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The Buckle Quietly Sets the Bar for Retail Success

June 28, 2012 | About:
Invest E Gator

Invest E Gator

9 followers
Sometimes great companies can be found in the most unexpected places, and this one would certainly be my most optimistic prospect for the value idea contest. I first took a look at Buckle back in 2009 but, at the time, I thought that the clothing world was coming to some sort of apocalyptic end and decided to pass. They came back to mind lately as I was clicking through the Magic Formula screen and decided to give them another go. There was an article submission on them here at GuruFocus about a year ago, and it was interesting to read through the commentary as the audience poked about trying to figure this company out. It was in reading this that I decided that I should write an article, as I think I can shed some light on this situation.

1462459429.jpg

There is a durable competitive advantage with this company, and it's something that's deeply ingrained in their corporate structure and culture. We will get into what this is, and how to identify it, after a short overview on the company.

Are you ready to be a fashion tycoon?

The Buckle is a (mostly) mall-based clothing retailer. Their main focus is on jeans, but they also sell a lot of tops, and then small amounts of other fashionable accompaniments. When you buy into this company you get a main office with a fulfillment center (owned), 431 retail stores in 43 states (leased), inventory on the shelves, a bunch of employees buzzing around, and what comes to a net cash balance of about $110m million*. In other words, this is a very simple company with a strong balance sheet.

Over the past 10 years their store count has done this:

Year Locations

2011 431

2010 420

2009 401

2008 387

2007 368

2006 350

2005 338

2004 327

2003 316

2002 304

They also have plans to continue opening more locations. A quick Google search pulls up that we have about 1,000 malls across America. Certainly, not all of the malls are going to meet their target consumer demographic profile, but they also open some locations in strip centers and lifestyle centers, then there is always Canada - so we can ballpark a location potential of about 1,000 into the foreseeable future.

Meanwhile, average sales per store, in thousands of $;

2011 2,314

2010 2,133

2009 2,129

2008 1,995

2007 1,668

2006 1,493

2005 1,474

2004 1,454

2003 1,350

2002 1,334

This is steadily increasing, surprisingly, through both good times and bad, at a CAGR of 5.66%. Their average sales per square foot metric is also steadily increasing, in a similar manner, with 2011 reporting $462 sales/sq ft.

It is with these numbers that we can project out into the future and come up with a very enticing estimation for investment returns. However, unless someone in the comments section wants to go crystal ball bowling into the future, let's leave such speculation out of this report for now. Instead, Price Earnings Growth Ratio, or PEGR, works great for situations like these.

Year EPS

2011 3.20

2010 2.86

2009 2.73

2008 2.24

2007 1.63

2006 1.24

2005 1.13

2004 .86

2003 .69

2002 .65

Average growth for the last 10 years is 20%, 19% for the last 5 years, and then 20% again if we subtract the high and low growth years and then reaverage the rest. This is a company that is growing at a pretty steady 20%. We can also see that they even grew earnings through 2008/2009/2010 while everything was turning ito pumpkins and mice. They must have missed the memo that we were in a severe recession. There is an endless list of things that can get in the way of future growth, but we can atleast surmise that they still have plenty of room left to expand. Let's give them a conservative 15% future long term growth rate, the numbers we need after that would be their current PE of 11.63, and their dividend yield of 2.10.

PEGR = PE (Estimated Growth + div yld) = 11.63 / (15% + 2.10%) = .68 =<1 = A value purchase

Awesome. What we have here is a company with an excellent growth history, good future growth prospects, selling at a very reasonable price. As investors, with this information we need to then consider everything that can go wrong with this proposition; competitive landscape, fasion trends, economic factors, the whole shebag. This requires countless hours of indepth research and an expert level undersanding of the entire retail industry... or maybe not.

