Buckle Inc. (BKE) Update

Recommendation: HOLD

On 6^th of October, I had published a ‘BUY’ recommendation on Buckle Inc. It was trading at a price of $26.53 per share. The Company announced a whopping $2.50 special dividend in November 2010 and a regular quarterly dividend of $0.20 in December 2010. Current market price of BKE’s stock is $37.78, which means an overall return of 51.8% since October 6^th, 2010. This is one company that gives out over 90% of its net income in dividends and still managed to grow its business in last five years.

BKE’s steady flow of brand merchandise and store expansion will go a long way to increase brand awareness and attract new customers. Buckle is supported by strong management along with strong financials. Currently they have zero debt, current ratio of 3.4 and a quick ratio of 2.0. The company’s PEG ratio has increased from 1.00 in October 2010 to 1.35 December 2010. The Company’s Price to earnings ratio has increased from 9.8X to 13.9X over the same period, which is lower, compared to its competitors namely American Eagle, Urban Outfitters and Abercrombie & Fitch. Buckle’s Price to earnings ratio is higher compared to GAP and Aeropostale.

The Buckle’s sales per square foot has increased by about 40% in last five year period, which shows that the management is able to utilize store space efficiently and able to allocate resources effectively. Over the last five years, BKE’s had a very good organic growth, which shows that the company’s strategy is working well and its merchandise is fresh. Adding to this they have strong ROE and ROA of 35% and 26%. Buckle insiders hold 43% of the company showing they believe in its long-term growth potential. This long-term growth will be strengthened now that the Buckle is planning on expanding into the Northeast for the first time. The management’s plan to open 20 new stores is expected to drive sales up. Management has been conservative and strategically opened new stores when the time is right. In doing so, they have been able to achieve strong margins and have been consistently increased gains. The company had 401 stores as of December 26^th, 2010.

I like BKE due to their shareholder friendly and experienced management, overall sales appeal, and high dividend payout. Based on price multiples, Buckle share looks appropriately priced. Hence, I am changing my recommendation from a ‘Buy’ to ‘Hold’ on Buckle’s stock.

Key Statistics:

	OCTOBER 6TH, 2010	DECEMBER 26TH, 2010
Recent Price	$26.53	$37.78
Market Cap(million)	$1,228.30	$1,765.80
Enterprise Value (millions)	$1,104.90	$1,601.30
P/E Ratio	9.8X	13.9X
P/S Ratio	1.4X	1.9X
P/B Ratio	3.1X	4.2X
EV/EBITDA Ratio	4.9X	6.9X
PEG Ratio	1.0X	1.3X
Recommendation	BUY	HOLD

Buckle Inc. growing and undervalued

The Buckle Inc. (Ticker: BKE)                    Recommendation: BUY

Key Statistics:

Recent Price (as of 6th Oct 2010)	$26.53
Market Cap(million)	$1,228.30
Enterprise Value (millions)	$1,104.90
Shares outstanding (millions)	$46.70
52 week low	$23.00
52 week high	$40.35
5 year Average Dividend Yield	2.60%
Insider ownership	43.01%
Fiscal year	30-Jan

Business Description:

Buckle, Inc. is a retailer of medium to better-priced casual apparel for young men and women. The company’s merchandise designed to appeal to the fashion conscious 15 to 30-year old. The company markets a wide selection of mostly brand name casual apparel, including denims, other casual bottoms, tops, sportswear, outerwear, accessories, and footwear. They emphasize personalized attention to their customers and provide individual customer services such as free alterations, free gift-wrapping, easy layaways and a frequent shopper program. Most stores are located in regional, high-traffic shopping malls, and this is their strategy for future expansion. As of January 30, 2010, the company operated 401 retail stores in 41 states throughout the continental United States under the names ‘Buckle’ and ‘The Buckle’. (Source Capital IQ)

Financial Highlight 2004-2010:

