Five Below Has 'Huge' Potential And High ROI: RBC Starts At Outperform

In a report published Tuesday, RBC Capital analyst Scot Ciccarelli initiated coverage of

with a Buy rating and $48 price target. The analyst believes that the company has "huge" potential for unit growth and offers high ROI. The stock is ideal for investors seeking long-term growth. "We believe FIVE has one of the best long-term growth profiles in retail, with the potential to expand their store footprint by nearly 500+ percent over time. Its stores are highly productive, with recent first-year 4-wall ROI's of 150 percent, enabling paybacks on invested capital in ~8 months. Its low price point model also protects against e-commerce cannibalization," Ciccarelli stated. Five Below is expected to expand its store base by about 20 percent in 2015 and 2016, with a growth rate of 15-20 percent over the next several years. The company intends of grow its stores to about 2,000 locations over the longer term. This means that there is potential to grow the current store base by almost 500 percent, which would be the biggest unit expansion potential in Hardlines Retail. The analyst also expects Five Below to be able to attain an "impressive" ROI of 110-120 percent within the first 12 months of operation of any store. For its new store classes during 2011-2014, the company was able to generate 4-wall ROI of over 150 percent, indicating a payback period of just 8 months. According to the RBC Capital report, "The company's low price point model should insulate it against e-commerce cannibalization, as the amount of money that a person could potentially "save" from buying $1-$5 items through alternative distribution channels is immaterial. Further, the Internet would struggle to replicate the company's "treasure hunt" shopping experience, which is key to Five Below's retail model." The low price point model is also expected to help Five Below cope with any modest economic volatility, despite its merchandise being discretionary in nature.