Buckle Shareholders: Fasten Your Seat Belts, That 4.6% Dividend Yield Is In For A Bumpy Ride

| About: The Buckle, (BKE)

Summary

Buckle continues to have a poor sales run as product offerings fall out of favor with target markets and consumer spending weakens in key Midwestern markets.

While its dividend yield is attractive and its balance sheet is strong, Buckle could still see further downside as investors punish it for poor comparable sales.

It might seem harsh, but new investors shouldn't touch Buckle until shares drop to a 5-times P/E multiple.

Background

Buckle Inc. (NYSE:BKE) recently reported its September comparable store sales - and the results were disappointing, to say the least. As it did in August, Buckle reported a mid-double-digit comparable sales decline - 15.5%.

On the face of it, Buckle's performance through two-thirds of its third quarter mirrors the down performance of much larger apparel companies such as Gap (NYSE:GPS) - and is unsurprising considering that retail spending on clothing has barely changed since a year earlier.

Having said that, its weak sales bode ominously for Buckle's shareholders since the company has missed expectations for two straight quarters - and three of the past four quarters overall. These weren't exactly small misses - overall, Buckle has fallen short expectations for the first half (which ended in July, like most apparel stores) of the current year (which ends in January 2017) by 13%.

The upside to Buckle's poor first half is that it has boosted its stock's dividend yield. With Buckle's stock down by 30% so far in 2016, its dividend yield is now at very fairly attractive 4.6%, which is more than double the yield on the S&P500 and apparel stocks. Thus, investors who buy $10,000 worth of its stock can expect dividend checks totaling $462 over a year's time.

Considering where Buckle's dividend yield is and how far its stock has fallen this year, should investors be looking to get into Buckle's stock? Let's take a look.

Dismal same store sales and the bumpy road ahead

There's no equivocating - the decline in Buckle's comparable sales is not good for the company. In fact, beyond the 15.5% decline year-on-year decline in September, Buckle's comps are down by 12.1% in the 35-weeks ending October 1st compared to a year ago. If this trend persists, the current would be its worst year since the year that ended in January 2012, when its comparable sales fell by 8.2%.

To make matters worse, Buckle, which derives around a third of its sales from denim, indicated that its denim prices are falling, leading its margins to fall to 38.3% -- a slippage of around 170-basis points from its margin a year earlier. Despite everything, investors should note that Buckle's pre-tax margin is at around 11.6% -- which is approximately 370-basis points better than the industry average - and about 480-basis points better than Gap's. We're pointing this out because it means that Buckle still has a bit of a buffer from which it can restructure its operations, if necessary.

Some restructuring is almost certainly a decision that Buckle will have to make since it appears that its offerings are behind in terms of fashion (which is anathema to a firm that is described as a seller of 'fashionable' clothing for young men and women). Indeed, changes are already underway: Buckle's management indicated during its last conference call that the firm is deploying new brands and trends in order to attune itself to current fashion trends - and (hearkening to our point about accepting lower margins overall), it is also introducing lower price points. Buckle currently has 470 stores in 44 states and, if its fortunes continue to slide, the company could decide to shutter some of these stores as part of a broader restructuring effort beyond simple changing its sales mix.

Investors should note that falling out of favor with the times is something that consumer stocks aimed at younger audiences will have to face on an ongoing basis. We've seen other apparel stocks like Abercrombie & Fitch (NYSE:ANF) and American Eagle (NYSE:AEO) struggle with the same issue over the years as their offerings fell out of favor with their target market and, as in the case of Abercrombie, it can be a lengthy process.

Of course, economic reality is also impacting Buckle - its markets in the Midwest have been hit hard by the slump in oil prices earlier in the year. The recent recovery in oil prices will have to be sustained for some time to have a lasting positive impact on these markets - but oil is already slipping from recent highs so consumers in these areas are likely to remain cautious, causing spending in these regions to remain tepid.

Thus, we see Buckle continuing to struggle with its comparable sales for the rest of the current year - and we anticipate that sales are likely to fall from $1.12 Billion last year to around $1.03 Billion this year.

Stable balance sheet equals continued dividend payments

One thing that should enable Buckle to weather its current downturn is its strong balance sheet. The company has very strong liquidity - nearly $1.76 of cash for every dollar of its short term liabilities - and it has a working capital ratio of $3.93 overall. Buckle also has zero long-term debt and a very robust equity base; its overall liabilities-to-equity ratio (which includes payables to suppliers and the like since it has no debt) is just 0.35-to-1.00.

These readings are all considerably better than the industry average - indeed, apparel stores typically have just $0.50 of working capital to cover their short-term liabilities and are leveraged by over two times their equity.

In practical terms, these indicators mean that Buckle should be able to sustain its dividends indefinitely - the company only pays around $12 million in dividends each quarter, after all - though weak company performance could curtail the payment of special dividends like it made in December of 2015.

Cheap, but not cheap enough

Buckle is currently trading at just 8-times its trailing earnings and 8.7 times its expected forward earnings. This is emblematic of the antipathy that investors feel towards Buckle: the average Forward Price-Earnings ratio for its sector is 19.6-times - well more than double Buckle's ratio and more in-line with the S&P500's.

We believe these valuation ratios are justified. Our own expectation is that Buckle will earn just $2.50 per share in the current year and that its earnings will remain flat next year. In that sense, an 8.7-times ratio gives us a price target of $21.75 for Buckle, which is broadly consistent with its current stock price. We should note that the market could further punish Buckle for earnings misses in the third and fourth quarters, pushing the stock to a multiple of 6- or 7-times earnings.

Conclusion

All things considered, Buckle's current dividend yield is not attractive enough to cover for its potential downside. While we do like the fact that its prudent fiscal management has enabled it to maintain a strong balance sheet that will help it adjust to its current downturn, we just don't anticipate a meaningful appreciation in the stock anytime soon.

That being said, investors should be watching the stock in the event that it falls to around 5-times earnings, which would equate to a price of $12.50. At this level - and even considering the current environment for Buckle - we believe the stock would be worth buying for patient investors as it would be trading at only 1.4-times its Book Value - or a 42% discount to its sector average. Even so, Buckle isn't a stock for those faint of heart and it should be a while before the stock recovers to even footing with its peer group.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.