Year	Total Revenue	Gross Profit	EBITDA	Net Income	OCF	Cap-Ex	FCF	EPS
2004	422.8	173.1	64.1	33.7	57.9	-20.2	37.67	$0.69
2005	470.9	199.4	79.7	43.2	72.6	-16.6	55.98	$0.86
2006	501.1	227.9	93.9	51.9	76.1	-25.6	50.53	$1.13
2007	530.1	244	98.4	55.7	80.4	-21.9	58.49	$1.24
2008	619.9	294	130	75.2	121.1	-27.5	93.58	$1.63
2009	792	388.4	172.5	104.4	143.7	-47.4	96.33	$2.24
2010	898.3	450.6	224.6	127.3	158	-50.6	107.36	$2.73

(In millions, except for EPS)

Financial Analysis:

Profit Margins:

	2006	2007	2008	2009	2010
Pre-tax Profit Margin	16.5	16.6	19.2	20.8	22.7
Net Profit Margin	10.4	10.5	12.1	13.2	14.2

Solvency Ratio:

	2006	2007	2008	2009	2010
Quick Ratio	3.8	3.2	2.2	2.1	1.8
Current Ratio	5.5	4.8	3.4	3.2	2.9
Payout Ratio	24	138	37	126	95

Efficiency Ratio:

	2006	2007	2008	2009	2010
Asset Turnover	1.3	1.4	1.5	1.7	1.9
Cash %	7.2	6.7	10.4	20.5	15.1
A/R %	1	0.8	0.5	0.5	0.8
SG&A %	23.5	24.2	23.4	22.9	22.4

FCF/Sales: BKE’s FCF/sales was 9.4% over the LTM, in line with the company’s performance over the last 10 years; ranging from 8% to 15% (with 2002 being only 4%).  ROE: The Company’s Return on Equity over the LTM was 33%. Over the last 10 years, BKE delivered satisfactory ROE, ranging between 15% and 20% from 2001 to 2007 and reaching over 30% in 2008.

ROA: Over the LTM, company’s Return on Assets was 25%, in line with BKE’s performance between 11% and 27% over the last 10 years.  Dividend Yield: Cash redistribution to shareholders is mixed with a good dividend but no buybacks. The company’s dividend yield was 2.9% (using about 30% of earnings). Revenue Growth: Revenue growth has been strong and quite stable on a 10 year basis between 9% (most recently) and 12%. Liquidity Ratio: 2006 2007 2008 2009 2010 Receivable Turnover 149.3 119.5 181.1 242.4 168.8 Inventory Turnover 4.2 4.3 4.6 5.2 5.4 Receivables per day sales 3.47 2.75 1.63 1.7 2.77 No. of days COGS in inventory 85 83 78 69 66 Inventory % 13.7 13.3 12.5 10.6 9.8 LT Debt/Equity: The company does not have any debt on balance sheet. Buckle’s business performance is strong with high FCF generation and strong ROE/ROA’s in particular in recent years and despite the slowdown in consumer spending. In addition, BKE has been able to growth steadily at 8-9% on average over 10-year periods. Buckle’s valuation seems attractive at this point, with a P/E of only 10.4X (LTM) on a company which has been growing EPS year on year for almost 10 years.  The cash return is also attractive at 7.3% and could leave an investor with enough margin of safety to be comfortable with holding BKE’s stock for a while. Same Store Sales Growth Analysis: The Buckle’s same store sales analysis shows that the company had a very good organic growth in the last five year period. Such an increase in same store sales shows that the company’s strategy is working well and its merchandise is fresh. Year 2005 2006 2007 2008 2009 2010 Stores at Beginning 316 327 338 350 368 387 Stores Opened 13 15 17 20 21 20 Stores Closed 2 4 5 2 2 6 Total Stores 327 338 350 368 387 401 Total Same Store Sales Growth 6.3% 1.4% 0.0% 13.2% 20.6% 7.8% Sales per Square Foot: Sales per square foot is a reliable indicator of how good management is at using store space and allocating resources. The Buckle’s same store sales per square foot has increased by about 40% in last five year period. Year 2005 2006 2007 2008 2009 2010 Sales/Sq. Ft. (Gross) $291.0 $298.0 $302.0 $335.0 $401.0 $428.0 Growth in % 2.41% 1.34% 10.93% 19.70% 6.73%

