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Why Five Below Can Deliver a Stock Price Turnaround

Five Below Inc (NASDAQ:FIVE) has recovery potential, in my opinion, after its 54% stock price decline in the past year.

The discount store chain is changing the prices of some of its products, expanding its presence into new geographical areas and seeking to attract a broader range of consumers to its stores.

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New prices

The company is introducing products that are priced above its traditional limit of $5 each. It has successfully trialled products priced at up to $10 each in 25 of its stores during fiscal 2019.

The retailer reported in its fiscal 2019 results, and feedback from its customers regarding its new prices has been positive. Five Below's higher prices on some items allows it to sell a wider variety of products and offer better value for money to its customers.

New stores

The business opened six new stores in the fiscal 2019 fourth quarter. This followed the 61 stores it opened in the third quarter, which was the highest number of stores it has ever opened in a single quarter. It met its target to open 150 new stores in fiscal 2019. This increased its store numbers by 20% compared to the previous year.

The company's new stores recoup all of their initial costs within one year on average. This means that they make a contribution to the retailer's bottom line in a short period of time compared to some of its sector peers. This may allow Five Below to expand at a fast pace and open new stores in markets where it previously did not have a presence. This could increase the size of its potential customer base and catalyze its financial performance.

Customer focus

Five Below is investing a larger proportion of its marketing budget in online advertising. This includes its use of social influencers who may boost the appeal of the retailer to younger consumers. This may increase the number of consumers who visit its stores and strengthen its sales prospects.

In addition, the company is aiming to increase its appeal to children and teenagers through its partnership with video gaming business Nerd Street Gamers. The partnership will mean that Five Below will build facilities where its customers can play video games next to 70 of its existing stores. This could boost Five Below's sales of video game-related products at a time when there are 64 million video game players under the age of 17 in the U.S.

Potential difficulties

The spread of the novel coronavirus could hurt Five Below's financial performance in upcoming months. The company closed all of its stores for an unspecified period of time on March 19. Some of its customers may buy more products through the company's website because they cannot visit its stores, but the overall impact of Five Below's store closures on its sales performance is likely to be negative.

The virus may also cause challenging operating conditions across a range of sectors. This may lead to U.S. consumers having less disposable income, which could cause them to avoid unnecessary spending at Five Below in the short term.

The company's plan to remodel its stores could make them more attractive to its customers when they reopen following the outbreak. It plans to remodel 300 of its stores by 2023. This includes redesigning its checkouts to reduce waiting times for customers.

Five Below reported in its fiscal 2019 results that its store remodels have been positively received by its customers. The company has also recorded a rise in its sales in stores that have been upgraded compared to their past performance.

Future prospects

Market analysts forecast that the retailer will report a 30% rise in its earnings per share in 2020, followed by further growth of 20% in 2021. Its price-earnings ratio of 19 suggests the stock is not cheap, but its growth strategy could lead to a turnaround in its performance.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.