table of contents – spring...

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Table of Contents – Spring 2007

Executive Summary 2

Business and Industry Analysis 5

Five Forces Industry Analysis 7

Industry Competitive Advantage Analysis 16

Firm Competitive Advantage Analysis 19

Accounting Analysis 20

Key Accounting Policies 20

Accounting Flexibility 23

Actual Accounting Strategy 25

Quality of Disclosure 26

Potential Red Flags 27

Undo Accounting Distortions 38

Financial Analysis and Forecasting 40

Liquidity 41

Profitability 50

Capital Structure 57

SGR and IGR 63

Financial Statement Forecasts 64

Income Statement 64

Balance Sheet 66

Statement of Cash Flows 68

Cost of Capital Estimation 71

Valuation Models 75

Appendix 86

References 98

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Executive Summary The Buckle

Investment Recommendation, Overvalued-Sell as of April 2, 2007

BKE=NYSE $35.34 52 Week Range=$22.25-$37.37 Revenue 2006 (ttm)=$530.07M Market Capitalization=1.09B Shares Outstanding=19,656 Dividend Yield= $0.80 (2.20%) 3 Mth Daily Avg Trading Vol=135,697 Percent Institutional Ownership=29.1% Book Value per Share (mrq)=$9.79 ROE=17.30% ROA=13.90% Estimated 5 yr. EPS Growth Rate= 1% Cost of Capital Est. R2 Beta Ke Ke Estimated 12.03% 3-month .4% .35 6.57% 1-year .5% .37 6.68% 5-year 1.4% .48 7.26% 7-year 1.7% .51 7.42% 10-year 1.9% .53 7.52% Published .7 BKE kd= 8.16% WACC= 10.5% Altman Z-Score for 2005 = 6.11

EPS Forecast FYE ‘06 ‘07 ‘08 ‘09 ‘10 ($) 2.44 2.66 2.89 3.12 3.37 Ratio Comparison BKE Industry Avg. Trailing P/E 50.19 27.03 Forward P/E 29.71 16.00 M/B 37.69 3.85 Valuation Estimates Actual Price (as of 4/2/07) $35.34 Ratio Based Valuations D/P 88.88 P.E.G Ratio 77.21 P/EBITDA 12.19 P/FCF 174.42 Ent Val/EBITDA 9.49 Intrinsic Valuations (g=0) Actual Discounted Dividends 2.45 Free Cash Flows 45.35 Residual Income 15.42 LR ROE 21.62 Abnormal Earnings Growth 6.22

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Recommendation-Overvalued Firm

Company Industry Overview

The Buckle, Inc. started business in 1948 under the name of Mills

Clothing, Inc. as a men’s clothing store. After extensive growth, the company

changed its name to The Buckle, Inc. in 1991, and changed to focus to men’s

and women’s clothing and accessories. The Buckle has maintained a steady

growth in the apparel industry, which is dependent on consumer spending. The

Buckle uses strategies such as differentiation and the use of multiple brands to

draw customers in. Having a wide variety of brands in one store is something

that other companies, such as Abercrombie and Fitch do not do. The two main

competitors in this industry are Abercrombie and Fitch and Pacific Sunwear. The

Buckle creates a competitive advantage by using what is known as the Hybrid

strategy. They offer superior product quality and personalized customer service,

as well as use tight cost control systems to become a cost leader in the apparel

industry.

Accounting Analysis

Managers of firms have the ability to disclose important investor

information within financial statements. This information can dramatically affect

the way a company is valued. The Buckle uses aggressive accounting policies,

which allow for flexibility in reporting revenue recognition, inventory, and lease

agreements. Using ratios, as well as reading the 10-K, provides insight on the

company’s past disclosure, as well as provides clear information on the firm’s

outlook of the future.

Financial Analysis and Forecasting

Computing financial ratios helps to give a better view of the company’s

performance compared to its competitors. Liquidity ratios provide information

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about the firm’s ability to meet short term obligations. Profitability ratios offer

several different measures of determining the firm’s success at generating

profits. Capital Structure ratios refer to numbers in the balance sheet and give

insight on how the firm is being financed.

Forecasting a firm’s financial statements for a ten year period can be a

tedious process, but can be useful to the company in that it shows an outlook of

where the firm can be in the future. The forecasted numbers may be offset by

the changes that occur in the industry and economy. The forecasting calculations

can be a key factor in valuing a company, so the numbers need to be as

accurate as possible.

Intrinsic Valuations

Determining if a price is overvalued or undervalued can be done using

five methods. The methods used are; discounted dividends, free cash flows,

residual income, long run return on equity, and abnormal earnings growth. For

all of the methods, it is necessary to use either the cost of capital and the

weighted average cost of capital using regression and weighted averages of the

cost of debt. Not all of the methods will portray an intrinsic price that is

reasonable to the stated market price, so it is important to note that sensitivity

analysis is imperative in the valuation process. The Altman Z-Score is used to

determine a company’s credit worthiness. A score of 1.8 or below can be a sign

of nearing bankruptcy. A score of above 2.7 means there is a low percentage of

hitting bankruptcy.

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Business & Industry Analysis

Company Overview

The Buckle, Inc. started business in 1948 under the name of Mills

Clothing, Inc. as a men’s clothing store. In 1967, they focused their product line

to men’s denim and changed their name to The Brass Buckle. After extensive

growth, the company changed its name to The Buckle, Inc. in 1991. The Buckle

then focused on both men’s and women’s apparel and accessories. Corporate

headquarters, manufacturing, and distribution facilities are located in Kearney,

Nebraska to provide a central location of distribution to the 341 stores in 38

states (as of April 11, 2006). In 2005, The Buckle expanded an average of 20

additional stores per year and projects 17 new openings in fiscal year 2007

(fiscal year ending February 3rd) (BKE 10-K, 2005).

The Buckle, Inc.’s merchandise mix includes denims, casual bottoms, tops,

sportswear, outerwear, accessories, and footwear. The company currently offers

high quality key name brands and private labels in order to meet the demand of

their target market of men and women ages 12-24. The company focuses on

using quality merchandise selection and customer service to compete with

numerous competitors in the apparel industry.

The company has maintained a steady growth (Figure 1) in revenue and

net income (finance.yahoo.com). In fiscal 2005, The Buckle, Inc. achieved record

levels of both sales of profitability with a 20.1% increase in net income. Net sales

increased 6.4%, while comparable store sales only increased 1.4% (The Buckle

2005 Annual Report).

Personally, we view The Buckle as a company in a period where they are

trying to build an identity with customers. When aiming to please your target

market, steps taken to achieve this need to be dead on. With a niche target, The

Buckle must be in continuous conversation with their consumer base. Looking at

their 10-K filed April, 13, 2006 (pg. 5) they give a description of their marketing

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and advertising operations toward this goal. To us it sounds like they are

heading into this goal with sound planning to achieve this aim and are

attempting to keep pace with the growth seen in online sales worldwide. They

are still viewed as a brick and mortar operation. This will be instrumental to their

future as a company in a field of competitors.

It appears at the surface that The Buckle is attracting and convincing

certain customers that their company is where they can subscribe to a certain

fashion appeal and demographic mindset. Bombarding consumers with an

explicitly stated conformist view of what you should strive to look like from the

age 12 to 24. This can hook some but also turn away potential sales revenue.

The way we view them, The Buckle is operating in the “specialty retail”

industry which includes numerous firms, some of which target similar market

segments. The Buckle faces fierce competition in this industry. This will be

evaluated in the following section.

Figure 1

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Five Forces Industry Analysis

The evaluation of the industry a firm competes in is necessary before

progressing to the examination of the said firm. Industry analysis is the first step

in valuing a business because it is inadequate to look at the financial

performance of a firm without understanding what factors guide the decision

process in a specific industry. The five forces model is used here to establish an

in depth understanding of the apparel store industry, addressing the issues of

rivalry among existing firms, threat of new entrants, threat of substitute

products, the bargaining power of suppliers, and the bargaining power of buyers

(customers). Most of the discussion will be concerned with how each force

relates to competitive factors in both the internal and external environments.

Figure 2 summarizes the main conclusions of the apparel store industry and

more specifically the specialty retail market.

Figure 2

Force: Level:

Rivalry among Existing Firms High

Threat of New Entrants High

Threat of Substitute Products High

Bargaining Power of Suppliers Moderate

Bargaining Power of Buyers High

Rivalry among Existing Firms

The apparel industry competes on dimensions such as price, customer

service, product quality, product selection, and location; which leads to a great

amount of competition. There are several factors pertaining to rivalry among

existing firms that lead to a highly competitive industry.

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Concentration

The degree of concentration in an industry is determined by the number

of firms and their relative sizes. With numerable sources of competition coming

from direct competitors (i.e. Dillard’s, Abercrombie & Fitch, Pacific Sunwear, and

Urban Outfitters) as well as other department stores, local/regional specialty

retail stores, mail order, and online merchandise sales; it is clear that

concentration of firms is low in the industry. There is a wide variation of firm

sizes in the apparel industry, and depending on their chosen strategy, firms can

compete and succeed with limited resources (See Figure 3). With such a range of

firms competing, the industry is fragmented and battles on several dimensions.

The low level of concentration leads to an ever present high level of competition

between existing firms.

Figure 3 (in thousands $)

More specifically when we look at the specialty retail industry and the

companies we view as direct competitors, due to their target consumer segment,

Total Assets

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

Buckle Abercrombie &Fitch

Dillards PacSun Urban Outfitters

Companies

200420052006

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we can see that market share numbers based on net sales is influenced by

consumer perception and what the target market views as “in.” Abercrombie &

Fitch clearly had the edge in fiscal year 2006 (Figure 4).

Figure 4: 2006 Market Share in specialty retail industry

Market Share

11%

59%

30%BKE

ANF

PSUN

Industry Growth

The industry operates on evolving trends, and falling behind according to

your target market can be detrimental to the sustainability of a firms operations.

The apparel industry will have a continuous existence because it meets a basic

human need. Fluctuations and business tactics are important to look at in

quarterly (seasonal) timeframes.

Firms do not necessarily have to make the goal of obtaining market share

from competitors a priority to grow. In an industry that rises and falls with

consumer spending levels (depending on economic conditions), success is

determined by the ability of a firm to adapt to and learn about the external

environment. Figure 5 presents the market share percentages over the past

three years for the direct competitors The Buckle, Abercrombie & Fitch, and

Pacific Sunwear. Using both Figure 3 and 5 we can see that assets do not always

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translate into market share. Growth in this industry is highly determined by

consumer spending; a category that comprises around 70% of the US economy

(Bloomberg.com).

There is a lot of potential growth with rising populations and a strong

economy, but when the economy is in a recession consumer spending slows,

which leads to contractions in the specialty retail market. With the industry so

dependent on consumer spending levels, competition is high in order to make

sales.

Figure 5: Direct Competitors Market Share based on Net Sales

Market Share

0.0%

20.0%

40.0%

60.0%

80.0%

Year

Per

cent

age

BKE 13.3% 12.1% 10.7%

ANF 53.8% 52.0% 59.5%

PSUN 32.8% 35.8% 29.7%

2004 2005 2006

Switching Costs

Competing firms in this industry can never let it slip from their sight that

switching costs for customers is extremely low. Switching costs are defined as

the propensity of a customer to move from one product or competitor to another

(Palepu et al. pg.2-3). Customers are the ones ultimately deciding if a firm sinks

or swims. Firms, both large and small, have to use marketing concepts and

abilities to their advantage. Building a perceived value in customers’ minds is

how firms attract a numerous customer base. Specialty retailers have to work

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toward building that value from the initial moment consumers see the

characteristics of their firm.

Since this industry competes on so many dimensions, price, one of the

more important factors to consumers, must be competitive. But differentiation is

what provides growth in the apparel store industry. Switching frequency from

firm to firm could potentially be lowered in specialty retail by putting focus

towards marketing efforts which are specific to certain consumer groups. This

allows customer retention rates to increase and help guide buyers decisions. In

an industry with low switching costs, competition is high when trying to attract

customers.

Differentiation

According to Michael Porter, differentiation is the strategy where

organizations attempt to distinguish their products or services from others in the

industry. For firms with fewer economic resources than the leaders in the

industry, separating themselves from their abundant competitors is an essential

leading goal. Using strategies such as focused differentiation, contending on a

specific buyer group, firms can effectively utilize resources. With apparel being

very similar in functionality, but differing on aesthetics, customers show the

market that has got it right for the time period.

Within specialty retail, differentiation should be the leading focus for firms

to create value, both tangible and intangible, for customers. This aspect leads to

high competition among existing firms, especially in a market where a learning

organization excels.

All of the factors discussed concerning rivalry among existing firms lead to

high competition in the industry for market share. Established firms are in an

environment of constant change and have to recognize all the external threats,

which is important to the discussion of new entrants.

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Threat of New Entrants

The apparel industry is a highly competitive market, which can lead to

successful profits. The success ratings of certain companies inspire others to

enter the business and challenge their positions. Threat of new entrants is the

possibility that new firms will enter the industry. New entrants can put pressure

on profits of existing firms, and force prices to go down. Analyzing the threat of

new entrants involves examining barriers to entry, and the reactions of existing

firms to new competitors.

Economies of Scale

When entering a new industry, economies of scale plays an important role

in determining profitability measures. When large economies of scale exist in an

industry, it is necessary for new entrants to obtain a substantial amount of

starting capital to be able to compete with existing firms. Looking back to Figure

3, we can see how assets can play a role in achieving economies of scale, but

considering the fluctuations seen over the past three years this isn’t necessarily a

predictor of market power. In the apparel industry however, it is possible for

companies of both large and small scale to succeed. What determines the profit

margins for these companies is customer demand. The most successful retailers

and manufacturers have been able to excite customers by developing an

innovative product by age and demographic group, as well as focusing on a

defined niche. Specialty retailers can use differentiation strategies such as

customer service, and a focused target market to build a customer base.

The challenge for the domestic clothing industry is to find ways to shift

the basis of global competition from manufacturing cost, where the United States

is at a comparative disadvantage in all but the most capital-intensive products, to

the speed of supply, where proximity to markets gives the U.S. industry an edge.

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First Mover Advantage

The apparel industry has a low first mover advantage because the

industry has been in existence for quite sometime. There is not one certain

company that sets standards for others to follow.

In today’s competitive retail environment, competing on low prices isn’t

always the answer. Learning to adapt to changes in the external environment

becomes very important to gain market share. Offering extended customer

service, customer loyalty programs, and developing knowledgeable employees

are things that differentiate companies from their rivals.

Access to Channels of Distribution and Relationships

In the apparel industry, efficient distribution between suppliers, stores,

and customers is a necessity. Access to suppliers and specific distribution centers

vary from year to year, although it is important to have relationships with

suppliers to whom the firm associates with the most. New entrants have the

option to either incur high fixed costs and develop their own distribution or use

existing third party carriers, such as UPS and FedEx. Using carriers allows new

entrants to enter the market quickly and smoothly, avoiding substantial fixed

costs.

Legal Barriers

In the apparel industry, there are not many legal barriers that forbid a

company from entering the market. Companies should consider possible legal

issues, such as trademark infringements and the use of brand named labels.

Encouraging brand image and marketing status, creating trademarks and

patents, offering a reasonable price, and creating alliances with associated

products are ways to lessen the threat of new entrants in this industry. It is

important to differentiate a new firm in order to draw market share from those

that already exist.

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Threat of Substitute Product

When a product or service is non-substitutable, firms can not easily

imitate competitors. In the apparel industry, products can be easily substituted

because all clothing achieves the same basic function. To be non-substitutable,

firms have to create a perceived value in fashion and convenience in location.

The men’s and women’s apparel industry competes primarily in fashion, quality,

price, and service. Large companies such as Abercrombie and Fitch, The Gap,

and The Limited dominate this industry utilizing their own private brands and

recognition as a foundation for competition. Some companies like The Buckle

and Pacific Sunwear hold a niche in the industry by offering a wide variety of

brand name as well as private brand merchandise and providing exceptional

customer service. Small companies in this industry must rely on their “value-

added” services such as free alterations, gift wrapping, and frequent shopper

cards in order to keep customer retention. This small sector of the industry also

concentrates on site location and lease terms to beat out their competition. With

many of the stores located in malls, firms compete to sign leases in heavy traffic

areas.

The topic of substitutes is also related to switching costs and the

consequences associated with it. Growth can be greatly swayed when a firm’s

competing strategies are diminished by their competitors, so specialty retailers

must have in place a learning organization that can adapt to changes in its

external environment. With innumerable substitutes, a highly competitive

industry follows.

Bargaining Power of Suppliers

The idea of bargaining power of suppliers is important in an industry

where self producing (backwards integration) and importing firms (outsourcing)

compete. In the specialty retail industry, the overall bargaining power of

suppliers is moderate. Name brand suppliers have a bargaining power over

apparel retailers because of the designer labels they carry. The name brand

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products are substantial sources of revenue for retailers. The retail stores rely on

name brand designer labels to offer the latest fashion trends that consumers are

willing to spend generous amounts of money for. Without good relationships with

name brand suppliers, apparel retail stores that don’t carry only private labels

would lose a great deal of income.

On the other hand, retailers that have extensive sales and numerous

stores globally or nationwide can be venues for substantial revenues for name

brand suppliers. Without their merchandise in these stores, the bottom line for

supplying companies can be adversely affected a considerable amount.

Most apparel retail stores that carry outside labels don’t have extensive or

long-term contracts with suppliers because of the dynamic nature of the

industry. Low switching costs help out retailers when fashion trends change and

new designer labels are sought after.

Retail stores that outsource their private label brand manufacturing have

high bargaining power over potential suppliers because they have many to

choose from. It is not uncommon for retailers to outsource to multiple suppliers

for one private label, depending on the scope of the merchandise.

Apparel retailers can help out relations with name brand suppliers with the

information they offer. Many retailers have merchandising teams in fashion

hotspots, such as New York or Los Angeles, that keep track of the latest trends

and share their knowledge with designer labels.

Considering all these aspects of buyer/seller relationships in the apparel

industry, we believe the overall bargaining power of suppliers is moderate. With

this in mind, the strategy to outsource or to integrate your company in the

specialty retail industry could be a deciding factor in the long-term sustainability

and the response time you can provide to customers. A company in this industry

can make choices to limit the power of suppliers as can be seen in some of the

new and upcoming global fashion firms, such as Zara (zara.com).

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Bargaining Power of Buyers

High buyer bargaining power is achieved with the ability for customers to

choose where and from whom they purchase products. The power of buyers is a

factor competing firms must always be aware of. The fashion market is

constantly changing. Every season, trends change and it is essential to stay up-

to-date with customers’ preferences. Meeting customer demand is influenced by

all the competing factors discussed and particularly with firms in such close

locations; buyers have an easier option of switching without time constraints.

Relative bargaining power is moderate in the industry because there is no single

buyer with a large quantity of sales. A high number of competitors with

substitute products are in the industry to capture the remaining market share.

Industry Competitive Advantage Analysis

With this extensive analysis of the specialty retail industry we can

confidently conclude and categorize the industry. Analysis of an industry is only

useful if you apply it to understanding how a firm can succeed with its strategic

choices. The following is the classification of what strategies create a competitive

advantage in the specialty retail market. Understanding strategic management in

this industry will aid in the analysis of the firm of concern, The Buckle.

Strategic Choices

From a strategic standpoint, competitive advantage can be achieved when

a firm’s strengths meet four requirements: valuable, rare, difficult to imitate, and

non-substitutable. These could be met by creating something valuable from the

customer’s prospective, establishing rarity in the industry, acquiring

resources/capabilities that are difficult to imitate, and providing a product/service

that is not easily substituted. All four are difficult to achieve and sustain in any

industry. This holds true especially in the apparel industry.

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Firms in the apparel industry create a competitive advantage by

competing on both costs and differentiation strategies. This leads to a hybrid

industry.

Key Success Factors

To be successful, firms have to create products and/or services that are

valuable to its customers. We believe this to be the main competing dimension in

the apparel industry. Value is what attracts consumers to certain companies and

their core competencies must align with demand. This can be met with extensive

market research in segments and regions.

Having to compete on both price and differentiation, firms can look at

achieving a competitive advantage with many tactics. As far as cost is concerned,

economies of scope is important to reaching a mass market; and with a wide

market, low-cost distribution is vital to success. Also for cost success in the

industry, efficient production is necessary. In the current global economy,

outsourcing is what most firms are turning to for production.

Looking at differentiation, the key success factors for a firm to address

are first creating a product with superior quality. Quality is a significant feature

on a consumer’s perspective on a product. Specialty retailers must make a

product that meets quality standards that are established in the market to even

start to contend. Along with quality, variety is essential to success. Variety in

product lines such as denim, footwear, clothing, and accessories becomes very

important to consumers. Having a variety of products allows firms to meet a

wide range of consumer tastes. Another way firms can differentiate is through

better-quality customer service. Service makes a big impact on a shopper’s

experience, and firms want a positive association with their business when

thought of.

