Five Below: Differentiated Concept, No Margin Of Safety

Summary

• 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.

Synopsis

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 non-executive chairman, while Joel Anderson has filled the CEO position since 2015. Anderson is an industry veteran who most recently helmed Walmart's e-commerce business before joining Five Below. Five Below's leadership culture is one of authentic passion for the customer base and intellectual humility. Joel Anderson runs the company through virtues of David Blanchard's management book "Gung Ho!", sharing that, through the reading,

[he] came to understand how powerful an individual's self-esteem is, teamwork secondly, and finally recognition and cheering people's successes."

Vellios chimed in on his guiding philosophies during a speech to Penn State's business school, stating,

I am exceptionally passionate and connected to the customer. And I constantly remind myself of how little I know and how much more I need to go out and learn. I try to convey that to the team. The more we isolate ourselves and think we know it all, the quicker we fall into a trap.

Vellios and Anderson have approximately 45% and 65% of their net worth, respectively, in Five Below stock.

Five Below offers a wide assortment of goods for under $5 with a focus on "trend-right" products. Five Below's stores are organized across eight "worlds": Candy, Beauty, Style, Create, Sports, Books, Room, and Toys & Games. The company has built a reputation for its good taste in quirky items. Five Below's value proposition is one of experience, as evidenced by the company's motto, "Let's Go and Have Fun". Five Below's 8000 square foot stores are colorfully illuminated and harmonized by popular music apt for its intended customers. A trip to Five Below is borne not out of a material necessity, but of a desire to participate in a fun, cheap activity.

Five Below is intensely committed to delivering value to the customer with full transparency. For example, when the company began testing a "Ten Below" section in its stores (items priced between $6-10), and, separately, chose to slightly rise prices on tech merchandise because of tariffs, the company delivered an explanation on its website.

Through its cheap prices and transparency, Five Below exploits two psychological models: Richard Thaler's transactional utility and Robert Cialdini's reciprocity (one of his six methods of persuasion, to which Charlie Munger is so fond of referencing). Transactional utility dictates that an individual's satisfaction with a purchase is not merely a comparison between the price paid and the perceived value of the good acquired, but also between the price paid and some reference point, in Five Below's most relevant case, the price offered at another store. As such, Five Below's low prices make the consumer feel like they are getting a bargain, which, in turn, engenders loyalty to the brand. Because the customer feels as though Five Below has done it a favor with its remarkable prices, it returns to the store to "return the good deed", so to speak. This is reciprocity. When the company is clear about pricing, consumer goodwill is strengthened and another "favor" is branded on the customer base' psyche.

Chuck Grom, analyst at Gordon Haskett, espouses the company's tactics,

The No. 1 thing we like is they don't get greedy. They could have better margins, but they take that money and put it into better products."

Another compelling aspect of the Five Below experience is its "treasure hunt qualities". Joel Anderson explains,

we give a sense of discovery throughout the whole store. It's like T.J. Maxx for kids". The treasure hunt provides another one of Cialdini's methods of persuasions - that of scarcity.

Anderson discusses on another occasion,

That's what the concept's about. If you see something in our store and you love it, you better take it, because you don't know if it's gonna be there three months later."

Five Below provides a fun and cheap activity for teens and preteens, perhaps more alike a trip to the movies than to Walmart. The strategy has been vindicated by its roaring success since going public in 2012, but the ever-important question remains: is the business defensible?

Competitive Landscape

I believe that Five Below's growth and profits are surrounded by two barriers to entry. The first is that the brand owns meaningful, hard-earned real estate in the consumer's mind, as just discussed. The company has been genuine, focused and consistent in its value proposition, and I think that replication of the brand imagery is a tall task. Look around - there are zero duplicates. Second, Five Below's supply chain depends on collaborative and opportunistic relationships with vendors in order to offer an eccentric, on-demand product selection. While I consider this a less surmountable barrier than the brand, it is an obstacle that entrants would be forced to overcome in order to offer the cheap and bespoke product set that powers Five Below.

