Yesterday, on the 13th of January 2020, Five Below (Ticker: FIVE) closed down 11.36% after cutting its outlook on weaker holiday sales.

Over the last 12-18 months, many of my mentees came with this company as a possible idea. As always, you need to look at quantitative analysis, qualitative analysis, price action and about the possible catalysts. Then as I fear many people might have not done, have a clear risk management by limiting possible downside.

Five Below is a specialty retailer offering a range of merchandise for teen and pre-teen customer with $5-to-$10 products. Growth is mainly coming from the opening of new stores.

In March 2018, they stated: “We are excited to continue our high growth with a record number of new store openings and remain confident in our 20/20 through 2020 goals and our ability to reach our 2,500+ U.S. store potential.”

At the end of 2019, Five was operating 900 stores and was planning to open 180 new stores in 2020. Vs 900 that translates into new opening growth of 20% year on year.

Below is their store openings since 2016:

Year	2017	2018	2019
Opening	103	125	150
Nb. of stores at the end of the year	625	750	900
Growth yoy		20%	20%

If we take 2,500 stores as the end market size and the recent 20% yoy growth, that should give us 4-5 years left of growth:

Year	2017	2018	2019	2020e	2021e	2022e	2023e	2024e	2025e
Opening	103	125	150	180	216	259	311	373	448
Nb. of stores at the end of the year	625	750	900	1080	1296	1555	1866	2239	2687
Growth yoy		20%	20%	20%	20%	20%	20%	20%	20%

As of yesterday, you had a stock trading on 48.1x 2019 earnings and 34.9x 2020e. But this valuation works as long as Five can open 20% more stores every year and have the comparable sales at least stable.

Why? market participants are not only 12 months of growth but for several years to come.

Problem was that Five came with falling comparable sales:

“The Company announced that net sales for the Holiday Period increased by 13.4% to $596.6 million from $526.1 million in the comparable nine-week period from November 4, 2018 to January 5, 2019. Comparable sales for the Holiday Period decreased by 2.6%. “

Verdict on the day: Stock hammered – retesting on previous support at 95.50 (lows of Jun 2018 gap), 30% of the capital traded, gap down, decent candle.

Retail trader worst nightmare with bad risk management: stock opening with a gap down and executed at the worst possible price on the day.

What you had is market discounting a lot both in terms of new openings (which they managed to meet) and at least stable comparable sales (where they missed). Meaning when you have high expectations, any miss will be punished big.

Conclusion here: if you still believe that you should blindly go for long for stocks with P/E above 40-50x and short ones where P/E below 10x, then either you are wrong or you have been misled.

When I look at a business like this one which relies heavily on new opening stores, I quickly try to figure out if the sales expectations by the consensus are realistic. To be honest, there are great examples for mentoring sessions.

In the meantime, yesterday I did a mentoring session on Planet Fitness (ticker: PLNT). Planet Fitness is a franchisor and operator of fitness centers in the United-States. Similar to Five Below, the business model is mainly about opening new stores or new fitness centers here.

At the end of 2019, PLNT had 2,000 centers and they think that there end market could reach 4,000.

Like Five, the stock is trading on high P/E 56.3 x 2019 / 44.9x 2020e / 36.8x 2021e. Market is discounting big growth for many years to come through new openings and at least stable same fitness center sale.

What about the facts?

At the end of 2018, PLNT had 1,739 fitness centers and ended 2019 with 2,000. So even if it is not perfectly accurate as centers are opened all along the year, I like (similar to Five) to calculate the average yearly sales per center. That roughly tells me what is the average revenue for one fitness center. To do so, you need to divide revenues on the year by the number of fitness centers.

2018 sales = 573m / 1,739 centers = ~$330k per center in 2018

2019e sales = 685m / 2,000 centers = ~ $342k per center in 2019

First thing here, (even again if it could be distorted by calendar open of those centers), PLNT was experiencing 3 to 4% same-center revenue in 2019.

If we take 2,000 stores at the end of 2019 vs 1,739 stores at the end of 2020, that translates into a 15% new opening every year. (Five has a 20%).

So now let’s extrapolate this 15% yoy center growth for 2020 and 2021 and later:

Year	2019	2020e	2021e	2022e	2023e	2024e
Nb. of fitness centers at the end of the year	2000	2300	2645	3042	3498	4023
Growth yoy	15%	15%	15%	15%	15%	15%

Like Five, Planet Fitness could/should reach the its maximum capacity around 2024. Bottom line is as an investor of PLNT, you might be betting that the company has 4-5 years of growth capacity by opening new fitness centers.

Let’s now look at what is the market consensus for 2020 and 2021 on the revenues or what is the market discounting.

2020(e) sales = $778m

2021(e) sales = $873m

What about we try to calculate with my method (even if not perfect as centers will open at different time of the year):

Average sales per fitness center x Number of fitness center.

2020: 2,300 x $330k = $759m if we take average sales per center from 2018

2020: 2,300 x $342k = $786.6m if we take average sales per center from 2019

Those two numbers should be compared with the $778 expectations.

Which tells us that market is mostly positioned for the openings of 300 fitness centers but without growth in comparable sales. In other words, PLNT due to its positioning might be struggling to be a price maker.

What about 2021?

2021: 2,645 x $330k = $872.9m if we take average sales per center from 2018

2021: 2,645 x $342k = $904.6m if we take average sales per center from 2019

That is vs $873 m sales expected in 2021 or another way of saying that the average sales for a fitness center should be around $330k, that growth will mainly be coming from openings of new fitness centers and market is not discounting any ability from the company to increase price.

Similarly that tells you that consensus might be a bit too optimistic on 2020e revenues unless we have clear pricing power.

Uptrend that started in 2017 is broken and stock is now consolidating between 56 and 82 which gives you possible ways of structuring the trade through options.

The whole idea of this blog is not about telling you to go long or short but to check quickly if the numbers that are in front of your eyes from the consensus are realistic.

For Five and PLNT, the growth relies heavily on the companies’ abilities to open new stores and at least to keep comparable sales.

I hope it helps,

Gregoire