Five below equity hikes after earnings: 3 things to know

Shares Five below (NASDAQ: FIVE) were trading sharply higher after the company reported strong results for the fiscal third quarter following market close on Wednesday.

Investors were pleasantly surprised as the stock had fallen in the week leading up to the earnings report, but Five Below is performing at a high level despite the supply chain issues many retailers face in this market. moment.

The stock is not cheap, trading at a relatively high price-to-earnings ratio of around 40, but more results as we just saw could support a rise in the stock price until 2022. Here are three things from the report that highlight why Five Below is such a terrific retail business.

Image source: five below.

1. Growth where it counts

Total sales increased 27% year-on-year. Five Below had the highest average store sales in the third quarter of company history. The additional demand during the quarter helped offset higher transportation costs and generated an exceptional 75% increase in operating profit year over year.

“The ability of our teams to recognize trends and take advantage of them quickly is a key distinguishing feature and strength of our model,” said CEO Joel Anderson at the earnings call.

It is no coincidence that Five Below achieved this level of performance in a quarter where consumers are pressed by higher prices for products. Higher inflation could act as a catalyst for increased demand in the fiscal fourth quarter as consumers seek the best value for Christmas gifts.

2. Offer more value than the price of $ 5

One growth catalyst to watch is Five Below’s efforts to sell items above their traditional assortment of $ 5 or less. As the business grows and expands its purchasing power from its suppliers, it is able to source goods at higher prices and deliver even better quality and savings to customers. . Management is pleased with the results so far, citing its recent offering of $ 12 telescopes and a $ 25 six-foot basketball hoop.

Additionally, customers who buy Five Beyond products tend to spend more than the average customer. These high expenses clearly contributed to Five Below’s record average sales last quarter. The Five Beyond category is expected to expand to half the chain by the end of next year. It currently represents around 30% of the activity.

3. Space for more store openings

Overall, new stores are the biggest contributors to the sales momentum. Five Below opened 52 new stores during the quarter. This brings its total fleet to 1,190 stores in 40 states, but management continues to see the potential of more than 2,500 stores in the long term.

The number of stores has historically increased by around 21% per year. Additionally, stores have consistently experienced positive same-store sales growth, excluding temporary store closings during the pandemic. This gives the company a long term lead for sales growth.

More importantly, Five Below has proven to have a profitable business model to sell products at super low prices, making it a resilient retail business in times of recession. Consumers will naturally buy more value when the economy slows down or inflation spikes, as it has recently. This scenario works to the advantage of Five Below.

Of course, long-term investors should always consider the value they get for buying shares in a company. Given the opportunities for Five Below to continue to open new stores, the stock price / earnings ratio 40 based on this year’s profit forecast doesn’t seem that expensive. Investors should not be afraid to start a position in the stock at these levels.

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Jean Ballard has no position in any of the stocks mentioned. The Motley Fool recommends Five Below and recommends the following options: $ 115 long calls in January 2022 on Five Below and $ 120 short calls in January 2022 on Five Below. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.