FIVE Below: Looking at 2014 and beyond

Hi all,

Five is one of my smaller positions, but I have been studying it in some detail to see if it deserves more of my investment funds.

I came across Five through Hidden Gems - this is a newsletters I actually like a lot for the small cap ideas it provides. If you are interested in small caps, a Hidden Gems subscription is definitely worth considering. Sometimes, you get them on a deal, like $49/year or so …

Anyways, Five’s valuation has come down a fair bit. It’s come down because earnings have gone up and the multiple the market was assigning has come down, but the growth hooks are still intact (at least it appears so to me). This is an interesting one, and has the potential to be a big winner over the next 5-10 years.



Most recent presentation (13 Jan 2015):…

About Five Below

Five Below is a retailer focussed on serving the teen and preteen market with what it calls “extreme value” merchandise all in the $1 to $5 price range. Five carries a variety of merchandise including porting goods, games, fashion accessories and jewelry, collectibles, bath and body items, candy and snacks, room décor and storage, stationery and school supplies, video game accessories, books, dvds, smartphone accessories, and various seasonal items. The concept marries trendy with value and serves a demographic that’s generally considered to be underserved.

Five Below was founded by David Schlessinger and Tom Vellios in 2002. The company IPO’ed in 2012, and Vellios was its CEO. More recently, Five Below hired Joel Anderson from and Joel took over from Vellios as CEO, with Vellios stepping into the Executive Chairman role. David Schlessinger remains a director of Five Below.

Summary of Q4 2014 Results

o Net sales increased by 24.4% to $263.8 million from $212.0 million in the fourth quarter of fiscal 2013; comparable store sales increased by 3.2%.

o Operating income increased to $52.9 million from $40.3 million in the fourth quarter of fiscal 2013. Adjusted operating income, which excludes the impact of the founders’ transaction in the fourth quarter of fiscal 2013 (see GAAP to Non-GAAP reconciliation table), increased to $52.9 million from $41.9 million in the fourth quarter of fiscal 2013.

o The Company opened one new store and ended the quarter with 366 stores in 21 states. This represents an increase of 20% from the end of the fourth quarter of fiscal 2013.

o GAAP diluted income per common share was $0.61 compared to $0.45 in the fourth quarter of fiscal 2013. Adjusted diluted income per common share, which is adjusted net income on an adjusted diluted weighted average shares outstanding basis in the fourth quarter of fiscal 2013 (see GAAP to Non-GAAP reconciliation table), was $0.61 per share compared to $0.47 per share in the fourth quarter of fiscal 2013.

o Cash position: Ended Q4 with $63M cash and $20M in revolving credit.

o Inventory: Inventory at the end of the year was $115.7 million as compared to $89.4 million at Q4 2013.

Management commentary

Joel Anderson (CEO) started by giving some colour on Q4 2014, then went on to give some colour on 2015 and 2016, essentially giving a bit of a longer-term look into how FIVE is going to grow and scale.

  • Q4 delivered sales of $264M, or a 24% YoY growth, driven by strong performance of both comp and non-comp stores. Same store sales came in at 3.2%, and this marked the 35th straight quarter of positive comps. Beauty, toy, candy, and frozen merchandise did very well, while craft and tech didn’t do as well.
  • Marketing improvements were highlighted as an area where additional work might actually help increase brand awareness. Q4 also saw increases in gross margins. Anderson noted that new stores have been performing very well, delivering sales of around $1.9M and well ahead of their expectations.
  • He also noted that new stores are paying for themselves in less than a year, which I thought was great.
    This is one of the beauties of the FIVE model, low cost, quick payback stores. Further, Anderson noted that the new stores have been performing well across different geographic area. Combine consistency with a good store model and it seems we have a winning formula at hand.

