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L Brands vs. Buckle: Which Stock Looks Better Pre-Earnings?

Zacks

L Brands Inc. LB and The Buckle, Inc. BKE are scheduled to report earnings on May 17 and May 18, respectively. Last quarter, L Brands pulled off the sixth-straight quarter of positive earnings surprise, while Buckle delivered a negative earnings surprise for the fourth consecutive quarter. However, since both companies experienced poor comparable sales recently, it is important to determine which of these will end up reporting better numbers than the other in their upcoming earnings releases.

Both L Brands and Buckle have a Zacks Rank #3 (Hold), but let’s see which stock is better positioned in terms of fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Other important earnings slated for this week includes, Wal-Mart Stores, Inc. WMT and Foot Locker, Inc. FL.

Clothing and Shoe Sales Move Upward

Additionally, the U.S. Department of Commerce reported that retail sales increased 0.4% in April after disappointing results in the prior two months. Total retail sales decreased from 473.5 billion in January to 472.5 billion in February and increased by only 0.1% to 473.1 billion in March.


In March, clothing and shoe sales rebounded after a sluggish performance in February. Clothing and clothing accessories sales increased from 21.1 billion in February to 21.5 billion in March. Also, shoe store sales rose from 737 million in February to 791 million in March.

Price Performance

Over the last year, the retail apparel industry as a whole and the two stocks under consideration, have performed poorly. While the Retail – Apparel And Shoes industry has fallen 8% over the last one year, L Brands has slumped 25.3%. Buckle dropped 24% over the same period, relatively lower than L Brands.

Current Ratio

This is the most important liquidity ratio, which is widely used by retail apparel companies to measure their ability to meet short-term obligations using current assets. In the last one year, the current ratio for L Brands has been 5.7%, above the sub-industry’s level of 4.4%. Meanwhile, Buckle has a negative current ratio of 0.2%.

Return on Asset

Return on assets (ROA) is one of the key financial ratios for retail apparel companies as these rely heavily on inventory to create revenues. Although, such companies have a lower level of net profit, an above-average ROA denotes that one is generating earnings by effectively managing its assets.

A negative ROA indicates that the company has reported losses for the period in question. Coming to L Brands, ROA for the trailing 12 months (TTM) is -5.8%, which is comparatively better than the Retail – Apparel And Shoes industry’s level of -8.1%. Buckle has net ROA TTM of -23.9%, vastly inferior to that of L Brands and sub-industry.

Valuation

The most appropriate ratio to evaluate these two apparel makers is EV/EBITDA. This metric is usually used to compare two stocks within the same industry. It is superior to other metrics such as P/E because it is not affected by the different capital structures of the two companies.

Coming to the individual EV/EBITDA ratios, L Brands is the one that lags behind with a ratio of -15.1 compared with -0.3 for the Retail – Apparel And Shoes industry. On the other hand, Buckle has an EV/EBITDA ratio of only -9.5, which is slightly better than L Brands.

Dividend Yield

In the last one-year period, the dividend yield for L Brands has been higher than the broader sub-industry. While Retail – Apparel And Shoes industry offered a yield of 8.7%, L Brands returned 34%. In comparison, Buckle has a dividend yield of 31.5%, which falls short of L Brands.

Earnings History, ESP and Estimate Revisions

L Brands posted fiscal fourth-quarter earnings of $2.03 per share, beating the Zacks Consensus Estimate of $1.90 and coming in above the company’s initial guidance of $1.85–$2.00, primarily owing to favorable tax rates. However, the company reported lower-than-expected quarterly revenues and issued a weaker guidance for fiscal 2017. (Read More: L Brands Tops Q4 Earnings, Stock Hurt on Tepid View)

Meanwhile, Buckle reported earnings per share of 74 cents that missed the Zacks Consensus Estimate of 78 cents and declined 34.5% year over year. The company’s net sales of $280 million were in line with the Zacks Consensus Estimate but declined 15.7% year over year. (Read More: Buckle Q4 Earnings Miss Estimates, Revenues in Line)

Considering a more comprehensive earnings history, L Brands delivered positive surprises in all the prior four quarters, with an average positive earnings surprise of 9.4%. In comparison, Buckle delivered negative earnings in all the trailing four quarters, with an average negative earnings surprise of 6.3%.

When considering Earnings ESP, L Brands has a 0.00% ESP, while Buckle has an ESP of -5.9%. At the same time, L Brands’ earnings estimate for the current year has increased by 0.2% over the last one month, compared with Buckle’s increase of 1.2%.

Conclusion

Our comparative analysis shows that Buckle holds an edge over L Brands when considering price performance and EV/EBITDA ratio. However, when considering current ratio, return on assets, average positive earnings surprise and a more comprehensive look at its previous earnings performance, L Brands is clearly a better stock.

What clinches the case for L Brands is the fact that it offers a stronger dividend yield than Buckle. This is why it may be better to bet on L Brands over Buckle as they prepare to report earnings results this week.

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