There's no shortage of potential investment opportunities in the apparel sector, but finding the companies that are at the forefront of the current trends will lead to the best returns. One such company is The Buckle (NYSE:BKE).
Buckle operates some 400 stores, selling trendy apparel and accessories. The stock has managed to outpace the S&P 500 index by nearly 100 percentage points over the past half decade. However, for investors who are looking for a still-underrated company with under-appreciated growth, they should buy Buckle and strap in for a move even higher.
At a market cap of only $2.5 billion, Buckle can easily be overlooked. The company missed earnings per share by $0.05, or by slightly more than 5%. However, the news wasn't all bad. Comp-store sales were down 0.5%, but online sales were up 11.9%. Online sales are not included in the comp-store sales calculation.
But it's a jeans company
Buckle gets about 50% of revenue from denim, and tops make up 30%. All in all, Buckle is a top shop for denim, with more than 20 brands like ReClaim, Buckle Back, Diesel, 7 For All Mankind, and Buffalo. Its key brands range from $60 to $100 per pair.
Being a leader in the premium denim space has proven to be very successful for the company, but one thing investors should not overlook is that Buckle is quickly expanding beyond denim into activewear and footwear. For instance, the apparel company is breaking into the sportswear market with its BKE Sport. And it is also expanding its accessories offering by selling Oakley sunglasses and Diesel watches.
A proven model
Buckle is very good at keeping its inventory flowing. This helps prevent markdowns, which, in turn, keeps margins high. Buckle keeps its inventory low by only keeping a few sizes of each item, ultimately keeping its inventory level shallow. It also has a high level of new items constantly cycling through its offering.
Another initiative the company utilizes for keeping inventory "fresh" is moving slow- selling items to stores where those items are selling the best. And as a last resort, the company uses its online site as a clearance outlet. On the other hand, a number of other apparel retailers are having noted issues with moving inventory.
This includes American Eagle Outfitters (NYSE:AEO). This company and its peers are seeing huge pressure in the teen-apparel space. American Eagle's days of inventory have gone from 58 days in 2009 to 81 days in the last 12 months. There appears to be a change in "what's hot," and apparently American Eagle has failed to innovate.
One of American Eagle's top peers is already facing pressure from activist investors. Aeropostale saw Hummingbird take a near 8% stake in the company a couple of months ago, and just last week Hirzel Capital joined the fight to either reform or sell the company. Although American Eagle has yet to gain any activist attention, it appears to be a prime candidate.
On the other hand, Gap (NYSE:GPS) appears to be doing a number of things right. Its days of inventory have remained almost flat since 2009. The company, which operates The Gap, Old Navy, and Banana Republic brands, is also looking to flip the script when it comes to sales. With the holiday shopping season right around the corner, there are a number of apparel retailers launching sales campaigns. Gap, however, could be taking a different approach.
Gap's CEO noted earlier this week that "are we disappointed in the consumer sentiment or have we -- I'm just being honest -- as an industry not been that innovative in order to give the consumers a value proposition that doesn't look like wallpaper day in, day out? They are looking for something exciting." It'll be interesting to see what Gap comes up with.
Foolish bottom line
Buckle trades at 15 times earnings; meanwhile, the apparel industry is trading closer to 23 times, so Buckle appears to be trading a bit cheaply. The positive aspects for the company includes its expansion beyond jeans and the fact that it's working its way online, looking to boost sales via its online channel.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle and has the following options: short December 2013 $45 puts on The Buckle. 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.