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Express, Inc. (EXPR), The Buckle, Inc. (BKE): Do These Retailers Deserve to Be This Cheap?

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If you’re searching for new investment ideas, a great place to start is by looking for companies with high earnings yields and strong returns on invested capital.

Express Inc (EXPR)

Why? Because companies with strong returns on invested capital typically possess solid competitive advantages and demonstrate a knack for creating shareholder value by reinvesting capital in their businesses. When such companies also sport high earnings yields — meaning they earn a lot for the price we have to pay — they can potentially represent great opportunities for patient, long-terminvestors to beat the market.

With this in mind, that’s why clothing retailers Express, Inc. (NYSE:EXPR) and The Buckle, Inc. (NYSE:BKE) have finally piqued my interest.

The numbers
Before we dig further, though, let’s take a quick look at both companies’ key metrics next to two of their publicly traded peers:

Express Buckle The Gap Inc. (NYSE:GPS) Abercombie & Fitch
Market Capitalization $1.5 billion $2.2 billion $16.5 billion $3.6 billion
Debt-to-Equity Ratio 0.66 0.00 0.43 0.03
Current Ratio 1.65 2.15 1.76 1.84
P/E Ratio (TTM) 11.0 13.6 15.0 14.5
Estimated Forward P/E Ratio 10.2 12.7 12.0 11.2
Dividend Yield N.A. 1.7% 1.7% 1.7%
Payout Ratio (TTM) N.A. 24% 16% 22%
Return on Capital 26.74% 42.95% 22.7% 6.3%

Source: YCharts and Fool.com. TTM = trailing 12 months

Of course, at first glance and based on the numbers above, there are no glaring problems with Gap or Abercrombie & Fitch Co. (NYSE:ANF); to the contrary, while Abercrombie’s return on capital may leave a bit to be desired, both stocks appear to be reasonably priced with sustainable dividends supported by relatively healthy underlying businesses.

Right off the bat, however, both Express, Inc. (NYSE:EXPR) and Buckle look pretty darn cheap based on their trailing price-to-earnings ratios of 11 and 13.6, giving them decent earnings yields of 9.1% and 7.4%, respectively. Coupled with their even more impressive returns on capital of 26.74% and 42.95%, these two stocks start to look downright mouthwatering.

Express, for one, has manageable debt levels based on its relatively healthy debt-to-equity ratio of 0.66 and current ratio of 1.65. The Buckle, Inc. (NYSE:BKE), however, takes the cake here given its sterling balance sheet, which boasted zero debt and total cash and investments of nearly $180 million at the end of its most recent quarter — and that’s even after Buckle forked out $254.6 million in dividends in 2012, including a massive $4.50-per-share special dividend last December.

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