Five Below (FIVE)

Discount retailer Five Below (NASDAQ:FIVE) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 19.5% year on year to $970.5 million. On top of that, next quarter’s revenue guidance ($985 million at the midpoint) was surprisingly good and 3.7% above what analysts were expecting. Its non-GAAP profit of $0.86 per share was 3.3% above analysts’ consensus estimates.

Company Overview

Often facilitating a treasure hunt shopping experience, Five Below (NASDAQ:FIVE) is an American discount retailer that sells a variety of products from mobile phone cases to candy to sports equipment for largely $5 or less.

Discount retailers understand that many shoppers love a good deal, and they focus on providing excellent value to shoppers by selling general merchandise at major discounts. They can do this because of unique purchasing, procurement, and pricing strategies that involve scouring the market for trendy goods or buying excess inventory from manufacturers and other retailers. They then turn around and sell these snacks, paper towels, toys, clothes, and myriad other products at highly enticing prices. Despite the unique draw and lure of discounts, these discount retailers must also contend with the secular headwinds of online shopping and challenged retail foot traffic in places like suburban strip malls.

Retail competitors include TJX (NYSE:TJX), Urban Outfitters (NASDAQ:URBN), and Ollie’s Bargain Outlet (NASDAQ:OLLI).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $4.04 billion in revenue over the past 12 months, Five Below is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers. On the bright side, it can grow faster because it has more white space to build new stores.

As you can see below, Five Below’s sales grew at an impressive 16.3% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new stores and expanded its reach.

This quarter, Five Below reported year-on-year revenue growth of 19.5%, and its $970.5 million of revenue exceeded Wall Street’s estimates by 1.3%. Company management is currently guiding for a 18.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9.9% over the next 12 months, a deceleration versus the last six years. Still, this projection is commendable and indicates the market sees success for its products.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Five Below operated 1,826 locations in the latest quarter. It has opened new stores at a rapid clip over the last two years, averaging 15.6% annual growth, much faster than the broader consumer retail sector. This gives it a chance to scale into a mid-sized business over time.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Five Below’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. Five Below should consider improving its foot traffic and efficiency before expanding its store base.

In the latest quarter, Five Below’s same-store sales rose 7.1% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Five Below’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 35.4% gross margin over the last two years. That means for every $100 in revenue, $64.64 went towards paying for inventory, transportation, and distribution.

Five Below produced a 33.4% gross profit margin in Q1, in line with the same quarter last year and exceeding analysts’ estimates by 0.8%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Five Below has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 9.3%, higher than the broader consumer retail sector.

Analyzing the trend in its profitability, Five Below’s operating margin decreased by 2 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Five Below generated an operating margin profit margin of 5.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Five Below’s full-year EPS grew at a solid 24.8% compounded annual growth rate over the last five years, better than the broader consumer retail sector.

In Q1, Five Below reported EPS at $0.86, up from $0.60 in the same quarter last year. This print beat analysts’ estimates by 3.3%. Over the next 12 months, Wall Street expects Five Below’s full-year EPS of $5.30 to shrink by 12%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Five Below has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 4.3% over the last two years, better than the broader consumer retail sector.

Taking a step back, we can see that Five Below’s margin expanded by 4.8 percentage points over the last year. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Five Below’s free cash flow clocked in at $96.45 million in Q1, equivalent to a 9.9% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Five Below historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.1%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Five Below reported $624 million of cash and $1.98 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $555.5 million of EBITDA over the last 12 months, we view Five Below’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $4.21 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Five Below beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad it raised its full-year revenue and EPS guidance, though the EPS outlook still fell short of Wall Street’s estimates. Zooming out, we think this was a mixed quarter. The market seemed to be hoping for more, and the stock traded down 2.5% to $118.01 immediately after reporting.

Updated: June 19, 2025 at 10:37 PM EDT

Before making an investment decision, investors should account for Five Below’s business fundamentals and valuation in addition to what happened in the latest quarter.

Five Below isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was impressive over the last six years, it’s expected to deteriorate over the next 12 months and its mediocre ROIC lags the market and is a headwind for its stock price. And while the company’s new store openings have increased its brand equity, the downside is its brand caters to a niche market.

Five Below’s P/E ratio based on the next 12 months is 26.4x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $130.17 on the company (compared to the current share price of $123.18).