Unlike most retailers that are at the mercy of both the economy and the whimsical tastes of retail consumers, this 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 its annual report. The first place to look is on page 7, where investors learn that the vast majority of stores are located in Middle America. Page 4 tells investors that 43% of company sales are denims, 37% are tops, and 29% is 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.
Another aspect of The Buckle that may not be obvious to investors, unless they actually make a visit to 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 their 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 10 and 20 years.
So if it isn't clear at this point, The Buckle is all about its people, and those people are the backbone of the company's success. There's also another statistic that demonstrates just how committed these people are to their company. 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's 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 and 23% in 2009. Investors may be dismayed to see 2010 earnings only popped 3% and then 12% in 2011, but look deeper. Same store sales growth is in the 8% range, which is strong for any retailer, especially one that sells clothing. The company continues to operate with increasing efficiency, as gross margins are at 44%, net margins are 14.3%, and return on equity is a strong 38%. Its margins are stronger than almost all other competitors. Abercrombie soars with a 60% gross margin, but gives it all away, ending with a 3% net. The Gap (GPS) has gross/net of 36% and 5.4%. Limited Brands (LTD) has a 42%/6% split. Urban Outfitters (URBN) enjoys a 35%/7.5% split - the highest closest competitor. Meanwhile, Wet Seal (WTSLA) and Pacific Sunwear (PSUN) struggle with losses.
Finally, the company's free cash flow has been increasing every year, and last year hit $173 million and much of it gets returned to shareholders via its 80 cent annual dividend. The reason for all these fine metrics goes back to the store's fundamental concept.
The company trades at fair value given analyst earnings projections and backing out the $4 in cash it holds. When one adds up the 10% projected annualized earnings growth, add its 2.1% dividend, toss in the exceptional management and financials, the stock is likely to provide solid and reliable 12-14% annual returns going forward.