• Brett Schafer

Deep Dive: Five Below

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  1. What do they do? Five Below operates value retail locations with items that cost $5 or less and a focus on kids aged 5 – 19.

  2. History? The first Five Below store was founded in 2002 in Philadelphia by David Schlessinger and Thomas Vellois.

  3. Industry? The dollar store industry is about $94 billion in the U.S, but Five Below is going after a smaller portion of that by only serving kids. It doesn’t have much direct competition but is really competing with all dollar stores and all retail in general.

  4. Management? Joel Anderson is CEO and President and got the job in 2015. He used to be the president of Walmart.com. Insiders ownership is 2%

  5. Valuation? (As of recording) P/S of 5.6, P/GP of 16.8, and P/OI of 71.

  6. Earnings? Revenue was up 6.2% in 2020 to $2 billion but comparable sales actually dropped 5.6% due to the pandemic.

  7. Balance Sheet? Around $410 million in cash, the only major debt is operating leases which don’t necessarily count as debt.

  8. Potential Competitive Advantages? Not disruptable by e-commerce, economies of scale in their niche, and focus.

  9. Future Growth Opportunities? E-Sports, store growth, and e-commerce were potential growth drivers we thought of.

  10. Highlights? Predictability, profitable growth, and defensibility vs. giant retailers were some that we had.

  11. Lowlights? You can see market saturation coming fairly quickly, ceiling on price raises, and some uncertainty around comp sales going forward.

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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

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