Pop quiz – what has been one of the best performing investments in teen apparel retailers over the past 5-6 years? Better than big names like Gap (GPS), Pacific Sun (PSUN), Aeropostale (ARO), Abercrombie & Fitch (ANF), American Eagle (AEO), and Urban Outfitters (UBRN)?
At A Glance:
Symbol: BKE Price: $50.53 Market Cap: $2.44B Yield: 1.74%
The answer to the quiz above is, surprise, surprise, small little retailer The Buckle (BKE). Need some proof?
Now it probably isn’t fair to compare the 450 stores The Buckle operates in the US against the 3100 stores GAP, or even the 1000+ stores Abercrombie & Fitch operate worldwide. I even adjusted the timeline a little just to manipulate the data to show BKE as top dog. As you’ll find out at the end, there’s a little something special that probably puts BKE on top no matter what time period you look at.
Even their products they sell are in a higher price category than say, GAP. From their website, The Buckle focuses on “medium to better-priced casual apparel, footwear, and accessories for fashion-conscious young men and women”. Now, I typically don’t invest in apparel and especially in the world of teenagers and young adults. Apparel is very fad/fashion based – if your product is in style that year, you do great. If it isn’t, you’re out of luck – and will likely have to wait a full season to refresh your line and see if your new styles are a hit for that season. Unfortunately, that means taking a big hit for being out of style. On top of that, the teenager/young adult category is probably the most hard to please of them all – as the popular 3As in retail found out this year. So what makes BKE unique and special?
1) Operating Model
The majority of Buckle ‘s sales (66% according to the latest annual report) doesn’t actually come from producing their own styles and fashions – they sell medium to better-priced labels (see the complete list of partners on their website) The remaining third of sales are from the company’s own private label which allows for a great mix of product selection and reduced risk of falling out of style.
What I’ve been told makes The Buckle different from other retailers (i.e. why a customer wouldn’t just go to a brand store) is the personalized attention a customer gets when visiting a store – sales people are trained in finding the best fits and showing for customers, co-coordinating outfits, as well as services such as free hemming.
2) Managed Growth and Expansion
Unlike GAP in the early 2000s (which expanded to over 4000 stores and then closed 1000), The Buckle has shown modest expansion over the past decade, preferring to open fewer new stores and focus on better operational control. As the table shows below, not only have sales / store increased as the company has expanded; but the earnings / store has increased as well.
|Year||# of Stores||Net Sales (‘000s)||Net Sales/Store (‘000s)||Income from Operations (‘000s)||Income from Ops/Store (‘000s)|
The company’s other smart decision was to focus expansion in the inner states of America and limit expansion to the coasts where competition for consumer dollars are a little bit tougher. However, as you can see from the existing 400+ stores, the company still has plenty of areas to expand to, especially if they can keep improving operations the way they have been over the past decade.
3) Shareholder Friendly Leadership
Insiders own 40% of the company; many having worked at a Buckle Retail location at the very beginning. It’s great when leadership is aligned with shareholders – these guys seem to know how to operate the retail space, manage expansion, and reward shareholders in the meantime. Not only does the company provide a 1.7% dividend (which recently received a 10% raise), but The Buckle has also provided a “special dividend” in each of the past five years ranging from 4.8% to last year’s monster 10% special dividend!
Right on par, the company also just announced this year’s special dividend of $1.20/share (~2.4%) which while smaller than normal, probably adjusts for last year’s abnormally large gift (which some believe was large in order to beat the rumored cut to the dividend tax credit). Typically, in a growing company, you don’t want to receive dividends – the company should be reinvesting the money into its own growth. However, with these special dividends, leadership is showing that they will grow at a pace that they feel is manageable; and excess funds get returned back to shareholders. Note, the special dividend is classified as a return of capital vs. a distribution – which has the effect of just lowering your purchase price / book value.
As a shareholder, I can’t complain – so far, the company is executing on its mission and not getting ahead of itself expanding too fast too soon. It’s got a long way to becoming a GAP or Abercrombie – and we’ll revisit the company if it ever really gets to that size. For now, The Buckle looks like it’s got plenty of room to grow in the next 5-10 years and if they continue to perform as they have for the past decade, I look forward to many more special dividends just in time for Christmas.
Disclaimer: The author owns shares of BKE and has previously owned shares of AEO. A full list of holdings can be found here.