Retail Mystery Solved: Why the Buckle's a Buy

With consumer confidence perking up and summer just around the corner, it may be time to go shopping -- for a retail stock. After all the belt-tightening in recession, my sense is that there's plenty of pent-up demand, and many Americans, like the "Real Housewives of New Jersey" now appearing on Bravo, are itching to get back to the malls.

I’ve been eyeing one company since March, when it emerged as a finalist on one of the stock screens I ran. (See "3 Stocks on My Shopping List." At the time, I'd never heard of the Buckle, and, once I determined that it caters to the fickle teenage market, I put it aside. 

Still, it stuck in my mind. Every time I've looked at a list of top-performing stocks over periods of 10 years, there's a retail stock on it. (Wal-Mart (WMT), of course, remains one of the legendary good investments.) I made a trip to the Buckle web site. There were lots of blue jeans and cute young people. In other words, nothing distinctive, at least to my middle-aged eyes. I thought I might check out a store, but discovered there are none in the New York City area, which is one reason I'd never heard of the chain.

So, with the Buckle mystery deepening, I called on my secret weapon: the sisters of Pi Beta Phi.

My niece, Maggie, is a Pi Phi at Franklin College outside of Indianapolis, which is prime mall and Buckle territory (there are 14 Buckle stores in Indiana). Buckle started as a single store in Kearney, Neb., where it's headquartered. It now has more than 390 outlets in 40 states. I'd never thought of Kearney as a trend-setting fashion capital, but I'm sure Nebraskans know their blue jeans. In any event, Maggie enlisted her sorority sisters, who fall squarely into the Buckle demographic.

Here's some of what they had to say:

"I shop there and I know they work on commission so they are always really attentive and friendly and they always end up bringing you so many other cute jeans and shirts to try on...and then you end up buying more than you planned on."

"I shop there to buy Silver jeans. They are the only brand that fits me, and last many years. I also like the type of clothing they have, which is different from other places like AE [American Eagle Outfitters], Hollister, A&F [Abercrombie & Fitch]. I also like their jewelry. I feel the clothes they sell are definitely worth the price.

"The Buckle has jeans that fit me and hold their shape for a really long time. They might be expensive but when you have the same pair of jeans a year later that is not even six dollars a month."

"I shop there because the jeans fit me the best. But the prices are ridiculous."

Much of this should be music to a retail investor's ears. The Buckle's appeal seems to be fit, selection and service, not some quirky fashion trend, like Crocs footwear. The merchandise isn't cheap (the company says it sells "medium to better priced" apparel) but still represents value to these customers. They end up buying more than they planned on.

The formula seems to be working. Last week Buckle reported an 18% increase in same-store sales for April, its 21st consecutive month of double-digit gains. And this during the worst recession since the Depression. Buckle is gaining market share (Abercrombie same-store sales were down 22% and American Eagle's were down 5% in April) and is planning to expand into the competitive but potentially lucrative Northeast market.

Given the recent stock market rally and Buckle's strong performance, it's not surprising that Buckle shares have gained 43% since I mentioned the stock in March. It's not the bargain it was then. But its forward price/earnings ratio of 13 is lower than both Abercrombie's (ANF) (17) and American Eagle's (AEO) (20). It also pays a dividend with a current yield of 2.34%. Buckle strikes me as a good candidate for my strategy of simultaneously buying the stock while selling covered calls. (See "Is It Too Late to Buy Stocks?")

I wouldn't go so far as to call Buckle the next Wal-Mart of retailing, but it's clearly on a growth trajectory. If it can emerge from the recession with this kind of momentum, it could be the retail success story of the decade.