Buckle (BKE, Financial) is the retailer of casual apparel, footwear, and accessories for fashion-conscious young men and women. As of January 29, 2011, the company operated 420 retail stores in 41 states nationwide under the names "Buckle" and "The Buckle." It focuses on personalized attention to its customers and provides customer services such as free hemming, free gift-wrapping, easy layaways, the Buckle private label credit card, and a frequent shopper program. Most stores are located in regional, high-traffic shopping malls and lifestyle centers.
Merchandising
Buckle’s strategy is to create customer loyalty by offering a wide selection of key brand name and private label merchandise and providing a broad range of value-added services. Its target customer is from 15-30 years old. Denims and tops are key items for the company’s growth. As of fiscal 2010, denims takes 45% and tops takes 34% of total net sales.
Merchandising and pricing decisions are centralized, which makes the whole chain very consistent; nevertheless, the distribution system allows for variation in the mix of merchandise distributed to each store. This allows individual store inventories to be tailored to reflect differences in customer buying patterns at various locations. And it does not hold store-wide off-price sales at anytime.
Marketing and Advertising
Besides seasonal campaign, online marketing, in point of sales, Buckle offers the frequent shopper program to enhance the loyalty of the customers. The Buckle Black program, launched in October 2007, is an exclusive credit card account for most loyal cardholders. This marketing program is partially funded by WFNNB, a third-party bank that owns the Buckle Card accounts.
Stores operation
Buckle has the program of stressing the prevention and control of shrinkage losses. Methods to avoid shrinkage consists of monitoring cash refunds, voids, inappropriate discounts, employee sales, and returns-to-vendor. It has achieved a merchandise shrinkage rate of 0.4% of net sales in fiscal 2010 and 0.5% of net sales in fiscal 2009 and fiscal 2008.
The average store is approximately 5,000 square feet (average of 80% is selling space), and stores range in size from 2,900 square feet to 8,475 square feet.
For the last 10 years, Buckle has experienced significant growth. The total stores increased from 274 at the beginning of 2001 to 420 at the end of fiscal 2010.
Purchasing
Buckle does not have long-term or exclusive contracts with any brand name manufacturers, private label manufacturers, or any suppliers. Before product delivery, it often plans its private label production with private label vendors three to six months in advance.
In fiscal 2010, Koos Manufacturing Inc. accounted for 26.4% of the company’s net sales and Miss Me/Rock Revival accounted for 12.9%. No other vendor accounted for more than 10% of the company’s net sales.
Distribution
It uses a centralized receiving and distribution center located in Kearney, Neb. Buckle’s goal is to ship the majority of its merchandise out to the stores within one to two business days of receipt. This system allows stores to receive new merchandise almost daily, so the customers can get excited to shop often.
Snapshot of the operations financial figures
Source: Morningstar
All figures are USD millions, except Earnings Per Shares and Dividends Per Shares
As can be seen from the snapshot, it has achieved growth of 9.4% annually, while operating income, net income, operating cash flows and free cash flows have grow at the same pace of 15-16% over the last 10 years. For dividends, the payout ratio has been fluctuating with the high rate, ranging 20-37% and stays at 28% for the last year, with the growth rate from 2004 till now the high growth of 36.3% annually
Retail operating figures
Source: Buckle’s annual report
Buckle keeps adding stores, with increasing sales per square foot and average sales per store over the last five years, signalling the continuing trend of the company’s growth.
For the most current year, as in the management discussion, the comparable store sales increase in fiscal 2011 was primarily due to a 1.9% increase in the average retail price and a 2.9% increase in the average number of units sold per transaction, partially offset by a 3.3% decrease in the number of transactions at comparable stores during the year. Sales growth for the fiscal year was also because of the 20 new stores opened during fiscal 2009, to the opening of 21 new stores during fiscal 2010, and to growth in online sales.
Profitability
We will look at the profitability based on DuPont Model
Source: Morningstar
All figures are in %, except Asset Turnover and Financial Leverage
For the last five years, Buckle has been achieving very impressive return, due to increasing net margins as well as asset turnover with little of financial leverage. So it has been seen that Buckle’s growing fast combining with impressive dividend records, high return on equity as well as growing margins. However, any value investor would post the questions of whether this trend will continue in the future, or any bad events can wipe out the company’s competitive advantage permanently. Let’s check the financial strength of Buckle by examining its balance sheet.
