Analysis: FIVE TJX

Shortly after the opening bell, we will be initiating a position in Five Below, Inc. (FIVE) , buying 200 shares at a bid/ask of roughly $98.50/$99.00. Following the trade, FIVE will represent 0.78% of the portfolio.

We will call up FIVE from the Bullpen with the stock down roughly 26% from its 52-week high. We believe this drop provides us with a solid, de-risked entry point to initiate a position in this discount store. You can read our initial Bullpen Alert on the company here, the company's most recent Investor Presentation can be found at the site here and its most recent earnings release is here.

This company has several qualities we look for in retail. As members know from our time in TJX Companies (TJX) , we value retailers that create "treasure hunt atmospheres" for their customers. This approach has been so successful because it fosters a unique customer experience and creates an engaging shopping environment. Five Below has mastered this approach, and management attributes its impressive run at growth from the stores' fun experience, its "handpicked, trend-right, wow products," its tween and teen focus, and the compelling value that comes with its low-priced products.

As we dig further, the most compelling aspect of the Five Below story relates to its "regional to national" strategy. We view its push to expand from about 700 stores mainly in the Northeast to about 2,500 stores with a national footprint as a catalyst initiative that provides a visible trajectory into earnings growth. Indeed, management has laid out an ambitious goal for the company, but we think they are up to the task based on their execution track record. They have already been plenty successful with their approach and returns on new store launches, and it's hard to argue why they wouldn't as the value proposition resonates with all types of consumers from all over the country. In fact, FIVE appeals to consumers from all different types of income classes as evidenced in the company's slide below.

Source: Company Presentation

Through the first three quarters of 2018, Five Below opened 120 new stores across the country, putting management on track for their full-year goal of 125 openings. Included in its third quarter launches was a new flagship store located in New York City. The store opened not too long ago, and its prominent location on 5th Avenue near Grand Central Terminal should be a smash it. Not only will it attract New York residents, but it will also build brand awareness as tourists move in and out through the streets and walk by/in the store.

Also, it would be remiss of us if we did not mention how quick of a payback period and how strong an average return on investment these new stores have as shown below.

Source: Company Presentation

On tariffs, management has confidence in their ability to fully mitigate such headwinds at the current 10% level. In their prepared comments from the recent earnings call, management highlighted the close partnership between merchants and vendors and how they have worked together to reduce costs without the sacrifice of product quality.

We are initiating the position with a $125 price target, reflecting about 40x consensus fiscal year 2020 earnings. While this multiple is certainly rich in this type of market, we believe it is one that is justified due to its rare catalyst being the nationwide expansion which provides a pathway towards significant multi-year top and bottom line growth evidenced in the slide below. We also value this name for its 100% domestic revenue exposure. That's not to say it is fully immune from trade as tariffs will poses risks to FIVE's supply chain; however, management has indicated before that it will be manageable. So what we see here is a catalyst-driven idea with a "secular" growth story expansion led by a strong management team with a solid track record and a handle on how tariffs will impact their 100% domestic revenue business, thus checking nearly all of the criteria we laid out during November's members-only conference call that you can re-watch here.

Source: Company Presentation

Lastly, we are starting very small in the position, leaving us with plenty of room to scale in further should the market's volatility continue.

Action Alerts PLUS, which Cramer manages as a charitable trust, has no positions in the stocks mentioned.