In this new world of disappointing retail sales with little or no growth, what passes as a retailer you want to own?
How about one with 1% same store sales growth?
That's what Five Below (FIVE) delivered and its stock is flying today.
Now we could say that in the land of the blind the one-eyed man is king and with an eked out 1% same store sales growth that's surely the definition of a cyclops prevailing.
But I have to tell you, after listening to the call, while Five Below is not in the class of Home Depot (HD) , Lowe's (LOW) , Action Alerts PLUS charity portfolio holding TJX Companies (TJX) , Ulta Beauty (ULTA) , Burlington (BURL) , Foot Locker (FL) or Childrens Place (PLCE) it is acquitting itself quite well and has a terrific long-term story.
So how can a 1% grower get such a premium multiple and an uproarious applause for putting up what would have been a truly disappointing number even just a few years ago?
Let me tick down what the market likes about this one.
First, it has a purely defined regional to national story, with a 20/20 plan for 20% sales growth and 20% net incomes, a plan it beat for 2016 and hopes to continue to beat until, well, 2020. It makes it easy and clean to remember.
Second, with only 522 locations there's plenty of room for expansion and until this year it had no stores in California, which is one-fifth of the country. Whether it be Dunkin Donuts (DNKN) or Dollar General (DG) it has always paid to buy a regional-to-national story, if it hasn't yet entered California. Plus, there is plenty of room for in-fill. I know these guys from Philadelphia, where they started 15 years ago. They had 10 stores back then and they just added another four, some within two miles of each other, and yet there is no cannibalization to speak off. That's terrific for gross margins, especially because you can advertise in one area and amortize it over a host of stores.
Third, they have a perfect balance sheet and a quick one-year payback on each $300,000 store, which makes them a much sought-after tenant in a declining real estate investment trust universe, so it can get terrific rent deals. "We are a desired tenant," as it mentioned on the call, a tenant which brings vibrancy and traffic -- two qualities many a mall lacks these days.
Fourth, they learn. Their most recent vintage stores are putting up their best numbers, so they can take what's working from those stores and insert it into the old stores. Given that their newest stores are their best performers, I would expect the 100 stores they are adding in 2017 to put up excellent comp-leading numbers.
Fifth, they know how to reach kids. They advertise disproportionately on social media, tout their mobile phone reach and have a heavy presence on YouTube.
Sixth and final, they are fun and experiential to go to. Management talk about the wow factor, where they wow teens of all ages with fresh merchandise, with tech -- mostly virtual reality, gaming and ear-plug related goods -- and also some featured product, which this month is slime, all sorts of it, including many kinds of glitter. Suffice it to say they know more than we do about what kids want.
You put it altogether and in today's low-bar environment, 11 consecutive years of positive comps, even with 1% as the last one, is enough to propel a stock higher.
Oh, and yes, the potential border tax derailment did come into play on the call; but even here there's a glimmer of hope as management believe there will be a low-dollar exemption for imports. If that's the case, suffice it to say that Five Below will become one of the go-to names for retail in 2017.