Friday, January 2, 1998

The Buckle Inc.
(NYSE: BKE)
Phone: 308-236-8491
Website: http://www.buckle.com
Price (12/31/97): $34 1/4


HOW DID IT DOUBLE?

Buckle Up! Buckle Way Up! For the teen clothing retailer, changing fashions and young adults with more money to spend has made the company popular to both shoppers and investors.

Grunge is dead. Goodbye shredded jeans and oversized flannel shirts. Teenager closets need to be restocked, and the hip Buckle (or is that the hip-hugging bell-bottom Buckle?) has been more than happy to comply.

Teens are dressing up. Boys are trading in their Seattle-inspired garb for Tommy Hilfiger, Nautica, and Ecko, while adolescent girls are buying up sequined tank tops and lace dresses.

The trend has been significant enough to drum up a stunning 16.5% gain in same-store sales. That has led to some favorable margin expansion given the nature of the fixed overhead and the low variable clothing cost. In the October quarter, sales were up 30% while earnings soared 66%. No wonder shareholders have decided to Buckle up -- it's been quite a ride.

BUSINESS DESCRIPTION

Nebraska's The Buckle, Inc. owns a chain of 200 specialty retail shops. Primarily mall-based, the stores offer apparel and accessories tailored to young men and women.

Back in the spring the stock had a 2-for-1 stock split and moved from the Nasdaq to the New York Stock Exchange.

FINANCIAL FACTS

Income Statement
12-month sales: $245.2 million
12-month income: $19.2 million
12-month EPS: $1.28
Profit Margin: 7.8%
Market Cap: $527.5 million

Balance Sheet
Cash: $37.5 million
Current Assets: $99.4 million
Current Liabilities: $34.4 million
Long-term Debt: None

Ratios
Price-to-earnings: 26.8
Price-to-sales: 2.2

HOW COULD YOU HAVE FOUND THIS DOUBLE?

If there is one word that can aptly describe young fashion it would have to be fickle. Tastes ebb and flow. It's depeche mode where no garment lasts forever. Just two years ago we saw the flip side of today's revival. Back then Merry Go Round and Edison Brothers were filing for bankruptcy as the entire niche suffered with no definite fashion trends.

A forward-thinking investor would have figured that when the tide changed new stores would have to fill the void -- and the emptied out mall sites. Momentum has been on Buckle's side all year. The chain was beginning to report double-digit same-store sales growth while the stock was trading for a third of where it is today.

How popularity helps a retail chain is pretty simple. A mall tenant will pay the landlord for square footage. While there is often a meager percentage of revenues attached to the terms of the lease, rent is pretty much a fixed expense. So, as has been the case with Buckle, when each square foot is generating $206 in annual sales compared to just $179 the year before, margins tend to expand. Despite the busier fingers at the cash register, labor costs remain relatively fixed as well.

The one knock on labor costs, that the minimum wage went up this year, actually has helped Buckle since the nationwide mandate has put more change in the pockets of potential Buckle customers.

WHERE TO FROM HERE?

Not all teen retailers have thrived. Hot Topic (Nasdaq: HOTT) has only registered a 2% same-store sales gain over the past year. Buckle has set itself apart by offering everything from jean alterations to gift wrapping -- for free. The service goodies have made sense to a prudent yet hurried generation of young shoppers.

Despite its fickle patrons, Buckle itself is being run quite conservatively. The company has a cash-rich balance sheet and is debt free, unlike many of its leveraged mall counterparts -- many of whom have buckled under debt pressure. The company is also only growing its base of stores at 10% a year. That may change next year when the company expands its strained distribution center capacity to be able to service more than 400 eventual locations.

The analysts are conservative as well. Despite growing earnings more than 50% this year, they expect the chain to grow the bottom line at a 16% clip next year and over the next five years.

That is certainly a realistic benchmark -- one that places the stock's P/E valuation, its growth rate, and its patronage all in the teens. Yet, remember the fickle. Keep an eye on the monthly same-store sales figures. Just as smart investors scored big by jumping in early, they can be hurt by jumping off too late.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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