Saturday, August 22, 2009

The Buckle: Too Good To Be True?

When the financials of demins, tops and footwear retailer The Buckle, Inc. are gone through, the question that occurs is: "why is its P/E in the lowest quintile?" Or, why is it in the Low P/E Bin? After lackluster earnings growth from 1999-2004, the company took off. 1999-2008 growth in earnings per share, as measured by logarithmic regression, was 12.66%. Growth in net income, calculated by the same method over the same timeframe, was 12.30%. That's a fairly creditable performance.

The last five years have been better. 2004-08-year EPS growth was 25.62%; net income growth for the same period was 23.76%. Ten-year average return on equity from 1999-2008 was 18.34%. Five-year average ROE was 20.73%. Sales per square foot and sales per store were also up smartly from 2004 to 2008.

Given this growth, one might wonder why its P/E wasn't higher. The ratio actually was at the high-flyer level, as recently as eleven months ago. The Buckle was a stock that bucked the 2008 bear market until late September. It made its 2008 high on Septenber 19th, closing at $41.05. Its price at the beginning of 2008 was about $20.64. After dropping with the general market in late 2007, the stock reversed itself and spent most of the mid-year around $30-$33. The Buckle's 2008 earnings explain why: its earnings and revenue growth were still hot last year.

The September-November period saw the stock slaughtered: from $41.05, it plummeted almost without interruption to $16.18. However, no earnings disappointment came. March 6th saw its price higher than at December 5th. A one-month tear, ending on April 9th, saw the stock go from $22.94 to $36.97. That price marked the 2009 high, after which it's been drifting down.

The earnings, however, didn't co-operate with the market. The Buckle's latest earnings report shows above-expected earnings for 2Q '09, which were 12.5% above 2Q '08's on a diluted basis. Net sales were up 13.6% in the same timeframe, so the increase in EPS can't be explained by cost-cutting. Gross margin was up, from 41.4% to 42.7%, and operating margin rose slightly from 19.6% to 19.8%. Net profit margin did decrease slightly, from 13.1% to 13.0%. This last statistic may indicate why The Buckle's growth story is "too good to be true."

Another indication of slowing growth is found in its accounts receivables: they rose 80.0% from 2Q '08 to 2Q '09. Although inventories dropped slightly in that timeframe, despite the 13.6% growth in sales, the jump in accounts receivables suggests that sales are being pushed by lowering credit standards. That could be true, but its impact wasn't that much. 2Q '09's total accounts receivable was $6.719 million. Net sales for the same period were $192.906 million. Had accounts receivable stayed at 2Q '08's level, or $3.734 million, net sales for 2Q '09 would have been $189.921 million. Revenues would still have increased by 11.9%. Using a 13.0% net profit margin, the decrease in net income for those sales would have been $388,050. 2Q '09 net income would have been reduced to $24.605 million. Earnings per share would have been reduced by one cent. The EPS increase would have been lowered to a 10.4% gain on a diluted basis. The company still would have beat expectations.

So, if accounts receivable had stayed constant from 2Q '08 to 2Q '09, The Buckle would still have been on a growth trend. The rate would have been lessened, but the earnings and revenue growth would still be there.

More serious is the slight decline in the net margin. Does it meant that The Buckle is in for a period of subnormal growth? Will its recent record prove to be too good to be repeatable?

More than 40% of its sales come from denims - jeans. Teenagers and young adults are The Buckle's target market. They're legendarily fickle, so it is possible that they may throw away the jeans for something else. That change isn't very likely, though; designer jeans have been around for more than two decades and show no sign of losing their popularity.

It could also be that The Buckle will lose its "cool," which is a more likely possibility. There wasn't any sign of it in the financials, however. Revenue hasn't slumped. The net margin has, slightly, but a more plausible explanation for that dip is the recession finally catching up with the company.

Its July same-store sales did disappoint: they were only up 2.8% from the same period a year ago. That increase is much smaller than its 13-week increase of 13.6% and its 26-week increase of 13.1%, which further indicates that the recession has finally gotten to The Buckle. The same day of the July figure's annoucement, shares in the company dropped 15.2%.

The July disappointment answers the question at the top of this post. The market's reaction to the lackluster July figure pushed the company into the Low P/E Bin.

Had The Buckle been a high P/E stock, the July figure would have been decisive for a "sell/avoid" recommendation. But is it an "avoid" at its current P/E level of 11.21? That question is more ambiguous. The Buckle proved not to be recession-proof; in this sense, the stock's overall decline in the last 11 months can be said to have discounted its eventual same-store sales slip. Seeing accounts receivable shoot up again in the next quarter would be a clear warning sign. So would a continuation of July's disappointing same-store sales results, especially since the third (back-to-school) quarter has usually been The Buckle's biggest in terms of sales.

I suggest that it's largely been discounted. Granted that this suggestion is speculative, but the lack of recession proofing in The Buckle's results does not change it as a recession-resistant company. Its same-store sales figures for July, considered in isolation, are like that of a discount store - even though it isn't one. All through this recession, The Buckle's results have been way above a full-price store like Abercrombie & Fitch.

Of course, I'm assuming that consumer spending patterns are going to return to a more normal level. A more conservative person would take the July figures as a signal to avoid until the growth comes back, regardless of the P/E ratio.

Disclosure: I'm now holding The Buckle in the actively-managed Marketocracy mock fund I run, as a recovery play. What swayed me was its long-term EPS growth (12.66%) as compared with its P/E ratio (11.21), and the fact that it's in a trading range right now.


  1. the white text on the black background is kind of an eye strain.

  2. Maybe there are some risks on the balance sheet or cash flow? Too aggressive expansion? Financing issue? Too much debt? I dunno, just guessing. Havent looked at the stock, I am just commenting off the cuff.

  3. @Anonymous: It's been changed.

    @8percentpa: I checked the balance sheet, and found that it was quite conservatively financed. The current ratio is well above 2:1.

    However, its expansion might prove to have been too aggressive if same-store sales keep disappointing. As far as I know, it was the disappointing July figure that's shot it into the doldrums.

    Anyways, as (ill) luck would have it, The Buckle is down almost 3% in an up market.

  4. I observe the balance sheet, and got that it was quite conservatively financed. The current ratio is well above 2:1. If we observe July figure we found that it was really disappointing.

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