No Store Growth; Perhaps a Good Decision, But What’s the Strategy? The Buckle Annual Report

The Buckle ended its February 3rd fiscal year with 457 retail stores and expects to end the current year with the same number.  These days, that may be exactly the right decision; the days of open more stores, automatically earn more money, are gone.

So what’s the strategy?  Over three years, revenues have fallen from $1.120 billion to $975 million and to $913 million in the recently completed fiscal year.  Pretax income is down from $235 million in the year ended January 30, 2016 to $156 million last year and $139 million in the most recent year.  Gross margin, however, rose from 40.7% last year to 41.6% in the year just ended.  On the other hand, SG&A expenses rose a bit in the face of declining revenues.

Here’s how The Buckle describes its business and operations in the 10-K:

  • “The Buckle, Inc….is a retailer of medium to better-priced casual apparel, footwear, and accessories for fashion-conscious young men and women.
  • “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.”
  • “Management believes the Company provides a unique store 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.”
  • “Merchandising and pricing decisions are made centrally; however, 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.”
  • “The Company’s management information systems (“MIS”) and electronic data processing systems (“EDP”) consist of a full range of retail, financial, and merchandising systems…The system includes PC based point-of-sale (“POS”) registers in each store. The registers trickle transactions to a central server using a virtual private network for collection of comprehensive data, including complete item-level sales information and employee time clocking. The transactions are then swept into the central computer (IBM iSeries). Price updates are sent daily for the price lookup (“PLU”) file maintained within the POS registers.”

This is all good stuff.  Indeed, it’s all necessary stuff.  Doing it, however, is the price you pay to get a chance to compete rather than a source of competitive advantage.  And I have a hard time with the use of the word “unique.” I’ve always thought The Buckle did a great job integrating their owned with purchased brands, but “unique” is pushing the envelope.

The balance sheet remains strong with no long-term debt, though equity has fallen 9.1% since last year from $531 to $391 million.  Two years ago, cash flow from operations was $159 million.  Last year it was $149 million and in the most current year, $120 million.  It’s profitable but, as we’ve already reviewed, revenues and earnings are down over three years.  I’d add that they had a 7.2% decline in comparable store sales.

Here are the questions I’d like to ask The Buckle’s management.  For all I know, they may have great answers.  They just didn’t want to put them in the 10-K

  1. What is your process for identifying and bringing in new brands? If that’s as important as I think it is, you must have one to succeed.
  2. Your online sales in the fourth quarter were $33.5 million, or about 12% of fourth quarter revenue. But there’s no discussion of how you tie your brick and mortar and online presence together.  I think that’s become increasingly important to critical.  Have you made a decision to focus on a brick and mortar strategy?
  3. Your private label business was 36% of revenue in 2017, and you list ten private label brands you carry.  I can’t tell if this is all of them.  I’ve noted how well you merchandise private label and purchased brands together, but I’d sure like some more information on what limits, if any, you consider the private label business to have.  You note you expect purchased brands will continue to be a majority of sales.  You actually have “Dependence on Private Label Merchandise” as a risk factor and note, “The Company may increase or decrease the percentage of net sales from private label merchandise in the future. The Company’s private label products generally earn a higher margin than branded products. Thus, reductions in the private label mix would decrease the Company’s merchandise margins and, as a result, reduce net earnings.”
  4. The purchased brand Miss Me/Rock Revival was 18.2% of the year’s revenues.  Another purchased brand, Axis Denim, was 14.0%.  That’s 32.2% from two brands and seems like a troubling concentration.  Are you confident those two brands will remain popular?
  5. You aren’t opening any new stores this year but are doing four full remodels. You note that construction costs for a remodel are about the same as for a new store.  Should we expect remodels rather than new store openings to be emphasized in the future?  What kind of sales bump do you get from remodels?

So there you have it.  The Buckle is a profitable business with a strong balance sheet.  But the three-year trends are going in the wrong direction, and the public information doesn’t describe a strategy to address the issue or respond to the new retail environment.



