This Fashion Retailer Will Outperform

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Buckle (NYSE: BKE) is a much underappreciated company; the retailer of fashion apparel has a resilient business model, a strong management team and a healthy dividend policy, yet the stock is trading at a discount versus its less profitable peers. This high performing company looks well positioned for outperforming the markets in the middle term.

A High Quality Business

With 440 retail stores in 43 states, The Buckle focuses on medium to better-priced casual apparel, footwear and accessories for fashion conscious young men and women. The company specializes in Denim, and it works with both its own Buckle brands and partnering brands like Diesel, Fossil, Quicksilver, Reef and Puma among many others.  

Management has proven its ability in several important areas like product sourcing, inventory management and pricing strategy through the years, and clients appreciate the wide variety of products and helpful customer service. This has delivered superior growth rates for The Buckle versus the competition over the last five years.

When comparing earnings per share for the company against competitors like Gap (NYSE: GPS), Aeropostale (NYSE: ARO), American Eagle Outfitters (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF), The Buckle has done much better during the recession, and it has achieved better growth rates than any of its competitors in  the last five year period.

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It’s easy to generate growth at the expense of profitability by undercutting prices, but that is not the case here. The Buckle generates higher profitability margins than its competitors, as we can see from the table comparing gross margins, operating margins and return on equity.

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The Right Management Team

It´s not by pure chance that the company has performed so well, incentives can be a very powerful force, and the management team has its own interests well aligned with those of outside shareholders. Daniel J. Hirschfeld, the company´s Chairman, owns 34% of the company's shares, so you can rest assured on the fact that he is doing his best to deliver extraordinary results.

The Buckle is very friendly with investors, and it strives to make sure they receive their share of the business's cash flow on a regular basis. The company has declared special dividends over the last five years, and last December it gave a $4.50 special dividend on top of its regular $0.20 quarterly payment.

This last special dividend was probably higher than usual because of coming increases in dividend tax rates, but that's still a big juicy yield versus the current price of $44.  Even if special dividends for 2013 are much lower than 2012 payments, investors have good reasons to expect a considerable dividend by year end.

The Buckle has a pristine balance sheet and a solid track record of cash flow generation under different economic scenarios, so it has more than enough resources to finance dividend payments over the following years.

Attractive Valuation

The company has delivered better growth rates than its peers, and it has also achieved superior profit margins, but the stock is trading at a lower P/E ratio than any of its competitors in the table.  If we also consider the distinct possibility of more special dividends in the future, the valuation picture becomes increasingly attractive.

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The stock has a heavy short interest of nearly 29% of its float, probably because short sellers have placed their bets in reaction to expected price declines after the dividend. This could be an explosive fuel for the stock in the coming months, as shorts would need to run for the exits and buy the stock en masse if the price starts moving against them.

Bottom Line

The Buckle is a high quality company with a great management team and a shareholder friendly dividend policy. The valuation is quite attractive, and heavy short interest could provide a big catalyst in the middle term.  From different perspectives, The Buckle looks poised to outperform.

acardenal has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of Aeropostale and The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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