Management Overview:

BKE management is shareholders-orientated, especially when founder’s son and current Chairman, Daniel Hirschfeld, owns approximately 43% of the company. Dividend payout ratio in 2010 was 95%. Buckle is led by dedicated management; Daniel Hirschfeld has been with the company since 1965 while Dennis Nelson (President and CEO) has been with the company for over 30 years. He has helped lead the company to over 400 stores and is actively involved in all phases of the company’s operations. Executive Vice President, Jim Shada has been with the company 25 years. Kari Smith, Vice-President of Sales, has been with the company for 25 years.

Competition/ Relative Analysis:

In the men’s merchandise area, the company competes primarily with specialty retailers such as Abercrombie & Fitch, American Eagle Outfitters, Aeropostale, Hollister, Gap, Pacific Sunwear, and Metropark. The men’s market also competes with certain department stores, such as Dillards, Macy’s, Bon-Ton stores, Nordstrom, and other local or regional department stores and specialty retailers.

In the women’s merchandise area, the company competes primarily with specialty retailers such as Abercrombie & Fitch, American Eagle Outfitters, Express, Aeropostale, Hollister, Gap, Maurices, Pacific Sunwear, Wet Seal, Forever 21, Vanity, and Metropark. The women’s market also competes with department stores, such as Dillards, Macy’s, Bon-Ton stores, Nordstrom, and certain local or regional department stores and specialty retailers.

2009	Buckle Inc.	American Eagle Inc.	Gap Inc.	Abercrombie & Fitch Inc.	Urban Outfitters Inc	Aeropostale Inc.
P/E	9.79	17.92	10.52	28.6	20.44	9.11
P/S	1.37	1.03	0.85	1.14	2.75	0.97
P/B	3.14	2.24	2.78	1.83	3.88	4.36
P/E * P/B	30.74	40.14	29.24	52.33	79.30	39.71
Yield (%)	3.04	2.92	2.16	1.85	0	0
Payout	0.3	0.52	0.23	0.53	0	0
ROA (%)	25.85	8.74	15.09	4.19	16.01	30.59
ROE (%)	35.1	11.77	25.02	6.48	20.18	54.15
Operating Margin (%)	13.92	5.81	8.26	3.73	12.45	10.66
Net Margin (%)	13.89	4.59	8.26	2.99	12.45	10.66

The Buckle’s P/E ratio of 9.79X was lower with compared to American Eagle, Gap, Urban Outfitters and Abercrombie & Fitch. The company’s P/E ratio was slightly higher than the P/E ratio of Aeropostale (9.11X), but was lower than the industry and BKE’s five year average P/E of 13.9X.

The Company’s Return on Equity (35.10%) and Return on Assets (25.85%) were higher than the most of its competitors.

The Buckle’s had an operating margin and net margin of 13.92% and 19.89% respectively, which were higher than the industry average.

Greenblatt’s Magic Formula Analysis:

For a stable business, the higher the earnings yield, cheaper the stock. The Magic Formula requires an earnings yield greater than 10%. With an Enterprise Value of $1116 and EBIT of $204, earning yield of the company was 18.3% (Earning yield for Guess, Fossil and Urban Outfitters was 12.7%, 9.2% and 7.5% respectively).

Greenblatt recommends using return on assets greater than 25%. The Buckle had ROA of 25.85% in 2010 (ROA for Guess, Fossil and Urban Outfitters was 17.4%, 13.1% and 15.1% respectively). The company’s return on capital (ROC) was 35.9% in 2010.

