The Second Quarter
The Buckle, Inc. (BKE) released its second quarter financial reports on August 22, 2013. The numbers were not spectacular; although in line with the average estimate of analysts, and the company remains on course to meet the 2013 earnings estimate of $3.53 per share, an anemic (yoy) growth rate of 2.6%. This is far below the 12% growth I calculated as its four-year average, and also below its 7% growth in 2012. In 2011, it grew at 12%. Gross revenue in the recent quarter came in at $232,529, a 7.8% gain over the same quarter in 2012. The average estimate of analysts for the 2013 fiscal full year revenue is $1.6 billion, a 3.2% gain over the $1.2 billion earned in 2012. BKE is still growing, but at a much slower pace than in the last four years.
BKE's net profit for the quarter was 10.8%. Although this is considerably less than its four-year average of 14%, it's part of the company's normal pattern as shown in the graph below that compares BKE's profit margin with some of its peers. BKE's profit margin goes down in the summer and up in the winter. That being said, there has been recent news that apparel retailers are doing deep discounts because of the lackluster back to school sales. On September 5, 2013, BKE released its August sales numbers that showed a 1% increase for comparable stores open for more than one year, a further indicator of the slow growth trend.
For those of you that are unfamiliar with BKE, it is an apparel retailer that caters to young adults. It is an American success story that began in 1948 when David Hirschfeld opened a men's store named Mills Clothing, in the small college town of Kearny, Nebraska. In 1965, Dave's son Dan took over the business. If you remember the sixties, men's stores were a little out of vogue unless they were selling bell-bottom pants and tie-dyed shirts. Dan was hip enough to notice the change, and transformed the store to the times. He changed its name to the Brass Buckle, and it became a denim store. In 1977, it started selling women's apparel, and in 1991, it went public as The Buckle, Inc.
Dan Hirschfeld still owns a big hunk of stock (about 30%). Since going public its stock price has gone straight up from $2.00 to a high of $57.68 on August 5, 2013. This growth was accomplished while keeping the company debt free, and it has been paying regular dividends since 2003. In addition to its regular dividend, it consistently pays a mammoth special dividend at the end of the year. The present yield for the regular dividend is 1.5%.
Dan is still involved in the store as chairman, and has recently become a billionaire. The present CEO started as a salesman in 1970 while attending college. Most of the top executives have worked their way up from the bottom.
The company's growth is organic and entirely in the US. It markets are well known brands as well as private label, and denim is still its top product at 46% of sales. It has 440 stores that are located in high traffic shopping malls, primarily in secondary markets with only two in New England and three in New York. The company still has plenty of room to expand without entering into the uncertain global market. In 2012, it opened ten new stores, and had twenty-one full remodels. The company anticipates similar expansion in 2013. This business model seems to work, in that BKE has some of the highest margins of any of its peers. (BKE's 2012 Annual Report)
In 2010 BKE expanded its considerable headquarter operations in Kearny by building a 240,000 square foot distribution facility. This new facility is now their only store distributing center.
According to my calculations, in the last five years BKE has put up the following averages:
- Gross profit is 43%
- Net profit after taxes is 14%
- Operating income is 22%
- Inventory turnover is 9.5 weeks
- Capital expenses are 23% of net earnings
- P/E is 12.36
Other current key statistics as of September 7, 2013, are as follows:
- P/E (TTM) is 14.91
- Book value per share is $7.10
- Return on Assets is 30.84
- Return on equity is 40.14
BKE pays a per share dividend of $.20 per quarter (annual yield 1.5%). It also consistently pays a large special dividend in the last quarter of the year. In 2012, the special dividend was an especially large $4.50, because of the fear of losing the dividend tax treatment. In 2011 and 2010 it was $2.50. It is likely that the 2013 special dividend will be substantially reduced because of the 2012 dividend.
In the last five years the total dividends have an average payout ratio to earnings of 154%; however, the five-year payout ratio to operating cash flow is only 68%. The large payout ratio is concerning, but by keeping the regular payout low (about 25%), I think it can avoid the usual share price chaos if a substantial decrease in future special dividends becomes necessary, although shareholders have probably grown accustomed to this large bonus each year.
In determining fair value of BKE, I used a present value model of total owners' earnings (earnings plus depreciation minus capital expenditures), over a ten-year period. Determining the current fair value of BKE is difficult, because of its rapidly declining growth. Its four-year average growth on earnings is 12%, but in 2012, it was only 7% and the 2013 estimate is only 2.6%. Normally I would use the average growth of 12%, but because of the recent decline, I believe a 6% growth rate is more appropriate, and that is what I used in my calculations.
The total ten-year earnings (using the 6% growth rate and 2012 owners earnings of $3.50 per share), came to $48.90. I then added the current share price of $51.69 to get a total of $100.59. The share price is added to the total earnings for the reason that without it there would be an assumption that the company goes out-of-business, and has no value at the end of 10 years. I believe such an assumption is unreasonable. I look at the share price as I would the principal of a loan that will be paid back when the term of the loan ends. I then computed the present value of $100.59 using a 7% discount rate. The results of the calculation was a fair value price of $51.92, which is essentially the same as the price it is selling for today.
As a word of caution, I believe most economists and analysts agree that computing fair value is more art than science. In reviewing computations at other online sites, I have seen present value discount rates as high as 11%, and a wide range of fair value calculations. The higher the discount rate the lower the fair value.
Although BKE still has a very strong balance sheet and continues to grow its revenue and earnings, its rate of growth has decreased considerably, which appears to be developing into a trend. BKE's second quarter financial statements emphasize rather than dispel this trend of lower growth. The chart above that compares BKE's earnings with its rate of growth clearly shows this trend.
BKE's share price has fallen from its all time high of $57.68 set in August to its present price of $51.69, a decline of 10.3%. From my calculations, I find its current price to be close to fair value. That could change rapidly if its growth rate continues to decline, or even stays at its current low rate. As an apparel retailer the next two quarters are critical for BKE, and account for the bulk of its revenue. BKE needs a big holiday season to see its share price increase, and it will need to do more than just meet analysts' estimates. If BKE cannot prove that the present decline in its growth is temporary, I would expect a considerable correction.