The Loop: Cheap, Stable, Experienced EBITDA Margin (NYSE: BKE)
The Loop, Inc. (NYSE: BKE) reports a significant amount of cash, which management could use to invest in marketing efforts. Having operated for many decades in the same industry, I assumed The Buckle would be able to predict fashion trends and successfully manage inventory. On the other hand, if The Buckle continues to invest in new technological innovations to assess its need for inventory, sales will likely remain relatively stable. I expect some risk due to the origin of the merchandise and the fact that The Buckle has only one distribution center. New policies, tariffs or regulations in other countries could be detrimental to the free cash flow margin. However, the current valuation seems too low given my free cash flow expectations.
The loop: a stable business model with great expertise in the clothing industry
Incorporated in Nebraska in 1948, The Buckle is a retailer of mid- to best-priced casual clothing and footwear for young men and women. Among the best-selling merchandise from The Buckle are jeans, tops and other accessories:
As of January 29, 2022, the company had 440 retail stores in 42 states, but in 2016 the company reached a total store count of 468 stores. In my opinion, the number of stores has been really stable for ten years. I believe the business model seems stable.
I don’t like that the loop doesn’t provide much guidance, but the estimates seem optimistic
I don’t like the fact that management usually doesn’t offer much information about the future. In one of the last quarterly publications, I could read that the management does not give any indication on the next quarterly sales:
It is our company policy not to provide any indication of current sales or project results for the next quarter. Source: press release
With that, if you don’t mind the lack of guidance, analysts think the company will likely perform well going forward. Estimates include median sales growth of around 4% to 5% and average sales growth of 1% from 2020 to 2024. The median EBITDA margin is also expected to be close to 24%. Additionally, The Buckle is expected to report net income of $226 million and $263 million in 2023 and 2024 respectively.
Most analysts haven’t given information on the company’s free cash flow, but I expect it to be positive like in 2019:
In fiscal years 2021, 2020, and 2019, The Buckle’s operating cash flow was $311.8 million, $227.4 million, and $130.7 million, respectively. Source: 10-K
The Buckle’s balance sheet includes cash on hand and a healthy asset/liability ratio
As of January 29, 2022, The Buckle reported $253 million in cash and cash equivalents and an asset/liability ratio close to 2x. In my opinion, The Buckle’s financial position looks quite healthy and poised to support the company’s growth.
La Boucle does not declare any financial debt. It finances its balance sheet through operating leases, which amount to approximately $289 million.
With a sufficient amount of marketing spend, my DCF model implied a valuation of $42 to $53
In my opinion, having been in the same industry for many decades, management knows very well how to invest in marketing efforts. In 2021, The Buckle invested nearly 1.3% of total revenue in digital marketing efforts. With cash in hand, I expect new investments in marketing to likely generate revenue.
In fiscal 2021, the company spent $16.9 million, or 1.3% of net sales, on targeted seasonal marketing campaigns, digital marketing efforts and in-store point-of-sale materials. A coordinated effort to amplify value and relevance through brand image, voice and experience is featured in store windows, seasonal and product-level signage throughout the store, as well as on digital commerce and experience platforms. Source: 10-K
In this scenario, I would also expect management to be able to pick and identify new trends and sign collaboration agreements with manufacturers. It is very relevant to note that The Buckle does not sign long-term agreements with private label suppliers or manufacturers. Accordingly, management may withdraw from non-performing manufacturers if necessary:
The company’s merchandising team shops and monitors fashion to keep abreast of the latest trends. The Company constantly monitors styles, quality and delivery times. The Company has not encountered any material difficulties with goods manufactured abroad. The Company does not have long-term or exclusive contracts with any brand manufacturer, private label manufacturer or supplier. Source: 10-K
Finally, in this scenario, I expect management to be able to achieve new technological innovations. For example, in the last annual report, The Buckle announced digital video surveillance for inventory management. New innovations could help management increase free cash flow margin.
The Company’s network is also structured to support additional features such as digital video surveillance and digital music content programming in each store. Source: 10-K
In a conservative scenario, I assumed a median sales growth of 4.9%, an EBITDA margin of 2.4.4% and a 2026 EBIAT of $271 million.
Additionally, with conservative changes in working capital, capital expenditures, and depreciation and amortization, free cash flow would be between $216 million and $295 million.
In the past, The Buckle has traded at around 4x and 5.8x forward EBITDA, so I think the exit multiple in 2026 wouldn’t be far off that figure. Moreover, with a discount of 8.96% and an exit multiple of 5.8x, the implied price would be close to $53.3. If we are more pessimistic, with a multiple of 4x, the implied price would be $42.7.
Loop could trade for $25 if foreign production sources fail
In the worst case that could happen to The Buckle, there would be problems with foreign producers of goods. Political issues, taxes, new tariffs or regulatory changes could increase The Buckle’s operating expenses and lower the company’s EBITDA margins. Therefore, if the media notices the drop in free cash flow expectations, it could lower the total valuation:
Loop faces a variety of risks associated with doing business overseas, including competition for facilities and quotas, political instability, possible new import legislation that could limit the amount of goods that can be imported, the imposition of tariffs, duties, taxes and other taxes on imports, as well as local business practices and political issues that can lead to bad publicity. The Company’s inability to rely on foreign production sources due to these or other causes could reduce the amount of inventory the Company is able to purchase, delay the time it takes to receive new goods and reduce margins on merchandise if comparable inventory is purchased from branded sources. Source: 10-K
The Buckle has a single facility in Kearney, Nebraska for merchandise distribution. In the last annual report, management offered a list of issues that could ruin Buckle’s supply chain. Therefore, failure to manage inventory could result in lower net sales:
The distribution function for all of the Company’s stores is managed from a single facility in Kearney, Nebraska. Any significant interruption in the operation of the distribution facility due to natural disasters, system failures or other unforeseen causes would impede the distribution of goods to stores, resulting in lower store inventory, reduced store sales and a reduction in business income. profitability. Source: 10-K
I assumed net sales growth of -20% in 2023, -5% in 2024 and 5% in 2026. I also think the company’s EBITDA margin could drop to around 20% in 2025.
In 2025, with a variation in the working capital requirement of 25 million and investments of approximately 22.1 million dollars, free cash flow would amount to 107.2 million dollars.
If we assume a 10% discount, the implied equity would be almost $1.25 billion and the implied price would be $25.
The loop does not buy back shares, but the company has done so in the past
Buckle is not currently acquiring its own shares, but I wonder if the company might do so in the near future. In the past, the board of directors has decided to acquire shares at around $14 per share. Note, however, that the company has a share buyback plan which was approved in 2008. If the Board deems the acquisition of shares necessary, it could do so:
The Company did not repurchase any shares of its common stock during fiscal 2021. During fiscal 2020, the Company repurchased 25,000 shares of its common stock at an average price of $14.83 per share . During fiscal 2019, the Company repurchased 4,552 common shares at an average price of $14.92 per share. As of January 29, 2022, 410,655 shares remained available under the Company’s current buyback plan for 1,000,000 shares which was approved by the Board of Directors on November 20, 2008. Source: 10-K
The Buckle has many years of experience in the apparel industry. Management has access to a significant amount of cash on hand, which could be invested in digital marketing efforts and new technological developments for inventory management. In my opinion, if The Buckle does not suffer from any problems with foreign manufacturers or producers, the stock price should be higher than its current figure. Even taking into account the substantial operational risks, the potential upside of the stock price is greater than the potential downside.