Buckle Up, Abercrombie & Fitch

I admit I probably do not qualify as a sartorial genius. Living in a house full of girls, I pretty much just nod my head and go with it. But I'm not totally dense when it comes to fashion. I just tend to look at it from a different perspective: an analyst's perspective.

Mention The Buckle (NYSE: BKE  ) around me, and chances are I may reach for the seat belt. The reality though is that Buckle is a well-run retailer that gives companies such as Abercrombie & Fitch (NYSE: ANF  ) some healthy competition. And since we're talking more about buying stocks as opposed to buying shirts here, I took a look at a few ratios to get a better idea of which one is the smoother operator.

I want to ride my cash cycle
The cash conversion cycle is one of the best measures of how a company is managing its working capital. It represents the number of days it takes a company to convert raw materials into goods or services, finished goods into sales, and sales into cash. In other words, it measures how long it takes to get cash spent on raw materials back via sales. With this in mind, the lower the number the better. Here's how Buckle and Abercrombie & Fitch compare:

 

TTM

2010

2009

2008

2007

5-Year Avg.

Buckle 62.6 53.3 53.2 62.9 76.6 61.7
A&F 93.6 95.4 89.8 84.9 107.3 94.2

Source: Capital IQ, a division of Standard & Poor's.

Looks like a big difference here. I like the way Buckle converts.

No margin for error
Operating margin, also known as the EBIT margin (earnings before interest and taxes), is an excellent indicator of operational efficiency. These are the earnings that take into account the company's operating expenses and this can tell us how much the company is spending to operate the business. I mean let's face it, earning $1 million isn't going to mean much if it costs you $950,000 to do it. So how do these two compare? Here are the figures:

 

TTM

2010

2009

2008

2007

5-Year Avg.

Buckle 21.8% 22.2% 19.0% 17.7% 14.9% 19.1%
A&F 6.9% 5.4% 14.3% 20.8% 19.7% 13.4%

Source: Capital IQ, a division of Standard & Poor's.

Another significant difference here is that it looks as if Buckle is able to consistently run a more efficient operation. This is somewhat surprising, too, in that Abercrombie is a bit bigger than Buckle, so I would think that scale might help them out here.

Turnovers are delicious!
Inventory turnover is another valuable metric, particularly in retail. It can tell us how often a company's inventory is sold and replaced over a given period of time. Comparing inventory turnover ratios in the same industry can offer some insight as to which company may be performing better. The higher the number, the better the performance. Here's the turnover:

 

TTM

2010

2009

2008

2007

5-Year Avg.

Buckle 4.1 5.2 5.0 4.4 4.1 4.6
A&F 2.7 2.9 3.2 3.2 2.8 3.0

Source: Capital IQ, a division of Standard & Poor's.

Again, Buckle is outperforming Abercrombie. But they both pale in comparison to Gap's (NYSE: GPS  ) average of 5.5.

Tell me what this means
The bottom line is that Buckle is running a more efficient operation than Abercrombie & Fitch, at least based on these numbers. That said, these aren't the only metrics to consider when assessing a business. Remember that fashion and retail is a fickle game on a good day, and what's hot today may not be tomorrow (as I'm sure I will be told many, many times over the coming years). Nevertheless, I'll continue to seek out winning investments for my Motley portfolio keeping these very same ideas in mind. Wanna talk shop? Swing on by my discussion board; you can also follow me on Twitter.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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