Extensive investments in brand image and market research can help a

company generate a differing product/service in an industry that competes on so

many dimensions. Brand image is an important factor for firms that carry

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established brand names and their own private label. Carrying established brand

names with positive images can bring an instant encouraging reputation to firms

and could potentially help build the perception of their private labels. Market

research is important to this factor so that firms’ decision making is consistent

with buyer behavior. Smaller firms can compete with limited resources (Figure 3)

and still obtain sales in this highly competitive market (Figure 6). We included

Dillard’s for partial comparison concerning sales to understand the potential of

some of the brand labels carried by some of these companies. This can be

attributed to what we touched on earlier with limiting or altogether eliminating

supplier power through integration from production, marketing, to distribution.

Figure 6 (in thousands $)

Net Sales

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

The Buckle Abercrombie andFitch

Dillard's Pacific Sunwear Urban Outfitters

200420052006

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Firm Competitive Advantage Analysis

Historically, the Buckle has attracted fashion conscious young men and

women by offering the latest trends through name brand designer and private

labels. They provide this merchandise with a variety of fits, finishes, and styles.

They cater to customers’ needs through unique services such as free gift

wrapping, free alterations, layaway programs, and frequent shopper incentives.

These exceptional services are a key aspect of the company’s strategy to

distinguish their name from others in the retail apparel industry. Variety and

quality is a strength The Buckle has and if really developed could be a key

success factor over their competitors.

The Buckle strives to present the latest fashions trends in their stores

through research and development projects, including merchandising workshops

in fashion centers such as New York and Los Angeles. The company uses this

information to continually change the selection of merchandise to represent the

newest casual trends, aiming to decrease response and lead times. By

decreasing lead times The Buckle can have a closer relationship to their

customers.

The Buckle seeks out primary locations for their new expansions and

puts a large emphasis on the environment inside each store. They provide similar

layouts in every store to make the different lines of merchandise easy to find,

and lighting is set to enhance the displays of new selections. The company also

strives to offer their private label brand on the same level of quality and fashion

as designer label merchandise. We believe The Buckle seeks a competitive

advantage in the industry mainly through differentiation. They offer superior

product quality and personalized customer service. However, the company can

compete as a cost leader with the low cost outsourcing of manufacturing for

their private label, along with their savings from using United Parcel Service

(UPS) in the distribution of their products. Overall, we conclude that The Buckle

has a hybrid strategy for competitive advantage.

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Accounting Analysis

The accounting analysis is used to determine how the firm’s accounting

procedures describe the business in reality. Accounting includes summarized,

submitted statements and reports which are used to make operating, financing,

and investing decisions. By identifying the key success factors and recognizing

the degree of flexibility, the firm is able to determine the appropriate accounting

policy to use. Under GAAP, estimates and assumptions are required to be made

by management. Because estimates are used, errors can be made. It is

extremely important for managers of the company to ensure that accounting

disclosures are accurate and provide a clear picture of what the company is

doing and what the future holds.

Key Accounting Policies

The preparation of financial statements requires that management makes

estimates and judgments that affect reported amounts of assets and liabilities, as

well as sales and expenses during the fiscal year ending January 28, 2006. Using

the strategic success factors identified for this industry, we can relate these to

key success factors in the critical accounting policies. The following are the

factors we consider important because they could potentially affect reported

results of operations.

Revenue Recognition

In an industry where revenue is a key factor for growth, The Buckle

creates value to the customer by offering several methods of payment for

merchandise, providing a higher level of customer satisfaction. Due to the

payment possibilities offered, The Buckle can choose how they report these

numbers. There are many options to recognize revenue for financial statements

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and the company’s policies add appeal to the customers through variety. The

policies also allow the firm the ability to position revenue in their financial

statements to their advantage. This issue alone makes for a very strong key

accounting policy, and indirectly affects The Buckle’s competitive advantage.

Like most companies in the retail industry, sales are recorded at the time

of purchase. The down payment made when merchandise is placed on layaway

is recorded as a current liability, and is recognized as a sale at the time the

customer makes the final payment and picks up the merchandise. Revenue is

not recorded when gift certificates and gift cards are sold, but rather than the

card or certificate is used for merchandise. This helps to not overstate the

income of the company. A current liability (unearned revenue) is recorded at the

time of the purchase. Customer returns could potentially exceed historical

average returns which can reduce future net sales and earnings (BKE 2006

10-K).

Inventory

Policies on accounting for inventory are significant to firms in the retail

industry. Inventory is greatly affected by the firm through its competitive choices

on cost efficiency and distribution. Firm’s using the strategic choice of backwards

integration and lower lead times are at an advantage. Expected performance is

represented by customer demand and not managerial exercitations of product

mix. The Buckle attempts to lower deviation of inventory costs by keeping

expected values consistent with actual performance by positioning merchandise

with the most demanding market segments. Inventory policies relate to the

firm’s attempted competitive advantage through cost leadership.

The Buckle values inventory at the lower cost or market. Cost is

determined using average cost method, which approximates first in first out

methods of inventory. Adjustments are made based upon estimates to account

for outdated merchandise and markdowns. Outdated inventory is revalued to

determine if it can be resold in the current market. The estimation of inventory

22

varies from actual results due to future economic conditions, fashion trends,

consumer demands, and the competitive retail market (BKE 2006 10-K).

Operating Leases

The disclosure of operating leases on financial statements is indirectly

influenced by The Buckle’s attempts to build competitive advantage through

selecting locations while also saving on costs. We believe this is important

because the company is smaller than their direct competitors and the strategic

choices they make affect their growth and yearly net income. By optioning to use

operating leases, they can direct these numbers benefiting their bottom line.

The Buckle’s stores are located in high traffic shopping malls. Operating

leases are used for reporting each of the locations on financial statements. Using

operating leases are an industry standard seen through out the firms located in

mall locations. This allows the liabilities stated on the books to be understated,

providing a more attractive view at their current financial statements.

Most of the company’s stores have lease terms of approximately ten

years, and generally do not contain renewal options. The company

improvements are made by improvement allowances and rent holidays which are

provided in the lease agreements. The improvements allowances allow The

Buckle to update the space in order to establish the shopping environment

customers expect to see when entering the Buckle stores. Amortization begins on

the date of possession. Straight line basis is used in order to minimize expenses.

For improvement allowances and rent holidays, the company records a deferred

rent liability on the balance sheet and amortizes the deferred rent over the terms

of the leases as reduction to rent expense on the income statements (BKE 2006

10-K).

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Accounting Flexibility

Accounting flexibility refers to the ability of a company to use its financial

resources to adapt to change. Flexibility allows management the opportunity to

relate their statements to the changing environment. Managers with flexibility

can use strategies to provide data that is more informative on the economies of

their firm. Choices can be constrained by accounting standards, but firms in the

specialty retail industry can identify key success factors which can lead to

flexibility. All firms have to make choices on certain accounting policies. This

gives firms the opportunity to disclose data to their advantage. The amount of

accounting flexibility differs greatly from one company to another, depending on

how in-depth management wishes to disclose its information. The specific

policies set forth by GAAP are required for the financial reporting of all U.S.

companies, but they are flexible enough for management to use them to their

advantage.

Revenue Recognition

The Buckle, like most retail companies, generally recognizes revenue at

the time of sale. Therefore, there is usually a great deal of flexibility when gift

cards, layaway, and merchandise returns are taken into consideration. Gift cards

are recorded as unearned revenue at the time of sale, and not recognized as

actual revenue until they redeemed for merchandise. A liability is recorded for

unredeemed gift cards and amounted to $5.5 million on January 28, 2006, and

$4.7 million on January 29, 2005. Recording the sale of gift cards as unearned

revenue does not have a significant impact on total sales since they are

recognizing it as a liability to the company. The Buckle recognizes estimated

merchandise returns as a liability based upon a historical average return

percentage assuming most returns occur within nine days of the original sale.

The liability is referred to as an allowance for sales returns account which

amounted to $308,000 for January 28, 2006, and $277,000 for January 29, 2005

24

(BKE 2006 10-K). Other main competitors in the retail industry, Abercrombie &

Fitch and Pacific Sunwear, also recognize all revenues with the same policies.

Inventory

Managers have the ability to choose between several inventory methods;

LIFO, FIFO, and Average Cost. The Buckle values inventory at the lower of cost

or market, where cost is determined using an average cost method to estimate

first-in, first-out (FIFO). Merchandise obsolescence and markdowns could

potentially affect market value, so management must make adjustments to

inventory and cost of goods sold, based on shrinkage estimates, in order to

maintain a fair market value (BKE 10-K). Management continuously reviews the

inventory levels during each of the markdown periods and decides which

products are becoming aged and which will continue to hold future value. The

managers’ projections may sometimes vary from actual results, either positively

or negatively, according to current economic fluctuations, consumer demand, or

industry trends. Abercrombie, an industry competitor, also uses the average cost

method to value inventory. Some companies, like Pacific Sunwear, can use the

FIFO method for internal reporting purposes to minimize expenses that apply to

inventory. Although none of The Buckle’s close competitors use the LIFO method

of inventory valuation, companies can choose to do this for tax and external

reporting purposes. The variety of choices managers have for inventory valuation

give them a high degree of flexibility in this area of reporting.

Operating Leases

Leaders in the retail industry can choose to recognize their lease

agreements through operating or capital leases. Many companies choose

operating leases to minimize short term expenses and make the company’s

liabilities appear more attractive to investors. Companies that use capital leases

have a greater amount of liabilities in early stages of the lease life. Capital leases

have an advantage in the final stages of the lease due to the nature of the

25

amortization process. The Buckle leases its retail stores under operating leases.

Generally, retail lease terms include tenant improvement allowances, rent

holidays, and rent escalation clauses. The Buckle records these as a deferred

rent liability and amortizes the liability over the terms of the lease through

straight line depreciation as a reduction of the rent expense on the income

statement. Close competitors, like Pacific Sunwear and Abercrombie & Fitch, use

operating leases and similar methods for reporting lease terms as well. Having

the option to choose the style of leases gives managers flexibility in reporting

liabilities and expenses.

Actual Accounting Strategy

Using the prior discussion of accounting flexibility, we can ultimately

determine the actual strategies The Buckle uses pertaining to the key accounting

policies. Each of the factors leads to the company being either conservative or

aggressive with their accounting policies. Conservative accounting policies allows

managers opportunities for “income smoothing,” which may prevent analysts

from recognizing poor performance in a timely fashion (Palepu page 3-12).

Aggressive accounting policies can lead to more informative data, but it can also

lead to greater data distortion which managers use to make the company seem

more attractive to investors. The Buckle uses aggressive accounting policies to

create flexibility in reporting revenue recognition, inventory, and lease

agreements.

We believe The Buckle is aggressive with revenue recognition because

they offer several options to purchase merchandise and estimate merchandise

returns based on historical data. Flexibility is high when The Buckle recognizes

revenue with respect to gift cards and gift certificates. Recognizing revenue

when the card or certificate is redeemed and putting it under current liabilities at

the time of purchase allows the company to establish an expiration date and

having the potential to become cash instead of being exchanged for

merchandise.

26

From what is stated on the company’s 10-k, portions of the overall

inventory strategy are conservative while others are aggressive. By choosing to

valuate inventory through average cost, we think The Buckle is conservative

because reported assets are not skewed to alter cost or for tax purposes.

However, the company is slightly aggressive by management’s ability to predict

inventory levels. If merchandise underperforms, it can be repositioned to a

different market segment to lower fiscal year inventory data at individual

locations. This also creates value by negating the purpose of lowering the

potential worth of the merchandise. With this in mind, the company’s overall

inventory accounting strategy is aggressive.

Using operating leases to disclose lease payments on financial statements

is an aggressive tactic The Buckle uses that is consistent with the industry. As

stated earlier while discussing the flexibility of the firm’s lease strategy, expenses

and long term liabilities are minimized affecting yearly net income.

Considering these key areas of The Buckle’s accounting policies, we

conclude they have an overall aggressive strategy for reporting important

information to stockholders, investors, and the public.

Quality of Disclosure

Managers of firms have the ability to disclose important investor

information within financial statements. These disclosures can be through

footnotes, as well as management discussion. The quality of disclosures can

greatly affect the transparency of financial reports strengthening managers’

ability to project the firm in a positive light. Quality of disclosure can be looked at

by two means of measure: qualitative and quantitative. Qualitative pertains to

how detailed the management discussion is, and the supplemental footnotes

they include in the statements. Quantitative measures use both revenue and

expense diagnostics to interpret the underlying economic conditions of the firm

and its competitors. It is necessary to compare the firm to its competitors for an

27

accurate interpretation of accounting disclosure. By comparing these diagnostics

for firms in the same industry, it becomes easy to recognize any manipulations.

Qualitative

First looking at the qualitative aspect, we turn to the extent management

discusses strategy and economic consequences pertaining to The Buckle’s

current and future capabilities. With relation to the key accounting policies

identified earlier, management briefly, but adequately, discusses which segments

create revenue for the company, how inventory control systems and distribution

are in place, and what the aim is with property location and lease disclosure.

They also touch on the fact of the volatility of the specialty retail industry,

providing a clear picture for the unknown of sustainable operations. In contrast,

compared to the identified competitors, ANF and PSUN, the supplemental

footnotes fall shortly behind on the level of detail of internal conditions that are

leading to the current performance. The Buckle leaves interpretation of the

numbers mostly up to investors and analyst.

The Buckle breaks down clothing segments more, while ANF and PSUN

have economies of scale by operating with several store names (influencing store

numbers in Figure 7 on the following page) and disclosing the strength of each

but do not break down the revenue created from differing product lines.

Breaking down the percentage of sales that each product line consumes is an

aggressive and voluntary disclosure for the company to show their strengths with

brand names and private labels. They also discuss the average retail price

changes of their major product lines that influenced a $1.61 increase in the

average retail price of merchandise. To us this seems to be voluntary to further

prove the companies goal of shifting with consumer trends.

Furthering the discussion on segment reporting, there is an industry

standard of disclosing average sales per square foot and stores open at the end

of the period, both good measures of visible growth for shareholders. Figure 7

allows us to put into perspective the size of The Buckle compared to the

28

identified competitors. Reporting this information is important for The Buckle

because it proves the company can compete and see increases concerning their

main revenue indicator: sales. As stated before, The Buckle’s operations are

smaller than many of its competitors, so to see increases with modest expansion

is promising of the managements understanding of their external environment.

Trying to push to hard for large, companywide growth can be a trap in the

specialty retail industry. You must verify you’re not the flavor of the month and

are attracting customers who are loyal and understand the idea of “classics.”

With consistent and moderate (compared to direct competitors) increases in

store openings; we believe their management would be proud to disclose this to

the public because it could essentially be interpreted as a step toward avoiding

volatility in The Buckle’s operations.

Figure 7 (respective company 10-K’s)

2001 2002 2003 2004 2005 BKE Average sales per square foot $279 $274 $274 $291 $298 Percentage change -1.80% 0% 5.80% 2.30% Stores open at end of period 295 304 316 327 338Difference from year to year 9 12 11 11 ANF Average sales per square foot $401 $379 $345 $360 $464 Percentage change -5.80% -9.86% 4.35% 22.41% Stores open at end of period 491 597 700 788 851Difference from year to year 106 103 88 63 PSUN Average sales per square foot $321 $330 $363 $374 $371 Percentage change 2.73% 9.09% 2.94% -0.81% Stores open at end of period 718 791 887 990 1105Difference from year to year 73 96 103 115

In their 10-K filed April 23, 2006, The Buckle’s management identifies two

areas that were contributing to material weaknesses in their internal control over

financial reporting. The first of which was the lack of appropriate procedures for

29

disclosing lease agreements in accordance with GAAP. The other was identified

deficiencies related to information technology. They go into depth on what steps

and in what time frame those steps were taken to alleviate the weaknesses.

Knowing this, comparisons of past 10-K’s are important to how these

weaknesses either helped the company perceive their operations in a better light

or that the improvements help the company only from herein out.

Looking at the past 10-K’s it is apparent that the company has attempted

to have consistency with the framework and information disclosed within each,

while using the same auditing firm located in the same city as the companies

central headquarters (conflict of interest?).

For companies in industries that sales are heavily influenced with seasons,

just as in the specialty retail market, it is significant that firms disclose quarterly

accounting data. This data has the potential of shedding a considerable amount

of light on The Buckle’s ability to capitalize on their target market which

increases consumption of their merchandise in the back-to-school and holiday

seasons ( Figure 8: third and fourth fiscal quarters). We can see the significance

of disclosing this information to the public since it also relates to the overall

economic conditions of the country that ultimately influences spending habits.

Figure 8 (BKE 2006 10-K)

BKE QUARTER FISCAL 2005 First Second Third Fourth Net sales $105,547 $104,130 $138,067 $153,357 Gross Profit $37,249 $36,247 $56,249 $64,293 FISCAL 2004 Net sales $94,774 $96,848 $133,722 $145,593 Gross Profit $30,662 $29,794 $52,191 $58,332

Overall this feature of disclosure is promising for the accounting quality

and depth provided in their annual 10-K’s concerning revenue.

30

We are, in summary, pleased with the quality of disclosure of their

business and financial performance with the only concern being the ease of

extracting relevant information for investors compared to their competitors.

Supplemental footnotes should enhance, not slow the upfront analysis of serious

investors. The aspect that does require thorough analysis is that of quantitative

measures, which we will now cover.

Quantitative

The quantitative measures of quality of disclosure include the key financial

ratios which evaluate a company’s revenues and expenses. The following chart

(Figure 9) lists the revenue and expense diagnostics for The Buckle and its

competitors. The ratios are calculated for the years 2001-2005. These ratios are

important in measuring the efficiency of a company in either turning their

inventory, sales, assets, accounts receivables or payables. This also determines

the ability of the company to meet its short term and long term obligations.

31

Figure 9

Revenue and Expense Diagnostics (All sales in thousands)

The Buckle

2001 2002 2003 2004 2005 Sales $387,638 $401,060 $422,820 $470,937 $501,101

Sales/Cash from sales 0.999 0.998 1.005 0.996 1.006

Net sales/inventory 7.139 6.68 6.914 6.892 7.291 Net Sales/AR 191.805 288.53 117.941 249.569 103.877

Asset Turnover 1.66 1.26 1.19 1.16 1.34 CFFO/OI 0.926 0.994 1.203 1.145 0.998

CFFO/NOA 0.145 0.188 0.679 0.842 0.809

Pacific Sunwear

Sales $685,352 $847,150 $1,041,456 $1,229,762 $1,391,500

Sales/Cash from sales 1.000 1.000 1.002 1.002 N/A Net sales/inventory 6.686 6.863 7.049 7.024 6.468

Net Sales/AR 225.148 290.518 200.511 151.281 N/A Asset Turnover 1.928 2.119 1.616 1.814 1.723

CFFO/OI 1.318 1.102 1.256 0.841 0.934 CFFO/NOA 0.277 0.412 0.553 0.440 0.484

Abercrombie & Fitch Sales $1,364,853 $1,535,757 $1,707,810 $2,021,253 $2,784,711

Sales/Cash from sales 1.003 0.994 0.998 1.015 1.001

Net sales/inventory 12.53 11.06 10 9.57 7.681 Net Sales/AR 66.72 150.94 237.29 53.52 66.53

Asset Turnover 1.771 1.559 1.424 1.457 1.555 CFFO/OI 0.859 0.938 0.851 0.667 0.835

CFFO/NOA 0.638 0.745 0.631 0.592 0.538

Revenue Diagnostics

Quantitative measures are broken down into two diagnostic categories:

revenue and expense. In this section we breakdown The Buckle’s measures of

revenue, providing an internal and external view of their abilities to create profit

32

and consistently perform based on comparisons to direct competitors. Each ratio

is presented with its respective graph.

Sales/Cash from sales

0.96

0.97

0.98

0.99

1

1.01

1.02

1.03

1.04

2001 2002 2003 2004 2005

Years

BucklePacSunA&F

The ratio Sales/Cash from Sales is the comparison of cash-balance at the

end of a period to the sales revenue of that period. The smaller the ratio, the

more cash is collected from sales. As you can see from this graph, all three

companies remained steadily close to 1. In the retail industry this is to be

expected because most of the sales are an immediate transaction. For sales on

credit the company receives payment from a card company (Visa and

MasterCard) within a very short period of time, so there is no delay of payment

with cash or credit within this industry. The delay of payment is placed on the

card holder and the card company instead of on the retail store.

33

Net Sales/Inventory is the annual net sales divided by the inventory value.

This ratio represents how quickly inventory turns over. The industry norm is

7.98. Ratios below the industry norm suggest high levels of inventory. High

rations could indicate product levels insufficient to satisfy demand in a timely

manner. With the issue of low sales/cash from sales, cash is collected in a timely

manner; in return you would hope to see inventory levels remaining low. From

this graph we can see that The Buckle and Pacific Sunwear have been successful

in maintaining an industry norm. This is probably contributed to management’s

success in predicting consumer demand while in a growth period over the past

five years. A&F seemed to have problems at the beginning of the decade with

inventory calculations relative to net sales, but have recovered in recent years.