Valuation/DCF:

Current EPS	$2.73
10 Year Average Growth Rate	15%

	5 Yr Growth=15%	5 Yr Growth=10%	5 Yr Growth=5%
	Terminal=3%	Terminal=3%	Terminal=3%
Discount Rate=9%	$77.34	$63.08	$51.09
Discount Rate=10%	$65.80	$53.82	$43.41
Discount Rate=11%	$57.15	$46.88	$38.21
Discount Rate=12%	$50.44	$41.49	$33.92

DCF valuation of the company under different scenarios of growth rate and discount rate shows that the stock is undervalued and there is a margin of safety.

Conclusion:

I have a ‘BUY’ recommendation on BKE stock. BKE’s Long-term growth prospects are bullish due to strong earnings estimates. In addition, the company is planning to open 20 new stores, which will drive sales up. BKE’s steady flow of brand merchandise and store expansion will go a long way to increase brand awareness and attract new customers. Buckle is supported by strong management along with strong financials. Currently they have zero debt, current ratio of 2.9 and a quick ratio of 1.8. The company has a PEG of 1.0, which is a bullish indicator. Adding to this they have strong ROE and ROA of 35% and 26%. Buckle insiders hold 43% of the company showing they believe in its long-term growth potential. This long-term growth will be strengthened now that the Buckle is planning on expanding into the Northeast for the first time. Also, BKE’s same store sales growth and sales per square foot analysis shows that company is growing and has shown a better performance in comparison to its competitors. I like BKE due to their strong brand management, overall sales appeal and low Price/Earnings multiple.

Disclosure: The analyst/author of this report holds no financial interest in the securities of this company. The analyst/author knows of no existence of any conflicts of interest that might bias the content of this report. The analyst/author is not monetarily or financially compensated in any way for writing this report.

Disclaimer: The information/data in this report has been obtained or derived from sources generally available to the public and believed by the analyst/author to be reliable, but the analyst/author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.

Was Continental Headed for Bankruptcy Before Merging With United?

The airline industry is a highly competitive industry which generally earns low returns because of the high cost of operation. This can bring disaster when times get tough in the economy.

Continental Airlines (CAL) is the fourth largest airline in the US based on revenue passenger miles. It was founded in 1931 and commenced operations in 1934. Continental Airlines had been through Chapter 11 twice. It filed for the bankruptcy for the first time in September 1983 and remained under Chapter 11 from 1983 to 1986. Continental filed for its second bankruptcy in 1990 mainly due the increased jet fuel prices after the Gulf War of 1990. In 1993, Air Canada, Air Partners and Texas Pacific Group enabled Continental to emerge from bankruptcy by investing $450 million in the airline.

Was Continental Airlines heading towards bankruptcy for the third time before merging with United Airlines (UAUA)? Altman Z-score analysis, capital structure analysis, and profitability analysis shows that the company was in distress before the merger was announced.

Altman Z-Score Analysis:

Altman Z-Score decreased to 1.2 in year 2009 from 1.7 in year 2008. At the end of June 2010, the company had a Z-Score of 0.49, which means that company was in distress zone and chances of financial embarrassment were very high. (Data source: Old School Value)

Zones of Discrimination:

Z > 2.99 –“Safe” Zone

1.8 < Z < 2.99 –“Grey” Zone

Z < 1.80 –“Distress” Zone

Capital Structure Analysis:

At the end of year 2009, the company’s total debt to equity ratio was 1062%. Debt comprised 91.4% of the total capital and equity comprised only 8.6% of the total capital. Also, about 15% of the company’s total debt was due in year 2010 and another 18% was due in year 2011, which would have created problems for the company. The company had approximately $7 billion worth operating lease commitments due in next five years.

