BKE - Buckle's Prudent Management Overshadowed By A Fierce Competitive Landscape

2023-10-18 12:48:37 ET

Summary

• Buckle should be held as a cautious investment due to challenges in the competitive retail industry and no clear competitive advantage.
• The company operates 442 retail stores across 42 states and has a loyal customer base, but its exclusion from various Russell indexes highlights changing market perception.
• Buckle's financial health is stable, with no debt and a history of special dividends, but potential investors should consider better opportunities in less competitive sectors.

Thesis

After conducting an in-depth analysis, I confidently recommend a 'Hold' position on Buckle, Inc. (BKE). This recommendation is rooted in several pivotal factors. To begin, Buckle operates in a competitive retail industry and has faced challenges in recent years, including declines in revenue and comparable store sales. While the company maintains financial stability and a loyal customer base, it operates in a highly dynamic market with shifting consumer preferences.

Buckle's commitment to providing high-quality fashion apparel, particularly in the denim niche, has been noteworthy. However, its recent exclusion from various Russell indexes and projected declines in revenue and earnings per share for the coming years underscore the evolving market perception of its stock.

Despite these challenges, Buckle has demonstrated resilience through a stable presence in 442 retail stores across 42 states. Additionally, its dividend yield, supported by a history of special dividends, may still appeal to income-focused investors.

Nevertheless, given the intensely competitive landscape and the broader market environment, I recommend a cautious 'Hold' position on Buckle. The company's valuation may present an investment opportunity, but the potential for better opportunities in less competitive sectors should also be considered.

Company

Buckle stands out as a specialty retailer, dedicated to delivering not just exceptional service and style, but also unforgettable shopping experiences. Catering to those who embrace a stylish lifestyle, Buckle offers a carefully curated assortment of high-quality, fashionable apparel, accessories, and footwear. It has carved a niche for itself as a go-to destination for denim enthusiasts, boasting an extensive range of fits, styles, and finishes from premier denim brands, alongside its exclusive label, BKE.

With its headquarters in Kearney, Nebraska, Buckle has significantly expanded its presence, now operating 442 retail stores across 42 states. The company boasts a market capitalization of $1,649 million. Over the past 52 weeks, its share price has oscillated between $30 and $50, with a relatively modest average trading volume over three months at 330,000 shares. The stock exhibits a stable five-year beta of 0.99, indicating its volatility is in line with the market average.

However, financial forecasts for Buckle suggest some challenges ahead. Revenue estimates for 2024 and 2025 stand at $1,287 million and $1,311 million, respectively, representing a decrease of 4.3% and 2.5% compared to the current year's projections. Furthermore, earnings per share are anticipated to decline, with projections for 2024 and 2025 at $4.23 and $4.45, respectively, falling short of this year's estimate of $5.13.

Adding to these financial headwinds, Buckle's stock has recently faced setbacks, evidenced by its removal from various Russell indexes, a development that potential investors should consider. Further details can be found through recent reports highlighting its exclusion from the Russell 3000E Value Index and the Russell 2000 Value Index , underscoring the shifting market perception of the company's stock.

Business Model

Buckle, operates both through physical stores and ecommerce platforms, the latter accounting for less than 15% of its revenue. The company caters to a diverse customer base, with a focus on:

• Young adults aged 15-30,
• Middle to high-income individuals with significant disposable income, and
• Fashion-forward consumers willing to invest in unique style choices.

Originally a men's retailer, Buckle has diversified, now offering attire for women and children. While targeting primarily the 15-30 age group, its broadened fashion range appeals to a wider audience.

Embracing an omni-channel approach, it engages customers through 450 'Buckle' branded stores and its ecommerce site, also reaching an international audience online.

Buckle streamlines operations with a single distribution center, relying on third-party partnerships for efficient delivery, ensuring a seamless shopping experience from order to delivery, regardless of the customer's location.