Net Sales/Inventory

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005

Year

Ratio

BucklePacSunA&F

Net Sales/Accounts Receivable

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005

Years

Rat

io

BucklePacSunA&F

34

The Accounts Receivable Turnover Ratio measures the annual turnover of

accounts receivable. A high turnover ratio shows a short period of time between

sales and the collection of cash. Even though the ratios seem to be fluctuating a

lot, if we look at the days supply of receivables, each of the three firms are still

operating within one business week. Since most of the accounts receivables in

the retail industry consist of payment from card companies, the receivable

turnover will remain high.

Expense Diagnostics

Now that we have covered the revenue aspect of diagnostic measures we

can proceed to expenses. Expenses diagnostics can show a certain level of

efficiency a company has with their assets and how those assets are supported.

This is important to compare to competitors because it can provide insight to

their potential for growth and sustainability in operations. Just as with the

revenue portion each ratio is presented with a graph for ease of interpretation.

Days Supply Of Receivables

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005

Years

Day

s

BucklePacSunA&F

35

Asset Turnover determines a company's ability to use assets to generate

sales. This ratio may vary depending on the amount of assets on hand in

comparison to net sales. A low ratio shows that a company holds too many

assets which aren’t generating sales. A higher figure means that the assets play

a greater part in achieving net sales. From this graph we can make the

assumption that the recession of 2001 played a major part in the declining asset

profitability. The trend seemed to be fairly consistent among the three firms

throughout the five years. Pacific Sunwear showed an unusual increase in 2002

compared to the economic conditions of the time, but sharply declined in the

next fiscal year. The Buckle, a much smaller company than Pacific Sunwear and

A&F, realizes a smaller asset turnover because they have fewer assets.

Asset Turnover

0

0.5

1

1.5

2

2.5

2001 2002 2003 2004 2005

Years

Ratio

BucklePacSunA&F

36

Cash flows from operations/operating income is a representation of the

amount of cash generated through operations. Ratios near one are a good sign

for the company’s cash expenditures creating workable income in operations.

Fluctuations will occur but the ability to consistently produce a favorable ratio, as

seen with Abercrombie & Fitch, is a good sign concerning expenses. The Buckle

appears to be able to back cash flows from operations with operating income.

CFFO/OI

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2001 2002 2003 2004 2005

Years

Ratio

BucklePacSunA&F

CFFO/NOA

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

2001 2002 2003 2004 2005

Years

Ratio

BucklePacSunA&F

37

It is necessary to understand the quantitative measures of a given firm to

provide depth of current and the potential of future financial performance.

Management has the ability to guide and skew numbers to their favor, ultimately

manipulating interpretation of actual performance. A fact covered in our

discussion of red flags and accounting distortions.

Potential Red Flags

From the discussion of quality of disclosure there appear to be a few

potential red flags pertaining to The Buckle’s accounting statements. First of

which is the recognition of internal material weaknesses with disclosing lease

agreements and information technology. The Buckle’s management believes that

the distortions were corrected for the financial statements 2003-2006. This is

potential only because it is managements’ opinion and distortions could still be

present in the data. But with the material discussed in the 10-Ks, we are not able

to find further distortions in their internal control processes.

Another red flag is the potential for conflict of interest with the auditing

firm. Deloitte and Touche, LLP as well as The Buckle headquarters are located in

Kearney, Nebraska. If The Buckle wants to portray themselves in a positive

position, then the auditing firm can approve the financial statements. This makes

The Buckle, the auditing firm, and Kearney, Nebraska look more economically

appealing to the future growth of the city.

A final potential red flag which we came across is the use of operating

leases for disclosing lease agreements. For larger firms, converting operating to

capital leases can be a substantial factor in their balance sheet data by

understating liabilities. Also with this red flags lies another. Level of disclosure

with full statement line items is of concern. Without complete grasp of each

balance sheet item you must rely on inference and work toward measuring

changes indirectly. Our over all stance though is, with The Buckle being a smaller

company than their direct competitors, the conversion of operating to capital

leases would not be significant to the overall statement of financial position.

38

Undo Accounting Distortions

Looking at The Buckle’s projected minimum lease payments required

when converted to capital leases, the projections differ by $65,463,000 (Figure

10). With this relatively small difference with operating leases over the next 10

years compared to capital leases, it can be expected that current disclosure of

operating expenses will not be substantially understated on the balance sheets.

The firm still uses this distortion to their advantage but it is also the industry

trend to disclose lease payments in this manner. Although not a good argument

for these practices, it allows investors to expect the same from The Buckle’s

competitors.

Figure 10: Operating vs. Capital Leases (in thousands)

FV PV

factor PV End Bal PVCL FVCL

2006 $33,161 0.9479 $31,432 128137 $22,308 $23,539 2007 $31,222 0.8985 $28,051 103963 $20,947 $21,145 2008 $28,903 0.8516 $24,614 80778 $19,617 $21,834 2009 $26,050 0.8072 $21,028 59171 $18,342 $22,723 2010 $20,554 0.7651 $15,727 41871 $17,153 $22,418 2011 $8,382 0.7252 $6,079 35792 $16,202 $22,340 2012 $8,382 0.6874 $5,762 29379 $15,868 $23,083 2013 $8,382 0.6516 $5,461 22613 $15,515 $23,811 2014 $8,382 0.6176 $5,177 15475 $15,143 $24,518 2015 $8,382 0.5854 $4,907 7944 $14,750 $25,195 2016 $8,382 0.5549 $4,651 0 $13,899 $25,047

$190,180 $152,889 $189,744 $255,653

Looking at their current statements, specifically total current obligations

(Figure 11) we can see the effect this difference has, totaling $65,473,000. On

their 10-K filed April 13, 2006, they state the payment due within one year on

this amount as $33,696,000. If we use the same percentage of payment

(17.44%) we get a revised number of $45,113,200, a difference of $11,417,200

(Figure 12).

39

Figure 11: Changes in Contractual obligations (total)

ACTUAL REVISED Contractual obligations

(dollar amounts in thousands) Total Total Diff

Long term debt 0 0 Purchase obligations 535 535 Deferred compensation 2,518 2,518 Operating leases 190,180 255,653 Total contractual obligations 193,233 258,706 65,473

Figure 12: Changes in contractual obligations (less than 1 year)

Contractual obligations Due Less than 1 year (dollar amounts in thousands)

ACTUAL REVISED Diff

Long term debt 0 0 Purchase obligations 535 535 Deferred compensation 0 0 Operating leases 33,161 44578.2 Total contractual obligations 33,696 45113.2 11,417

With the limited disclosure of balance sheet line items, we can not with

100 percent certainty show the impact this would have on their statements. As

stated before they fall behind in the breakdown in their footnotes to financial

statements making it difficult to have complete revisions. Our stance remains the

same concerning using operating leases, as an industry standard why would a

firm with fewer resources take a slight disadvantage with disclosure strategy.

These numbers would not significantly change The Buckle and how they

compare to competitors. This could be argued opposite for larger competing

firms in the specialty retail industry.

40

Financial Analysis and Forecasting

Progressing into the evaluation of The Buckle we will begin by using time

series and cross sectional analysis to determine financial ratios and follow with

statement forecasting for the next ten years. By doing this analysis, we get a

more educated valuation of The Buckle. The purpose of the ratio analysis is to

determine how The Buckle measures compared to its competitors and the

industry average. Forecasting the financial statements for ten years into the

future, we are able to better estimate the company’s future growth in the

industry.

A time series analysis includes the past five operating years of the firm

looking at its liquidity, leverage, and capital structure. The liquidity ratios are

used to evaluate the firm’s ability to meet obligations with its liquid assets such

as cash and cash equivalents. Leverage ratios look at the overall profitability of

the firm through operating efficiency, asset productivity, return on assets and

return on equity. The capital structure section explains how the company

finances their acquired assets. From this information, we can make assumptions

of future performance. In contrast to the time series, where information is an

analysis for the selected firm, cross sectional analysis evaluates both competitors

and the entire industry.

In the next section we will be forecasting the financial statements for The

Buckle for ten years ahead from the end of the third quarter, November 2006.

Using the assumptions from the ratio analysis section, well will forecast the

income statement, balance sheet, and the statement of cash flows. With the

presentation of each of the forecasts, a common size statement will also be

included to ease interpretation of each of the individual line items.

41

Time Series (Trend) Analysis

This section is strictly an analysis of The Buckle’s performance from the

past five years. These ratios break down the financial statements in a more

meaningful way to understand how certain aspects of the firm have recently

performed. Analyzing The Buckle’s financial statements will provide us with

information, information with the ability of detecting trends and to guide

explanation of relationships between several line items. Another important

measure that will be included in this section is the sustainable growth rate (SGR)

and internal growth rate (IGR) of The Buckle. The overall purpose of the

information we obtain from this analysis is to be used to make valued judgments

on our assumptions for the forecasting. As stated above we will first be looking

at the company’s leverage, then profitability and capital structure.

Liquidity

All the ratios pertaining to liquidity must be looked at as a group to get an

overall evaluation of The Buckle’s liquidity. Figure 13 shows the output of each

ratio from the past five years, each of which discussed below followed with a

table (Figure 15) on the impact of each on the firm’s liquidity.

Figure 13: BKE Liquidity Ratios

2001 2002 2003 2004 2005 Current Ratio 5.84 5.21 5.82 6.02 5.45Quick Asset Ratio 3.79 3.21 3.93 4.4 3.78Accounts Receivable Turnover 191.8 288.5 117.9 249.6 103.9Days Supply of Receivables 1.9 1.3 3.1 1.5 3.5Inventory Turnover 4.8 4.5 4.6 4.4 4.5Days Supply of Inventory 76 81.1 79.3 83 81Working Capital Turnover 2.7 2.8 2.3 2.1 2.5

Although The Buckle has been operating with a current ratio far from the

definition of an efficient firm, there has not been a substantial difference seen

over the past five years with this ratio. The relatively high ratio numbers for

current ratio and quick asset ratio is due to the low amount of current liabilities

42

the company has compared to their assets. So to understand if the company is

having problems with sufficiently maintaining near-cash resources we turn to

working capital turnover (sales/working capital). Working capital is defined as

current assets minus current liabilities. In the case where working capital

decreases (years 2002-2004), current liabilities increasing is an unfavorable

situation compared to current assets decreasing. The reverse is true when

working capital is increasing. Working capital increased for The Buckle from 2001

to 2002 and 2004 to 2005. The ratio held fairly constant over the years and with

closer evaluation of The Buckle’s balance sheets we can see that current assets

and liabilities moved in the same direction from year to year (Figure 14).

Figure 14: (BKE 10-Ks: Dollar amounts in thousands)

2001 2002 2003 2004 2005 Current Assets 175,310 178,134 217,146 275,330 246,043 Current Liabilities 29,998 35,128 36,468 45,736 45,131

Looking at the two other ratios that enhance liquidity, inventory turnover

and receivables turnover, along with working capital turnover, we can make a

final statement on The Buckle’s liquidity from 2001 to 2005. We believe the great

fluctuation in the accounts receivable turnover is unfavorable but a condition that

is primarily out of the firms control since it is a ratio dependent of consumer

spending. The day’s supply of receivables reaches a maximum of 3.5 days.

Concern would be warranted if it stayed consistently high and if it ever spanned

over a standard business week. The Buckle’s inventory turnover has performed

fairly consistent over the past years within a range of 7 days supply, appearing

to reside at a number management is comfortable with. Using the knowledge we

gained in the prior sections we can conclude that with inventory, although not

100 percent accurate, an informed management has the ability to influence this

ratio year to year guiding it to a comfortable range.

43

Figure 15: Trend/Impact on Liquidity

Impact Current Ratio Essentially no change Quick Asset Ratio Essentially no change Accounts Receivable Turnover Unfavorable Days Supply of Receivables Unfavorable Inventory Turnover Essentially no change Days Supply of Inventory Essentially no change Working Capital Turnover Essentially no change

To us there appears to be no strong trends with the firm’s liquidity ratios,

but we can conclude The Buckle has become less liquid in its operations due to

somewhat expected inefficiencies in the specialty retail market but still has the

ability to make payments.

Cross-Sectional Liquidity

The liquidity ratios are used to evaluate the firm’s ability to meet

obligations with cash and cash equivalents.

Current Ratio (Current Assets / Current Liabilities)

2001 2002 2003 2004 2005 The Buckle 5.84 5.21 5.82 6.02 5.45

A&F 2.48 2.84 2.42 1.56 1.93 Pacific Sunwear 2.2 2.49 3.2 3.7 3.48

Current Ratio

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005

Year

BuckleA&F

PacSunAverage

44

Over the past five years, The Buckle’s current ratio has seen both positive

and negative changes resulting in an overall slight decrease, but still well above

the industry average. A current ratio considerably above the industry average is

an indicator that the company isn’t using its assets efficiently. The current ratio is

the key indicator of the firm’s ability to meet short-term obligations. While The

Buckle is successfully meeting their current liabilities, they are not doing so with

and efficient use of their current assets. Inefficiency of inventory turnover could

be a reason for current assets to increase.

Quick Asset Ratio (Quick Assets / Current Liabilities)

2001 2002 2003 2004 2005 The Buckle 1.59 1.95 1.7 0.09 1.03

A&F 1.59 1.95 1.7 0.09 1.03 Pacific Sunwear 0.4 0.54

The quick asset ratio has also fluctuated over the past five years. The

overall change was stable primarily due to the exclusion of inventory in the

equation. The quick asset ratio similar to the current ratio with the exception that

Quick Asset Turnover

0

1

2

3

4

5

2001 2002 2003 2004 2005

Year

BuckleA&FPacSunAverage

45

inventory is not included as a quick asset. The Buckle’s quick asset ratio is well

above the industry average indicating that its current assets are growing faster

than their quick assets.

Accounts Receivable (Sales / Accounts Receivable)

2001 2002 2003 2004 2005 The Buckle 191.8 288.5 117.9 249.6 103.9

A&F 66.72 152.53 237.3 53.53 66.53 Pacific Sunwear 224.98 290.26 200.51

The accounts receivables turnover ratio depicts the balance between sales

and money received from sales on account. The ratio is described as sales

divided accounts receivable. It indicates the number of dollars allocated to

accounts receivable for each dollar of sales made. A low accounts receivable

turnover, relative to other firms in the industry, shows that a company is

receiving a lower percentage from sales on account in respect to total sales. This

shows poor productivity in the accounts receivable component of working capital.

Accounts Receivable Turnover

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005

Year


46

The Buckle fluctuates from the industry average in the past five years, with poor

results in 2004 and high efficiency in 2005. The Buckle ends 2006 slightly higher

than the average of firms. As you can see, all firms displayed above are fairly

inconsistent from year to year.

Accounts Receivable Days (365 days / AR Turnover)

2001 2002 2003 2004 2005 The Buckle 1.9 1.3 3.1 1.5 3.5

A&F 5.47 2.4 1.54 6.82 5.49 Pacific Sunwear 1.62 1.26 1.82

Days’ supply of receivables, or days’ sales outstanding, is another way to

measure efficiency for the accounts receivable component of working capital. It

is described as accounts receivable divided by average sales per day, or 365

divided by the accounts receivable turnover ratio. This indicated the collection

period of a firm’s accounts receivables. Unlike the accounts receivable turnover

ratio, a low days’ supply of receivables is favorable. A shorter collection period

for accounts receivable, relative to competing firms, shows a higher efficiency in

Accounts Receivable Days

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005

Year


47

working capital. Similar to accounts receivable turnover, The Buckle fluctuates

with the industry average. Their days’ supply of receivables is less efficient in

2004 and more in 2005. Also like accounts receivables turnover, The Buckle is

slightly more efficient than the industry average at the end of 2005.

Inventory Turnover (COGS / Inventory)

2001 2002 2003 2004 2005 The Buckle 4.8 4.5 4.6 4.4 4.5


Inventory Turnover in Days (365 days/ Inventory Turnover)

2001 2002 2003 2004 2005 The Buckle 76 81.1 79.3 83 81

A&F 9.25 4.06 62.89 69.37 141.80 Pacific

Sunwear 80.57 80.04 80.57 81.66 88.81

Inventory Turnover

0

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005

Year


48

Inventory turnover measures how many times the inventory is being used

per year. The Buckle has seen a relatively constant inventory turnover over the

past five years and remained consistent with the industry average. This shows

that the firm is effectively competing with the industry through its efficient

inventory control systems. It is usually better to keep inventory turnover low

because it becomes very costly for a company to hold inventory for long periods

of time. The Buckle, along with its close competitors, has an inventory turnover

average of 4.5 which means that inventory is sold and replaced 4.5 times a year.

The inventory supply in days indicates how many days inventory takes to turn

over. The Buckle’s inventory turnover in days has also remained fairly stable over

the past five years at about 80 days which is close to the industry average.

Working Capital Turnover (Sales / (CA-CL))

2001 2002 2003 2004 2005 The Buckle 2.7 2.8 2.3 2.1 2.5


Inventory Days

0

20

40

60

80

100

120

140

160

2001 2002 2003 2004 2005

Year


49

A company’s working capital turnover shows a relationship between sales

and operating working capital, described as sales divided by operating working

capital. The ratio is an indication of the number of dollars in sales made for every

dollar invested in working capital. Operating working capital is a firm’s current

assets less its current liabilities. Thus, a firm’s working capital can fluctuate

depending on the abundance of assets or liabilities. This makes it difficult to

evaluate a firm’s performance through the working capital turnover without the

knowledge of the firm’s current ratio (current assets/current liabilities). In the

graph above, The Buckle has a more consistent working capital turnover

throughout the last five years, but is considerably less the industry average. This

could possibly be because of the firm’s size relative to the larger competition.

The Buckle has become less liquid in its operations due to somewhat

expected inefficiencies in the specialty retail market but still has the ability to

make payments. Looking at the liquidity ratio, Abercrombie & Fitch’s numbers

fluctuate skewing the industry average. The average is not that great of a

predictor because The Buckle and Pacific Sunwear have operated more

Working Capital Turnover

0

2

4

6

8

10

12

2001 2002 2003 2004 2005

Year


50

consistently over the past five years when compared to both industry and

Abercrombie & Fitch.

Profitability

Extending on the thought of efficiency we look at the four critical factors

that relate to profitability. First factor is operating efficiency consisting of gross

profit margin, operating expense ratio, and net profit margin. Then asset

turnover, return on assets (ROA), and return on equity (ROE). Figure 16 presents

the data for each ratio pertaining to these four factors and their overall result.

Figure 16: BKE Profitability Ratios

2001 2002 2003 2004 2005 Result Gross Profit Margin (%) 44.5 32.8 33.8 36.3 38.7 Positive Operating Expense Ratio (%) 20.8 21.4 22.4 22.8 23.5 NegativeNet Profit Margin (%) 8.5 8 8 9.2 10.4 Positive Asset Turnover 1.5 1.3 1.3 1.2 1.3 Neutral Return on Assets (%) 12.4 10.7 10 10.7 13.9 Positive Return on Equity (%) 14.1 12.1 11.3 13 17.3 Positive

The ratios measuring operating efficiency consist of gross profit margin,

operating expense ratio, and net profit margin all of which compare the selected

income statement item to sales on a percentage basis allowing for easier analysis

of overall profitability. Looking at the table we can see that two of the three

ratios had a positive effect on efficiency. Gross profit margin increased over a

four year period due to cost of sales decreasing as a percentage of sales

( Ex.2003: 66%, 2004:64%, 2005:61%; BKE 2006 10-K). Going further into the

income statement we see that the operating expense ratio increased over the

five years providing a negative result on profitability. This is trumped by the

large increases in net profit margin over the past few years. A one percent

increase is large because where in 2004 nine cents of every sales dollar was

retained as profit ten cents was retained in 2005 (BKE 10-K).

With asset turnover we are looking for trends with increasing ratio

numbers for the firm to become more profitable. The Buckle has produced a

51

steady ratio over the past four years, with 2001 appearing to be a large outlier.

Wit h forecasting the income statement, we will look in the firm’s favor with

these numbers, in hopes of a bounce back to 2001 performance.

Figure 16 shows us that, although not as strong of a trend as with gross

profit margin, a current upswing in the numbers for ROA and ROE has occurred,

a positive for The Buckle. It is no surprise that the two of these ratios are

moving in comparable patterns, since the current assets and current liabilities of

the firm were shifting directionally the same, differing only proportionally.

Cross-Sectional Profitability

Profitability ratios are measures of performance which show how much a

company is earning compared to its assets, equity, and sales. The principal

factors related to profitability analysis are to analyze four critical factors related

to profits: 1.) Operating Efficiency, 2.) Asset Productivity, 3.) Rate of Return on

Assets, and 4.) Rate of Return on Equity (class notes).

