Buckle’s Quarter and a Note on Auction Rate Securities

I should start out by telling you that the Buckle July 28, 2012 balance sheet is strong. But long term investments include $15.1 million in Auction Rate Securities (ARS). An ARS is a long term security with an interest rate that resets via a “Dutch auction” every 7 to 49 days depending on the terms of the security. Until about February of 2008, the ARS market was very active and very liquid and was a great way for corporations to park excess cash and earn a little extra return. Now it’s not liquid. I guess I mean it’s still not liquid. 

How do you know what an investment that isn’t trading regularly and isn’t liquid is worth? Well, you use “Unobservable inputs that are not corroborated by market data and are projections, estimates, or interpretations that are supported by little or no market activity and are significant to the fair value of the assets.”
 
Every time I read that somebody (not only Buckle) is using “unobservable inputs” as the basis for evaluating an investment, I chuckle. And Buckle notes that “…the Company has reason to believe that certain of the underlying issuers of its ARS are currently at risk…” But they also point out that even if the investment ends up being worth nothing, they’ll be fine, and I agree.
 
I first wrote about ARSs a few years ago and wanted to remind you that the issue is still around. The reason you might care (aside from “unobservable inputs” making you chuckle too- god I love that) is that our current economic mess was caused by a certain level of paralysis in the financial system. You can see, in the case of the ARS market at least, that there’s still some paralysis out there.
 
Buckle’s performance in the quarter ended July 28, 2012 was pretty much exactly the same as in the pcp (prior calendar period- same quarter the previous year). Sales rose 1.5% from $212.4 million to $215.5 million, but comparable store sales were down 0.8% or $1.6 million. “The decrease in comparable store sales was primarily due to a 4.2% decrease in the number of transactions at comparable stores during the period and a 0.9% decrease in the average number of units sold per transaction, partially offset by a 4.6% increase in the average retail price per piece of merchandise sold.” The sales increase came from opening new stores. They had 439 stores in 43 states at the end of the quarter.
 
The average retail price of a piece of merchandise sold was up $1.94 or 4.6% in the quarter compared to the pcp. I think it’s interesting that the average accessory price point was up 13.7% ($0.54). Accessories were 10.1% of revenues up from 8.9% in the pcp. Denim was 36.2% of revenue. Tops represented 33.9%.
 
Online sales rose 12.1% to $16 million. Those aren’t included in the comparable store sales number.   
 
Gross profit fell a bit from $87.1 million to $86.5 million. The gross profit margin was down from 41% to 40.1%.
 
Selling, general and administrative expenses were almost constant, falling from $50.4 million to $50.1 million. Net income declined just barely from $23.6 million to $23.2 million.
 
In the conference call, they noted that private label business was around 30% of sales compared to 28% in the pcp. In response to an analyst question about their target for private label, CEO Dennis Nelson responded, “…we don’t set a specific number of what we want private label to be. We evaluate the product with the brands, and we have our plans. But depending how strong the brands look and are performing, cuts into the percent of how — what our private label is. So private label will continue to grow, it’s just a matter of how much the brands will grow.”
 
The point, which I’ve noted before for Buckle, is that private label isn’t just a way to make some extra margin. It’s part of their strategy for branding Buckle and merchandising their store. I think that’s the right way for a retailer to approach private label.
 
That analyst also asked, “…And then out of the remaining third-party offerings you have, how much of that product is exclusive to Buckle?” Here was the response.
 
“I would say the majority of our product from the brands is exclusive. I don’t know if that would be 80-plus percent. It might vary by season. And sometimes, in season, we’ll pick up some of their product that is out of their line if something is performing and we don’t have time to either tweak the fit, or the color or styling details.”
 
I was a bit surprised by that answer. What I think he’s saying is that of the 70% of product that’s not proprietary, 80% of that is merchandise only Buckle has. I need to walk back through a Buckle store and look at their merchandising with that in mind. Are they saying that 80% of the non-owned brands that Buckle carries are created exclusively for Buckle? While that’s consistent with what’s going on in the relationship between brands and retailers in general, it surprises me that the number would be that high.
 
Buckle’s quarter, then, was not too good and not too bad. The most intriguing thing to me is the comment about so much of their merchandise being exclusive to Buckle. I haven’t followed Buckle all that closely, but I think I’ll start.