Shares of Five Below (FIVE -3.36%) are trading 48% below their peak (as of June 10), which was established in August 2021. Clearly, the company has a long way to go to get back to its former glory. However, shares are surging recently, up 102% just in the past two months.

The market is building up the momentum for Five Below, taking a more bullish stance. And this might be a compelling reason to consider adding the shares to your portfolio. If you're looking to buy this retail stock, take the time to learn these three things first.

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Expanding at a brisk pace

The rise of online shopping in the past couple of decades has been widely publicized. This is clear when looking at successful tech-driven enterprises like Amazon and Shopify that have helped support adoption of online shopping. However, consumers still like to shop in person; 84% of retail spending in the U.S. still takes place in a brick-and-mortar setting.

And this has benefited a company like Five Below, which has rapidly expanded over the years. As of May 3, it had 1,826 stores scattered across the U.S. That figure is up nearly fivefold from 385 exactly a decade ago. Management has huge ambitions. "We still believe that there's an opportunity here for 3,500 stores," Chief Operating Officer Kenneth Bull said on the fiscal Q4 2024 earnings call in March.

You'd probably struggle to find other retailers that are trying to grow their physical presence like this. But it makes sense why. Five Below's unit economics appear to be in good shape. A new location costs about $500,000 to open, but it can generate on average $2.2 million in revenue and $500,000 in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first year.

There remains sizable opportunity to expand in very populated states like California, Texas, Florida, New York, and Pennsylvania. Should Five Below reach this target, its revenue base should be much higher than it is today.

Success in a tough industry

There might be no industry more competitive than the retail sector. Consumers have unlimited choices on where to spend their money. There is no lock-in that retailers can benefit from. Margins are typically already thin. Consumers have ever-changing preferences and expectations. And there are low barriers to entry.

That's why it's impressive to see the momentum Five Below has right now. During the first quarter of fiscal 2025 (ended May 3), the company reported 19.5% year-over-year revenue growth. This gain was driven by a 7.1% jump in same-store sales (SSS), which benefited from strong foot traffic.

Management expects SSS to increase by 3% to 5% for the full fiscal year. While this indicates there will be a slowdown in the near term, it's encouraging to see this key performance metric growing. That's especially true in the current economic environment that could force consumers to be more critical about their spending habits.

Valuation matters to investors

Five Below might be trading well off its peak. However, the fact that the stock has rocketed higher since early April creates a more difficult setup for prospective investors. The best opportunities come when shares are priced attractively. I don't believe this is the case here.

Investors can buy the stock at a price-to-earnings ratio of 25.9. This represents a notable discount to the trailing three-year average. But it's a slight premium to the overall S&P 500 index.

This provides no margin of safety, in my view. That's because Wall Street consensus analyst estimates call for earnings per share to rise at just a 6% compound annual rate between fiscal 2024 and fiscal 2027. That weak forecast won't necessarily bode well for the stock price.

If the valuation comes down, interested investors have a better understanding of Five Below's growth outlook, as well as its recent fundamental momentum, to make an informed decision.