Selling an array of products catering to teenagers and preteens, Five Below (NASDAQ: FIVE) is a retail powerhouse on the ascent nationwide. However, investors didn’t receive this memo post the 2023 full-year financial report. Reacting to the report’s release, Five Below stock took a 15% nosedive.

Stock fluctuations are familiar territory for Five Below shareholders. Ever since its initial public offering in 2012, the company has seen fluctuations of over 15% numerous times. These pullbacks, though, present golden opportunities for savvy, long-term investors. With its rapid growth, profitability, and ambitious goals, Five Below promises to be a valuable addition to any stock portfolio.

FIVE data by YCharts

The Allure of Five Below Stock

The investment proposition surrounding Five Below is elegantly simple. The company aims to establish approximately 2,000 new retail outlets by 2030. These locations boast a one-year self-sustaining period, resulting in an exponential surge in cash flow without delving into precarious financing. In sync with the burgeoning cash flow, the stock price is poised to skyrocket.

Examining the past decade sheds light on Five Below’s trajectory. By the end of fiscal 2013, Five Below operated 304 stores. Jump to fiscal 2023, and the tally soared to 1,544 locations — a remarkable surge of 1,240 outlets. These new stores triggered a significant uptick in overall sales, with same-store sales growth witnessed in eight of the last ten years, further bolstering the revenue.

The financials of Five Below vividly illustrate the transformative impact of these new outlets. In 2013, the company held a modest $50 million in cash, with $20 million in debt. Fast forward to fiscal 2023, and Five Below boasted a net income crossing $200 million, concluding the year with $460 million in cash reserves and no outstanding debt.

FIVE Revenue (TTM) data by YCharts

Why Five Below Continues to Shine in 2024 and Beyond

In essence, Five Below keeps the wheels turning by working on what it does best — launching new stores. Over 1,000 profitable stores have emerged, swiftly recouping their costs, ensuring a debt-free existence and an expanding cash pile. In 2023 alone, Five Below unveiled over 200 new stores, experienced a near 3% surge in same-store sales, and raked in close to $100 million in net income.

Inflation might be raising eyebrows among investors, given Five Below’s brand identity, which signifies merchandise priced under $5. However, the company isn’t shackled by its moniker. The introduction of “Five Beyond” sections in its stores enables it to peddle wares at varied price points, with customers showing little resistance.

Five Below’s consistent profitability over the past decade, maintained gross margins in the mid-30% range, and operating margins consistently exceeding 10% allay fears of margin erosion due to rigid pricing constraints.

FIVE Revenue (TTM) data by YCharts

Looking ahead, by 2030, Five Below envisages a store network surpassing 3,500 locations — nearly 2,000 more stores than today. Should the existing business dynamics hold, the company will metamorphose into a cash-generating juggernaut by then, unburdened by debt obligations.

Subsequently, Five Below could shower shareholders with substantial returns since financial exigencies would no longer be pressing. Dividend payouts or extensive share buybacks could be on the table, painting a rosy picture for investors.

Trading at a modest 3 times its trailing sales, Five Below emerges as a reasonably priced gem. For investors seeking growth at a reasonable valuation, this stock is a keeper for the long haul.

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Jon Quast holds positions in Five Below. The Motley Fool endorses Five Below. The Motley Fool abides by a disclosure policy.

The perspectives expressed here belong to the author and not necessarily reflect those of Nasdaq, Inc.