With both the S&P500 And Nasdaq composite index In record territory, investors may be surprised to learn that not all companies have benefited from the market’s strong rally. Five below (NASDAQ: FIVE) falls into the category of underachievers.
As of this writing, Five Below shares are down a whopping 46% through 2024. Does this mean it’s time to buy this? stock growth on the dip?
Disappointing results
After the last two times Five Below reported its quarterly results, the stock took a huge hit. Most recently, the company provided an update on its first-quarter fiscal 2024 results. The only positive may have been the 11.8% increase in net sales during the 13-week period ending May 24.
Investors likely sold the stock because they may have been disappointed by the fact that Five Below’s sales in the same store fell by 2.3% in the first quarter. And to make matters worse, executives believe this metric will decline 3% to 5% for the full fiscal year.
The company is facing some pressure in the current macro environment. People visit the stores less often because fewer comparable transactions took place in the quarter. And these customers are more selective in how they spend their money, especially after an extended period of above-average inflation.
Growth potential
Despite the latest challenges in boosting same-store sales, investors can be somewhat optimistic. That’s because historically the company has still been able to grow its revenue and profits at healthy rates. It’s easy to get caught up in the recent financial data, but it’s smart to zoom out and focus on the bigger picture.
Expanding the store base has been management’s main strategic objective. After opening 61 new stores in the first quarter, there are now 1,605 Five Below locations. This figure is significantly higher than the 552 stores seven years ago.
That growth rate is impressive. However, the leadership team has its sights set on a loftier goal. They believe the company will have opened at least 3,500 stores in the US by 2030. This implies an expansion of approximately 118% compared to the current footprint. California, Texas, Florida, New York and Pennsylvania are the five states cited as having the most growth potential. There is no doubt that if Five Below achieved its store goal, sales and profits would be significantly higher than they are today.
But investors shouldn’t just assume that a management team’s long-term goals, no matter how encouraging they seem, will automatically materialize. There are risks to consider that could get in the way. In this case, the intensely competitive nature of retail is something we cannot ignore.
Five Below is fighting to attract shares of consumer wallets against major retailers such as Walmart, AmazonAnd Dollar general. That will not be an easy task. But if historical trends are any indication, investors may want to give Five Below the benefit of the doubt.
Depressive appreciation
Thanks to the massive share price drop, shares are trading at their lowest valuation in the past three years. The shares can be purchased at a price-earnings ratio (P/E) of 21.5. This represents a huge discount to the price-to-earnings ratio of around 50 that the stock had at the end of June 2021.
Clearly the market for this company has soured. But for investors who can look past the latest problems and have a time horizon that spans the next five years, there appears to be an opportunity here. Buying shares of Five Below today could be a smart financial decision.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds and recommends positions in Amazon and Walmart. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
A 46% decline in 2024: should you buy this growth stock during the dip? was originally published by The Motley Fool