It’s Not All About the Omnichannel? Could That Be Okay? The Buckle’s Annual Report

The way The Buckle 10K and conference call come across, you can’t quite decide, at first read, if they’ve made a specific decision to focus on brick and mortar or if they are just way, way behind in online.  I think it’s the former given how they describe their business and how they compete.

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The Buckle Has a Lousy Quarter- Kind of. Well, Not Exactly. Can the Outsized Returns Continue?

As I’ve recently written, Tilly’s and Zumiez were kind of caught by surprise by their very positive end of October quarterly results.  But because the surprise was of the positive kind, nobody seemed to care.  Though perhaps they should.

The Buckle, on the other hand, reported a 14.6% decline in revenues from $280 million in last year’s quarter to $239 million in this years.

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Fun Times at Other Industry Retailers

At almost the same time Abercrombie & Fitch (owner of Hollister), Tilly’s, The Buckle, and Genesco (owner of the Journeys chain) released, in early June, 10-Qs for their quarters that ended April 30th.

I was going to do my usual thing and review each one separately.  But I was busy, too much time passed and honestly, there’s so much sameness to what our industry’s retailers are saying that I wasn’t sure anybody would want to read four separate reports.  Hell, I didn’t even want to.

So what I’ve done is gone through the 10-Qs and collected a few observations and some summary data.  It is, I think, enough.

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A Brief Review of The Buckle’s Quarter

The Buckle didn’t say anything unusual or intriguing in its conference call or 10-Q. I guess that’s good. But at the moment, this is the last retailer I haven’t reported on, and it appeals to my sense of order to get it done before settling in for Christmas and the holidays.

What we can learn from The Buckle is that they basically have the same general market related issues as all the other retailers in our space.

For the quarter ended October 31, 2015, their sales fell 4.1% to $280.2 million. In the same quarter last year, sales were $292.2 million. They ended the quarter with 468 stores in 44 states compared to 461 a year ago. Private label was about 35% of their business. I’ve remarked in the past about The Buckle’s apparent success in integrating its owned with purchased brands. I think they continue to be good at that.

Comparable store sales declined $15.2 million or by 5.2%. The number of transactions was down 5.6%. Online sales were up 13.6% to $25.9 million during the quarter. We haven’t heard much talk lately about online sales cannibalizing brick and mortar. I’m beginning to think it’s something retailers should refocus on, if they ever lost their focus.

The gross profit margin also declined from 43.7% to 41.9% while total gross profit fell $10 million to $117.3 million. “The decrease was primarily attributable to a reduction in merchandise margins (1.00%, as a percentage of net sales) and deleveraged occupancy, buying, and distribution expenses as a result of the comparable store sales decline (0.80%, as a percentage of net sales).”

Selling expenses declined very slightly to $52.3 million and general and administrative expense was down 15.5% from $10.3 to $8.7 million. As a percentage of revenues, selling expense rose from 18.1% to 18.7%. General and administrative expense fell from 3.5% to 3.1%.

Operating income fell 12.9% from $64.6 to $56.3 million and net income was down 11.6% from $40.6 to $35.9 million.

Cash flow from operating activities through three quarters was $53.4 million compared to $91.6 million in the same period the previous year, but the balance sheet remains strong. I would note an increase in inventory from $147 million last year to $176 million in this year’s quarter. Not what you want to see with declining sales.

One analyst asked some penetrating and rigorous questions of CEO Dennis Nelson. I can’t quote everything he said here, but he was very concerned with comparative store sales declines that go back to 2013. After laying that all out, he asks, “…what is going on with the retail market and Buckle, in particular? And is brick-and-mortar stores are going through secular decline, what is Buckle’s strategy to resume comps growth going forward?”

I guess I’d characterize CEO Nelson’s response as nonspecific. I never expect CEOs to be very detailed in explaining their strategies during a pubic conference call. But I thought his answer could have been given by other retail CEOs and demonstrated the common issues and uncertainty as to how to respond to those issues they all face.

