Daily Gains Letter

A Compelling Case for This Retail Discounter

By for Daily Gains Letter |

While Others Flee This Discounter, It Tops My ListThere is a lot of hurt out there in the retail sector as consumers have yet to come back in full force. The soft consumer sentiment has impacted retailers across the board, from the specialty retailers to department stores. Even the discount and big-box stores, which are pretty resilient when spending declines, are hurting at the register.

Consequently, we saw a consolidation in the discount sector after Dollar Tree, Inc. (NASDAQ/DLTR) decided to snap up rival Family Dollar Stores, Inc. (NYSE/FDO) in a cash and stock deal valued at $8.5 billion, or about $74.00 per share.

I last talked about picking up a company like Family Dollar Stores in April as an investment opportunity when the stock was trading at $58.31.

Now for both companies, the merger makes a whole lot of sense, especially at a time when consumers are tighter with their spending habits. The merger will likely mean eliminating overlapping stores in the same vicinity, since there will be 13,000 stores in the network.

At the smaller end of the spectrum, a discounter that is an investment opportunity and worth a look is Five Below, Inc. (NASDAQ/FIVE), which has a share price of $35.27 and a market cap of $1.94 billion. The stock debuted on July 19, 2012 at $26.05, but has reported several soft quarters, which drove some investors to the exits. Yet at just above its 52-week low of $33.94, the stock offers a decent contrarian investment opportunity for speculators.

With Five Below down over the past 52 weeks, compared to a 17.39% advance by the S&P 500, there could be a good investment opportunity here.

Five Below Inc Chart

Chart courtesy of www.StockCharts.com

The discounter operates a network of 323 stores in 20 states that sell a broad line of goods geared mainly to teens and pre-teens. While this niche is competitive, all the items are marked at below $5.00, which makes for an investment opportunity. The selection is broad and includes style, room, sports, media, crafts, party, candy, and seasonal departments.

Growth in the store’s networks and jumpstarting sales will be critical to the stock becoming a good investment opportunity. On this note, analysts polled by Thomson Financial estimate annual sales will rise 27.9% to $684.88 million in FY15 and 25.0% to $855.07 million in FY16.

The advance in sales will also push earnings higher to $0.90 per diluted share in FY15, followed by $1.17 per diluted share in FY16, according to Thomson Financial.

The results are showing some encouragement. Five Below has outperformed the Thomson Financial earnings-per-share (EPS) estimates in five of the last six quarters.

Sales in the quarter surged 31.8% to $126 million, up from $95.6 million in the comparative quarter in fiscal 2014. The key comparable store sales metric rose 6.2%.

In addition, investors may get some short selling support should the stock rally. There are about 9.02 million shorted shares as of May 30, or about 17.4% of the float.

So if you are searching for a contrarian investment opportunity in the discount area, take a look at a company like Five Below.

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