Financial Strength
In the most current balance sheet, the amount of cash is 28% of the total assets, standing at $136 million, fixtures and equipments takes 35%. There is little debt on the balance sheet; the total liabilities account for 30% of the total assets. However, for majority of retails sales, we need to look at the purchase commitments as well as operating leases which are kept off-balance sheets. The total off balance sheet obligations are $55 million within a year, $94 million for 1-3 years, $76 million for 4-5 years and $124 million five years after. With the amount of cash on the balance sheet, as well as the OCF, FCF is growing, the company’s financial position is quite strong currently.
Management
Any great company is built from loyal, competent employees with a lot of experience in the industry. Here in The Buckle, the majority of the management has been with the company for the long time, since they were still in university, working as part-time employees and now advanced to management positions. The management's total holdings comprised approximately of 1.9% of the total shares.
Dennis Nelson, President, Chief Executive Officer and Director
He has held the titles of president and director since April 19, 1991. Mr. Nelson was elected chief executive officer on March 17, 1997. Mr. Nelson began his career with the company in 1970 as a part-time salesman when he was just a student. Upon graduation from college in 1973, Mr. Nelson became a full-time employee of the company, and he has worked in all phases of the company's operations since that date.
Karen B. Rhoads. Vice President of Finance and Chief Financial Officer and a Director
Ms. Rhoads was elected a director on April 19, 1991. She worked in the corporate office while a student and later worked part time on the sales floor. She has been employed with Buckle since November 1987.
Thomas B. Heacock, Treasurer and Corporate Controller
Mr. Heacock has been employed by The Buckle since October 2003 and has served as corporate controller since February 2007. He is the son-in-law of Dennis H. Nelson, who serves as president and chief executive officer and a director of The Buckle Inc.
Kari Smith, Vice President of Sales
Ms. Smith joined the Company on May 16, 1978, as a part-time salesperson. Since 2001, she has held this position.
Patricia Whisler, Vice President of Women's Merchandising
Ms. Whisler joined the company in February 1976 as a part-time salesperson and later became manager of a Buckle store before returning to the corporate office in 1983 to work as part of the growing merchandising team. She held this position from 2001.
Robert Carlberg, Vice President of Men's Merchandising
Mr. Carlberg started with the company as a salesperson and also worked as a store manager and as an area and district. He has been full-time with the merchandising team since January 2001.
Brett Milkie, Vice President of Leasing
Mr. Milkie joined the company in January 1992 as director of leasing. Prior to that, he was a leasing agent for a national retail mall developer for six years.
Kyle Hanson, Corporate Secretary and General Counsel
Ms. Hanson joined the company in 1998 as general counsel. She also worked for the company as a part-time salesperson while a student. She has held this position since 2001.
Notably, Daniel Hirschfeld, Chairman of the Board is the biggest shareholder of Buckle. He has served as president and CEO until 1991, and then the chairman of the board since April 19, 1991. He is the biggest shareholder in the company with a position of nearly 35%.
Competitors
The main competitors of The Buckle are Abercrombie & Fitch (ANF, Financial), American Eagle Outfitters (AEO, Financial) and GAP (GPS, Financial). The comparison valuation table is as follows:
As it can be seen, BKE TTM figures are very impressive, growing over the years with the operating margin and the net margins the highest, twice the next competitor. That is why the valuation in terms of P/CF and P/S is higher than the competitors. However, with the average growth of 15% of FCF and dividends of 36% annually, it is certainly cheap for the potential of the company. It is the company not for trading but for buy and keep for 5-10 years unless something comes along to change its fundamentals.
Valuation
We would use the Discounted FCF model with the assumption as follows:
The growth is continued like the average past 10 years for the next 5 years, and we will see growth at 3% to infinity afterwards; the required rate of return is 8%.
Base case:
Low case
The valuation of the total business is around $3 to $4.2 billion, and the valuation can be changed when the new inputs in the FCF that affect the growth and the potential of the company can change. We would adjust that in the future. For the current market value of $1.9 billion, that’s 57% off the intrinsic estimated value.
Potential risks
The assumptions for valuation can be very subjective, as the change in the growth and discount rate affects the valuation a lot.
The chairman is the biggest shareholder, holding 35% of the total company; his sole decision cannot be aligned with the minority shareholders.
The distribution function for all of the company’s stores is handled from a single place in Nebraska. Any event such as a natural disaster, or other unforeseen causes would damage the distribution of merchandise to the stores, causing a decline in store inventory, a reduction in store sales, and a reduction in company profitability.
