The Buckle Inc.
The Buckle (BKE) is a chain of mall-based retail apparel stores, targeting the 12-24 year old age group, with a specific focus on denim which accounts for over 45% of sales. The stores sell both name brand third party items and company-specific exclusive brands. As of the end of October, Buckle operated 452 locations across 43 U.S. states.
Retail apparel stocks are notoriously volatile, which can represent both a risk and an opportunity to make quick gains. With the stock down 19% in the past 6 months, is this a Magic FormulaŽ retailer to consider? Let's have a look.
Well Run Retailer
Buckle is one of the better run retailers you will find. The company's 5-year operating margin has held steady at right about 22%. That's one of the best in the space. For comparison sake, American Eagle (AEO) and Abercrombie (ANF) are both under 10%, and category leader Gap (GPS) generates margins under 14%.
The company also can boast of a rock solid balance sheet, with close to $200 million in cash and investments, and ZERO debt.
Management has utilized a "slow-and-steady" growth strategy (more on that in a moment), electing to return the bulk of its substantial cash flow to shareholders in the form of dividends. Buckle's ongoing dividend yield is close to 2%, but above that, the firm has paid FAT special dividends in each of the past 6 years. These have ranged from a 3% yield payout a few weeks ago to a massive 9% payout in December of 2012.
Speaking of management, Buckle's team is experienced and well vested. Founder Daniel Hirschfeld remains as chairman and still owns 33.5% of the company. CEO Dennis Nelson has been the top man since 1997 and owns a sizable 6% stake of his own. CFO and Director Karen Rhoads is another important figure at the firm, with over 20 years of experience.
Buckle has plenty of room to grow. Its 452 store base is less than half of American Eagle and core Gap locations. In fact, Buckle has barely even begun to penetrate the eastern seaboard, with only 6 total stores in the New York - New Jersey - Connecticut megalopolis!
Growth should be slow but steady, with 10-15 net new stores a year historically.
On top of this, Buckle has been generating about industry average same-store sales growth, roughly 2-3%. Combine this with about 3% square footage growth, and you get a revenue growth expectation of about 5-6% per year.
That's modest growth, but there is a "long tail" to it. Also, the strategy has prevented Buckle from suffering the boom-and-bust cycles that competitors like Aeropostale (ARO) have experienced.
Is BKE Cheap Enough to Buy?
The market has never given mall retailers much of a valuation, and Buckle is no exception, with a very steady 5-year earnings yield valuation of just over 12%.
Also, rather inexplicably, Buckle has always carried a high short ratio, which today stands at almost 27% of the float. Frankly, I don't get this at all, but "it is what it is".
Plugging in our above growth expectations, assuming more or less steady margins, a 12% earnings yield, and about 5% in dividend yield, my target price for Buckle is $50/share.
That presents about 14% upside to the current quote. That makes Buckle a reasonably attractive buy at just under $45, but no Top Buy.
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Steve does not own BKE.
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