Gross Profit Margin (Gross Profit / Sales)

2001 2002 2003 2004 2005 The Buckle 44.5% 32.8% 33.8% 36.3% 38.7%

A&F 40.9% 45.1% 63.4% 66.4% 66.5% Pacific Sunwear 32.2% 33.5% 35.8% 36.4% 36.4%

Gross Profit Margin

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2001 2002 2003 2004 2005

Year


52

The gross profit margin shows how much a firm’s revenues exceed the

direct costs of sales. It is calculated as gross profit (sales – cost of sales) divided

by sales. The gross profit margin is influenced by the price paid for merchandise

in the market and the cost of inputs to make the final products. If a firm is

competing on a low-cost strategy, its gross profit margin can be competitive

through efficient production or lower input costs. As shown above, Abercrombie

& Fitch is the industry leader in respect to gross profit margin for the last five

years. The Buckle is consistently lower than the industry average along with

Pacific Sunwear. This low performance can bring the company’s cost or

production efficiency into question

Operating Expense Ratio (Operating Expenses / Sales)

2001 2002 2003 2004 2005 The Buckle 20.8% 21.5% 22.5% 22.8% 23.6%


Operating Expense Ratio

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2001 2002 2003 2004 2005

Year


53

The operating expense ratio measures the percentage between total

operating expenses and the gross income. Operating costs are associated with

the costs that income producing properties incur. Gross income is the actual

yearly income. This ratio shows the percentage of the company’s income that is

used to pay operating and maintenance fees. This ratio helps explain how

efficiently the company is being managed. The lower the ratio, the greater the

profit will be for investors. The industry average is around 23%. The Buckle

comes within the industry average, with a 5 year average ratio of 22.23% of

every sales dollar going towards operating expenses. Opening more stores and

incurring more inventories play a part in this ratio increasing. Abercrombie and

Fitch stays close to The Buckle’s margin until 2006 when they drop to being the

leader with only 11.26% of every sales dollar going toward operating expenses.

Net Profit Margin (Net Income / Sales)

2001 2002 2003 2004 2005 The Buckle 8.5% 8.0% 8.0% 9.2% 10.4%


Net Profit Margin

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2001 2002 2003 2004 2005

Year


54

The net profit margin demonstrates how much profit the company

makes with every dollar generated in revenue. The higher a company’s profit

margin compared to competitors, the better it is. The Buckle is below the

industry average of 9% over the five year period, although in 2006 an increasing

trend occurs. Pacific Sunwear has been struggling to keep up with the industry

average, with a 5 year average of only 7.01%. Having a low net profit margin

can explain the need for pricing strategies, and shows the impact competitors

have on margins.

Asset Turnover Ratio (Sales / Total Assets)

2001 2002 2003 2004 2005 The Buckle 1.5 1.3 1.3 1.2 1.3


The asset turnover ratio determines the amount of sales that are

generated from each dollar of assets. Companies with low profit margins tend to

have higher asset turnover, the opposite true for companies with high profit

margins. The Buckle has a low asset turnover ratio of 1.32 averaged over 5

Asset Turnover

0

0.5

1

1.5

2

2.5

2001 2002 2003 2004 2005

Year


55

years. In other words, for every dollar of assets, a return of $1.32 was generated

in sales. This may indicate that the company may need to sell more assets, or

utilize them in a different manner. The Buckle however does stay steady within

the 5 years that are accounted for. Pacific Sunwear leads the industry with a 5

year average of 1.82, indicating that the company efficiently used their assets to

create sales.

Return on Assets (Net Income / Total Assets)

2001 2002 2003 2004 2005 The Buckle 12.4% 10.7% 10.0% 10.7% 13.9%


Return on assets measures how many dollars profit the company can earn

for each dollar of assets they control. The lower the ratio, the more the company

is dependent upon its assets. The Buckle’s ratio is below industry average.

Having such a low ratio means that more money has to be reinvested to

continue generating earnings. The five year average ROA for The Buckle is

Return on Assets

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2001 2002 2003 2004 2005

Year


56

11.54%, meaning that the company earned about $0.11 for each dollar invested

in assets. Abercrombie and Fitch lead the industry in all 5 years averaging

18.20%.

Return on Equity (Net income / Equity)

2001 2002 2003 2004 2005 The Buckle 14.10% 12.10% 11.30% 13% 17.30%

A&F 28.30% 26% 23.90% 32.30% 33.60%Pacific Sunwear 11.12% 16.43% 18.71% 23.34% 23.08%

Return on equity determines a firm’s ability to provide returns on owner’s

equity. It measures the firm’s profitability of the owner’s interests in total assets.

The higher the return on equity percentage, the better it is for a firm to provide

for owner’s equity through a high net income. The Buckle’s ROE steadily

decreased for four years due to a decrease in net income while owner’s equity

stayed relatively steady. The Buckle has started to increase the return on equity

Return on Equity

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2001 2002 2003 2004 2005

Year


57

from year four to year five while Pacific Sunwear and Abercrombie & Fitch are

holding a constant percentage.

The industry has recently been profitable due to economic conditions

coming out of the recession in 2001. Consumer spending increased due to the

favorable economic upswing. The most favorable ratio increases were seen with

the ROA and ROE for all the companies, but this is something that can’t be

predicted with specialty retail because of economic fluctuations and the fact they

are meeting a specialty and not necessity.

Capital Structure

There are two key concerns of the capital structure analysis: debts

relationship to the owner’s equity (debt to equity ratio) and the capacity to meet

the principal and interest obligation on the firm’s debt (times interest earned and

debt service margin).

In Figure 17 you can see that we have not reported any ratio numbers

for the debt service margin. This is attributed to the lack of a line item on The

Buckle’s 10-K that correlates to any annual installment payments on the principal

amount of long-term liabilities.

Figure 17: Capital Structure Ratios

2001 2002 2003 2004 2005 Debt to Equity Ratio 0.13 0.13 0.14 0.22 0.25 Times Interest Earned 2.5 2.5 2.5 2.6 2.5 Debt Service Margin N/A N/A N/A N/A N/A

There has been an upward trend with the debt to equity ratio of The

Buckle. This is a point of concern for future performance because debt has

become a larger proportion of total financing. The normal range of this ratio is .5

-1.5. The Buckle is consistently performing under the norm but it appears they

are starting to converge toward the norm. This ratio will be important to

58

compare to close competitors and the industry average in the cross-sectional

section.

In a ratio that bigger is better, meaning the income from operations is

able to cover more of the interest expense of the firm, we would like to see

increasing numbers for times interest earned The Buckle’s consistency on this

measure shows that, with their growth over the past five years, management

has been able to keep this number relationship relatively proportional. Not just

improving performance can draw investors; stability in such a fluctuating market

can be attractive to future performance.

Overall the capital structure of The Buckle in the past five years has

neither really improved nor diminished. There are no alarms going off for

warranted concern when looking at only The Buckle’s ratios. To reiterate the

position stated before, these will be important to compare to the industry. Figure

18 provides a review of the trend ratios for The Buckle.

Figure 18: BKE Trend Ratios

Buckle's Trend Analysis 2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 LIQUIDITY Current Ratio 5.84 5.21 5.82 6.02 5.45 Quick Asset Ratio 3.79 3.21 3.93 4.4 3.78 A/R Turnover 191.8 288.5 117.9 249.6 103.9 A/R Days 1.9 1.3 3.1 1.5 3.5 Inventory Turnover 4.8 4.5 4.6 4.4 4.5 Inventory Days 76 81.1 79.3 83 81 Working Capital Turnover 2.7 2.8 2.3 2.1 2.5 PROFITABILITY Gross Profit Margin 44.50% 32.80% 33.80% 36.30% 38.70% Operating Expense Ratio 20.80% 21.49% 22.49% 22.80% 23.59% Net Profit Margin 8.50% 8% 8% 9.20% 10.40% Asset Turnover 1.5 1.3 1.3 1.2 1.3 Return on Assets 12.40% 10.70% 10% 10.70% 13.90% Return on Equity 14.10% 12.10% 11.30% 13% 17.30% CAPITAL STRUCTURE Debt to Equity Ratio 0.13 0.13 0.14 0.22 0.25 Times Interest Earned 2.5 2.5 2.5 2.6 2.5 Debt Service Margin N/A N/A N/A N/A N/A

59

Cross-Sectional Capital Structure

The capital structure of a company refers to how the company is being

financed. This is shown through the liabilities and owners equity section of the

balance sheet. It also accesses the health and riskiness of the firm. The debt to

equity ratio is equal to total liabilities divided by total owners’ equity. This ratio

explains the amount of liability financing they have for every dollar of equity.

The times interest earned ratio is calculated by Net income before interest and

taxes divided by interest expense. This ratio determines the company’s ability to

repay the debt they have incurred. The debt service margin is the operating cash

flow divided by the current notes payable. This ratio determines if the company

can pay the current debt with the current generating cash flows.

Times Interest Earned (NBIT / Interest Expense)

2001 2002 2003 2004 2005 The Buckle 0.13 0.13 0.14 0.22 0.25


Times Interest Earned

2.4

2.45

2.5

2.55

2.6

2.65

2001 2002 2003 2004 2005

Year


60

Times interest earned shows there is a sufficient amount of operating

income to covert interest expense within the year. If a company does not have

adequate operating income to cover its interest responsibility, it could be forced

into bankruptcy.

Debt to Equity Ratio 2001 2002 2003 2004 2005

Buckle 0.13 0.13 0.14 0.22 0.25 A&F 0.29 0.33 0.61 1.01 0.8

Pacific Sunwear 0.45 0.32 0.5 0.48 0.48

The debt to equity ratio measures what proportion of equity and debt the

company uses to finance total assets. A company with a high debt to equity ratio

indicates that a firm has been acquiring more debt to use for growth. The Buckle

has a debt to equity ratio of .25. This means that for every $.25 of liabilities it

has a $1.00 of owner’s equity. Debt is a small percentage of financing for The

Buckle. If The Buckle is going to maintain competitiveness and growing potential,

it may need to take on more debt in order to create more earnings.

Debt to Equity Ratio

0

0.2

0.4

0.6

0.8

1

1.2

2001 2002 2003 2004 2005

Year


61

Figure 19 summarizes the analysis ratios for The Buckle and its

competitors including an industry average. The purpose of this section was to

guide our assumptions for the following forecasts for The Buckle.

Figure 19: Compiled Cross-Sectional Ratios Buckle's Trend Analysis 2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 LIQUIDITY Current Ratio 5.84 5.21 5.82 6.02 5.45 Quick Asset Ratio 3.79 3.21 3.93 4.4 3.78 A/R Turnover 191.8 288.5 117.9 249.6 103.9 A/R Days 1.9 1.3 3.1 1.5 3.5 Inventory Turnover 4.8 4.5 4.6 4.4 4.5 Inventory Days 76 81.1 79.3 83 81 Working Capital Turnover 2.7 2.8 2.3 2.1 2.5 PROFITABILITY Gross Profit Margin 44.50% 32.80% 33.80% 36.30% 38.70% Operating Expense Ratio 20.80% 21.49% 22.49% 22.80% 23.59% Net Profit Margin 8.50% 8% 8% 9.20% 10.40% Asset Turnover 1.5 1.3 1.3 1.2 1.3 Return on Assets 12.40% 10.70% 10% 10.70% 13.90% Return on Equity 14.10% 12.10% 11.30% 13% 17.30% CAPITAL STRUCTURE Debt to Equity Ratio 0.13 0.13 0.14 0.22 0.25 Times Interest Earned 2.5 2.5 2.5 2.6 2.5 Debt Service Margin

Abercrombie's Trend Analysis 2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 LIQUIDITY Current Ratio 2.48 2.84 2.42 1.56 1.93 Quick Asset Ratio 1.59 1.95 1.70 0.09 1.03 A/R Turnover 66.72 152.53 237.30 53.53 66.53 A/R Days 5.47 2.40 1.54 6.82 5.49 Inventory Turnover 39.44 89.85 5.80 5.26 2.57 Inventory Days 9.25 4.06 62.89 69.37 141.80 Working Capital Turnover 5.65 4.10 3.87 8.37 6.11 PROFITABILITY Gross Profit Margin 40.88% 45.11% 63.43% 66.36% 66.49% Operating Expense Ratio 20.90% 21.50% 22.60% 27.80% 11.26% Net Profit Margin 12.40% 12.20% 12.00% 10.70% 12.00% Asset Turnover 1.77 1.60 1.24 1.46 1.56 Return on Assets 21.90% 20.00% 14.80% 15.60% 18.70% Return on Equity 28.30% 26% 23.90% 32.30% 33.60% CAPITAL STRUCTURE Debt to Equity Ratio 0.29 0.33 0.61 1.01 0.80 Times Interest Earned 2.52 2.57 2.55 2.55 2.52 Debt Service Margin 7.31 6.90 5.89 5.06 5.24

62

PacSun's Trend Analysis 2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 LIQUIDITY Current Ratio 2.20 2.49 3.20 3.70 3.48 Quick Asset Ratio 0.40 0.54 A/R Turnover 224.98 290.26 200.51 A/R Days 1.62 1.26 1.82 Inventory Turnover 4.53 4.56 4.53 4.47 4.11 Inventory Days 80.57 80.04 80.57 81.66 88.81 Working Capital Turnover 10.73 7.74 4.29 4.78 4.57 PROFITABILITY Gross Profit Margin 32.15% 33.52% 35.78% 36.42% 36.40% Operating Expense Ratio 26.68% 23.92% 23.47% 25.60% 22.22% Net Profit Margin 4.02% 5.59% 7.70% 8.69% 9.07% Asset Turnover 1.93 2.12 1.62 1.81 1.72 Return on Assets 7.76% 12.43% 12.44% 15.77% 15.63% Return on Equity 11.12% 16.43% 18.71% 23.34% 23.08% CAPITAL STRUCTURE Debt to Equity Ratio 0.45 0.32 0.50 0.48 0.48 Times Interest Earned 2.58 2.62 2.63 2.62 2.57 Debt Service Margin

Average 2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 LIQUIDITY Current Ratio 2.34 2.67 2.81 2.63 2.71 Quick Asset Ratio 1.00 1.25 1.70 0.09 1.03 A/R Turnover 145.85 221.40 218.91 53.53 66.53 A/R Days 3.55 1.83 1.68 6.82 5.49 Inventory Turnover 21.99 47.21 5.17 4.87 3.34 Inventory Days 44.91 42.05 71.73 75.52 115.31 Working Capital Turnover 8.19 5.92 4.08 6.58 5.34 PROFITABILITY Gross Profit Margin 37% 39% 50% 51% 51% Operating Expense Ratio 24% 23% 23% 27% 17% Net Profit Margin 8% 9% 10% 10% 11% Asset Turnover 1.85 1.86 1.43 1.64 1.64 Return on Assets 15% 16% 14% 16% 17% Return on Equity 20% 21% 21% 28% 28% CAPITAL STRUCTURE Debt to Equity Ratio 0.37 0.33 0.56 0.75 0.64 Times Interest Earned 2.55 2.60 2.59 2.59 2.55

63

SGR and IGR

Figure 20: BKE SGR and IGR (BKE 10-K)

2001 2002 2003 2004 2005 SGR 15.93% 13.67% 11.11% 12.37% 16.40% IGR 14.10% 12.10% 9.86% 10.14% 13.36%

The table above (Figure 20) shows the Sustainable Growth Rate for The

Buckle for the past five years. For the first two years, 2001 and 2002, the SGR

was not applicable because The Buckle did not pay dividends. We predict that in

the future The Buckle will pay dividends annually, which will help to maintain

SGR consistency. With the information from the past five years, we were unable

to predict future growth due to the lack of trends. While the average SGR over

the past three years is 13.29%, it is not an accurate measure for the future

projections due to the high volatility in growth rate.

Any Internal Growth Rate projections will also be inaccurate due to the

lack of trends and consistency. This is because IGR also depends on the payment

of annual dividends for accurate measures.

All the ratios pertaining to The Buckle’s liquidity, profitability, capital

structure, and sustainable growth rate will be vital to providing knowledgeable

forecasts into the next ten years in the upcoming forecast section. Although

forecasts for such a long time period can in no way be an accurate outlook of a

company’s performance but with all the preceding discussion and information we

will be able to give an estimated guess to where The Buckle may be heading.

64

Financial Statement Forecasts

Income Statement Forecast

To forecast the income statement, we began looking at the trends in sales

growth percentage for 2002-2006 (Figure 21) and also used three quarters worth

of data for fiscal year ending January 28, 2007. The quarterly data showed

consistency with growth projections with the even the fourth quarter not

included (Q-4 most profitable due to seasonality). Sales growth percentage is

calculated by taking the second year sales and subtracting the first year sales

and then dividing that total by the second year sales to get a percentage. This

process is repeated for five years. The average sales growth percentage for five

years equals 6.67%. We assumed that net sales would increase 1.0% rather

than 6.67%. The 1.0% is a more realistic number to use for sales growth in

relation to The Buckle because their market share is not as large as the

competitors. We chose to grow gross profit based on the previous calculation

used for sales growth percentage. This gives them a lot of credit on our behalf

over the 10 years but is really useful looking at the next two fiscal years. This

can be said for any of there competitors too, due to the unpredictable long-term

nature of the economy.

The five year averages for the remainder of the income statement were

calculated and used to forecast out for 10 years (Figure 21). We also forecasted

selling expenses with a growth of .2%. Growth in this item will grow as the

company grows so to estimate future expansion this was necessary.

65

Figure 21: BKE Actual Income Statements (BKE 10-K)

Income Statement

Assume2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006 Net sales 387,638 401,060 422,820 470,937 501,101 1.00% 506,112 511,173 516,285 521,448 526,662 531,929 537,248 542,621 548,047 553,527 Cost of Goods Sold 259,994 269,516 280,004 299,985 307,063 306,214 305,238 304,131 302,887 301,500 299,967 298,281 296,437 294,428 292,250 Gross profit 127,644 131,544 142,816 170,979 194,038 199,898 205,935 212,154 218,561 225,162 231,962 238,967 246,184 253,618 261,278 Selling expenses 69,786 74,757 79,669 89,008 100,148 101,352 102,570 103,803 105,051 106,313 107,591 108,884 110,193 111,518 112,858 General and administrative expenses 10,939 10,979 15,045 18,599 17,568 20,244 20,447 20,651 20,858 21,066 21,277 21,490 21,705 21,922 22,141 Income from operations 46,919 45,811 48,103 63,372 76,322 78,302 82,918 87,700 92,653 97,782 103,093 108,592 114,286 120,179 126,278 Other income, net 4,820 4,698 4,688 4,470 6,123 5,061 5,112 5,163 5,214 5,267 5,319 5,372 5,426 5,480 5,535taxes 51,739 50,509 52,791 67,842 82,445 73,241 77,806 82,537 87,438 92,515 97,774 103,220 108,859 114,698 120,743 Provision for income taxes 19,097 18,434 19,112 24,613 30,539 25,306 25,559 25,814 26,072 26,333 26,596 26,862 27,131 27,402 27,676 Net income 32,642 32,075 33,679 43,229 51,906 47,935 52,248 56,723 61,366 66,182 71,177 76,358 81,728 87,296 93,067

Assume2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006Sales Growth Percentage 3.46% 5.43% 11.38% 6.41% Net sales 100% 100% 100% 100% 100% 1.00% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of Goods Sold 67% 67% 66% 64% 61% 60.50% 59.71% 58.91% 58.09% 57.25% 56.39% 55.52% 54.63% 53.72% 52.80% Gross profit 33% 33% 34% 36% 39% 2.00% 39.50% 40.29% 41.09% 41.91% 42.75% 43.61% 44.48% 45.37% 46.28% 47.20% Selling expenses 18% 19% 19% 19% 20% 0.20% 20.03% 20.07% 20.11% 20.15% 20.19% 20.23% 20.27% 20.31% 20.35% 20.39% General and administrative expenses 3% 3% 4% 4% 4% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Income from operations 12% 11% 11% 13% 15% 15.47% 16.22% 16.99% 17.77% 18.57% 19.38% 20.21% 21.06% 21.93% 22.81% Other income, net 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%taxes 13% 13% 12% 14% 16% 14% 14.47% 15.22% 15.99% 16.77% 17.57% 18.38% 19.21% 20.06% 20.93% 21.81% Provision for income taxes 5% 5% 5% 5% 6% 5% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Net income 8% 8% 8% 9% 10% 9.47% 10.22% 10.99% 11.77% 12.57% 13.38% 14.21% 15.06% 15.93% 16.81%

Actual Financial Statements Forecasted Income Statement

Common Size Income Statement Forecasted Common Size Income Statement

66

Balance Sheet Forecast

To forecast the total assets, we used the assumed net sales from the

income statement and divided that number by the asset turnover ratio. This

calculation was used for all 10 years that were forecasted (Figure 22). Once total

assets were found, current and non current assets were found based on a

percentage of the total assets. Current assets were 65%, while non current

assets assumed 35% of total assets. The five year averages were taken and

used to forecast 10 years out. Liabilities were done in the same manner. We

used the five year averages to forecast. We forecasted that total liabilities were

only 15% of the total assets. Current liabilities accounted for 75% of total

liabilities, and non current liabilities accounted for 25%.

To have our forecasted income statements and balance sheets to speak to

each other in a fairly accurate manner we left retained earnings as a constant

percentage of total stockholder’s equity; since net income goes into the

calculation of retained earnings this will create a level of consistency with our

forecasts that we are comfortable with.