Summary
For the retail industry, Buckle is definitely the pick for the buy-and-hold. With the strong balance sheet, the net cash is 28% of the total asset, along with ample debt and off-balance sheet commitments. Free cash flows grew 15-16% annually over the past 10 years, the operating and net margin has been increasing and becoming the best in the industry. ROE is 22% average of the past 10 years, and TTM ROE stays at 38%. Besides, the company has been paying the growing dividends over the last seven years.The management team has been with the company for at least 10 years, some 20-25 years. It seems that they are loyal, experienced and very dedicated to the development of the company.
Disclosure: The author currently does not own any shares in The Buckle at the time of writing. And this research is subjective to the author’s view. It’s not the recommendation of buying or selling. Please do your own research for your own decision.
Merchandising
Buckle’s strategy is to create customer loyalty by offering a wide selection of key brand name and private label merchandise and providing a broad range of value-added services. Its target customer is from 15-30 years old. Denims and tops are key items for the company’s growth. As of fiscal 2010, denims takes 45% and tops takes 34% of total net sales.
Merchandising and pricing decisions are centralized, which makes the whole chain very consistent; nevertheless, the distribution system allows for variation in the mix of merchandise distributed to each store. This allows individual store inventories to be tailored to reflect differences in customer buying patterns at various locations. And it does not hold store-wide off-price sales at anytime.
Marketing and Advertising
Besides seasonal campaign, online marketing, in point of sales, Buckle offers the frequent shopper program to enhance the loyalty of the customers. The Buckle Black program, launched in October 2007, is an exclusive credit card account for most loyal cardholders. This marketing program is partially funded by WFNNB, a third-party bank that owns the Buckle Card accounts.
Stores operation
Buckle has the program of stressing the prevention and control of shrinkage losses. Methods to avoid shrinkage consists of monitoring cash refunds, voids, inappropriate discounts, employee sales, and returns-to-vendor. It has achieved a merchandise shrinkage rate of 0.4% of net sales in fiscal 2010 and 0.5% of net sales in fiscal 2009 and fiscal 2008.
The average store is approximately 5,000 square feet (average of 80% is selling space), and stores range in size from 2,900 square feet to 8,475 square feet.
For the last 10 years, Buckle has experienced significant growth. The total stores increased from 274 at the beginning of 2001 to 420 at the end of fiscal 2010.
Purchasing
Buckle does not have long-term or exclusive contracts with any brand name manufacturers, private label manufacturers, or any suppliers. Before product delivery, it often plans its private label production with private label vendors three to six months in advance.
In fiscal 2010, Koos Manufacturing Inc. accounted for 26.4% of the company’s net sales and Miss Me/Rock Revival accounted for 12.9%. No other vendor accounted for more than 10% of the company’s net sales.
Distribution
It uses a centralized receiving and distribution center located in Kearney, Neb. Buckle’s goal is to ship the majority of its merchandise out to the stores within one to two business days of receipt. This system allows stores to receive new merchandise almost daily, so the customers can get excited to shop often.
Snapshot of the operations financial figures
| Fiscal year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| Revenue | 388 | 401 | 423 | 471 | 501 | 530 | 620 | 792 | 898 | 950 |
| Operating Income | 47 | 46 | 48 | 63 | 76 | 79 | 110 | 162 | 199 | 211 |
| Net Income | 33 | 32 | 34 | 43 | 52 | 56 | 75 | 104 | 127 | 135 |
| Operating Cash Flow | 43 | 43 | 53 | 73 | 76 | 80 | 121 | 144 | 158 | 180 |
| Cap Spending | (11) | (26) | (15) | (17) | (26) | (22) | (27) | (47) | (51) | (55) |
| Free Cash Flow | 32 | 17 | 38 | 56 | 50 | 58 | 94 | 97 | 107 | 125 |
| Earnings Per Share | 0.68 | 0.65 | 0.69 | 0.86 | 1.13 | 1.24 | 1.63 | 2.24 | 2.73 | 2.86 |
| Dividends Per Share | 0.09 | 0.2 | 0.27 | 0.37 | 0.6 | 0.82 | 0.8 | 0.8 |
All figures are USD millions, except Earnings Per Shares and Dividends Per Shares
As can be seen from the snapshot, it has achieved growth of 9.4% annually, while operating income, net income, operating cash flows and free cash flows have grow at the same pace of 15-16% over the last 10 years. For dividends, the payout ratio has been fluctuating with the high rate, ranging 20-37% and stays at 28% for the last year, with the growth rate from 2004 till now the high growth of 36.3% annually
Retail operating figures
| Fiscal year | 2007 | 2008 | 2009 | 2010 | 2011 |
| Stores open at end of period | 350 | 368 | 387 | 401 | 420 |
| Average sales per square foot (USD) | 302 | 335 | 401 | 428 | 428 |
| Average sales per store (USD 000’s) | 1493 | 1668 | 1995 | 2129 | 2133 |
| Comparable store sales change (%) | 1.2% | 7.8% | 20.6% | 13.2% | 0.0% |
Buckle keeps adding stores, with increasing sales per square foot and average sales per store over the last five years, signalling the continuing trend of the company’s growth.
