A Retail Play for 2009

Even if you've sworn off retail after the past year's dismal performance, there is one sector play out there still that's thriving. While its competitors are feeling the effects of plunging comps and rising inventory levels, The Buckle (NYSE: BKE  ) has already posted 11 straight months of double-digit same-store sales gains in 2008 and has been steadily improving margins. And there's more to like about this company than just its recent strong performance.

The Buckle has been around for five decades, and it's a store I predict will be around for a few more. These days, retailers come and go quickly, as many concepts have faddish concepts and fail to properly diversify their merchandise or adapt to changing trends. Diversifying and adapting are key characteristics of retailers who boast longevity, and Buckle's success in the past 50 years displays its unique ability to withstand the rapid pace of the retail world.

All in the family
Buckle first opened in 1948 under the name Mills Clothing Inc. by David Hirschfeld as a single conventional men's clothing store in Nebraska. Today, it is still run by his son who took over operations in 1965 and owns over 41% of the company. The rest of upper-management must nearly feel like family, as the president, two vice presidents, and CFO have all been with Buckle for over 30 years. Further, its district managers have 20 years of experience on average with Buckle. 

This cohort of seasoned management has found the right recipe in terms of growing the business; with just over 370 stores in comparison to the thousand-plus run by competitors Abercrombie & Fitch (NYSE: ANF  ) and American Eagle (NYSE: AEO  ) , the company has avoided overexpansion. Unlike many retailers who find near-term success with a product and uncontrollably expand, Buckle methodically selects where it places each of its locations.

Experience at the helm has also lead to a tightly run inventory management system. Daily delivery of new inventory allows stores to offer a consistently fresh assortment of merchandise. Its distribution system also tailors inventory to reflect buying patterns at various locations and while the incremental costs from this are expensive, they are offset by the lack of markdowns necessary. This has led to an annualized inventory growth rate of just 7% over the past five years in comparison to a 12.7% revenue growth rate during the same time frame.

Each store carries a wide array of brands, including Fossil (Nasdaq: FOSL  ) , Volcom (Nasdaq: VLCM  ) and Guess (NYSE: GES  ) . Brand-name products account for 70% of sales. These high-profile brand names attract customers and allow the company to spend minimal amounts on marketing; advertising costs amount to just 1% of sales, in comparison to most retailers, who spend 3% to 4%.

The remaining 30% of sales are derived from the company's higher margin private label. By offering this assortment, consumers can pair higher end apparel with lower priced in-house branded items. Both the private label items and lower marketing expenses have likely helped the company achieve gross and net margins superior to most of its peers, including Urban Outfitters (Nasdaq: URBN  ) and Zumiez.

The valuation
I've had my eye on Buckle for some time, but its superior performance has come at a hefty price in the recent past. And while the stock has since rebounded some, it is now down nearly 50% since reaching over $40 in September. My best guess for the recent drop is general market concern for the retail sector in general. This has left the company selling at just 9 times next year's expected earnings.

Using my discounted cash flow model, I peg the company to be worth roughly $38 per share. This assumes the company grows its expected 30% this year, 15% over the next five years and 5% for five years thereafter and uses a 10% discount rate.

The debt free company has historically generated strong cash flow and it optimally employs its capital to shareholders, rewarding them with a 30.4% ROE in the past 12 months. Management has been repurchasing shares over the past several years; with a total of nearly 1.3 million shares in 2006 and 2007, and the Board recently approved for another 1 million to be bought back. Further, its dividend represents a healthy 38% of trailing earnings. At current prices, the company is yielding 3.8%.  

Buckle up for great returns
As a retail analyst, it's hard for me to admit that there are few retailers that I'm bullish about these days. Many do not have the operational discipline or health to withstand the lengthy recession we are faced with. Some are drowning in too much debt, others have expanded to a level that can't be sustained in a deleveraging economy. However, Buckle is one that I expect to easily weather the current storm and continue to steadily reward its investors for years to come.

Further Retail Foolishness:

Kristin Graham owns shares of American Eagle. American Eagle is a Motley Fool Stock Advisor selection and the Fool owns shares of it. Zumiez, Fossil, and Volcom are Motley Fool Hidden Gems recommendations. The Fool has a disclosure policy.


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  • Report this Comment On December 26, 2008, at 3:06 PM, captschnorrer wrote:

    There's no doubt BKE's operating perfromance over the last year-and-a-half has been superb, but it's longer history doesn't quite justify your romance with it.

    The company had negative annual comps in 1993 and 1994 (-3.7% and -1.8%), which surged over the next four years to +7.5, +11.1, +18.6 and +15.4%. But then there was a rough patch that extended seven years from 1999 through 2006 with annual comps of +0.9%, -6.0%, -6.2%, -0.5%, +1.1%, +6.3%, +1.4% and 0.0%. It's only last year and this year that the company (possibly) re-established an upward trend in same store sales (although productivity, in sales per square foot, has been trending up since 2003, rising from $274 to $335, after previously peaking in 1998 at $344). Net proft margin has also sneaked up from 8.0% to 12.1 % in that period from a 1998 peak of 10.1%.

    In fact, while I don't have available monthly same store sales figures from FY2000, from Feb. 2001 through August 2006, the comps were negative in 35 of those 68 months, flat in another two and between 0.0 and plus one per cent in six. In other words, monthly comps were positive little more than a third of the time (37%).

    In its current surge, BKE has been posting double-digit comps against double-digit comps in only six of the sixteen months since it started its consecutive string in August last year, In another four months the double-digit increase was against a strong roughly 8-9% comp.

    All I'm suggesting is that BKE's development has been irregular, and while its success in a generally dismal environment (although two other youth retailers have also done well), makes it stand out, I'd say any recommendation should be a little more cautious than you seemed to express.

    The other two literal standouts are ARO, with a +17.0% year-to-date comp, and APP, which doesn't report year-to-date numbers, but which has reported seven consecutive double-digit quarters ranging from +16% to +40%, and eight of nine monthly reports this year ranging from +15.0% to +31.0%. Both ARO and APP fell off in November to -5.0% and +6.0% respectively. BKE's strength in Nov. is distinctive.

  • Report this Comment On December 26, 2008, at 3:16 PM, captschnorrer wrote:

    In the last line of the paragraph beginning "In fact," it should read "solidly positive" rather than merely "positive." (and I may be generous in having credited a +1,2% and a +2.4% month following negative months in the prior years as "solidly positive."

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