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Why Five Below Stock Soared 18% in April

John Ballard, The Motley Fool

What happened

Shares of Five Below (NASDAQ: FIVE) gained 17.8% in value last month, according to data provided by S&P Global Market Intelligence.

Following another round of impressive earnings results in late March, one Wall Street analyst upgraded Five Below stock in early April, which sent the stock price higher. 

Three young girls taking a selfie while shopping.

IMAGE SOURCE: GETTY IMAGES.

So what

After the discount retailer proved the skeptics wrong in 2018, investors are starting to look at Five Below as a sustainable, long-term growth story. The stock has doubled over the last year, leaving the forward P/E at a high 46 times based on this year's consensus earnings estimate. 

An analyst with JPMorgan Chase believes the growth story is in the early innings after meeting with Five Below executives last month. Five Below's strategy of selling in-trend merchandise to teenagers for less than $5 is proving resilient in the competitive retail industry. In fiscal 2018 (which ended Feb. 2), the company' sales jumped 22%, while earnings per share climbed 45% year over year.  

Management believes it can maintain 20% sales growth through 2020, while still delivering positive comparable-store sales and profitability, a prospect that has investors fired up. 

Now what

Over the long term, Five Below is targeting more than 2,500 stores across the country. That's about three times the current store footprint. The stock's high valuation reflects high growth expectations, but if the company can continue to post results like it has recently, the stock should be a long-term winner for investors.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.