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Down 70% Since 2015, Can Buckle Inc Win Back Investors With Special Dividends?

U.S. apparel chain Buckle (NYSE: BKE) has seen declining revenue and profits as its mall-based stores struggle with shifting consumer preferences. Yet the company is still profitable and offers a compelling dividend yielding 6% as of this writing.

In this video from Industry Focus, the team digs into Buckle's recent results to determine whether the company can sustain its special dividends, on top of its quarterly payouts. Tune in to learn more.

A full transcript follows the video.

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This video was recorded on July 18, 2017.

Vincent Shen: Levi wrote, "What do you think of BKE? The Buckle is one of my favorite stores to shop at. The stock is down huge over the last year, and it's caused the dividend to shoot up to REIT territory. I know mall-based fashion is in danger, but BKE has a huge presence in denim, which never really goes out of style. With mall-based stores going out of business, I believe this one will take market share. Any thoughts on this one?" 

If you're unfamiliar with this company, Buckle is a U.S. apparel chain based in Kearney, Nebraska with about 465 stores. The top five states for store locations include Texas, Florida, Ohio, Michigan and Illinois. Buckle generated about $975 million of revenue in fiscal 2016. As Levi mentioned, the company is known for denim, which was its biggest product category last year, making up 42% of revenue, followed closely by tops at 31%. So there you have a quick lay of the land for Buckle. To address some of the main concerns and issues that Levi brings up, it's important to note as well that BKE's stock is down over 35% in the past 12 months, and well over 60% looking out two or three years. Asit, can you give us a rundown of how the company has performed recently? What are investors seeing in the financials and operations that they've punished the stock for these past few years?

Asit Sharma: Vince, investors haven't so much punished the stock as they're shying away from it a bit. You and I often talk about retail. Everyone is under pressure who exists in a brick-and-mortar environment. If you look back about five years at Buckle's revenue, they've lost about 13% over that time. That's a gradual decline. Investors also keyed in on the fact that to retain mall traffic, Buckle, like other of its competitors, has had to engage in promotions, that is price discounting, to keep those customers coming in. Net profits have also declined, they're down about 400 basis points over the last five years to just under 10%. So, this is a primary concern to investors. The chart does look ugly over that five-year time period. There are some positives, though, in Buckle. It's still profitable, it has pretty generous operating cash flow for its roughly billion dollars in sales. So it's not one of these stocks that is considered decimated by Amazon.com and the erosion of mall traffic that is losing money. The question is, when do these trends flatten out and begin to improve?

Shen: Sure. For me, personally, Levi, I have to say, you'll have a hard time convincing some investors of being confident in any retailers that ultimately rely heavily on mall traffic. Keep in mind that for Buckle, of their approximately 465 stores, nearly 400 of them are based in shopping malls. Regular listeners of the show have heard us talk about some of the struggles of store closures and consolidation for mall-based apparel chains, and even the anchor department stores, too. But Asit is totally right. There's a point where things do flatten out and potentially improve. But with the numbers, I think it's really important to keep in mind for this company -- look at recent comparable sales for Buckle, down 13.5% in fiscal 2016. And obviously, there's a toll that's been taken on the company's operating leverage. We've seen things trend down or in the wrong direction for profitability. Operating margins down 6.6 percentage points in just two years' time. Even online sales in fiscal 2016 were down 5.4% to just under $100 million, so that's about 10% of the company's total revenue. This weakness has continued into the first quarter of fiscal 2017. Comps again down 12.7%, online sales down another 7.2% for that period.

Another major bright spot that Levi mentioned in his question has to do with the company's dividend. The company made $0.25 quarterly payments last year. That alone would be a 6% yield as of the most recent closing price of $16.70. But the company has also been paying regular special dividends. In 2016, it was $0.75 per share. In 2015, it was $1 per share. In 2014, it was $2.77 per share. If you include those payouts, we're looking at yields well into the double digits. Very attractive, undoubtedly. Asit, do these look sustainable to you?

Sharma: Actually, they do, at least that $0.25 quarterly dividend. This is, in some ways, an old school company. By that, I mean it's been around since the late 40s, and they have a very conservative approach their stock valuation. The company realizes that since revenue is declining, it has to give shareholders a reason to stick around. If you crunch the numbers, you'll find that Buckle is actually allocating about 50% of its net operating income to this regular quarterly dividend of $0.25. As you mentioned, that share price has declined about 60% over the last five years, it's pushed up the yield to that 6%.

Then, management actually waits to see what net profits are at the end of the year. In December, they declared a special dividend which goes up to about over 90% of total net income. They're signaling to shareholders, if you stick around with us, we're going to give you an appreciable total return, especially if our stock turns around. So, Levi -- I have to say, what a great name for our listener to ask about a denim company -- there is something in here for you that is very intriguing in the the company is making a profit, it has positive cash flow, and it's very carefully managing that dividend. Now, Levi's question was, is this dividend sustainable? I think the quarterly dividend is definitely sustainable. It's a fraction of net income and it's a fraction of operating cash flow. The company has no long-term debt and it has a pretty strong balance sheet. The question is this special dividend. I think that's what might be in danger if the trends in revenue and net profit can't reverse soon, you'll see that special dividend compress because they're following their net income each year. So that's what you need to watch out for. But at 6% base yield, boy, this is starting to look a little interesting, everything considered.

Shen: Yeah, absolutely. Again, I'll reiterate the fact, on my end, I do believe the outlook for this company and the space that it operates in is not going to get any less competitive, it's not going to get any less challenging. That mall-based presence could prove to be an ongoing liability, in a way. But the profitability, the close attention that management pays to the dividend to keep investors in the stock, and the fact that the balance sheet and some of the other financials for the company are still quite strong, for me, I'm kind of on the fence. It's something that, Levi, we'll be watching here, too. We haven't followed this company very closely previously on Industry Focus, so we'll try to provide an update maybe in the next few months, next year. Thanks for the question, we'll definitely have to follow up with you soon.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.