I’m pretty sure this is probably the first time you’ve heard of the NYSE-listed Five Below Inc. (NYSE:FIVE) – incorporated in Pennsylvania in January 2002, the company is in the business of offering a broad range of trend-right, high-quality merchandise with its target customers being tween and teen customers, with most of its products priced at US$5.00 and below (hence the name ‘Five Below’.)
Five Below Inc. offers products under the following 9 categories:
(i) Style – consists of accessories such as novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, along with ‘attitude’ t-shirts;
(ii) Room – products under this category include everything you’ll find in a teen or tween’s bedroom, such as glitter lamps, posters, frames, fleece blankets, plush items, pillows, candles, incense, lighting, and novelty decor;
(iii) Sports – where you’ll find an assortment of sports balls, team sports merchandise and fitness accessories, such as include hand weights, jump ropes, and gym balls;
(iv) Tech – products you’ll find under this category include accessories for the mobile phone (they call it ‘cell phone’ in the United States) and tablet, audio, and computers;
(v) Create – consisting an assortment of craft activity kits, as well as art and craft supplies such as crayons, markers, and stickers;
(vi) Party – as the name suggests, products you’ll find here include products you’ll find in a party, such as party good, decorations, gag gifts, along with greeting cards;
(vii) Candy – products under this category include classic and novelty candy bars, as well as gum and snacks;
(viii) Now – where products consists of seasonally-specific items used to celebrate and decorate for events such as Christmas, Easter, Halloween, and St. Patrick’s Day.
As at the end of financial year 2020/21 on 30 January 2021, the company have a total of 1,020 stores across 38 American states.
One of the reasons why I like the company is because it has an easy-to-understand business model (I’m sure you’ll agree with me on that one.) In the rest of today’s post, you’ll read about my analysis of its financial performance and debt profile over a period of 7 financial years (between FY2014/15 and FY2020/21; the company has a financial year end on the Saturday closest to 31 January), and also some of the key performance statistics for the first quarter of FY2021/22 (ended 01 May 2021) compared against the same time period last year (i.e. Q1 FY2020/21 ended 02 May 2020.)
Also, before I begin, in case you’re wondering why I have omitted dividend payouts, that’s because the company did not declare any in all of the 7 years I have looked at (so if you’re someone who is looking to invest in a company that pays out a dividend, then it is not for you…)
Financial Performance
In this section, I’ll be taking a look at the company’s total revenue and net profit, gross and net profit, as well as its return on equity (or RoE) over a 7-year period:
Total Revenue and Net Profit (USD’mil):
| FY2014/15 | FY2015/16 | FY2016/17 | FY2017/18 | |
| Total Revenue (US$’mil) | $680m | $832m | $1,000m | $1,278m |
| Net Profit (US$’mil) | $48m | $58m | $72m | $102m |
| FY2018/19 | FY2019/20 | FY2020/21 | ||
| Total Revenue (US$’mil) | $1,560m | $1,847m | $1,962m | |
| Net Profit (US$’mil) | $150m | $175m | $123m |
Its total revenue saw year-on-year (y-o-y) improvements every single year over the past 7 years, growing at a compound annual growth rate (or CAGR) of 29.2%. Meanwhile, apart from the most recent financial year 2020/21, all the other 6 financial years saw its net profit went up on a y-o-y basis – over a 7-year period, the company’s net profit grew at a CAGR of 23.0%.
Gross and Net Profit Margin (%):
The following is Five Below’s gross and net profit margins over the last 7 financial years I have computed:
| FY2014/15 | FY2015/16 | FY2016/17 | FY2017/18 | |
| Gross Profit Margin (%) | 35.0% | 35.1% | 35.7% | 36.2% |
| Net Profit Margin (%) | 7.1% | 7.0% | 7.2% | 8.0% |
| FY2018/19 | FY2019/20 | FY2020/21 | ||
| Gross Profit Margin (%) | 36.3% | 36.5% | 33.2% | |
| Net Profit Margin (%) | 9.6% | 9.5% | 6.3% |
Over the past 7 financial years I have looked at, personally, I felt that apart from in FY2020/21, where its businesses were badly affected in the first quarter with all of its stores having to temporarily shut as a result of lockdown measures in the United States, I’m sure you agree with me as well that its gross and net profit margin growth in the remaining years have been resilient.
