Does Five Below Belong in the Elite Retail Class?

As we've seen with the likes of Michael Kors Holdings , Under Armour , and Lululemon Athletica , fast-growing new trends in retail are often awarded with pricey premiums compared to the overall market. Five Below is considered by many to be a rising retail star, but is its growth deserving of a premium multiple?

3 explosive retailers
Rather than focusing on margins, balance sheet, and inventory, let's focus on comparable-store sales and total revenue growth. These are important metrics, and are the basis around which premiums in retail are formed.

For companies deemed trendy, explosive growth is often seen. Michael Kors, Under Armour, and Lululemon are three such retailers. Michael Kors sells fashion apparel such as handbags and wallets.

Both Under Armour and Lululemon operate in the sports retail business, although Lululemon's products are primarily for women. The key similarity among these three companies is that all are growing fast in total revenue and comparable sales. Moreover, all three are large companies and have hefty market premiums due to their growth. To better explain, take a look at the chart below.

We're clearly looking at three explosive companies, and all three are very expensive. As you can see above, each company's trading premium relative to both sales and next year's earnings is significantly higher than market averages.

However, just look at the growth that each company has produced. Kors and Lululemon have both been growth monsters for the last three years, and Under Armour is still growing at the same pace today as it has the last three years.

This fact about Under Armour brings up an important point: growth naturally slows as a company grows larger. It is easier to double sales at $100 million than it is at $10 billion. Still, despite slowed growth for Kors and Lululemon, all are equally impressive given the size of each company's overall business.

Will Five Below join the elite list?
After looking at Kors, Lululemon, and Under Armour, let's transition to Five Below. Many believe that it is the next to join this list.

Five Below operates a business where everything sells below $5. It trades with a very similar gaudy premium as its peers, at 5.5 times sales and 47 times next year's earnings. Our basic understanding of growth and its relation to the size of a business paints a completely different picture, however.

Take a look at the revenue growth for each of Five Below's last six quarters:

As we previously discussed, revenue growth naturally slows as a company grows larger. In the cases of Kors, Lululemon, and Under Armour, each maintained growth of more than 30% until exceeding $1 billion in annual sales.

In Five Below's last quarter, however, it produced sales of just $110.7 million. This is far less than its peers. It seems that Five Below is already seeing a deceleration of growth at a time when it should be growing at 50% plus - or it would if Five Below is to become the next great growth retail company.

Final thoughts
When it comes down to it, Five Below is not deserving of its multiple. It also hasn't proven itself worthy to be mentioned in the same sentence as Kors, Under Armour, or Lululemon.

This is a company that has already sunk below 30% year-over-year growth and has comparable sales growth of only 6.6%. This is not on the levels of its peers, as each of the three noted companies were all producing insane growth when quarterly revenue was $100 million. It would be very hard to validate an investment in Five Below at this time, as investors must wonder how much of a fundamental upside the company has to gain.