Store opening, digital push make Five Below (FIVE) an attractive bet

Discount stores became sought-after shopping destinations after the virus crisis weighed on spending power and left many people financially stressed. When the movement restrictions caused widespread store closures, retailers with efficient e-commerce platforms took advantage of the new shopping behavior to boost sales. After suffering a major slump in early 2020, Five Below Inc. (NASDAQ: FIVE) bounced back quickly and ended the year on an upbeat note aided by impressive holiday sales.

The stock climbed to a record high this week and maintained the momentum after the company reported strong fourth-quarter results. market watchers are optimistic about the uptrend continuing and the stock breaching the $200-mark this year, offering a unique investment opportunity. The current rating on the stock is strong buy.

Digital Shift

Despite competitive pricing, the discount retailer experienced a slowdown after the onset of the pandemic, mainly due to the absence of a full-fledged omnichannel platform. But soon things changed for the better, and comparable sales returned to the positive territory in the second half, after plunging 52% to an all-time low in the early months of 2020. Of late, e-commerce sales have grown at a faster pace than brick-and-mortar revenue. There is a strong contribution from COVID protection products, thanks to the integration of the Hollar.com assets and the launch of the Five Below app.

Growing Footprint

Aggressive store reopening and expansion of multichannel capabilities, with focus on value products, should help the company retain the current trend because it is estimated that the new shopping habit would stay in the foreseeable future. Going forward, the growth strategy will be based on expanding the store network, with a target of raising the number of units to 2,500 in the domestic market.

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Read management/analysts’ comments on Five Below’s Q4 results

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From Five Below’s Q4 2020 earnings conference call:

“Five Below has a long history of successfully navigating difficult times whether economic or other and we believe that value never goes out of style. We remain laser-focused on the customer and delivering our promise in a safe shopping environment. We work back from our customers to find those got-to-have-it trend-right products at extreme value and that will never change. With Easter just around the corner on April 4, we’re really excited about our offering and to be a destination for Easter basket stuffers including gifts, candy, and all else that brings joy to our customers and helps them celebrate the holidays.”

Comps Surge

With most of the company’s stores back in operation currently, comparable sales bounced back to a record high in the fourth quarter, registering a 13.8% year-over-year increase. As a result, sales grew by a fourth to $859 million, driving the bottom-line up by 18% to $170 million. Despite the management canceling its holiday campaign to ensure safety, the numbers came in above the consensus forecast. The company operated 1,020 stores at the end of 2020, which is slightly above the pre-COVID levels.

Stock Performance

The shares closed the last session sharply higher after the company released impressive financial results, but retreated later and traded lower early Thursday. There was a two-fold increase in Five Below’s market value in the past twelve months.