The Buckle: Flying Under the Mall Radar

Today, we add teen-oriented apparel retailer The Buckle (NYSE: BKE) to our Best Ideas list.

Investment Highlights

• Under the radar stock. In our opinion, The Buckle's stock doesn't garner the same attention that other mall-based competitors such as Aeropostale (NYSE: ARO), American Eagle (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), J. Crew Group (NYSE: JCG), and The Gap (NYSE: GPS) do. One reason for this is the company's relatively small market cap ($1.5B compared to the peer group average of about $3-$4B), but with virtually no stores in the Northeast US, it is easy for the Street to overlook the company (in fact, there are only a handful of analysts covering the stock). Buckle stores are often located in secondary and tertiary markets where there are only a limited number of apparel options for a fashion-starved audience - a key reason behind the company's excellent sales trends as of late. As awareness of Buckle increases, we expect institutional shareholders to gravitate toward the stock and move its price upward.
• Appropriate brand name/private label merchandising mix. The company employs a dual-merchandising strategy, where 70% of the assortment are brand names highly sought by the teen audience (Lucky Brand, Hurley, Affliction, Guess, Quiksilver/Roxy, among others) and the remaining 30% represents in-house private label brands. The brand name items drive customers to the stores, while the private labels represent a key margin driver. While we would prefer a bit higher proportion of the private label brands, similar merchandising strategies have worked for the top mall-based apparel retailers in the past.
• Costs well controlled. Instead of costly marketing programs, The Buckle keeps its advertising expense budget to about 1% of total sales (compared to 3%-4% for some other national retailers) and allows its reputation for quality rand-name merchandise to drive traffic. When a company can still generate sales growth in the low 30% range (as The Buckle did in 1Q08) with minimal marketing costs, it has a profound effect on the bottom line. Furthermore, the minimalist approach to advertising frees up capital to be used on other important matters, such as inventory management and distribution.

Investment Risks

• Rising production costs. Most apparel and footwear retailers are feeling the negative impact of rising Chinese labor costs as well as higher input prices. Thus far, The Buckle has been successful passing these costs to its customers, but considering the pressures facing the US consumer, there may be a time where this becomes more challenging. That said, The Buckle's target audience is more resilient (or more oblivious, perhaps) to price inflation than "head-of-household" consumers; given the high demand for its fashion brands (especially the denim segment, which represents just over 40% of sales), we believe the company has additional room to increase pricing, if necessary.
• Valuation. Like some of the other names on our Top Ideas List, valuation is a bit of a concern because the stock has rallied quite nicely since January lows around $31. However, for a high-growth, well-managed company and an under the radar stock, we believe a modest premium is warranted. The stock currently trades at just under 16x the consensus fiscal 2009 estimate of $3.07, roughly in-line with the peer group. With continued earnings outperformance, a somewhat resilient customer base, and increasing investor awareness, we could envision this stock in the mid-to-high $50 range, barring any additional "shock" type events in the economy.

Disclosure: No positions BKE.

Comments

[Jerry Dill]

The buckle is providing great service with a great product mix. I think what holds this company back is it's lack of advertising and while this cuts down on costs it really hinders their growth.