A Look at Buckle: Fundamentals Don't Matter Anymore

The Buckle (BKE) is a great example of why there is no reason to do fundamental homework or look at individual stocks anymore. The market could care less about any positive news. This is a retailer - fine; we've been among the biggest bears on retail far earlier than it was fashionable to be bearish on retail.

[Sep 7, 2007: More Retail Tells? Harley Davidson & Office Depot]

Just for data points that point to a 'reality' of a consumer who, without his main arms merchant, the house ATM, is pulling back.

[Sep 23, 2007: A Lump of Coal This Christmas? A Look at Retailers]

I remain bearish on the middle class US consumer, deprived of his/her ATM card (i.e. house equity), as housing prices in general fall and many new found homeowners (from 2005 onward) will find themselves upside down on their 0% down homes - along with the inflation the government tells us is nearly nonexistent

[Sep 24, 2007: And Here Comes the Reality Check on Retailers]

Avoid 95% of retailers; this is just the beginning of what I expect to be a steady stream of lower guidance and excuses such as "cold weather" or "warm weather" or "too sunny" or "too rainy". The American consumer is pinched by lack of easy money via home equity withdrawals and inflation that the government believes is make believe. Period.

[Oct 11, 2007: Retail Sales]

Again I think the 'analysts' underestimate the cost of food spikes and psychology of hearing daily about how bad the housing market is on people - they retrench mentally. Just like the M&A market was in a bubble due to easy credit, I contend retail sales are as well - if this country ever went to "spending" at a level they actually earn money at, retail sales would probably be cut 20-30% across the board. All we are seeing now is "less" use of credit, as people are forced to use credit cards instead of their house for an ATM.

Again, I wrote the above litany of posts during the biggest Kool Aid period we've seen in a long time - the stock market was at ALL TIME HIGHS in October 2007 while I was streaming all these warnings about retail. So I was looking like a loony back then; spitting in the wind as the "pundits" told us not to fight the Fed and it's "only a subprime issue"....

With that said, as much as retail stinks - some companies are executing.... one of our conditions for "investing" rather than trading is that WITHIN sectors the good companies should separate from the bad; individual company metrics need to matter again. That has not happened yet, and how The Buckle (BKE) has been trashed is the perfect example of "why bother" with individual stocks or doing research.

We sold this name in early October in the mid $30s. That's 6 weeks ago. It's now in the $17s; 50% haircut. Despite continuing to execute and making their peers look hopeless. This is essentially all that is wrong with the stock market summed up in 1 stock. Last earnings report...

• Youth apparel retailer Buckle Inc. on Thursday reported a 31 percent increase in its third-quarter profit on strong sales of its merchandise. (31% gain in retail? gotta be kidding me)
• The Kearney, Neb.-based company earned $29.1 million, or 62 cents per share, compared with $22.2 million, or 48 cents per share, in the year-ago period. The quarter included a charge of $1.8 million, or 2 cents per share after taxes, related to investment losses. Stripping out the one-time item, the company earned 64 cents per share.
• Net sales totaled $210.6 million, up 26 percent from $167.6 million last year.
• Buckle said same-store sales at stores open at least a year -- a key metric of performance for retailers because new stores tend to skew results positively -- was up 19.1 percent from last year.

To boot, what other retailers out there are actually buying back shares? Most are trying to conserve cash so not to go into bankruptcy.

• Teen apparel retailer The Buckle Inc. said Friday it will buy back up to 1 million shares of common stock.
• The company had about 30.7 million shares outstanding as of Aug. 29, according to an SEC filing.

The point is... there is no point in doing research or finding diamonds in the rough anymore. I still spend the time researching and looking at companies, but they seem to trade in a parallel universe & there is no benefit in doing extra work. The "student body right" trading is all that exists - good stocks trade with bad, good sectors with bad - only what ETF you are in matters and making sure your timing of the ETF gambling is correct.

The Buckle is a great example of why investors are being mocked in this market. If we had held onto this name we'd be down well over 50% since early October - for a company that executes in an incredibly hard environment. We own many other stocks with similar characteristics - who are pummeled - despite executing. In return we lose money for holding them. Par for the course.

As I said earlier - someone who has one day of market experience can do just as well as someone with 20 years experience in this market. Just show up at 3 PM, put your chips on an ETF and you have a 50/50 chance of "winning". Research, homework, thinking, experience - all laughed at.

