Buckle Inc: Surprising Performance For A Small Cap

It comes as no surprise that the consumer discretionary sector has been one of the hardest hit sectors given its heavy reliance on consumer spending, which has declined for 3 straight months- a very rare event in market history. Only the largest cap, stable plays like Nike (NKE) and McDonalds (MCD) have performed well in this environment. But today I have a stock for you that has performed just as well (or poorly) as NKE has and offers more upside once the market turns. Historically, after the NBER announces that we are in a recession the markets tend to turn within a month or two. The company I am talking about is Buckle Incorporated (BKE).

Company Description

Buckle Inc. operates 388 retail stores in 39 states, providing high quality on-trend and private label denim, tops, sportswear, footwear and apparel accessories. They have two main consumer segments: a Men’s segment, which is about 42% of sales and a Women’s segment, which is about 58% of sales.

3Q08 Earnings
Buckle reported 3Q08 EPS of $0.62 vs. consensus estimates of $0.63. However, there was a one-time loss on impairment of ARS investments by the firm, which reduced earnings by $0.02. Overall solid results with a 25% increase in sales (up 30% YTD), comp store sales up 19.1% (up 23.7% YTD) and gross margin expansion of 140 basis points to 43.6% (up 270 basis points YTD). Also, net income was up 50% from the 39 week period in the prior year ($1.50 EPS vs. $1.00 EPS). Growth was driven by store expansion, higher transaction units and average transaction value and an expanding portfolio.

Returning Value to Shareholders

Buckle Inc has a strong history of returning value to its shareholders via dividends and share repurchase programs. They had just recently increased their dividend by 20% to $0.30 from $0.25. Since 4Q06, they have also issued two special dividends of $2.00 and $3.00, in 4Q06 and 3Q08 respectively. While there is no guarantee of special dividends in the future, the yield on regular dividends currently stands at over 4% and provides great value to shareholders in an extremely volatile and tough market.

The board of BKE recently authorized a share repurchase program of up to 1,000,000 shares, on top of the 750,000 share repurchase program they announced a year ago, which is 90% complete. This is a strong indication of their commitment to returning shareholder value and ensures that they have a strong cash position going forward, particularly important in an environment where cash is considered king.

A Victim of Mr. Market

Even with strong sales numbers and EPS growth, BKE shares have fallen by over 55% since reaching their 52 week high due to the tough macroeconomic environment for retailers and the over 35% drop in the S&P 500. While no stock can avoid the systemic risk of Mr. Market during downturns, we believe that the recently depressed value has opened up a good buy in point, given the solid fundamentals, strong portfolio of brands, strong balance sheet and tendency to return value to shareholders.

While shares have suffered, BKE’s performance in comparison to the S&P 500, Consumer Discretionary SPDR (XLY) and large cap retailers like Nike (NKE) and Abercrombie and Fitch (ANF) is encouraging, considering that Buckle is a small cap growth firm. With macroeconomic trends playing in their favor, I could see BKE being able to continue to outperform their sector and competitors in the near-medium term, albeit with heightened risk due to the volatile nature of discretionary stocks.

Given BKE’s solid same store results that have performed well above national retail sales performance, superior margins to their competitors and strong balance sheet which should allow them to continue to return value to shareholders, BKE is the perfect play in this market environment, as consumers stay away from BKE’s more expensive competitors American Eagle and Abercrombie and Fitch. Their plans to move into more markets and open new stores, along with developing their already diverse portfolio, will drive growth going forward in the short to medium term and should allow shareholders to capture some nice gains once the market does indeed turn.

Disclosure: None

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