Is The Buckle Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does clothing retailer The Buckle (BKE 0.38%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The charts you're about to see tell Buckle's story, and we'll grade the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Buckle's key statistics:

BKE Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q4 2010.

BKE Return on Equity (TTM) data by YCharts.

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
We first looked at Buckle last year, and this time around it racked up a more modest four of nine possible passing grades than the seven of nine it picked up in 2013. One big source of that weakness is falling free cash flow, which has slipped below net income in trailing-12-month terms for the first time in years, and which now seems inadequate to maintain the company's high level of special dividends. Despite this disappointment, Buckle's shareholders have enjoyed solid upside over the past few years, although its share price now appears to be running ahead of its fundamentals. Is this situation sustainable, or will the company be tripped up by fundamental weaknesses in the end? Let's dig a little deeper to find out.

Buckle posted lower than expected revenue and earnings per share for its fourth quarter, which was primarily due to weakness on the brick-and-mortar side -- same-store sales were flat, so the 10 new locations opened last year were effectively responsible for all of Buckle's growth in 2013. The company's e-commerce business, which now accounts for 8% of sales, was the only other contributor to growth. However, over the long run, Buckle and other denim retailers should be well positioned to benefit from growth in the jeans market, which is expected to reach $56 billion by the end of 2018.

My fellow Fool writer Natalie O'Reilly notes that Buckle and fellow clothing retailers Gap and Express have all enjoyed strong e-commerce sales growth, which will have a major impact on their bottom lines in the next few years. However, O'Reilly's data shows that Buckle's e-commerce gains are actually the weakest of these three mall-based businesses, as Gap and Express have both posted two consecutive years of double-digit growth to Buckle's modest single-digit improvement. This underperformance could explain why Buckle's EPS growth has also been the weakest of the three in recent years:

BKE EPS Diluted (TTM) data by YCharts.

My fellow writer Prabhat Sandheliya notes that Buckle's store count has been growing by 10 to 15 new locations annually, which has insulated it from the boom-and-bust cycles hurting both American Eagle Outfitters and Guess?, which have expanded far more aggressively in the past. Buckle's dynamic inventory management and efficient cost management initiatives also give it an edge in growing sales and earnings for investors in difficult macroeconomic environments, something that can't be said of many apparel retail peers.

Buckle plans to open 16 new stores and complete 14 to 16 store remodels this year, far fewer than the triple-digit annual outlet growth seen at Guess? or the 40-odd new stores American Eagle opened in 2013. Buckle is also expanding its product portfolio to include activewear and footwear, which should help it to compete with larger and more diversified rivals. Buckle's bottom line is likely to remain strong with the realization of cost efficiencies as its e-commerce division grows.

Putting the pieces together
Buckle today has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.