May 2014 Sales
The Buckle, Inc. (NYSE:BKE) released its May 2014 sales figures on June, 5th, 2014 which showed flat growth. The net sales in May for comparable stores, opened at least one year, continued their pattern of decline with a decrease of 3.1% from May 2013 sales. Total net sales for May were down 1.2%. Although its fiscal year-to-date total net sales (seventeen weeks that started in February), showed an increase, it was quite small at .3%. The year-to-date comparable stores sales decreased by 1.4%. The May numbers are not what BKE's share holders wanted to see.
Fiscal year 2013 was not a good year for BKE. According to my calculations, from its SEC form 10-K, it had negative earnings per share (NYSEARCA:EPS) growth of 1%. This was the first negative growth for the company since 2001. Its four year average EPS growth is 6% and (according to F.A.S.T. Graphs), its ten year average diluted EPS growth is 15.5%. BKE also saw a decrease of approximately 3% in both its average sales per store, and its average sales per square foot (the first decreases in more than ten years). As a caveat 2013 was based on a 52-week year, and 2012 was based on a 53-week year.
BKE currently operates 454 stores in 44 states. This is nine more stores than it operated in June of 2013. It just recently opened its first store in Alaska. BKE has had an online store since 1999. The online store is not used in its comparable store sales number, so what little EPS growth BKE has been receiving this year has been from its new stores and online store. In fiscal year 2013 its online store generated $89 million in sales, a 5.3% increase over fiscal year 2012.
According to its 2013 Annual Report, the company plans on opening seventeen new stores in fiscal year 2014, and remodeling seventeen older stores. This expansion should give BKE at least some growth in 2014, even if comparable store sales remain flat. Most of the new stores are scheduled to be opened before the all important back-to-school season and holiday season. BKE's stores averaged $2.318 million per year in 2013. Even if the new stores are not open for a full year, most will be opened by late summer, and during the seasons when most of their revenue is generated. Assuming they can bring in 75% of the revenue of an average store, that would mean an additional $29.55 million in sales for the company (an increase of 2.6 % from its 2013 sales of $1.128 billion). The company should also have continuing growth in its online sales which were $89 million in 2013, (an increase of 5.3% from 2012). A similar increase in 2014 would add another .4% of revenue growth. Therefore BKE should have 3% total growth in sales from its store expansion and online business alone. Although F.A.S.T. Graphs' estimate for future earnings (based on S&P's IQ analysts) is 7%, its estimate for 2014 EPS is only 1%, a rather low bar for BKE to beat.
In a first quarter conference call held on May 22, 2014, management did indicate that they had been raising their average price points on jeans, and that so far they were being well received. If these higher prices hold up, revenue should also increase since denim accounts for 45% of its sales.
A number of apparel retailers -- including major competitors of BKE, such as Aeropostale, Inc., (NYSE:ARO), and American Eagle Outfitters, Inc. (NYSE:AEO) -- have also indicated weak first quarter sales, so BKE's performance appears to be an industry wide trend. In fact, Express, Inc. (NASDAQ:ESPR), rather than expanding, announced it is planning on closing fifty of its stores.
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 Kearney, 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.
Dan Hirschfeld still owns approximately 30% of the common shares of the company. Since going public its share price has gone 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.
Its growth is organic and entirely in the US. It markets well known brands as well as private label, and denim is still its top product at 45% of sales. Its stores 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. This business model seems to work in that BKE has some of the highest margins of any of its peers.
The following is a list of relevant financial ratios from Charles Schwab which shows the financial strength of BKE. As the chart shows, (other than the five year average EPS growth), there has been little change in BKE's key ratios. Most important is that it managed to maintain its profit margins, which are some of the highest in the industry. They also continue to have zero long term debt. BKE's fundamentals remain very strong, despite its weak performance in 2013.
|Return on Assets||43%||31.26%|
|Return on Equity||40.14%||45.66%|
|Return on Investment||35.01%||38.89%|
|Net Profit Margin||14.32%||14.37%|
|Operating Profit Margin||22.64%||22.74%|
|Enterprise Value||$2.20 Billion||$2.04 Billion|
|EPS Growth Rate (5-Year)||16.18%||8.62%|
|Long Term Debt||$0.00||$0.00|
In addition to its regular dividend, BKE consistently pays a mammoth special dividend at the end of the year. the present yield for the regular dividend is 1.9%. A special dividend was announced December 10, 2013 in the amount of $1.20 (a 2.6% yield under its current share price of $46.15). In fiscal year 2012 the special dividend was an exceptional $4.50, issued (at least in part) as a result of an anticipated adverse change in tax law.
