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The Buckle Inc. (Ticker: BKE) Recommendation: BUY

Key Statistics:

Recent Price (as of 6th Oct 2010)

$26.53

Market Cap(million)

$1,228.30

Enterprise Value (millions)

$1,104.90

Shares outstanding (millions)

$46.70

52 week low

$23.00

52 week high

$40.35

5 year Average Dividend Yield

2.60%

Insider ownership

43.01%

Fiscal year

30-Jan

Business Description:

Buckle, Inc. is a retailer of medium to better-priced casual apparel for young men and women. The company’s merchandise is designed to appeal to the fashion conscious 15 to 30-year old. The company markets a wide selection of mostly brand name casual apparel, including denims, other casual bottoms, tops, sportswear, outerwear, accessories, and footwear. They emphasize personalized attention to their customers and provide individual customer services such as free alterations, free gift-wrapping, easy layaways and a frequent shopper program. Most stores are located in regional, high-traffic shopping malls, and this is their strategy for future expansion. As of January 30, 2010, the company operated 401 retail stores in 41 states throughout the continental United States under the names ‘Buckle’ and ‘The Buckle’. (Source Capital IQ)

Financial Highlight 2004-2010:

Year

Total Revenue

Gross Profit

EBITDA

Net Income

OCF

Cap-Ex

FCF

EPS

2004

422.8

173.1

64.1

33.7

57.9

-20.2

37.67

$0.69

2005

470.9

199.4

79.7

43.2

72.6

-16.6

55.98

$0.86

2006

501.1

227.9

93.9

51.9

76.1

-25.6

50.53

$1.13

2007

530.1

244

98.4

55.7

80.4

-21.9

58.49

$1.24

2008

619.9

294

130

75.2

121.1

-27.5

93.58

$1.63

2009

792

388.4

172.5

104.4

143.7

-47.4

96.33

$2.24

2010

898.3

450.6

224.6

127.3

158

-50.6

107.36

$2.73

(In millions, except for EPS)

Financial Analysis:

Profit Margins:

2006

2007

2008

2009

2010

Pre-tax Profit Margin

16.5

16.6

19.2

20.8

22.7

Net Profit Margin

10.4

10.5

12.1

13.2

14.2

Solvency Ratio:

2006

2007

2008

2009

2010

Quick Ratio

3.8

3.2

2.2

2.1

1.8

Current Ratio

5.5

4.8

3.4

3.2

2.9

Payout Ratio

24

138

37

126

95

Efficiency Ratio:

2006

2007

2008

2009

2010

Asset Turnover

1.3

1.4

1.5

1.7

1.9

Cash %

7.2

6.7

10.4

20.5

15.1

A/R %

1

0.8

0.5

0.5

0.8

SG&A %

23.5

24.2

23.4

22.9

22.4

FCF/Sales: BKE’s FCF/sales was 9.4% over the LTM, in line with the company’s performance over the last 10 years; ranging from 8% to 15% (with 2002 being only 4%).

ROE: The Company’s Return on Equity over the LTM was 33%. Over the last 10 years, BKE delivered satisfactory ROE, ranging between 15% and 20% from 2001 to 2007 and reaching over 30% in 2008.

ROA: Over the LTM, company’s Return on Assets was 25%, in line with BKE’s performance between 11% and 27% over the last 10 years.

Dividend Yield: Cash redistribution to shareholders is mixed with a good dividend but no buybacks. The company’s dividend yield was 2.9% (using about 30% of earnings).

Revenue Growth: Revenue growth has been strong and quite stable on a 10 year basis between 9% (most recently) and 12%.

Liquidity Ratio:

2006

2007

2008

2009

2010

Receivable Turnover

149.3

119.5

181.1

242.4

168.8

Inventory Turnover

4.2

4.3

4.6

5.2

5.4

Receivables per day sales

3.47

2.75

1.63

1.7

2.77

No. of days COGS in inventory

85

83

78

69

66

Inventory %

13.7

13.3

12.5

10.6

9.8

LT Debt/Equity: The company does not have any debt on balance sheet.

Buckle’s business performance is strong with high FCF generation and strong ROE/ROA’s in particular in recent years and despite the slowdown in consumer spending. In addition, BKE has been able to growth steadily at 8-9% on average over 10-year periods.

Buckle’s valuation seems attractive at this point, with a P/E of only 10.4X (LTM) on a company which has been growing EPS year on year for almost 10 years. The cash return is also attractive at 7.3% and could leave an investor with enough margin of safety to be comfortable with holding BKE’s stock for a while.

Same Store Sales Growth Analysis:

The Buckle’s same store sales analysis shows that the company had a very good organic growth in the last five year period. Such an increase in same store sales shows that the company’s strategy is working well and its merchandise is fresh.

Year

2005

2006

2007

2008

2009

2010

Stores at Beginning

316

327

338

350

368

387

Stores Opened

13

15

17

20

21

20

Stores Closed

2

4

5

2

2

6

Total Stores

327

338

350

368

387

401

Total Same Store Sales Growth

6.3%

1.4%

0.0%

13.2%

20.6%

7.8%

Sales per Square Foot:

Sales per square foot is a reliable indicator of how good management is at using store space and allocating resources. The Buckle’s same store sales per square foot has increased by about 40% in last five year period.

