Earn 4.2 Percent Today From This Trendy Retailer
I noticed something surprising at Target the other day…
They are already selling Easter decorations! We’re barely into January, but, at least here in Wyoming, you can get your Easter decorations at Target.
You might have noticed that trend where you live as well. Retailers are pushing holiday decorations earlier and earlier every year. Just a few months ago, Christmas decorations were competing for space with Halloween decorations.
When I notice trends like this, I’m always left with the question of who is responsible. Are retailers creating demand for decorations… or are consumers demanding the decorations? I believe, in this case, the trend is driven by consumers, but the consumers are blaming the retailers.
If the decorations weren’t selling, stores wouldn’t waste the shelf space displaying them. Shelf space is a limited resource at any retailer, and it is the store’s most valuable resource. A retailer cannot survive if it dedicates shelf space to items that don’t sell.
In providing decorations earlier than they once did, retailers are meeting demands from consumers to help them prepare for the holidays. It could be a sign of the times.
If you read the news, it tends to be depressing. In reality, news has always been depressing. It has always been about politics, natural disasters, crime and war. But, years ago, we could hide from the news. Now, it’s in Facebook feeds and is the subject of comedy routines. It’s inescapable.
So, I think, to make our lives a little cheerier in the face of depressing news, we look ahead to the holidays. By focusing on the next one — whenever it may be — we feel better.
Sure, we all say, “I can’t believe these decorations are out so soon!” as we walk down the Target aisle.
But, we also say, “I need to get that now because it will be perfect in my living room and it’s only a few dollars!” When we pick up those small items, we reward the retailers for stocking the shelves. They respond by introducing more and more decorations and making it easier for us to buy them by displaying them longer and longer.
In this way, large retailers are duplicating the success of smaller retailers that have long catered to home decorations. Target has known this for years which is why it introduced the “One Spot” at the front of the store years ago. Right when we walked in, we were shown cheap items we probably didn’t need but that we often bought because Target created the opportunity for us to buy.
And, that is largely what retail is — creating an opportunity for consumers to spend money. One company that does that well is Five Below (NASDAQ: FIVE).
A Bright Spot In The Retail Wasteland
Five Below is retailer offering trendy, high-quality, low-cost products, all priced at $5 or below. The company reports having more than 600 locations and growth of 20% or more a year.
As I researched the company, I found myself hoping it would expand to the Western United States soon. Its product line contains exactly what kids need.
You have to admit that FIVE’s product selection includes something for everyone, which explains the stores’ economics. FIVE’s regulatory filings indicate that it costs the company about $300,000 to open a new store, which then generates average earnings before interest, taxes and depreciation of $450,000 a year.
The company’s financial statements verify those numbers. The company’s net profit margin of 7.3% is more than twice the department and discount store industry average of 3.2%. The return on equity of 23.8% is also well above the industry average of 14.5%.
Store openings have led to sales growth averaging 25% a year over the past five years and earnings per share (EPS) growth averaging 26% a year over that same time.
However, the stock did sell off earlier this week. Traders were disappointed when the company reported disappointing results for the holiday shopping season.
But don’t expect this temporary downturn to last. FIVE has missed analysts’ expectations just once since the company began trading in 2012, and has met or beat expectations in 17 consecutive quarters. Its recently issued guidance is in line with a company that manages analysts’ expectations to ensure it delivers stronger-than-expected results.
Earnings are expected to be reported around March 21. I will be watching them closely, but we’ll have already made our money long before then.
How I’m Trading FIVE — Without Buying Any Stock
If you’re interested in catching some of the potential upside, you can always buy shares of FIVE.
But I found a better trade… One that will guarantee that my Income Trader readers and I collect a 4.2% return in a little under a month. And all without buying a single share of the stock. This trade uses a high-income, short-term put option on FIVE.
And even if the trade moves “against” us, we still get the chance to buy FIVE at an 11.5% discount, which is a gain in my book. If this happens, you’ll get in at a great price before FIVE announces what I expect to be an earnings beat, amplifying what would have been good gains into great ones.
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