Five Below's closest peers worth evaluating include mega merchant retailers, namely Walmart (WMT) and Target (TGT), and dollar stores, such as Dollar General (DG) and Dollar Tree (DLTR). I will also discuss the company's resistance to Amazon (AMZN) and e-commerce at large, as well as how Five Below differentiates itself from stores who focus specifically on products offered in one of its worlds (i.e. Big 5 in the sports "world"). Last, I'll issue a thought about unsuspecting competitors. Notable differences in intended value proposition, targeted customer base and sheer size account for important variables in retail's competitive arena.

Mega Merchants

Walmart and Target are the destinations that sell almost everything. An individual makes a trip to these stores to fulfill a material need, knowing with high probability that the desired item will be in stock for an affordable price. This is in stark contrast to Five Below, where customers embark upon a trip to the store without knowledge of the contents of their purchase. Walmart and Target are fundamentally different concepts than Five Below and whom compete for different sectors of the consumer's budget.

David Makuen, executive vice president of marketing and strategy at Five Below, illuminates,

If you spend time in a dollar store or mass merchant like Target or Walmart, it's not really about letting go because you're there to meet your needs. Our purpose is really simple: We want customers to be able to let go and have fun.

In addition, Walmart and Target may not be incented to encroach on Five Below's turf because the opportunity is not big enough to materially impact their businesses. Walmart and Target reported TTM revenue of approximately $524 billion and $77 billion, respectively. Consider that if Five Below executes on its long-run ambitions of nearly tripling its footprint, adding ~160 stores annually through 2029, and sustains healthy 2% same store sales growth along the way, the company would report a mere (in respect to Walmart and Target) $6.5 billion in sales. This amounts to ~1% and ~8% of Walmart and Target TTM revenue, and, of course, ignores the interim sales growth that such companies will likely also experience, thus further diluting an entrance onto Five Below's territory.

Finally, while Walmart and Target have the advantages of scale to recreate Five Below's supply chain, it would seem a mighty challenge to launch or reposition a subset of the store fleet such that it earns a consumer perception similar to what Five Below currently possesses. Walmart and Target, deservedly so or not, are kind of like the bullies on the block to whom consumers are beholden. We don't necessarily like to empower the Big Guy, but they have the best prices for our necessities and the most abundant and convenient locations, so we line their pockets. As such, I imagine that the necessary marketing investment for Walmart or Target to launch an organic venture to compete with Five Below would be a dramatically less efficient use of capital than an identical quantity of marketing investment made by Five Below itself. Taking the thought experiment one step further, higher relative marketing spend would lead to an entrant choice between pressured profitability and maintenance of the low prices that are so critical to the model's success. As a result, were Walmart, Target, or any other capitally-capable retailer so compelled to enter the space, acquiring Five Below would likely be a better investment than an organic effort.

The Dollar Stores

At first glance, one might assume that the dollar stores are direct competitors to Five Below, but they are actually more akin to especially price-sensitive models of Walmart and Target. Dollar General and Dollar Tree service necessities like packaged food, household goods and personal care. Dollar stores also target a separate demographic. Dollar General, the healthier of the two leading dollar stores, has carved out a deliberate locational niche in rural America, specifically intended to circumvent Walmart. This is telling of where Dollar General segments itself in the retail market and who it views as its potential substitutes. The dollar stores may provide value, but they are not positioned to serve a younger group of shoppers - they are not noisy and fun. While Dollar Tree is contending with a heap of challenges, Dollar General appears to be humming along in its well-defined "value in rural America" strategy. With fundamentally different intended customer bases, and in the case of Dollar Tree, internal issues to resolve before exploring a new model, these names do not appear an imminent threat to Five Below.

Amazon & E-Commerce

There are two aspects of Five Below's model, that, when compared to Amazon's (and e-commerce at-large), work to preserve Five Below's competitive standing. As such, I do not believe that online retail is a credible threat to Five Below. As I have repeated, shopping at Five Below is best understood as an experience, not an expedition to acquire a specific product. Second, it is fundamentally uneconomical to ship goods as cheap as those retailed by Five Below. As Ken Perkins, president of Retail Metrics, says,

Five Below generally doesn't compete with Amazon … They offer products that sell for prices below what the shipping cost would be from Amazon, which is why they have a minimal e-commerce footprint. To a certain extent they're Amazon-proof.

