TGT - The Buckle: Long-Term EPS Growth Persists A Buy Ahead Of Earnings

2023-05-17 13:19:35 ET

Summary

• April retail sales and cautious guidance from Target this week make for a mixed consumer spending situation.
• While The Buckle's same-store sales numbers are soft, I see long-term upside due to its low valuation and high yield.
• I outline key price levels to watch ahead of its Q1 reporting date.

US April retail sales were strong at the core level. While the headline month-over-month climb of just 0.4% was less than what economists were expecting, the so-called “control group” which backs out volatile factors topped estimates. What’s more, compared to the April CPI rate, core retail sales were positive on an inflation-adjusted basis. Within the report, clothing spending was lower, though. Then Target ( TGT ) suggested a cautious American consumer on Wednesday this week.

I reiterate my buy rating on shares of The Buckle (BKE) based on valuation as shares encroach on key support ahead of earnings on May 26.

April Retail Sales Were Impressive, But Clothing Was Weak

According to CFRA Research, BKE operates as a retailer of casual apparel, footwear, and accessories for young men and women in the United States. It markets a selection of brand-name casual apparel, including denims, other casual bottoms, tops, sportswear, outerwear, accessories, and footwear, as well as private-label merchandise.

The Kearney, Nebraska-based $2.0 billion market cap Apparel Retail industry company within the Consumer Discretionary sector trades at a low 6.4 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.3% dividend yield, according to The Wall Street Journal.

The Buckle is one of just a handful of consumer companies that still issues monthly same-store sales updates, and the May report (for April) was not strong. The retailer reported comp-store sales that were down 10.2% from the same four-week period a year ago. That came after a rough April report as March sales slipped on an annual basis, too.

While the industry is going through a rough patch, BKE’s management team declared a $0.35 dividend in late March following an upbeat Q4 profit report. Still, sellside analysts have turned less sanguine on the stock – a month ago, UBS cited macro headwinds as inhibiting sales growth for the small Consumer Discretionary company. Nevertheless, long-term sales growth should persist, while 20%+ EBIT margins suggest The Buckle is positioned well for future profits.

On valuation, BKE sports a forward operating earnings multiple of just 7.3 - that is a sharp 32% discount compared to its 5-year average. Moreover, the company trades at less than 1.2 times historical sales, also a significant discount to the mean. An exceptionally low EV/EBITDA ratio compared to the sector median is another bullish feature. Per-share profits are expected to be about flat over the coming quarters, but that also makes valuing the company on a P/E basis simpler.

The Buckle: Earnings Estimates, Key Profitability Ratios

Overall, if we assume $4.40 of NTM earnings with a 10 P/E, then the stock should be near $44.

BKE: Attractive Valuation Ratings

Looking ahead, corporate event data provided by Wall Street Horizon show an active upcoming period. First, Q1 2023 earnings hit the tape on Friday, May 26 BMO. Then comes data on May same-store sales before The Buckle’s annual shareholders’ meeting on June 5.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research and Technology Services (ORATS) show a consensus EPS forecast of $0.91 which would be a 19% decline from $1.12 of per-share profits earned in the same period a year ago. While the YoY profit picture is weak, notice that the firm has topped analysts’ EPS forecasts in each of the past 11 quarters. Additionally, BKE has traded higher post-earnings in the previous six instances.

This time around, the options market has priced in a small 4.7% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the reporting date. That premium amount is much lower compared to prior quarters. I assert selling a downside put to finance a long call option makes sense. Read on for the strikes based on the technicals.

BKE: Outlining A Risk Reversal Trade Idea

The Technical Take

While BKE shares are down big from the early 2023 peak of $50, there’s long-term support in the $26 to $27 range from the 2022 double-bottom low. Also notice in the chart below that shares are forming a bullish RSI momentum divergence as price drifts lower. While not an instantly bullish implication, it shows that the bears are losing their vigor. So, going long a low to mid-$30s June-strike call option while selling a low $30s put going into earnings could make sense.

Longer-term, BKE endured a bearish death cross whereby the 50-day moving average crosses below the 200-day (which is not flat versus being upward sloping), so that is not a great feature. Overall, while not a screaming bullish chart, there are signs that the downtrend could be slowing.

BKE: Bullish RSI Divergence, $26 Long-Term Support

The Bottom Line

I reiterate my buy rating on BKE based on valuation while the chart suggests the downtrend could be slowing.

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