The Gap Inc. (GPS), The Buckle, Inc. (BKE): Heartland Meets Hipster – A Tale of Retail Outperformance

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So The Gap Inc. (NYSE:GPS) reported some fine and dandy numbers on Feb. 28 with a 61% rise in net income   and raised its dividend by 20%. Investors will be tempted to fall into the Gap with such numbers but another retailer that may be a better idea is reporting on Mar. 8. A much smaller rival, The Buckle, Inc. (NYSE:BKE) , has a lower P/E of 13.35 and a slightly higher yield of 1.80% compared to Gap's 14.54 P/E and 1.50% yield. A retailer of young men and women's clothing, including some private label apparel and accessories, they carry many of the hottest brands for men, women, and kids. Buckle has been a stalwart name over the last few years with almost annual special dividends, fine execution, and a reasonable expansion plan.

The Gap Inc.Why Buckle over Gap?

The Gap Inc. (NYSE:GPS), which also owns Old Navy and Banana Republic, seems to have a lot going for it, granted, but as an investor it leaves me cold. It is omnipresent and ubiquitous and is close to being a consumer staple of clothes. Analysts expect 9.37% five year EPS growth for The Gap Inc. (NYSE:GPS), close to the 9.00% predicted for Buckle. The Buckle, however, has penetrated underserved markets for young people's retail all over the US with its own niche jeans and much wanted name brands. They are not as edgy as an Urban Outfitters, Inc. (NASDAQ:URBN) but for those who can't get to a big city Buckle is a very viable alternative.

Thats not to say they are located in cow pastures; for example, the one closest to me is in a higher end and very busy mall in a smaller city in Maryland, midway between Baltimore and D.C. There's a huge young adult demographic in that area that the Buckle can serve. Three years ago 20% of their stores served geographic area of 20,000 or less in population. It is gradually growing to larger but still underserved markets. Currently, they have 433 retail operations in 43 states.

Old-Fashioned Values But New-Fangled Strategies

Buckle, founded in 1948 and headquartered in Lincoln, Nebraska, must puzzle big city analysts who are used to evaluating big city headquartered retailers that buy inventory nine months out and are fairly deaf to customer feedback. Not so at Buckle, the company gets inventory daily and customer feedback is considered crucial. They also can switch inventory from location to location rapidly.

This should be heartening to investors who shy away from teen retail as too fickle a sector because this inventory strategy keeps buyers and management in the loop as to what's hot and what's not. This inventory strategy is why I think analysts may be underestimating their EPS growth rate.

The customer service at Buckle, Inc. (NYSE:BKE) stores is extraordinary as a shopper, even a teenager, can arrange for a personal denim fitter and experience a level of concern and retail expertise usually available only at a Nordstrom or Saks. And did I mention free alterations?! This is a concept so old-fashioned that it's almost as dated as doctors' house calls and the milkman. This customer service and ability to move inventory like Nordstrom has been implementing at its stores is why gross profit margin at 44.14% is higher at Buckle than Urban Outfitters and The Gap Inc. (NYSE:GPS). Yes, another old fashioned value makes a buck.

But the company isn't afraid of the future as they have been expanding their web and social media presence dramatically making their merchandise available to 90 countries online. Their web site and blog look as contemporary as Urban Outfitters' but without the sullen looking models, sort of Happy Heartland meets Hipster.

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