Think Retail Is Suffering? Here's 1 Fast-Growing Retail Stock to Buy Today

By Sean O'Reilly Markets Fool.com

The retail sector has seen better days. Sears Holdings may be on its last leg, J.C. Penney's once-possible rebound is floundering, Macy's is closing stores, and The Limited is closing all of its retail stores. For investors in the retail space, still-growing retail names are becoming increasingly hard to find, but one retailer that continues to grow while others retreat: Five Below (NASDAQ: FIVE).

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Wall Street is more than aware of this company -- with revenues almost doubling over the last four years, how could it not be? This spectacular growth has led to a premium valuation as well, with shares trading at 30 times fiscal-year 2018 forward earnings estimates. This is a generous valuation, even compared to peers Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR). The market is likely right to pay up for quality. Growing retailers are hard to find, and the valuation is more than warranted for a discount retailer like Five Below, which has the added kicker of focusing on college towns.

Image source: Five Below Corporate.

Five Below's growth story appears to be more than intact. Investors looking for exposure to the retail space, a sector with more than its share of bad apples in recent years, would do well to give Five Below a close look. Here's why.

Recent results

The company's fiscal fourth quarter ended on an extremely strong note on January 28, 2017. It was fueled by new store openings and respectable same-store sales gains. Sales rocketed upwards 19% to $388.1 million, surpassing analyst estimates.

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Profits followed Five Below's net sales up, coming in at $49.8 million, up 18.5%. Assisting both figures was the net 85 new stores that were opened in fiscal year 2016, on top of 71 new stores in the previous year. Five Below's all-important same-store sales growth came in at 1% -- more than laudable in what was acknowledged to be a rough quarter across the retail sector.

A history of value and expansion

Five Below, which specializes in a myriad of products all priced at or below $5, was founded just 15 years ago by David Schlessinger and Tom Vellios, who met as executives at children's toy store Zany Brainy. By offering a broad range of products spread across categories such as Sports, Media, Crafts, and Party, the company rapidly expanded. As of January 28, 2017, it had over 520 locations in 31 U.S. states. It's no secret that American consumers love a bargain. This combined with a relentless focus on offering the right products in its stores proved to be a fantastic combination.

The company is led by CEO Joel Anderson, a sound retail operator who took over for the co-founders. He continues to expand while keeping an eye on costs and ensuring that all stakeholders are well served. The key fact for investors to know is that Five Below's success shows no signs of stopping. It just announced its first wave of store openings in California and projects that this year will be yet another record. Shares may be on the pricey side, but Five Below continues to execute and bring value to the consumer.

Net revenue

Company FY 2016 FY 2015 FY 2014
Five Below $1,000,410 $831,954 $680,218
Dollar Tree $20,719.20 $15,498.40 $8,602.20
Dollar General $21,986.60 $20,368.60 $18,909.60

Data source: S&P Global Market Intelligence.All dollar figures are in millions.

Net income

Company FY 2016 FY 2015 FY 2014
Five Below $71,840 $57,680 $48,024
Dollar Tree $896.2 $282.4 $599.2
Dollar General $1,251.10 $1,165.10 $1,065.30

Data source: S&P Global Market Intelligence.All dollar figures are in millions.

Same-store sales growth

Company FY 2016 FY 2015 FY 2014
Five Below 2.00% 2.40% 2.40%
Dollar Tree 1.80% 2.10% 4.30%
Dollar General 0.90% 2.80% 2.80%

Data source: S&P Global Market Intelligence.

Estimated earnings growth rates

Company

5-Year Est. AnnualizedEPS Growth Rate

Five Below 22%
Dollar Tree 11.4%
Dollar General 9.3%

Data source: S&P Global Market Intelligence.

Forward P/E ratio

Company Forward P/E
Five Below 30
Dollar Tree 17.7
Dollar General 16

Data source: S&P Global Market Intelligence.

Five Below has begun outpacing peers Dollar General and Dollar Tree. True, Five Below trades for a higher earnings multiple than its larger peers, but it's a better company and is growing more quickly.

Foolish final thoughts

Five Below's enviable revenue and profit growth, up 20.33% and 24.53% in 2016 from 2015 alone, more than stand out in the broad retail sector. Not only that, but Five Below is beginning to stand out from its peers, as seen in its same-store sales metric. With shares trading at 30 times forward earnings estimates, Five Below is no bargain stock, but this shouldn't prevent venturesome investors from stepping up to the plate. After all, how often do truly great businesses trade at statistically cheap prices? Five Below is a rare find -- a company that has a solid growth plan, coupled with the ability to execute.

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Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.