3 Reasons to Love The Buckle

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During the Great Recession of 2008 and 2009, while other companies were struggling with dropping sales and over expanded stores, The Buckle (NYS: BKE) was growing its store count, sales revenue, and net income. The company, a mid-range retailer of fashion to a teen and young adult audience, was reaching success while competitors like Abercrombie & Fitch (NYS: ANF) , American Eagle (NYS: AEO) , and Gap (NYS: GPS) struggled.

The Buckle's ability to continue growing despite its relatively small size has made me curious to see how good of an investment the company could be. With a long-term-oriented management team, a quality business, and a misunderstood dividend, The Buckle is, I believe, poised to become a very enticing investment.

Owner mentality
What strikes me most about this company is how well managed it is. Most of the management team has been with the company for more than 20 years. The CEO began his career at the company as a part-time salesperson and worked his way up over the years. The management team thinks like owners, and in fact they own a large proportion of shares -- about 40% among the top five managers.

Even while expanding, the company has been able to stay close to its roots, keeping its headquarters in the small mid-Nebraska town of Kearney. All the while, those who run The Buckle have created a company that has done a great job of maximizing shareholder value, with a return on equity of 36% and margins that put their main competitors to shame.

Company

Return on Equity

Return on Assets

Operating Margin

Gross Margin

The Buckle36.1%26.6%22.0%49.6%
Abercrombie10.7%7.7%9.5%63.9%
American Eagle12.3%15.1%10.0%38.5%
Gap29.3%15.1%12.4%39.0%

Source: Yahoo! Finance. All numbers for the past 12 months.

Even though the company is growing, the management team is taking a disciplined approach, opening only stores that it knows can be profitable. In the past five years, The Buckle opened about 20 new stores each year while Abercrombie has had to close stores because of overexpansion. Management doesn't rely on a massive number of new stores to grow. Instead, it's focusing on the customer experience and on improving existing stores -- building the business for long-term success.

The beautiful design
The most exciting thing to me is what it means that the CEO rose through the ranks. Sometimes when we work for a company, we see things that we know could be done better if only the leaders knew about them. That's what he did as he worked his way up and fixed them. Like many salespeople, at one point he probably was frustrated that the popular products sold so fast they were never in stock, while the less popular products clogged up store space, thus lowering his commissions.

Well, at The Buckle, this problem has a beautiful solution:Unlike other clothing companies, The Buckle does daily deliveries of products to its stores. That may seem expensive and inefficient at first glance, but the benefit flows right to the bottom line. The company tracks sales at its stores very closely and finds specific products that sell well at each location. The daily deliveries allow The Buckle to modify in-store product offerings on the spot -- increasing what is selling and moving unpopular inventories to other stores where that particular merchandise might be selling better. As a result, each store is assured of stocking the most popular items -- ensuring high margins and happy customers.

Misunderstandings: the secret to finding underpriced stocks
At first glance, the 2% dividend yield might seem to be nothing to bother with. But management has issued a special dividend every year for the past three years. This past year, it was $2.50 per share, or 6% based on the current price. So if The Buckle continues to issue this special dividend and we collect the annual dividend, we would be making an 8% yield per year right away -- not bad, especially for a growing retailer.

The Foolish bottom line
With stores in only 41 states, The Buckle has some fantastic growth prospects, particularly in the Northeast. We can rest assured that the conservative management team will invest for the long term, when it sees a real opportunity to make a profit. As a result, I believe The Buckle will continue to generate consistent long-term growth for years to come.

At the time this article was published Fool contributor Reza Handley-Namavar puts his money where his mouth is: He owns shares in The Buckle but in no other company mentioned in this article. The Motley Fool owns shares of Gap. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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