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Bobby Raines's Analyst Insights

Options Analyst Writer
Bobby Raines
Author Bio

September 24, 2012 - Buckle Up for a Big Return

The apparel retail sector is a tough place to compete, especially in today's economy.  Back-to-school can be a bright spot in the calendar for some retailers, as even the thriftiest of consumers have to buy new clothes for kids who have outgrown last year's duds.

Selling clothes to young people brings its own challenges however, as rapidly shifting trends can leave retailers who move too slowly with a store full of unappealing clothes. 

Retail chains have to constantly evolve, reacting to a constantly-changing marketplace. The rise of big-box discount retailers like Wal-Mart (WMT) and Target (TGT) has taken one set of customers, but the decline of retail chains like Sears (SHLD) and J.C. Penney Co. (JCP) has created a space where retailers with smaller stores can target specific niches.

One such retailer is Buckle Inc. (BKE). The company sells casual clothing to men and women, and a big chunk of its sales are in denim, which is seemingly always in style. The company differs slightly from some of its competitors by selling a lot of brand-name apparel, as opposed to stores like Abercrombie & Fitch (ANF) or Gap (GPS), which sell its own brands.

Selling brand-name goods means the company must know what brands are hot, but the company does not have to work on developing clothing in popular styles like it would if it made its own clothes. This allows the company to stay nimble with respect to always having the latest fashions, which in turn gives the company the ability to increase prices. Customers will generally resist price increases, but this resistance is lessened when the items in question are the newest, most desirable fashions.

With a P/E ratio of about 14, the stock seems undervalued when compared to some of its peers. Consider Abercrombie & Fitch (ANF) which has a P/E ratio of about 37, or American Eagle (AEO) which has a P/E of about 24.

The company is steadily increasing its reach. It plans to expand its 439 stores by 10 stores during the current fiscal year, while also remodeling 20 stores.  Same-store sales growth is expected to be modest this year. S&P expects about 2%, which isn't amazing, but it is steady.  S&P also expects the company's margins to widen in fiscal 2013, going to 22.6% from 22.5%.

September retail sales figures will be released on Oct 15. Buckle usually reports monthly sales figures near the end of each month. This should be a big month for the company as shoppers stock up on back-to-school clothes. The company reported a 4.5% year-over-year increase in August with total sales rising by 5.7%. One would expect that August's strong numbers would continue into the month of September.

Consider a bull-put credit spread as one way to play Buckle. A December bull-put spread between $40 and $37.50 yields a credit of 45 cents. That's a 21.95% return or 21.95% on an annualized basis (for comparison purposes only.) This trade makes a full profit so long as the stock is above $40 at December expiration, giving this trade more than 13% downside protection.

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