Five Below: Another Successful Public Offering Last Week

| About: Five Below (FIVE)

Shares of Five Below (FIVE) saw a successful public debut last week. The retailer of discount merchandise for teenagers made its debut last Thursday.

The Public Offering

Five Below sold 9.6 million shares for $17 a piece on Thursday, thereby raising $163.5 million in gross proceeds. Half of the shares were offered by selling shareholders which implies the company will raise approximately $82 million in the offering process. The offering price of $17 came in at the high end of the initial offer price range of $15-$17 per share, which was already revised upwards by $3 in recent weeks. The company will sell approximately 18% of its 54 million shares outstanding. Investors reacted very positive to the public offering as shares opened at $26.05 on Thursday to end their first trading day at $26.50 per share, marking a first day gain of 56%. On Friday shares gained another 2.9% closing at $27.27. Goldman Sachs, Barclays and Jefferies acted as underwriters in the offering.


Five Below will use the proceeds from the offering to repay at least $50 million in debts, with the remainder of the funds being used for general corporate purposes. Five Below has seen aggressive growth in recent years as revenues more than tripled between 2008 and 2011. For the full year of 2011 the company generated $297 million in annual revenues which was up 51% on the year. Net income more than doubled last year from $7 million to $16 million.

The share price jump to $27.27 per share values Five Below at roughly $1.5 billion or 5 times its annual sales for 2011 and at almost a hundred times earnings. Undoubtedly revenues will continue to rise for the fiscal year of 2012 as the company plans to increase its store count from 199 at the moment by opening another 50 stores in 2012. For 2013 Five Below expects to open another 60 stores. Including same stores sales growth of around 10%, as reported in its latest earnings report, the business is on track to generate $500 million in annual revenues by 2013. Such a revenue base would bring the revenue valuation multiple down to 3 times. This valuation compares to a 1.8 times revenue multiple for Dollar Tree (DLTR) and 1.2 times revenue multiple for Dollar General (DG).

A lot of good news has already been priced in for Five Below. At these levels I won't consider making an investment unless same store sales growth increases notably in the coming quarters or I get better visibility about its medium term future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.