Five Below, Inc. is a retail chain belonging to the specialty retail industry which was incorporated in Pennsylvania, USA in 2002. It offers “dynamic, edited assortment of exciting products, all priced at $5 and below, including select brands and licensed merchandise” ("Overview | Fivebelow"). Five Below’s products range from sports equipments, styling merchandise, small décor items, craft works to candies and party items. It largely targets customers who are teenagers or pre-teens.
Since the company’s inception, it has expanded its business to almost all regions of the United States and has been successful in opening more than 350 stores across the country. The company has done remarkably well in the past few years and has had tremendous growth in net turnover and profit margins. It attributes its stunning growth to few of its key success factors such as keen focus on their target customers, use of high quality products, low costs and powerful management.
The company’s “brand concept, merchandising strategy and store ambience work in concert to create an upbeat and vibrant retail experience that is designed to appeal to our target audience, drive traffic to our stores and keep our customers engaged throughout their visits” (Five Below, Inc Form 10-K (Annual Report) 5).
The company’s financial model has contributed to its exceptional growth in the recent years. The company was listed on NASDAQ at $17 per share when it went public on July 19, 2012. At present, its share price has increased to $40 per share. Since its listing, its cumulative net sales growth has been approximately 25% and cumulative growth in profit margin has been almost 31%.
An analysis of the company’s balance sheet reveals that it has made several investments in the fiscal year 2015. It invested a total amount of $46.3 million in short term securities which it plans to hold till maturity as these will bear heavy interest receipts for the company in the foreseeable future. The company also invested in property, plant and equipment to the tune of $53.1 million in 2015. The company claims to “have a proven store model that generates strong cash flow, consistent store-level financial results and a high level return on investment” (Five Below, Inc Form 10-K (Annual Report) 5).
Another notable feature in the company’s financial structure is the absence of non-current liabilities. The company has not borrowed any sum from external parties in 2015 and believes in making investments through owners’ funds alone. The company had borrowed $7 million through Revolving Credit Facility in 2014 but repaid the whole amount within one year itself. This demonstrates the company’s credibility and eagerness to pay back loan as soon as possible. In 2015, the company financed its investing and working capital requirements through equity share capital alone and raised a total of $1.1 million through issuance of common stock and exercise of options.
Furthermore, the company’s net sales have increased by $152 million since the fiscal year 2014. “The increase in non-comparable store sales was primarily driven by new stores and the number of stores that opened in fiscal 2014 but have not been open for 15 full months” (Five Below, Inc Form 10-K (Annual Report) 35). The Company has also managed to earn an increased gross profit of $52 million in 2015 making its gross profit margin increase by a marginal 0.3%.
Its net profit also increased by $9.7 million however, the net profit margin decreased marginally by 0.1%. These figures indicate that the company did not do remarkably well since 2014 and its performance remained almost equal to the previous year. The shareholders were slightly benefitted though, since the basic and diluted earnings per share increased by a very small margin.
The company’s cash flow statement is a clear indicator of the strong liquidity position it holds. It did much better in earning net cash flows from operating activities in 2015 as compared to the last two years. The improved cash flow position can be attributed to the company’s better sales strategy, effective use of fixed assets and ability to unblock funds faster. It can also be seen that Five Below has invested heavily in capital expenditures in the fiscal year 2015 as compared to the last two years. Greater investments in fixed assets show that the company will earn greater economic benefits in the future as new resources are continually being employed for seeking better results.
As was noticed in the balance sheet, the company has only raised cash from its common stock in 2015 and has sought no external financing. Moreover, the company does not pay dividend to their shareholders stating that “For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock” (Five Below, Inc Form 10-K (Annual Report) 24). The company has done well by avoiding unnecessary costs such as interest and dividend payments and utilizing that amount for its working capital requirements and investments.
As is quite evident from the company’s cash flow statement, Five Below’s liquidity position looks quite strong. On further analysis, Five Below’s current ratio of 2.59 in 2015 looks quite favorable as per the industry standard of 2 depicting its strength in repaying its current debts with its current assets. Furthermore, a quick ratio of 0.97 also shows that the company can easily pay off its current liabilities with its current levels of highly liquid assets. Inventory is deducted from current assets to calculate this ratio since stock is more difficult to liquidate or convert into cash than cash itself. It is worthwhile to note here that the company’s liquidity ratios have improved considerably since 2014 indicating improvement in covering its current debt with its current assets.
