edge in transforming legacy brick-and-mortar businesses into tech-enabled, customer-centric operations.

Her role has come at a really critical juncture when Five Below’s goal of tripling its store count to 3,500 locations is most needed

Expensive but Worth It

After its latest share price run-up, Five Below now trades at roughly 22x forward earnings, a premium compared to other discount retailers like Dollar Tree trading at 19x and Dollar General at 20x.

But earnings multiples alone aren’t where your focus should be as much as how they compare to future growth and earnings are expected to grow at 18% annually over the next 5 years as a result of stronger unit economics and store growth. So too the rollout of the Five Beyond initiative, which is driving higher basket sizes and the strong operating margins of 11.5% that consistently eclipse those of peer should be tailwinds.

Another key metric that savvy investors follows is return on invested capital, or ROIC, which is over 25% and highlights just how efficient Park and her team are at growing the retailer.

Don’t forget also that adorned retailers that have gone on massive runs, like Lululemon, have often traded at lofty price-to-earnings multiples in excess of 25x for most of their trading histories.

Is Five Below Stock Overvalued?

There are 20 analysts who cover Five Below and on the whole they have a price target of $112.80 per share, which sits about 4% below the current share price, suggesting it is marginally overvalued.

When we plugged the numbers into a spreadsheet and arrived at a discounted cash flow forecast over a five year time period, the outlook was a bit more upbeat with $131 per share calculated as the intrinsic value.

One reason six analysts have raised their targets for upcoming earnings is that, unlike high-ticket retailers that rely heavily on discretionary spending, Five Below benefits from its value-focused offerings that resonate with budget-conscious shoppers during downturns.

Five Beyond May Be The Secret Growth Sauce

While there’s lots to like about Five Below some things to keep in mind are that Five Beyond products account for only 15% of sales, yet significantly boost average transaction value. This higher-margin initiative not only attracts older shoppers but also reduces dependence on its core $5-and-under pricing model.

Another data point to keep an eye on is that the retailer only operates in 42 states, especially those in the Western U.S. and Southeast so there’s a multi-billion-dollar opportunity ahead as it enters underserved markets.

CEO Winnie Mark is almost certainly paying special attention to the e-commerce channel, and that’s the lever most investors may be missing because it only accounts for a small portion of sales but grew at 28% YoY.

Low Cost Rivals Can’t Be Overlooked

While CEO Winnie Park has already made positive waves, rapid store growth is accompanied by serious execution risks when scaling and she’ll have to navigate them successfully to hit the stated goals.

Other low-price retailers, like Dollar General in particular, have been exceptional in overcoming these brick-and-mortar scale challenges while others, like Dollar Tree, have really stumbled. 

Apart from the brick-and-mortar realm, e-commerce platforms like Amazon’s Haul will be laser-focused on denting Five Below’s market share too and that 1,000 pound gorilla can’t be underestimated.

There’s also the broader concern of a downturn heading into 2025 when the enthusiasm of what deregulation may mean for the markets and business in general has faded somewhat.

Winnie Park May Have The Last Laugh

Five Below is trading above fair value in the eyes of analysts but it appears that the earnings multiple is justified based on the growth rates forecasted over the next five years that are 16.2% on the top line and 18% on the bottom line.

The addition of CEO Winnie Park might well be the ace up the sleeve that Five Below shareholders had been hoping for during the past four years when the stock was slumping and all signs point to rapid improvement since she took over in terms of the profit-and-loss statement, margins, growth, and new channel opportunities. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.