Even with sales down a bit, The Buckle had a pretty good bottom line although it exhibited the same issues and uncertainty as its competitors. I guess my conclusion, after seeing the results from various retailers, is that you need to build your balance sheet, control your inventory, be thoughtful to cautious about the roles of brick and mortar and where you open new stores, and define omnichannel in a way that does more than just make things easier for customers.

What does your store stand for as a brand that can differentiate it from its competitors?



Not Much Happened But That’s Not So Bad; The Buckle’s Quarter

In the retail and economic environment we’ve got right now and given the results of some of its competitors it’s kind of hard to complain about a company that put 10% of revenue to the net income line in the quarter that ended August 1st.

Revenues were pretty much the same as in last year’s quarter at $236 million. The cost of sales was more or less constant at $141 million. Gross profit stayed at $95 million as did selling expense at $46 million. Okay, here’s a dramatic change! General and administrative expenses actually rose from $10 to $11 million. That took income from operations down $1.5 million to $37.2 million and net income was down a million from $24.5 to $23.5 million.

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

The Buckle’s results for the year ended January 31st 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.

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The Buckle’s November 1st Quarter; Little Financial Change

For the quarter ended November 1, 2014, The Buckle’s revenues rose a little from $286.8 to $292.2 million. That’s a 1.9% increase over last year’s quarter.

The gross profit margin fell a little from 44% in last year’s quarter to 43.7%. In dollars it went up a little from $126.2 to $127.8 million.

Selling, General and Administrative expenses rose a little (1.7%) to $63.2 million. As a percentage of sales, selling expense stayed the same at 18.1% and general and administrative expense fell a little from 3.6% to 3.5%.

Operating income rose- you guessed it- a little, from $64.1 to $64.6 million.

Net income was up a really, really, really little (0.079%, or $32,000) to $40.6 million.

Well, these day holding your own isn’t the worst result we’re seeing among retailers in our industry.

The balance sheet is in good shape, with comparable store inventory down about 1.5% compared to a year ago. Net cash flow from operations was a positive $69.3 million in the three quarters of last fiscal year. It improved to $90.6 million this year. That’s more than a little. I like positive cash flow.

The company ended the quarter with 461 stores in 44 states, up from 452 stores in 42 states a year ago. So far this year, they’ve opened a net of 11 new stores and did what they call “substantial remodels” on 17. According to the conference call, plans presently call for 6 new stores next year and 10 of those substantial remodels. I’d love to hear something about the impact of the remodelings.

Comparable store sales were down 0.3% during the quarter. Online sales are not included in comparable store sales. They rose 3.7% during the quarter to $22.8 million compared to $22.0 million in last year’s quarter.

The conference call is short and not particularly intriguing either. Private label business, we hear, was 35% of revenues, the same as in last year’s quarter.

One analyst asked President and CEO Dennis Nelson “…about your philosophy on ecommerce versus stores.” I’d characterize his answer as noncommittal and understated.

“Well, we continue to look at new marketing and upgrading our staff and taking different approaches, so it is something we are not ignoring. We involve the merchandise teams continually more on that, so we would expect it to continue to have steady growth, and we have taken approach that it’s part of our business.”

While that isn’t the whole answer, you get the gist. Compare that to the soliloquy we’d get from Zumiez’s senior management in response to the same question. I’m not highlighting this as a problem. I doubt CEO Nelson’s answer encompasses his complete thinking about ecommerce. I hope not. But I do wish somebody had followed up and used the word “omnichannel” to see what response we’d gotten.

And that’s about it. I’d like to thank The Buckle for making this one easy for me, though I wouldn’t have minded a bit more information.

The Buckle Annual Report: Less Online, More Brick and Mortar Focus?

There’s a lot I like about The Buckle. I don’t find time to cover them every quarter, but whenever I visit one of their 450 stores, I am impressed with how they’ve merchandised their owned (34% of revenue) with purchased brands together.   My sense is that they give credibility to the brands they carry, not the other way around. Long time readers know I like that and believe it distinguishes good retailers. 

