Denim Isn't Going Away, And Neither Is The Buckle - Seeking Alpha

The Business

For those of you who are unfamiliar with The Buckle, Inc. (NYSE:BKE), it is an apparel retailer that caters to young adults. It is an American success story that began in 1948 when David Hirschfeld opened a men's store named Mills Clothing, in the small college town of Kearney, Nebraska. In 1965, Dave's son Dan took over the business. Dan changed its name to the Brass Buckle, and it became a denim store. In 1977, it started selling women's apparel, and in 1991, it went public as The Buckle, Inc.

Dan Hirschfeld still owns approximately 30% of the common shares of the company. Since going public, its share price went from $2.00 to a high of $57.68 on August 5, 2013. It has been a bumpy ride down since then and its current share price is $21.30 (October 17, 2016). The precipitating decline started in 2015.

BKE data by YCharts

Recent Sales History

BKE's recent decline in revenue started in fiscal year 2016 when it decreased to $1.120 billion from $1.153 billion in 2015 (a 2.8% decline). Earnings per share (NYSEARCA:EPS) have been declining since 2014 ($3.39 in 2014, $3.38 in 2015, 3.09 in 2016), and, after reviewing this years monthly sales reports, a 10% or more drop in revenue can be expected for fiscal 2017.

Even with its recent decline in revenue, the company continues to have one of the highest profit margins of its peers. According to my calculations from its SEC filings, in its current year (2017 fiscal year beginning February 1, 2016), net profit after taxes for the first six months was 8.5%. In 2015 its net profit after taxes was 11.2% for the same period, and its average over the previous five years has been 14%. The company's full year 2015 net profit after taxes was 13%. Although declining in the last couple of years, it still maintains a healthy margin, and is very profitable. For comparison purposes, The profit margins of The Gap, Inc.'s (NYSE:GPS) profit margin is about 4.2%, and American Eagle Outfitters, Inc.,'s (NYSE:AEO) margin is about 6.6%.

You can come up with a number of reasons and excuses for the recent decline in BKE's revenues, including the following:

Regardless of the specific reasons for the recent decline in BKE's sales revenue, it has always been and continues to be a cash cow. In the first half of fiscal year 2017 its operating cash flow was $44.449 million. This was an increase from 2016's first half operating cash flow of $30.763 million (31% growth). During the same time period, cash and cash equivalents increased 37% ($122.458 million in 2015 to $168.173 million in 2016). Over the last five years operating cash flow has averaged $192 million per annum. Its best year was 2013 when its operating cash flow was $121 million.

BKE started online sales in 1999. It is the only segment that has been growing in the last several years. According to its 2015 annual report, it grew 11.8% to $105 million in fiscal year 2016.

The company's historic growth has been organic and entirely in the U.S. It markets brand named merchandise as well as private label, and denim is its top product at approximately 45% of sales. Its stores are primarily located in high traffic shopping malls.

BKE'S Dividend Policy

One reason for holding BKE's shares is its generous dividend policy. In addition to its regular dividend BKE consistently pays a mammoth special divided at the end of the year. The company's current regular dividend is $.25 per quarter (4.7% yield). Last year's special dividend was $1.00 which was paid in January 2016. Whether or not the special dividend will increase or decrease for the current year or not paid at all is speculative, but in the past it has been somewhat dependent on its cash flow. The current year cash flow is at this point exceeding fiscal 2016's cash flow.

Dividend Payout Ratio

According to my calculations, BKE's payout ratio on earnings has averaged 97% over the last five years. This obviously is not sustainable over the long term. However its payout ratio on operating cash flow averages only 78% which is why the company is able to pay such large dividends. In fiscal year 2016 the payout ratios were 64% on earnings and 59% on cash flow.

It is also important to point out that during the last five years the company has engaged in some large capital expenditure programs which included the construction of a 240,000 square foot distribution center and a 80,000 square foot office building at the company headquarters in Kearney, Nebraska. All of this was done without incurring any long-term debt and while increasing its cash.

Fundamentals

The following is a list of relevant financial metrics I have calculated from BKE's 2016 financial statements, which shows financial strength:

• Return On Assets - 25.65%
• Return On Equity - 36%
• Return On Investment - 33%
• Net Profit Margin After Taxes - 13%
• Operating Profit Margin - 21%
• Long-Term Debt - $0.00
• Quick Ratio - 2.41
• Current Ratio - 3.93
• Enterprise Value - $829 Million
• EPS Growth Rate (5 year) - 1.3%
• PE - 8.03

Conclusion

Regardless of its recent problems with growth, BKE remains a very profitable, and debt free company. Although the recent precipitous drop in its share price is concerning, and perhaps logical in view of its declining revenue, it does seem a bit overdone in view of the company's profitability and strong balance sheet. This is a company that has stronger fundamentals then almost any of it peers, it still make healthy profits, and its cash flow is stable. The company dividend policy has been very generous to shareholders, and with its current profitability and cash flow it is unlikely to change in the near future.

It doesn't look like BKE is going away anytime soon, so the only question is whether it has reached a bottom in its sales decline. I think its close, but sales could drop a lot farther and the company would still be profitable.

A turnaround in the share price will probably not occur until the comparable store sales start increasing, but the poor performance this year will make the bar for next year much easier. Unlike many of its peers who are reducing stores, the BKE is still adding stores. In its most recent annual report, it stated that it anticipated opening four new stores in 2016. New stores will add additional revenue.

In my opinion BKE is a safe place to put your money for a few years, while receiving monster dividends in this low interest environment. When and if denim becomes a hot fashion item again, you could easily double your money. Although some people might think that denim is dead forever, I doubt that's going to happen in my lifetime. Even if denim does stay down as a fashion item, BKE has a long history of adapting to the apparel market.

Disclosure: I am/we are long BKE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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