The company’s asset turnover ratio has decreased from 2.59 to 2.42 since the previous year. An asset turnover ratio of 2.42 indicates that the firm’s capability of utilizing its assets to increase its sales has weakened. This also indicates that the company should have started investing in fixed assets a long time before. However, since the company has invested considerably in fixed assets in the current period, the asset turnover ratio is expected to improve soon.
The inventory turnover ratio of the company has also declined marginally from 4.3 in 2014 to 4.1 in 2015. This shows that the company’s ability to utilize its closing inventory to extract sales has weakened since the past. However, the days’ sale in inventory ratio increased slightly from 95 days to 100 days indicating that the company’s ability to convert sales into inventory has improved since the last year.
The company’s profitability ratios show a slight decline in the current year. Although, the gross profit margin increased from 35.0% to 35.1% in 2015, the net profit margin decreased from 7.1% to 6.9% in 2015. The declined net profit ratios indicate that the company has not been able to extract greater profits from its sales and the non-trading costs have reduced the net income of the entity. This also indicates that the company has not been able to reduce its cost of wholesale purchasing or has not been able to receive larger discounts from the manufacturers. The profit margins are bound to decline for the company if costs increase since it cannot sell a product for more than $5 as per its policy.
Another aspect to be considered here is the return on asset and return on equity ratios. The return on asset ratio was 20.6% in 2014 which decreased to 16.8% in 2015 indicating that the company’s earnings after tax decreased significantly in relation to its total assets. Similarly, Five Below’s return on equity ratios also stood at 33% in 2014 but declined to 27.60% in 2015 signifying that the company was unable to utilize its equity capital for producing profits more effectively in 2015.
The company’s solvency ratios haven’t improved or declined significantly since the previous year. A decline of 3% in debt ratio and increase of 3% in equity ratio indicates the company’s slight inclination towards employing equity in its financial structure. A reduced debt to equity ratio also indicates the same that the leverage in the financial structure has been reduced in 2015. It is worthwhile to note here that the company’s times interest earned ratio has increased by a huge 579 times. This is a considerable improvement in the company’s ability to pay back its interest expenses with its earnings before interest and taxes. This has largely been possible due to decreased interest expenditure in 2015.
Five Below has had a tremendous growth story since the last few years. The company is currently estimated to be trading at 25 times its value in the stock market. Its stock prices are at a boom due to its constant rising trend in growth. The company has huge operating cash flows and zero leverage in its financial structure which makes it so favorable to invest in. “Looking at the management execution and commitment to growth, Five Below has a great chance of repeating its success in its new ventures” (Meka).
As can be seen above, the company is doing considerably well as per the industry standards. It is one of the leading players in the specialty retail industry in terms of market capitalization, growth, revenue, net income and Price to Earnings ratio. Its competitors such as Dollar General, Inc, Dollar Tree, Inc. and Family Dollar, Inc. are older in business in comparison to Five Below however; their growth rates are too slow as compared to Five Below. “Just as in the case of its revenue, Dollar Tree's net income rose slower than Five Below's over this period but was impressive nonetheless” (Jones). Moreover, the potential of a fairly new brand, Five Below cannot be overlooked. The company’s store count increased almost 200% by the end of 2013 which was the highest amongst its peers. Over the last five years, the company’s net income has also risen by approximately 180% which was the second highest in the industry after Dollar General. Five below’s liquidity and profitability position is also the best among its peers.
Also, where the specialty retail industry’s average market capitalization is approximately $1.1 billion, Five Below stands at a double market cap. The company’s price to earnings ratio also stands at around 45 times which is again far more than the industry norm of 20 times. It can be concluded that the company has allowed the specialty retail industry to come to the forefront and is one of the pioneers in setting the industry standards.
Five Below, Inc. is an attractive investment for the risky investors. It has a clean record of compound growth in turnover and net income since its inception. Its operating profit margins are approximately 15% higher than the industry averages. It is a debt-free company and has a very strong liquidity position. It has an attractive Return on Assets and Return on Equity position as well. “Five Below has said in presentations that they hope to deliver 20% annual revenue growth and 20%-plus earnings growth in the foreseeable future” ("Five Below: A Retailer For Austere Times - Smarter Investing").