World-Specific Stores

Five Below's stores are segmented across different worlds which host their own goods like t-shirts and shoes, candy, headphones and phone chargers, school supplies, and more. Why would a customer come to Five Below when it could go to a discount retailer who is entirely centered around one such product category and would therefore have much greater selection? It refers back to the experiential nature of Five Below's visits. If you know what you need to get, you are not coming to Five Below. If you want to have some fun and only spend $5-10, you come to Five Below. In this way, Five Below has creatively engineered its value proposition such that it is not directly competing with much of the retail world.

Unsuspecting Substitutes

This strategy, however, whereby Five Below has defined itself as an experience, does have a downside: it competes with nearly everything on which teen/preteens spend their time. This is particularly challenging because one cannot enumerate all of the potential substitutes facing Five Below. Five Below potentially competes against Netflix, Little League, SAT studying, and first dates. As a result, a seemingly periphery shift in the way that young shoppers spend their time could damage Five Below's business.

Valuation

Five Below's valuation hinges on mature store sales (those in operation at least 12 months), and, to a lesser extent, terminal store footprint. Mature store sales drive Five Below's value for two reasons. First, same store sales are independent of changes to the long-term asset base (store fleet), and therefore critically impact asset turnover, the multiplier on margins to arrive at returns on capital. Second, same stores sales leverage fixed costs and are thus an input to margins themselves. For this key assumption, I settled on 2-3% same store sales growth, relying on long-run retail industry growth as a base rate.

Roughly 30-50% of Five Below's CapEx is allocated to growth in the form of new stores and distribution centers. In other words, the company is delaying much of its value realization to the terminal state when it is no longer expanding its store footprint. In turn, the eventual size of the store fleet is the key determinant in terminal value. I assume that the store expansion persists 10 years such that terminal value commences after 2029. The terminal period assumes 2% growth, and backs out all estimated expenses related to footprint expansion.

Below are the results of my DCF with regard to revenue CAGR, pre-terminal (2029) EBIT margin and fair value per share. All cash flows are discounted at a 10% opportunity cost.

2500 stores/3% Comps: 14.4% Rev CAGR, 12.05% pre-terminal EBIT margin, $103 fair value per share.

2500 stores/2% Comps: 13.2% Rev CAGR, 8.8% pre-terminal EBIT margin, $72 fair value per share.

2000 stores/3% Comps: 11.7% Rev CAGR, 12.8% pre-terminal EBIT margin, $90 fair value per share.

2000 stores/2% Comps: 10.7% Rev CAGR, 9.3% pre-terminal EBIT margin, $61 fair value per share.

Five Below does not present a margin of safety at ~$96 per share. Stellar footprint growth and same store sales performance are necessary to justify the current valuation. I would only recommend purchasing Five Below around $60-70 per share, wherein more moderate expansion and comp growth would be embedded in the share price.

The remainder of this writeup will detail all assumptions in the valuation. I approached this valuation by allocating revenues and expenses to the individual store level, with a distinction between new and mature stores. Consolidated line items are a function of the per store estimates and the total footprint. I will examine each relevant line item, beginning with revenue and ending with free cash flow.

If I could ask management two questions to aid in the accuracy of my valuation, I would want to know:

1. In how many years do you expect to reach 2000-2500 stores?
2. What proportion of operating expenses are fixed? More specifically, how are store associates and corporate employees compensated with regard to sales growth?

Revenue

Five Below's annual revenue can be decomposed as the number of mature stores (those open at least 12 months) multiplied by sales per mature store, plus new stores built during the year multiplied by average first twelve-month sales for new stores. Revenue growth, then, relies upon the rate at which new stores are built, and the change in sales per mature store (same store sales growth) and new stores (average first twelve-month sales growth). Building out the store footprint is substantially the largest driver of Five Below's go-forward revenue growth, so I will tackle this first, followed by sales per mature and new stores.

