The Business
For those of you who are unfamiliar with The Buckle, Inc. (NYSE: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 went from $2.00 to a high of $57.68 on August 5, 2013. Its current share price is $45.00. BKE's 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 U.S. It markets brand named merchandise as well as private label, and denim is still its top product at 45% of sales. Its stores are primarily located in high traffic shopping malls. This business model seems to work in that BKE has some of the highest margins of any of its peers.
May 2015 Sales
On June 5, 2015, BKE released its May 2015 sales numbers. Comparable net sales for stores opened a year or more increased 2.4% from net sales in May of 2014. This may be somewhat deceptive since BKE started including online sales in its comparable store sales statements in fiscal-year 2016 (BKE's fiscal year ends January 31). Online sales increased 6% in fiscal-year 2015 to $94.3 million (about 8% of gross sales). The sales news was welcome since comparable store net sales have been flat since 2012 when they increased 2.1%.
Unfortunately, the May comparable store net sales number was not enough to overcome the previous three months of negative comparable store net sales and the year-to-date comparable net sales are still a negative 1.3%. Hopefully, the May sales are a start of an upward trend, but it is probably a safe bet that comparable store sales for fiscal-year 2016 will again be flat. If this pattern of comparable sales over the last several years continues, it means that any growth in sales will have to come from new stores, which now include online sales.
BKE's New Store Expansion Policy
With only 462 stores (all in the U.S.), BKE is clearly not over saturated, and has plenty of room to grow. Three of its competitors are Abercrombie & Fitch (ANF), American Eagle Outfitters, Inc. (AEO), and The Gap, Inc. (GPS). ANF has 799 stores in the U.S. and 170 stores outside the U.S. AEO operates more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom. GPS has about 1,000 stores in North America, and 3,539 stores worldwide, which includes its Old Navy and Banana Republic stores.
Below is a table from BKE's 2014 Annual Report showing BKE's current stores.
| State | Number of Stores | State | Number of Stores | State | Number of stores |
|---|---|---|---|---|---|
| Alabama | 8 | Maryland | 3 | OK | 13 |
| Alaska | 1 | MA. | 1 | Oregon | 6 |
| Arizona | 12 | Michigan | 19 | PA | 11 |
| Arkansas | 6 | MN | 13 | RI | 1 |
| California | 15 | MS | 5 | SC | 4 |
| Colorado | 13 | Missouri | 15 | SD | 3 |
| Florida | 23 | Montana | 5 | TN | 13 |
| Georgia | 11 | Nebraska | 14 | Texas | 52 |
| Idaho | 7 | Nevada | 5 | Utah | 11 |
| Illinois | 18 | NJ | 2 | Virginia | 6 |
| Indiana | 15 | NM | 5 | WA | 14 |
| Iowa | 17 | NY | 4 | WV | 5 |
| Kansas | 17 | NC | 13 | WI | 12 |
| Kentucky | 6 | ND | 4 | Wyoming | 2 |
| Louisiana | 10 | Ohio | 22 | ||
| Total | 462 |
A quick review of the table shows the amount of opportunities for new store openings. Connecticut, Delaware, Hawaii, Maine, New Hampshire, and Vermont have no stores, and some of the most populous states (such as New York) have only a few. The East Coast (especially the North East), is especially underrepresented.
BKE's policy for new store openings was stated in its 2014 Annual Report as follows:
"The Company's criteria used when considering a particular location for expansion include:
• Market area, including proximity to existing markets to capitalize on name recognition;
• trade area population (number, average age, and college population);
• economic vitality of market area;
• mall location, anchor tenants, tenant mix, and average sales per square foot;
• available location within a mall, square footage, storefront width, and facility of using the current store design;
• availability of experienced management personnel for the market;
• cost of rent, including minimum rent, common area, and extra charges; and
• estimated construction costs, including landlord charge backs and tenant allowances.
The company generally seeks sites of 4,250 to 5,000 square feet for its stores. The projected cost of opening a store is approximately $1.0 million, including construction costs of approximately $0.8 million (prior to any construction allowance received) and inventory costs of approximately $0.2 million, net of accounts payable."
In calendar-year 2014, BKE opened 16 new stores. In 2015, it anticipates opening only 9 stores, which is the least amount of stores it has opened since the Great Recession. In the last ten years, it has averaged 12.5 new store openings per year. Of course, it also closes stores. In the last ten years, it has averaged 3.3 closings per year. In its 2014 annual report, management gave no specific reason why it was anticipating a decrease in its new store openings for 2015 other than a general statement that it will open new stores only when it feels there is a "reasonable expectation of satisfactory results". There was also some implicit language about the difficulty of finding and training qualified employees.
With a strong balance sheet, including zero long-term debt, BKE has the ability to open new stores at a much greater rate than it has in the past. As of January 31, 2015, BKE had $160 million in cash and short-term investments. Its capital expenses have averaged $39 million for the last five years. BKE can easily open 30 stores per year, at a cost of $30 million. This would be an increase of only 17.5 new stores from its ten-year average of 12.5 stores. According to BKE's 2014 annual report, its current average sales per store is $2.321 million. If the new stores reach this average in a few years, BKE could increase its annual gross revenue by $69.63 million (a 6% increase from 2015). This would also mean a 5.9% increase over its 2015 earnings, assuming the new stores could maintain BKE's current 14% rate of net earnings after taxes.
Conclusion
The retail apparel industry has been struggling for the last several years. BKE is no exception. The company's growth, both top and bottom line, has been flat. Since comparable net sales revenue for stores open at least one year have been trending downward, the best way to spike growth is to open new stores. Compared to its competition, BKE is underrepresented in the number of stores in the U.S. With zero debt and a strong balance sheet, it could easily double the number of stores it has been opening annually, and pay for it out of its substantial cash and short-term investments. Such a strategy would increase its revenue and earnings growth, thus resulting in an increase in its share price.
Although it is difficult to criticize a company that has obtained such success with conservative management, the last several years has shown flat or negative growth in net sales for comparable stores open for one year or more, and also flat or negative growth in average sales per square foot, and average sales per store. If net sales don't start improving soon, BKE's management will be forced into a more aggressive expansion policy if it wants to grow its business.
BKE has for a number of years paid a huge dividend to shareholders. Last year, it was $3.30 (a 7.3% yield on its current share price of $45.00). This dividend makes BKE an easy stock to hold. It also is currently carrying a PE of only 13.4. Unlike a number of its competitors, BKE fortunately has the option of expansion to get future growth. I therefore believe BKE is a buy at this price, which I have computed at close to fair value.
There is also the possibility that BKE could be sold to a private equity firm or an apparel conglomerate like V.F. Corporation (VFC) (although VFC usually only buys distressed properties at a discount). The founder of BKE, Dan Hirschfeld, is 72 years of age and is still involved in the company as the Chairman of the Board. I don't know if he has any children or family that are involved in the business, but there are no other Hirschfelds who are listed as directors or executive officers. Dan owns about 30% of BKE's common shares. At this time, the market capitalization of the company is $2.16 billion, making his share worth approximately $720 million. With no debt, this company could probably be sold at a premium to a private equity firm. It could bump up earnings by quickly doubling the number of stores, and then take it public. There would also be an immediate savings by not having to pay out dividends, which I have calculated at about 83% of cash flow. Although I have not heard any rumors of a sale, in the current retail apparel environment, a 72-year-old co-founder might think this is a good time to cash out if he could make a cool billion.
