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THE BUCKLE INC BKE
June 14, 2021 - 1:25pm EST by
inflection99
2021 2022
Price: 41.00 EPS 5.25 6
Shares Out. (in M): 49 P/E 7.81 6.83
Market Cap (in $M): 2,045 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 1,958 TEV/EBIT 0 0

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Description

We think BKE a compelling risk reward here and very mispriced. Thematically, it’s half mall
based, half off mall. The company’s stores are located primarily in what we
consider B markets i.e., “one shopping center” type of towns.
 
So what’s good about this one?
 
Quite a bit! First, it’s key competitors are essentially gone. There is no question that
Buckle is benefiting from the closures of major competitors. Maurice is in
retreat. Stage stores is now gone. Lucky Jeans closed their stores, Fossil
closed their stores. Oakley closed many stores. Buckle is big in denim but
also sells accessories (like Oakley, Fossil, etc).
 
While most retailers are reporting strong financial results that are +10-30%
above ‘19 levels, Buckle is substantially above their 2019 levels to the tune
of +40-50%.
 
Is this just stimulus combined with a ‘denim’ cycle?
 
No, we think this is must deeper than just a Denim cycle. This company is
EXECUTING and has transformed their business. Some industry people
are saying it’s a “once in a decade reinvention of the assortments” that
began BEFORE the pandemic. They used to sell $110 jeans and now they
sell $70 jeans and it took them 5 years to successfully cycle through that.
The company did spend 2017-2019 in a deep reset: marketing,
merchandising, etc.
 
For example, in the stores, we observed performance polos that were
priced at $30. Admittedly, they are not quite Rhône or Lulu but they are
quite nice. In addition, the Company has done a great job in expanding
their shoe category, which they have long history in casual shoes and
famously put Doc Martins on the map! The company has also done an
amazing job of expanding its appeal far beyond prior levels. Nobody can
put up these kind of earnings and same store sales comps on stimulus
alone; it’s just not how it works.
 
High insider ownership:
 
Insider ownership/alignment: There is a large owner/operator, Chairman
Daniel Hirshfeld, who owns 32%+ of the company. The CEO also owns
about 5% of the shares outstanding.
 
Estimates:
 
While there are many moving parts, we estimate that the company should
earn $5.25+ this year (current year) and then grow positive low single digits
with both sustainable merchandise and gross margins. That growth
algorithm implies a $6+ earnings estimate for next year.
 
 
 
 
 
 
 
 
Balance sheet:
 
This is a conservative Midwest company. They typically keep about $225M
or so on their balance sheet. However, the Company also has a history of
friendly capital allocation via regular dividends and special dividends. For
example, last November, the company had $325M+ on their balance sheet
and they completed a special dividend for $100m. Therefore, if our
estimates turn out to be accurate, we think they should have about $550M
or so in cash by November 2021!! We further speculate that based on BKE’s own past
history, a substantial special dividend should come in addition to the .33
quarterly dividend that we’ve grown to expect. While BKE does have a
small stock buyback (a bit laughable, frankly) if we’re right on our
estimates, this implies $11 in cash (NOT A TYPO) on the balance sheet.
 
What makes us confident this company can grow beyond this year (aka
NOT a peak year)?
 
One of the growth pillars for Buckle is their successful test of Boys 8-20
and Girls 7-14, both online and in existing stores and even their recent
tests of stand-alone stores. These separate stores appear to be doing well
based on our checks and we think that they have substantial growth
potential.
 
 
What’s the right valuation?
 
We think Hollister, Abercrombie (ANF) and core American Eagle (AEO) are
the correct peers. If you look at the peers, most are trading for at least 12x-
14x earnings.
 
Not adjusting for cash on BKE’s balance sheet, this company is trading at
7x or so our estimates. If we’re right, this spread versus BKE’s peers
should converge as the stock becomes more discovered.
 
One way we approach valuation is to simply take the 5 year average P/E,
which is 11x, and then add back the cash. While many companies have
substantial cash on their balance sheet that the Street ignores, this cash
hoard should not be ignored since the company has a history of returning it
via special dividends. Applying this metric and using our $5.25 estimate for
this year and giving them credit for their cash implies a low $60s price
target. Apply a peer multiple and give them credit for the cash and you
could certainly justify a double. This stock is just incredibly cheap by all
metrics.
 
Jefferies recently upgraded peer Abercrombie (ANF) using a 16x PE on ‘23
estimates. ANF has many similar characteristics to BKE in the sense that it
has a robust balance (less strong than BKE) and is also focused on adding
Abercrombie Kids as a category. While we don’t have a “dog in the hunt”
with ANF shares, we think a higher valuation for ANF is just another
positive data point and support for a higher stock price for underfollowed
and undervalued BKE.
 
Why does this opportunity exist?
 
BKE is a sleepy Midwest company with minimal sell side coverage. While
we don’t know if that changes, as a humble bottoms up fundamental
analyst, I have learned that cheap stocks with catalysts just don’t stay
cheap indefinitely—if the humans can’t figure this one out, I’m pretty sure
BKE’s strong results and potential for special dividends will eventually wake
up the algos.
 
Other musings:
 
One missing element here is a sense of urgency about a mispriced stock
from senior management. While we have alignment in terms of insider
ownership, we do not sense that management is eager to hit the Wall
Street conference circuit. We do not think that they are hostile or avoiding
Wall Street intentionally, we just think they are quietly doing “their thing”
under the radar. We do think that this stock could attract an activist or even
the Reddit crowd (we’ve seen worse ideas!!!). The activist angle is
interesting because if you apply the activist playbook of pushing for
aggressive buybacks while the stock is still cheap and putting the strong
balance sheet to work, the math gets pretty compelling. Admittedly, we’re
not playing for that or suggesting we think that this will happen. We are just
pointing out that cheap stocks usually don’t stay cheap forever. Finally, it
should be noted that BKE has 18.5%+ short interest. Having been “run over”
by many shorts in our career, we think this is a strange stock to pick on
given the valuation and balance sheet.
 
ReplyForward
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1. Continue strong outperformance via same-store-sales comps reported monthly

2. Earnings beats (see above) relative to the Street estimates 

3. Balance sheet by year end should be robust, resulting in a large special dividend

4. Heavily shorted stock with a pristine balance sheet--sets up for a potential squeeze

5. BKE could attract an activist, who might push for a buyback in addition to dividends

6. Additional Wall Street coverage is possible here as well

 

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