The Buckle, according to the 10K which you can see here, “…is a retailer of medium to better-priced casual apparel, footwear, and accessories for fashion-conscious young men and women….The Company emphasizes personalized attention to its customers and provides customer services such as free hemming, free gift-wrapping, easy layaways, the Buckle private label credit card, and a frequent shopper program.” Most stores have somebody to do alterations. The Buckle’s stores “…are located in regional, high-traffic shopping malls and lifestyle centers…” and they expect it will stay that way.
“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.”
“Management believes the Company provides a unique store 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. Each salesperson is educated to help create a complete look for the customer by helping them find the best fits and showing merchandise as coordinating outfits.”
Most of you know I’ve got a problem with the word “unique.” It’s not that we couldn’t use some of that in this industry. The Buckle does, as they say, some things to differentiate itself in the market, but as a group, they don’t rise to unique.
Here’s a breakdown of their sales for the last two years by product group:
They try to deliver new merchandise daily to stores, and have a program to shift merchandise to where it’s selling best.   They warehouse part of their initial shipments so they can distribute it as sales patterns require. They strive “…to provide a continually changing selection of the latest casual fashions.”
You can’t really read that without “fast fashion” coming into your brain. But every retailer is striving to improve their systems to make sure they get the right product to the right customer at the right time. That’s always been good business. You need to do it even if “fast fashion” isn’t where you see yourself competing.
Stores average about 5,000 square feet and range from 2,900 to 8,475. A reader pointed out to me that the wider the variation in square feet among stores, the more difficult it is to merchandise and inventory a store because different sizes require different layouts and quantities. I guess that’s something that most multi store retailers have to deal with. The Buckle expects to open 17 stores this year and complete 17 full store remodels.
The Numbers
Sales for the year ended February 1, 2014 were $1.128 billion (including online sales of $29.3 million), up from $1.124 billion in the year ended February 2, 2013. That’s an increase of 0.35%. So not much.
One of the analysts noted that online sales growth was “…below the industry growth rate for e-comm,” and asked why that was. Here’s the answer from President and CEO Dennis Nelson…
“…we have not been promotional with our online sales and have not had any free shipping specials. We continually run our business regular price like our stores and also over the last year we have added that if a guest orders or buys something that they can special order that out of the store and have free shipping and pick up at the stores and I know that has cut into the online business as well. So we think it’s been a good way to run the business in a profitable way.”
Gross profit was pretty much, well, the same at $499 million. The gross profit margin fell 0.2% to 44.2%. Selling expenses were up $4.9 million to $206.9 million while general and administrative expenses fell by $3.9 million.  The decline in G & A expense was mostly the result of lower equity compensation and incentive bonus accruals. I’d guess they’d like to be paying that, as it would be indicative of better performance. Anyway, not much change in expenses. Ho hum.
Net income fell a bit from $164.3 to $162.6 million, or by 1%.
Well this is all kind of boring. What the hell am I supposed to analyze? Their store count went up by ten during the year. Comparable store sales were unchanged after being up 2.1% the prior year, so the sales increase was the result of new stores. The Buckle does not include online sales in the comparable store sales computation. 
Ah, here’s something. Fourth quarter sales fell 6% from $360.6 to $339 million. All the other quarters had sales increases, though the third quarter increase was small.   We all already know that retailers had a tough holiday season so I guess there’s not much to discuss there either.
There’s no long term debt and hasn’t been. The current ratio is strong and improved. Hmmm. I do see that inventory is up almost 20% on a very small sales increase. It went from $103.9 to $124.1 million. New stores, they tell us, require a $200,000 inventory investment, so that would be $2 million. On a comparable store basis it was still up 18%. Mark down inventory was up compared to the end of the prior year. They tell us, “The adjustment to inventory for markdowns and/or obsolescence was $7.4 million as of February 1, 2014 and $6.3 million as of February 2, 2013, respectively.” A higher adjustment decreases inventory.
In the conference call, they characterize the inventory increase as being the result of being under inventoried in some areas.
Let me try and finish this up with an analyst’s question and the answer Dennis Nelson gives. I think it tell you something about how The Buckle views its competitive positioning.   The question was, “…do you think you are being negatively affected by the so called omnichannel where expectations are for 24/7 online, mobile, price ops kind of experience where you might actually be being showrooms or fitted at Buckle and then having customers make purchase — purchases somewhere else online?”
The answer was, “I think the key to our success along with our people is in our selection with our brands we almost probably 70% – 80% exclusive styles in most seasons and so to find that exact product or sometimes it’s an exclusive fit for us as well as design so that the guest cannot go elsewhere to buy that product and then among our own brands we have several of our own labels in both men’s and women’s that our teams merchandise and design and are also exclusive and now we have a great look, fit but it’s unique styling and has been very successful as well.”
Mr. Nelson kind of punted on the question. Not that this is the first time that’s happened in a conference call. But he said a couple of important things. First, that he thinks 70 to 80 percent of their styles are exclusive (I’m not entirely clear what that means). Second, in not directly addressing the omnichannel issue, he implies that The Buckle is relying on their brick and mortar presentation, their “exclusive” product, their people, and the services they offer in their stores to compete. It sounded to me like they are less focused on the omnichannel than some other teen retailers.
Doing pretty much the same as you did a year ago isn’t all that bad in the current retail market The Buckle serves. The retail strategy seems to emphasize some different services and points of distinction from certain of their competitors. I have trouble with their use of the words “exclusive” and “unique,” but I will watch with interest to see how their brick and mortar strategy, which seems to be less online focused, works out.



