The fashion retail industry is incredibly competitive and difficult. Low margins make growth and value creation a challenge. And even small changes in financial condition can lead to inexorable amounts of pain for investors. But having said that, for the companies that are capable of making a name for themselves, the upside can be significant.
One business in this market that makes for an interesting prospect is The Buckle, Inc. (NYSE:BKE). The most recent financial data available shows a company that has experienced a nice bit of upside in revenue and cash flows. On top of this, shares of the company look rather cheap, even though they might be pricey relative to similar players. Though certainly far from being a great prospect, The Buckle may make for a decent one for certain investors.
Operationally speaking, The Buckle's emphasis is on selling medium to better-priced casual apparel, footwear, and accessories to young men and women. Examples of products include denims, bottoms, tops, sportswear, outerwear, accessories, shoes, and so much more. To be more specific, during the company's latest fiscal year, denims made up 39.6% of the firm's overall revenue. Tops, including sweaters, made up 30.2%. The other categories for the company were much smaller. The largest example would be footwear, which comprised 9.7% of sales. Accessories made up 9.3%, while sportswear and related fashion products made up 5.9%. Outerwear accounted for 1.9% of sales, while casual bottoms made up 0.9%. That left the remaining 2.5% to the youth category.
Today, a shockingly small percentage of the company's sales come from brand name merchandise excluding the brands that it owns. That number is 57%. The remaining 43% of sales come from private-label merchandise from exclusive brands the company has access to. Examples include BKE, Buckle Black, Salvage, Red by BKE, Daytrip, Gimmicks, and more. This is important because, generally speaking, private-label merchandise is responsible for fatter margins than brand names the company must sell. Although still a minority of sales, it is great to see the number approaching the halfway mark. Two years earlier, 39% of sales came from private-label offerings. If this continues to grow, it should only add to the company's value.
In the four years ending in 2020, sales for the company had remained in a fairly narrow range of between $885.5 million and $913.4 million. No clear trend was visible. But then, in 2021, sales spiked to $1.29 billion. The bulk of this sales increase came from a 43.8% rise in comparable store net sales for the company. Total sales growth for the year was a result of a 43.5% rise in the number of transactions the company experienced. Meanwhile, prices contributed only 2% of the sales increase. This increase was largely offset by a 1.9% decline in the average number of units sold per transaction.
Interestingly, virtually none of the sales increase came from a change in store count. In fact, the number of stores the company operates has been declining for years. Back in 2015, for instance, the company had 468 locations at the end of the year. By the end of the company's 2021 fiscal year, this number had declined to 440. As for the 2022 fiscal year, this picture might change. The company only had one store closing plan for the year, with plans to open five new stores before the year is out. This is in addition to between 15 and 20 full remodels of existing locations.
This is not to say that the company is not continuing to invest in things like e-commerce. During 2021, 15.9% of the company's revenue came from online sales. That compared to the 12.3% reported just two years earlier.
On the bottom line, things have looked considerably better. Net income has risen for each of at least the past five years, climbing from $89.7 million in 2017 to $130.1 million in 2020 before surging to $254.8 million last year. Other profitability metrics have generally followed suit. Although operating cash flow did decline from $119.7 million in 2017 to $108.7 million one year later, it then began a steady incline, eventually hitting $227.4 million in 2020 before jumping to $311.8 million last year. A similar trend can be seen when looking at EBITDA, with the metric ultimately rising from $164.8 million to $354.2 million.
Valuing the company can be a bit tricky. This is because we don't know if the recent improvement in the company's top and bottom lines is indicative of a new normal or if it's temporary in nature. If we use the 2021 figures, the company is trading really cheap, with a price-to-earnings multiple of 6.2. The price to operating cash flow multiple is 5, while the EV to EBITDA multiple comes out to 3.7. Even if we assume financial performance eventually reverts back to what it was in 2020, the picture is not all that bad. Yes, the price to earnings multiple would climb to 12.1. But the price to operating cash flow multiple would be 6.9, while the EV to EBITDA multiple would also be 6.9. Another benefit is that the company has no debt on hand and has cash and cash equivalents of $266.90 million. That works out to roughly 17% of the company's market capitalization.
To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 6.8 to a high of 8.1. Using our 2020 results, the business is the most expensive of the group. But, if we instead use the 2021 figures, The Buckle ultimately becomes the cheapest. The price to operating cash flow multiple of these companies ranges from a low of 6.1 to a high of 10.5. Our 2021 results would also reveal the company as the cheapest player of the group. While if we use the 2020 figures, two of the five companies are cheaper. And finally, using the EV to EBITDA approach, the range is from 2.5 to 4.1. Our 2021 results would imply that three of the five companies are cheaper than The Buckle, while the 2020 results would push ours to being the most expensive.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Abercrombie & Fitch (ANF)||8.1||7.7||2.5|
|Designer Brands (DBI)||6.8||6.1||4.1|
|Urban Outfitters (URBN)||7.5||6.4||3.5|
|American Eagle Outfitters (AEO)||6.9||9.5||3.0|
Fundamentally speaking, The Buckle seems to be doing quite well for itself. Even ignoring the recent surge in revenue and profitability, the general trend for the company's bottom line has been encouraging. And the fact that management has been able to keep sales flat prior to 2021 even while the number of stores it operates decreases is impressive. How the company is priced relative to similar players changes significantly based on which year's worth of data we use. But on an absolute basis, I don't find shares trading all that high anyways. And because of that, for investors who do like a niche retail play, I think that this might be worth consideration.
That having been said, because I don't like seeing the number of stores decrease and the story that tells, I cannot quite rate the company a "buy," even though I acknowledge that some investors may find this a compelling opportunity. On the whole, though, especially when you factor in the uncertainty in the market moving forward, I would rate this a "hold."
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.