The Consumer Stock Network Best Ideas List: The Buckle (BKE)

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers right now (record-high gas prices, declining home values and the corresponding "wealth effect," as well as lingering credit concerns), we concede that this space may not be appropriate for all investor classes in at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add teen-oriented apparel retailer The Buckle (NYSE: BKE) to the list.

Investment Highlights

  • Under the radar stock. In our opinion, The Buckle's stock doesn't garner the same attention that other mall-based competitors such as Aeropostale (NYSE: ARO), American Eagle (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), J. Crew Group (NYSE: JCG), and The Gap (NYSE: GPS) do. One reason for this is the company's relatively small market cap ($1.5B compared to the peer group average of about $3-$4B), but with virtually no stores in the Northeast US, it is easy for the Street to overlook the company (in fact, there are only a handful of analysts covering the stock). Buckle stores are often located in secondary and tertiary markets where there are only a limited number of apparel options for a fashion-starved audience - a key reason behind the company's excellent sales trends as of late. As awareness of Buckle increases, we expect institutional shareholders to gravitate toward the stock and move its price upward.
  • Appropriate brand name/private label merchandising mix. The company employs a dual-merchandising strategy, where 70% of the assortment are brand names highly sought by the teen audience (Lucky Brand, Hurley, Affliction, Guess, Quiksilver/Roxy, among others) and the remaining 30% represents in-house private label brands. The brand name items drive customers to the stores, while the private labels represent a key margin driver. While we would prefer a bit higher proportion of the private label brands, similar merchandising strategies have worked for the top mall-based apparel retailers in the past.
  • Costs well controlled. Instead of costly marketing programs, The Buckle keeps its advertising expense budget to about 1% of total sales (compared to 3%-4% for some other national retailers) and allows its reputation for quality rand-name merchandise to drive traffic. When a company can still generate sales growth in the low 30% range (as The Buckle did in 1Q08) with minimal marketing costs, it has a profound effect on the bottom line. Furthermore, the minimalist approach to advertising frees up capital to be used on other important matters, such as inventory management and distribution.
Investment Risks
  • Rising production costs. Most apparel and footwear retailers are feeling the negative impact of rising Chinese labor costs as well as higher input prices. Thus far, The Buckle has been successful passing these costs to its customers, but considering the pressures facing the US consumer, there may be a time where this becomes more challenging. That said, The Buckle's target audience is more resilient (or more oblivious, perhaps) to price inflation than "head-of-household" consumers; given the high demand for its fashion brands (especially the denim segment, which represents just over 40% of sales), we believe the company has additional room to increase pricing, if necessary.
  • Valuation. Like some of the other names on our Top Ideas List, valuation is a bit of a concern because the stock has rallied quite nicely since January lows around $31. However, for a high-growth, well-managed company and an under the radar stock, we believe a modest premium is warranted. The stock currently trades at just under 16x the consensus fiscal 2009 estimate of $3.07, roughly in-line with the peer group. With continued earnings outperformance, a somewhat resilient customer base, and increasing investor awareness, we could envision this stock in the mid-to-high $50 range, barring any additional "shock" type events in the economy.
For our mock portfolio purposes, we will assume our entry price on The Buckle was $48.51 (the price at the time of this post).

Previously on The Best Ideas List:
GameStop (NYSE: GME)
Gymboree (NASDAQ: GYMB)

Analyst Ownership? No
Analyst's Family Ownership? No
Analyst's Firm Ownership? No
Investment Banking Conflict? No
Other Conflicts? No

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