Boning-up on Buckle (BKE)

 

The Buckle (BKE) was this month’s Online Stock Study at the Better Investing website. 

 

Company Background:

 

BKE is a chain of 391 retail clothing stores that sells casual clothing to “trendy” young men and women who shop at malls.  Stores are located in 40 states, none of which are in the northeast, and 70% of sales in its FY 2007 were brand name goods. 

 

Like many retailers, Buckle had a tough year, but may be on the road to recovery: Google Finance reports that BKE’s share price fell 19% in the last 12 months and 38% in the last 6.  However, it fell only 2.6% in the last 3 and actually rose 3.5% last month after the company had a surprisingly good 4^th quarter and FY 2008.

 

The company reported that its Sales rose 21.5% in Q4 and 27.8% in FY 2008 which ended 1-31-09.  Comparable store sales increased 14.3% for the Q and 20.6% for the FY.  Nineteen new stores were added during the FY. 

 

The company has no debt and Value Line was favorable impreseed overall: << The Buckle has much going for it, including high margins and top-notch finances that allow for share buybacks and husky dividend increases. >> (2-6-09 VL report on BKE)

BKE’s  direct competitors, according to Hoovers.com and YahooFinance, are Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and The Gap (GPS).

Buckle’s average Pre-Tax Profit Margin for the last 5 years is much better than its industry average (Apparel, Retail), but slightly below ANF’s and AEO’s.  Its Return on Equity for the same period is almost the same as its industry average, but much worse than ANF’s and AEO’s.

 

The BI Online Stock Study:

 

The March 2009 Online Stock Study was led by Diane Amendt, a member of the BI Volunteer Advisory Board, who did what she called a top-down study.  Diane picked BKE for this study after she first did a SSG to learn if the company warranted further research.

 

The Online Stock Study produces a Consensus SSG where the judgment calls are made by consensus voting.  The recorded session (about 1 hour), the SSG, Diane’s presentation slides, and the Value Line report on BKE are now available for downloading by BI members.

 

What follows is a comparison of the Consensus SSG with two SSGs of mine and with Take Stock.  My analysis and conclusions follow this table.

 

Buckle (BKE)	Consensus SSG	Armin-1	Armin-2	Take Stock
Date	2-20-09	2-21-09	3-8-09	2-20-09
Data	S&P	same	same	Hemscott
Price	$23.79	same	not changed	$23.79
52 week High & Low Price	$44.57 & $13.57	same	not changed	n/a
Project Growth From End of	Last Quarter	same	same	Last Annual
Sales Growth	10.00%	8.00%	same	5.90%
EPS Growth	15.00%	8.00%	10.00%	5.90% initial 1.89% final
High PE	15.0	17.8 (last 5 yr ave)	same	15.0
High EPS	$4.21	$2.38	$2.61	$1. 78
High Price	$63.20 ~$8.00/sh or 15% > VL	$42.40	$46.50	$26.76 ~$13/sh  or 33% < VL
Value Line Estimated High Price = $40-55 at $20.92 as of 2-6-09
Low PE	10.0	11.7 (last 5 yr ave)	same	8.4
Low EPS	$2.09 (ttm)	$2.09 (ttm)	same	$1.70
Low Price	$13.10 (ave low price last 5 years)	$16.70 (70% x curr price	same	$23.79 Yield Supported Low Price that overrode $14.28
Upside/Down	3.7	2.6	3.2	impossible to calculate
Total Return	24.7%	14.9%	17.0%	4.9%
SSG Buy Under	n/a	$23.09	$24.11	$14.94
RV/PRV (no outs)	77.6/67.3	77.6/71.7	same/70.4	n/a
Quality	n/a	B+	same	2.6
PTPM – 5 yr ave	15.8% trend up	same	same	15.8% trend n/a
ROE – 5 yr ave End Equity	16.1% trend up	same	same	n/a
ROE – 5 yr ave Start Equity	n/a	17.2% trend up	same	17.1% trend n/a
Debt to Equity – 5 yr ave	n/a	-0- trend even	same	n/a

 

The Consensus SSG:

 

- Diane used SSG software rather than the BI Online SSG which meant that she had the option to project future growth from the last quarter (which she did) and had more than one option for the Forecast Low Price (which she used).  The Online SSG does not offer those features.  Neither does Take Stock.

 

- The SSG involves making five estimates for the next 5 years, but I’m only going to discuss three of these Consensus judgment calls.

 

- Participants were givem four choices to estimate future EPS growth: 22.8%, the 5 year average EPS; 15.0%, Diane’s initial estimate (not explained); 10.0%, same as estimated Sales growth; and 17.0%, Diane’s maximum (not explained).  

 

** VL’s 15.5% EPS estimate was not considered, which I found surprising especially since VL’s Sales (actually Sales per share) estimate was considered when future Sales growth was voted on.

 

** The Consensus (52%) chose 15.0%, Diane’s initial estimate, while second place with 34% of the vote was for 10.0%, same as the Sales growth decision.