	Million $	Percent
Debt	6266	91.4%
Equity	590	8.6%
Total	6856	100%

	Million $	Percent
LT Debt (Incl. Cap Leases) Due 2010	975	15.6%
LT Debt (Incl. Cap Leases) Due 2011	1148.9	18.3%
LT Debt (Incl. Cap Leases) Due 2012	590.9	9.4%
LT Debt (Incl. Cap Leases) Due 2013	656.9	10.5%
LT Debt (Incl. Cap Leases) Due 2014	338.9	5.4%
Total LT Debt (Incl. Cap Leases) Due in next 5 years	3710.6	59.2%
Total LT Debt (Incl. Cap Leases) Due after 5 years	2555.5	40.8%
Total	6266	100.0%

	Million $	Percent
Total Term Long	350	5.6%
Total Senior Bonds and Notes	5272	84.1%
Total Capital Leases	196	3.1%
Total Trust Preferred	248	4.0%
Other Borrowings	200	3.2%
Total	6266	100.0%

	Million $	Percent
Operating Lease commitment due 2010	1485	10.5%
Operating Lease commitment due 2011	1432	10.1%
Operating Lease commitment due 2012	1487	10.5%
Operating Lease commitment due 2013	1331	9.4%
Operating Lease commitment due 2014	1285	9.1%
Operating Lease commitment due in next 5 yrs	7020	49.7%
Operating Lease commitment due after 5 yrs	7094	50.3%
Total	14114	100.0%

(Source: Capital IQ)

Profitability Analysis:

Continental Airlines had negative operating earnings in the years 2008 and 2009. The company’s ROA and ROE were also negative in the years 2008 and 2009. In year 2009, the company paid around $330 million in interest expenses.

Jet Fuel Price Analysis:

The airline industry is extremely sensitive to costs such as fuel, labor and borrowing costs. Jet fuel price in 2010 increased by about 10.7% with compared to 2009.

27 Aug 10	Share in World Index	cts/gal	$/bbl	$/mt	Index Value 2000= 100	vs. 1 week ago	vs. 1 month ago	vs.1 yr ago
Jet Fuel Price	100%	208.2	87.5	689.3	239.1	1.7%	0.8%	10.7%
Asia & Oceania	22%	203.6	85.5	675.5	244.3	-0.6%	-1.3%	10.2%
Europe & CIS	28%	208.5	87.6	690.1	236.0	1.9%	0.3%	10.2%
Middle East & Africa	7%	200.4	84.2	664.2	251.4	0.6%	0.0%	9.9%
North America	39%	210.8	88.5	698.6	235.4	2.8%	2.2%	11.4%
Latin & Central America	4%	219.8	92.3	710.8	255.7	2.9%	3.0%	11.5%

(Source: IATA.org)

Disclosure: The author of this article holds no financial interest in the securities of this company. The author of this article knows of no existence of any conflicts of interest that might bias the content or publication of this article. The author is not monetarily or financially compensated in any way for writing this article.

Altman Z-Score: A tool to predict likelihood of bankruptcy

The Altman Z-Score is a measure of a company’s health and likelihood of bankruptcy. It was developed by Edward Altman in 1968 when he was a finance professor at NYU. This is a mathematical formula which uses financial data from company’s income statement and balance sheet. It generates a number which tells you the likelihood of bankruptcy or financial embarrassment. It has a reported 72% accuracy in predicting bankruptcies two years in advance.

Z-Score Formula for Public Companies:

T₁ = Working Capital / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Market Value of Equity / Total Liabilities

T₅ = Sales/ Total Assets

Z-Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + 0.6T₄ + .999T₅

Zones of Discrimination:

Z > 2.99 -“Safe” Zone

1.8 < Z < 2.99 -“Grey” Zone

Z < 1.80 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation

Old School Value has a spreadsheet for calculating Z score for any company by typing in a ticker of the company.

