Stock market investors could be forgiven for thinking Five Below (FIVE -2.94%) was stuck six feet under. Shares of the specialty retailer, known for its bargain prices on trendy merchandise targeted to teens, have declined approximately 52% year to date.
Nevertheless, despite a rough first half of 2024, the company reported a strong growth rebound in its latest results with management even hiking full-year guidance. Indeed, the stock has rallied off its lows with multiple indicators pointing to a sustained turnaround.
Let's discuss why Five Below could be a fantastic buy for your portfolio in 2025.
An emerging comeback story
Five Below stands out with its unique concept of selling most items for $5 or less, representing a sweet spot for its customers between typical dollar stores and traditional retailers. The product assortment covers everything pre-teens up to young adults might need with a diverse mix of crafts, tech gadgets, fashion accessories, beauty supplies, toys, and candy.
The brand's popularity is evident across its 1,749 stores nationally -- nearly double from 894 five years ago. On the other hand, a shifting macroeconomic environment in recent years, including inflationary cost pressures since the pandemic, has been a challenge for the company to manage. Weaker-than-expected sales and earnings, particularly at the start of this year, led to expectations getting pulled back and the stock's extreme volatility.
Favorably, the company's third-quarter report (for the period ended Nov. 2) may have helped reaffirm the growth story, which remains supported by overall solid fundamentals including a net cash balance sheet position with zero debt.
Image source: Getty Images.
The key performance metric this quarter was the 0.6% increase year over year in comparable sales. That was the first quarter with positive growth since the fourth quarter of 2023. More impressive was the total net sales revenue, which managed to climb by 15% from last year, propelled by the 18% higher store count over the period as Five Below opened a record 82 locations just this quarter.
Third-quarter adjusted earnings per share (EPS) rose significantly to $0.42 from $0.26 last year as efforts to refresh merchandise mix and optimize the cost structure worked to lift margins. Citing strong early holiday shopping season indications, the company raised its full-year guidance, projecting optimism for the momentum to continue.
Five Below now forecasts 2024 net sales growth between 7.9% and 8.7%, compared to the prior midpoint estimate of under 6%. Similarly, the company is now targeting full-year adjusted EPS between $4.78 and $4.96, well above the prior $4.35 to $4.71 range announced in August. While the new earnings estimate implies an approximate 10% decline compared to 2023, the setup suggests a strong finish to the year.
| Metric | Prior 2024 Estimate | New 2024 Estimate |
| Net sales (in billions) | $3.73 to $3.80 | $3.84 to $3.87 |
| Net sales change (YOY) | 4.8% to 6.7% | 7.9% to 8.7% |
| Adjusted earnings per share (EPS) | $4.35 to $4.71 | $4.78 to $4.96 |
| Adjusted EPS change (YOY) | (19.6%) to (12.9%) | (11.6%) to (8.3%) |
Source: Five Below. YOY = year over year.
What's next for Five Below?
What makes Five Below a compelling investment to me is precisely its aggressive expansion strategy, with the company on track to open 228 stores this year. The understanding is that the cohort of new locations takes some time to ramp up and operate at peak efficiency. This means the company has a runway for comparable sales growth going forward as an earnings tailwind through the next several years.
While 2024 presented challenges, my takeaway is that all the pieces are in place for a more robust 2025, which makes the stock attractive right now. Shares of Five Below are trading at 21 times its full-year consensus EPS as a forward price-to-earnings (P/E) ratio. This level represents a deep discount compared to a three-year average for the earnings multiple closer to 34 suggesting the stock could be undervalued.
The company's ability over the next few quarters to confirm it is back on track toward its growth potential would be a catalyst for the stock to reclaim some of its lost ground.
FIVE PE Ratio (Forward) data by YCharts
Final thoughts
It likely won't be a straight line higher, but I see a good chance Five Below stock will be trading at a higher price by this time next year. The company is proving it can connect with the coveted Gen Z and Generation Alpha demographic, supporting a positive long-term outlook. As long as macroeconomic conditions stay resilient, Five Below is well-positioned to continue generating profitable growth and ultimately reward shareholders.