Year

2005

2006

2007

2008

2009

2010

Sales/Sq. Ft. (Gross)

$291.0

$298.0

$302.0

$335.0

$401.0

$428.0

Growth in %

2.41%

1.34%

10.93%

19.70%

6.73%

Management Overview:

BKE management is shareholder-orientated, especially when the founder’s son and current Chairman, Daniel Hirschfeld, owns approximately 43% of the company. Dividend payout ratio in 2010 was 95%. Buckle is led by dedicated management; Daniel Hirschfeld has been with the company since 1965, while Dennis Nelson (President and CEO) has been with the company for over 30 years. He has helped lead the company to over 400 stores and is actively involved in all phases of the company’s operations. Executive Vice President, Jim Shada has been with the company 25 years. Kari Smith, Vice-President of Sales, has been with the company for 25 years.

Competition/ Relative Analysis:

In the men's merchandise area, the company competes primarily with specialty retailers such as Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO), Hollister, Gap (NYSE:GPS), Pacific Sunwear (NASDAQ:PSUN), and Metropark. The men's market also competes with certain department stores, such as Dillard's (NYSE:DDS), Macy’s (NYSE:M), Bon-Ton stores (NASDAQ:BONT), Nordstrom (NYSE:JWN), and other local or regional department stores and specialty retailers.

In the women's merchandise area, the company competes primarily with specialty retailers such as Abercrombie & Fitch, American Eagle Outfitters, Express (NYSE:EXPR), Aeropostale, Hollister, Gap, Maurices, Pacific Sunwear, Wet Seal (WTSLA), Forever 21, Vanity, and Metropark. The women's market also competes with department stores, such as Dillards, Macy’s, Bon-Ton stores, Nordstrom, and certain local or regional department stores and specialty retailers.

2009

Buckle Inc.

American Eagle Inc.

Gap Inc.

Abercrombie & Fitch Inc.

Urban Outfitters Inc

Aeropostale Inc.

P/E

9.79

17.92

10.52

28.6

20.44

9.11

P/S

1.37

1.03

0.85

1.14

2.75

0.97

P/B

3.14

2.24

2.78

1.83

3.88

4.36

P/E * P/B

30.74

40.14

29.24

52.33

79.30

39.71

Yield (%)

3.04

2.92

2.16

1.85

0

0

Payout

0.3

0.52

0.23

0.53

0

0

ROA (%)

25.85

8.74

15.09

4.19

16.01

30.59

ROE (%)

35.1

11.77

25.02

6.48

20.18

54.15

Operating Margin (%)

13.92

5.81

8.26

3.73

12.45

10.66

Net Margin (%)

13.89

4.59

8.26

2.99

12.45

10.66

The Buckle’s P/E ratio of 9.79X was lower with compared to American Eagle, Gap, Urban Outfitters (NASDAQ:URBN) and Abercrombie & Fitch. The company’s P/E ratio was slightly higher than the P/E ratio of Aeropostale (9.11X), but was lower than the industry and BKE’s five year average P/E of 13.9X.

The Company’s Return on Equity (35.10%) and Return on Assets (25.85%) were higher than the most of its competitors.

The Buckle’s had an operating margin and net margin of 13.92% and 19.89% respectively, which were higher than the industry average.

Greenblatt’s Magic Formula Analysis:

For a stable business, the higher the earnings yield, cheaper the stock. The Magic Formula requires an earnings yield greater than 10%. With an Enterprise Value of $1116 and EBIT of $204, earning yield of the company was 18.3% (Earning yield for Guess, Fossil and Urban Outfitters was 12.7%, 9.2% and 7.5% respectively).

Greenblatt recommends using return on assets greater than 25%. The Buckle had ROA of 25.85% in 2010 (ROA for Guess, Fossil and Urban Outfitters was 17.4%, 13.1% and 15.1% respectively). The company’s return on capital (ROC) was 35.9% in 2010.

Valuation/DCF:

Current EPS

$2.73

10 Year Average Growth Rate

15%

5 Yr Growth=15%

5 Yr Growth=10%

5 Yr Growth=5%

Terminal=3%

Terminal=3%

Terminal=3%

Discount Rate=9%

$77.34

$63.08

$51.09

Discount Rate=10%

$65.80

$53.82

$43.41

Discount Rate=11%

$57.15

$46.88

$38.21

Discount Rate=12%

$50.44

$41.49

$33.92

DCF valuation of the company under different scenarios of growth rate and discount rate shows that the stock is undervalued and there is a margin of safety.

Conclusion:

I have a ‘BUY’ recommendation on BKE stock. BKE’s long-term growth prospects are bullish due to strong earnings estimates. In addition, the company is planning to open 20 new stores, which will drive sales up. BKE’s steady flow of brand merchandise and store expansion will go a long way to increase brand awareness and attract new customers. Buckle is supported by strong management along with strong financials. Currently they have zero debt, current ratio of 2.9 and a quick ratio of 1.8. The company has a PEG of 1.0, which is a bullish indicator. Adding to this they have strong ROE and ROA of 35% and 26%. Buckle insiders hold 43% of the company showing they believe in its long-term growth potential. This long-term growth will be strengthened now that the Buckle is planning on expanding into the Northeast for the first time. Also, BKE’s same store sales growth and sales per square foot analysis shows that company is growing and has shown a better performance in comparison to its competitors. I like BKE due to their strong brand management, overall sales appeal and low Price/Earnings multiple.

Disclosure: The analyst/author of this report holds no financial interest in the securities of this company. The analyst/author knows of no existence of any conflicts of interest that might bias the content of this report. The analyst/author is not monetarily or financially compensated in any way for writing this report.

Source: Buckle Inc: Growing and Undervalued