I'm looking at a retailer, The Buckle (BKE) - for those not familiar, Buckle is a medium-high priced apparel retailer catering to the teenage/early adult market, big focus on denim (46%) and their private label brands (34%), 452 stores all in the U.S.
Retail traffic/sales have been weak across the board recently, and for Buckle 2013 SSS are basically flat y/y (up 0.4%) and were weak in the second half along with the industry as a whole. But thinking long-term it looks like a wonderful business to own - management is all promoted from within and many have been there 30+ years, Chairman and CEO own 40% of the company, with consistent execution looking back 10-15 years, they have grown very selectively, with any excess capital returned to shareholders, and returns are very good (return on capital of ~40%, return on assets 28%). Valuation is very reasonable (EV/EBIT 7.5x, no debt) and below many other retailers. But margins are key - EV/sales is 1.7, while most similar retailers are 1.
The thing I can't figure out is if their high margins are sustainable. Operating margins have held mostly steady since 2010 at around 22.5% which is way above any of the comps I have looked at - all are 10% EBIT margin. Margins at BKE have basically been climbing for a decade, doubling from ~11%. Digging into the past, some young adult retailers have put up >20% margins for a short time - for example, American Eagle in 2006-2008, Chico's '03-'05. But I can't find a mid-tier apparel company which has sustained such high margins. I looked at Coach, and they have sustained >30% EBIT margin but you're talking about a very different product.
I'm just curious if anyone has an opinion on BKE, and for those who are more experienced with retail, advice on how to evaluate whether or not these margins are sustainable? If they are, I think it's a great buy and hold.. management seems incredible and very focused on denim and their private-label products, and keeping quality/store experience high, maintaining a premium image (no discounting ever), and returning capital to shareholders. All these things suggest higher than average margins, but they are blowing everybody else out of the water right now.
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