Five Below, Up 82%, Flashes Sell Signals

Investors who bought into Five Below (FIVE) around its IPO last July should feel pretty good now, even as the outlook for retailers generally grows dimmer by the day. Five Below shares are up 82%, same-store-sales gains are beating the pants off competitors, and its focus on very inexpensive fashion, toys and gifts should play well to a penny-pinching public this Christmas. But we’d like to offer a reason for profit-taking in Five Below anyway.

FIVE Chart

FIVE data by YCharts

Five Below investors are encouraged by a couple of signals that are pretty depressing for investors in most retail stocks. Consumers, it seems, are not up for extensive holiday spending this year. The U.S. Commerce Department on Monday reported very weak retail sales in August, and an index of consumer sentiment at mid-September declined considerably. On Tuesday, retail researcher ShopperTrak put out a forecast Tuesday calling for the weakest holiday shopping since 2009.

Investors expect Five Below, with its promise of cheap fare, can benefit. They’re encouraged by its aggressive store-opening schedule and same store sales growth about twice the size of most retailers last quarter. In fact, investors are betting that fast-growing Five Below can do for shareholders what older and bigger Family Dollar Stores (FDO), Dollar General (DG) and Dollar Tree Stores (DLTR) did in a similarly weak economy. Each of those stores more than doubled their share prices in two-year periods by selling dime-store items like household goods, gifts and food priced close to $1.

FDO Chart

FDO data by YCharts

Five Below is essentially a Dollar General store with a more focused niche; items selling for $1 to $5 coveted by teens and tweens. But for investors, there’s one big whopping difference between Five Below and other three success stories: Family Dollar, Dollar General and Dollar Tree never traded at share price valuations anywhere near what Five Below shares go for now. Five Below’s historic price-to-sale ratio at 5.5 is almost double the highest level of any of those companies. On forward sales estimates, only lululemon athletica (LULU) stands out as a more expensive retailer, and even eBay (EBAY) and Netflix (NFLX) are far cheaper. Its forward PE ratio at 70 looks even more remarkable compared to the dollar stores.

FDO Forward PE Ratio Chart

FDO Forward PE Ratio data by YCharts

Five Below’s valuation leaves the shares vulnerable to disappointment, and the potential for that grows even for this company when shoppers are skittish. Consumers don’t automatically go downscale in tough time; sometimes they just don’t shop. Cheap top-sellers like the rubber band bracelets that are hot now can go in and out of fashion in a flash. (What happened to Silly Bands?) As we’ve noted before, it doesn’t take a crisis to drop a lot of value off an extravagantly valued share. The only way an investor can ensure he’s really made 82% on Five Below is to put at least some of that money in the bank now.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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