January 2014 Sales
The Buckle, Inc. (NYSE:BKE) released its January 2014 sales numbers on February 6, 2014, and the market responded with a 3.5% rise in its share price to $44.30. The market being up for the day didn't hurt, nor did the fact that BKE has been beat up this year along with the overall market and the particularly vulnerable retail apparel companies. Prior to today, BKE had declined 16% since the first of the year.
At first glance, the January numbers did not look good. For the four-week period ending February 1, 2014, net sales of comparable stores opened at least one year declined 6.6% from the similar 2013 four-week period. Total net sales in the January 2014 period declined 27.9% from the January 2012 period. However, the 2013 and 2014 fiscal year Januaries were not the same. Fiscal year 2013 had 53 weeks and fiscal year 2014 had 52 weeks. The extra week was in January 2013, which skewed the figures, so the decline is not as bad as it looks.
More importantly comparable store net sales for the 52-week fiscal period ending February 2, 2014 were flat compared to the 52-week fiscal period ending February 2, 2013. Total net sales for the 2014 fiscal 52-week period were up .4% compared to the 2013 fiscal year 53-week period (one additional week). As is its policy, BKE gave no guidance or projections on current and next quarter earnings.
Although BKE's net sales growth was minimal for the year, it was more than what many analysts were expecting, and it appears that the market decided the company was over sold. At today's price of $44.30, BKE's regular dividend of $0.88 has a 1.98% yield. It also routinely pays a large year-end special dividend.
For those of you who 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. Dan 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.
BKE currently pays a regular per share dividend of $0.22 per quarter. Since 2006 it has also consistently paid a large special dividend in its fourth quarter. In 2010, the special dividend was $2.50; in 2011, it was $2.25. In 2012, it was an especially large $4.50, because of the directors' fear of losing a favorable dividend tax treatment. In January 2014, it paid a special dividend of $1.20.
In determining the intrinsic value of BKE, I first used a present value model of total owners' earnings (earnings plus depreciation minus capital expenditures) over a ten-year period. Determining the current intrinsic value of BKE is difficult because of its rapidly declining growth. If 2014 fiscal year earnings is 0%, its five-year average growth rate on earnings is 9.2%. Yahoo Finance analysts estimate 3.15% growth for 2015, and F.A.S.T. Graphs' estimate for future earnings (based on S&P's IQ analysts) is 6%. Normally I would use the average between the two which is 7.6%, but because of the recent decline, I believe the 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 2013 owners' earnings of $3.50 per share), came to $48.90. I then added the current share price of $44.30 to get a total of $93.20. The share price is added to the total earnings because 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 $93.20 using a 7% discount rate. The results of the calculation was a intrinsic value price of $47.37, which is 6.9% higher than the price it is selling for today. Using a 5% discount rate, the intrinsic value comes to $57.21.
I next used a simplified intrinsic value formula suggested by Benjamin Graham in his book "The Intelligent Investor" (fourth revised addition - chapter 11). According to Graham, this is a foreshortened evaluation method that can be used for growth stocks. The following is the formula and my calculations for BKE using a 6% growth of earnings rate:
- Value = Earnings X (8.5 +(2 X future growth))
- Value = 3.44 X (8.5 + (2 X 6))
- Value = 70.52
One can also determine the growth rate the market presently gives to the stock at its current price of $44.30 by changing the unknown in the formula as follows:
- Value = Earnings X (8.5 +(2 X future growth))
- ((Value / Earnings) - 8.5) / 2 = future growth
- ((44.30 / 3.44) -8.5) / 2 = future growth
- 4.38 / 2 = future growth
- 2.2% = future growth
As one can see the intrinsic value is very much dependent on the future growth rate. However, with the current price, the bar is set very low and it does not require much growth for BKE to be determined to be undervalued.
BKE's 2014 fiscal year was not good. At best it looks like its earnings will be flat with maybe a slight increase. However, BKE still has a strong balance sheet with no long-term debt, so it's unlikely that it will cut its regular dividend, and it should continue its special dividend policy. With its current price selling at a 6.9% discount to intrinsic value, and a long history of growing dividends (4.59% yield in fiscal year 2014), I believe it is a buy at its present price.