Buckle Is Belted, Creating Another Buy Opportunity

Jun. 7.10 | About: The Buckle, (BKE)

One of the worst same-store-sales results relative to expectations last week was from Buckle (NYSE:BKE), which reported a decline of over 5% compared to expectations of roughly flat. The company, which doesn't provide guidance, also had posted a weak April number, but it explained on its 1st Quarter conference call a few weeks ago that the weakness had been due to a lack of inventory, especially in accessories. At this point, it's unclear whether those problems persisted in May. In any event, the stock lost about 8% of its value over the next two days (click to enlarge):

BKE ST
Over the past two years, the stock has performed better than the market despite a pretty tough ending to 2009. I first got interested in the stock near the end of 2009 and added it to the Conservative Growth/Balanced Model Portfolio in mid-December near 28. In February, we added it to the Top 20 Model Portfolio near 29. It's been a good trading stock, as we sold some in the Top 20 in April at around 38.50 and repurchased some in May at 35.71. In CG/B, we trimmed at 38 and repurchased some at 35.71 as well.

For those not familiar with the company, it is a mall-based seller of denim and tops to primarily young adults, with a focus on above-average quality. Based in Kearney, Nebraska, which isn't exactly the fashion center of our country, the company competes with many other concepts, though none quite so directly. It is often lumped with American Eagle (NYSE:AEO), Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF), but, from what I can tell, it's overlap isn't as big as one might expect. Its demographic is a bit older and a bit higher-end.

The company stands out from these and other retailers in many ways. First, management doesn't get much better in my view, with long tenure, proven success over a long period of time and high ownership. In total, insiders own 45%, though Chairman and founder Dan Hirschfeld accounts for 36%. CEO Dennis Nelson, who has been with the company since 1970, on the Board since 1991 and CEO since 1997, owns 7%. CFO Karen Rhoades, with the company since 1987, owns almost 1%. Second, the company excels for its service, which includes free alterations on jeans (which is good, since they average $90 a pair). The company invests very heavily in training its salespeople. Third, the company has mastered the private label, which accounts for 29% of its business in the most recent quarter. The price points may be high, but so is the value to its customers. Fourth, like true owners, the management team knows how to allocate capital. The balance sheet is pristine, with no debt and $236mm in cash and investments (about $5 per share). The dividend is now .80 (2.4% yield), but the company has paid extra dividends in three of the past four years. During the past two years, total dividends per share have been 2.60 and 2.73. The company has also been opportunistic in repurchasing stock, buying 557k in 2008 and 964K in 2007 for a total cost of 20.38 per share.

I think that the stock is very inexpensive, with current PE ratio based upon projected earnings over the next year of just 11.3X. Adjusting for the cash and investments, the PE is below 10. What's interesting to me is that the FY12 estimate of 2.95 appears to be too low, representing just 1% growth from the FY12 estimate of 2.92. As I examine the detail, I see two outliers: GS at 2.13 (-18% from FY11) and GARP Research at 1.65 (-38% from its estimate for FY11). All of the other analysts show growth. Excluding the outliers, the consensus would be 3.16 based upon the other 10 contributing analysts. So, while it's not exactly robust growth, it is still, at 8%, a lot better than just 1%.

Growth for the company will come from some new stores and some substantial remodels, but the current expansion rates aren't so great. Thus, same-store-sales growth will be critical. Note that internet sales aren't reported monthly and have been growing very strongly. In the longer run, the company believes that it can more than double its current 412-store base. The East Coast is an obvious green field for them.

One can't comment on BKE without noting the extraordinary short-interest. The most recent figures suggest that almost 10mm shares are short, up from 8mm earlier this year. This represents 15 days of trading volume, 21% of the shares outstanding and almost 40% of the "float", which excludes shares owned by insiders. Also worth noting is the very large ownership of Royce & Associates, which owns 6.6mm shares (14.5%). Two other large institutional holders own another 5.8mm shares. Thus, with 46.9mm shares total and 20.5 held by insiders and 12.4mm by three key institutional investors (combined for 32.9mm), that 9.85mm share short looks awfully crowded. The shorts are betting that the very high margins aren't sustainable, but I disagree. Another point is that I believe the shorts are concerned with the recent impact of price relative to units on sale, but it's not so much apples-for-apples pricing changes as it is the customer trading up to higher price points.

As I look out, I don't expect BKE to command the kind of multiple that it used to get because it probably won't grow as quickly as it used to grow because its margins are already very high. Still, though, if it can continue to execute, the company has a reasonable shot of growing its EPS at low double-digit for quite some time based upon store openings and a better retail environment. I give kudos to the company for how it has performed already - note the EPS line in the 5yr chart (click to enlarge):

BKE LT
When I look out a year, I expect to see earnings growth continue into 2012. For FY13, there isn't much to go on from the analysts. As I project out for an interpolated May 2012 estimate, I am blending 3.16 and 3.48 (10% growth of off the current adjusted consensus for FY12) to get 3.26. I believe that a multiple of 14 is appropriate, which gets a target of 45 a year from now (a potential gain of 37% before dividends and special dividends). This also happens to be the late 2008 peak and just an 11% advance from the recent April high. Downside support appears to be at 31.50.

So, I see BKE as a great company with excellent management and a strong balance sheet. Earnings growth is slowing, but the company has growth potential through store openings and continuing growth in its stores even if margin expansion will become more difficult. The chart looks good to me, and valuation seems inappropriately low. BKE is a good name to consider for a continuing challenging retail environment in my view given these factors and its value focus and conservative management style.

Disclosure: Long BKE in both model portfolios for Invest By Model