BKE Stock: The Safest Clothing Retailer Is a Takeover Target

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I hate clothing stocks. They’re way too volatile. The chart of just about any clothing retailer looks the same: The stock skyrockets on roaring growth, followed by a devastating crash back to earth … where it remains significantly off its high.

Buckle 185Look at American Eagle Outfitters, which was trading above $23 in September of 2012, but has since lost 37% of its value. And AEO stock remains more than 55% off its all-time high in 2007.

Meanwhile, the S&P 500 gained 47% since AEO’s 2007 high and 44% since the 2012 high.

There are only two exceptions to clothing stocks’ disastrous cycles. The first are men’s suit stores, which offer the same men’s clothing staple. That’s why The Men’s Wearhouse, Inc. (NYSE:MW) has been around for so long and why it bought out Jos. A. Bank Clothiers — people will always need to buy suits.

The other is the casual analog to the business suit model. It’s the denim model, and since The Gap, Inc (NYSE:GPS) abandoned that territory ages ago, it’s been filled by The Buckle, Inc. (NYSE:BKE).

Unlike most retailers that are at the mercy of both the economy and the whimsical tastes of retail consumers, this company has been faithfully frequented by its core base since 1948. This company was able to grow earnings even during the recession, and that trend will continue for the foreseeable future.

BKE Runs a Safe, Smart Business

The answers to the success of BKE are located in its annual report. The vast majority of its 450 stores are located in Middle America: 45% of company sales are denims, 30% are tops, and 33% of their stock is private- (i.e. unknown) label.

This means that BKE serves up simple, no-frills clothing that is not reliant on the latest fashion fad. BKE stock doesn’t try to be Abercrombie & Fitch (NYSE:ANF), and doesn’t have the wildly varying earnings of that company, either.

Another aspect of BKE stock that may not be obvious to investors, unless they actually make a visit to a store, is the level of personalized service its employees offer. Personal experience has demonstrated that The Buckle goes just that much farther in looking out for a customer than other chains do. This attention to personnel is what lifts BKE above its peers. The company prefers to promote from within.

Of its 7,000 employees, almost 2,000 are full-time, and almost all began on the sales floor. An area or district manager is always going to be more efficient and, simply put, better at their job, than a manager hired from some other chain with a different corporate culture.

Management has learned all of this from personal experience. The chairman has held his position for 24 years, including some time as the company’s CEO. The current CEO began as a part-time salesman in 1970. The CFO has been with BKE since 1987.  The newest director has been with the company nine years, with the others having served between 15 and 25 years.

Solid Operations

So if it isn’t clear at this point, BKE is all about its people, and those people are the backbone of the company’s success. There’s also another statistic that demonstrates just how committed these people are to their company: 40% of company shares are held by insiders, an amount that blows away the vast majority of public companies.

The Buckle has also taken a very deliberate, cautious approach to expansion. Unlike its trendy competitors, the company funds its expansion entirely from operational cash flow — cash flow that increased from about $100 million in 2010 to over $200 million in recent years.

BKE stock has no debt and about $185 million in cash and short-term investments. The company opens fewer than twenty new stores each year, being careful not to overreach.

I said that the company was the safest clothing retailer out there, but it comes at a price. Earnings per share have slowed dramatically. Right now, with FY15 earnings projected at $3.48 per share, that’s only a 4% increase. Backing out the $4 in net cash, the stock trades at 12.5x estimates.

Buy BKE Stock for Buyout Potential

It isn’t an unreasonable price to pay, but there’s one reason you might want to consider buying it. Because growth has stalled, but it has great cash flow and a solid brand, it is a perfect target for private equity. A buyer could streamline operations, cut costs and boost cash flow, and they’d pay a premium for it.

Other buyout candidates include the Gap, since BKE stock is only capitalized at $2.37 billion, and The Gap has a billion of cash on hand.  Ross Stores Inc. (NASDAQ:ROST) also makes some sense, with its no-frills brand, and solid balance sheet.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He is the Manager of the forthcoming Liberty Portfolio. He can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/the-buckle-bke-stock/.

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