Is It Possible for Five Below's Shares to Reverse a 50% Decline in 2024 and Achieve a 50% Increase in 2025?
Is It Possible for Five Below's Shares to Reverse a 50% Decline in 2024 and Achieve a 50% Increase in 2025?
If you had pumped $10,000 into Five Below (negative 2.03% - FIVE) at its first public offering (IPO) back in 2012, you'd have around $40,000 now. Not a bad long-term investment, right? However, 2024 hasn't been kind to Five Below shareholders. At the time of writing, Five Below shares are down 51% for the year.
There are a few reasons for Five Below's underwhelming stock performance this year. First off, sales haven't been as robust as investors would've liked. Five Below tracks same-store sales for stores that have been around for at least 15 months. Through the first three quarters of 2024, same-store sales are down nearly 3% compared to the same period in 2023. Not ideal, right?
Secondly, lower profitability has been a problem. This is due to sales plateauing. Five Below's operating expenses have grown faster than sales progress over the past few years. For example, total net sales increased by 12% to $2.5 billion this year. But operating cash flow has dropped from $92 million at this time last year to just $67 million this year, a decrease of 27%.
Lastly, Five Below's performance had already been subpar. But then in July, CEO Joel Anderson suddenly left the company. This uncertainty among investors caused a bigger drop in the stock price.
Here's why I believe Five Below could turn things around with a 50% surge in 2025.
Why Five Below might have a bright future ahead
If Five Below manages to increase revenue and improve profits, then their stock will likely follow suit. And both seem plausible in 2025.
First, Five Below aims to have 1,771 store locations by the end of its fiscal 2024 (early 2025). But they plan to open at least 150 more locations during 2025, which is more than 8% growth. Plus, it's rare for same-store sales to decrease for two consecutive years. That's why I think it's reasonable to expect them to bounce back, adding to the company's overall growth.
Consider that Five Below's third-quarter same-store sales were up nearly 1%, despite expectations for a decline. In other words, the rebound might have already started, pointing upwards for 2025.
Furthermore, Five Below estimates full-year net income to be between $240 million and $250 million for this year. That's a drop from $301 million in 2023. But it would be surprising if profits took a further step back in 2025. They've had time to make adjustments and get back on track.
And letting's talk about management. Five Below named Winnie Park, a seasoned retail leader, as their new CEO in early December. This might help reassure investors. This final piece might be crucial to Five Below's stock performance in 2025. Currently, the stock trades at about 21 times earnings, whereas historically it has traded over 30 times earnings.
Hiring an experienced CEO could help restore confidence in Five Below as an investment, improving their valuation. If they manage to grow profits at a double-digit rate in 2025 and their valuation rebounds as investor confidence improves, then Five Below stock could potentially increase by 50% or more next year.
As a final note, I'd encourage investors to look beyond 2025. A single year is quite short in the world of investing, and too many unpredictable things could happen. I wouldn't risk everything on Five Below stock gaining 50% next year.
This is why extending your time horizon is important. Five Below still plans to open hundreds of additional locations in the coming years - growth is expected far beyond 2025. And with stores having a short payback period and the company having zero debt, I predict that those profits will eventually be returned to shareholders in a meaningful way.
In conclusion, I think Five Below has the potential to post substantial gains in 2025. But even if those gains don't materialize next year, the long-term opportunity here will still be worth the wait.
Investing in Five Below's stock could potentially yield significant returns if the company manages to boost its revenue and profits in 2025. This is due to their plan to open over 8% more stores, leading to an expected rebound in same-store sales and potential performance improvement.
Furthermore, the appointment of Winnie Park as CEO could help restore investor confidence and improve Five Below's stock valuation, possibly leading to a double-digit increase in profits in 2025. Hence, for long-term investors, Five Below still represents a worthwhile opportunity with its continued store expansion and short debt payback period, promising profitable returns in the future.