Over the past six months, Five Below’s stock price fell to $99.82. Shareholders have lost 8% of their capital, which is disappointing considering the S&P 500 has climbed by 6.3%. This may have investors wondering how to approach the situation.
Is now the time to buy Five Below, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.Even with the cheaper entry price, we're cautious about Five Below. Here are three reasons why FIVE doesn't excite us and a stock we'd rather own.
Why Is Five Below Not Exciting?
Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ:FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Five Below’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Less Negotiating Power with Suppliers
Five Below is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage. On the other hand, it can grow faster because it’s working from a smaller revenue base and has more white space to build new stores.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Five Below historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.1%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Five Below isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 21.4× forward price-to-earnings (or $99.82 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at Meta, a top digital advertising platform riding the creator economy.
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