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‘Buckling’ Down to Get a Bargain

February 10, 2010 | About:
The Buckle operates as a retailer of medium to higher-priced casual apparel, footwear, and accessories for young men and women in the United States. The company’s casual apparel products include denims, bottoms, tops, sportswear, and outerwear. They operate 405 retail stores spread over 41 states mainly in the central, northwestern and southern regions of the country.





This debt–free company has been consistently profitable over the past 17 years and EPS grew from $0.72 in 2000 to an estimated $2.66 in the FY just completed on January 31, 2010.


Value Line notes that The Buckle’s stock has outperformed 95% of all shares in their 1700 company research universe with 95th percentile ‘earnings predictability’ (with 100th being best). Value Line rates BKE’s financial strength as ‘A’. Buckle has no pension plan and thus no defined benefit liabilities.


Dividends were initiated in 2003 and have been increased in each subsequent year. The most recent $0.20 quarterly distribution makes for a nice 2.84% current yield that is well covered at just about a 30% payout ratio.


Here are BKE’s (split-adjusted) per share numbers as reported by Value Line [FYs end Jan. 31of the following year]:




FY


Sales


C/F


EPS


Div.


B/V


Avg. P/E


2002


8.47


0.94


0.65


Nil


5.59


14.2x


2003


8.75


0.97


0.69


0.09


6.16


12.6x


2004


9.65


1.22


0.86


0.20


6.82


14.3x


2005


11.52


1.60


1.13


0.27


6.89


14.2x


2006


12.02


1.70


1.24


0.37


6.50


14.8x


2007


13.85


2.14


1.63


0.60


7.56


15.2x


2008


17.25


2.75


2.24


0.73


7.35


13.0x


2009*


19.35


3.20


2.66


0.83


7.45


11.3x


* FY 2009 includes consensus estimates for Q4





The impressive growth in sales, cash flow, earnings and dividends was all accomplished with internally generated funds. As of Oct. 31, 2009 the company had no debt and held $93.6 million in cash. Unlike most companies that continuously dilute shareholders, Buckle’s total share count is actually lower today than it was in 1993.


Chairman Daniel Hirschfeld holds about 36.3% and CEO Dennis Nelson owns about 5.5% of the outstanding shares. They are obviously interested in the long-term share price performance.


Buckle’s shares dipped recently when January same store sales were down 1.2% versus analyst predictions of a 4% gain. The pullback from over $33 to $28.18 seems to more than compensate new investors for this transitory disappointment.


The average P/E for BKE was 14.04x for the entire seven-year period 2002 – 2008. With FY 2009’s EPS expected to have been $2.66 the current trailing multiple is just 10.6x. A return to even 13x earnings would bring Buckle’s share price back to $34.58 or 22.7% above today’s closing quote. Is that a rational goal? Why not? BKE hit $44.60 in September 2008 and over $39 in 2009 when fundamentals were not as good as they are today. Standard and Poors likes the shares – giving them a 4-Star rating (out of 5) and looking for $40 /share as their 12-month target price.





If you understand option selling you might want to consider this 7.25 month buy/write combination play:






Cash Outlay


Cash Inflow


Buy 1000 BKE @$28.18 /share


$28,180




Sell 10 Sep. $30 calls @ $2.30 /share




$2,300


Sell 10 Sep. $30 puts @ $5.40 /share




$5,400


Net Cash Out-of-Pocket


$20,480







If Buckle shares rise to at least $30 (+ 6.5%) by Sep. 17, 2010:


· The $30 calls will be exercised.


· You will sell your shares for $30,000.


· The $30 puts will expire worthless.


· You will have collected $400 in dividends.


· You will have no further option obligations.


· You will end up with no shares and $30,400 in cash.


This best-case scenario would be a net profit of $30,400 - $20,480 = $9,920/$20,480 = + 48.4% cash-on-cash on shares that only needed to rise by 6.5% or more over the 7 ¼ months.





What’s the risk?


If Buckle shares remain< $30 on Sep. 17, 2010:


· The $30 calls will expire worthless.


· The $30 puts will be exercised.


· You will be forced to buy an additional 1000 BKE shares.


· You will need to lay out another $30,000 in cash.


· You will have collected $400 in dividends.


· You will end up with 2000 BKE and $400 in cash.





What’s the break-even on the whole trade?


On the original 1000 shares it’s their $28.18 purchase price less the $2.30 /share call premium = $25.88 /share (excluding yield).


