Shares of popular discount retailer Five Below (FIVE) have been lagging the markets this year, now up 8.8% and struggling to break through the $200 level of resistance.
Five Below is a retailer that’s hit the right spots with consumers, and as shares continue to consolidate into year-end, the stock looks in great shape to make up for lost time, after an underwhelming first three quarters of the year.
Despite COVID-19 disruptions and global supply chain challenges, I am bullish on the stock, especially as falling COVID-19 cases causes relief to retailers. (See Analysts’ Top Stocks on TipRanks)
Five Below goes below $200
Five Below isn’t just your run-of-the-mill discount retailer. It’s a firm that ought to get top marks for its in-store experience. Amid the continued rise of digital retailers, Five Below has shown that brick-and-mortar retail isn’t going anywhere.
Undoubtedly, as a retailer of lower-cost goods that don’t make as much sense to ship digitally unless bought in bulk as big-ticket items, Five Below has a bit of an advantage over other players in the retail space. Call it the discount retail advantage, if you will.
Still, Five Below has really found a niche it can thrive in, the under-$5 category, and most recently, under-$10 category. Most other discount retailers focus on lower-cost goods under some arbitrary amount.
By raising the price bar on the products it sells, the firm has attracted a wider audience with a more compelling line-up of goods that wouldn’t have sold at discount retailers keen on keeping their prices below a buck or two.
Indeed, the higher-price tag was a trade-off worth making. The willingness to raise the bar modestly on prices could come in handy, as inflation drives up the price of everything, from input costs to shipping. If Five Below can sell stuff above $5, it’s already knocked down a significant barrier to its growth.
Upward Price Flexibility
Consumers don’t seem to mind when it comes to Five Below. Any other discount retailer or dollar-store and a doubling of prices (from $5 to $10) would be met with great distaste.
How has Five Below been able to pull it off without so much backlash? The Five Below brand shows tremendous signs of promise, and it’s the high degree of price certainty the firm gives its consumers.
Consumers want a promise that goods are below a specific price. They don’t seem as sensitive to the price ceiling, whether we’re talking Five Below or Ten Below. In fact, consumers may even prefer the higher price ceiling, as it means a more extensive line-up of goods.
As long as Five Below doesn’t break its “promise” of keeping goods below a price, consumers will still flock to it.
At around $10, the company has found the sweet spot that could allow greater flexibility amid inflation without having to upset consumers.
Certain discount retailers may tout low prices, but have prices that are off the charts (think a $30 item in a “discount” retailer). Five Below won’t break its promises, so consumers with a fixed budget know that they can get what they’re looking for within their price range without having to suffer from a bad case of sticker shock.
Five Below has combatted sticker shock quite well. As a result, consumers appreciate it and will continue shopping at its locations, perhaps at an increasing rate, as COVID-19 cases continue falling.
Indeed, Five Below can’t patent price certainty, and competition is catching on. Any rise in competition could weigh on margins. Regardless, I think Five Below has the talent and expertise to continue to do well, as rivals look to copy its proven model.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, FIVE stock comes in as a Moderate Buy. Out of 12 analyst ratings, there are eight Buy recommendations, and four Hold recommendations.
The average Five Below price target is $234.27. Analyst price targets range from a low of $184 per share, to a high of $300 per share.
Bottom Line
On the lower end of the price range, Five Below has the means to really exhibit its dominance.
Undoubtedly, margins may not be the best when it comes to some of the more inexpensive goods. Still, Five Below has found a way to ease the pressures that can come with being a discount brick-and-mortar retailer, and it should come in handy as rivals pick up their games.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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