Footprint

Between the 2012 (when Five Below went public) and 2016, the company stated in its annual reports that it believed it had the opportunity to service 2000 store locations. Beginning in 2017, Five Below revised its terminal footprint upwards, to 2500. Are 2500 stores attainable?

Five Below primarily erects stores in "power, community and lifestyle shopping centers", and just 4% of stores reside in malls. Five Below states in its 10-K that, "Our unique focus on the tween and teen customer is supported by our real estate strategy to locate stores in high-visibility locations. We seek to operate stores in high-visibility, high-traffic retail venues, which reinforce our brand message, heighten brand awareness and drive customer traffic. Our strategy is to saturate markets with clusters of stores because of the considerable benefit that stores derive from market concentration. Our store model is profitable across a variety of urban, suburban and semi-rural markets…"

There are three points in the real estate strategy to unpack. First, the company seeks to locate stores in areas in which there are other attractions or retail venues. This works to introduce the concept to consumers without undue marketing spend, and also incites impulsive visits when customers are already out and about. Second, Five Below "clusters" its stores. This mainly benefits the supply chain and helps to minimize costs, as distribution and advertisements are leveraged across a specific locale. Minimizing expenses of this sort is key to profitability because of the promise to customers to keep prices low. Last, the company claims that its model works in urban, suburban and semi-rural geographies, allowing both for a substantial opportunity set of new locations and a high degree of selectivity in expansion - i.e. that Five Below can set a high hurdle rate for new stores because it has a range of geographies from which to choose.

Source: 2018 10-K, page 10

Five Below was founded in Philadelphia and as such, the per capita saturation in Pennsylvania is highest. Pennsylvania's per capita store count serves as a rough guidepost for estimating potential US-wide saturation in the future. The goal in the following exercise is not to precisely forecast terminal footprint, but to understand how challenging it is to reach 2500 stores. It should be noted that Five Below currently has ~900 stores, not 750 as shown above (investors will receive an updated map when company reports FY 2019 results).

There are approximately 48 million children in the US between the ages of 6-17, and assuming children are equally distributed across states, 1.9 million of such children live in Pennsylvania. Therefore, based on FY 2018 results, there is roughly one Five Below store for every 30 thousand potential customers in the state. This compares to New York, Texas and Florida, which all have one store for roughly every ~50 thousand 6-17 year-olds, and California, with one store per 180 thousand potential shoppers. Five Below has significant white space, particularly in the Western US.

If we assume that the store buildout phase lasts 10 years and the US 6-17 year old population grows 0.5% during the period (roughly the rate between 1980-2010), and apply Pennsylvania's 2018 per capita store saturation to all of the country's children, we get the high-level guess of approximately ~1700 stores in 2029. However, if we assume that Pennsylvania accounts for the same percentage of the store fleet in FY 2019 that it did in 2018 (~8.5%), then Pennsylvania's more current saturation figure is one store for every ~25,000 children. Applying this to the estimated 2029 US 6-17 year-old population of ~50.7 million, we land at ~2030 stores. In order to reach 2500 stores, Five Below must be saturated at the rate of roughly one location for every 20 thousand US children.

There are some logical loopholes in this exercise, namely that Pennsylvania is unlikely to increase its store count at the same rate as other, completely unvisited states. As a result, the estimated 2019 percentage of total stores located in Pennsylvania (8.5%) is too high, the per capita saturation guidepost is too high, and, as follows, the nationwide terminal estimate is too high. In addition, it is very possible that Pennsylvania retains a unique level of brand familiarity and that other states will never be as saturated, also sending the terminal footprint lower. Despite the imprecision, I deem this a reasonable ballpark process for gauging the company's store count goal - confirmed: difficult.

With that said, there is information asymmetry with management and it seems foolish for them to publish a goal that is beyond reach. As such, I will use range of 2000-2500 stores as my terminal footprint estimate, and I will assume that the store expansion phase persists until 2029. Five Below intends to build 180 stores in 2020, and thereafter, I will model linear increases until reaching the terminal figure.

