Description

Overview
The Buckle, Inc. is a retailer of casual apparel, footwear and accessories for young men and women. Most of its stores are based in regional malls. As of April 10th, the company operated 309 stores in 37 states compared with 298 stores in 37 states at this same time a year ago.

While the brands offered by the Company change to meet current customer preferences, the Company currently offers brands such as Lucky Brand Dungarees, Silver, Fossil, Billabong, Ecko, Quicksilver, and Roxy. Top categories include denims (33% of fiscal 2002 sales), tops (32%), footwear (11%), and accessories (11%). About 10% of sales are private label merchandise.

Sluggish Results The Past Few Years
The Buckle has experienced weak results since 1999. That year suffered from difficult comps. In 2000, the company suffered with all teen retailers. In 2001 and 2002, the company suffered from a lack of trends, lower price points, and a decreasing percentage of sales from higher-margin footwear. These trends have led to gross margins falling to 32.8% in 2002 from 35.2% in 1999.

Although the company tends to be trend-right, it is subject fashion vagaries of teen apparel retailing. When fashion trends are strong (e.g. 1998-1999), the company will show extraordinary results. On the other hand, results can be weak when trends decelerate or the company faces tough comps (e.g. 2000-2002).

The adverse trends can be seen in comp results over the past few years:

1999 2000 2001 2002
Q1: 10.2% -9.8% -8.7% -1.3%
Q2: 0.9% -11.1% -11.1% 1.3%
Q3: 1.5% -2.7% -3.9% -0.5%
Q4: -3.3% -1.9% -2.1% -1.3%

But Recent Stabilization...
I think an important point to note is that 2002’s results were fairly strong relative to the rest of the market. While comps were slightly negative, they didn’t experience the notable drop of many other teen retailers.

From a more recent perspective, the company had positive 0.5% comps for the four-week period ending March 2, 2003. Comps were down 3.1% during the five weeks ended April 6 (this probably reflects the fact that Easter fell much later this year).

...And a New Store Design Could Help Results
The company is in the midst of rolling out a new store design. In the summer of 2002, the company introduced a revamped store prototype with new architectural finishes, lighting, column treatments, cashwrap design and other stores features. A total of 15 locations (8 new, 7 remodels) were open at the end of fiscal 2002 (January 2003). Management states that these changes were “very positively received” by guests and management and will be incorporated in all new stores and remodels. (The last store update was in 1997.) The company currently plans to open 15 new stores and complete 15 complete remodels this fiscal year. New stores cost about $540K in construction costs and a net $170K to stock inventory. Construction costs on remodeled stores are about the same as a new store. Given the company’s historical judicial use of capital, I assume the sales results from remodel stores justify this large expenditure.

Nice Long-Term Earnings and Profitabity
The company has an enviable track record, with strong earnings growth. Despite sluggish results for the past few years, Buckle has grown its earnings from $0.38/share in 1992 to $1.47 in fiscal 2002. Increased competition and no hot trend has resulted in the stagnant earnings since 1998. Current estimates call for earnings of $1.54 in fiscal 2003.

Despite sluggish earnings growth and very weak comparable store sales in the recent past, profitability has remained excellent. Return on equity has ranged from 12%-23% since the company came public in 1992. As the company slowed growth over the past few years, the returns have dropped to the lower-end of that level. Currently, the figure is about 12%.

Superb Cash Flow and Balance Sheet
While earnings have not grown recently, company generates significant cash flow. Free cash flow has totaled about $30MM per year during 2000 and 2001. That number fell to $20MM in 2002 as the company spends more on CAPX, primarily related to full remodels.

The balance sheet is rock solid. The company has no debt and $162 million in cash ($7.50/share) on its balance sheet as of 02/01/03.

Huge Insider Ownership and Stock Repo Program
Insider ownership is 67% and management is stable. The founder’s son (company was founded in 1948), Daniel Hirshfield, is Chairman. The president and CEO, Dennis Nelson, has been with the company since 1970. Limited liquidity could partially explain Buckle’s lower valuation relative to peers such as Abercrombie, American Eagle, and Pacific Sunwear.

The company has a stock repurchase program, with 500K shares authorized on December 27th, 2000. In 2002, the company acquired 119,125 shares at an average price of $16.64. The company has continued to repurchase shares – with 23,600 shares acquired in March at $16.85

Attractive Valuation
Buckle’s stock is now trading at about 11.6x earnings and is even cheaper when stock price and earnings adjusted for cash. The stock is at the lower end of its P/E range, which has been 7x-20x over the past four years. Using interest-adjusted earnings/enterprise value, BKE is trading at about 7.4x earnings ($10.35 Enterprise Value on $1.40 earnings [1.54 estimate-0.14 tax adjusted other income]).

Summary
Buckle has a solid history, great balance sheet, and extremely cheap valuation. Buckle has a history of very profitably weathering the vagaries of teen fashion. While a catalyst isn’t necessarily immanent, relatively stabilized comps in a generally tough retail environment bode well. The possibility for further improvement from remodeled stores also exists. The biggest risk would be a slowing economy crimping sales or a fashion shift away from denim, which could hurt sales results. That being said, the attractive valuation and continued stock repurchases should put a floor on the stock not too far from the current price.

While today’s valuation hasn’t dropped to lows reached in 2000, the balance sheet is much stronger with $162MM in cash vs. $103MM two years ago. (The company also seems to have much less likelihood of seeing double-digit negative comps than it had during that time period). With fairly limited earnings risk, a strong balance sheet, and the possibility of a rebound with improved consumer spending, better results from remodeling efforts, or a new fashion trend among teens, Buckle appears to be an attractive opportunity.

Catalyst

* Attractive valuation and solid balance sheet
* Market recognition of comp stabilization in a tough retail environment
* Improved comps from rollout of remodeled stores
* Improved comps from general economic rebound (not guaranteed, but a possibility)