 

- To estimate the projected Average High PE, participants were given two, maybe three choices: 17.8, the 5 year average; 15.0, Diane’s initial estimate (not explained); and 15.0, the same as future EPS growth.

 

** The Alt-M option was not considered which averages the five lowest values in the last 10 years and is usually the most conservative option. Here, 15.6 was Alt-M’s average high PE.

 

** The Consensus (73%) chose 15.0, Diane’s initial estimate.

  

- The Forecast High Price is not a judgment call as it is simply the product of Projected High PE x High EPS which equaled $63.20.  I ALWAYS like to compare the Forecast High Price to VL’s estimate which was $40 to 55 in the next 3-5 years and meant that the Consensus was $8.00 per share or 15% greater than VL.

 

- For the last judgment call, Diane offered four choices to decide the Forecast Low Price: $20.90, the Low PE x Low EPS; $13.10, the average low price for the last 5 years; $13.60, the recent severe low price; and $6.90, the price BKE’s dividend will support.

 

** The Consensus (38%) chose $13.10, the average low price.

 

Armin’s SSG-1 and SSG-2

 

- When I did SSG-1 on 2-21, S&P had no Long-term EPS estimate and the five other analysts I always check were estimating an average of 11.50% with VL high at 15.50% and FirstCall via YahooFinance low at 8.38%.  Reuters.com consensus estimate was 10.70% (with 13.00% high and 5.00% low); FactSet CallStreet via CNNMoney was 11.00%; and Zacks.com was 11.14%.

 

** My 8.00% estimate was based on FirstCall, the lowest of the five estimates, as I thought that the 5.00% low estimate at Reuters was too low.

 

- I updated my SSG on 3-8 and found that S&P still had no EPS estimate while the average of the five other analysts had dropped slightly from 11.50% to 11.34%.  VL and FactSet were unchanged, FirstCall was 10.00% (up from 8.38%), Reuters was 10.50% (down slightly from 10.70%), and Zacks was 10.50% (down from 11.14%).

 

** I changed my EPS estimate to 10.00%, now the lowest estimate, just to see how that would affect my SSG’s outcome.  I did not change BKE’s price.

 

- It’s no surprise that my $42.40 Forecast High Price in SSG-1 and $46.50 in SSG-2 were well within the range of VL’s $40-55 estimated High Price.  If I substantially fall above or below VL’s estimate, I consider that a red-flag warning sign to revisit my judgments.

 

- I was surprised that SSG-2 satisfied the BUY Criteria, while SSG-1 did not, because all I changed was my EPS growth estimate from 8.00 to 10.00%.

 

- With SSG-1 and SSG-2, I used 70% of BKE’s current price ($16.70) as my Forecast Low Price because I didn’t like the standard choices offered by my SSG software.  The method most appropriate for growth companies (low PE x low EPS) was $24.50 and too high; the Average Low Price ($13.10) and the Recent Severe Low Price ($13.60) were too low.

 

** The Consensus chose the Average Low Price ($13.10) and was not offered the option I chose.

 

Take Stock

 

- Take Stock is a computerized program at the StockCentral.com website that produces an almost-SSG with one click that involves no judgment by the user.  It is programmed to produce a conservative analysis, ultra-conservative in my judgment, which is solely based on historical results.

 

- Take Stock initially estimated 5.90% EPS growth that was overridden by 1.89% from its so-called Business Model (another name for the NAIC/BI Preferred Procedure).

 

** The 1.89% final EPS estimate was way, way unreasonably low compared to the six analysts I checked for my SSGs.  The lowest analyst estimate was 8.00% on 2-21 and 10.00% on 3-8.

 

- Its no surprise that Take Stock’s $26.76 Forecast High Price was $13 per share or 33% BELOW VL’s estimated High Price of $40-55.  When you start with a low EPS estimate, for sure you will end up with a low High Price estimate.

 

- Take Stock’s Forecast Low Price is weirdly programmed: unlike the SSG, its Low Price is allowed to exceed the stock’s current price (a SSG NO-NO according to BI’s SSG Handbook).  Moreover, a special feature kicked in here where the Yield Supported Low Price of $23.79 was allowed to override $14.28 AND made it impossible to compare Upside-Downside Ratios. 

 

Conclusions:

 

- The 15% EPS growth selected by the Consensus SSG was much higher than what the analysts were estimating.  By starting high, its resulting Forecast High Price was 15% higher than VL’s estimate.

 

** To learn whether our EPS estimates are out-of-line or whacky, too high or too low, I have explained my approach at: Estimating EPS

 

- Small changes on the SSG can have a big effect.  My SSG-1 did not satisfy the Buy Criteria while my SSG-2 did and the only change I made was to increase EPS growth from 8% to 10%.

 

** When I come close to satisfying the Buy Criteria (a 3.0 Upside-Downside Ratio and the 15.0% Total Return), I’m going to complete different “what-if” SSGs to learn what happens when I change 1 or 2 key judgments.  Our SSG software makes this easy to do.

 

- Armin

 

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