The Buckle: Short-Term Risk Means Long-Term Rewards

Aug.24.11 | About: The Buckle, (BKE)

Investing in the volatile specialty retail sector may seem like the equivalent of investing in losing lottery tickets at this point, but there’s at least one name in the sector that deserves a look. A quick glance at The Buckle (NYSE:BKE) reveals about what you’d expect from a highly sensitive specialty retailer. The stock price is at about 11x earnings at current market prices with a PEG of 1.05 and yields an unremarkable 2.3%. Like other specialty retailers, the stock got crushed in recent weeks, falling 26% from its May high, and there are definite signs that the market is still nervous about its sensitivity to economic conditions. But if you dig a little deeper into the stock, you might find a hidden gem.

Sharp decreases in the market are often a boon for dividend investors, so The Buckle deserves a look from the income perspective. The stock pays a regular dividend of $.20 a quarter which last increased in Q4 2008, a rather unflattering statistic. But a closer look reveals that The Buckle’s management has a history of distributing additional cash to shareholders by issuing a special dividend at the end of the year. The 2010 dividend was an additional $2.50, on top of the $.20 quarterly dividend, meaning that an investor who purchased the stock on the first trading day of January 2010 at 29.65 and sold on December 31, 2010 saw a total yield of 11.1% on top of a 27.3% gain in the share price of the stock. Right now, the balance sheet looks slightly better than it did last year with $2.98 cash per share.

Additionally, management has decreased capital expenditures for the year and there are no apparent plans for acquisitions, which suggests that a special dividend of comparable size could be in the works for the end of the year. This implies that if you were to buy BKE today and hold for a year, you would be looking at a yield of about 9.3%. Looking at the company’s track record (click to enlarge images), I would expect an announcement within the next 3 months.

Click to enlarge

The key factor in The Buckle’s success is its management. Management’s ability to grow the business at a consistent rate while maximizing shareholder value is perhaps the most impressive feature of the business. The company is headquartered in Kearney, Nebraska and the majority of management started out on the sales floor and worked their way up the ranks, giving it an understanding of store level operations that is evident in the company’s results. Management pursues a conservative growth strategy that focuses on keeping net margins high.

The primary means of maintaining The Buckle’s margin is through a conservative growth strategy. While other specialty retailers, such as Abercrombie &Fitch (NYSE:ANF) tend to flood the market with stores when times are good, The Buckle maintains a conservative growth strategy that has kept growth at around 13% annually since 2008. Growth is achieved through a combination of increasing same store sales (up 8.9% this quarter from last year) and limited well planned expansion.

With a market cap of just $1.66 billion and slightly over 400 stores in 41 states, The Buckle still has plenty of room to grow, but chooses to expand at a slower rate than its peers. The result is that the Buckle is much less susceptible to macroeconomic shocks than its competitors. This is why The Buckle was still paying a $1.80 per share special dividend in the middle of the 2009 financial crisis.

The firm is well positioned to survive another economic downturn. The company has increased its earnings per square foot of floor space impressively over the last 4 years, so a slight downturn won’t force it to close stores like some competitors did during the last crash. The company has zero long term debt, so there is very little risk of the company going bankrupt. Management owns 37% of the outstanding shares. Insiders are less likely to sell out in a panic, and management has an incentive to maximize long term returns rather than grasp desperately for short term results. While the stock regularly gets clobbered for 25-50% losses during crises, the long term chart shows that it bounces right back and resumes its steady trend upward.

The Buckle tends to get clobbered -25% to -50% during crisises, but bounces right back.Click to enlarge

If you believe in the adage, “Be greedy when others are fearful,” now is the time to buy. There are certainly risks associated with The Buckle: volatile markets, reduced consumer demand, and the fact that there’s no guarantee that a special dividend will be paid should all be on an investor’s mind. However, I believe that there is a lot of fundamental value in the company for the long term investor. The Buckle has fallen over 24% since July 19th, almost entirely on greater market losses and macroeconomic fears, while the company’s fundamental keys to success remain unchanged. The Buckle reported earnings in line with expectations on August 18th, and surprised with increased margins and quarterly same store sales rose 8.9%. If you’re willing to take the short term risk for a long term reward, do your due diligence and consider snapping up BKE on the dips.

Disclosure: I am long BKE.