Report
Zain Akbari
EUR 850.00 For Business Accounts Only

Morningstar | Although Competition Is Intense, Five Below Still Has Significant Room for Growth

Five Below's strong management team has generated consistent returns by leveraging a differentiated concept and prudent expansion strategy. The company should have ample room to expand profitably, particularly as its nimble supply chain and distribution network are well-suited to meeting the ever-changing demands of its customers (preteens, teenagers, and their money-wielding parents). However, we do not believe the firm has developed a sustainable competitive edge. Competition for discretionary dollars spent on younger Americans is fierce and widespread, coming from not just other retailers but also entertainment providers (including mobile apps), and we suspect the need to consistently provide a high level of value at a low price will limit margins despite burgeoning operating leverage.Five Below's assortment offers its young target clientele a wide variety of items in a tailored store environment while giving their parents a measure of cost-certainty, a concept we believe should remain attractive to shoppers under a range of economic scenarios. With appeal to a wide variety of consumers, we anticipate the concept should translate well to new markets as the chain grows toward its 2,500-unit target (from 750 at the end of fiscal 2018).With around 60% of items priced at or below $3 and the average store transaction totaling around $15, we believe Five Below's physical locations fulfill orders more economically than competing digital sellers can on an item-for-item basis, considering shipping costs. Still, online retailers' growth is boosting their distribution cost leverage and closing the gap, and as we estimate that many of Five Below's target households have access to an Amazon Prime membership, the threat of further digitization looms. Competitive pressure also comes from physical rivals, including mass merchandisers that are dedicating aisles to items priced at a given dollar amount or less. Although we believe that Five Below's emerging scale and targeted store experience should help offset margin pressure, the crowded landscape will require management to maintain the high level of execution that it has exhibited despite changing customer demands.
Underlying
Five Below Inc.

Five Below is a retailer providing a range of merchandise targeted at the tween and teen demographic. The company provides an assortment of products, all priced at $5 and below, including select brands and licensed merchandise across eight worlds: Style, Room, Sports, Tech, Create, Party, Candy and Now. The company operates in states that include Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Massachusetts, New Hampshire, West Virginia, North Carolina, New York, Connecticut, Rhode Island, Ohio, Illinois, Indiana, Michigan, Missouri, Georgia, Texas, Tennessee, Maine, Alabama, Kentucky, Kansas, Florida, South Carolina, Mississippi, Louisiana, Wisconsin, Oklahoma, Minnesota, California and Arkansas.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Zain Akbari

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