Sales per Store

Five Below discloses sales per new store in its first twelve months. Knowing the percentage of stores that are new, and the total sales per all stores (total revenue divided by total stores), we can derive sales per mature store, and track its trend over time.

Image created by author using information in company filings, 2012-2018

In addition, we can uncover to what extent Five Below's comp sales growth has been driven by number of transactions per store compared to average dollar value per transaction.

Image created by author using Management Discussion & Analysis, company filings, 2012-2018

It should be noted that company's comp sales growth is calculated with more nuance than my metric of sales per mature store, which is why the figures differ.

Five Below, unsurprisingly, mostly grows sales through increased transactions, not increased prices. However, the company has demonstrated modest pricing power, for which I theorize there are two reasons. First, because the product set is so cheap, customers may not notice or care about a ~2-3% price hike. Second, once Five Below brings consumers inside its walls, they may be enticed to buy goods at the higher price range. After all, a $6 pair of shoes is not exactly splurging.

I feel comfortable modeling mature store sales growth at a long-run retail industry growth rate of ~2-3%. Although Five Below has exceeded that pace heretofore, I am going to rely on this base rate in my model.

The last constituent of topline growth is sales per new store. As shown in the above image, the figure was largely flat between 2012-2017, before a 12.5% jump in 2018, from $1.6 to $1.8 million. I think a conservative range of go-forward new store sales is $1.8-2 million (0-1% annual growth).

Gross Margin

Five Below's Cost of Goods Sold is split between merchandise expenses, which include inventory purchases and distribution costs, and store occupancy, namely rent, as all stores are leased. Five Below breaks out its annual rent expense, and so we can see what percentage of CoGS is allocated to merchandise versus rent, and their trends over time.

Image created by author using information in company filings, 2012-2018

Five Below's consistent merchandise margin is an extremely attractive characteristic about the business. Five Below is likely relatively insulated from industry-wide price markdowns because its goods are already quite cheap. As the company grows, its purchasing power and order sizes should follow, which may permit modest merchandise margin improvements. I will model for 44-45% merchandise margin going forward.

With total rent expense disclosed, we can easily derive rent per store and then model future rent expense as a function of total store footprint.

Image created by author using information in company filings, footnote 5, Commitments & Contingencies, 2012-2018

I think a fair assumption is that rent expense per store will increase at the rate of inflation, presumed to be 2% per annum.

Selling, General & Administrative (excluding Depreciation & Amortization)

SG&A is comprised of salaries and compensation, advertising and depreciation. The focus of this section will be on the first two items; capital outlays will be discussed next.

Five Below breaks out SG&A incurred to launch new stores. Knowing the number of new stores built during the year, we can find SG&A per new store.

Image created by author using Management Discussion & Analysis, company filings, 2012-2018

In light of this line item's past inconsistencies, I will model for SG&A per new store to grow at 10% annually, near the high end of historical results.

The next part of SG&A is "maintenance spend", defined as SG&A spent on stores in operation longer than 12 months, which I derived by subtracting the "new store" SG&A expense from total SG&A (also less depreciation). Similar to SG&A per new store, SG&A per mature store is estimated by dividing the SG&A spent on stores in operation longer than 12 months by aggregate mature stores in the period (total stores minus stores built during the prior fiscal year).

Image created by author using Management Discussion & Analysis, company filings, 2012-2018

In dialogue with analysts, Five Below management provides clues on the mechanics of SG&A, same store sales growth and margins.

Ken Bull, CFO, on the Q4 2017 earnings call,

Keep in mind that we would expect to leverage our fixed cost with a comp of approximately 3%, therefore at a flat or close to flat comp, we would expect to see deleverage on our fixed expenses.

Again, in Q4 2018, Bull reiterates,

As we've said before on an annual basis, as we've seen in the recent past, and we expect at least at this point that at a 3% comp, we start to hit that tipping point for leverage.

However, when we overlay comp growth, YoY change in SG&A per mature store and EBIT margin net gross margin impacts, we see that the correlation between comp growth and margins is not direct. Changes in EBIT margin appear to be partially attributable to comp growth, but also to independent SG&A changes. The 3% same store sales growth level does not appear to have strong historical reliability in predicting margin trends.