If you don't know jewelry, know the jeweler

When buying ownership into a company, we are essentially hiring the workers on as our own, and here is where their competitive advantage comes in. A good place to start with this would be to get into your car and visit some of their stores - they have some of the most eager-beaver fashionistas that I have ever encountered in a clothing retailer. They will literally walk around the store with you, help you coordinate your purchase, give you their advice on the fit, and even make additional recommendations. The next place to look would be to open up their proxy and give it a read-a-roo, sometimes these documents can get quite wordy but theirs is particularly short and sweet. Their executive compensation is based on some very simple factors:

Competitive base salary, increasing by a bit each year

Long term stock awards, not too excessive

Incentive cash bonus, based on three metrics that are grouped together into a bonus pool, and then awards portioned out among the executive staff:

- 8% of the increase in Same Store Sales

- 5% of of the increase in Gross Margin

- 15% of the increase in Pre-Bonus Net Income

- The base year amounts under the plan are immediately preceding fiscal year for Same Store Sales and the prior three-year rolling average for Gross Margin and Pre-Bonus Net Income.

Bingo. They picked the right metrics and their compensation policy effectively ties management together into looking for ways to continually improve them, and they have even managed to accomplish this despite severe economic difficulties. The Buckle is like a See's Candies or Shaw Carpets of jeans and shirts. We can see from this setup that the company is designed to have a fierce executive team at the top, we can see with our own eyes that they have fierce fashionistas working at the bottom, and we can then safely imagine that all of the levels in between must also be streamlined accordingly. This is why, when you compare them to the competition, they (by far!) run the leanest, meanest, and most profitable operation in the industry. It also helps that they have considerable insider ownership at 42% of shares outstanding. Their 14% profit margin represents profits powered by elbow grease, an environmentally-friendly renewable resource, and it sets the bar for what the rest of the industry would otherwise be capable of accomplishing, but they do not.

1273562148.jpg

The chart above is ordered by the Operating Margin column on the right. We can see that the next competitor is about half of their margin at 11.5%, and this also the same with Net Profit Margin. Is this a temporary anomaly? In light of what we now know, it appears not. And with them being compensated accordingly to both grow earnings and cut costs, their expanding profit margin % now begins to make sense. Is a 14.2% profit margin the peak potential for a clothing retailer?

Year Net Profit Margin

2012 14.2

2011 14.2

2010 14.2

2009 13.2

2008 12.1

2007 10.5

2006 10.4

2005 9.2

2004 8

2003 8

With a look at PE ratios, can also see there is an anomoly here where this company is well-underbet compared to others in the industry.

1004411488.jpg

Normally, with them being so undervalued compared to the others, I would have to consider that there is something going on here that I am unaware of. Maybe this is the case, however, despite having years upon years of good results, their growth has been consistently doubted for quite some time.

Year PE

2012 12.8

2011 11.4

2010 11.1

2009 12.9

2008 15.3

2007 14.9

2006 14.2

2005 14.3

2004 12.7

2003 14.4

Low PE + high growth looks more like the working of a neurotic Mr. Market. Their current PE ratio of 11.64 essentially represents an assumption of having no long-term future growth, and the markets have already been consitently wrong about this. So what do we know anyway? We are just a bunch of frumpy investors, too scared to go into the business of retailing fine fashions. Ten years ago the investing world was assuming a low-growth scenario, but Buckle's target consumer group at that time has grown up, long flown the coop, and been replaced with an entirely different population of customers - and the company is still keeps on growing. Bottom line here is they sell (mostly) jeans and shirts. Perhaps the cut and the style varies from year to year but the products in themselves are timeless, it's not like these are pet rocks or Troll dolls. Considering how well they have performed in the past, and that their compensation policies are designed for them to continue performing well in the future, it looks more likely than not that they will be able to continue overcoming any future obstacles that get thrown in their way. Recent releases are showing that their SSS, although they are not yet decreasing, are not increasing as robustly as they have in the past, but this is happening to a lot of companies lately, so its not necessarily a red alarm as far as these guys are concerned.

Therefore, at today's price of $38, this company is a buy and hold until:

A. They start to hit an unjustifiable PE of greater than 15 or 20, that would be $50 or $60 at today's earnings.

B. They reach 1,000 store locations, this is a long time from now.

C. Something else comes up to materially change their situation or disprove this thesis, for example, an investor-unfriendly change in their compensation policies, but not something like a change in the overall economy.

*(Their net cash balance = cash + short term investments + long term investments - total liabilities.)