On the ‘put’ shares it’s the $30 strike price less the $5.40 /share put premium = $25.60 /share.


Your overall break-even would be $25.74 /share ignoring dividends and $25.54 /share after figuring in the $400. BKE shares could drop by up to (-9.3%) without causing a loss on this trade.





Summary:


Buckle is a conservatively financed, very profitable growth company selling at a non-growth valuation. I see total return of 20% - 25% before year end simply on a rebound to a more normal P/E.


Those who buy shares and write options would see cash-on-cash returns of > 48% on any move up in the underlying shares of better than 6.5% between now and September 17th.







Disclosure: Author is long BKE shares and short BKE options.

About the author:

Dr.Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr.Paul Price's Website


Rating: 3.9/5 (16 votes)

Comments

jpbarcz
Jpbarcz - 4 years ago
In your analysis, shouldn't you account for the $30,000 of equity your broker will hold to cover your naked put position? This would essentially reduce your 48% return to 19.7% ($9920 / $50480). Still not a bad return for 7 months with some downside protection.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago


The maintanece margin requirement on 10 $30 puts sold for $.5.40 would be only 20% of $24,600 or $4,920.

That amount of cash is NOT required if you have enough paid-up marginable equity in your account to write against.

This could be shares of stock, bonds, or T-bill etc. That is how I do my combinations without the need for furthter cash (unless the puts actually get exercised.)
cm1750
Cm1750 premium member - 4 years ago


Stockdocx is right from a mechanical point of view.

However, for practical purposes, one is really risking capital equal to the amount needed to buy the original and potential put shares, less option proceeds.

In 90%+ of the cases (hopefully), this risk capital will not need to be utilized, but you really are, in effect, using margin using Stockdocx method. While this margin does have an element of downside protection (option proceeds), a black swan scenario would lead to very ugly results. The risk is mitigated by having excess cash available to cover the put obligation, and the resulting IRR calculation is closer to Jpbarcz' observation.

Even WEB, who is a master probability investor, has said that he would never risk his capital for great returns if there was even a 1% chance of total loss.

"In 1965, perhaps we could have judged there to be a 99% probability that higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause [a catastrophic result]. We wouldn't have liked those odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns."
batbeer2
Batbeer2 premium member - 4 years ago
That amount of cash is NOT required if you have enough paid-up marginable equity in your account to write against.

The fact that the capital you have to put up to do this trade is in T-bills or stock does not mean it is reasonable to ignore it. For all I know a broker may even accept your home as collateral. IMHO it is reasonable to adjust the expected return accordingly.

Levarage takes on many forms and disguising it is what leads to ever increasing boom and bust cycles.

Think of it this way...

Ignore other forms of capital and Conns becomes the best business money can buy..... earnings 10-20m while holding just 10m of cash..... WOW.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Even WEB, who is a master probability investor, has said that he would never risk his capital for great returns if there was even a 1% chance of total loss.

When BRK sold over $20 billion face value of index puts he certainly had at least a 1% chance of a disastrous result.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




Nothing Sells Like Teen Spirit

By ALEXANDER EULE - Barrons.com

Apparel retailers that cater to teens posted an impressive 5% same-store sales gain in February. Here’s the best way to invest in the group.

CONSUMERS ARE RETURNING to the malls. In fact, several East Coast blizzards couldn’t keep them away in February.

Among retailers reporting sales Thursday, the biggest surprises came in the teen-apparel sector. For February, the group posted a sales gain of 5% at stores open for more than a year. (The frequently used metric is known as same-store sales or comps.) Analysts, on average, were expecting a 2.3% decline according to Thomson Reuters.

The teen group has now posted two months of same-store sales gains, after 18 consecutive monthly declines, according to Jharonne Martis, director of consumer research at Thomson Reuters. She considers teen retailers a good proxy for discretionary spending.

“Consumers are digging into discretionary income, which they weren’t doing before,” Martis says. Meanwhile, retailers are heading into a good time of the year, with racks holding new full-price merchandise for the spring. “If you thought February was strong, wait until you see March,” Martis adds.

The February standout is Zumiez (ticker: ZUMZ), whose shares are up 14% today; the action-sports outfit saw an 11% spike in comps. Analysts had expected just 1% growth, according to Thomson Reuters. Abercrombie & Fitch (ANF) shares are up 11.4%, with comps up by 5%, versus an expected decline of 6.9%.

