Five Below: The One Retailer You Should Own This Holiday

| About: Five Below (FIVE)
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Shares of specialty discount retailer Five Below (NASDAQ:FIVE) surged over 9% in the after hours trading session. This is on top of a 2.8% gain during Thursday's trading session. The rise in the stock price was due to strong third quarter earnings and updated guidance.

Five Below sells all of its products at $5 or less and caters to a primary audience of ages 5-19. The company has been growing its store count and continues to post strong sales increases. The big reason to pick up shares of Five Below now is the upcoming holiday season. The three months of November, December, and January make up 42% of annual net sales for the retailer. The company is also attempting to get to 2000 stores and you have the chance to get in on the current growth level with only 18 states represented.

In the third quarter, Five Below reported a 39.9% increase in net sales to $86.6 million. Comparable same store sales increase 8.8%. Adjusted net income hit $1.6 million, representing earnings per share of $0.03. Analysts on Yahoo Finance were expecting earnings per share of $0.01. The analysts' target for revenue was $81.41 million. Back in Five Below's second quarter earnings report, the company forecasted third quarter revenue to hit $79-$81 million and earnings to come in at $.01 per share.

In the third quarter, Five Below opened 17 new stores. Over the last nine months of the current fiscal year, Five Below has now opened 51 new stores. In the busy fourth quarter, Five Below will open one store. The company ended the quarter with 243 stores in 18 states. Along with new store openings, Five Below is opening a new distribution center in the state of Mississippi. The warehouse is expected to open in the Spring of 2013 and will help with distribution as a more centralized United States location.

In the fourth quarter, analysts are hoping to see earnings per share of $0.39. Revenue target from analysts is $166.14 million. For the fiscal year, analysts see earnings hitting $0.49 on sales of $407.15 million. Five Below has updated guidance for the fourth quarter. The company sees net sales hitting a range of $167 to $170 million. Five Below sees earnings per share hitting $0.35 to $0.37 in the fourth quarter. In fiscal 2012, Five Below is guiding for earnings per share to hit a range of $0.47 to $0.49. Net sales are expected to hit $412 to $415 million by the company. Both of these company supplied full year numbers are increases from the range given during the second quarter earnings report. Previously, Five Below said full year net sales would hit a range of $402 to $407 million, and earnings per share would come in between $0.45 and $0.47.

I highlighted shares of Five Below and the investment opportunity back in July, shortly after the IPO. At that time shares were trading at $26.50 and I recommended getting in for the long term on this growing retailer. My own estimates broke down as follows:

· 2012 Net sales of $405 million, based on 199 stores increasing same store sales by 7% and the company adding 50 stores. I called these numbers conservative and it appears to be the case as the company now expects to hit a range of $412 to $415. My estimates were higher than most analysts were predicting at the time for the full year.

· 2013 Net sales $523.60 million, based on adding 60 stores and a 5% same store sales increase at current stores. Analysts on Yahoo Finance currently see the company hitting net sales of $522.60 in fiscal 2013. Five Below will provide 2013 guidance during the next earnings call.

· Conservative estimate of annual store sales increasing to $1.75 million, from a current $1.5 million. This represents a $3.5 billion annual sales retailer if the company can meet its goal of 2000 stores in 20 years.

Shares of Five Below have traded between $25.00 and $40.00 since going public in July. The company priced its IPO at $17 a share, after seeing strong demand. Previous pricing was expected to be in the $12-$14 range. This is a great concept going after a target age (5-19) and target demographic (discount). With 243 stores open, Five Below is only 12% towards its saturation point of 2000 stores. If Five Below is not on your radar, it needs to be added to a watchlist. If the stock has been on your watchlist, it needs to get added to your portfolio.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FIVE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.