67

Balance Sheet

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20162/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006

ASSETS

Cash and cash equivalents 101,915 92,976 119,976 40,206 36,141 104,229 108,398 112,734 117,243 121,933 126,811 131,883 137,158 142,645 148,350 154,284 Short-term investments (Note B) 9,720 15,450 23,346 159,214 129,453 58,368 60,703 63,131 65,656 68,283 71,014 73,854 76,809 79,881 83,076 86,399 Accounts receivable 2,021 1,390 3,585 1,887 4,824 Inventory 54,297 60,041 61,156 68,330 68,731 108,398 112,734 117,243 121,933 126,811 131,883 137,158 142,645 148,350 154,284 160,456 Prepaid expenses and other assets (Note E) 7,357 8,277 9,083 5,693 6,894 Total current assets 175,310 178,134 217,146 275,330 246,043 270,995 281,835 293,109 304,833 317,026 329,707 342,896 356,611 370,876 385,711 401,139PROPERTY AND EQUIPMENT (Note C): 54,292 64,606 83,903 83,542 91,396 91,722 95,390 99,206 103,174 107,301 111,593 116,057 120,699 125,527 130,548 135,770LONG-TERM INVESTMENTS (Note B) 32,556 54,548 52,647 44,032 34,170 50,030 52,031 54,112 56,277 58,528 60,869 63,304 65,836 68,469 71,208 74,057OTHER ASSETS (Notes E and F) 2,499 2,512 2,526 2,639 2,657 4,169 4,336 4,509 4,690 4,877 5,072 5,275 5,486 5,706 5,934 6,171 Total Non-Current Assets 89,347 121,666 139,076 130,213 128,223 145,921 151,757 157,828 164,141 170,706 177,535 184,636 192,022 199,702 207,691 215,998Total Assets 264,657 299,800 356,222 405,543 374,266 416,916 433,593 450,936 468,974 487,733 507,242 527,532 548,633 570,578 593,402 617,138

LIABILITIESCURRENT LIABILITIES: Accounts payable 11,133 13,318 14,207 12,665 11,119 16,260 16,910 17,587 18,290 19,022 19,782 20,574 21,397 22,253 23,143 24,068 Accrued employee compensation 10,755 10,556 11,890 18,467 20,096 16,885 17,561 18,263 18,993 19,753 20,543 21,365 22,220 23,108 24,033 24,994 Accrued store operating expenses 4,231 4,487 3,833 4,236 3,725 5,628 5,854 6,088 6,331 6,584 6,848 7,122 7,407 7,703 8,011 8,331 Gift certificates redeemable 2,482 2,855 3,778 4,654 5,495 4,378 4,553 4,735 4,924 5,121 5,326 5,539 5,761 5,991 6,231 6,480 Income taxes payable 1,397 2,966 2,760 5,714 4,696 3,752 3,902 4,058 4,221 4,390 4,565 4,748 4,938 5,135 5,341 5,554 Total current liabilities 29,998 34,182 36,468 45,736 45,131 46,903 48,779 50,730 52,760 54,870 57,065 59,347 61,721 64,190 66,758 69,428DEFERRED COMPENSATION (Note H) 957 946 1,467 1,799 2,518 1,876 1,951 2,029 2,110 2,195 2,283 2,374 2,469 2,568 2,670 2,777DEFERRED RENT LIABILITY (Note A) 24,442 25,080 26,824 13,758 14,309 14,881 15,476 16,095 16,739 17,409 18,105 18,829 19,582 20,366Total Non-Current Liabilities 957 946 25,909 26,879 29,342 15,634 16,260 16,910 17,587 18,290 19,022 19,782 20,574 21,397 22,253 23,143 Total liabilities 30,955 35,128 62,377 72,615 74,473 62,537 65,039 67,640 70,346 73,160 76,086 79,130 82,295 85,587 89,010 92,571

STOCKHOLDERS' EQUITY (Note I): Preferred Stock 0 0 0 0 0 Common stock*** 211 210 215 217 193 3,544 3,686 3,833 3,986 4,146 4,312 4,484 4,663 4,850 5,044 5,246 Additional paid-in capital 19,320 18,089 24,245 26,857 39,651 92,138 95,824 99,657 103,643 107,789 112,101 116,585 121,248 126,098 131,142 136,387 Retained earnings 214,309 246,373 272,125 305,854 261,948 258,696 269,044 279,806 290,998 302,638 314,744 327,333 340,427 354,044 368,206 382,934 Unearned compensation - restricted stock (126) (2,740) (1,999)Accumulated other comprehensive income (loss) (12) Total stockholders' equity 233,702 264,672 293,845 332,928 299,793 354,379 368,554 383,296 398,628 414,573 431,156 448,402 466,338 484,992 504,391 524,567Total Liabilities and Stockholders' Equity 264,657 299,800 356,222 405,543 374,266 416,916 433,593 450,936 468,974 487,733 507,242 527,532 548,633 570,578 593,402 617,138

***authorized 100,000,000 shares of .01 par value

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20162/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006

ASSETSCURRENT ASSETS: Cash and cash equivalents 39% 31% 34% 10% 10% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Short-term investments (Note B) 4% 5% 7% 39% 35% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% Accounts receivable, net of allowance of 94 and 113, respectively 1% 0% 1% 0% 1% Inventory 21% 20% 17% 17% 18% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% Prepaid expenses and other assets (Note E) 3% 3% 3% 1% 2% Total current assets 66% 59% 61% 68% 66% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%PROPERTY AND EQUIPMENT (Note C): 21% 22% 24% 21% 24% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%LONG-TERM INVESTMENTS (Note B) 12% 18% 15% 11% 9% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%OTHER ASSETS (Notes E and F) 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Total Non-Current Assets 34% 41% 39% 32% 34% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

LIABILITIESCURRENT LIABILITIES: Accounts payable 36% 38% 23% 17% 15% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% Accrued employee compensation 35% 30% 19% 25% 27% 27% 27% 27% 27% 27% 27% 27% 27% 27% 27% 27% Accrued store operating expenses 14% 13% 6% 6% 5% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% Gift certificates redeemable 8% 8% 6% 6% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% 7% Income taxes payable 5% 8% 4% 8% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% Total current liabilities 97% 97% 58% 63% 61% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%DEFERRED COMPENSATION (Note H) 3% 3% 2% 2% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%DEFERRED RENT LIABILITY (Note A) 0% 0% 39% 35% 36% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22% 22%Total Non-Current Liabilities 3% 3% 42% 37% 39% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Total liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

STOCKHOLDERS' EQUITY (Note I): Preferred Stock 0% 0% 0% 0% 0% Common stock*** 8% 0% 0% 0% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% Additional paid-in capital 92% 7% 8% 8% 13% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% 26% Retained earnings 0% 93% 93% 92% 87% 73% 73% 73% 73% 73% 73% 73% 73% 73% 73% 73% Unearned compensation - restricted stock 0% 0% -1% 0% -1% Accumulated other comprehensive income (loss) 0% 0% 0% 0% 0% Total stockholders' equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Actual Balance Sheet Forecasted Balance Sheet

Common Size Statement of Cash Flows Forecasted Common Size Balance Sheet

Figure 22: BKE Actual and Common Size Balance Sheets (BKE 10-K)

68

Statement of Cash Flows Forecast

Looking at the cash flow statement, we found that most of the items were

volatile (Figure 23 and 24), and would be hard to forecast out for a 10 year

period. We forecasted that the total cash flows from operating activities would

grow about 3% per year. This assumption is based on the management’s ability

to keep sufficient cash flows to cover operating expenses. Net income was

forecasted to be 61% of the total cash flows from operating activities, and would

grow at the same rate as net sales, which is 1% (Figure 23 and 24). The same

was done for depreciation. We assumed that depreciation accounted for 25% of

the total cash flows from operating activities, and would grow by 1% as well.

Forecasting cash flows out 10 years, let alone one year, can in no way be stated

as an accurate

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Figure 23: BKE Actual Statement of Cash Flows

Statement of Cash Flows

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152/2/2002 2/1/2003 1/31/2004 1/29/2005 1/28/2006

CASH FLOWS FROM OPERATING ACTIVITIES: Net income 32,862 32,075 33,679 43,229 51,906 47,935 52,248 56,723 61,366 66,182 71,177 76,358 81,728 87,296 93,067 Adjustments to reconcile net income to net cash flows from op. activities: Depreciation and amortization 12,007 14,869 15,956 16,353 17,613 19,604 20,192 20,798 21,422 22,065 22,727 23,408 24,111 24,834 25,579 Amortization of unearned compensation - restricted stock 126 126 1,635 2,724 667 Deferred income taxes (746) (174) 1,813 (1,184) (973) Income tax benefit from employee stock option exercises (307) 182 2,185 1,874 8,540 Other 512 (53) 773 531 114

Changes in operating assets and liabilities: Accounts receivable 47 631 (2,195) 1,698 (2,937) Inventory 95 (5,744) (1,115) (7,174) (401) Prepaid expenses (459) (552) (256) 4,291 (254) Accounts payable (2,570) 2,185 889 (1,542) (1,546) Accrued employee compensation (998) (199) 1,564 6,577 1,629 Accrued store operating expenses 159 (383) 671 403 (511) Gift certificates redeemable 283 432 300 876 841

Long-term liabilities and deferred compensation 107 554 2,175 970 2,463 Income taxes payable 2,314 1,569 (206) 2,954 (1,018)

Total Cash Flows from operating activities 43,432 45,518 57,868 72,580 76,133 78,417 80,769 83,193 85,688 88,259 90,907 93,634 96,443 99,336 102,316

CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (10,734) (28,328) (20,237) (16,637) (25,625) Proceeds from sale of property and equipment 4 3,049 22 13 44 Decrease in other assets (431) (54) 23 170 8 Purchases of investments (21,973) (50,135) (135,342) (119,873) (106,076) Proceeds from sales/maturities of investments 19,834 22,425 96,097 92,495 145,699

Total Cash Flows from investing activities (13,300) (53,043) (59,437) (43,832) 14,050 14,261 14,475 14,692 14,912 15,136 15,363 15,593 15,827 16,065 16,306

CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options 3,909 574 2,509 4,300 12,495 Purchases of common stock (1,281) (1,988) (2,908) (3,443) (94,935) Payment of dividends (4,282) (9,500) (11,808)Total Cash flows from financing activities 2,628 (1,414) (4,681) (8,643) (94,248)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,760 (8,939) (6,250) 20,105 (4,065)

CASH AND CASH EQUIVALENTS, Beginning of year 69,155 101,915 26,351 20,101 40,206CASH AND CASH EQUIVALENTS, End of year 101,915 92,976 20,101 40,206 36,141

Actual Financial Statements Forecast Financial Statement

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Figure 24: BKE Common Size Statement of Cash Flows

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CASH FLOWS FROM OPERATING ACTIVITIES: Net income 76% 70% 58% 60% 68% 61% 61% 61% 61% 61% 61% 61% 61% 61% 61% Adjustments to reconcile net income to net cash flows from op. activities: 0% 0% 0% 0% 0% Depreciation and amortization 28% 33% 28% 23% 23% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% Amortization of unearned compensation - restricted stock 0% 0% 3% 4% 1% Deferred income taxes -2% 0% 3% -2% -1% Income tax benefit from employee stock option exercises -1% 0% 4% 3% 11% Other 1% 0% 1% 1% 0%

0% 0% 0% 0% 0% Changes in operating assets and liabilities: 0% 0% 0% 0% 0% Accounts receivable 0% 1% -4% 2% -4% Inventory 0% -13% -2% -10% -1% Prepaid expenses -1% -1% 0% 6% 0% Accounts payable -6% 5% 2% -2% -2% Accrued employee compensation -2% 0% 3% 9% 2% Accrued store operating expenses 0% -1% 1% 1% -1% Gift certificates redeemable 1% 1% 1% 1% 1%

Long-term liabilities and deferred compensation 0% 1% 4% 1% 3% Income taxes payable 5% 3% 0% 4% -1%

Total Cash Flows from operating activities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Common Size Statement of Cash Flows (CFFO) Forecasted Common Size Statement of Cash Flows (CFFO)

71

The above section was presented for a thorough understanding of the past

performance and the potential future performance of The Buckle. We feel that the

assumptions and expectations we made are backed by research and analysis. Although

we are fairly confident in these assumptions, there is always the possibility of

uncertainty with each line item in the future. The whole purpose of the forecast was to

use any identified trends and project the possibilities for years 2006 to 2016.

Cost of Capital Estimation

The weighted average cost of capital (WACC) is an important measure for our

final valuation models. To obtain an accurate number for WACC we must find the cost

of equity and the cost of debt for the firm. Cost of equity is estimated using regression

analysis based on the CAPM equation and cost of debt is a value weighted measure

based on total liabilities.

The regression analysis we ran was designed to obtain The Buckle’s beta. The

CAPM equation consists of risk-free rate, the market risk premium, and the Beta. We

used the 3 month, 1 year, 5 year, 7 year, and 10 year constant maturity Treasury bond

rates as the risk-free rate in our regression (St. Louis Fed). There is a current inverted

yield curve for 6 month to 5 year bonds as seen in Figure 26. Each bond rate will

produce the market risk premium when subtracted from the S&P 500 monthly returns.

From the multiple outputs of the Treasury bonds, we could estimate the most accurate

Beta using the adjusted R squared. Figure 25 highlights our regression output for the

coefficients with the most explanatory power. The remainder of our regression output is

presented in the appendix. As you can, the adjusted R squared explains very little at

2%.

72

Figure 25: Regression output using 10 year Treasury Bond

Regression Statistics Adjusted R Squared 0.0189075Standard Error 0.1218462Observations 85 Coefficient Beta (x variable) 0.5315152t Stat 1.6182825

Figure 26: Bond Yield Curve

Identifying the Beta as .53 compared to Yahoo! Finance stating The Buckle’s

beta as 0.7, we could then find our cost of equity using the CAPM equation. The

explanatory power of this will be weak. A second method for finding cost of equity will

be presented.

73

Ke = Rf + β(Rm – Rf)

Market Risk Premium = (Rm – Rf)

In order to calculate the cost of equity, we chose to use the most recent data

given for the risk-free rate and market risk premium. Using the most recent data allows

us to have the most current measure of cost of equity. We found the cost of the equity

for The Buckle to equal 7.52%.

Ke = .0472 + .53(.0529)

Ke = 7.52%

To find the cost of debt, we simply divided each item under liabilities by the total

liabilities to obtain a percentage. We then multiplied the percentage by its respective

interest rate. The three categories The Buckle classifies their liabilities under are current

liabilities, deferred compensation, and deferred rent liability (Figure 27).

Figure 27: Cost of Debt Calculation

Amount Percentage Rate Kd

Current Liabilities 45,131 60.60% 4% 2.42% Deferred Compensation 2,518 3.40% 10% 0.34% Deferred Rent Liability 26,824 36% 15% 5.4% Total Liabilities 374,266 100% 8.16%

With accurate estimates of cost of equity and cost of debt, we are able to

calculate The Buckle’s WACC after taxes with the tax rate assumed at 35%. The market

value of the firm is presented in Figure – on the following page.

WACCAT = Ve/ Vf (Ke) + Vd/ Vf (Kd(1 - Tax rate))

74

Figure 28: Market Value of BKE (2005 10-K)

Vf = Vd + Ve

674,059 = 374,266 + 299,793

WACCAT = 16.37%

With the cost of equity and cost of debt with fairly similar percentage rates, the

WACC after tax of The Buckle is not overly financed by either equity or liabilities. The

WACC is greater than the cost of equity; therefore, it is not a reliable measure of

valuation. In theory, WACC should not be great than your cost of equity. We can use an

alternative method to find the cost of equity that has better explanatory power to

valuate The Buckle.

Backdoor Method for Cost of Equity

This method uses assumptions based on ROE, current book value of equity,

current stated market price, and assumed growth rate.

Po = BVEt(1 + (ROE – Ke)/( Ke – g))

Po BVEt ROE g Ke

$35.34 15.25 .2 .09 ?

Based on both our assumptions and market assumptions, we used these values to

determine the new cost of equity and WACC. These values are more accurate and will

be used in the valuation models. It is a closer picture to The Buckle’s cost of capital.

These numbers are shown below.

75

Ke = 12.03%

WACC = 10.5%

Our confidence is higher with these findings and can now be used for running

valuation models. These valuation models will give us a good conclusion to

recommendations concerning The Buckle.

Valuation Methods

The final section of the report will cover several valuation models, all with

differing explanatory power. The first set will be based on earnings multiples comparing

The Buckle to the identified industry averages. The second, broad set of models will

then be shown. The actual Excel model will be provided in the appendix. With each

model (discounted dividends, free cash flows, residual income, long-run residual

income, and abnormal earnings growth) the sensitivity analysis will be included with the

discussion. Our opinion, based on the entire report, on whether The Buckle is over or

undervalued can then be accurately stated.

Earnings Multiples Valuation

The method of comparables is a screening tool which allows ratios to be

calculated using relevant multiples of The Buckles competitors. The industry averages

of Pacific Sunwear and Abercrombie and Fitch were used to evaluate The Buckles

prices. Large outliers and negative numbers are omitted. Using this method to

determine price per share may not be accurate because the competitors used may not

be equivalent to The Buckle. However, it is a simple and easy way to compute price per

share. Due to Pacific Sunwear not paying dividends, we were only able to use

Abercrombie and Fitch as the industry average to evaluate the DPS for The Buckle.

76

Method of Comparables

PPS EPS BPS DPS

BKE 35.34 1.85 9.79 0.8

ANF 77.14 4.59 15.96 0.7

PSUN 20.86 0.56 7.27 N/A

The Buckle’s Price per Share Using Comparables

P/E Tr. P/E

Fore. P/B D/P P.E.G. P/EBITDA P/FCF Industry

Avg. 27.03 16.00 3.85 0.009 0.3615 0.000000125 4.94

BKE's Price 50.19 29.71 37.69 88.88 77.21 12.19 174.42

Trailing Price/Earnings

This ratio was found by taking the price per share divided by earnings per share

for Pacific Sunwear and Abercrombie and Fitch to get an industry average of 27.03.

Then we multiplied The Buckle’s earnings per share by the industry average to get

50.19. This makes the Buckle undervalued with a current share price of 35.34.

Forecast Price/Earnings

The forecasted P/E ratio is found by taking the current PPS for that period and

dividing it by the forecasted EPS of the next period. Once the industry average is

computed, that is then multiplied by The Buckle’s earnings per share.

The Buckle’s price per share comes out to be $29.71. This method shows The Buckle to

be overvalued at a current share price of $35.34.

Price/Book Value

The market to book value ratio estimated the price per share to be $37.69. This

makes The Buckle slightly undervalued with a current price of $35.34. The ratio was

77

found by taking the industry average of Pacific Sunwear and Abercrombie and Fitch and

multiplying it by The Buckle’s book value of equity per share.

Dividend/Price

To determine the industry average, we were only able to use Abercrombie and

Fitch’s dividend price because Pacific Sunwear didn’t pay a dividend. This will obviously

skew the price per share number. We divided The Buckle’s dividend price by the

industry average to get a price per share of $88.88. This makes The Buckle

undervalued at a current price per share of $35.34.

P.E.G. Ratio

To find the P.E.G. ratio we found the industry average by taking Abercrombie &

Fitch and Pacific Sunwear’s price over earning ratio divided by the forecasted earning

per share growth for one year ahead. We forecasted Abercrombie & Fitch’s growth rate

to be 2% and Pacific Sunwear to equal 1%. We then took the industry average and

multiplied it by The Buckle’s price over earnings ratio. The price per share calculated

equals $77.21 which makes The Buckle undervalued at a current price per share of

$35.34.

P/EBITDA

The price per share determined is $12.19. This shows The Buckle is overvalued

at a current share price of $35.34. In order to find this share price, we calculated the

ratios for Abercrombie & Fitch and Pacific Sunwear and multiplied the average by The

Buckle’s EBITDA.

P/FCF

Free cash flow is cash flow from investing activities subtracted from cash flows

from operating activities. This number divided by the company’s number of shares

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outstanding. To complete this ratio, price is divided by the free cash flow per share. The

industry average for Abercrombie & Fitch and Pacific Sunwear equals 4.94. This number

is multiplied by The Buckle’s price per share.

Enterprise/EBITDA

This method of comparable differs from all the preceding because the output

isn’t based on comparing a price. Enterprise value answers the question, what are the

businesses productive assets worth? It is found adding both long-term debt and

preferred stock to the market value of equity and then subtracting cash and cash

equivalents. An enterprise/ EBITDA ratio of 10 is considered good for firms in many

industries. The Buckle shows numbers fairly consistent with the industry average of

8.97.

Ent./EBITDAIndustry Avg 8.97

BKE 9.439

Earnings multiple measures are primarily useful for a quick estimate at the

potential return of investing in a certain firm in an industry. The purpose of this report

is to not look at the quick but at the informed valuation of The Buckle It is necessary

that we go into more involved, theoretical models using our forecasts and cost of

capital estimates so our overall conclusion is accurate to all our assumptions

Discounted Dividend The Discounted Dividends Model is an intrinsic valuation model that uses the

present value of future estimated dividends to determine the value of a firm’s equity.

The estimated cost of equity is used in the model less the growth rate of the dividends.

Each year’s forecasted numbers are reduced to the present value using the present

79

value factor for each year. The dividends are forecasted for ten years, using a

perpetuity value for the tenth year. This is done through the assumption that dividends

will continue to be paid indefinitely.

