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.