Ponder These Points Prior to Investing in This Expansion Share
In recent years, the market has been on an upward trajectory, leaving investors feeling optimistic. However, not all businesses have been thriving. One such company is the discount retailer, Five Below (FIVE 5.76%), which is currently 56% off its peak price from August 2021. Although its revenue growth has been impressive, with a 95% jump from five years ago due to the opening of numerous stores, investors should be wary of a major red flag.
Rapid Expansion and Strong Finances
Five Below's rapid expansion is evident in its store count, which has almost doubled, leading to $736 million in revenue in Q3 2024. Remarkably, the company boasts a zero-debt balance sheet as of Nov. 2, 2024, despite the aggressive investment in new stores.
Same-Store-Sales Trends: A Significant Concern
While revenue growth is robust, Five Below's same-store-sales (SSS) trends pose a significant concern. A retailer's primary focus is consistently increasing SSS to demonstrate healthy foot traffic and pricing over time in existing locations. Five Below's SSS soared in FY 2021, but declined in FY 2022 and then increased slightly in FY 2023. However, through the first nine months of FY 2024, same-store-sales fell 2.6%.
Despite the concerns, Five Below's executives remain optimistic about the business, attributing the improvement in traffic trends to the second half of 2024. They believe the company is doing well by focusing on fresh product assortments that drive customer excitement.
A Cheap Stock, but May Not Be a Buy Yet
Five Below shares have plummeted since their 2021 peak, while the S&P 500 has climbed 30%. The depressed valuation, with a price-to-earnings ratio of 20.6, might make it an attractive option for some investors. However, it's essential to exercise caution as Five Below needs to demonstrate consistent growth in SSS before adding it to the portfolio.
Enrichment Data Insights
During the holiday shopping season of November 3, 2024, to January 4, 2025, Five Below reported a 3.2% decrease in comparable sales despite an 8.7% increase in net sales to $1.19 billion. The company also expects a 3-5% decrease in comparable sales for Q4 and a 3% decrease for the full fiscal year 2024. These trends suggest weakening consumer demand at existing locations, which could pose significant challenges for the company. To address these challenges, Five Below is focusing on enhancing its product offerings, value, and store experience. The effectiveness of these strategies in reversing the decline in comparable sales is yet to be seen.
Investors might see Five Below's low stock price as an opportunity for investing, considering its zero-debt status and impressive revenue growth. However, the consistent decline in same-store-sales trends could be a finance-related concern that investors should carefully consider before making a financial decision.
