Expert Stock Picks: Jim Cramer Thinks You Should Buy Five Below

In a recent post, I talked about the disappointing holiday sales for many retailers and how their stock prices suffered as a result. One stock that I did not mention was Five Below (NASDAQ: FIVE).

On Wednesday, the teen discount retailer reported same store sales growth of 1%. As a result, the stock popped 10%. Talk about investors desperate for some good news in the retail sector! But maybe investors are on to something with this stock, including Jim Cramer. He talked about why this stock is a buy on his Mad Money show last night.

Let’s see why Jim Cramer loves Five Below and see if it would make sense to hold a position in your portfolio.

Who Is Five Below?

Five Below was founded in 2002 by David Schlessinger and Tom Vellio, both of whom have retail experience with stores targeting kids. They currently operate 522 stores in 31 states and plan on opening their first stores in Arizona, California, Colorado, Nevada, New Mexico and Utah in 2017. Most of their stores are centered around college towns.

The discount retailers target shoppers are teens and young adults and they sell products that cost $5 or less. Some of the products that Five Below sells include:

  • Games
  • Fashion accessories
  • Electronics
  • DVDs
  • Novelty items
  • Gag gifts
  • Room decorations
  • School supplies
  • School stationary
  • Bath and body items
  • Seasonal items
  • Candy
  • Beverages

Outlook For 2017

For 2016, the company reported an increase in operating income of 23% and diluted earnings per share of $1.30. This was an increase of 24% over fiscal year 2015. They also were able to end 2016 with their 11th straight year of positive comparable same store growth.

For 2017, the company notes that there is an extra week in the year, which will boost their numbers compared to 2016, but even without this extra week, they expect sales to hit $1.2 billion and net income in the $86 – $89.5 million range. Both of which puts them on target to hit their 20/20 plan goal.

Five Below: A Buy

Looking at just a 1% increase in same store sales would leave many investors to question why the hype around Five Below. While on the surface a 1% increase in same store sales doesn’t look impressive, you have dig under the hood to get a full understanding of why you should own this stock.

First, the company has implemented a 20/20 plan. This means they aim for 20% sales growth and 20% net income growth every year. They hit that target in 2016 and sound confident they will hit the mark again in 2017.

Another important thing to note is that they currently operate in 31 states and have only 522 stores. They have a lot of room for adding stores, and plan to add new stores, but are adding them strategically. In 2017 they will open up their first store in California, the most populated state in the nation. As they add more stores in the California market, you can expect Five Below to easily hit their 20/20 plan targets in the coming years.

There are two other critical things to know about Five Below, and both deal with how they conduct business. They are very strong users on social media, including YouTube. Since these platforms are where teens are, the discount retailer not only connects with them, but has a strong idea of what they like and dislike. This helps the company to sell the right products.

The second thing to know is that when they have new ideas, they present them in their most popular stores first. If the product is a hit, they roll out the items to their underperforming stores to help boost sales.

Overall, Five Below has a solid strategy for growing the business and they have willing customers. After all, when you need something at a good price and there is a Target and a Five Below in the same shopping center, most teens will flock to the Five Below because they know the price is affordable.

This process just continues to repeat for future buying decisions and that is why Five Below has many bright years ahead and why you should own the stock.

This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.