Despite Lofty Valuations, FIVE Stock Continues to Defy Gravity
FIVE (NASDAQ:FIVE), parent of the Five Below chain, is an exception to the rule that retail stocks are notoriously cheap relative to their annual revenue. FIVE stock sits just shy of $200 per share with a market cap of $10.3 billion on 2020 sales of $1.85 billion.
There are other numbers reminiscent of a tech stock. A price to earnings ratio of 196, no dividend, but a price target of $301.
Technical analysts are giving FIVE stock the breathless coverage they give cloud applications. They claim the buy point is $192, a “base on base pattern after a prior descending base.”
They’re telling you to buy it because it has been going up. But should you?
A Closer Look at FIVE Stock
The secret sauce for Five Below is the same as you’ll find at any tech company. Growth and profits.
Revenue for fiscal 2020, which like for many retailers ends in January, was 18% ahead of a year earlier. Net income was 17% ahead of fiscal 2019.
The company reports its 2020 Christmas season on March 17. About $800 million in revenue is expected, 16% ahead of last Christmas. Net income of $2.11 per share would be 7% ahead of last year. As with a tech stock, the growth is funded by operating cash flow, not debt.
Joel Anderson, a former Walmart (NYSE:WMT) executive has led the company since 2015. The stores have low-price goods at lower prices, often below what it would cost Amazon.Com (NASDAQ:AMZN) to ship them. The stores try to provide a treasure hunt “wow” factor to teens and even younger shoppers.
Anderson is assuming an end to the pandemic, with plans to open as many as 180 stores this year, raising the store count by 16%. He is opening “e-sports” centers in some stores, which turn videogaming into a competitive sport.
Of eight analysts now following the stock five say buy it. TV analyst Jim Cramer said he wished he already had it at the bottom of the pandemic. The only thing the pandemic made Five Below do is pivot toward turning homes into learning environments.
Valuation Remains a Problem
The danger signs for FIVE stock here are all about the valuation.
Retailers aren’t valued in the way Five Below is. Five Below is focused on fickle shoppers who are willing to go online. Think of it as a Toys R Us for older kids who do their own shopping.
The stock has been on fire, doubling in price over the last year as other retailers have faltered. Anderson’s assistants are prized like those of Kansas City Chiefs coach Andy Reid, giving him what in that business would be called a coaching tree. Andersen himself is going onto other retailers’ boards, hoping the luster will rub off on them.
Still, a consensus rating of buy has analysts saying “buy any dip,” and those who take that advice are making money.
The Bottom Line on FIVE Stock
Five Below is the strangest retail story I’ve covered since I left tech for the finance beat a decade ago.
It seems immune to all the common pressures that are crushing other retailers. It has immense loyalty from a group that’s not supposed to even be inside stores. Anderson seems to have a sixth sense about what his customers want, and a unique ability to deliver it.
I seriously wonder what Walmart (NYSE:WMT) would have looked like if it had made Anderson its CEO in 2014 instead of Doug McMillon. He is still 54 and in theory could be lured to another, bigger challenge. If he were, then I’d say sell.
At the time of publication, Dana Blankenhorn directly owned shares in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.