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Big Growth Potential in Five Below

By Tom Taulli
IPO Playbook

Teen retailer Five Below (NASDAQ:FIVE) came public in mid-July at $17 and quickly shot up to $40. But since then, the shares have come down to about $29. True, the valuation is still a bit frothy, with a forward price-to-earnings ratio of 42. But the company’s growth potential remains strong.

As the name implies, Five Below sells its apparel at $5 or lower. The company uses a sophisticated sourcing infrastructure as well as opportunistic purchases of excess inventories, focusing on maximizing sell-throughs. Each store location has sections that are divided into “worlds” like Style, Party, Candy and Seasonal.

The formula has worked out quite well — a new store location has a payback period of less than one year.

So it should be no surprise that Five Below has been on a tear. From fiscal 2009 to 2011, net sales grew at an average rate of 54.1% and operating income grew by 95.3%. Comparable-store sales growth has also been strong, coming to 10.4% in the latest quarter.

Five Below has 199 locations, most of them on the East Coast — there is much more room for expansion. Indeed, the company plans to expand its store base to more than 2,000 locations over the next two decades.

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