For the most current year, as in the management discussion, the comparable store sales increase in fiscal 2011 was primarily due to a 1.9% increase in the average retail price and a 2.9% increase in the average number of units sold per transaction, partially offset by a 3.3% decrease in the number of transactions at comparable stores during the year. Sales growth for the fiscal year was also because of the 20 new stores opened during fiscal 2009, to the opening of 21 new stores during fiscal 2010, and to growth in online sales.
Profitability
We will look at the profitability based on DuPont Model
| Fiscal year | 2007 | 2008 | 2009 | 2010 | 2011 |
| Operating Margin | 14.9 | 17.7 | 20.5 | 22.2 | 22.2 |
| Net Margin | 10.51 | 12.14 | 13.18 | 14.17 | 14.18 |
| Asset Turnover | 1.43 | 1.51 | 1.73 | 1.88 | 1.93 |
| Return on Assets | 15.01 | 18.38 | 22.8 | 26.68 | 27.38 |
| Financial Leverage | 1.28 | 1.33 | 1.38 | 1.38 | 1.43 |
| Return on Equity | 19.01 | 24.08 | 30.91 | 36.82 | 38.48 |
All figures are in %, except Asset Turnover and Financial Leverage
For the last five years, Buckle has been achieving very impressive return, due to increasing net margins as well as asset turnover with little of financial leverage. So it has been seen that Buckle’s growing fast combining with impressive dividend records, high return on equity as well as growing margins. However, any value investor would post the questions of whether this trend will continue in the future, or any bad events can wipe out the company’s competitive advantage permanently. Let’s check the financial strength of Buckle by examining its balance sheet.
Financial Strength
In the most current balance sheet, the amount of cash is 28% of the total assets, standing at $136 million, fixtures and equipments takes 35%. There is little debt on the balance sheet; the total liabilities account for 30% of the total assets. However, for majority of retails sales, we need to look at the purchase commitments as well as operating leases which are kept off-balance sheets. The total off balance sheet obligations are $55 million within a year, $94 million for 1-3 years, $76 million for 4-5 years and $124 million five years after. With the amount of cash on the balance sheet, as well as the OCF, FCF is growing, the company’s financial position is quite strong currently.
Management
Any great company is built from loyal, competent employees with a lot of experience in the industry. Here in The Buckle, the majority of the management has been with the company for the long time, since they were still in university, working as part-time employees and now advanced to management positions. The management's total holdings comprised approximately of 1.9% of the total shares.
Dennis Nelson, President, Chief Executive Officer and Director
He has held the titles of president and director since April 19, 1991. Mr. Nelson was elected chief executive officer on March 17, 1997. Mr. Nelson began his career with the company in 1970 as a part-time salesman when he was just a student. Upon graduation from college in 1973, Mr. Nelson became a full-time employee of the company, and he has worked in all phases of the company's operations since that date.
Karen B. Rhoads. Vice President of Finance and Chief Financial Officer and a Director
Ms. Rhoads was elected a director on April 19, 1991. She worked in the corporate office while a student and later worked part time on the sales floor. She has been employed with Buckle since November 1987.
Thomas B. Heacock, Treasurer and Corporate Controller
Mr. Heacock has been employed by The Buckle since October 2003 and has served as corporate controller since February 2007. He is the son-in-law of Dennis H. Nelson, who serves as president and chief executive officer and a director of The Buckle Inc.
Kari Smith, Vice President of Sales
Ms. Smith joined the Company on May 16, 1978, as a part-time salesperson. Since 2001, she has held this position.
Patricia Whisler, Vice President of Women's Merchandising
Ms. Whisler joined the company in February 1976 as a part-time salesperson and later became manager of a Buckle store before returning to the corporate office in 1983 to work as part of the growing merchandising team. She held this position from 2001.
Robert Carlberg, Vice President of Men's Merchandising
Mr. Carlberg started with the company as a salesperson and also worked as a store manager and as an area and district. He has been full-time with the merchandising team since January 2001.