Image created by author using information in company filings, 2012-2018

Because of the unclear relationship between comp growth and EBIT margins, I feel most justified forecasting SG&A per mature store at 3% growth per annum, 1% greater than the assumed inflation rate.

Capital Expenditures

Similar to SG&A, CapEx can be divvied between investments in new stores and investments in mature stores. Distribution centers (DC) represent a third bucket of capital investments.

Management guides in the annual report how much it plans to spend on CapEx for new stores in the following year. Therefore, we can calculate CapEx per new store by dividing the guided new store CapEx figure by new stores actually built during the year.

Image created by author using information in company filings, Liquidity and Resources, 2012-2018

I will assume that go-forward CapEx per new store is $0.33 million.

After backing out CapEx for new stores, we are left with CapEx on DC and mature stores. On Page 14 of the 2018 annual report, under Distribution and Fulfillment, the company states that it paid $42 million to build its DC in the southeastern US. In the 2019 third quarter 10-Q, Five Below notes that its DC in Texas, under construction during 2019, will cost $56 million. Using these as guideposts, we can expect that future DC will cost around $50 million to build.

As for the pace of future distribution investment, Joel Anderson stated in December 2018 that the company would be investing in one DC for each of the next four years, the first two of which just mentioned. Anderson shares,

When a company is growing as fast as we are, we have to stay in front of that growth and put scale in place ahead of sales. I really applied what I learned at Walmart so I could set us up for the long-term future. For example, we're going to build a distribution center a year for the next four years.

Five Below had just one DC in place through 2017, which supported $1,278 million in sales. If Five Below builds one DC annually through 2021, and sales grow in line with my assumptions, each DC will be supporting roughly $700 million in sales by 2021. The necessary assumption to forecast future DC investment is how much revenue one DC can support. I will settle on $1,000 million, which requires DC investment in 2026, 2028 and 2029.

The final component of CapEx is that invested in the existing store fleet. By subtracting out the other two pieces of CapEx, we can derive what was historically spent on mature stores.

Image created by author using information in company filings, Liquidity and Resources, 2012-2018

The uptick in 2019 CapEx per mature store (which is based on guidance, as FY results have not yet been released) is driven by a store remodeling program. Five Below is remodeling 50 stores in 2019 and plans to roll out the program on ~250 more locations over the next several years. Assuming that the company remodels 50 mature stores for the next five years, I will model that Five Below spends $100,000 per mature store through 2025, after which point CapEx per mature store returns to prior levels around $50,000-$60,000.

Net Operating Working Capital

The largest component of NOWC ([CA-Cash] - [NIBCL]) is inventory. In fact, Inventory is by far the company's biggest operational asset, accounting for 40% of the left side of the balance sheet after netting out cash. Five Below has managed inventory well, with turnover around ~3.8x and zero writedowns in its public history. A successful concept and consistent turnover and gross margin performance lend confidence in Five Below's ability to prudently manage inventory going forward.

In 2017, the company's NOWC was 7.25% of sales, and in 2018, the figure declined to 4.5%. However, 2018's result was impacted by an irregular increase in "accrued other charges" related to CapEx. Normalizing that line item at its historical rate of growth, NOWC was 7.5% of sales. Using 2017-2018 as a guideline, I will model for NOWC to represent 7-8% of sales going forward, accompanied by an annual investment commensurate with this estimate.

Terminal Value

The terminal value in my DCF represents the period during which Five Below stops building new stores. As such, all topline growth must be from mature stores (assumed at 2% in perpetuity), and SG&A and CapEx allocated to new stores is eliminated.

Other Assumptions & Considerations

I assume that Depreciation and Amortization remain a steady percentage of sales (2.66%) and apply a 25% tax rate on EBIT to estimate normalized cash taxes. Five Below has zero debt so there are no interest payments for which to account.

I do not account for cash flows that occur during FY 2019 whose results are to be reported on March 25, 2020. I use guidance where given to supplement my model but omit 2019's cash flows. 2020 is the first year in which value accretes in my model.

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.