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.
