What it Takes to Succeed in Retail; Some Ideas from The Buckle’s 10-K

The Buckle’s results for the year ended January 31^st are certainly not news at this point, but I do think they have a few things to tell us about retail. There are some commonalities emerging among retailers in the active outdoor/fashion retailers that I want to highlight.

The Buckle is a retailer I think does a good job. I’ve been particularly impressed with their ability to integrate owned with purchased brands and the way they merchandise them together. Just to review briefly they had, at year end, 460 stores in 44 states. For the year they had revenue of $1.153 billion, up just slightly from $1.128 billion the previous year. Their gross margin didn’t change much and gross profit was up just a bit from $499 to $507 million.

Expenses rose a similar amount with the result that both operating and net income were more or less unchanged. Net income of $162.6 million was the same as last year. They haven’t managed an increase in comparable store sales for the last two years. No balance sheet issues to discuss.

That’s the shortest financial review I’ve ever done, probably to the relief of some of you.

Here’s how they describe their marketing and merchandising strategy:

“The Company’s marketing and merchandising strategy is designed to create customer loyalty by offering a wide selection of key brand name and private label merchandise and providing a broad range of value-added services. The Company believes it provides a unique specialty apparel store experience with merchandise designed to appeal to the fashion-conscious 15 to 30-year old.”

Almost 44% of their revenues are from denim. As an aside, I’m told denim has been showing some weakness lately. I continue to be amazed at what people seem prepared to pay for a pair of jeans. That’s no doubt because I am not very fashion sensitive.

The company says that “Brand name merchandise accounted for approximately 65% of the Company’s sales during 2014.” The balance is private label. They expect “…that brand name merchandise will continue to constitute a majority of sales.”

I find this characterization as only 65% being “branded” fascinating as 100% of their merchandise is branded- it’s just that 35% is brands they own.   The integration of owned and purchased brands is what I believe to be one of The Buckle’s strong points.

Let’s move on to what the company calls its “unique shopping environment.”

It creates this environment by “…maintaining a high level of personalized service and by offering a wide selection of fashionable, quality merchandise. The Company believes it is essential to create an enjoyable shopping environment and, in order to fulfill this mission, it employs highly motivated employees who provide personal attention to customers… The Company also incorporates specialized services such as free hemming, free gift wrapping, layaways, a frequent shopper card, the Buckle private label credit card, and a special order system that allows stores to obtain specifically requested merchandise from other Company stores or from the Company’s online order fulfillment center.”

It goes on to further describe what it does.

“…the Company’s distribution system allows for variation in the mix of merchandise distributed to each store. This allows individual store inventories to be tailored to reflect differences in customer buying patterns at various locations. In addition, to ensure a continually fresh look in its stores, the Company ships new merchandise daily to most stores. The Company also has a transfer program that shifts certain merchandise to locations where it is selling best. This distribution and transfer system helps to maintain customer satisfaction by providing in-stock popular items and reducing the need to markdown slow-moving merchandise at a particular location. The Company believes the reduced markdowns justify the incremental distribution costs associated with the transfer system. The Company does not hold store-wide off-price sales at any time.”

And then it notes, “To enhance selling and product presentation, the Company continues to update the fixtures in its stores. New tables and fixtures have been added to the Company’s signature store design in each of the last several fiscal years. The new tables and fixtures were also rolled out to select existing stores to update their looks as well.”

We learn in the conference call that they plan to open nine new stores during the year while completing “11 substantial remodels.” In the 10-K we’re told, “The Company intends to open new stores only when management believes there is a reasonable expectation of satisfactory results.”

One would think that wouldn’t need to be said. I’ve never known a company to set out to get poor results. I think it’s an appropriate indication of caution in the market and an acknowledgement that getting (profitable) sales is no longer as simple as just opening more stores.

Just one more quote from their discussion of computer systems, then I’ll explain where this all comes together.

“The system’s function is to ensure that store shipments are delivered accurately and promptly, to account for inventory, and to assist in allocating merchandise among stores. Management can track, on a daily basis, which merchandise is selling at specific locations and direct transfers of merchandise from one store to another as necessary. This allows stores to carry a reduced inventory while at the same time satisfying customer demand.”

“To reduce inter-store shipping costs and provide timely restocking of in-season merchandise, the Company warehouses a portion of initial shipments for later distribution. Sales reports are then used to replenish, on a basis of one to three times each week, those stores that are experiencing the greatest success selling specific styles, colors, and sizes of merchandise.”

In a sense, all of this sounds simply like good operating procedures that any successful retailer has always had to have. But the level of detail, the rigor and discipline required is much greater than it had to be in the past. Even with the efficiencies of computer systems, it’s expensive. And doing it well is no longer a choice- it’s a survival requirement.

What The Buckle is doing is the minimum bar that its customers require. So you see them talking about doing all this, but you don’t yet see an impact on the bottom line, an improvement in comparative stores sales or a meaningful improvement in revenues.  Of course, maybe without it the direction would be down rather than sideways.

Fundamentally, it’s harder to be a retailer because your customer is less brand loyal, has better information, more choices, and there’s less real product differentiation. The Buckle and other retailers like them have the balance sheet and the size to respond to this tough competitive environment. That’s not a guarantee of success, but it’s a chance to try.

This environment and the requirements of success favor larger players. I don’t like that. Well, it’s not that I don’t “like” it; I try and focus on how the market is going to change/function and what I like has nothing to do with that. But I’ve still got a soft spot for smaller, independent specialty retailers and believe, or maybe want to believe, they have a role to play in trend identification and brand launching.

Or maybe that’s changing as connectedness makes communities the arbiter of brands and trends.

Years ago, I wrote an article discussing why brands should identify the 50 most influential shops for their brand and make sure they are in them. Given the decline in the number of specialty retailers, maybe the number 50 is too high now. But bear in mind that the ones still standing are either phenomenal retailers or are among the luckiest business people in the world. You’ll know you’ve arrived as a brand when you don’t have to give those stores product on consignment, guarantee a margin, or agree to buy it back if it doesn’t sell.