The key to US retail success can be summed up with the two S’s: spinners and slime.
As its name suggests, Five Below sells items for $5 and under. Adults may be unfamiliar with the brand but the youth-focused discount chain has emerged as one of the brightest stars in the retail sector over the past 12 months.
Shares are up 53 per cent so far this year. The price hit a record $103.99 on Thursday, lifting the company’s market valuation to $5.6bn, or five times the combined market cap of department store operators Sears and JCPenney.
Unlike traditional discounters Dollar General or Dollar Tree, which sell cheap staples such as bread, soda and cleaning products to budget conscious households, Five Below chases pocket-money. It peddles $3 slime and $5 giant unicorn pool floaties to teens and pre-teens. This has turned out to be something of a retail sweet spot. A bet on fidget spinners helped Five Below deliver a 28 per cent rise in sales during its most recent fiscal year. Same-store sales were up 6.5 per cent — a feat few were able to match in the bombed out US retail sector.
Five Below’s merchandise mix, one-third of which are in-house exclusives, helps protect its sales from Amazon. Its fortunes have also been helped by the demise of Claire’s and Toys R Us.
But $100 is a steep share price, even for a cash generative company without debt — a rare quality in retail.
Valuation close to 25 times 2019 earnings is too high. TJX Companies, the highflying operator of off-price retailer TJ Maxx, trades at 17 times forward earnings. Dollar Tree at just 13 times.
Five Below operates 630 stores and aims to open another 125 this year. That is still not enough to justify the share price. Even the company’s chief executive concedes 2017 was an exceptional year. Five Below’s neck-breaking pace of growth has a time limit.
If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.