With consumer prices remaining uncomfortably elevated, many households seek discounts. At the same time, they want to keep their pride intact. Fortunately, that’s where retailer Five Below (NASDAQ:FIVE) comes into play. Filling an important niche in the consumer discretionary space, Five Below may be the most sensible retailer today during tough times. I am bullish on FIVE stock.
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Not Your Average Discount Dollar Store
As if historically high inflation wasn’t enough of a problem for consumers, they must also contend with the government response, namely, the Federal Reserve and its attempt to curb rising prices with higher benchmark interest rates. So far, the unique circumstances of the post-pandemic new normal created a situation of high prices and high borrowing costs. Therefore, discount dollar stores should thrive in this environment.
To be sure, they’re doing just that. For example, shares of Dollar Tree (NASDAQ:DLTR) popped up over 11% on a year-to-date basis. This performance beats that of the benchmark S&P 500 (SPX) during the same period. However, even though FIVE prints out a weaker performance, gaining 7.7% since the January opener, it arguably presents a more credible upside narrative, moving forward.
Primarily, that’s because Five Below conducts business a bit differently than traditional discount dollar stores. Rather than offering products priced exactly at a buck, Five Below offers most of its products at $5 or below, hence the brand name. As well, the company offers a small assortment of products priced between $6 to $25.
This pricing diversity is important for two reasons. Number one, the decision obviously expands the total addressable market. Sure, the main purpose centers on catering to families on a budget. However, with diverse product offerings, many folks can pop in looking for a sweet deal.
Second, Five Below gets rid of the dingy reputation that discount dollar stores unfortunately carry. These stores are brighter, cleaner, and overall more attractive than your typical dollar store. Organically, the superior ambiance should drive more revenue to the cash registers.
Cynically, FIVE Stock Should Rise in Relevance
Another reason to maintain a bullish view on FIVE stock centers on likely rising relevance. It’s a cynical perspective, no doubt about it. However, with the numerous headwinds that the consumer economy faces – and possibly more on the way – Five Below makes sense. Appealing to the desperate and those that want to save face, the company hits the important notes.
Most notably, the technology sector layoffs that made headlines earlier this year (and continue to do so) have spilled over into other sectors. In addition, as the Fed maintains an overall hawkish monetary policy, recession risks only rise. Put another way, society may incur more unemployed people, which may bode well for FIVE stock.
Further, with multiple regional banks failing – and more possibly about to collapse – the circumstance doesn’t look great for everyday households. True, as TipRanks contributor Yulia Vaiman alluded to, mainstream entities continue to hold to the “everything’s fine” narrative. However, this framework doesn’t seem realistic.
Banks don’t just fail, especially in the U.S. However, as more shocks materialize, the matter might cynically bolster FIVE stock and the underlying business.
The Financials Tell the Tale
It’s not just that Five Below seems well suited for the presently troubled economy. Rather, the financials tell the tale.
Back in the fiscal year ended January 2021, Five Below posted revenue of $1.96 billion, up 5.94% against the prior year’s result of $1.85 billion. In the following year, the company rang up sales of $2.85 billion, a whopping 45.4% annual increase. If that wasn’t enough, in the fiscal year ended January 2023, the retailer generated $3.08 billion, 8% higher.
In the quarter ended January 2023, Five Below’s revenue was $1.12 billion, a 12.4% lift against the year-ago quarter’s tally of $996.33 million. The company continues to ride from strength to strength as economic conditions become more troubled. Frankly, investors should expect the formula to continue.
Is FIVE Stock a Buy, According to Analysts?
Turning to Wall Street, FIVE stock has a Strong Buy consensus rating based on 14 Buys, one Hold, and zero Sell ratings. The average FIVE stock price target is $225.71, implying 22.35% upside potential.
The Takeaway: FIVE Stock Offers Discounts for All
When financial hardships fall on households at scale, the natural tendency is for discount retailers to thrive. However, Five Below fills an important niche: it offers much-needed discounts but without resorting to a low-cost leader business model that cuts corners wherever possible. Instead, it offers fun, judgment-free discounts, making FIVE stock a compelling market idea.