In fiscal year 2013, BKE had a payout ratio to earnings of 60% and a payout ratio to cash flow of 67%. In the past it payout ratio to earnings, has often been in excess of 100%, while its payout ratio to cash has been somewhat lower, averaging about 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.
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. Its four-year average growth on earnings is 16%, but in fiscal year 2013 it was only 7% and in 2014 a negative 1%. Although F.A.S.T. Graphs' estimate for future EPS growth (based on S&P's IQ analysts) is 7%, its 2014 EPS growth estimate is only 1%. Normally I would use the average growth of 16%, but because of the recent decline, I believe the 7% growth rate is more appropriate, and that is what I used in my calculations.
The total ten-year earnings (using the 7% growth rate and 2014 owners earnings of $3.48 per share), came to $51.43. I then added the current share price of $46.15 to get a total of $97.58. 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 $95.69 using a 7% discount rate that I believe is reasonable for a company with no long term debt in the current low interest rate environment. The results of the calculation was a intrinsic value price of $49.60, which is 7% higher than the price it is selling for today. Using a 8% discount rate the intrinsic value comes to % 45.62.
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 7% growth of earnings rate:
- Value = Earnings X (8.5 +(2 X future growth))
- Value = 3.44 X (8.5 + (2 X 7))
- Value = 78.30
In this formula, if one assumes zero growth the intrinsic value of the stock would be 29.58.
- Value = 3.48X (8.5 + (2 X 0))
- Value = 3.48 X 8.5
- Value = 29.58
One can also determine the growth rate the market presently gives to the stock at its current price of $46.16 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
- ((46.16 / 3.48) -8.5) / 2 = future growth
- 4.76 / 2 = future growth
- 2.38% = 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 substantially undervalued.
BKE's shares are currently selling at $46.15 (June 6, 2014), which is 7.5% below my fair value estimate of $49.60, using a present value model of owners' earnings. The current share price is up 11% from its fifty-two week low of $41.45 set on February 5, 2014. Its fifty-two week high of $57.68 was set on August 5, 2013. So far the company's earnings have been flat in fiscal year 2014, but 35% of its sales come in the back-to-school season (July 15 to September 1), and the holiday season (November 15 to December 30), which gives the company a lot of time for a turn around.
The primary issue regarding BKE and the apparel industry at this time, is whether sales will pick up in the all important back-to school, and holiday seasons. My valuation of BKE is based on a future EPS growth rate of 7%. That may be difficult to achieve in 2014, based upon BKE's recent performance, but it could turn around quickly in the second half of the year if the economy continues to improve. F.A.S.T Graphs' analysts (based on S&P's IQ analysts) have a estimated EPS growth rate of only 1%. In my opinion BKE should be able to beat most analysts expectations, and any beat should result in a increase in its stock price to at least my current valuation of $49.60.
Fundamentally BKE is a very strong company with zero debt, and it can withstand a few years of slow or even negative EPS growth. It also pays a very high dividend if you include its traditional special dividend. Last year all of its growth came in its new stores, and online business. The company intends to continue its policy of slow but steady growth (without long term debt), by opening seventeen new stores this year.
At its current price, BKE looks like a buy at $46.00, but I would wait for a few months, hoping its share price retreats back to the lower forties. In most years, as shown by the chart below, the company's share price goes down in the summer. I don't see any rush to buy now, and waiting could produce a substantially better entry point. I would also like to see a couple of more months of sales figures that indicate a turn around of the present downward trend.
Disclosure: The author is long BKE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.