1. Buckle (BKE): We’re going long this puppy, as we think there’s 50% upside to $72 over the next 6-9-months. Like PLCE (below), this call is not like the multi-baggers that we tend to gravitate towards, but the fact is that is that we like companies with significant earnings upside and stock catalysts, and we think that BKE has both. A few points…
1) What is BKE? Historically it’s a high-margin (20-25%) fashion retailer with 442 stores that is as pure of a play on the denim cycle (40-50% of total sales) as you’ll find anywhere. And like it or not, post covid-we’re entering a new denim cycle, which is likely to last for 3+ years. After stalling for a few years due to mis-merchandising and an ebb in the denim cycle, it made major changes to its merchandise org that were just starting to take hold in 2019…and then COVID hit, which had a dramatic impact on profitability.
2) Big play on the de-urbanization trend given the location of its stores, while denim retailers like Lucky, Maurice’s, Fossil, and Stage Stores all closed down their operations. In other words, this is a rare situation in retail where demand is accelerating, and supply has been cut back materially. That should put prior peak levels of revenue per store of $515/sq ft back in play vs the trailing three-year levels of $385/ft. This is a change that is both well ahead of the consensus and is sustainable.
3) Due to a shift in the supply/demand balance, we should see EBIT margin revert back to 25%, which gets us to $5.10 per share in 2021, and compares to the Street at $3.56. We say ‘The Street’ lightly, as the name is only followed by 3 sell-side shops, with zero bulge bracket coverage. Of the analysts covering (and under-modeling EPS) absolutely no one has a BUY rating – Holds across the board. In other words, the bearish street is low by 43% on the EPS line this year, and we’re likely to see the upgrade cycle mirror positive earnings revisions.
4) This company is no stranger to special dividends…The ownership structure – most notably the CEO who owns 33% of the stock – lends itself to an annual payout when annual cash balance goes over $250mm. Based on our above-consensus EPS estimates (and cash generation), we should see a special dividend of $5-$6per share in the back half of this year. Importantly, that’s likely a recurring event at the margin level we’re likely to see in the new supply/demand environment, which suggests that the stock is currently trading at a 13% dividend yield.
5) When all is said and done, within 6-months we should start to see the Street talk about $6 in EPS power at this company, and a recurring $5-6ps special. Ultimately, we think the multiple will revert back to a historical 12-15x…or $72-$90. Looked at a different way, you’re buying the forward earnings stream at 6-7x ex-cash, which lends immense downside support.
The Bottom Line: If we’re wrong, you’re looking at 12x the ‘Street’ estimate of $3.50, or $42, which is 10% downside from current levels. If we’re right on the model, then this at a minimum 30% above current levels over 6-months, and a double over a year with a sizable special dividend along the way. Can’t find a risk-reward like that in retail (or anywhere) too easily these days. All-in, we’re long BKE at $46.
2. Children’s Place (PLCE): Taking this one to our Best Ideas Long list. We first went long PLCE on 1/18 at $57.27. So now why in the world would we make it a Best Idea at $99? Well, first off, our thesis was correct. Check. In Jan we said that a better full price selling climate after the industry had consolidated and the company had rationalized the butt-end of its money losing store base store would take margins up materially that would result in a one-two punch to revise earnings materially higher. And that’s exactly what happened. Back then, the Street was at ~$3.19 for the year, and is now sitting at $8.36. But we think that the company is tracking to blow past those numbers, and put up better than $10 per share this year. In fact, for the upcoming quarter, the Street is looking for $0.31 per share in 2Q, while we’re sitting here at $2.44, with a bias to the upside. That’s far better than any barometer of earnings beats that we’ve seen in the latest quarter of ‘blow away’ retail earnings. And then there’s the cash flow…This company is the poster child for companies that were debt-laden during the pandemic and now will turn around the balance to squeeze the 20% of the float that’s short the stock by repaying the ‘pandemic note’ and buying back stock at current levels, or higher. Is this a name like RH, DUFRY or CPRI that we think will be a multi-bagger over the next 2-3 years? No. We’ll get off this horse at some point – likely over the next year. But we think that the catalyst calendar is lined up to put this stock at $130-$140 over the next 6-9 months – and that kind of return over such short a duration is worthy of being on our Best Idea list.