The sensitivity analysis depicts the amount of change in value when the growth

rate of dividends and the cost of equity are slightly altered. This is done to find the level

of explanatory power the model portrays with the estimated cost of equity and growth

rate. The Discounted Dividends Model usually has less explanatory power than other

intrinsic valuation models.

We found using different cost of equity values and growth rates that the lower

the cost of equity with a zero growth rate gives the closest intrinsic value equal to

$38.73 compared to the market value of $35.34. According to this model, The Buckle is

an overvalued firm. Using our estimated cost of equity at 12.03%, the closest

approximation to the market price is with a growth rate of 11.65%. A 11.65% growth

rate is too high and inconsistent with our findings in the retail industry.

Sensitivity Analysis g 0 0.01 0.02 0.03

Ke 0.01 $38.73 NA ($33.68) ($15.58) 0.03 $12.16 $17.12 $32.00 NA 0.06 $5.61 $6.36 $7.47 $9.33 0.09 $3.49 $3.72 $4.02 $4.42 0.1203 $2.45 $2.55 $2.66 $2.81

g 0 0.05 0.1165 0.15

Ke 0.1203 $2.45 $3.21 $35.18 -$2.94

Free Cash Flow

The free cash flow method of valuing a firm consists of the forecasted free cash

flow information and the weighted average cost of capital. The forecasted cash flow

from investing is subtracted by the forecasted cash flows from investing to find the free

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cash flow of the firm. To find the present value of each cash flow, you use the weighted

average cost of capital as the discount rate. After each present value is found, you add

them up to get the annual free cash flow. The next calculation is the perpetuity, which

is also discounted back using the weighted average cost of capital. The present value of

the perpetuity is then added to the annual cash flow, which then allows us to complete

the valuation. To arrive at the book value of equity, you subtract the cost of debt. Once

the calculations are made, you divide that number by the amount of shares outstanding

to get a price per share.

The sensitivity analysis shows that the higher the WACC and lower growth rate

makes the intrinsic value closer to the market price. The free cash flow model using our

estimated WACC shows that The Buckle is undervalued, but this model also has low

explanatory power. When WACC equals 13% and the growth rate is 1%, we found the

closest intrinsic value equal to $35.66 compared to actual market price of $35.34.

Sensitivity Analysis g 0 0.01 0.02 0.03 0.05 $110.55 $130.42 $163.54 $229.77

0.07 $74.61 $82.44 $93.41 $109.87 0.09 $54.99 $58.79 $63.67 $70.18

WACC 0.105 $45.35 $47.74 $50.69 $54.43 0.12 $38.22 $39.80 $41.70 $44.01 0.13 $34.44 $35.66 $37.10 $38.84

Residual Income

Residual Income is an accounting based model in that there is some relationship

between the market value of equity and the book value of equity. In order to value a

firm, the book value of equity, earnings per share and dividends per share are needed.

The cost of equity is used as a discount rate to determine the present values, which

means that a firm can only create value when the earnings are more than the cost of

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capital. The calculation is as follows: the book value of equity is added to the sum of

the dividends per share that were paid out subtracted by the net income. This will give

an ending value of equity. The ending value of that year becomes the beginning value

of the next year. The calculation of the normal income is calculated by taking the

ending book value and multiplying it by the cost of equity. After taking the Earnings per

Share and subtracting the Normal Income, the Residual Income is found. The Residual

Income can then be discounted back to the using the cost of equity as the discount

rate. That number is then added to the book value of equity and the present value of

the perpetuity.

Since the Residual Income model contains the most explanatory power we obtain

a good idea of the value of The Buckle. With sensitivity analysis we saw a lower

estimated cost of equity with a relatively high growth rate (i.e. 16%) producing the

closest intrinsic value to their market price.

Sensitivity Analysis g 0 0.16 0.5 0.6 -0.2

Ke 0.03 $25.46 $40.72 $38.65 $38.51 $36.24 0.05 $25.25 $34.18 $32.07 $62.08 $30.16 0.09 $19.48 $24.85 $22.35 $22.24 $21.10 0.11 $16.71 $21.84 $18.77 $18.67 $17.75 0.1203 $15.42 $20.80 $17.18 $17.09 $16.25

Although it has, in theory, the most explanatory power there are two other

models that should be run when valuing a company. This goes with the ideology of

“more is better.”

Long-Run Residual Income

Long run residual income model is another accounting based valuation model. It

shows the relationship between the cost of equity, book value of equity, ROE, and

growth rate. Book value of equity is calculated by taking the book of equity in the

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previous year and adding earnings per share in the present and then subtracting

dividends per share in the present year. ROE is found using the forecasted information

for net income and equity. The average ROE is found for the ten year forecasts. After

the average ROE is found, we use the formula below to find the long run residual

income perpetuity value.

Po = BVEt(1 + (ROE – Ke)/( Ke – g))

The long-run residual income model gives us the opportunity to analyze a third

variable, ROE. For sensitivity analysis each combination of the three is needed for a

through understanding. This model shows the closest intrinsic to market based on

estimates of 9% growth. The first table we see with our estimated cost of equity and a

growth rate of 8% produces a price of $34.27, a difference from $1.07 from the market

price of $35.34. The second table is also consistent with our findings on ROE and

growth, stating The Buckle as slightly overvalued.

Sensitivity Analysis g 0 0.04 0.08 0.11 0.03 $86.70 ($199.10) ($27.62) ($11.54) Ke 0.05 $52.02 $199.10 ($46.03) ($15.39) 0.09 $28.90 $39.82 $138.10 ($46.17) 0.1203 $21.62 $24.79 $34.27 $89.66 0.15 $17.34 $18.10 $19.73 $23.09

g 0 0.04 0.08 0.11 10.00% $12.68 $11.39 $7.57 ($14.81) 13.00% $16.48 $17.09 $18.92 $29.61 ROE 17.06% $21.63 $24.80 $34.28 $89.72 20.00% $25.35 $30.39 $45.41 $133.25 23.00% $29.16 $36.08 $56.76 $177.67

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ROE 10.00% 13.00% 17.06% 20.00% 23.00% 0.03 $50.83 $66.08 $86.72 $101.67 $116.92 0.05 $30.50 $39.65 $52.03 $61.00 $70.15 Ke 0.09 $16.94 $22.03 $28.91 $33.89 $38.97 0.1203 $12.68 $16.48 $21.63 $25.35 $29.16 0.15 $10.17 $13.22 $17.34 $20.33 $23.38

The third and final table shows that The Buckle is overvalued to a greater

amount with our predictions. One final model was run so we could have a complete

conclusion and make an informed recommendation.

Abnormal Earnings Growth

Our final valuation model is that of abnormal earnings growth (AEG). This model

is similar to the residual income because it is accounting based and is bounded in

growth. The AEG model is run finding what the firm earned, cumulative dividends

earnings, and what the firm should have earned to maintain value, normal earnings.

Cumulative dividends earnings for time t is found using EPS for this year (NI)

and adding the cost of equity times the DPS from the previous year. Normal earnings

are calculated with the NI from the previous year and multiplying by one plus the cost

of equity.

AEGt = NIt + ke (DPSt-1) – (NI t-1) (1+ ke)

When the output for AEG is a negative value the firm is destroying value, which

is the case for The Buckle using our forecasted information. When the value is positive

the opposite is true, they are creating value, a good sign of short-term (3-5 years)

sustainability.

To find the intrinsic value per share you take a core EPS (EPS t-1) add the total

year by year present value of AEG and then add the present value of the terminal

84

value, this gives you the total average EPS perpetuity value. Multiple this value by the

capitalization rate (ke) and you have a accurate portrayal of the intrinsic value of a firm.

Running this for The Buckle we found with sensitivity analysis the closest pair of

ke and growth rate was unrealistically low, 4% and 0% respectively. According to the

AEG model The Buckle is an overvalued firm using our estimated cost of equity

(12.03%), a finding consistent with other models.

Sensitivity Analysis g 0 -0.2 -0.4 -0.8

Ke 0.04 $31.60 $77.25 $81.40 $83.77

0.05 $28.60 $56.55 $59.66 $61.49

0.09 $14.96 $22.35 $23.71 $24.59

0.1203 $6.22 $13.13 $13.99 $14.60

0.15 $3.69 $8.43 $9.03 $9.47

Altman Z-score

The Altman z-score is a metric used to measure the credit risk on a firm. It is

used by bankers and analyst to measure the amount of risk a firm has on their current

statements. The formula is based on a regression and uses weights on differing ratios

of the firm. The formula is presented below.

Z-score= 1.2 [Working Capital/ Total Assets] + 1.4[Retained Earnings/ Total Assets] + 3.3 [Earnings Before Interest and Taxes/ Total Assets] + .6 [Market

Value of Equity/ Book Value of Liabilities] + 1 [Sales/ Total Assets]

With different weights each part of the formula has a different impact on the

overall z-score. For instance, a weight of 3.3 is given to Earnings Before Interest and

85

Taxes/ Total Assets which measures if the company has current earnings to support

interest and taxes.

Concerning the output, a z-score greater than 3 is a sign of good credit and a

score below of 2 is poor. Using The Buckle’s financials over the past five years, we

found the most recent z-score to equal 6.11. This is a good credit rating and will be

able to obtain lower interest rates on loans. This can also lead to a better chance of

store in ideal locations for marketing and selling their product.

2001 2002 2003 2004 2005

Altman Z-score 8.43 8.2 5.85 6.2 6.11

With knowledge of accounting, manager’s can also manipulate their z-score. The

Buckle, using operating leases instead of capital, lowers their liabilities and in return

overstates assets. This increases their z-score allowing them to appear less risky.

Although highly unethical, it is the norm in the industry. Larger firms can actually profit

from this even more due to the economies of scale. Smaller operating firms in the

specialty retail industry, such as The Buckle, have to play along and can’t afford to stray

from the norm. If they do, it is an instant disadvantage concerning the interest rates

they receive on loans.

Valuation Conclusion

When the intrinsic value per share is lower than the market price per share the

firm is overvalued in the market based on our beliefs. Now that every valuation models

has been run and presented we can conclude with confidence that The Buckle is an

overvalued firm in the specialty retail industry. Each model produces output with this

interpretation except the free cash flow model. This is no case for discrepancy because

the free cash flow model has very little explanatory power. Overall, The Buckle is

overvalued and a recommendation to investors is to sell as of April 2, 2007.

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Appendix

SUMMARY OUTPUT 3M

Regression Statistics Multiple R 0.126207 R Square 0.015928 Adjusted R Square 0.004072 Standard Error 0.122764 Observations 85 ANOVA

df SS MS F Significance

F Regression 1 0.02025 0.020247 1.343446 0.249751 Residual 83 1.25089 0.015071 Total 84 1.27114

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.013879 0.01626 0.853631 0.395766 -0.01846 0.046218 -

0.01846 0.046218

X Variable 1 0.352619 0.30423 1.159071 0.249751 -0.25247 0.957711 -

0.25247 0.957711 SUMMARY OUTPUT 1YR




Coefficients Standard t Stat P-value Lower 95% Upper Lower Upper

87

Error 95% 95.0% 95.0%

Intercept 0.01513 0.01673 0.904269 0.36847 -0.01815 0.04841 -

0.01815 0.04841

X Variable 1 0.365125 0.30685 1.189915 0.237472 -0.24519 0.975436 -







Lower 95.0%

Upper 95.0%

Intercept 0.023302 0.01904 1.223845 0.224474 -0.01457 0.061172 -

0.01457 0.061172

X Variable 1 0.480782 0.32486 1.479962 0.142669 -0.16535 1.126918 -




F Regression 1 0.03597 0.035974 2.417346 0.123803

88

Residual 83 1.23517 0.014882 Total 84 1.27114



Lower 95.0%

Upper 95.0%

Intercept 0.02592 0.01978 1.310555 0.193623 -0.01342 0.065257 -

0.01342 0.065257

X Variable 1 0.509334 0.32759 1.554782 0.123803 -0.14223 1.1609 -







Lower 95.0%

Upper 95.0%

Intercept 0.027931 0.02027 1.378115 0.171872 -0.01238 0.068241 -

0.01238 0.068241

X Variable 1 0.531515 0.32844 1.618283 0.109396 -0.12175 1.184777 -

0.12175 1.184777

Buckle Historical Prices Dividends Only Date Dividends 10/10/2003 0.06667 1/13/2004 0.06667 4/13/2004 0.06667 7/13/2004 0.06667

10/13/2004 0.08 1/12/2005 0.08 4/13/2005 0.08 7/13/2005 0.1

89

10/12/2005 0.11333 1/11/2006 0.11333 4/12/2006 0.11333 7/12/2006 0.11333

10/12/2006 0.13333 1/16/2007 3:2 split 1/17/2007 0.133 0.088667

90

Firm'sNo Split Split Split Adjusted

Adjustment Raw Split Adjusted Adjusted Closing Date Close Dividend Factor Closing Price Dividend Return MRP3M MRP1YR MRP5YR MRPYR7 MRPYR10

1/3/2000 15.69 15.69 0.073187415 0.0031 -0.04682/1/2000 14.62 14.62 -0.093052109 -0.0345 -0.0407 -0.0453 -0.0465 -0.04613/1/2000 16.12 16.12 0.258391881 -0.1455 -0.1504 -0.1550 -0.1554 -0.15344/3/2000 12.81 12.81 -0.055309735 -0.0268 -0.0304 -0.0332 -0.0333 -0.03085/1/2000 13.56 13.56 0.154042553 -0.0358 -0.0391 -0.0402 -0.0403 -0.03756/1/2000 11.75 11.75 -0.137298091 -0.0833 -0.0867 -0.0903 -0.0903 -0.08787/3/2000 13.62 13.62 0.04287902 -0.0420 -0.0451 -0.0464 -0.0467 -0.04448/1/2000 13.06 13.06 0.123924269 -0.1186 -0.1180 -0.1190 -0.1194 -0.11779/1/2000 11.62 11.62 -0.308744795 -0.0063 -0.0053 -0.0041 -0.0040 -0.0018

10/2/2000 16.81 16.81 -0.056148231 -0.0568 -0.0563 -0.0543 -0.0548 -0.053011/1/2000 17.81 17.81 0.014236902 0.0241 0.0269 0.0292 0.0286 0.029612/1/2000 17.56 17.56 -0.142578125 -0.0676 -0.0649 -0.0610 -0.0618 -0.06121/2/2001 20.48 20.48 0.091102824 -0.0929 -0.0895 -0.0852 -0.0863 -0.08592/1/2001 18.77 18.77 0.001066667 0.0488 0.0536 0.0531 0.0504 0.05013/1/2001 18.75 18.75 -0.074074074 0.0185 0.0218 0.0197 0.0176 0.01764/2/2001 20.25 20.25 0.030534351 -0.1167 -0.1143 -0.1177 -0.1201 -0.12025/1/2001 19.65 19.65 0.03968254 -0.0448 -0.0449 -0.0527 -0.0554 -0.05656/1/2001 18.9 18.9 -0.005263158 -0.0113 -0.0121 -0.0236 -0.0267 -0.02827/2/2001 19 19 -0.05 -0.0248 -0.0249 -0.0372 -0.0405 -0.04198/1/2001 20 20 0.212121212 0.0326 0.0323 0.0209 0.0179 0.01619/4/2001 16.5 16.5 -0.090909091 0.0546 0.0543 0.0433 0.0406 0.0393

10/1/2001 18.15 18.15 -0.0925 -0.0447 -0.0460 -0.0590 -0.0629 -0.065111/1/2001 20 20 -0.103139013 -0.0919 -0.0932 -0.1090 -0.1130 -0.115612/3/2001 22.3 22.3 0.119477912 -0.0266 -0.0293 -0.0472 -0.0517 -0.05401/2/2002 19.92 19.92 -0.17515528 -0.0014 -0.0064 -0.0281 -0.0328 -0.03512/4/2002 24.15 24.15 -0.014285714 0.0044 -0.0004 -0.0222 -0.0267 -0.02923/1/2002 24.5 24.5 0.049250535 -0.0530 -0.0577 -0.0784 -0.0825 -0.08454/1/2002 23.35 23.35 0.013015184 0.0471 0.0397 0.0180 0.0140 0.01265/1/2002 23.05 23.05 -0.064908722 -0.0083 -0.0156 -0.0373 -0.0410 -0.04296/3/2002 24.65 24.65 0.083516484 0.0605 0.0546 0.0332 0.0291 0.02657/1/2002 22.75 22.75 0.099033816 0.0685 0.0638 0.0439 0.0398 0.03658/1/2002 20.7 20.7 0.029850746 -0.0220 -0.0245 -0.0430 -0.0479 -0.05149/3/2002 20.1 20.1 0.101369863 0.1071 0.1060 0.0907 0.0848 0.0810

10/1/2002 18.25 18.25 -0.078282828 -0.0962 -0.0968 -0.1090 -0.1146 -0.118311/1/2002 19.8 19.8 0.1 -0.0701 -0.0705 -0.0835 -0.0894 -0.093412/2/2002 18 18 0.084337349 0.0517 0.0493 0.0337 0.0278 0.02371/2/2003 16.6 16.6 -0.000602047 0.0161 0.0137 -0.0021 -0.0081 -0.01212/3/2003 16.61 16.61 -0.061581921 0.0054 0.0037 -0.0132 -0.0187 -0.02323/3/2003 17.7 17.7 -0.016666667 -0.0202 -0.0213 -0.0373 -0.0428 -0.04734/1/2003 18 18 -0.010989011 -0.0865 -0.0874 -0.1028 -0.1084 -0.11315/1/2003 18.2 18.2 -0.053562142 -0.0599 -0.0611 -0.0777 -0.0831 -0.08806/2/2003 19.23 19.23 -0.055036855 -0.0221 -0.0230 -0.0364 -0.0419 -0.04697/1/2003 20.35 20.35 0.018009005 -0.0254 -0.0261 -0.0387 -0.0444 -0.04938/1/2003 19.99 19.99 0.037902388 -0.0268 -0.0288 -0.0463 -0.0521 -0.05749/2/2003 19.26 19.26 -0.140562249 0.0024 -0.0010 -0.0216 -0.0275 -0.0324

10/1/2003 22.41 22.41 0.024223035 -0.0617 -0.0645 -0.0839 -0.0895 -0.094811/3/2003 21.88 0.06667 21.88 0.06667 -0.009179684 -0.0165 -0.0196 -0.0390 -0.0446 -0.050012/1/2003 22.15 22.15 -0.139805825 -0.0578 -0.0617 -0.0812 -0.0864 -0.09131/2/2004 25.75 25.75 0.000777303 -0.0261 -0.0301 -0.0497 -0.0549 -0.05972/2/2004 25.73 0.06667 25.73 0.06667 -0.109231008 -0.0211 -0.0245 -0.0433 -0.0486 -0.05363/1/2004 28.96 28.96 0.060029283 0.0072 0.0042 -0.0141 -0.0193 -0.02424/1/2004 27.32 27.32 -0.02741189 0.0076 0.0052 -0.0108 -0.0160 -0.02125/3/2004 28.09 0.06667 28.09 0.06667 -0.003303717 -0.0215 -0.0262 -0.0458 -0.0508 -0.05546/1/2004 28.25 28.25 0.027272727 -0.0281 -0.0355 -0.0562 -0.0608 -0.06497/1/2004 27.5 27.5 0.05973025 0.0226 0.0143 -0.0038 -0.0080 -0.01188/2/2004 25.95 0.06667 25.95 0.06667 -0.052906079 -0.0159 -0.0233 -0.0392 -0.0434 -0.04739/1/2004 27.47 27.47 0.06390395 -0.0243 -0.0295 -0.0440 -0.0483 -0.0521

10/1/2004 25.82 25.82 -0.161688312 -0.0306 -0.0350 -0.0474 -0.0513 -0.055111/1/2004 30.8 0.08 30.8 0.08 0.046779661 -0.0551 -0.0595 -0.0707 -0.0747 -0.078212/1/2004 29.5 29.5 0.031108004 -0.0525 -0.0564 -0.0667 -0.0702 -0.07331/3/2005 28.61 28.61 -0.0560871 0.0037 -0.0008 -0.0101 -0.0134 -0.01642/1/2005 30.31 0.08 30.31 0.08 -0.129475795 -0.0423 -0.0472 -0.0557 -0.0583 -0.06083/1/2005 34.91 34.91 0.014825581 -0.0063 -0.0108 -0.0182 -0.0202 -0.02224/1/2005 34.4 34.4 -0.12823112 -0.0075 -0.0125 -0.0212 -0.0228 -0.02455/2/2005 39.46 0.08 39.46 0.08 -0.108254398 -0.0575 -0.0623 -0.0691 -0.0707 -0.07256/1/2005 44.34 44.34 0.025913929 -0.0289 -0.0332 -0.0384 -0.0393 -0.04137/1/2005 43.22 43.22 0.100866021 -0.0651 -0.0683 -0.0724 -0.0733 -0.07478/1/2005 39.26 0.1 39.26 0.1 0.158669414 -0.0216 -0.0251 -0.0285 -0.0293 -0.03059/1/2005 33.97 33.97 -0.077904452 -0.0421 -0.0456 -0.0481 -0.0487 -0.0495

