Any earnings release that includes a 49.1% increase in net income is usually a good one.
Five Below Inc (FIVE) delivered that, and a 22.7% increase in sales as well. It's no mystery that the stock is up 14% today. In retail, pricing is everything.
Discount stores certainly do find a good spot in terms of pricing, but there are a lot of them. And they don't all trade at the high multiples that Five Below is currently experiencing.
Is it the best pick within the discount sector?
You're definitely paying a premium for this one if you try to get in at this point. When you compare the company's earnings growth to its competitors in the dollar space, you can see why.
Five Below has successfully outpaced the big names within the dollar store industry in terms of earnings growth. This includes the old time champion of pharmacy/discount aisles CVS health (CVS).
Does CVS belong in this list? Probably not, but they've been compared to Five Below a few times so I'll include them. FIVE has increased its revenues by over 100% in the last four full years. The closest match to that growth rate is CVS with a respectable 63%. The concern I have here is the earnings relative to the stock's price performance. While more mature enterprises like Dollar Tree or Big Lots or Dollar General are putting together much slower earnings growth, their overall earnings per share are much higher, and far more in line with the stock performance.
FIVE's 2017 earnings of $1.84 per diluted share give the stock a trailing FY P/E ratio of over 70 at today's pricing. That's pretty high relative to its counterparts. The lowest priced of the five, Big Lots, has a trailing P/E of 13.4. As you can see, there's a big discrepancy in the premium charged for Five Below stock in order to get that high earnings growth rate. Overall though, I'm not sure it's worth paying that premium.
Five Below operates in a category that largely targets teenagers. That limits is consumer base. The company is younger than many of its counterparts, and has an easier time putting up big growth rates as its earnings are much smaller than the others on this list. 2018 guidance is putting conservative full year diluted earnings at $2.51 per share. That would mark a 36% growth rate year over year, and give the stock a forward P/E of around 50. That is still an expensive stock when you consider Dollar General is projecting 34% growth with a forward P/E of 18.76 at FY diluted earnings of $5.95. I would urge caution on my comparisons here, as some of these firm's do and don't include GAAP in their estimates. This is more of a rough picture.
When considering a play within the dollar/discount store space, it becomes a question of value versus potential. Because of Five Below's position as a more growth prone entity, it's easy to get caught up in the momentum. I urge caution here, as the stock is definitely burning a little too hot. At this sort of pricing, the stock has a lot of pressure for Five Below to maintain a very high rate of growth. It's a risky move for investors. If you got in a few quarters ago, congratulations.
In a very simple comparison of revenue growth, Dollar Tree is actually the one outpacing the group in terms of sales growth; but the dollar store has been in the middle of the road in terms of translating that growth into earnings. Five Below's 87% growth rate between 2014 and 2017 does impress me. Conservative full-year guidance of $1.528 billion would mark a 52% increase in sales year over year. That's great, but it's still not enough to get me to buy into the share pricing. I think the stock is a hold.
For those that have enough gains, I'd certainly be taking profits. This stock is trading very high late in the market cycle.
It stacks up strong against competitors in terms of growth, but regarding actual valuation, I just can't get behind it. Investors on the sidelines have already missed the ship so to speak. If you want in on the space, I think other names like Dollar General offer more bang for the buck. If Five Below experiences a pullback, I might be more interested.