I Predicted Five Below Stock Would Bounce Back in 2025. Here's Why I Wasn't Nearly Bullish Enough.

In 2024, shares of discount retailer Five Below (NASDAQ: FIVE) -- a chain catering to teens and preteens -- fell by 51%. On Dec. 16 of that year, I wrote an article asking whether Five Below stock could jump by 50% in 2025. I concluded that it could.

It turns out that my prediction for 50% gains wasn't nearly bullish enough: Five Below stock delivered 79% returns for shareholders in 2025, outpacing the 16% gain for the S&P 500.

Image source: Getty Images.

I was right to be bullish about Five Below stock. But there's one factor in 2025 that I didn't foresee. And it could lead to long-term market-beating returns from here.

What I got (really) right

In 2024, Five Below's same-store sales fell, profits declined, and the CEO abruptly left. For 2025, I believed the company's same-store sales would rebound, profits would consequently improve, and a new CEO would restore confidence among investors.

I got my first two predictions correct, objectively speaking. Based on preliminary results from the holiday quarter, Five Below's full-year same-store sales are expected to take a huge 12.5% jump. These higher sales are expected to result in earnings per share (EPS) of at least $6.10, compared with EPS of $4.60 in 2024 -- that's huge.

It's a bit more subjective as to whether investor confidence was restored due to the new CEO, Winnie Park. But consider this: the valuation of Five Below stock has increased since she joined the company, which suggests that I was correct on this prediction as well. The chart below shows the price-to-earnings (P/E) ratio since her hiring.

FIVE PE Ratio data by YCharts

A higher valuation means that there's higher demand from investors for Five Below stock. And in my opinion, smart investors will continue to want to own shares of this company due to a significant development that occurred with the business in 2025.

What I didn't expect

As its name suggests, Five Below aims to sell merchandise at $5 or less, which makes it compelling to its younger customer base. But inflation is real, and investors worry about how much pricing power a chain like this has in the long term. It's the same psychological problem faced by chains such as Dollar Tree and Dollar General -- the price is in the name, limiting increases.

Five Below's previous management team launched a section of the store called Five Beyond, which appeared to be successful. This gave me confidence in the company's long-term pricing power. But new management surprisingly scrapped the Five Beyond idea almost immediately.

This decisive move by Five Below's new management proved to be shockingly effective. It turns out that the company really can sell items at higher price points and customers won't revolt -- see the aforementioned 12.5% same-store-sales gain that it expects to report for 2025. And it turns out that it doesn't need a special section of the store to do it.

Five Below's management eliminated the Five Beyond section of Five Below but continues to sell products at higher price points. This is significant because the company can now sell these higher-priced items throughout the store and not just in a dedicated section. The end result is that purchases for the higher-priced items are now increasing significantly as its customers encounter them more often.

Why this is huge

Last year, I ended my Five Below article by saying, "Even if the gains don't materialize in 2025, the long-term opportunity here will still be worth the wait." Now, a year later, the long-term opportunity is as attractive as ever.

Five Below currently has over 1,900 locations and aims to reach over 3,500 locations in the long term. This runway for growth is attractive for two reasons. First, new stores have a short payback period of about a year, making the opening of new stores a good use of cash. Second, the opportunity is even more attractive as the new pricing strategy boosts sales and consequently margins.

This doesn't have to be complicated: I believe Five Below will outperform the S&P 500 again over the next three to five years. The company is opening up hundreds of new locations with good economics. And management has made smart moves, getting momentum on its side. My position is up substantially but I'm excited to continue to hold my shares.

Jon Quast has positions in Dollar General and Five Below. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.