Five Below A 'Unique And Differentiated' Retail Winner, Says Bullish Morgan Stanley

Five Below Inc FIVE is a "unique and differentiated" retailer that combines a compelling value proposition with a fun "treasure hunt" shopping experience, according to Morgan Stanley.

The Analyst

Simeon Gutman resumed coverage of Five Below with an Overweight rating and $135 price target.

The Thesis

Five Below has earned a reputation of selling "trend-right" items at $5 or less across multiple categories to the teens and pre-teens market, Gutman said in a Monday note. (See his track record here.) 

Its prior success was hinged on selling "trend-right" items such as the fidget spinner in 2017, but the company evolved into a "destination visit" store backed by strong brand awareness, the analyst said. 

Five Below's 3.1% comp growth in the first quarter of 2019 was driven evenly between ticket growth and traffic growth at a time when many retailers weren't showing any traffic growth, he said.

The first quarter marks the company's third consecutive quarter of traffic growth, and 3-3.5% comp growth over the longer term looks to be sustainable, Gutman said. 

"While FIVE often trades on comps in the short term, the business is ultimately driven by new stores. On that front, we see little to pick at." 

New stores are operating near 100% productivity at an industry-leading payback period of less than one year, the analyst said. 

Despite the cost associated with operating new store openings, Five Below should still show "reasonable" free cash flow of more than $100 million in 2020 and beyond, he said.

Price Action

Five Below shares were trading higher by 4.12% at $124.97 at the time of publication Monday. 

Related Links:

The Street's Reaction To Five Below's Earnings, Tariff Commentary

BofA: Five Below Has Upside To $150

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