The Buckle, Inc. (BKE), Abercrombie & Fitch Co. (ANF): Which Apparel Retailer Is Worth Buying Now?

Are you interested in investing in a debt-free retailer that has generated double-digit returns on invested capital in the past ten years? Moreover, this retailer has also consistently produced positive free cash flow during the same period. Well the, take a look at The Buckle, Inc. (NYSE:BKE). In the past twelve months, The Buckle has matched the S&P 500’s overall return of around 29%-30%.

Three reasons to be bullish on The Buckle

The Buckle is a retailer of casual apparel, footwear, and accessories for young people, operating around 440 retail stores in 43 states in the U.S. The majority of its revenue, or 46.4% of its total 2012 revenue, was generated from the sale of Denims while Tops (including sweaters) ranked second, accounting 30.9% of the total revenue. In the past five years, The Buckle, Inc. (NYSE:BKE) has managed to consistently grow the number of stores, from 387 in 2008 to 440 in 2009. It has also increased average sales per square foot from $401 to $475 during the same period. Interestingly, its comparable store sales growth has been consistently positive, but fluctuating in the range of 1.2% to 20.6%. In 2012, its comparable store sales grew 2.1%.

There are three things which impress me about The Buckle, Inc. (NYSE:BKE). First, the retailer has kept generating double-digit return on invested capital, staying in the range of 12% to 50.34% in the past ten years. In 2012, its ROIC was as high as 50.34%. Second, The Buckle employs no leverage at all in its operations. As of January 2013, it had $290 million in equity, $144 million in cash, and no debt at all. Third, The Buckle has generated increasing cash flow since 2003. Operating cash flow has increased from $53 million in 2003 to $221 million in 2012 while free cash flow has increased from $38 million to $191 million during the same period.

The market does not value The Buckle, Inc. (NYSE:BKE) quite expensively, as it trades at only 8.4 times EV/EBITDA. Compared to its peers Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO), The Buckle has the highest EV multiple but is also the most profitable among the three.

Are Abercrombie & Fitch and American Eagle Outfitters better buys?

Abercrombie & Fitch Co. (NYSE:ANF) is the operator of 912 stores in the U.S. and 139 stores outside the U.S., offering casual sportswear apparel, personal care products, and accessories under Abercrombie & Fitch, Abercrombie kids, and Hollister brands. In 2012, the retailer experienced a decline of 5% in its comparable store sales.Revenue came in at $4.51 billion, 8.4% higher than last year while net income rose 65.5% to $237 million, or $2.89 per share.

In 2012, Abercrombie & Fitch Co. (NYSE:ANF) generated $684 million in operating cash flow and $344 million in free cash flow. The retailer is trading at around $54.24 per share with a total market cap of $4.2 billion. The market values the company much cheaper than The Buckle, Inc. (NYSE:BKE) at only 6.14 times EV/EBITDA.

American Eagle Outfitters (NYSE:AEO) has the cheapest EV multiple of the trio. At $20 per share, American Eagle Outfitters is worth $3.9 billion. The market values the retailer at only 5.78 times EV/EBITDA. The company operates around 893 American Eagle Outfitters stores and 151 aerie stand-alone stores, offering high quality clothing and accessories products under American Eagle Outfitters and aerie brands.

What makes me interested in American Eagle Outfitters is its high comparable sales growth of 9%. In 2012, the retailer produced $475 million in operating cash flow and $380 million in free cash flow. Moreover, the retailer has been expanding its business overseas. In March, American Eagle Outfitters announced that it opened its first store in Manila. After four years of international expansion, it currently has 45 franchised stores in 11 countries including Russia, China, Hong Kong, Mexico, and Israel.

Of the trio, The Buckle, Inc. (NYSE:BKE) is the most profitable with the highest return on invested capital of more than 50.3% while the return on invested capital of American Eagle Outfitters and Abercrombie & Fitch Co. (NYSE:ANF) are much lower, at only 17.60% and 12.11%, respectively. The extremely high return on invested capital of The Buckle was due to the high net margin of 14.6%. However, American Eagle Outfitters seems to have the most efficient operations among the three with the lowest cash conversion cycle (CCC) of only 34 days, while the CCCs of The Buckle and Abercrombie & Fitch are 44 days and 77 days, respectively.

My Foolish take

Income investors might like American Eagle Outfitters the most with its highest dividend yield of 2.20%. The Buckle and Abercrombie & Fitch pay dividends with a similar yield of 1.50%. Personally, I like The Buckle the most with its extremely high return on invested capital. Moreover, investors might also consider American Eagle Outfitters with its lowest valuation and highest dividend yield.

The article Which Apparel Retailer Is Worth Buying Now? originally appeared on Fool.com and is written by Anh HOANG.

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