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Five Below: Differentiated Concept, No Margin Of Safety

Mar. 02, 2020 8:14 AM ETFive Below, Inc. (FIVE)1 Comment
Nimble Opinions profile picture
Nimble Opinions


  • Five Below is a differentiated, profitable and relatively defensible concept.
  • Company is counting on long runway for footprint expansion.
  • Mature store economics, principally same store sales, drive intrinsic value.
  • There is no margin of safety in the current stock price.


Five Below (NASDAQ:FIVE) is a differentiated retail concept with strong profitability, double-digit topline growth prospects and seemingly competent, honest managers. I estimate that Five Below is reasonably worth between ~$60-100 per share. As such, the current share price and valuation of ~$96 and ~35x TTM EPS, respectively, do not permit a margin of safety. Although Five Below is likely to compound intrinsic value at a 10-15% pace going forward, a purchase at today's levels incurs risk of overpayment that may diminish investor returns as convergence to intrinsic value offsets underlying business value growth. Accordingly, I believe that Five Below only presents a compelling risk/reward proposition at closer to $60-70 per share (22-25x TTM EPS) where the risk of overpaying is limited.

The Story

Five Below is a discount retailer targeting the teen and preteen demographic. The company has over 900 US locations, up from 244 in FY 2012, and believes that it can eventually reach 2500 stores. Five Below has paired strong unit growth with consistent same store sales expansion, increasing yearly revenue per "mature store" from $1.77 million to $2.14 million (my estimate of sales for stores in operation at least 12 months, based on information in company filings) between 2012-2018, an annualized rate of 3.2%. In aggregate, Five Below has grown its topline 24.5% per year over the past six years. Moreover, during this period, the company has sustained gross margins between 35.1-36.2%, consistency that is rare amidst the distressed retail industry, and has increased EBIT margin from ~9% to ~12% via leverage against fixed costs like rent, distribution and advertising. Five Below has generated consistent, unlevered 25-30% returns on equity.

Five Below was founded by serial retail entrepreneur David Schlessinger, and his partner, Tom Vellios, in 2002. Vellios was CEO from 2002-2015 and remains the company's

This article was written by

Nimble Opinions profile picture
"When the facts change, I change my mind. What do you do?"I stick to what I know, which prohibits thinking in certainties.Evidence based opinions, earnings power based valuations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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