Five Below has followed the market’s trajectory closely. The stock is down 8.4% to $83.80 per share over the past six months while the S&P 500 has lost 6.2%. This might have investors contemplating their next move.
Is there a buying opportunity in Five Below, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Five Below Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Five Below. Here are three reasons why we avoid FIVE and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Five Below’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Fewer Distribution Channels Limit its Ceiling
With $3.88 billion in revenue over the past 12 months, Five Below is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers. On the bright side, it can grow faster because it has more white space to build new stores.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Five Below historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.4%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Five Below’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 15.9× forward P/E (or $83.80 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.
Stocks We Like More Than Five Below
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