Why Five Below Can Deliver Stock Price Growth
While the stock price of budget retailer Five Below (NASDAQ:FIVE) has flatlined over the last year, its evolving strategy likely means growth ahead.
In particular, the company is expanding the size of its store estate, remodeling its existing stores and introducing new price points. These changes should boost its financial performance.
New store growth
The company is implementing an ambitious store opening program that resulted in it opening 44 new stores in its second quarter. It is on track to meet its own target of opening 150 new stores in its current fiscal year. This would represent an increase in the size of its store estate of 20%.
Five Below is aiming to open its new stores across a diverse range of markets in 21 different states. This should increase the size of its total addressable market, as well as provide it with a broader customer demographic. Its new store payback period of one year suggests that increasing the size of its store estate is an efficient use of its capital.
Remodeling
Five Below is also remodeling its existing stores, which could strengthen its competitive position. The remodeling program includes a faster checkout option for its customers, as well as an increase to the size of its impulse section near to its checkouts. In addition, it is investing in further training for its staff in order to boost its customer service levels.
The company remodeled 35 stores in the first half of fiscal 2019. Since being remodeled, the stores have posted mid-single digit comparative sales growth. This provides evidence of the positive effect that its refreshed store estate could have on future financial performance.
Pricing potential
The company is currently testing a revised sales format called 10 Below! that includes products priced between $5 and $10. This allows it to offer a wider range of products to its existing customers, as well as lift the price points of products that it has historically sold at under $5.
Five Below's shift to including products that occupy higher price points could increase its appeal to a broader range of shoppers. It may also boost the company's margins, since it will have a wider product pool from which to choose the items that it sells.
Possible risks
The introduction of tariffs could negatively affect the company's financial prospects. Since Five Below's business model is focused on offering value to its customers, many of its products are relatively price-elastic. Should the company seek to pass on higher import costs to its customers, it may experience slower sales growth as a result. Since Five Below's comparable sales growth in its second quarter was behind analyst consensus forecasts at 1.4%, its near-term sales prospects could be relatively disappointing.
In order to overcome the potential negative effect of tariffs, Five Below is testing price increases in around 5% of its stores. According to its second quarter update, those tests have been positively received by its customers in terms of the business maintaining its strong competitive position on pricing.
Additionally, the business is investing in its supply chain in order to reduce its costs. In the second quarter, it announced that it had signed a contract to build its next distribution center. This should provide it with greater flexibility in its supply chain, as well as boost its efficiency.
Outlook
Five Below is forecast to post a rise in its earnings per share of 13% in its current fiscal year, followed by growth of 20% next year, according to market consensus forecasts. Since it trades on a forward price-earnings ratio of 42, it could offer fair value for money.
Disclosure: The author has no position in any stocks mentioned.
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This article first appeared on GuruFocus.
