An Out-Of-Favor Retailer That Pays Amazing Dividends.

Summary

  • Strong fundamentals.
  • Consistent and growing dividend payments.
  • High ROC compared to its competitors.

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Source: Buckle’s Corporate Page

The Buckle, Inc. (NYSE: BKE) is an out-of-favor retailer that offers investors an attractive opportunity to grab this dividend stock. After consecutive quarters of sagging sales number, its stock price plunged from a high of $45 to current price of $22.30 per share. Trading at a current PE ratio of 9.25 with a dividend yield of 4.48% (excluding special dividend) compared to the industry average of 2.33%, is Buckle a good dividend play?

Let’s explore this stock further.

Business

Buckle is an apparel retailer that offers a wide selection of apparel to the fashion conscious young men and women 15 to 30-year old. As of fiscal 2015, the company operates 468 retail stores in 44 states through the United States with an approximately of 8600 employees. The company’s merchandise includes a mix of denim jeans, sportswear, tops, bottoms, footwear and accessories from well-known brand names like Under Armour, Fossil, Oakley as well as the company’s private label, “Buckle”. The company differentiates itself from competitors by providing customers with value-added services such as free gift wrapping service, free hemming, Buckle’s private label credit card as well as easy layaways which allow customers to make a partial payment for the product that is held by the store until the full payment has been made. As you can see from the merchandise brand chart below, brand name merchandise accounted for 64% of the total sales with the remaining 36% from their own Buckle private label. Denim and tops are main significant sales contributor which comprises of 33.5% and 32.4% respectively of total sales.

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Source: BKE 10Q SEC Report

Fundamentals

Buckle has track records of strong fundamentals that enable the company to sustain and grow its dividend payment.

  • The company has been able to consistently keep up with a debt to equity ratio of 0 for the last 10 years (fiscal 2007 to 2016). This shows that the company has the strong cash flow to fund its operations and expansion plan without the use of debt.
  • Strong free cash flow and operating cash flow. From 2014 onwards, there is a slight decline in both free and operating cash flow due to the current retail headwinds. It is likely due to industry specific headwinds where another apparel retailer like Gap Inc (NYSE: GPS) has also seen a decline in sales and store traffic.

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Source: Gurufocus

  • Consistent and increasing dividend payments. The management has been able to consistently increase its annual dividend payment despite current retail headwinds. Buckle is also well-known for its special cash dividend.

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Source: Gurufocus

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Source: Morningstar

  • Buckle has been able to generate higher return relative to the capital invested in the business compared to its competitors.

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Source: Gurufocus

Potential Risk

  • E-commerce sales are expected to account for more than 20% of all retail sales within the next seven years. Retailers are shifting from brick and mortar stores to online stores. In my opinion, this will cause a negative impact on retailers. Investments in digital marketing, IT, and supply chain upgrades could result in higher selling, general and administrative expenses (SG&A) and lower operating income. Furthermore, offline stores are often leased by retailers based on a long-term lease contract basis (For example, 10-year lease period). Therefore, retailers may have to pay additional cost required to break lease agreements to close down physical stores.
  • The Federal Reserve raises the interest rate for the second time since last year and hints to increase at a faster pace in 2017. Higher interest rate results in consumers having lesser disposable income and cut back on spending. As a result, retailers will likely to suffer from a decline in sales.

Conclusion

Buckle has strong fundamentals and tracks records of consistent dividend payments. As the current retail headwind has not subsided yet, I will expect Buckle’s sales to continue declining. As such, a hold is recommended until the company has shown a significant improvement in store sales.

If you want to learn more about how to find cheap and good dividend stocks, click on the picture below to join our Free Value Investing Masterclass.

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Sam Shi Feng
Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

 

 

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