Z-Score Formula for Private Firms:

T₁ = (Current Assets-Current Liabilities) / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Book Value of Equity / Total Liabilities

T₅ = Sales/ Total Assets

Z’ Score Bankruptcy Model:

Z’ = 0.717T₁ + 0.847T₂ + 3.107T₃ + 0.420T₄ + 0.998T₅

Zones of Discrimination:

Z’ > 2.9 -“Safe” Zone

1.23 < Z’ < 2. 9 -“Grey” Zone

Z’ < 1.23 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation (Private Firms)

Z-Score for Non Manufacturer Industrials and Emerging Market Credits:

T₁ = (Current Assets-Current Liabilities) / Total Assets

T₂ = Retained Earnings / Total Assets

T₃ = Earnings Before Interest and Taxes / Total Assets

T₄ = Book Value of Equity / Total Liabilities

Z-Score Bankruptcy Model:

Z = 6.56T₁ + 3.26T₂ + 6.72T₃ + 1.05T₄

Zones of Discrimination:

Z > 2.6 -“Safe” Zone

1.1 < Z < 2. 6 -“Grey” Zone

Z < 1.1 -“Distress” Zone

Download free spreadsheet for Altman Z-Score Calculation (Non Manufacturer Industrial and Emerging Market Credits)

Reference:

Altman, Edward I. (July, 2000). “Predicting Financial Distress of Companies”   http://pages.stern.nyu.edu/~ealtman/Zscores.pdf

An Appetizer of ‘declining revenue’ served with a meal of ‘heavy debt’ leads to bankruptcy

Debt is the worst poverty; on top of it declining revenue may lead a company to bankruptcy. Energy Future Holdings (EFH) is going through distressed situation because of heavy debt and low electricity prices. In February 2007, the private equity investors announced their decision to buy TXU’s outstanding shares. Like most private equity firms, the intention was to bring a major change i.e. make TXU a  private company from a public company, slice costs, improve operations and earnings, cling to it for few years and then again take the company public in an initial public offering.

Because of this deal, EFH’s long-term debt increased from $10.6 billion to $38.6 billion in 2007. Increase in long-term debt had a major impact on interest expenses which amplified from $1.5 billion in 2007 to $3.4 billion in 2008. In 2009 company also paid an amount of $3.4 billion as interest on debt.

In addition to this cash drain in the form of interest, average wholesale prices for electricity plummeted by about 50% from 2008 to 2009. In 2008, prices were $70.40 per megawatt-hour as compared to just $29.36 per megawatt-hour in the year 2009. Also, EFH lost about 4 percent of its customers in the last year due to low retail prices of competitors and high purchasing power of customers. EFH’s revenue in 2009 reduced to $9.5 billion from $11.4 billion in 2008.

EFH has a debt repayment model built on higher prices for natural gas, and it is not going to get that higher price in the next few years. The company has protected itself against the drop in natural gas prices by buying hedges. But the hedges will begin expiring in a couple of years and EFH would not get these attracted hedges anymore. Altman Z Score analysis shows that EFH’s Z-Score is below 1 which is in ‘Distressed’ zone. This implies that probability of financial embarrassment is very high.

Under these circumstances, company must try to trim or restructure its debt with exchange offers and then hope for electricity market to improve. This will allow the company to swap or slice away some of its debt with longer maturity debt because about half of the company debt is due in 2014.

The alteration of once financially sound and publically traded company into the debt-laden, privately held EFH of today, has made it difficult for the company to survive in the present environment of low electricity price and low electricity demand. And it would not be an easy task for the company to come out of this crisis quickly.

This article is also available at http://seekingalpha.com/instablog/693697-sudhanshujain/91914-an-appetizer-of-declining-revenue-served-with-a-meal-of-heavy-debt-leads-to-bankruptcy

Disclosures:The author of this article holds no financial interest in the securities of this company. The author of this article knows of no existence of any conflicts of interest that might bias the content or publication of this article. The author is not monetarily or financially compensated in any way for writing this article.

Disclaimer:The information/data in this article has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.