Other teen retailers posting better-than-expected comps include Aeropostale (ARO), its shares are up 6.4% today; Buckle (BKE), up 4.6%; Hot Topic (HOTT), up 4.2%; and Wet Seal (WTSLA), up 4.1%. Among the group, only American Eagle (AEO) is getting left out of the party, with shares down 5.4%. American Eagle posted solid comps, but reiterated disappointing guidance for the fourth quarter.

So is it a new day in retail investing? Many of the stocks have already had stellar runs in the last 12 months, led by Zumiez’s 153% rise, and nearly 100% gains for Wet Seal and Abercrombie. Not one of those stocks is cheap, trading at forward earnings multiples of 51.7, 19.6 and 21.7, respectively.

For value investors, Buckle and Aeropostale are the best choices. The stocks fetch 11.4 and 10.4 times earnings estimates for the next 12 months.

Barrons.com has been positive on Aeropostale in recent months. (See Barron’s Take, “Aeropostale Shares Can Take Off Again,” Dec. 3, 2009.) The company noted today its gross margin was up in February. Margaret Whitfield at Sterne, Agee & Leach thinks a multiple of 13.5 times is appropriate and assigns a price target of $55 for the stock, 46% above current levels.

Buckle, meanwhile, is one of the few teen names to have underperformed the Standard & Poor’s 500 index over the last 12 months.

Both Aeropostale and Buckle will provide more detailed results when they report fiscal fourth-quarter results on March 11.

It’s a good day for teen retailing, but investors should shop wisely.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




Buckle’s Big Bet - Forbes Magazine

By Monte Burke

Forbes Magazine dated March 15, 2010

The clothing retailer prospered during the recession by dominating small markets. Will its pitch work in big cities?

Kearney, Nebr., two hours west of Lincoln on numbingly straight I-80, is the hometown of the publicly traded clothing retailer known as the Buckle, which caters mainly to the finicky teenage crowd. On a tour of the company’s boxy, one-story headquarters, Karen Rhoads, Buckle’s chief financial officer, seems self-conscious about the carpet in the main hallway. “You can see that we’ve expanded,” she laughs, nodding at the various patterns stitched together beneath her feet.

Rhoads needn’t be embarrassed. Like rings in a tree, the carpeting chronicles a company with same-store sales growth in 40 of the past 41 months (they were down 1% in January) that has prospered while higher-profile competitors stumbled. The Buckle, which has 404 stores in mostly smallish markets in 41 states, looks recession-proof at the moment.

What’s the recipe? Tight control of the inventory of hip jeans, shirts and hats and lots of customer service, says Dennis Nelson, the 59-year-old chief executive. “We let our guests and teammates drive the business, not what’s expected of us on Wall Street.” There’s another reason: Thus far the Buckle hasn’t strayed too far from its small-town, midwestern roots. Most of the stores are in the interior of the U.S.; a fifth are in Metropolitan Statistical Areas of under 50,000 people. “They are the leading edge of fashion in most of their markets,” says Adrienne Tennant, who covers the company for FBR Capital Markets.

But with those markets nearly tapped out, the Buckle has begun a slow advance into larger ones. Last year the company opened stores in Buffalo; Mays Landing, N.J. (near Atlantic City); and Destin, Fla. Stores in Albany and Rochester, N.Y., Orlando, Fla. and Sacramento, Calif. are among 21 planned openings for 2010. The new markets provide big challenges, not least of them higher rent. An outlet takes 4,000 to 5,000 square feet at $20 a foot (annually) in the hinterlands but needs more like $60 in a city like Orlando. The competition is greater in bigger cities and Buckle’s brand recognition less.

That fact, as well as Buckle’s refusal to issue earnings forecasts, may be why Wall Street is cool toward this growth company. Estimated earnings last year were up 19% to $125 million on revenue up 13% to $900 million. Sales per square foot were up 8% to $434. Still, the company trades at a below-market multiple of 11 times trailing earnings.

At Buckle’s two biggest rivals, Abercrombie & Fitch ( ANF - news - people ) and American Eagle Outfitters ( AEO - news - people ), earnings last year were off 74% and 3%, respectively. Part of the reason: Buckle gets most of its sales from producer brands, like Guess ( GES - news - people ), Silver Label, Fossil ( FOSL - news - people ) and Ed Hardy. Abercrombie & Fitch and American Eagle carry only store brands, for which consumers seem to be even more fickle than for producer brands. Buckle stores get new inventory every day from a warehouse in Nebraska and don’t order what doesn’t sell. “Most retailers buy nine months out and push their inventory on their customers,” says Thomas Filandro, analyst at Susquehanna Financial Group. “The Buckle gets feedback from the customers and reacts.”

