Heartland Meets Hipster- A Tale of Retail Outperformance

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

So Gap (NYSE: GPS) reported some fine and dandy numbers on Feb. 28 with a 61% rise in net income   and raised its dividend by 20%. Investors will be tempted to fall into the Gap with such numbers but another retailer that may be a better idea is reporting on Mar. 8. A much smaller rival, Buckle (NYSE: BKE), has a lower P/E of 13.35 and a slightly higher yield of 1.80% compared to Gap's 14.54 P/E and 1.50% yield. A retailer of young men and women's clothing, including some private label apparel and accessories, they carry many of the hottest brands for men, women, and kids. Buckle has been a stalwart name over the last few years with almost annual special dividends, fine execution, and a reasonable expansion plan.

Why Buckle over Gap?

The Gap, which also owns Old Navy and Banana Republic, seems to have a lot going for it, granted, but as an investor it leaves me cold. It is omnipresent and ubiquitous and is close to being a consumer staple of clothes. Analysts expect 9.37% five year EPS growth for Gap, close to the 9.00% predicted for Buckle. The Buckle, however, has penetrated underserved markets for young people's retail all over the US with its own niche jeans and much wanted name brands. They are not as edgy as an Urban Outfitters (NASDAQ: URBN) but for those who can't get to a big city Buckle is a very viable alternative.

Thats not to say they are located in cow pastures; for example, the one closest to me is in a higher end and very busy mall in a smaller city in Maryland, midway between Baltimore and D.C. There's a huge young adult demographic in that area that the Buckle can serve. Three years ago 20% of their stores served geographic area of 20,000 or less in population. It is gradually growing to larger but still underserved markets. Currently, they have 433 retail operations in 43 states.

Old-Fashioned Values But New-Fangled Strategies

Buckle, founded in 1948 and headquartered in Lincoln, Nebraska, must puzzle big city analysts who are used to evaluating big city headquartered retailers that buy inventory nine months out and are fairly deaf to customer feedback. Not so at Buckle, the company gets inventory daily and customer feedback is considered crucial. They also can switch inventory from location to location rapidly.

This should be heartening to investors who shy away from teen retail as too fickle a sector because this inventory strategy keeps buyers and management in the loop as to what's hot and what's not. This inventory strategy is why I think analysts may be underestimating their EPS growth rate.

The customer service at Buckle stores is extraordinary as a shopper, even a teenager, can arrange for a personal denim fitter and experience a level of concern and retail expertise usually available only at a Nordstrom or Saks. And did I mention free alterations?! This is a concept so old-fashioned that it's almost as dated as doctors' house calls and the milkman. This customer service and ability to move inventory like Nordstrom has been implementing at its stores is why gross profit margin at 44.14% is higher at Buckle than Urban Outfitters and Gap. Yes, another old fashioned value makes a buck.

But the company isn't afraid of the future as they have been expanding their web and social media presence dramatically making their merchandise available to 90 countries online. Their web site and blog look as contemporary as Urban Outfitters' but without the sullen looking models, sort of Happy Heartland meets Hipster.

The company has a policy of promotion from within but so does Urban Outfitters. However, almost all Buckle C-suite management has worked its way up through the ranks including CEO Dennis Nelson who started as a pants folder at a Buckle while working his way through college in Kearney, Nebraska. He has a large holding of shares (308,600 shares) as does founder, Dennis J. Hirschfeld, who is still active in his role as Chairman. He  holds 16,200,000 shares of Buckle stock for almost a 33% stake.

From their careers web site, "In fact, all of our store managers are former management trainees, assistant managers, or team leaders...(and) Not only that, as a Buckle manager you share in your team's accomplishments by receiving a percentage of your store's annual net profits."

Also like Urban Outfitters they actively recruit on campuses from various degree programs. What they do differently from Urban Outfitters (no yield at all) and Gap are offer special, almost surprise dividends usually in September, but in 2012 in December it paid $6.00 which amounted to more than a 10% distribution and unlike an MLP didn't generate the slightly onerous tax paperwork.

Caveat Buckle Emptor

Same store sales in January were down by 2%. This has happened in the past to Buckle with January often being a weak month. The company reports on March 8 and with the expanded web presence and gradually growing brand recognition expect decent if not showy numbers. Buckle is off from its highs after those January numbers and is actually down 5.87% over the last 52 weeks.

It is a slower grower than Urban Outfitters with its expected 16.97% five year EPS growth rate. Urban Outfitters has a much higher P/E at 30.48 and has already run 43.09% over the last year. Both Urban Outfitters and Buckle have no debt and are acing their respective niches, urbanwear and less urban wear. Their PEGS are 1.48 and and 1.46 respectively.

Wrapping It Up

I've liked both Urban Outfitters and Buckle as stocks, Urban for the growth and Buckle for the value. Gap has the same growth as Buckle but not the value. That eliminates Gap to my mind and just leaves one to decide whether they want momentum as in Urban Outfitters or value as in Buckle.
     

          


leglamp has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of 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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