Revenue Streams

According to this recent press release , in the second quarter of fiscal 2023, net sales experienced a downturn, falling to $282.4 million from $302.0 million in the corresponding quarter of fiscal 2022, marking a 7.1% decline. This downturn was mirrored in comparable store net sales, which, for the thirteen weeks ending July 29, 2023, also fell by 3.3% compared to the figures from the same period in the previous year, which concluded on July 30, 2022. This overall dip in sales during the quarter was primarily due to a 3.5% fall in transaction numbers and a 1.8% drop in the average number of units per transaction. These factors overshadowed a 2.2% rise in the average retail price per unit. Additionally, online sales didn't buck this downward trend, showing a 5.6% decrease and falling to $43.6 million for the quarter ending July 29, 2023, down from $46.2 million in the prior year.

A similar scenario unfolded over the first half of fiscal 2023. Net sales receded by 5.9%, dropping from $611.0 million in the first two quarters of fiscal 2022 to $575.3 million during the same period of fiscal 2023. Comparable store net sales also waned, decreasing by 6.3% for the twenty-six weeks ending July 29, 2023, as compared to the sales of the period ending July 30, 2022. The contraction in year-to-date sales was attributed to a significant 6.8% decrease in the number of transactions. However, this was slightly mitigated by a modest 0.7% growth in the average retail price per unit and a 0.2% uptick in the average number of units involved in each transaction. In line with the broader trend, online sales for the half-year reported a decrease of 5.6%, dwindling to $94.9 million from $100.6 million in the comparative period the year before.

In fiscal 2023's second quarter, the Company saw a $0.99 increase in the average retail price per item, a 2.2% rise from fiscal 2022. This hike was influenced by higher price points across categories, particularly a 7.6% increase in accessories and 9.4% in footwear, despite a shift in merchandise mix reducing the overall gain by $0.48. These trends reflect changes in brand preferences and product offerings.

For the rest of fiscal 2023, the Company plans to open 7 new stores and remodel 8, with expected capital expenditures between $26.0 and $32.0 million, primarily for store projects and tech advancements. Funding is anticipated to come from its substantial cash flow and $322.9 million in cash and investments, ensuring financial stability for upcoming needs.

Seasonality significantly impacts the business, with the holiday and back-to-school seasons generating roughly 35% of annual net sales. However, various factors, including new store costs, markdown timing, competition, and economic conditions, can cause notable quarterly fluctuations.

Management

CEO Mr. Nelson started at Buckle in 1970 as a part-time salesperson. After completing his education, he transitioned to a full-time role and has since been involved in all aspects of Buckle's operations. Kari Smith, now the Executive Vice President of Stores and a member of Buckle's Board of Directors, began her career in a similar manner in May 1978. Starting as a part-time sales associate, she worked her way up through various positions, achieving her current executive status in 2018.

The role of CFO is filled by Mr. Heacock, a former employee of E&Y and the CEO's son-in-law. He joined Buckle in 2003 and, over the years, progressed through the ranks to his current position. The trend of long-term employment among staff members suggests a positive work culture. However, the familial relationship between the CEO and CFO could lead to potential concerns about nepotism and objectivity within the company's governance. On the other hand, such connections may contribute to a more unified, family-business atmosphere.

Competitiveness

Buckle functions within an intensely competitive industry where even substantial brands favored by younger generations have historically collapsed rapidly. While Buckle maintains commendable customer service, this alone does not secure a high competitiveness rating. However, the company has consistently demonstrated impressive Return on Equity and Return on Invested Capital over the past decade, seldom falling below 20%, indicating effective financial management despite the challenging market .

Industry

The retail apparel sector, known for its cyclical nature, is projected to generate US$351.40 billion in revenue in 2023, according to Statista . Forecasts show an annual growth rate of 2.11% ((CAGR)) from 2023 to 2028. Women's Apparel leads as the most substantial segment, anticipated to reach a market size of US$187.40 billion in 2023. Analyzing these figures relative to the total population, revenue per capita is expected to hit US$1.03k in 2023.

In the apparel industry, purchasing trends highlight significant disparities among different market segments. Women's apparel leads the sector with substantial spending, accounting for $187 billion. This figure not only underscores women's consistent influence in the fashion retail market but also reflects the extensive variety and volume of products catering to women.

