BKE - The Buckle: If You're Going To Shop Shop Denim

Summary

• The Buckle has a strong private label brand, denim dominant, focused on growing e-commerce sales and outdoor shopping centres.
• Dividend stock with a growing, profitable business, strong balance sheet and generating positive cash flow.
• Cautious of the difficult and fiercely competitive nature of the retail industry amidst continued headwinds.

The retail industry has seen better days; supply chain disruptions, inflation, energy prices and uncertain consumer behaviour have put some big names into the danger zone. Those companies that manage to do well amidst strong headwinds are worth looking into. The Buckle, Inc. ( BKE ) is a smaller speciality retailer that has beat earnings expectations for the last four quarters and has increased its top and bottom line for four consecutive years. This company is doing something right. Over the last year, it has rewarded investors with returns of 28.51%. However, it has also been a valuable long-term stock with returns of 200.99%.

It has a market cap of $2.18 billion, and the share price is still well below the analyst's one-year target estimate of $60. BKE has a proven history of adjusting its business model to industry and economic market changes, and it is profitable and growing, showing strength in its private label, and investing in its e-commerce and outdoor shopping centre stores. Therefore investors may want to take a bullish stance on this company.

Overview

BKE started as a single male clothing shop in 1948. Its focus on denim began in the 1970s when denim-on-denim was all the rage, and current president and CEO Dennis Nelson took over the company. The company also started marketing women's casual clothing. It IPOd in 1992 after reaching 100 stores in 18 states and launched its first e-commerce site in 1999.

The retail industry went through some significant changes with the growth of e-commerce and off-price retailing competition increasing. More stores did not equal more sales anymore, a strategy that had worked to build up BKE. As the company started losing sales from 2013 for a few consecutive years, it made a significant turnaround in 2018 by cutting back on mall-based store growth and investing in e-commerce. Its products are considered casual in the medium to better-priced range.

Fast forward to today, the company has 441 stores in 42 states, 15.9% of total sales last year were via its e-commerce channels, growing 3.6% in two years, and we see a growth trend continue over the previous few quarters. Denim is still the highest-sold item at 42.5% of total sales last quarter, followed by tops and sweaters at 30.5%; youth is its fastest-growing segment, representing 4% of total sales, a 26.5% YoY growth. Its private brands are popular, accounting for 46% of sales last quarter, a YoY increase of 2%.

For sales growth, the company is investing in IT, remodelling stores, and closing more of its mall stores, while it opens new stores in outdoor shopping centres, which customers prefer to visit .

Financials

BKE has increased its top and bottom line performance over the last four consecutive years and looks set to continue on that trend if we see the TTM. Last year it crossed the billion dollar mark at $1.294 billion for the first time in five years. It has increased its gross profit margin over five years from 41.61% to 59.76%. TTM of 59.43%, we can see a slight decrease.

Last year the company reached its highest net income at $254.8 million, a five-year growth of 184%. Although we see an upward curve, it is clear that last year's net income is an outlier, impacted by post-COVID pent-up demand and the start of rising inflation. However, we can see that the TTM is $250.7 million, which signals that they may continue this trend, especially if sales have continued to increase with 7.9% YoY for December 2022, which we can again attribute mainly to inflation.

A healthy positive cash flow is critical as it allows companies to reinvest in the business, pay out dividends, cover expenses and will enable them to grow. BKE's cash flow is positive and has been consistently increasing over the last four years by 194% to reach $245 million. Its TTM is currently less at $147.6 million.

BKE has a healthy balance sheet, $325.08 million in cash, and until three years ago, BKE was debt free. It has been decreasing its debt again and is now at $267.71 million. The stock has excellent liquidity, well above the retail industry benchmarks, with a current ratio of 2.11 and a quick ratio of 1.42. Its inventory is at $152.3 million as of last quarter and has been growing to meet the demands of its private label and denim.

BKE has a quarterly dividend program with a forward dividend yield of 3.15%. We can see that the dividend growth could have been more consistent. Its last ex-dividend was on January 12th at $0.35 per share, a forward yield of 3.13%, which is to be paid out later this month. It also announced a special cash dividend of $2.65 per share.

BKE is a healthy and growing company that has performed well against industry headwinds. It has an attractive price-to-earnings ratio of 8.90. The stock has performed better than the SP500 in the short and long run. While the company remains very profitable, its growth rate is rated as a C- by Seeking Alpha's quant system.

Risks

The retail industry is fiercely competitive and challenging to succeed in. There is no taking it easy, and unpredictable macroeconomic factors can force companies out of the game. There are some significant retailers likely headed for bankruptcy . The retail industry has been hit with solid headwinds; any increases in costs and pricing can be detrimental to the business. This is something to remain cautious of when considering companies in this industry. Furthermore, fashion is difficult to predict. BKE focuses on denim which has been a long and consistent fashion trend. It has also built up a brand that individuals are willing to pay for. Only a tiny amount of its revenue is generated through youth sales, which can bring significant growth; however, it is much more volatile.

Final thoughts

BKE has shown an encouraging upward trend in the top and bottom line performance. Against strong headwinds, management has grown the business and shown strength in maintaining a healthy balance sheet and generating cash flow. Its private brands perform exceptionally well, which says a lot about its brand reputation. BKE is proving itself a firm that can adjust and act according to the economic environment and challenges that arise. On top of that, investors have consistently been well rewarded by its dividend program in the past. Investors may want to take a long-term bullish stance on this stock.

For further details see: