BKE - The Buckle: Better Days Ahead

2023-11-20 02:22:12 ET

Summary

• The Buckle stock has shown volatility and presents both long and short trading opportunities.
• Q3 performance saw better-than-expected earnings, despite a decline in sales.
• BKE stock is rated as a hold, with potential for profits in the $40 range and a positive outlook for 2023 EPS.

The Buckle ( BKE ) is a stock we have traded a number of times in the past. It has moved with volatility over the past year setting up great long and short opportunities. We believe shares remain a hold until they hit the $40 range at which point profits should be taken. In this column, we check back in on the company and cover the just-reported Q3 earnings .

Buckle Q3 performance discussion

The stock has ebbed and flowed, recently moving into the low $30s when the market got crushed from August to October, but recently started to run back. The stock saw a nice boost yesterday (Friday 11/17) as earnings were better than expected but mixed in some areas. Given the pressure on specialty retail, from higher input and labor costs, it has been a tough place to invest. Inflation costs have started to subside, and the company has worked to improve margins. Long-term, we still rate the Buckle stock a hold, but still see this as one of the better stocks for trading. Right now, we would hang on if you are holding and looking for some profit taking in the $40s but would be buyers again in the low $30s, based on performance and valuation. Turning to Q3 we feel confident and holding out for more gains here. The company beat consensus estimates on the top line, while also surpassing expectations on the bottom line, which helped send shares higher. Both revenues and EPS were greater than the analyst consensus overall.

The sales in Q3 were down 8.7% from last year as revenue came in at $303.5 million, but this was significantly better than expected. Sales surpassed estimates by $13.3 million. Why were sales so much better than expected? We believe key metric to focus on with retailers like this is comparable sales. Comparable sales were ugly on the surface. Comparable store sales were down 9.2% from a year ago. At the same time, online sales decreased by 16.2% fell to $46.1 million from net sales of $55.0 million a year ago. Yet, this was better than anticipated. For the year, we are also seeing declines. Net sales year-to-date dropped 6.9% to $878.7 million. Comparable sales for the year thus far were down 7.3% Online sales decreased 9.4% to $141.0 million. But if we are seeing ongoing sales declines, why hold the stock?

Well, the reason we view this as a hold is that we think better days are ahead in retail, even with macro pressures like student loan repayment and unemployment creeping higher. That said, with lower sales, we expected earnings to fall. But work has been done to expand margins and this is bullish. Gross profit was $147 million (down from $165 million last year). What we like is that this was a 48.5% margin. This margin increased 120 basis points from the sequential Q2. That is a positive trend. However it is down from 49.6% margins. Net income was $51.8 million, or $1.05 per share down from $61.4 million, or $1.25 per share a year ago.

So with these metrics, why is the stock rallying? First, it was much better than expected. With shares having fallen so much in a year, and even factoring in the key metric declines, we see a very attractive valuation of the stock. We still have the risk of recession, and the risks to the consumer. Shares are not a buy nor a sell here. But the upside seems to persist to the $40s. We like the cash position is strong. At the end of the quarter, cash and equivalents totaled $311 million. Liabilities remain quite reasonable as well. For 2023, we were looking for $4.00 in EPS at minimum, putting shares at just over 9X FWD earnings, but this was before the earnings beat. We are now raising our estimates to $4.20 for the year. As the company works to increase gross margin, we note that inventory is not a problem, as it was about flat from a year ago. Buckle ended the quarter with 443 retail stores in 42 states compared with 441 stores in 42 states at the end of the third quarter last year, so there are two more stores contributing to sales. We expect that this year was a trough in earnings, and are looking for a better 2024. As such, we rate shares a hold.

Take home

We have an attractive value here and a dividend near 4%. We have successfully traded this stock a few times and think you should hold this one for the $40s. While performance declines are eyepopping, the company performance is significantly better than expected, and we have raised our outlook for 2023 EPS to $4.20 for the year. Risks include recession, student loan repayment, and a weakening labor situation. However, we like the balance sheet here and inventory is manageable. In our opinion, this remains a trading stock. For more trade ideas, with higher conviction please check out our group below.

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