Return on Equity:
In layman terms, Return on Equity, or RoE, is a measure of profitability (in percentage terms) for every dollar of shareholders’ money the company uses in its businesses.
The following table is Five Below’s RoE which I’ve computed over the past 7 financial years:
| FY2014/15 | FY2015/16 | FY2016/17 | FY2017/18 | |
| Return on Equity (%) | 27.6% | 23.8% | 21.8% | 22.2% |
| FY2018/19 | FY2019/20 | FY2020/21 | ||
| Return on Equity (%) | 24.4% | 23.0% | 13.9% |
If there’s one thing that is not so ideal as far as its financial performances are concerned, it will be its RoE – where the growth over the last 7 years have fluctuated.
Debt Profile
Apart from its financial performance, another area I focus my attention on when I study about a company is its debt profile – and if you’re not already aware, my preference is always towards companies that have little or no debt, as well as one that’s in a net cash position (preferably.)
In that regard, its good to note that the company does not have any borrowings over the past 7 years, and as such, it has remained in a net cash position:
| FY2014/15 | FY2015/16 | FY2016/17 | FY2017/18 | |
| Net Cash (US$’mil) | $63m | $53m | $76m | $113m |
| FY2018/19 | FY2019/20 | FY2020/21 | ||
| Net Cash (US$’mil) | $252m | $202m | $269m |
Over a 7-year period, the company’s net cash position have improved in all but 2 financial years (it saw declines in FY2015/16, as well as in FY2019/20.) Another thing I like is that, in the latest financial year 2020/21, its net cash position managed to record improvements despite the pandemic, where its business operations were affected due to temporary closures in the first quarter of the year.
Key Financial Statistics for Q1 FY2021/22 vs. Q1 FY2020/21
In the table below, you will find some of the key performance statistics reported by the company for the first quarter of the financial year 2020/21 ( ended 01 May 2021) compared against the same time period last year (i.e. Q1 FY2020/21 ended 02 May 2020) to find out whether it has improved or deteriorated:
| Q1 FY2020/21 | Q1 FY2021/22 | % Variance | |
| Total Revenue (US$’mil) | $201m | $598m | > +100.0% |
| Net Profit (US$’mil) | -$51m | $50m | > +100.0% |
| Gross Profit Margin (%) | 10.4% | 33.6% | N.A. |
| Net Profit Margin (%) | N.M. | 8.4% | N.A. |
| Cash & Cash Equivalent (US$’mil) | $70m | $84m | +20.0% |
| Total Borrowings (US$’mil) | – | – | N.A. |
| Net Cash/ Debt (US$’mil) | +$70m | +$84m | +20.0% |
Coming from a low base in the same time period last year, where all of Five Below’s retail outlets had to temporarily shut due to lockdowns implemented, its no surprise there to see that the company’s top- and bottom-line have recorded significant improvements (as businesses during the quarter under review have more or less resumed its normal operations.) The improvements can also be attributed by contributions from new store openings.
Another thing to note is that the company have zero borrowings for the quarter under review, and that its net cash position have further improved compared to the same time period last year.
Closing Thoughts
An easy to understand business, along with a growing revenue and net profit over the years, plus the fact that the company has zero debt, with its net cash position improving in the same time period I have looked at, are reasons why Five Below caught my investment eye.
The only thing which I find not so ideal about the company would be its inconsistent RoE growth over the last 7 years I have looked at, and also the fact that the company’s management did not pay out any dividend.
Finally, as to whether or not at its current share price of US$225.11 at close on 20 August 2021 is considered ‘cheap’ or ‘expensive’ – its current valuations (based on its current share price) compared against its 7-year average which I’ve calculated is as follows:
| Current Valuations | 7-Year Average | |
| P/E Ratio | 56.6 | 42.7 |
| P/B Ratio | 12.5 | 9.0 |
As both its current P/E and P/B ratios are above its average, its current share price is considered ‘expensive’ at the moment.
With that, I have come to the end of my review of Five Below. I do hope you’ve found the contents I’ve presented above useful. Also, do take note that everything you’ve just read is purely for educational purposes only, and that they do not represent any buy or sell calls for the company’s shares. As always, you’e strongly encouraged to do your own due diligence before you make any investment decisions.
Disclaimer: At the time of writing, I am not a shareholder of Five Below Inc.
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