The Buckle and Urban Outfitters: Are They Worthy Investments?

Investing legend Peter Lynch once said, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."  With that said you may have walked around your local mall and noticed apparel retail shops The Buckle (NYSE: BKE  ) and Urban Outfitters (NASDAQ: URBN  ) .

This may be a good starting place to research investment ideas. However, it always pays to check out whether or not companies grow their revenue, profitability, and free cash flow and retain some cash for reinvestment back into the business or for dividend payment to investors like you.

Slowing down
The Buckle sells mid to higher priced footwear, apparel, and accessories to young women and men.  Buckle operates 452 stores as of this writing.  The company experienced solid fundamental growth over the past five years with revenue, net income, and free cash flow growing 26%, 28%, and 35%  respectively during that time.

However, preliminary first quarter 2014 data indicates a slowdown. Buckle's revenue increased a mere 0.73% while net income declined 0.56% in the most recent quarter.  Not surprisingly, Buckle's online sales increased 2.5% indicating the consumer migration from brick and mortar purchases to e-commerce. Meanwhile, Buckle's same store sales, or sales from stores open at least one year, decreased 0.9% in the most recent quarter. 

Buckle does sport a solid balance sheet to help it get through rough times. Its $192 million in cash equates to 49% of stockholder's equity. The company possesses no long-term debt which means interest expense will not serve as a drag on future profitability. 

Buckle believes in returning cash to shareholders. The company paid out 67% of its free cash flow in dividends last year.  Currently the company pays $0.88 per share per year in regular dividends translating into a yield of 1.9% plus special dividends the company occasionally pays.

Source: Motley Fool Flickr

Ailing flagship
Urban Outfitters operates a portfolio of brands including Urban Outfitters, Anthropologie, Free People, Terrain, and Bhldn brands. Urban Outfitters, its oldest brand, represents an apparel retail brand that caters to young adults. Anthropologie sells apparel, footwear, and furnishings to contemporary women in the 28 to 45 age group. Free People sells private label apparel, footwear, and accessories to roughly the same demographic as Anthropologie. Free People, via its wholesale segment, distributes merchandise to other retailers. Terrain sells merchandise pertaining to the outdoors and gardening. Bhldn sells wedding related merchandise.  

Over the past five years, Urban Outfitters grew its revenue, net income, and free cash flow 59%, 28%, and 10%  respectively. In the most recent quarter, revenue grew 6% while net income declined 20%.  The Urban Outfitters brand served as a drag on overall growth in revenue and net income with brand sales declining 5% in the most recent quarter.  Urban Outfitters CEO, Richard Hayne said, "While Anthropologie and Free People continue to deliver record levels in sales and profits, Urban Outfitters had a disappointing quarter and is working diligently to regain its fashion footing." 

Like Buckle, Urban Outfitters sits on solid financial footing. The company harbored $342 million in cash in the most recent quarter equating to 25% of stockholder's equity.  Urban Outfitters possesses no long-term debt, but the company doesn't pay a dividend.

Now what?
Look for e-commerce to continue to outperform the brick and mortar segment of Buckle. Buckle represents a well run company headed by people who own a great deal of stock in the company. Over the long-term this company should do ok.    Meanwhile Buckle pays a dividend while shareholders wait for any turnaround that may happen.

Urban Outfitters needs to address the merchandising issues in its flagship brand. The company's diverse brand portfolio should enable the better performing brands to pick up the slack of the underperforming brands. This will mostly likely translate into superior long-term capital gains over the long-term.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 30, 2014, at 9:44 AM, ScoopHoop wrote:

    Nice piece William. I also own the Buckle, but recently sold more than half my position in the company because I am worried about the future of mall retailing. I worry young people don't have jobs to pay for expensive clothes like BKE and Urban Outfitters, and their parents can't afford to buy them. Online growth at BKE has really fallen off, it used to grow 20% annually, but recently up only 2.5%. That's not good either. BKE is financially strong enough to weather tough times, but is the retail landscape changing for everyone in the business?

  • Report this Comment On May 30, 2014, at 9:58 AM, stockdissector wrote:

    Hey Michael,

    That's a really good question about mall retailing. Buckle should really start focusing on its e-commerce given shifting consumer preference towards websites. However, if anyone could maintain and grow a brick and mortar business Buckle can-- but maybe at lower growth rate. That's why I said Buckle should do "ok" over the long-term. Investors such as you and myself would probably see more of the future total return coming from dividends and not capital gains on this company. Time will only tell and this company certainly deserves closer scrutiny for the medium term.

    I appreciate your readership!

    Fool on!

    William Bias

  • Report this Comment On May 30, 2014, at 11:24 AM, SSFE wrote:

    Hi Guys,

    Love the Fool. been reading for 10+ years now. One thing that I think is being missed here is that retail includes TVs, Blenders, Clothing etc. Clothing retail is radically different then air conditioners or laptops etc. when it comes to e-commerce. The world is way too vain to ever replace buying online as opposed to visiting the store and trying on the numerous supply of say jeans. E-commerece can not and will never be able to get passed the "trying on stuff to see how it looks" problem. Mall traffic? Who knows the future of the mall may be just to buy clothing. Also many private brands "bke" are only sold by the buckle so how do you get around that? I own shares of the buckle and already have more than half my initial cost paid by the dividends. BKE is a superior company compared to peers and managed by individuals who have been there 30+ years and have seen it all. One other thing urban, Aeropostale, American Eagle etc. are all closing stores Buckle is not. Where are all those shoppers going to go to now? They will go to the buckle to buy. it's called capitalism. Those that survive get stronger. My money is on the Buckle. Have a great day and thanks for the piece.

  • Report this Comment On May 30, 2014, at 1:33 PM, stockdissector wrote:

    That's an interesting thought SSFE. I never considered the trying on clothes viewpoint. That's hard to do with a website unless you already know what you want to buy.

    Thanks for your readership!

    Fool on!

    William Bias

  • Report this Comment On May 30, 2014, at 1:34 PM, stockdissector wrote:

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