Following women's apparel, men's clothing represents the next significant segment, with expenditures reaching $111 billion. Though this is a robust figure, it is considerably lower than that of the women's segment, possibly indicating a smaller variety of offerings or less frequent purchasing patterns among male consumers.

Children's apparel, while still a considerable portion of the market, sees less spending at $52.9 billion. This lower figure, compared to men's and women's segments, could be attributed to the nature of children's clothing, which is often less varied and lower in individual cost. Additionally, the purchasing frequency and volume might be lower due to the dependency of this demographic on adults for their buying needs.

Overall, these trends not only illustrate the purchasing power and preferences across different demographic groups but also indicate where brands and retailers might focus their marketing and product development efforts to capture more market share.

In the evolving landscape of digital retail, where approximately 30% of apparel purchases occur online according to Statista , Buckle maintains a steady presence, with 14.9% of its revenue from last quarter's report deriving from e-commerce. This figure is consistent with broader industry trends, yet there remains substantial room for growth.

To enhance its online visibility and sales, Buckle's management might consider diversifying its digital strategy beyond traditional e-commerce frameworks. Collaborating with popular third-party platforms such as Amazon ( AMZN ) could significantly broaden Buckle's audience reach, tapping into a customer base that values the convenience and diversity these platforms offer.

Additionally, exploring partnerships with fast-fashion e-commerce platforms like Shein could position Buckle within a vibrant, trend-sensitive market. Shein's rapid design-to-consumer model and its strong resonance with fashion-forward audiences could offer Buckle an advantageous entry point into the fast-fashion circuit.

Moreover, engaging with social media influencers could amplify Buckle's online presence. Influencer marketing , especially within fashion circles, has the power to shape consumer behavior, given that recommendations from popular personalities can significantly influence followers' purchasing decisions. This strategy could be particularly effective in reaching younger demographics, known for their high engagement with online personalities and social commerce.

By adopting a more multifaceted online strategy, Buckle could potentially drive higher web-based sales, aligning its revenue more closely with the digital-centric trends of the apparel industry. This approach, however, would necessitate a careful analysis of partnership terms, marketing investments, and alignment with Buckle's brand identity and long-term goals.

The data presented in the graphs gathered from Statista , indicate a significant disparity in purchasing behavior between genders, with women buying 42.6% more than men. Interestingly, this occurs despite a relative parity in pricing for men's and women's items. Given these industry dynamics, Buckle, primarily known for its focus on men's apparel, stands before a lucrative growth opportunity by potentially expanding its product lines to cater more comprehensively to women and children.

This strategic expansion could serve a dual purpose: diversifying the company's revenue streams and capitalizing on the higher purchasing frequency of women. By offering a wider range of products appealing to both demographics, Buckle could tap into a larger market segment, driving increased sales and customer engagement.

Moreover, venturing further into the women's and children's sectors could yield operational and cost synergies. An expanded inventory might lead to better economies of scale in production, procurement, and distribution, thereby reducing per-unit costs. This efficiency could be particularly pronounced if Buckle leverages its existing supply chain, retail, and marketing infrastructure to support this broader product range.

However, such an expansion would require careful market research to understand the specific preferences and buying patterns of these new target customer segments. Additionally, strategic marketing and potential brand repositioning might be necessary to ensure that Buckle's expanded offerings resonate with women and children, ultimately fostering a perception of the brand as a versatile fashion destination for the entire family.

Competitive Landscape

The Statista graph above illustrates the cutthroat nature of the retail apparel industry, where even giants like Nike ( NKE ), Lululemon ( LULU ), and Under Armour ( UA ) seize no more than 3% of the market. This fragmentation reflects a marketplace brimming with alternatives, pushing even industry leaders to grapple for market share and high profit margins.

According to IBIS World , there are 178,366 clothing brands in USA alone. This means that there is 1 brand (not shop) for every 1,860 Americans. In this crowded arena, companies are compelled to compete beyond price and quality, striving for standout brand recognition and customer loyalty. The plethora of choices forces brands to continually innovate and enhance customer experiences to distinguish themselves.