Disclosure: No position

Comments

[basehitz:]

I appreciate your earlier bold calls in the face of the chronic cheerleading from bubleTV (aka CNBC) back then. In the bounce last summer, many were pounding the table specifically to buy retail AFTER many had huge runs. I had shorted retail but, faced with the constant drumbeat of cheerleading, it didn't seem reasonable I was one of the few that called it right. So I took a small trade. I am really pissed. That was a home run.

That you were ahead of this is the most important. In contrast, many others do rear view analysis extrapolating the past into the future ad infinitum.

Yesterday I sold a ton of stocks into the 4 day rally. So now with the coffers restored, I'm retooling my strategy and will be looking at everything as a trade.

Thanks for your post.

2008 Nov 27 09:24 AM

[SteveTheHawk:]

I agree that fundamentals are taking a back seat in decision making when it comes to investing. When fear is rampant, little else matters. I think we are at the point of searching for bad. The market seeks out, and sometimes invents, reasons to sell.

Anyone looking to make money in this market has to become something of a trader. "Investing" doesn't make much sense unless you want to wait a good five years in hopes of making money. Stocks dropping and/or rising 10-30% in a given day indicates that this is a trader's market.

And by the way, in your first paragraph about Buckle, you said "The market could care less about any positive news". I assume you meant to say "COULDN'T".

2008 Nov 27 10:00 AM

[Swiss Investor:]

In the long run, the market is going to be a weighing machine again, as opposed to the voting machine it is now. Then, BKE is going to pay off.

2008 Nov 27 10:49 AM

[brombonz:]

There's merit to your general point of view. With respect to BKE, however, there is a rational explanation, whether or not (in the environment you sketch)it's a factor in its price decline, That is, that BKE will have very difficult prior-year comps to match in the months ahead, for which the general economic outlook is gloomy. Furthermore, its longterm comp history is quite ragged, despite its uninterrupted double-digit scores over the last 15 months. In fact, before starting that run, it had reported negative same store sales in 35 of the previous 67 months. Over that five-and-a-half year period (2001-05) its annual comps came to -6.2%, -0.5%, +1.1%, +6.3% and +1.4%. I couldn't find my 2000 monthly comp record, but BKE's annual SSS for that year were also negative, namely -6.0%.

Maybe they've found some magic ingredients. Since 2002 they've roughly tripled the proportion of sales that is private label, and net profit margin, which seemed confined to an 8-10% range for years, climbed to 12.1% last year, and for the first nine months this year was up 1.8 points to 13.0% (excluding the write down for auction related securities).

The last two months its SSS have trended down, although still alternating with APP for best in apparel retail, from +22.4% to +19.7% to +14.5%. On the favorable side, they've managed this against prior year matching comps of +16.7%, +10.9% and +14.9%. In the next three months they face +18.2%, +18.7% and +19.1% from last year.

All told, I like BKE at these prices, although I don't see my way clear to buy it, considering all the other alternatives in the stock universe.

Just wanted to give my version of a "Guide to the Perplexed."

2008 Nov 27 12:29 PM

[brombonz:]

Just a few more things.

The company hasn't filed its 10-Q for the third quarter, but for the 2Q it said its sales per square foot were up 25.8% for the first half. Annual sales per square foot bottomed out at $274 in 2002 and 2003 after rising from $225 in 1994 to $344 in 2003. Since 2003 they've been climbing again,to $335 last year, and unless the fourth quarter this year is a bomb, should be up again. Is this a repeat of that previous cycle, and so a likely top in productivity for the time being?

I used only a five-year span in the previous comment to illustrate the company's ragged longterm comp performance. I could have used seven years.
Here's what that (1999-2006) looks like, in sequence (all %s): +0.9, -6.0, -6.2, -0.5, +1.1, +6.3, +1.4 and 0.0. Not a barn burner.

So, flash in the pan? Or undervalued top performer?

2008 Nov 27 01:32 PM

[Dan Jacome:]

great company, bad stock. What else is new. We wrote about BKE here

seekingalpha.com/artic...

2008 Nov 28 09:18 AM

[Rack 'Em, D...:]

My worry is that BKE is a proxy for the corn belt. And if Obama does overturn the corn into gas business, BKE may follow them down.

Countering that is how BKE expands: it didn't during the real estate boom. But it is now, during the real estate collapse. (Compare TGT) And judging by [young] man on the street quotes of its expansion into California, BKE will do fine.

Pays a nice dividend, has no debt, good price point, stores are destinations. You could do a lot worse.

2008 Dec 01 11:00 AM