Another striking feature about the company is its aggressive expansion plans. The company “believes there is significant opportunity to expand our store base in the United States from 437 locations as of January 30, 2016 to more than 2,000 locations within the United States over time” (Five Below, Inc Form 10-K (Annual Report) 6). The company considers its expansion strategy to create a ripple effect in its growth and sales in the future.
The company is well aware that advertising their brand and creating awareness among its target consumers will fetch it its goal. The company also has immense faith in its brilliant team of employees and managers and considers them to be the driving force behind their success. The company has laid down plans to create brand-awareness, offer dynamic and new merchandise to its customers and create a well-refined shopping experience.
The company has also successfully been able to tap the benefits of its target market of pre-teens and teens. “Based on management’s experience and industry knowledge, we believe that this segment of the population has a significant amount of disposable income as the vast majority of this age group’s basic needs are already met” (Five Below, Inc Form 10-K (Annual Report)7). Five Below also believes that selling high quality products at $5 or below will allow it to remain one of the market leaders and achieve their economic goals.
When companies as new as Five Below lay down such extensive growth plans and survival strategies, it becomes quite hard for a potential investor to ignore them. The company not only values its customers but also deeply values its employees. The Company’s Annual Report mentions that it “is guided by a philosophy that recognizes strong sales performance and customer service, allowing us to identify and reward team members who meet our high performance standards” ” (Five Below, Inc Form 10-K (Annual Report)10).
The exceptional growth that the company has shown in the past few years signifies the company’s survival instincts and attitude for outstanding performance. It has not only created extraordinary performance standards for itself but also for its counterparts and other budding industries.
Investors and analysts recommend buying the company’s stock and investing in the company. According to them, “The Company’s strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and good cash flow from operations” ("Five Below Inc - NASDAQ:FIVE - Stock Quote & News - Thestreet"). Analysts also contend that “over the past five years alone, Dollar Tree saw its revenue jump 50%, from $5.2 billion to $7.8 billion, while Five Below's top line grew 328%, from $125.1 million to $535.4 million” (Jones).
With such outstanding growth standards, the highest price to earnings ratio in the industry, extensive and aggressive expansion strategies, core values and passion to survive in the market, Five Below indeed stands above its peers. “Although most of the attention has been paid to Dollar General and Family Dollar, it would be a mistake to overlook the potential of other players in the industry like Dollar Tree and Five Below” (Jones).
The company’s stock price is bound to increase in the future as analysts predict a booming trend in the company’s stock. This bullish trend can be attributed to the company’s recent growth trends and corporate policies. Investors will benefit from buying Five Below’s shares today since the stock price is highly anticipated to cross the $40 level at any time.
At last, Five Below is indeed better than its peers since the company has zeal to win over the industry. It is the best company to invest in because its stock prices are predicted to cross Dollar General’s, Dollar Tree’s and Family Dollar’s in no time. It is the best investment for those investors who have a passion to outdo their peers just like Five Below has.
Works Cited
"Five Below Inc - NASDAQ:FIVE - Stock Quote & News - Thestreet". TheStreet. N.p., 2016. Web. 7 May 2016. <http://www.thestreet.com/quote/FIVE.html>
Five Below, Inc Form 10-K (Annual Report). Philadelphia: EDGAR Online, Inc, 2016. Web. 7 May 2016. < http://investor.fivebelow.com/common/download/sec.cfm?companyid=AMDA-11NSLL&fid=1628280-15-2001&cik=1177609>
"Five Below: A Retailer For Austere Times - Smarter Investing". Smarter Investing. N.p., 2016. Web. 7 May 2016. < http://investing.covestor.com/2016/04/five-retailer-austere-time>
Jones, Daniel. "After Dollar Stores Rise, Which One Is Right For You? -- The Motley Fool". The Motley Fool. N.p., 2016. Web. 7 May 2016. < http://www.fool.com/investing/general/2014/06/18/after-dollar-stores-rise-which-one-is-right-for-yo.aspx>
Meka, Sreeni. "A Growth Story: Five Below - Gurufocus.Com". Gurufocus.com. N.p., 2016. Web. 7 May 2016. < http://www.gurufocus.com/news/411536/a-growth-story-five-below>
"Overview | Fivebelow". Five Below. N.p., 2016. Web. 7 May 2016. < http://investor.fivebelow.com>
