Unlike most retailers that are at the mercy of both the economy and the whimsical tastes of retail consumers, one company has been faithfully frequented by its core base since 1948. Investors must understand why this company was able to grow earnings during the recession – because that trend is going to continue and lead to solid returns.
The answers to the success of The Buckle (BKE) are located in the annual report. There, investors learn that the vast majority of stores are located in Middle America. 43% of company sales are denims, 37% are tops, and 29% private (i.e. unknown) label. This means that The Buckle serves up simple, no-frills clothing that is not reliant on the latest fashion fad. The Buckle doesn’t try to be Abercrombie &Fitch (ANF), and doesn’t have the wildly varying earnings of that company, either. Nor does The Buckle have to deal with the controversial racy ads of that retailer. Such things would, in fact, probably hurt the company’s brand. Whereas Abercrombie & Fitch is more about chasing trends, The Buckle sticks to standards.
Another aspect of The Buckle that may not be obvious to investors, unless they actually visit a store, is the level of personalized service its employees offer. Personal experience has demonstrated that The Buckle goes just that much farther in looking out for a customer than other chains do. It is this attention to personnel that lifts The Buckle above its peers. The company prefers to promote from within. Of its 7,000 employees, almost 2,000 are full-time, and almost all began on the sales floor. An area or district manager is always going to be more efficient and, simply put, better at the job, than a manager hired from some other chain with a different corporate culture.
Management has learned all of this from personal experience. The Chairman has held his position for 20 years and prior to that was the CEO. The current CEO began as a part-time salesman in 1970. The CFO has been with The Buckle since 1987. The newest director has been with the company five years, with the others having served between ten and twenty years. 43% of company shares are held by insiders, an amount that blows away the vast majority of public companies.
The Buckle has also taken a very deliberate, cautious approach to expansion. Unlike its trendy competitors, the company funds its expansion entirely from the $100 million it generates annually from operations. It carries no debt. It has opened fewer than twenty new stores each year, being careful not to over-reach.
What about The Buckle going forward? The company actually grew earnings 33% in 2008, 23% in 2009. Investors may be dismayed to see analyst predictions of only 12% annualized growth over the next five years. Are the company’s best days behind it? This is another reason why it’s imperative to read the 10-K. There, the company reveals plans to open new stores and relocate others. That means greater capital expenditures, and a corresponding impact on earnings. In addition, analysts often underestimate actual earnings by 5% – 8%. I think The Buckle will continue its surprising ways.
The company trades at fair value given analyst earnings projections and backing out the $3 in cash it holds. When one adds up the likely underestimated 12% projected annualized earnings growth, add its 2% dividend, toss in the exceptional management and financials, the stock is likely to provide solid and reliable 15% annual returns going forward.
Given how whimsical retail clothing shoppers can be, it's helpful to take careful note of how a clothing retailer's stock behaves. A stock that suddenly becomes hot and sees its price rocket will often see it come crashing down later, like Chico's FAS (CHS). Another type is the one whose business ebbs and flows with the economy, while its stock has a general long-term uptrend, like Christopher & Banks (CBK). The last type of clothier does a slow and careful expansion over many years, building its brand, and providing a reliable product. This stock rarely takes big hits, trending upward for long periods, like Joseph A. Bank Clothiers (JOSB).
Guess? Inc. (GES) is more like Joseph A. Bank as far as execution, although it is diversified beyond just clothes. It also deals in eyewear, watches, handbags, footwear, kids' and infants' apparel, leather apparel, swimwear, fragrance, jewelry, intimate apparel, and other fashion accessories. A quarter of its stores are outside the U.S., accounting for half of its revenue, so it would literally take a global recession to set the company back.
Guess has been executing phenomenally. The company routinely turns a profit, but I am particularly impressed that it has done so over the past four years. It posted a 15% net income increase each year from 2008-2010, and 20% last year, on compounded revenue growth of 27%. The company generated $354 million in free cash flow during the TTM, has $440 million in cash on the books and almost no debt.
This consistency of execution gives me a reason to have faith in the company, along with the fact that The Chairman and the CEO have been with the company since it started thirty years ago. That consistency should tell investors something. All that free cash also means it can expand freely.
Analysts project 13% compound annual earnings growth over the next five years. However, all that excess cash and great execution earn the shares a premium multiple of 16. With $3.44 per share in expected earnings this year, I see fair value at $55, a full 66% above today's price.