However, the competitive atmosphere often prompts aggressive pricing, potentially diminishing profits. To thrive, companies must balance competitive pricing with strategies to safeguard their profitability, focusing on operational efficiency, distinctive branding, and customer retention. And it is quite often that companies go under. Who would thought 10 years ago that American Apparel and 13 other major clothing brands will be bankrupt today?

Ultimately, success hinges not just on gaining market share but on securing repeat customers through quality, a unique brand voice, and memorable shopping experiences, ensuring sustainable growth and profitability in a challenging environment.

Porter's Five Forces

The retail apparel industry is highly competitive and consumer-driven. Companies must stay agile, continually adapting to market trends and consumer preferences while managing costs effectively. Success factors include supply chain optimization, unique branding, and customer engagement strategies that create and retain consumer loyalty. Strategic partnerships with suppliers or differentiation in product offerings can also provide competitive advantages.

Financials

Income Statement

The concurrent rise in both revenues and costs is notable, but the key positive is the increase in operating margins. This improvement indicates that the company is successfully enhancing its revenue at a rate that outpaces its cost increments, showcasing effective operational efficiency.

This positive trend in operating margins could stem from various strategic actions, such as optimized supply chain operations, more profitable product offerings, or tapping into higher-value markets. It's essential, however, to ensure that these strategies don't compromise product quality or customer satisfaction in the pursuit of broader margins.

In essence, the growth in operating margins in the context of rising revenues and costs suggests the company's strategies and operational adjustments are currently yielding favorable financial outcomes. However, a continuous assessment is necessary to confirm that these tactics are sustainable for long-term business health.

The steady rise in Earnings Per Share is a positive signal. This trend suggests sound financial stewardship, as increased earnings are effectively translating into shareholder value.

Balance Sheet

On the balance sheet, inventory levels have remained stable over the last five years, signaling efficient inventory management. This consistency suggests the company effectively avoids overproduction and excess stock, minimizing unnecessary costs. The increase in revenue indicates that this steadiness results not from flat demand, but from genuinely efficient management.

When comparing assets and liabilities, there is a noticeable increase in current liabilities without a corresponding rise in assets. However, it's important to note that the assets still exceed current liabilities. Significantly, Buckle operates with no debt, and its liabilities are primarily tied to operational aspects. This lack of debt is a positive indicator of the company's financial health, though the growth in liabilities warrants careful monitoring to ensure ongoing financial stability.

Examining the book value per share, I notice a slight decrease in 2022, followed by a rebound in 2023. This pattern suggests that the management's strategies may be more focused on maintaining the company's value rather than significantly increasing it. The stability in book value per share indicates a conservative approach, prioritizing the preservation of assets and equity over potentially riskier ventures that could drive higher growth in shareholder value. While this approach underscores a certain financial prudence, it also raises questions about the company's long-term growth strategy and its ability to deliver enhanced value to its shareholders.

Cash Flow Statement

Analyzing the cash flow statement, there was a noticeable decline in cash from operations from 2016 to 2019, followed by a reversal and a peak in 2022. This trend underscores Buckle's sensitivity to macroeconomic factors like interest rate hikes, which have recently been significant. The correlation between Buckle's operational cash flow and interest rates suggests that the company's cash position and overall financial health are influenced by external economic conditions. With rising interest rates, it's imperative for the company to strategize around these economic cycles to safeguard its financial stability.

Notably, even in 2019, when Buckle's Free Cash Flow reached its lowest, the company still achieved high Return on Invested Capital and Return on Equity. This performance points to a robust financial strategy and effective management.

It's worth highlighting that over the past decade, the company has sustained a gradual increase in its dividend, boasting a 5-year growth rate of 6.96%, as reported by Seeking Alpha . The dividend yield is robust at the current share price, standing at 4.2%.

However, what raises concern is the dividend coverage ratio. Buckle annually declares a special dividend, distributing excess earnings to its shareholders. This dividend fluctuates yearly and isn't guaranteed. In 2023, the special dividend is $2.65, bringing the total dividend to $4.05, which translates to almost a 12% return on the current share price.

It's crucial, though, not to base valuation solely on a special dividend dependent on surplus cash flow. The market appears to misconstrue this special dividend as a regular return rather than a bonus contingent on the company's financial performance. Consequently, the dividend's coverage ratio seems low.