Strategic Priorities for 2015

  1. Push the new store model. FIVE ended 2014 with 366 stores. They ultimately see having as many as 2000 stores. They expect to open 70 stores in 2015. Joel said the following about the stores opened in 2014:
    “Our new stores have consistently delivered first year four-wall EBITDA margins in the low 20% range driving a payback on our investment of less than one year, which honestly is among the best I’ve ever seen for any retailer. And the class of 2014 is on track to be another strong class in terms of year one sales and EBITDA performance.”
  • Class of 2014 performed exceptionally well, across both new and old markets
  • They plan to open take on at least one new state in 2015 (Florida was noted) and expand existing markets such as Texas and Alabama.
  • They seem to focus on having a 20% store addition rate, and declared intention of opening 85 stores in 2016.
  1. Merchandising, in-store, and web experience. One of the USPs of FIVE is the “new and cool” feel. They have a merchant team in place, led by Michael Romanko, and have made organisational changes to streamline the buying and placement of merchandise. E.g., there is a new Easter layout and merchandising plan. They also continue to focus on making their stores a fun and customer friendly place.

  2. Talent retention. It was noted that they now have a HR SVP (came from Dollar General), realising that the growth and significant opportunities ahead requires hiring the right people and retaining talent. This seems like a good structural development.

  3. Investing in infrastructure, systems, and processes. Anderson described 2015 as an investment year. He highlighted the following:
    o Construction of new East Coast distribution facility in NJ is on track. This facility along with the Olive Branch Mississippi facility can support 750 stores in the Northeast, Mid-Atlantic and South Central regions of the United States.
    o They are looking at overseas containers consolidation (i.e., looking at other aspects of the supply chain)
    o They are also making process and systems improvements such as new merchandising planning and financial systems

With respect to operating leverage, the following was stated:
“With sales growth in the 20 plus range there is always going to be some level investment we will continue to make, but in 2016 and beyond, the pace of investment will moderate and we expect to see operating leverage emerge as we anniversary many of the current investments and systems, infrastructure and people.”

  1. Marketing improvements. They are going to start targeting their customers via mediums that best reach them, i.e, they plan to do more with digital and social media advertising. Anderson also said that their TV testing has yielded results (with comp improvements compared to the average) in the markets they have tried it out and they plan to expand on it in 2015. Anderson noted that while FIVE caters to the teen and preteens it is a concept that can cater to other types of customers (e.g., parents etc), and their demographic is increasingly looking to interact digitally.

They are looking to launch an e-commerce service in the next 2 years, which in his opinion will complement the in-store experience. There was an interesting question from the Jeffries analyst about e-commerce. The Jeffries analyst noted that one of the charms of FIVE was that the price point was low enough to make the concept potentially “Internet resistant” so he wanted to know what the plans were with going for e-commerce in 2016. To this, Anderson noted that they still are primarily focusing on store growth and that they think the concept still falls well within the “Internet resistant” category but their management team believes that their core audience is “digital native” so tapping that opportunity makes sense. E.g., they might look to have complementary catalogues b/w the stores and e-commerce offerings but this is something they didn’t go into much detail.

Marketing was about $20M for 2014, is expected to go up in 2015 but the rates as percentage of sales is expected to stay near about the same, roughly 3% of sales.

2015 and 2016 Guidance

The Q1 2015 guidance is weak primarily because of weather effects (Feb and March snow storms). Comps of 1-2%versus comps of 6.2% in Q1 2014. Net sales of $151M, GAAP EPS between $0.06 and $0.07.

Overall, they are guiding for 20% sales growth in 2015 and 3% comps, and Anderson noted that they are being conservative about Q4 in their guidance because they don’t know how their planned merchandising and marketing will effect sales in the second half of 2015; Q4 is the big quarter for FIVE. Anderson expects revenue growth of low 20% in 2016 but also expects to see operating leverage kick in, essentially expecting to see some of the benefits of the investments being made in 2015. The end result, in Anderson’s view, would be a 25% growth in earnings. He did note that they have already factored in their 2016 estimates the costs for launching e-commerce and also the costs associated with various systems/processes costs.

With respect to 2015 CapEx investment, the CFO noted that they expect to spend about $56M for opening 70 new stores (split 60/40 b/w first and second half), distribution centres (includes $20M for new east coast distribution facility), and corporate infrastructures. We should note that the distribution centres are more or less one time expenses; with this expansion east coast is more or less set.