10/3/2005 36.84 36.84 0.123170732 -0.0168 -0.0204 -0.0220 -0.0227 -0.023911/1/2005 32.8 0.11333 32.8 0.11333 0.020884926 -0.0719 -0.0758 -0.0773 -0.0778 -0.078612/1/2005 32.24 32.24 -0.085390071 -0.0387 -0.0423 -0.0435 -0.0438 -0.04441/3/2006 35.25 35.25 -0.078431373 -0.0645 -0.0683 -0.0687 -0.0689 -0.06952/1/2006 38.25 0.11333 38.25 0.11333 -0.063166545 -0.0439 -0.0450 -0.0440 -0.0442 -0.04473/1/2006 40.95 40.95 -0.042105263 -0.0564 -0.0578 -0.0567 -0.0566 -0.05674/3/2006 42.75 42.75 0.032110092 -0.0583 -0.0597 -0.0592 -0.0591 -0.05925/1/2006 41.42 0.11333 41.42 0.11333 -0.008040841 -0.0153 -0.0171 -0.0171 -0.0175 -0.01806/1/2006 41.87 41.87 0.05465995 -0.0485 -0.0501 -0.0501 -0.0504 -0.05127/3/2006 39.7 39.7 0.171091445 -0.0543 -0.0567 -0.0558 -0.0559 -0.05628/1/2006 33.9 0.11333 33.9 0.11333 -0.103496837 -0.0716 -0.0730 -0.0712 -0.0713 -0.07179/1/2006 37.94 37.94 -0.041435068 -0.0749 -0.0748 -0.0722 -0.0723 -0.0728

10/2/2006 39.58 39.58 -0.157693126 -0.0798 -0.0802 -0.0772 -0.0773 -0.077711/1/2006 46.99 0.13333 46.99 0.13333 -0.073287512 -0.0667 -0.0663 -0.0631 -0.0631 -0.063512/1/2006 50.85 50.85 0.514294223 -0.0632 -0.0626 -0.0583 -0.0583 -0.05851/3/2007 33.58 33.58 0.490457168 -0.0636 -0.0633 -0.0592 -0.0593 -0.05952/1/2007 33.8 0.133 3:2 Stock Split 22.53 0.088667 -0.0564 -0.0559 -0.0528 -0.0528 -0.0529

Regression Data

91

S&P500 Historical Prices

Date Open High Low Close Volume Adj Close SP Mon Return GS3M MRP3M GS1 MRP1YR GS5 MRP5YR GS7 MRPYR7 GS10 MRPYR101/3/2000 1469.25 1478 1350.14 1394.46 1.124E+09 1394.46 0.0205207772/1/2000 1394.46 1444.55 1325.07 1366.42 1.106E+09 1366.42 -0.088190153 5.50 0.0550 -0.0345 6.12 0.06120 -0.0407 6.58 0.06580 -0.0453 6.70 0.0670 -0.0465 6.66 0.0666 -0.04613/1/2000 1366.42 1552.87 1346.62 1498.58 1.191E+09 1498.58 0.031774337 5.73 0.0573 -0.1455 6.22 0.06220 -0.1504 6.68 0.06680 -0.1550 6.72 0.0672 -0.1554 6.52 0.0652 -0.15344/3/2000 1498.58 1527.19 1339.4 1452.43 1.11E+09 1452.43 0.022406026 5.86 0.0586 -0.0268 6.22 0.06220 -0.0304 6.50 0.06500 -0.0332 6.51 0.0651 -0.0333 6.26 0.0626 -0.03085/1/2000 1452.43 1481.51 1361.09 1420.6 948127200 1420.6 -0.023374123 5.82 0.0582 -0.0358 6.15 0.06150 -0.0391 6.26 0.06260 -0.0402 6.27 0.0627 -0.0403 5.99 0.0599 -0.03756/1/2000 1420.6 1488.93 1420.6 1454.6 1.054E+09 1454.6 0.016612735 5.99 0.0599 -0.0833 6.33 0.06330 -0.0867 6.69 0.06690 -0.0903 6.69 0.0669 -0.0903 6.44 0.0644 -0.08787/3/2000 1454.6 1517.32 1413.89 1430.83 1.002E+09 1430.83 -0.057225502 5.86 0.0586 -0.0420 6.17 0.06170 -0.0451 6.30 0.06300 -0.0464 6.33 0.0633 -0.0467 6.10 0.0610 -0.04448/1/2000 1430.83 1525.21 1425.43 1517.68 931317300 1517.68 0.056505002 6.14 0.0614 -0.1186 6.08 0.06080 -0.1180 6.18 0.06180 -0.1190 6.22 0.0622 -0.1194 6.05 0.0605 -0.11779/1/2000 1517.68 1530.09 1419.44 1436.51 1.102E+09 1436.51 0.004974115 6.28 0.0628 -0.0063 6.18 0.06180 -0.0053 6.06 0.06060 -0.0041 6.05 0.0605 -0.0040 5.83 0.0583 -0.0018

10/2/2000 1436.52 1454.82 1305.79 1429.4 1.242E+09 1429.4 0.08703753 6.18 0.0618 -0.0568 6.13 0.06130 -0.0563 5.93 0.05930 -0.0543 5.98 0.0598 -0.0548 5.80 0.0580 -0.053011/1/2000 1429.4 1438.46 1294.9 1314.95 1.034E+09 1314.95 -0.004037022 6.29 0.0629 0.0241 6.01 0.06010 0.0269 5.78 0.05780 0.0292 5.84 0.0584 0.0286 5.74 0.0574 0.029612/1/2000 1314.95 1389.05 1254.07 1320.28 1.232E+09 1320.28 -0.033477061 6.36 0.0636 -0.0676 6.09 0.06090 -0.0649 5.70 0.05700 -0.0610 5.78 0.0578 -0.0618 5.72 0.0572 -0.06121/2/2001 1320.28 1383.37 1274.62 1366.01 1.387E+09 1366.01 0.101674275 5.94 0.0594 -0.0929 5.60 0.05600 -0.0895 5.17 0.05170 -0.0852 5.28 0.0528 -0.0863 5.24 0.0524 -0.08592/1/2001 1366.01 1376.38 1215.44 1239.94 1.204E+09 1239.94 0.068609792 5.29 0.0529 0.0488 4.81 0.04810 0.0536 4.86 0.04860 0.0531 5.13 0.0513 0.0504 5.16 0.0516 0.05013/1/2001 1239.94 1267.42 1081.19 1160.33 1.322E+09 1160.33 -0.071334817 5.01 0.0501 0.0185 4.68 0.04680 0.0218 4.89 0.04890 0.0197 5.10 0.0510 0.0176 5.10 0.0510 0.01764/2/2001 1160.33 1269.3 1091.99 1249.46 1.334E+09 1249.46 -0.00506442 4.54 0.0454 -0.1167 4.30 0.04300 -0.1143 4.64 0.04640 -0.1177 4.88 0.0488 -0.1201 4.89 0.0489 -0.12025/1/2001 1249.46 1315.93 1232 1255.82 1.171E+09 1255.82 0.025678302 3.97 0.0397 -0.0448 3.98 0.03980 -0.0449 4.76 0.04760 -0.0527 5.03 0.0503 -0.0554 5.14 0.0514 -0.05656/1/2001 1255.82 1286.62 1203.03 1224.38 1.266E+09 1224.38 0.010856732 3.70 0.0370 -0.0113 3.78 0.03780 -0.0121 4.93 0.04930 -0.0236 5.24 0.0524 -0.0267 5.39 0.0539 -0.02827/2/2001 1224.42 1239.78 1165.54 1211.23 1.187E+09 1211.23 0.068499797 3.57 0.0357 -0.0248 3.58 0.03580 -0.0249 4.81 0.04810 -0.0372 5.14 0.0514 -0.0405 5.28 0.0528 -0.04198/1/2001 1211.23 1226.27 1124.87 1133.58 1.056E+09 1133.58 0.088996484 3.59 0.0359 0.0326 3.62 0.03620 0.0323 4.76 0.04760 0.0209 5.06 0.0506 0.0179 5.24 0.0524 0.01619/4/2001 1133.58 1155.4 944.75 1040.94 1.777E+09 1040.94 -0.017777275 3.44 0.0344 0.0546 3.47 0.03470 0.0543 4.57 0.04570 0.0433 4.84 0.0484 0.0406 4.97 0.0497 0.0393

10/1/2001 1040.94 1110.61 1026.76 1059.78 1.361E+09 1059.78 -0.069919698 2.69 0.0269 -0.0447 2.82 0.02820 -0.0460 4.12 0.04120 -0.0590 4.51 0.0451 -0.0629 4.73 0.0473 -0.065111/1/2001 1059.78 1163.38 1054.31 1139.45 1.318E+09 1139.45 -0.007516898 2.20 0.0220 -0.0919 2.33 0.02330 -0.0932 3.91 0.03910 -0.1090 4.31 0.0431 -0.1130 4.57 0.0457 -0.115612/3/2001 1139.45 1173.62 1114.53 1148.08 1.304E+09 1148.08 0.015820209 1.91 0.0191 -0.0266 2.18 0.02180 -0.0293 3.97 0.03970 -0.0472 4.42 0.0442 -0.0517 4.65 0.0465 -0.05401/2/2002 1148.08 1176.97 1081.66 1130.2 1.491E+09 1130.2 0.021206618 1.72 0.0172 -0.0014 2.22 0.02220 -0.0064 4.39 0.04390 -0.0281 4.86 0.0486 -0.0328 5.09 0.0509 -0.03512/1/2002 1130.2 1130.2 1074.36 1106.73 1.444E+09 1106.73 -0.035436948 1.68 0.0168 0.0044 2.16 0.02160 -0.0004 4.34 0.04340 -0.0222 4.79 0.0479 -0.0267 5.04 0.0504 -0.02923/1/2002 1106.73 1173.94 1106.73 1147.39 1.386E+09 1147.39 0.065436616 1.76 0.0176 -0.0530 2.23 0.02230 -0.0577 4.30 0.04300 -0.0784 4.71 0.0471 -0.0825 4.91 0.0491 -0.08454/1/2002 1147.39 1147.84 1063.46 1076.92 1.373E+09 1076.92 0.009164683 1.83 0.0183 0.0471 2.57 0.02570 0.0397 4.74 0.04740 0.0180 5.14 0.0514 0.0140 5.28 0.0528 0.01265/1/2002 1076.92 1106.59 1048.96 1067.14 1.281E+09 1067.14 0.078115213 1.75 0.0175 -0.0083 2.48 0.02480 -0.0156 4.65 0.04650 -0.0373 5.02 0.0502 -0.0410 5.21 0.0521 -0.04296/3/2002 1067.14 1070.74 952.92 989.82 1.605E+09 989.82 0.085781356 1.76 0.0176 0.0605 2.35 0.02350 0.0546 4.49 0.04490 0.0332 4.90 0.0490 0.0291 5.16 0.0516 0.02657/1/2002 989.82 994.46 775.68 911.62 2.013E+09 911.62 -0.004857707 1.73 0.0173 0.0685 2.20 0.02200 0.0638 4.19 0.04190 0.0439 4.60 0.0460 0.0398 4.93 0.0493 0.03658/1/2002 911.62 965 833.44 916.07 1.374E+09 916.07 0.123626239 1.71 0.0171 -0.0220 1.96 0.01960 -0.0245 3.81 0.03810 -0.0430 4.30 0.0430 -0.0479 4.65 0.0465 -0.05149/3/2002 916.07 924.02 800.2 815.28 1.472E+09 815.28 -0.079570087 1.65 0.0165 0.1071 1.76 0.01760 0.1060 3.29 0.03290 0.0907 3.88 0.0388 0.0848 4.26 0.0426 0.0810

10/1/2002 815.28 907.44 768.63 885.76 1.717E+09 885.76 -0.053988529 1.66 0.0166 -0.0962 1.72 0.01720 -0.0968 2.94 0.02940 -0.1090 3.50 0.0350 -0.1146 3.87 0.0387 -0.118311/1/2002 885.76 941.82 872.05 936.31 1.492E+09 936.31 0.064206315 1.61 0.0161 -0.0701 1.65 0.01650 -0.0705 2.95 0.02950 -0.0835 3.54 0.0354 -0.0894 3.94 0.0394 -0.093412/2/2002 936.31 954.28 869.45 879.82 1.29E+09 879.82 0.028187449 1.25 0.0125 0.0517 1.49 0.01490 0.0493 3.05 0.03050 0.0337 3.64 0.0364 0.0278 4.05 0.0405 0.02371/2/2003 879.82 935.05 840.34 855.7 1.539E+09 855.7 0.017297747 1.21 0.0121 0.0161 1.45 0.01450 0.0137 3.03 0.03030 -0.0021 3.63 0.0363 -0.0081 4.03 0.0403 -0.01212/3/2003 855.7 864.64 806.29 841.15 1.4E+09 841.15 -0.008288335 1.19 0.0119 0.0054 1.36 0.01360 0.0037 3.05 0.03050 -0.0132 3.60 0.0360 -0.0187 4.05 0.0405 -0.02323/3/2003 841.15 895.9 788.9 848.18 1.504E+09 848.18 -0.074968372 1.19 0.0119 -0.0202 1.30 0.01300 -0.0213 2.90 0.02900 -0.0373 3.45 0.0345 -0.0428 3.90 0.0390 -0.04734/1/2003 848.18 924.24 847.85 916.92 1.498E+09 916.92 -0.048433462 1.15 0.0115 -0.0865 1.24 0.01240 -0.0874 2.78 0.02780 -0.1028 3.34 0.0334 -0.1084 3.81 0.0381 -0.11315/1/2003 916.92 965.38 902.83 963.59 1.554E+09 963.59 -0.011195485 1.15 0.0115 -0.0599 1.27 0.01270 -0.0611 2.93 0.02930 -0.0777 3.47 0.0347 -0.0831 3.96 0.0396 -0.08806/2/2003 963.59 1015.33 963.59 974.5 1.562E+09 974.5 -0.015964698 1.09 0.0109 -0.0221 1.18 0.01180 -0.0230 2.52 0.02520 -0.0364 3.07 0.0307 -0.0419 3.57 0.0357 -0.04697/1/2003 974.5 1015.41 962.1 990.31 1.507E+09 990.31 -0.01755935 0.94 0.0094 -0.0254 1.01 0.01010 -0.0261 2.27 0.02270 -0.0387 2.84 0.0284 -0.0444 3.33 0.0333 -0.04938/1/2003 990.31 1011.01 960.84 1008.01 1.23E+09 1008.01 0.012088718 0.92 0.0092 -0.0268 1.12 0.01120 -0.0288 2.87 0.02870 -0.0463 3.45 0.0345 -0.0521 3.98 0.0398 -0.05749/2/2003 1008.01 1040.29 990.36 995.97 1.501E+09 995.97 -0.052098105 0.97 0.0097 0.0024 1.31 0.01310 -0.0010 3.37 0.03370 -0.0216 3.96 0.0396 -0.0275 4.45 0.0445 -0.0324

10/1/2003 995.97 1053.79 995.97 1050.71 1.469E+09 1050.71 -0.007078057 0.96 0.0096 -0.0617 1.24 0.01240 -0.0645 3.18 0.03180 -0.0839 3.74 0.0374 -0.0895 4.27 0.0427 -0.094811/3/2003 1050.71 1063.65 1031.2 1058.2 1.313E+09 1058.2 -0.048312828 0.94 0.0094 -0.0165 1.25 0.01250 -0.0196 3.19 0.03190 -0.0390 3.75 0.0375 -0.0446 4.29 0.0429 -0.050012/1/2003 1058.2 1112.56 1053.41 1111.92 1.312E+09 1111.92 -0.016983017 0.95 0.0095 -0.0578 1.34 0.01340 -0.0617 3.29 0.03290 -0.0812 3.81 0.0381 -0.0864 4.30 0.0430 -0.09131/2/2004 1111.92 1155.38 1105.08 1131.13 1.723E+09 1131.13 -0.012061767 0.91 0.0091 -0.0261 1.31 0.01310 -0.0301 3.27 0.03270 -0.0497 3.79 0.0379 -0.0549 4.27 0.0427 -0.05972/2/2004 1131.13 1158.98 1124.44 1144.94 1.554E+09 1144.94 0.016631001 0.90 0.0090 -0.0211 1.24 0.01240 -0.0245 3.12 0.03120 -0.0433 3.65 0.0365 -0.0486 4.15 0.0415 -0.05363/1/2004 1144.94 1163.23 1087.16 1126.21 1.529E+09 1126.21 0.017077576 0.94 0.0094 0.0072 1.24 0.01240 0.0042 3.07 0.03070 -0.0141 3.59 0.0359 -0.0193 4.08 0.0408 -0.02424/1/2004 1126.21 1150.57 1107.23 1107.3 1.583E+09 1107.3 -0.01193918 0.95 0.0095 0.0076 1.19 0.01190 0.0052 2.79 0.02790 -0.0108 3.31 0.0331 -0.0160 3.83 0.0383 -0.02125/3/2004 1107.3 1127.74 1076.32 1120.68 1.525E+09 1120.68 -0.01767119 0.96 0.0096 -0.0215 1.43 0.01430 -0.0262 3.39 0.03390 -0.0458 3.89 0.0389 -0.0508 4.35 0.0435 -0.05546/1/2004 1120.68 1146.34 1113.32 1140.84 1.381E+09 1140.84 0.035508115 1.04 0.0104 -0.0281 1.78 0.01780 -0.0355 3.85 0.03850 -0.0562 4.31 0.0431 -0.0608 4.72 0.0472 -0.06497/1/2004 1140.84 1140.84 1078.78 1101.72 1.456E+09 1101.72 -0.002282113 1.29 0.0129 0.0226 2.12 0.02120 0.0143 3.93 0.03930 -0.0038 4.35 0.0435 -0.0080 4.73 0.0473 -0.01188/2/2004 1101.72 1109.68 1060.72 1104.24 1.26E+09 1104.24 -0.009277037 1.36 0.0136 -0.0159 2.10 0.02100 -0.0233 3.69 0.03690 -0.0392 4.11 0.0411 -0.0434 4.50 0.0450 -0.04739/1/2004 1104.24 1131.54 1099.18 1114.58 1.361E+09 1114.58 -0.013820563 1.50 0.0150 -0.0243 2.02 0.02020 -0.0295 3.47 0.03470 -0.0440 3.90 0.0390 -0.0483 4.28 0.0428 -0.0521

10/1/2004 1114.58 1142.05 1090.29 1130.2 1.572E+09 1130.2 -0.037160723 1.68 0.0168 -0.0306 2.12 0.02120 -0.0350 3.36 0.03360 -0.0474 3.75 0.0375 -0.0513 4.13 0.0413 -0.055111/1/2004 1130.2 1188.46 1127.6 1173.82 1.524E+09 1173.82 -0.031437719 1.79 0.0179 -0.0551 2.23 0.02230 -0.0595 3.35 0.03350 -0.0707 3.75 0.0375 -0.0747 4.10 0.0410 -0.078212/1/2004 1173.78 1217.33 1173.78 1211.92 1.45E+09 1211.92 0.025946651 2.11 0.0211 -0.0525 2.50 0.02500 -0.0564 3.53 0.03530 -0.0667 3.88 0.0388 -0.0702 4.19 0.0419 -0.07331/3/2005 1211.92 1217.8 1163.75 1181.27 1.659E+09 1181.27 -0.018552675 2.22 0.0222 0.0037 2.67 0.02670 -0.0008 3.60 0.03600 -0.0101 3.93 0.0393 -0.0134 4.23 0.0423 -0.01642/1/2005 1181.27 1212.44 1180.95 1203.6 1.636E+09 1203.6 0.019490255 2.37 0.0237 -0.0423 2.86 0.02860 -0.0472 3.71 0.03710 -0.0557 3.97 0.0397 -0.0583 4.22 0.0422 -0.06083/1/2005 1203.6 1229.11 1163.69 1180.59 1.874E+09 1180.59 0.020521243 2.58 0.0258 -0.0063 3.03 0.03030 -0.0108 3.77 0.03770 -0.0182 3.97 0.0397 -0.0202 4.17 0.0417 -0.02224/1/2005 1180.59 1191.88 1136.15 1156.85 2.18E+09 1156.85 -0.02908099 2.80 0.0280 -0.0075 3.30 0.03300 -0.0125 4.17 0.04170 -0.0212 4.33 0.0433 -0.0228 4.50 0.0450 -0.02455/2/2005 1156.85 1199.56 1146.18 1191.5 1.96E+09 1191.5 0.000142698 2.84 0.0284 -0.0575 3.32 0.03320 -0.0623 4.00 0.04000 -0.0691 4.16 0.0416 -0.0707 4.34 0.0434 -0.07256/1/2005 1191.5 1219.59 1188.3 1191.33 1.929E+09 1191.33 -0.034719409 2.90 0.0290 -0.0289 3.33 0.03330 -0.0332 3.85 0.03850 -0.0384 3.94 0.0394 -0.0393 4.14 0.0414 -0.04137/1/2005 1191.33 1245.15 1183.55 1234.18 1.963E+09 1234.18 0.011349389 3.04 0.0304 -0.0651 3.36 0.03360 -0.0683 3.77 0.03770 -0.0724 3.86 0.0386 -0.0733 4.00 0.0400 -0.07478/1/2005 1234.18 1245.86 1201.07 1220.33 1.93E+09 1220.33 -0.006900986 3.29 0.0329 -0.0216 3.64 0.03640 -0.0251 3.98 0.03980 -0.0285 4.06 0.0406 -0.0293 4.18 0.0418 -0.03059/1/2005 1220.33 1243.13 1205.35 1228.81 2.232E+09 1228.81 0.018061159 3.52 0.0352 -0.0421 3.87 0.03870 -0.0456 4.12 0.04120 -0.0481 4.18 0.0418 -0.0487 4.26 0.0426 -0.0495