Disclosure

This is not an investment recommendation but an analytical investigation into a company. Do not be silly enough to take anyone's perspective as infallible, certainly not mine, but make sure to do your own independent research and verification. I own shares in Buckle.

About the author:

Invest E Gator
I like to search out good values.

Rating: 3.9/5 (24 votes)

Comments

ecotycoon
Ecotycoon premium member - 2 years ago
Good choice i've also own this stock for a while turn it was a good investment. Good business, cheap, no debt, good liquidity.

Invest E Gator
Invest E Gator - 2 years ago
Thanks Eco.

You hit the nail on the head. Im excited about them too. My biggest concern here is that I am somehow wrong about them, like there might be a wild card hiding somewhere in the deck that I am missing, but I keep fishing around to find it and everything actually looks quite fine. Aside from general temporary economic issues... there could be a concern with them regarding currency fluctuations in that they import their clothes from abroad and, if the USD drops substantially in value, it will increase their product costs by that much, but this will be something that will hit the entire clothing retail industry as a whole and wouldnt necessarily hurt their ability to compete.

I have some other holdings that I also like, but they are not as cheap as these guys, so I may even consider selling on some of them and transferring the equity over.

ramprasad_bh
Ramprasad_bh - 2 years ago


Good Article. I've owned BKE in 2010-11 but am looking at it recently again with the pull back. Their Dividend doesn't hurt either. Other Retailers I liked for Fundamental Reasons are - Coach (not as cheap as this one but with better International prospects) and LULU (but too expensive and priced for perfection most of the time).

Although Buckle has strong Financials/Management, I was also trying to find things that could go wrong with the Company/Revenues/Stock. In the end it is a Retail Company that caters to Younger Crowd which could always turn the other way.As long as they can cater to their Core Customers and keep the Expansion Plans, Costs & Financial strength intact they should be fine.

I tried visting one of their stores, but there's nothing within 100 miles of Miami (room for expansion..), so I had to do with their Website :)

Cheers,

Ram.
Invest E Gator
Invest E Gator - 2 years ago
Hi Ram. Excellent tip there regarding growth potential into Southern Florida. In considering things that could go wrong withBuckle, I did some behind-the-scenes research with their customer base. This method I came up with is a bit unconventional, and kind of gruntworkish, but last night I went on Omegle.com and opened the random text chat. Omegle is popular with the 16 to 25 year olds so I would start conversations about going to the mall and where they like to shop, sort of work them into comparing different retailers and the results are generally that they either shop there, are neutral about the store, or unfamiliar with it. A lot of them unfamiliar, and this strikes me as a very good indicator regarding future location and SSS growth potential. Those who didn't shop there didn't have much of anything bad to say, just that it wasn't their style or things like that. This is probably a better place to be in than, say, Aeropostale, where those who don't shop there have negative perceptions about both the clothes, and the people who wear it.
ameyashinde
Ameyashinde - 2 years ago
It's hard to find anything wrong with this company, amazing EPS growth story and increasing cashflow. So like the article and the comments above it can be puzzling why the stock looks cheap atleast in terms of PEG.

So I focused on the balance sheet and cashflow to figure out what I am missing. The ROE is 40%, amazing! but the equity has only grown 2% annually in the last 4 years! why is that? cause bulk of the earning is returned to the shareholders in dividend (note they have a very high Q4 dividend payout). So the cash doesn't go back into the equity and hence the growth in equity is quite small. Now the stock as of now trades at around 5x P/B, which is ofcourse high for a retail stock but that is because the Market is getting its return through dividends.

So to figure out future returns I projected an earnings growth of 15% (note: current and next years growth as per MarketWatch Analyst Estimates is less than 10%) and deducted $43M for capex (average of last 4 years, I know I am not taking into account depreciation but also I am not taking into account regular maintenance expenditure ...the goal here is to estimate possible equity in 5 years), 95% of the rest is given out as dividend and the remaining adds back to the equity. So I projected the equity 5 years down the line and put a 5 multiple on it (which represented a 7 P/E...ofcourse that sounds ridiculous, but if I put a 15 P/E the P/B is 11 times and thats even more ridiculous for a retail stock as per my opinion, and further validation is that the div yield is ~9% at the 5 P/B multiple). So taking into account the future stock price and all the dividend payout for the 5 years I get a annual return of ~10% which is what I think the market expects and hence has priced it accordingly.

