Five below (NASDAQ: FIVE) is a specialized discount retailer targeting a younger population. Founded in 2002 and based in Philadelphia, the company went public in 2012; At the time of this writing, the stocks have returned 618% since its IPO, significantly beating the overall market performance over that time frame.
With the stock having gained so much in recent years, investors might think they missed the boat with Five Below. But that couldn’t be further from the truth.
Here are a few reasons why Five Below may be successful over the next decade.
Five Below has a proven business model
Five below, as the name suggests, sells most of its products for $ 5 or less, like the number of dollar stores. However, unlike other dollar stores, Five Below specifically targets teens, tweens, and children ages 5-19 with its selection of products. It offers eight different product segments (Tech, Create, Play, Candy, Room, Style, Party, New & Now) which aim to make shopping in its stores fun for children.
Image source: Getty Images.
Financially, since its stores are small (approximately 9,000 square feet) and typically located in existing malls, it doesn’t cost the company a lot of money to expand its store base. In fact, management estimates that, on average, new Five Below locations have a payback period of less than a year. This proven model gives it an advantage, allowing the company to increase the number of its stores at a double-digit annual rate without having to go into debt or dilute shareholders with stock offers.
Five below has room for expansion
Five Below ended 2020 with 1,020 stores in 38 states (it currently has no stores outside of the United States). He plans to open between 170 and 180 stores in 2021, and in the long term he plans to have 2,500 stores. With its model ubiquitous, investors should expect Five Below stores to eventually be found in all states of the United States.
However, for the moment, the management wishes to densify in its existing markets. Why? Because the more stores it has in certain geographic areas, the more efficient it can be with its supply chain. This, in turn, will hopefully increase Five Below’s operating margins. Once some areas become saturated with stores over the next few years, management can then focus on expanding to new areas like the Pacific Northwest, where Five Below is currently not present.
Overall, investors shouldn’t be concerned that Five Below stores will soon hit saturation point nationwide – at least not until the store count is close to 2,500.
Amazon and Costco can’t compete
Since Five Below has a niche offering targeting kids with items that cost $ 5 or less, giant retailers like Amazon (NASDAQ: AMZN) and Costco (NASDAQ: COT) have a hard time competing with him (if they really want to compete). Both retailers try to serve as large an audience as possible. Five Below, on the other hand, focused on a small but lucrative niche. Five Below is also touted as a little detour by parents to take their kids on shopping trips, which is again the opposite of Costco. Five-dollar trinkets don’t work well in e-commerce, where Amazon and other online retailers are focused on getting larger customer orders that can ease shipping costs. With all of these factors taken into account, there is no reason to believe that Five Below will be disrupted by big box retailers anytime soon, if ever.
At first glance, investors might look at Five Below and think there is nothing special. But once you realize that it has a proven model, plenty of room for store growth, and a strong competitive position against the retail giants, the business starts to look a lot more interesting. Even with a stock up over 600% since its IPO, Five Below’s business still has plenty of room to grow over the next 10 years and beyond.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.