Low Prices Could Send This Stock Higher

Ben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Five Below (NASDAQ: FIVE) is a specialty retailer that targets teens and sells products for under $5, hence the name. In the United States, there are roughly 25.6 million teens, and most of them have the same problem: not a lot of money. Five Below offers an assortment of trendy items such as makeup, beach and party supplies, and iPhone covers. But being trendy isn’t the only important part of this company.

Growing up 

Five Below recently posted a 33% increase in sales, to $95.6 million from $71.8 million, which beat the analyst prediction of 94.23%. The company also saw same-store sales increase 4.2%, its 28th consecutive quarter of growth in this area. This increase in sales was hindered slightly by the unseasonably cold weather this year, which slowed spring and summer seasonal item sales.

The company opened 14 new stores during the quarter, bringing the total number of stores to 258. Five Below expects to open 14 more during the next quarter, and 60 total for 2013. This growth will be supported by investing in infrastructure such as its new distribution center in Olive Branch, Mississippi. On a downside, the new distribution center was responsible for deleverage-of-distribution expenses that caused a 40-basis-point drop in gross margin to 31.6%.

New Leaders

Building a strong product development and sourcing team is important for Five Below, and the company recently hired Michael Panella, Julia Benhour, and Sharon Cardinal to help this endeavor.

Panella has been hired as Senior Vice President, leading the product development and sourcing team. He spent the last 13 years as President of JM Manufacturing, a company based out of Hong Kong that specializes in product development and sourcing for national retailers.

Benhour, who has worked for Avon Products and Victoria’s Secret, is director for product development, and will support Panella to help strengthen product development and sourcing. Cardinal is a divisional merchandise manager who will work to grow the fashion accessory, groom apparel, and beauty categories. Her previous employment at Eddie Bauer and Bath & Body Works makes her a good choice for this position.

These new hires will help Five Below keep new, trendy products on its shelves that will keep customers coming back.

Competition

Five Below’s competition comes from other teen focused specialty retailers such as Wet Seal (NASDAQ: WTSL), Claire’s, and Forever 21, only one of which is publically owned.

The Wet Seal operates 526 stores that sell fashionable and contemporary apparel and accessory items for girls. The company has had sales trouble recently with same store sales declining 2.9% last quarter and 7.7% a year earlier. Revenue fell 5.1% to $140.4 million which yielded an earnings per share of $0.01.

Wet Seal has a competitively high gross margin of 43%, compared to Five Below’s 31.6%. This is due to the difference in pricing between the companies. Wet Seal’s products aren’t expensive, but they are more than $5.

Five Below’s advantage is its highly advertised low prices that will draw teens to stores and with less than half the amount of locations as Wet Seal, it has more room to grow.

Conclusion

Because of its high growth potential and commitment to producing trendy, affordable products, I think Five Below is a buy. The company only went public last year and is still investing in the business so there won't be big dividends any time soon. But with a growth rate of 31%, I expect this company to give impressive returns as it expands. 


Ben Popkin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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