Brett Milkie, Vice President of Leasing
Mr. Milkie joined the company in January 1992 as director of leasing. Prior to that, he was a leasing agent for a national retail mall developer for six years.
Kyle Hanson, Corporate Secretary and General Counsel
Ms. Hanson joined the company in 1998 as general counsel. She also worked for the company as a part-time salesperson while a student. She has held this position since 2001.
Notably, Daniel Hirschfeld, Chairman of the Board is the biggest shareholder of Buckle. He has served as president and CEO until 1991, and then the chairman of the board since April 19, 1991. He is the biggest shareholder in the company with a position of nearly 35%.
Competitors
The main competitors of The Buckle are Abercrombie & Fitch (ANF, Financial), American Eagle Outfitters (AEO, Financial) and GAP (GPS, Financial). The comparison valuation table is as follows:
| TTM figures | BKE | ANF | AEO | GPS | Industry average |
| Operating margin (%) | 22.14 | 9.31 | 10.41 | 12.91 | 8.13 |
| Net margin (%) | 14.18 | 5.18 | 5.4 | 7.76 | N/A |
| ROE (%) | 38.48 | 10.1 | 11 | 26.16 | N/A |
| P/E | 13.7 | 32.49 | 16.15 | 9.65 | 15.61 |
| P/S | 1.9 | 1.6 | 0.84 | 0.7 | 0.71 |
| P/CF | 10.3 | 15.2 | 6.8 | 6.4 | 7.9 |
As it can be seen, BKE TTM figures are very impressive, growing over the years with the operating margin and the net margins the highest, twice the next competitor. That is why the valuation in terms of P/CF and P/S is higher than the competitors. However, with the average growth of 15% of FCF and dividends of 36% annually, it is certainly cheap for the potential of the company. It is the company not for trading but for buy and keep for 5-10 years unless something comes along to change its fundamentals.
Valuation
We would use the Discounted FCF model with the assumption as follows:
The growth is continued like the average past 10 years for the next 5 years, and we will see growth at 3% to infinity afterwards; the required rate of return is 8%.
Base case:
| Growth for first 5 years | 15% | |||||
| Growth after that to infinity | 3% | |||||
| Discount rate | 8% | |||||
| Fiscal year | 2012 | 2013 | 2014 | 2015 | 2016 | Terminal value |
| FCF (USD mil) | 144 | 165 | 190 | 219 | 251 | 5,179 |
| PV of FCF | 133 | 142 | 151 | 161 | 171 | 3,525 |
| Valuation | 4,282 |
Low case
| Growth for first 5 years | 10% | |||||
| Growth after that to infinity | 2% | |||||
| Discount rate | 8% | |||||
| Fiscal year | 2012 | 2013 | 2014 | 2015 | 2016 | Terminal value |
| FCF (USD mil) | 138 | 151 | 166 | 183 | 201 | 3,422 |
| PV of FCF | 127 | 130 | 132 | 135 | 137 | 2,329 |
| Valuation | 2,990 |
The valuation of the total business is around $3 to $4.2 billion, and the valuation can be changed when the new inputs in the FCF that affect the growth and the potential of the company can change. We would adjust that in the future. For the current market value of $1.9 billion, that’s 57% off the intrinsic estimated value.
Potential risks
The assumptions for valuation can be very subjective, as the change in the growth and discount rate affects the valuation a lot.
The chairman is the biggest shareholder, holding 35% of the total company; his sole decision cannot be aligned with the minority shareholders.
The distribution function for all of the company’s stores is handled from a single place in Nebraska. Any event such as a natural disaster, or other unforeseen causes would damage the distribution of merchandise to the stores, causing a decline in store inventory, a reduction in store sales, and a reduction in company profitability.
Summary
For the retail industry, Buckle is definitely the pick for the buy-and-hold. With the strong balance sheet, the net cash is 28% of the total asset, along with ample debt and off-balance sheet commitments. Free cash flows grew 15-16% annually over the past 10 years, the operating and net margin has been increasing and becoming the best in the industry. ROE is 22% average of the past 10 years, and TTM ROE stays at 38%. Besides, the company has been paying the growing dividends over the last seven years.The management team has been with the company for at least 10 years, some 20-25 years. It seems that they are loyal, experienced and very dedicated to the development of the company.
Disclosure: The author currently does not own any shares in The Buckle at the time of writing. And this research is subjective to the author’s view. It’s not the recommendation of buying or selling. Please do your own research for your own decision.