The Buckle’s Quarter

This, I’m happy to say, is going to be pretty short. But I’ve gone to the trouble of reviewing their information so I might as well write something. 

As I’ve noted before, what intrigues me about The Buckle is the way they’ve integrated their private label brands with the other brands they carry in their merchandising. They call it “…a collaboration on the styling details throughout brands and private label.” They are not an action sports retailer, describing the business as “…a retailer of medium to better priced casual apparel, footwear, and accessories for fashion conscious young men and women.”   Nor, given their pricing are they focused on fast fashion, though no retailer can ignore the issue of fresh product and time to market these days.
At the end of their quarter on August 3, they had 452 stores in 43 states, up from 439 a year ago. Their 10Q and conference call are notable for their brevity (a good thing from my point of view as the one who has to read it) but also their lack of useful information (a bad thing, though I suppose one leads to another).
Sales for the quarter rose 7.9% to $232.5 million compared to the same quarter last year. Comparable store sales rose 3.2%. This was “…primarily due to a 3.5% increase in the average number of units sold per transaction and a 1.2% increase in the average retail price per piece of merchandise sold, partially offset by a 1.6% decline in the number of transactions at comparable stores during the period.” However, they also had more stores, a one week shift in the fiscal period, and online sales growth. Online sales were up 5.3% to $16.8 million. The Buckle does not include online sales when calculating comparable store sales.
The chart below from their 10Q shows their sales by category. 
It makes you think what the impact on various retailers in addition to The Buckle would be if denim became unpopular. I know, that’s hard to imagine.
Their gross profit margin (which, remember, for a retailer includes buying, distribution and occupancy costs- not just product cost) from 40.1% to 40.6%. That’s a pretty attractive margin. It increased because of the extra week and due to leveraging certain costs over more stores.
There’s nothing particularly notable about their selling and general and administrative expenses. They were up in line with sales growth.
Net income rose from $23.2 to $25.1 million. In both periods, that was 10.8% of revenue.
The balance looks fine, but there’s literally no discussion of it or any footnotes. Too bad. There are some items I was curious about.
Why, as one analyst asked,  are you bucking the trend we’ve seen in some retailers recently? CEO Dennis Nelson says, “We take a true specialty store approach, where not only the selection of the product of continuing to flow new product in to create the excitement, but we really have a high quality sales management team throughout the company that supports our managers who are promoted from within. And they do a very nice job of developing teams that can help the guest and really benefit them in finding the right fits and the outfits. And that’s a real key part of our business as our team in the stores and our sales management team that helps develop them and keeps them looking for the next level.”
That is just an excellent job of not saying all that much, though I have no doubt, whatever it means, that it’s true.
And that is the end of what I think is the shortest article on a 10Q I’ve ever written.