However, this isn't necessarily alarming. Given the overall financial trends and the management's history of prudence in decision-making, it's clear that the company is cautious with its financial strategies. Businesses occasionally generate more cash than anticipated, and in the absence of suitable reinvestment opportunities, it's pragmatic to return excess funds to shareholders rather than channeling them into less promising ventures. This judicious approach to financial management not only avoids the potential misuse of resources but also reinforces the company's commitment to maximizing shareholder value.

Valuation

P/E Ratio

Buckle's valuation is notably lower than that of its major competitor, trading at approximately 7 times earnings, while Urban Outfitters stands at 13.6 times earnings. This significant discrepancy suggests a potential mispricing within the industry. It may indicate that Buckle is currently undervalued in the market compared to its peers, presenting a possible investment opportunity.

Analyzing the P/E ratio trends over the past five years, it appears that Buckle is trading at a discount compared to its historical and industry averages. If Buckle's stock traded at its one-year historical high P/E ratio, there would be a potential 38% increase in its stock price. Furthermore, if it aligned with the industry average P/E, the stock could see an even more substantial rise of approximately 67%.

DCF Valuation

Valuing a company that issues irregular special dividends can be challenging; therefore, I will adopt a straightforward approach. I'll base our valuation on the company's regular financial performance, excluding these additional dividend payments. By doing this, I consider any surplus from special dividends as a bonus rather than a standard expectation. This method allows for a more stable and reliable assessment of the company's intrinsic value, ensuring that the valuation is not inflated by variables that are not guaranteed year-to-year.

I'm employing a conservative approach by using a negative Free Cash Flow in my calculations, given the apparent strong correlation between the business's FCF and interest rates. By acknowledging the potential impact of rising interest rates on cash generation, this approach provides a safety margin in financial projections, ensuring that potential risks or downturns are factored into the company's valuation.

The Discounted Cash Flow analysis suggests a valuation of $41 per share, representing a 16% increase from the current share price. This modest premium indicates that the stock may be slightly undervalued, presenting a potential opportunity for investors.

I conducted two sensitivity analyses, focusing on variations in the Weighted Average Cost of Capital and the Free Cash Flow growth. The findings clearly indicate that even under the worst-case scenario, the valuation is more favorable than the current status. This resilience in the company's valuation, despite changes in critical financial metrics, underscores a potentially robust financial position. However, it's crucial for investors to consider these insights within the broader context of the company's overall market conditions and strategic direction.

Technical Analysis

Examining the chart, Buckle appears to be on a potential upward trajectory. Notably, the $30 support level proved resilient, effectively holding when tested in early October. This stability at a critical threshold suggests a possible confidence among investors, maintaining the stock's value above a certain point.

Risks

Buckle faces several significant risks within the retail sector. Key among these is the ever-changing landscape of consumer preferences coupled with intense competition in the fashion industry. The company must continuously predict and adapt to trends to maintain its market share. Additionally, supply chain disruptions pose a threat, as delays or disasters can critically impact stock availability and sales. Economic fluctuations also present a risk, as downturns can reduce discretionary spending, affecting Buckle's profitability. The company is further exposed to market risks, including interest rate changes impacting investment income and the value of securities. Operational challenges, both in physical stores and online platforms, such as data breaches or decreased foot traffic, can harm the company's performance and reputation.

Conclusion

In summary, Buckle, Inc. is a reputable retailer known for its unique fashion offerings and strong customer service. While it appears undervalued based on valuations and offers a decent dividend, its appeal as an investment is tempered by an intensely competitive industry. In a highly competitive landscape, Buckle must navigate with precision, and the rise in interest rates adds an extra layer of caution for investors.

While Buckle is a good business with potential, the challenging market dynamics leave little margin for error. To establish a robust margin of safety, a prudent entry point might be around $25 per share. At the current price of $34/share, investors may find more compelling opportunities elsewhere, that offer more stability, given the competitive nature of the retail sector and the current interest rate environment.

For further details see:

Buckle's Prudent Management Overshadowed By A Fierce Competitive Landscape