10/3/2005 1228.81 1233.34 1168.2 1207.01 2.493E+09 1207.01 -0.03399014 3.49 0.0349 -0.0168 3.85 0.03850 -0.0204 4.01 0.04010 -0.0220 4.08 0.0408 -0.0227 4.20 0.0420 -0.023911/1/2005 1207.01 1270.64 1201.07 1249.48 2.261E+09 1249.48 0.000953304 3.79 0.0379 -0.0719 4.18 0.04180 -0.0758 4.33 0.04330 -0.0773 4.38 0.0438 -0.0778 4.46 0.0446 -0.078612/1/2005 1249.48 1275.8 1246.59 1248.29 2.057E+09 1248.29 -0.024834385 3.97 0.0397 -0.0387 4.33 0.04330 -0.0423 4.45 0.04450 -0.0435 4.48 0.0448 -0.0438 4.54 0.0454 -0.04441/3/2006 1248.29 1294.9 1245.74 1280.08 2.596E+09 1280.08 -0.000452891 3.97 0.0397 -0.0645 4.35 0.04350 -0.0683 4.39 0.04390 -0.0687 4.41 0.0441 -0.0689 4.47 0.0447 -0.06952/1/2006 1280.08 1297.57 1253.61 1280.66 2.381E+09 1280.66 -0.010974075 4.34 0.0434 -0.0439 4.45 0.04450 -0.0450 4.35 0.04350 -0.0440 4.37 0.0437 -0.0442 4.42 0.0442 -0.04473/1/2006 1280.66 1310.88 1268.42 1294.87 2.311E+09 1294.87 -0.012009675 4.54 0.0454 -0.0564 4.68 0.04680 -0.0578 4.57 0.04570 -0.0567 4.56 0.0456 -0.0566 4.57 0.0457 -0.05674/3/2006 1302.88 1318.16 1280.74 1310.61 2.407E+09 1310.61 0.031903251 4.63 0.0463 -0.0583 4.77 0.04770 -0.0597 4.72 0.04720 -0.0592 4.71 0.0471 -0.0591 4.72 0.0472 -0.05925/1/2006 1310.61 1326.7 1245.34 1270.09 2.591E+09 1270.09 -8.66005E-05 4.72 0.0472 -0.0153 4.90 0.04900 -0.0171 4.90 0.04900 -0.0171 4.94 0.0494 -0.0175 4.99 0.0499 -0.01806/1/2006 1270.05 1290.68 1219.29 1270.2 2.633E+09 1270.2 -0.005060079 4.84 0.0484 -0.0485 5.00 0.05000 -0.0501 5.00 0.05000 -0.0501 5.03 0.0503 -0.0504 5.11 0.0511 -0.05127/3/2006 1270.06 1280.42 1224.54 1276.66 2.44E+09 1276.66 -0.020831096 4.92 0.0492 -0.0543 5.16 0.05160 -0.0567 5.07 0.05070 -0.0558 5.08 0.0508 -0.0559 5.11 0.0511 -0.05628/1/2006 1278.53 1306.74 1261.3 1303.82 2.281E+09 1303.82 -0.023977243 5.08 0.0508 -0.0716 5.22 0.05220 -0.0730 5.04 0.05040 -0.0712 5.05 0.0505 -0.0713 5.09 0.0509 -0.07179/1/2006 1303.8 1340.28 1290.93 1335.85 2.564E+09 1335.85 -0.030545597 5.09 0.0509 -0.0749 5.08 0.05080 -0.0748 4.82 0.04820 -0.0722 4.83 0.0483 -0.0723 4.88 0.0488 -0.0728

10/2/2006 1335.82 1389.45 1327.1 1377.94 2.709E+09 1377.94 -0.016199853 4.93 0.0493 -0.0798 4.97 0.04970 -0.0802 4.67 0.04670 -0.0772 4.68 0.0468 -0.0773 4.72 0.0472 -0.077711/1/2006 1377.76 1407.89 1360.98 1400.63 2.826E+09 1400.63 -0.012458577 5.05 0.0505 -0.0667 5.01 0.05010 -0.0663 4.69 0.04690 -0.0631 4.69 0.0469 -0.0631 4.73 0.0473 -0.063512/1/2006 1400.63 1431.81 1385.93 1418.3 2.463E+09 1418.3 -0.013864167 5.07 0.0507 -0.0632 5.01 0.05010 -0.0626 4.58 0.04580 -0.0583 4.58 0.0458 -0.0583 4.60 0.0460 -0.05851/3/2007 1418.03 1441.61 1403.97 1438.24 2.983E+09 1438.24 -0.005325256 4.97 0.0497 -0.0636 4.94 0.04940 -0.0633 4.53 0.04530 -0.0592 4.54 0.0454 -0.0593 4.56 0.0456 -0.05952/1/2007 1437.9 1446.64 1437.9 1445.94 5.83E+09 1445.94 5.11 0.0511 -0.0564 5.06 0.05060 -0.0559 4.75 0.04750 -0.0528 4.75 0.0475 -0.0528 4.76 0.0476 -0.0529

5.05 4.71 4.71 4.72

Market Risk Premium

92

Date Open High Low Close Volume Adj Close1/3/2000 14.87 16.81 13.56 15.69 81800 9.862/1/2000 15.81 16.12 13 14.62 64200 9.193/1/2000 15 17.81 14.75 16.12 62700 10.134/3/2000 15.88 16.75 12.38 12.81 93000 8.055/1/2000 12.81 14.12 10.81 13.56 60900 8.526/1/2000 13.44 13.44 11.5 11.75 92600 7.387/3/2000 11.62 14.44 11.37 13.62 30300 8.568/1/2000 13.62 14 12 13.06 27300 8.219/1/2000 13.06 14 11.19 11.62 88700 7.3

10/2/2000 11.94 16.81 11.62 16.81 67400 10.5611/1/2000 16.75 21.12 16.75 17.81 83800 11.1912/1/2000 17.69 19.38 15 17.56 41700 11.041/2/2001 17.69 20.95 17.06 20.48 45700 12.872/1/2001 20.4 20.71 18.77 18.77 31100 11.793/1/2001 18.77 19.5 16.89 18.75 65500 11.784/2/2001 18.5 21.55 18.05 20.25 58400 12.725/1/2001 20.25 20.84 17.7 19.65 59000 12.356/1/2001 19.68 20 17.3 18.9 39100 11.887/2/2001 18.5 19.9 17.46 19 32200 11.948/1/2001 19 20.49 18.35 20 50200 12.579/4/2001 20.01 20.1 14.6 16.5 78000 10.37

10/1/2001 16.5 18.33 16.25 18.15 34200 11.411/1/2001 18.05 20 17.4 20 38100 12.5712/3/2001 20 22.5 19.3 22.3 25900 14.011/2/2002 22.35 22.4 19.55 19.92 39300 12.522/4/2002 20.5 24.2 20.05 24.15 28200 15.173/1/2002 24 24.75 21.4 24.5 67700 15.394/1/2002 24.4 24.9 22.74 23.35 68800 14.675/1/2002 23.1 23.5 20.4 23.05 102200 14.486/3/2002 22.95 25 21.7 24.65 35400 15.497/1/2002 24.75 25.46 21.96 22.75 37200 14.38/1/2002 22.7 23.1 19.94 20.7 26600 13.019/3/2002 20.8 21.18 19.4 20.1 24500 12.63

10/1/2002 19.9 19.9 15.72 18.25 33500 11.4711/1/2002 18.15 19.84 17.9 19.8 10000 12.4412/2/2002 19.8 20.35 17.5 18 47800 11.311/2/2003 18.1 19 16.46 16.6 13000 10.432/3/2003 16.62 17.25 15.52 16.61 16500 10.443/3/2003 16.61 18.33 16.2 17.7 15600 11.124/1/2003 17.7 18.85 17.2 18 15000 11.315/1/2003 17.9 18.49 16.1 18.2 28700 11.446/2/2003 18.25 20.16 17.57 19.23 69100 12.087/1/2003 19.15 20.6 18.63 20.35 20800 12.798/1/2003 20.3 20.67 19.11 19.99 30700 12.569/2/2003 20.05 20.65 19.15 19.26 31300 12.1

10/1/2003 19.28 22.75 19.28 22.41 23200 14.1511/3/2003 22.45 22.85 21.05 21.88 23000 13.8112/1/2003 21.83 22.38 20.69 22.15 31100 13.981/2/2004 22.14 25.77 21.69 25.75 39500 16.332/2/2004 25.6 27.22 25 25.73 33500 16.323/1/2004 25.83 29.02 25.45 28.96 42900 18.364/1/2004 28.83 29.73 27.21 27.32 37800 17.395/3/2004 27.07 28.31 25.4 28.09 53100 17.886/1/2004 28 29 26.45 28.25 51200 17.987/1/2004 28.25 28.25 26.65 27.5 49000 17.568/2/2004 27.25 28.1 25.15 25.95 46100 16.579/1/2004 25.9 28.41 25.9 27.47 29400 17.54

10/1/2004 27.5 28.5 25.76 25.82 26500 16.5611/1/2004 25.77 31.65 25.67 30.8 39100 19.7612/1/2004 30.97 31.97 28.3 29.5 18000 18.921/3/2005 29.6 31 28.05 28.61 23100 18.432/1/2005 28.65 31.14 28.61 30.31 32400 19.523/1/2005 30.3 34.91 29.99 34.91 32000 22.494/1/2005 34.97 35.89 32.2 34.4 63100 22.235/2/2005 34.55 40.2 33.97 39.46 128700 25.56/1/2005 39.6 46.4 39.6 44.34 135500 28.667/1/2005 44.34 46.1 40.69 43.22 92100 28.038/1/2005 43.22 43.41 36.55 39.26 109200 25.469/1/2005 38 39.02 32.4 33.97 105400 22.03

10/3/2005 34.16 38.08 32.91 36.84 100500 24.0111/1/2005 36.84 39.98 32.19 32.8 119600 21.3712/1/2005 32.8 33.58 31.75 32.24 109200 21.011/3/2006 32.24 35.42 31.82 35.25 110400 23.092/1/2006 35.23 39.01 34.47 38.25 102500 25.063/1/2006 38.2 41.35 36.85 40.95 79000 26.834/3/2006 40.85 42.99 39.66 42.75 68100 28.135/1/2006 42.7 43.34 38.53 41.42 79200 27.256/1/2006 41.6 42.58 39.45 41.87 98000 27.557/3/2006 41.95 42.36 37.54 39.7 71100 26.238/1/2006 39.7 40 33.38 33.9 134100 22.49/1/2006 33.91 38.86 33.71 37.94 108300 25.07

10/2/2006 38 39.96 37.12 39.58 75700 26.2911/1/2006 39.64 47.41 37.87 46.99 106100 31.2112/1/2006 46.75 54.98 45.16 50.85 176000 33.771/3/2007 51 53.1 32.7 33.58 163000 33.582/1/2007 33.68 33.91 33.58 33.8 151600 33.8

End of Month Price Series for The Buckle (BKE)

BKE Month End Prices

93

Discounted Dividends Model

Disc Div1 2 3 4 5 6 7 8 9 10 Perp

Forecast Years $0.402005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 3.32502

Dividends per share $0.15 $0.18 $0.20 $0.23 $0.26 $0.28 $0.31 $0.34 $0.36 $0.38 1.0677PV Factor 0.89262 0.79677 0.71121 0.63484 0.56667 0.50582 0.4515 0.40302 0.35974 0.32111PV of Future Dividends $0.13 $0.14 $0.14 $0.15 $0.15 $0.14 $0.14 $0.14 $0.13 $0.12Total of YBY and Perp $2.45

Estimated Price per Share $2.450 0.01 0.02 0.03

Ke 0.1203 Ke 0.01 $38.73 NA ($33.68) ($15.58)g 0 0.03 $12.16 $17.12 $32.00 NA

0.06 $5.61 $6.36 $7.47 $9.33Actual Price Per Share $35.34 0.09 $3.49 $3.72 $4.02 $4.42

0.1203 $2.45 $2.55 $2.66 $2.81

0 0.05 0.1165 0.15Ke 0.1203 $2.45 $3.21 $35.18 -$2.94

Sensitivity Analysis g

g

94

Free Cash Flows Model

FCF1 2 3 4 5 6 7 8 9 10 Perp

Forecast Years $127,239.232006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $1,211,802.19

EPS 2.64 $2.82 $2.99 $3.17 $3.36 $3.56 $3.77 $4.00 $4.24 $4.49 $4.76 $446,487.14DPS $0.15 $0.18 $0.20 $0.23 $0.26 $0.28 $0.31 $0.34 $0.36 $0.38BVE 15.25 $17.92 $20.73 $23.70 $26.83 $30.13 $33.62 $37.31 $41.21 $45.34 $49.72CFFO $80,701 $85,543 $90,676 $96,116 $101,883 $107,996 $114,476 $121,344 $128,625 $136,343CFFI $14,261 $14,475 $14,692 $14,912 $15,136 $15,363 $15,593 $15,827 $16,065 $16,306FCF $66,440 $71,068 $75,984 $81,204 $86,747 $92,633 $98,883 $105,517 $112,560 $120,037

PV Factor 0.9049774 0.8189841 0.7411620 0.6707349 0.6069999 0.5493212 0.4971232 0.4498853 0.4071360 0.3684489PV YBY of FCF $60,127 $58,204 $56,316 $54,466 $52,656 $50,885 $49,157 $47,471 $45,827 $44,227Total of YBY and Perp $965,824BV Liab $74,473Estimated Mkt Value of Equity $891,351Estimated Price per Share $45.35

0 0.01 0.02 0.030.05 $110.55 $130.42 $163.54 $229.77

WACC 0.105 0.07 $74.61 $82.44 $93.41 $109.87g 0 0.09 $54.99 $58.79 $63.67 $70.18

WACC 0.105 $45.35 $47.74 $50.69 $54.430.12 $38.22 $39.80 $41.70 $44.01

Actual Price per share $35.34 0.13 $34.44 $35.66 $37.10 $38.84


95

Residual Income Model

RI1 2 3 4 5 6 7 8 9 10 Perp

Forecast Years -$0.502005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -$4.16

EPS 2.64 $2.44 $2.66 $2.89 $3.12 $3.37 $3.62 $3.88 $4.16 $4.44 $4.73 -$1.33DPS $0.15 $0.18 $0.20 $0.23 $0.26 $0.28 $0.31 $0.34 $0.36 $0.38BVE 15.25 $17.54 $20.02 $22.70 $25.59 $28.70 $32.04 $35.62 $39.44 $43.52 $47.87Normal Income 1.83 2.11 2.41 2.73 3.08 3.45 3.85 4.28 4.74 5.24Residual Income $0.60 $0.55 $0.48 $0.39 $0.29 $0.17 $0.03 ($0.13) ($0.30) ($0.50)

PV Factor 0.89262 0.79677 0.71121 0.6348376 0.56667 0.505818 0.451502 0.40302 0.35974 0.32111PV YBY of RI $0.54 $0.44 $0.34 $0.25 $0.16 $0.09 $0.01 ($0.05) ($0.11) ($0.16)Total of YBY and Perp $0.17BVE 15.25Estimated Price per Share $15.42

0 0.16 0.5 0.6 -0.2Ke 0.1203 Ke 0.03 $25.46 $40.72 $38.65 $38.51 $36.24g 0 0.05 $25.25 $34.18 $32.07 $62.08 $30.16

0.09 $19.48 $24.85 $22.35 $22.24 $21.100.11 $16.71 $21.84 $18.77 $18.67 $17.75

Actual Price per share $35.34 0.1203 $15.42 $20.80 $17.18 $17.09 $16.25


96

Long Run ROE Model

LR RI1 2 3 4 5 6 7 8 9 10

Forecast Years2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EPS 2.64 $2.44 $2.66 $2.89 $3.12 $3.37 $3.62 $3.88 $4.16 $4.44 $4.73DPS $0.15 $0.18 $0.20 $0.23 $0.26 $0.28 $0.31 $0.34 $0.36 $0.38BVE 15.25 $17.54 $20.02 $22.70 $25.59 $28.70 $32.04 $35.62 $39.44 $43.52 $47.87

ROE 15.63% 15.93% 16.24% 16.55% 16.87% 17.19% 17.52% 17.86% 18.20% 18.55%Avg ROE 17.06%

1.418121Long Run RI Perp Value $21.63

0 0.04 0.08 0.11Ke 0.1203 0.03 $86.70 ($199.10) ($27.62) ($11.54)g 0 Ke 0.05 $52.02 $199.10 ($46.03) ($15.39)

0.09 $28.90 $39.82 $138.10 ($46.17)Actual Price per share $35.34 0.1203 $21.62 $24.79 $34.27 $89.66

0.15 $17.34 $18.10 $19.73 $23.09

0 0.04 0.08 0.11 10.00% 13.00% 17.06% 20.00% 23.00%10.00% $12.68 $11.39 $7.57 ($14.81) 0.03 $50.83 $66.08 $86.72 $101.67 $116.9213.00% $16.48 $17.09 $18.92 $29.61 0.05 $30.50 $39.65 $52.03 $61.00 $70.15

ROE 17.06% $21.63 $24.80 $34.28 $89.72 Ke 0.09 $16.94 $22.03 $28.91 $33.89 $38.9720.00% $25.35 $30.39 $45.41 $133.25 0.1203 $12.68 $16.48 $21.63 $25.35 $29.1623.00% $29.16 $36.08 $56.76 $177.67 0.15 $10.17 $13.22 $17.34 $20.33 $23.38

gSensitivity Analysis

g ROE

97

AEG Model

0 1 2 3 4 5 6 7 8 9 10Forecast Years

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 PerpEPS 2.64 $2.44 $2.66 $2.89 $3.12 $3.37 $3.62 $3.88 $4.16 $4.44 $4.73 -0.09DPS 0.133 $0.15 $0.18 $0.20 $0.23 $0.26 $0.28 $0.31 $0.34 $0.36 $0.38DPS invested at 17% (Drip) $0.02 $0.02 $0.02 $0.02 $0.03 $0.03 $0.03 $0.04 $0.04 $0.04Cum-Dividend Earnings $2.45 $2.68 $2.91 $3.15 $3.40 $3.65 $3.92 $4.20 $4.48 $4.78Normal Earnings $2.96 $2.73 $2.98 $3.23 $3.50 $3.77 $4.06 $4.35 $4.66 $4.98Abnormal Earning Growth (AEG) -$0.50 -$0.06 -$0.07 -$0.09 -$0.10 -$0.12 -$0.14 -$0.16 -$0.18 -$0.20 ($0.75)

PV Factor 0.892618 0.796767 0.711209 0.6348376 0.5666675 0.5058177 0.451502 0.403019 0.359742 0.321112

PV of AEG ($0.45) ($0.04) ($0.05) ($0.05) ($0.06) ($0.06) ($0.06) ($0.06) ($0.06) ($0.06)

Core EPS 2.44Total YBY PV of AEG ($0.97)Total EPS Perpetuity StreamContinuing (Terminal) ValuePV of Terminal Value -0.7213317Total PV of AEG ($0.24)Total Average EPS Perp (t+1) $0.75Capitalization Rate (perpetuity) 0.1203

Intrinsic Value Per Share $6.22

Ke 0.1203 Sensitivity Analysisg 0 g

0 -0.2 -0.4 -0.8Ke 0.04 $31.60 $77.25 $81.40 $83.77

Actual Price per share $35.34 0.05 $28.60 $56.55 $59.66 $61.490.09 $14.96 $22.35 $23.71 $24.59

0.1203 $6.22 $13.13 $13.99 $14.600.15 $3.69 $8.43 $9.03 $9.47

98

References

The Buckle Website www.buckle.com

The Buckle 2002-2005 10-K

The Buckle 2002-2005 Annual Reports

Yahoo Finance finance.yahoo.com

Edgar Scan, PWC http://edgarscan.pwcglobal.com

Zara www.zara.com

Bloomberg Worldwide www.bloomberg.com

Palepu, Healy, Bernard. Business Analysis and Valuation Using Financial Statements (Ohio: Thomson-Southwestern, 3rd Edition, 2004) Abercrombie & Fitch 10-K Abercrombie & Fitch Annual Reports Pacific Sunwear 10-K Pacific Sunwear Annual Reports www.amerisave.com

St. Louis Federal Reserve Interest Rate Data http://research.stlouisfed.org/fred2/

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