Ofcourse the return could vary to 12% or so but as an investor I want to aim more than that and hence I would be a bit hesitant to buy it at this price.

Invest E Gator
Invest E Gator - 2 years ago
Awesome take on this Ameyashinde,

Lets take a look at this...

You quoted the "MarketWatch Analyst Estimate" of 10%, how accurate is something like that? BKE's earnings grew by 20% over the past 10 years, even through the recession, with very solid underlying fundamentals while at it. This article's analysis is using a more-conservative 15% because recent numbers are a bit on the low side, and there should be a tendency for them to slow down at some point. However, other retailers are getting clobbered much harder by comparison, so this indicates an overall reduction in spending, but its not hitting BKE as hard as others. This is a great sign for them, and my little investigative gruntwork is still showing that the tweens and teenieboppers do not yet disapprove of BKE's products. I'm very curious as to what MarketWatch is using in its assumptions to come up with the 10%.

Now, we do have a very high dividend payout, personally I would prefer that they would buy shares back for the tax savings or push that into capex at the 40% rate that they get, assuming that they would still be able to get the 40% but that is very doubtable. It looks to me like they are taking their time on growth and being very deliberate about it, and this seems very wise from a long-term perspective.

I have to get off the computer for a while, but I would like to dig into the rest of your post after a bit.

Invest E Gator
Invest E Gator - 2 years ago
"So to figure out future returns I projected an earnings growth of 15% (note: current and next years growth as per MarketWatch Analyst Estimates is less than 10%) and deducted $43M for capex (average of last 4 years, I know I am not taking into account depreciation but also I am not taking into account regular maintenance expenditure ...the goal here is to estimate possible equity in 5 years), 95% of the rest is given out as dividend and the remaining adds back to the equity. So I projected the equity 5 years down the line and put a 5 multiple on it (which represented a 7 P/E...ofcourse that sounds ridiculous, but if I put a 15 P/E the P/B is 11 times and thats even more ridiculous for a retail stock as per my opinion, and further validation is that the div yield is ~9% at the 5 P/B multiple). So taking into account the future stock price and all the dividend payout for the 5 years I get a annual return of ~10% which is what I think the market expects and hence has priced it accordingly.Ofcourse the return could vary to 12% or so but as an investor I want to aim more than that and hence I would be a bit hesitant to buy it at this price. "

Ok. Now on to the price/book part of this. Im having a hard time looking at them from this perspective because their hard assets would mainly be rotating inventory, store fixtures, and a main office with order fullfillment. Why would owning more of that be such a good thing? If they were a company with worthwhile assets, like perhaps Berkshire Hathaway with a considerable portfolio of equities, then I would be fishing around to get a grasp on (real) Book Value. Its the current, and especially future, earnings potential that has my attention. Possibly, they could lower the Dividend to zero and reinvest it all into rapid expansion, but then they would quickly take every nook and cranny of the country, become very trite like like the others who take this route, and financial results could likely then become quite volatile.

This potential for them to increase their earnings from CAPEX overdrive is always there, and I like that, but I also like that they are taking their time in doing it. Meanwhile, without considerable CAPEX allocations, they have been able to increase earnings, at a rate of 20% over 10 years, through productivity improvements and increasing sales from each of their stores. There are variable annoyances that could harm this but so far it sounds like a very solid operation to me. Ill take earnings growth from operational improvements over capital allocation any day.

Let's say they did a sale/leaseback of what little property that they own, and then, assuming this were possible, leased all of their store fixtures. There should be some extra cash flowing out from this, and it shouldnt cause any problem to operations, so we can perhaps assume that operational results would continue to remain the same. From doing something like this, their book value to earnings would collapse down to something close to zilch, but wouldn't the earnings increases still be worth earning just the same?

Your prior post was very interesting, I look forward to your response.

ameyashinde
Ameyashinde - 2 years ago
Hi Invest E Gator, good discussion, obviously you have done a great job in identifying a very good company...my take is an attempt on the 2nd part of a successful investment i.e. the expected return.

