If you had invested $10,000 in Five Below (FIVE -2.94%) at its initial public offering (IPO) in 2012, you'd have nearly $40,000 now. That's not a bad long-term return. However, 2024 hasn't been a good year for shareholders. As of this writing, Five Below stock is down 51% year to date.
Several factors contributed to Five Below's uncharacteristically bad stock performance this year. First, sales haven't been as strong as investors would like them to be. The company measures same-store sales for all locations that have been opened for at least 15 months. Through the first three quarters of 2024, same-store sales are down nearly 3% from the same period of 2023, which isn't ideal.
Second, lower profitability has hit Five Below stock, and it's related to stagnant sales. The company's operating expenses have increased faster than sales growth over the past several years. For example, total net sales this year are up 12% to $2.5 billion. But operating cash flow has dropped from $92 million at this time last year to just $67 million this year, a decline of 27%.
Finally, Five Below's business was already posting relatively weak results. But then in July, CEO Joel Anderson abruptly left the company. This resulted in too much uncertainty for investors, causing a more pronounced drop in the stock price.
To sum it up, Five Below stock has dropped 50% in 2024. But here's why I believe the stock could flip the script with gains of 50% in 2025.
Why Five Below's outlook is looking up
If Five Below stock grows revenue and profits improve, the stock will almost certainly go up as well. And both seem like real possibilities in 2025.
First, Five Below expects to have 1,771 locations by the end of its fiscal 2024 (which ends in early 2025). But the company expects to open at least 150 more during 2025, which is better than 8% growth. Moreover, it would be rare for its same-store sales to drop two years in a row. That's why I think it's reasonable to expect them to go up, which means same-store sales growth could add even more to its top-line growth.
Consider that Five Below's third-quarter same-store sales were up almost 1%, whereas management had expected a decline. In short, the rebound could have already started, which means the arrow for 2025 is pointing up.
Furthermore, Five Below expects full-year net income of $240 million to $250 million this year. That will be down from $301 million in 2023. But it would be surprising if the company's profits took a further step back in 2025. The management team has had time to make adjustments and get it back on track.
And speaking of management, Five Below answered questions about the CEO position by hiring Winnie Park, an experienced retail leader, earlier in December. This might help calm investors' nerves. This last component could be key to Five Below's stock performance in 2025. Consider that this stock has usually traded at over 30 times earnings, whereas right now it trades closer to 21 times earnings.
FIVE PE Ratio data by YCharts
Hiring an experienced CEO could help restore confidence in Five Below as an investment, helping its valuation. Assuming it grows its profits at a double-digit rate in 2025 and assuming that its valuation rebounds as investor confidence improves, then Five Below stock could realistically gain 50% or more next year.
As a closing caveat, I would encourage investors to set their sights beyond 2025. After all, a single year is really short in the investing world, and too many unpredictable things could happen. I wouldn't bet the farm that Five Below stock gains 50% next year.
This is why extending a time horizon is important. Five Below still intends to open hundreds of additional locations in coming years -- growth is expected far beyond 2025. And considering stores have a short payback period and the company has zero debt, I predict that those profits will eventually be returned to shareholders in a meaningful way.
All of this is to say that I believe Five Below is in a good position to post big gains in 2025. But even if the gains don't materialize in 2025, the long-term opportunity here will still be worth the wait.
