Five Below Stock Above...Why This Stock (FIVE) May Be Worth Watching?

(RTTNews) - Strong results, Stellar outlook, growth-driving store expansion, Low-cost operations inspiring self-funded growth, global sourcing with over 800 vendors , zero debt, growing Free Cash Flow, compelling new store metrics - make this teen-centric retailer Five Below (FIVE) a must-watch stock.

Stellar results & Outlook

The company posted a strong first quarter and gave better-than-expected outlook for the second quarter, while raising full-year guidance.

Q1 Results

*Net sales increased by 27.2% to $296.3 million from $232.9 million last year vs. consensus

*Comparable sales increased by 3.2%.

*Operating income increased by 93.3% to $24.7 million from $12.8 million last year

*Net income increased to $21.8 million or $0.39 per share from year-ago $8.4 million or $0.15 per share. The latest EPS number included a 4-cent benefit related to employee share-based payments. Consensus - $0.32.

Outlook

For Second-quarter

*the company sees Q2 EPS of 36-38 cents on revenue of $332 million-$335 million. Analysts are modeling Q2 EPS of 34 cents and revenues of $327 million.

For fiscal year

The company raised annual

*EPS guidance to $2.42-$2.48 from $2.36-$2.42, vs. consensus $2.41

*Revenue guidance to $1.502 billion-$1.517 billion from $1.495 billion-$1.510 billion vs. consensus $1.501 billion.

But, maintained annual Comps guidance for an increase of 1% to 2%.

The company also said it is well-positioned to achieve its previously articulated strategy of 20% topline growth with 20%-plus bottom line growth through 2020.

Store base expansion, the largest growth driver

Store base expansion is the biggest growth driver for this teen-centric retailer, which has 658 stores at high-traffic centers across 32 states. Year-to-date, Five Below has opened 42 stores and on track for opening 125 stores this year, bringing total store count to 750 at 2018-end. In tandem with store growth, sales and profit have increased consistently.

Growth in store base vs. Growth in sales, adjusted operating income, adjusted net income, adjusted EPS.

Five-year Growth (From 2012 to 2017)

Store base growth - From 244 stores at 2012-end to 625 stores at 2017-end.

Sales growth - From $419 million in 2012 to $1.28 billion (2017)

Adjusted operating income growth - From $49.5 million (2012) to $157.4 million (2017)

Adjusted net income growth - From $27.4 million (2012) to $102.5 million (2017)

Adjusted EPS - From 51 cents (2012) to $1.84 (2017)

The retailer plans to build an approximately 700,000-square-foot distribution facility that can flex up to about 1 million square feet, just South of Atlanta. The distribution facility is expected to become operational by the spring of 2019 and serve the company as it grows its footprint through the Southeast.

Five Below believes that it has the potential for 2500-plus stores in the long-term.

Compelling New Store Metrics

With ROI north of 100%, and a payback period of less than 1 year, new store economics seem pretty compelling for Five Below.

The retailer has a strong average 4-wall EBITDA (EBITDA of a store or EBITDA within the 4-walls of the store) of $450,000 for first full 12-months of operations, vs. low average investment for a new store of $300,000, yielding a Return on Investment (ROI) of approximately 150%.

The EBITDA number excludes distribution, buying and pre-opening costs, while store investment includes store build-out, inventory and cash pre-opening expenses.

Positive annual Comps. for more than a decade

The company has reported positive annual comparable store sales for more than a decade. Comparable sales or Comps, a key indicator of a retailer's health, compare a company's revenue growth based on the sales created by the stores that are open for at least one year.

Year Comps 2007 5.4% 2008 5.8% 2009 12.1% 2010 15.6% 2011 7.9% 2012 7.1% 2013 4% 2014 3.4% 2015 3.4% 2016 2% 2017 6.5%

Low-cost operating model driving self-funded growth

Five Below has a strong business model that drives self-funded growth. Low capex, Zero debt, and growing free cash flow render strength to the company's balance sheet. FCF has grown twenty-fold from $5 million in 2013 to $100 million in 2017, while capex has grown modestly from $26 million in 2013 to $68 million in 2017. Capex numbers mentioned here exclude tenant allowances, while FCF is operating cash flow less this capex (excluding tenant allowances).

For 2018, the company is planning a total capex of $137 million to reflect the opening of 125 new stores, and the remaining on the new 700,000 square feet South East distribution center, existing store base and corporate infrastructure.

Quick response to changing trends

Catering to a fickle audience (teens) keeps the retailer on its feet. The company says it took just six-weeks from idea to shelf for selling fidget spinners. The success of Five Below comes from identification of trends and quick response time.

Stock

Currently, the stock is trading at a 53-week high of $94.02 in pre-market hours. So, is it late to the party? Factoring in all its growth plans, the scrip has the potential for at least 20% upside from even these levels. **