Buckle Inc, (BKE) is a retailer of casual apparel, footwear, and accessories for the fashion conscious young men and women. Buckle operates around 412 stores in 41 states in America. If you haven’t heard of them there is good reason. They operate in the 21st century, with strategies used in the early 20th century, such as grass roots marketing and providing exceptional service. They don’t waste a lot of capital on advertising and they offer free alterations to clothing to accommodate customers. If this company doesn’t scream, old time, mid west, quality, I don’t know what does. After all, they were founded in Kearney, Nebraska in 1941 as Mills Clothing, Inc and in 1991 changed their name to The Buckle, Inc.
The stock itself has been hammered in recent months, dropping from a high of $40.00 per share in April to the current level of $27.01 per share, resulting in a loss of 32.5%. Buckle is off of its 52 week low by only 5.5% and the current Price to Earnings ratio (P/E) is 9.63, when the industry average for Apparel Stores is around 15. Since we now know where Buckle stands as far as price point, let’s talk about why Buckle has received a beating. Buckle reported growing profits and revenue for the 4th quarter and full year of 2009. They also reported an increase in same store sales in March of this year. The combination of these two factors ran the stock price up to $40.00 per share. The slide began when Buckle reported a decrease in same store net sales in April of 5.7%, when compared with April of 2009. The slide continued when revenue at stores that were open at least a year decreased 5.4% in May, while Wall Street analyst were expecting an increase of 0.6%. The trend repeated itself in June with a 7.3% decrease in revenue at stores open at least a year, when compared to the same time period a year ago. On top of all of this, on July 9th Goldman Sachs lowered its earnings estimate on shares of Buckle, and rated it a sell, with a $25 price target.
As I have written about in my Investment Philosophy post, we should not ignore Buckle because Goldman Sachs says sell, or because Buckle has reported a decrease in same store sales for the past three months. We must use independent thought and formulate our own conclusion, which we shall do now. What The Buckle lacks in brand image, it makes up for in the history of its earnings and strong balance sheet.
Buckle has reported increasing net income for the past seven years. Buckle’s annualized earnings growth from 2001 to 2010 is around 15.61%. Buckles five year annualized earnings growth is around 24.13%. Buckle’s Return on Total Capital (ROTC) has averaged around 19.42% from 2001 to 2010. In an effort to get a better grasp on Buckle’s real income we will use the operating income after depreciation:
- First Quarter 2009 vs. First Quarter 2008 => 52.2% operating income increase.
- Second Quarter 2009 vs. Second Quarter 2008 => 14.4% operating income increase.
- Third Quarter 2009 vs. Third Quarter 2008 => 13.9% operating income increase.
- Fourth Quarter 2009 vs. Fourth Quarter 2008 => 21% operating income increase.
- First Quarter 2010 vs. First Quarter 2009 => 10.8% operating income increase.
When comparing the numbers, the latest quarter has been relatively weaker on a year over year basis, even after factoring in the reduced operating income in late 2008 and early 2009, due to the financial crisis. The financial crisis caused an artificial inflation in the year over year quarterly operating income percentage increase (although Buckle faired pretty well during the crisis). The short term operating income shows a clear decreasing trend, but once again is expected, or else we wouldn’t be able to get Buckle at the price it is selling at today. When Buckle is compared to their competitors, namely, ANF, AEO, and GPS, Buckle has the far superior operating income as a percentage of sales (22%), which shows that they have managed to contain their operating expenses much more efficiently and consistently than said competitors. What we must make sure of is that Buckle has competent management, a strong balance sheet, and will get back to a trend upwards in profitability.
Management seems to be addressing the issue related to the decrease in revenue. A quick look at their website shows that they are currently having sales for as much as 75% off select summer attire in an effort to increase sales and lower inventory. Management could work on maintaining their free cash flow per share, since they have been negative three of the last five years. Free cash flow per share is currently positive after three consecutive quarters being negative. While I don’t like a company with negative free cash flow, the explanation lies in their current expansion and growth shown in the investing activities on the cash flow statement. Insiders currently own 43% of the shares outstanding, showing that they have a vested interest in the performance of Buckle. Furthermore, retained earnings have been put to good use by management. Buckle management also has declared a $0.20 dividend for the current quarter, equating to a current annual dividend yield of 2.9%. Lastly, I would like to see Buckle management possibly repurchase some of the shares outstanding, as a vote of confidence by management, not to mention that it would be a smart move at current depressed price levels.
Buckle’s balance sheet is as good if not better than any of their retail competitors out there:
- Minimal long term debt (better than their competitors).
- History of liquidity with current ratio averaging 3.95 over the past 5 years (better than their competitors)
- Debt to equity ratio averaged 0.32 over the past 5 years
- Long term debt less than their net current assets (shows financial stability)
- Inventory as a percentage of total assets is similar to competitors (shows fairly efficient management inventory control)
Overall, I would say that Buckle’s financial statements on a common size analysis basis are similar to The Gap, but Buckle has more liquidity in their balance sheet, and a higher operating income as a percent of sales on their income statement. Buckle seems to be operating more efficiently than The Gap, which is probably a combination of good management and the difference in scale of the two businesses as relating to market cap ($1.3B versus $11.9B for The Gap). Since Buckle is comparable to The Gap let’s compare the P/E ratios. The Gap’s current P/E based on the trailing twelve months is 10.54, whereas Buckle’s P/E is 9.63. Assuming earnings are fixed, and ignoring the premium one might pay for The Gap, due to their brand image, Buckle could see around a 9.8% stock price appreciation just to equal the premium The Gap is currently receiving. Is this relevant? Maybe. Maybe not. It is hard to value the goodwill or premium one would contribute to a brand, but the financials don’t lie, and I would much rather get into Buckle at their current price level, then to get into The Gap.
Buckle announces their July sales numbers today and their second quarter earnings on August 19th. Currently, there is a 17.5% short interest in Buckle, which has come down from previous levels. Because of the volatility that the stock can see, I wouldn’t normally recommend buying a stock around the time when news is about to come out about the company, but since we have the long term in mind, the future performance will weigh heavier than today's news. That being said, if you want in now, you can sell the December 18th put at a strike price of $25.00 for around a $2.30 premium. If you sell 4 contracts (equivalent to 400 shares), you will earn a 9.09% return after transaction costs by simply collecting the premium. The stock price can go down 16% from the current price before the option will be exercised at the breakeven price. If the stock price does go below the breakeven point, you stand to lose money, but you will be getting Buckle at around $22.70 per share, a great price to own at. For those of you who want to get into the company directly (think long term), you can do one of three things:
- Buy in early before Buckle releases their sales figures for July, with a long term mentality in mind (every stock purchase should have a long term mentality in mind). Using this strategy is riskier because you are buying around news, and that’s when all the vultures swoop in to get a piece on the long or short side
- Wait for the July sales number to come out and reevaluate the stock based on their numbers. If the sales are weak, you will have the opportunity to get into the stock at an even cheaper price (just wait for the dust to settle). If sales are strong, you may miss the opportunity to get in at the bottom, but you still will be able to get into a great company at a reasonable price
- Lastly, you can sell a put as I described above, and also purchase the stock directly. This allows you to be exposed to The Buckle if they report good sales numbers, while protecting you with the premium you earn from selling the put, if they report bad numbers. This strategy could get a little sticky if they report bad sales numbers and the stock price decreases more than 16% between now and December 18th.
Disclosure: No positions in BKE at this time.