Five Below (FIVE) Will Benefit from Retail Trend

Not all stocks in the retail industry are suffering. Sellers of luxury goods are on the top end of the spectrum. Dollar stores and retailers selling merchandise at bargain-basement prices are at the bottom end. Both ends will prosper during the next several years. In my mind, the best retail stock to take advantage of that trend is Five Below.

Five Below (FIVE) is a specialty value retailer offering merchandise marketed to teen and pre-teen customers in the U.S. The company offers products priced at $5 or below, including select brands and licensed merchandise across a broad range of categories, which it refers to as worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal.

The company’s merchandise includes sporting goods, games, fashion accessories and jewelry, hobbies and collectibles, bath and body, candy and snacks, room décor and storage, stationery and school supplies, video game accessories, books, DVDs, iPhone accessories, and novelty and seasonal items. Five Below is headquartered in Philadelphia, Pennsylvania. As of May 5, 2017, the company operated 555 locations in 31 states. The stores average 8,000 square feet and are typically located in shopping centers.

Five Below is expanding rapidly by opening lots of new stores. The company’s 2017 plans include 100 new stores that will extend into new markets, including California. In addition, TV advertising will be increased, and e-commerce on the company’s website will be enhanced.

For the 12 months ended January 31, 2017, sales surged 20% and EPS jumped 24%. Similar growth is forecast for the next 12 months. Five Below’s outstanding performance stands out in the retail sector. The company is not Amazon-proof, but young shoppers are attracted to the trendy bargain-priced merchandise for $5.00 or less at their favorite mall.

Five Below is not a bargain stock, but future growth prospects warrant a premium. With a P/E of 39.4 times latest 12-month EPS, FIVE sells at a 10% lower multiple than Ulta Beauty (ULTA), which sports a P/E of 43.5. Both retailers are expected to grow earnings at a robust 20% pace during the next five years, and neither pays a dividend. Five Below is expected to report first-quarter results on June 5. I recommend purchase of FIVE at the current price.