The Buckle Belts Fellow Retailers


I wrote an article three months ago ago praising the Buckle (Stock Quote: BKE), a Nebraska-based denim-jeans retailer, as an investment alternative to J. Crew (Stock Quote: JCG), Abercrombie & Fitch (Stock Quote: ANF), American Eagle (Stock Quote: AEO) and Aeropostale (Stock Quote: ARO).

At the time, consumers were growing pessimistic, and the stock market was plunging. But September comparable-store sales increased 19.7% and October sales rose 14.5%. And third-quarter net sales jumped 25.7% from a year earlier, while net income climbed 31%. But the shares fell to a low of $14.58 on Nov. 20. On Jan. 7, the company announced that December comparable-store sales increased 13.5%.

The Buckle has outperformed every retail competitor during the holiday season. J. Crew expects a hefty fourth-quarter loss and estimates a same-store sales decline in the double digits. Abercrombie & Fitch's same-store sales dropped 24% in December, and American Eagle's fell 17%. The Gap's (Stock Quote: GPS) sales slumped 14%.

Of the 35 retailers that have reported December same-store sales, only eight posted growth, and the Buckle recorded the largest gain, with Aeropostale grabbing second place. Ratings gives the company a buy recommendation.

Still, the company's stock has declined 47.1% over three months.

Based on the comparison of same-store sales and stock performance, it's clear specialty retail shares aren't trading on fundamentals. For example, ANF was by far the worst performer based on same-store sales from October through December, but its stock fared better than BKE's. ANF's stock also outperformed American Apparel (Stock Quote: APP), which had the second-best same-store sales from October through December.

By taking a step back and viewing these stocks over a broader period, you see that BKE is still doing reasonably well and, in our opinion, will continue to do so in the long run.

Over a one-year period, BKE is outperforming the Dow Jones U.S. Specialty Retailers Index and just about every major competitor, with the exception of Hot Topic (Stock Quote: HOTT). Over five years, BKE has beaten the industry benchmark and every rival by a wide margin. Based on this performance, strong sales, outstanding fundamentals and a peer-relative discount, it is now an attractive time to purchase BKE.

By examining sales figures, not stock performance, the Buckle appears unaffected by the economic downturn. In fact, the company is flourishing in what is perhaps the worst retail environment in decades. Keep in mind that BKE is not a discount retailer poised to benefit from "trading down." The Buckle sells mid-range to pricy denim, clothing and accessories. Its stores target teenagers and young adults and carry a diversified portfolio of merchandise, which includes proprietary and third-party brands.

BKE is generating buzz on the sell side. KeyBanc Securities and Roth Capital recently initiated coverage, both rating the stock a hold. Analysts cited a weak economy, poor mall traffic and conservative expansion plans as disadvantages. However, the company's strong financial position, particularly its zero debt and ample liquidity, is keeping it on track.

Based on peer valuation in the specialty retail industry, BKE is trading at a discount based on price-to-book, price-to-earnings and price-to-sales ratios. Market capitalization of $945.2 million places BKE in the small-cap category, and a beta of 1.08 indicates a strong stock-market correlation. Average daily volume of 991,000 shares demonstrates reasonable liquidity. The stock is trading significantly below its 52-week high of $44.57.

BKE has a quick ratio of 1.40, indicating sizable cash reserves. The stock has an annual dividend yield of 3.90%, which is higher than the S&P 500's average of 1.50%. Its gross margin climbed to 46.09% in the third quarter, while its operating margin widened to 21.56%. As of Jan. 7, our model evaluated more than 5,000 stocks and rated 46.47% sell, 44.64% hold and only 8.89% buy.

Downward pressure on retailers has pushed the Buckle's stock to discount levels, but that doesn't mean it's a risk-free investment. With an institutional-owned percentage of 66%, this stock could drop precipitously on any sign of poor performance. Also, modest expansion is a legitimate criticism and clothing trends are ephemeral. Developing a successful long-term retail strategy is tricky, especially when your target customers are fickle teenagers.

Nevertheless, this stock is attractive and the company's breakout performance is astounding in these trying times. As mentioned in my previous article, BKE has tremendous growth potential in the Northeast. It has not yet opened stores in New York, New Jersey or any state in New England. This represents a lucrative expansion opportunity. As always, consider macroeconomic and idiosyncratic risk before investing.

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