Buckle's Stock Looks Fashionable Again

Buckle ( BKE) has defied expectations more than any other clothing retailer.

The Kearney, Neb.-based company's stock has risen 38% this year, compared with a 25% decline for the S&P 600 Apparel Retail Index.

The 60-year-old company has expanded and owns 382 stores in 39 states, though it has none in New England, New York and New Jersey, potential growth markets.

Net sales in September jumped 19.2% to $72.8 million from $57.7 million in the same month a year earlier, and comparable-store sales increased 19.7%. The company does not make earnings projections and has been hesitant to comment on anticipated performance for the holiday season.

Despite weakness among clothing retailers, the Buckle has outperformed competitors so far in 2008, including Abercrombie and Fitch ( ANF), American Eagle ( AEO), Aeropostale ( ARO) and J. Crew ( JCG).

Using peer valuation, the Buckle's shares are fairly priced based on price to earnings, but are trading at a premium based on price to sales and price to cash flow. The stock was downgraded last month to "neutral" by JPMorgan's Anna Andreeva, who argued that limited square footage and excessive margins might indicate a growth peak. The shares tanked afterward. TheStreet.com's Ratings group sees opportunity in the stock-price pullback and recommends the shares for purchase.

The Buckle was founded as a men's clothing store. The company has continually refined its image to suit consumer preferences. It now considers itself a "denim destination," but also sells shoes, apparel and accessories for men and women. Products can be purchased online or at stores, which are typically located in high-end shopping malls. It offers personal assistance, free alterations, free gift wrapping and low shipping fees.

Success in the retail industry depends heavily on understanding consumer preferences. Due to a merchandising strategy based on proprietary brands, Abercrombie, Aeropostale and other stores carry the risk of falling out of favor with peer-influencing consumers. The Buckle, on the other hand, sells third-party brands in addition to its private label. Brand diversification and lean inventory allow the company to anticipate changes in consumer preferences and quickly meet demand by selling fashionable clothing. This flexibility makes the company particularly attractive.

The Buckle has developed a business model that adjusts for fashion trends but has established a brand identity with denim products. Jeans have been an American staple since they were reintroduced to the market in the 1950s. Designer jeans, which are sold at a considerable markup, became popular in the 1970s. The Buckle has exposure to this lucrative market and carries mid-range designer brands. Although denim has remained consistently popular since the 1950s, designer jeans fell out of favor in the late 1980s and just recently came back into style.

The company's stock trades on the NYSE and has a market value of $1.4 billion. The company has no debt, a healthy cash position as reflected by a quick ratio of 2.5, and regularly increases dividends. The stock is a growth play, and by no means cheap on an absolute basis. Despite an outstanding performance so far in 2008, the company is not immune to the downturn in the retail sector. The stock is liquid with average daily volume of 890,127 shares.

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