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Tickers in this Article: BKE, URBN, ARO, JCG, ANF
I first wrote about specialty retailer Buckle (NYSE:BKE) in February 2008. What really impressed me about the Nebraska retailer wasn't the double-digit same-store sales numbers it was putting up, it was the operating margins consistently delivered in good times and bad. Between 2003 and 2007, the company increased operating margins by 350 basis points to 14.9% despite generally flat same-store sales numbers.

In 2008, same-store sales began to improve (the stock took flight as well) and continued growing until January of this year when it had its first drop in more than two years and the stock lost all momentum. Year-to-date it's down 10% and 25% in the last three months alone. I suspect it will fall some more. The picture appears bleak and that's why it's the perfect time to buy. When others are running out the door, you want to be running in.

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The Right Decision
Sterne, Agee & Leach analyst Margaret Whitfield suggested in early February that Buckle could have achieved positive same-store sales in the month of January if it had offered promotional pricing to move merchandise. That's very true. However, management felt protecting its price-point was more important than top-line revenues. As I've discussed in past articles, same-store sales don't necessarily tell the entire story and if used inappropriately can hide potential profitability concerns. No such problem exists at Buckle. Despite just a 2.8% increase in same-store sales in its first quarter, its operating profit increased by 10.7%. How did they do it? With a 4.2% increase in the comparable stores average price per piece of merchandise and a 4.3% increase in the comparable stores average number of units sold per transaction. Without holding the line on price, the 5.3% drop in the number of transactions at comparable stores would have led to a lower operating margin. Profits are why you are in business.

The Past and Present
To put into perspective the value proposition that exists with Buckle's stock at present, I'll compare its valuation metrics today with those from 2003. I think you'll see that there is a glaring difference. In 2003, its operating margin was 11.4% on revenues of $401 million. In the trailing 12 months through May 1, its operating margin was 22.3% on revenues of $913 million. Today, it theoretically produces an additional $100 million in operating profit from the same level of revenues. Even though it's doubled its operating margin in the past seven years, its valuation has fallen. In 2003, it had a price-to-earnings ratio of 15.3 compared to 9.5 today. I believe a minimum valuation of $42.69 or 15.3 times earnings applies here. This would mean at current prices it's trading at a 38% discount. The real value is potentially much higher when you compare it with its competitors.

Buckle and Competitors

Operating Margin
Operating Margin
2003 P/E
Buckle (NYSE:BKE)
Urban Outfitters (Nasdaq:URBN)
Aeropostale (NYSE:ARO)
Abercrombie & Fitch (NYSE:ANF)
The Future
Despite the slowdown in same-store sales, Buckle has a lot to look forward to in the coming years. It's been through extended periods of tepid sales in the past and done just fine in terms of profits. It's a conservative company expanding at a steady pace of 20 store openings per year for the foreseeable future. With 25 remodels also on the books in 2010, it'll spend no more than $41 million on store construction, paying for themselves in less than two years. In comparison, rival Urban Outfitters plans to open 45 stores across its three banners and Aeropostale 55 across two. It's not in a race to open the most stores and that's a good thing. In the first quarter, its online sales grew 24% year-over-year to $14.4 million. That's just 6.7% of total revenue. It can do better, especially in Canada where it has no retail presence.

Bottom Line
Investors who can look past recent same-store sales declines are buying into a great company at a fair price, which is exactly what Warren Buffett looks for in a stock. (To learn more, see Analyzing Retail Stocks.)

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