FIVE: Five Below vs. Big Lots: Which Discount Retailer is the Better Buy?

Five Below Inc. (FIVE) and Big Lots Inc. (BIG) are two of the nation’s leading discount retailers. FIVE operates 900 stores and offers a merchandise selection that mostly limited to no more than $5. Its marketing focus is primarily aimed at teens and tweens.

BIG operates 1,400 stores and offers a merchandise selection that includes grocery items, furniture and apparel that are priced for affordability.

Both companies have navigated the economic tumult of the coronavirus pandemic with strong sales, and they are now focused on ending the year with a profitable holiday shopping season. And both are currently trading closer to their respective 52-week highs.

But which of these stocks is a better pick now? Let’s find out.

Latest Movements

Unlike many retailers that were forced to close stores during the pandemic, FIVE expanded its brick-and-mortar presence with 36 new stores in 20 states during Q3; a new store is set to open later this week in Lubbock, Texas. Q3 also saw popular product introductions including a line of gaming products under its Bugha brand (named for gaming champ Kyle “Bugha” Giersdorf) and a pandemic-inspired t-shirt with the message “I Miss Humans.”

BIG responded to the pandemic with the introduction of curbside pickups and same-day delivery partnerships with Instacart and Pickup, which the company credited with boosting its e-commerce growth. President and CEO Bruce Thorn highlighted the “continued momentum from the COVID-induced nesting trend” for driving sales of its Broyhill line of furniture to nearly $400 million in first-year sales, adding “it can be a $1 billion brand for Big Lots over time.”

BIG is also banking heavily on a robust holiday shopping season. Thorn, speaking in a recent earnings call, added that BIG’s “strategic decision to plan for early holiday shopping has paid off, as our quarter to-date comps are up low double-digits, with strong sell-through in seasonal merchandise.”

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Joel Anderson, FIVE’ president and chief executive, also used a recent earnings call to talk up the potential of the holiday season, observing that he believed “the December holiday selling period itself is more favorable this year, allowing more time for holiday shopping. Specifically, number one, there are two more days between Thanksgiving and Christmas. Number two, Christmas is on a Friday, providing a full week post super Saturday for last minute holiday shopping. Number three, Hanukkah is earlier in December than it was last year. And number four, schools are also doing virtual or hybrid models.”

Recent Financial Performance

For Q3, FIVE reported quarterly sales of $476.6 million, a 26.27% increase from the $377.44 million reported in the third quarter of 2019. The company also reported quarterly earnings of $0.36 per share, a 100% spike from $0.18 cents per share in the same period last year.

BIG’s Q3 results included $1.38 billion in revenue, up from the $1.17 billion in the same period one year earlier. Net sales in Q3 were $1,378 million, an 18% increase from the $1.168 million for the same period last year. However, its quarterly earnings of $0.76 per diluted share represented a year-over-year tumble from the Q3 2019 earnings of $3.25 per diluted share – the 2019 figure was based on income from a one-time, after-tax benefit of $136.6 million from the sale of a California distribution center and an after-tax expense of $2.6 million from the implementation of strategic business plan involving the rollout of the Broyhill product line and the launch of the Lot and Queue lines.

As of this writing, BIG is trading at $45.54, closer to its 52-week high of $57.24 than its $10.13 52-week low. FIVE is trading at $164.61, closer to its 52-week high of $167.53 and distant from the $47.53 52-week low.

POWR Ratings

FIVE is rated a “Strong Buy” in our proprietary POWR Ratings, with an overall “A” grade. It holds an “A” Trade Grade, “A” Buy & Hold Grade, “A” Peer Grade and a “C” Industry Rank. It ranks #1 of 36 stocks in the Specialty Retailers category.

BIG is rated “Buy” in our power ratings, with an overall “B” grade. It holds an “A” Trade Grade, “C” Buy & Hold Grade, “C” Peer Grade and an “A” Industry Rank. It is ranked #8 of 18 stocks in the Grocery/Big Box Retailers category.

The Winner

Both stores have shown exceptional performance during the pandemic and are ready to enter 2021 in a state of strength. BIG’s lower share price might inspire the bargain-hunting investor to gather up more shares, but FIVE has the potential to see its stock go higher into the new year, especially when the pandemic abates and the economy rights itself.

Which is the better buy? At the risk of being a cop-out, the answer is both. Neither retailer has stumbled during these unprecedented times, and their respective customer bases have made them solid investments. For those giving stocks as holiday gifts, FIVE and BIG will certainly add to the seasonal jollity.

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FIVE shares were trading at $165.59 per share on Wednesday morning, up $0.60 (+0.36%). Year-to-date, FIVE has gained 29.51%, versus a 16.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Phil Hall

Phil is an experienced financial journalist responsible for generating original content on the weekly Fairfield County Business Journal and Westchester County Business Journal, plus their respective daily online news sites, podcasts and video interview series. He is the winner of 2018, 2019 and 2020 Connecticut Press Club Awards and 2019 and 2020 Connecticut Society of Professional Journalists Award for editorial output. More...