Word of mouth, says Nelson, is the company’s best form of marketing. “Our biggest challenge is getting people to know our selection and understand what we are.” The company was founded by David Hirschfeld in 1948 as a men’s apparel store named Mill’s Clothing. In 1962 Hirschfeld’s son, Daniel, took over. Five years later the company added a second store and became known as Brass Buckle.

Nelson grew up on a farm 30 miles south of Kearney. As a junior at Kearney State College (now the U. of Nebraska at Kearney) he folded jeans part-time in a Buckle store; he stayed on after graduation. In 1992 he became president when the company went public. Five years later Daniel handed him the chief executive job while retaining a 37% ownership stake now worth $487 million.

Promoting from within is the norm. Kari Smith, the vice president of sales, started gift-wrapping at a store at age 14. Chief Financial Officer Rhoads went to Kearney State and started as a part-timer. Patricia Whisler, the head women’s clothing buyer, has worked for the company since 1976. Buckle’s 20 district managers average 20 years of experience with the company.

Buckle is old-fashioned in other ways, too. Its loyalty card is punched cardboard. (A new electronic card is in the works.) Web sales came to only 5.5% of the total last year.

If the slow and careful strategy works for Buckle in fast-paced and scary markets, Nelson will soon get some more varieties of carpet in his hallways. And a little more respect on Wall Street.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




Growth & Income - From Zacks

The Buckle April 15, 2010

The Buckle (BKE - Snapshot Report) fits the bill for investors looking for a stock that offers both long-term growth potential and current income.

This Zacks #2 Rank stock is expected to grow its earnings per share at 12.0% per year for the next three to five years. It also has a current dividend yield of 2.1%

Investment Story

BKE is a specialty retailer of casual apparel, footwear, and accessories for young men and women. It sells its merchandise under both private-label and name brands. It operates over 400 stores in 41 states under The Buckle nameplate.

The company differentiates its stores through its merchandise mix and a superior shopping experience. The Buckle competes with other mall-based, specialty retailers including Abercrombie and Fitch (ANF - Analyst Report), American Eagle Outfitters (AEO - Snapshot Report), and Aeropostale (ARO - Snapshot Report).

The Buckle isn’t a flash in the pan. It has grown its annual sales at 9% per year since 2002. And in the last three years, the retailer has reported negative comps just one time.

The company’s success stems from management’s ability to identify merchandise that resonates with its target market (young men and women between the ages of 12 and 24) and to staff its stores with helpful but not pushy front-line associates.

The Buckle’s most recent monthly sales report demonstrates that the retailer’s momentum remains strong. On April 8, it reported March comp-store sales of +7.2%. This was about 100 basis points ahead of analyst expectations. On its face, BKE’s March comp doesn’t look as strong as some other retailers. However, we note that Buckle’s 7.2% March 2010 comp was on top of a stellar 14.7% comp in March 2009.

Earnings Trends

BKE’s recent earnings results have been solid. In the fourth quarter, the retailer beat the Zacks Consensus Estimate by 6 cents, or 7.1%. The retailer has beaten the Zacks Consensus Estimate by an average of 9.2% in the 5 quarters.

The Buckle’s continued strength has analysts increasing their estimates. In the last 7 days, there have been 12 upward revisions to the company’s earnings estimates. And in the last month, the Zacks Consensus Estimate for fiscal 2011 is up 22 cents, or 4.3%, and consensus estimates for fiscal 2012 are up 2 cents, or 1.0%.

Concerns

Future earnings growth will continue to come from strong top-line growth and store expansion. BKE didn’t suffer the margin contraction that impacted the rest of retail. As such, The Buckle has little room for margin expansion.

The Buckle continues to open new stores. The company increases its square footage by 4% to 5% per year. In addition, BKE is one of the few retailers that has been able to increase prices without suffering a hit to sales. This is helping to slightly boost its gross margin. However, operating costs are about as low as they can be, which limits the retailer’s operating leverage.

The lack of margin expansion opportunities could be the primary reason that analysts are split on the stock. Of the 13 analysts covering BKE, four analyst rate the stock ‘Strong Buy;’ five rate the stock a ‘Hold;’ and four have a ‘Sell’ rating on the stock.

The Buckle will report first-quarter results around May 20.

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