Some Quick and Dirty Valuation

Quarter	Sales($K)   CoS	  Comps # stores GAAP-EPS Non-GAAP EPS	QoQ Rev Growth
Q4 14	$263,756    $157,428	3.2%	366	$0.61	$0.61	24.43%
Q3 14	$137,979    $96,356	1.5%	365	$0.06	$0.06	24.59%
Q2 14	$152,479    $101,574	3.2%	353	$0.15	$0.15	30.23%
Q1 14	$126,004    $87,069	6.2%	323	$0.06	$0.07	31.80%
Q4 13	$211,964    $127,795	0.3%	304	$0.45	$0.47	
Q313	$110,747    $76,513	9.0%	304	$0.03	$0.05	
Q2 13	$117,087    $77,687	6.6%	276	$0.07	$0.11	
Q1 13	$95,604	    $65,391	4.2%	258	$0.03	$0.05	

TTM GAAP EPS = $0.89
TTM Sales = $680M
Using price of $35.24 (27 March 2015 close), I get TTM PE = 39.6 and TTM PS = 2.8. Using the 2015 guidance (sales = $820M, eps = $1.04), I get PE NTM = 33.9 and PS NTM = 2.3. This looks pretty reasonable to me, given the 2015 earnings are muted by investments in distribution centre and some on systems & processes, as noted above. I would expect to see operating leverage kicking into action in 2016.

Finally, the Growth Hook

I like how the company has positioned itself and how they are growing the store footprint.

Five is really a merchandise driven company. They have a few usual items and then mostly sell trendy items. They also have a product development team in-place to work out what to sell. As the store footprint increases, the increased scale allows for improved product sourcing, and improvements in supply chain and distribution. Five has been in the market since 2002 and has steadily grown its footprint opening 50, 52, 60, and 62 stores in 2011, 2012, 2013, and 2014, respectively. That’s pretty consistent growth, and it shows the concept has staying power and is able to deal with competition (Dollar Stores, Target, Walmart etc). What’s cool is that the cost of a new store is not big and a new store’s payback period is about 1 year. That’s excellent unit economics. If we look at where Five is currently operating, we see that there’s large swathes of the US where there are no Five Below stores (e.g., West Coast , central US etc). As the store base grows, the company will be get more operating leverage, which will increase earnings at a much faster rate than we are currently seeing.


Sometimes, you get them on a deal, like $49/year or so

how about $39.50 a year?…

No brainer at that price.


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While the concept of Hidden Gems seems appealing, I have to say that the primary benefit I have gotten from the other services to which I belong are the boards associated with those services, not the newsletters and e-mail. Does Hidden Gems have good boards not available elsewhere that make it worth the price?

Does Hidden Gems have good boards not available elsewhere that make it worth the price?

The HG boards were, at one time, some of the best and most active. From what i understand, recent years have been quieter, but Vish has been trying to get them fired up again.

I only recently returned to HG after a pretty long absence - i see a lot of value over there personally.

Actually, Jim Gillies (TMFCanuck) posts on the PRAA board alone are worth $39.50 a year…

And, as always, if its not to your liking, you can get all of your money back if you leave before you are 30 days in…


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That sure is a very good deal. The boards are quieter compared to say Stock Advisor but the quality of posts is excellent. Over at Stock Advisor, we see a lot of “oh that stock is not doing well … Why? Should I get out” posts because the latter appeals to a broader audience. Over at HG, I think the posts are more nuanced and when things really matter (like the recent LL crisis) the quality of posts and coverage is simply astounding.

I am a fan of the service. All I need is a few good picks each year, which I do get from there.



All I need is a few good picks each year, which I do get from there.

That’s the real bottom line, of course. I don’t expect to get that from the newsletters, except accidentally. It is the discussion and give and take which brings me conviction.

I joined HG recently, using Greg’s link. Thanks!!
In the short while I’ve been with HG, I think they are not as shy about pulling the the trigger on selling a stock as RB is.

Another of the newsletters is also recommending FIVE.