It is based on the premise that as owners of the common stock our claim on the company's assets boils down to the shareholder equity in the company, whereas the debt-holders (various forms of it) make up the rest of the capital stack. And as the equity would grow (ideally in tandem with the ROE) so does our share of the business and hence the value of our ownership (i.e. price of the stock) would grow. However this company is indeed peculiar, in that with not much increase in asset/investment it has increasingly made more money (so far) and return the extra capital back to shareholders in the form of dividend. If you see the Return on Asset, it went from ~11% in 2002 to ~30% in 2011, similarly the ROE went from ~13% to ~40% in the same period. Ofcourse they can't keep doing that forever, if I project a 15% growth rate on their income and a modest 2-3% increase in the actual equity (the historic rate) then the ROE climbs up to 74% ... which is quite unlikely to happen, so sooner or later it will have to put more money back into the business, however I have no means on knowing what they will actually do. So to get an expected return I assumed that they continue doing what they have been doing in the last few years i.e. return extra cash back to shareholders and keep growing with modest increase in the investment in the company for the next 5 years (as my investment horizon), after which I will exit it at the then stock price (for which I used a modest multiple based on P/B, but even if I use a 10 P/E, I get a ~14% return including the dividends added back to the terminal value).

I can only control the entry price, not the dividend nor the exit price and hence I came to the conclusion that it might not be a home-run in terms of an investment scenario for me, even though the company does look awesome but the price might be a bit higher than my comfort level. I think in the end it comes down to if you think the company indeed can manage a 15% growth for the next 5 years or so or will it be closer to 10% and that depends on one's confidence level, I don't think there is much downside even in today's price as the management indeed has done a great job and even proved it by giving the cash back to the shareholders. So one can possibly make more than 15-18% return if growth continues but if not it will be less than 15% (most of it coming through dividends). The MarketWatch analyst estimates is an aggregate of 9 to 10 analysts, I can't vouch of them and I don't have history of how the company did compared to prior estimates, I also can't get any EPS guidance from the company. However I will be keeping a close eye on this stock and might even come to a different conclusion on further reflection.

Regards and good luck!

Invest E Gator
Invest E Gator - 2 years ago
I am going to have to marinate some over your post Ameyashinde. I also certainly agree about the ROE/ROA "glass ceiling," this has been on my mind along with the fact that their already-high profit margins can't keep increasing up to 100%. My first reaction was to listen through a few of their quarterly conference calls, because the analysts should be inquiring about this, but it mostly sounds like they are instead asking mundane questions about inventory levels while trying to swindle future projections on Comp sales. Go figure. The company is not budging on their policy not to give guidance, maybe this is why the stock price has been so low compared to earnings growth? More reason to like them.

With their returns, we are looking at the financial results of a company that is improving very well but also starving for capital allocation. It would be interesting to get their thoughts as to why they are not feeding the beast with more. They do talk in the conference calls about new stores here and there, but it's tip-toed expansion. The executives are compensated to improve Same Store Sales, Gross Margin, and Net Income. This is just a guess, but perhaps they see that if they expand too fast, this will reduce these numbers as the new stores will need time to ramp up, and they still accomplished a 20% net income growth over the past 10 years anyway without it, so why bother? Sooner or later improvements in this manner are going to hit a point of diminishing returns and they are going to have to direct more cash into the busines. ROE/ROA is telling us they could have done this a while ago, but does it really matter when they decide to do it? It's inevitable that they will as they continue chasing results.

This warrants picking up the phone and pestering them for some time. If they wont talk to people on the phone, then perhaps their next conference call, but they just had one some weeks ago so it will be a while.

Regards!
Invest E Gator
Invest E Gator - 2 years ago
The Buckle reported SSS for june at a decrease of 2.5% for comparable period last year. Boo hoo.

http://online.wsj.com/article/BT-CO-20120705-708675.html

Weak Retail sales overall

http://247wallst.com/2012/07/05/retail-spending-meets-low-expectations/

Here is a consolidated summary for the month,

http://online.wsj.com/article/BT-CO-20120705-708675.html
fredc
Fredc - 2 years ago
Anyone concerned about the high level of short? Typically shorts do their homework really well and as such I am thinking "I've I missed something?"

Any Ideas???

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