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.

The 467 store chain “…is a retailer of medium to better-priced casual apparel, footwear, and accessories … 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 guest loyalty program. Most stores are in regional shopping malls and lifestyle centers, and this is the Company’s strategy for future expansion…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.”

35% of their revenues were private label.

“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…Denim is a significant contributor to total sales (42.2% of fiscal 2016 net sales) and is a key to the Company’s merchandising strategy. The Company believes it attracts customers with its wide selection of branded and private label denim and a wide variety of fits, finishes, and styles.”

These passages from the 10K are typical of the rest of the document and most of the conference call in ignoring online/internet/mobile/omnichannel considerations.  How’s this all working out for them?

The good news is that their balance sheet’s solid and they are making money, though not so much as they had been making.  Well, they’ve got a lot of company.

In the year ended January 28th, revenues fell 12.9% from $1.12 to $0.975 billion.  Their net income fell 33.5% from $147 to $98 million.  The gross profit margin dropped from 43% to 40.7%.  They reduced their selling and their G&A expenses by 3% and 2% respectively, but that didn’t come close to offsetting the revenue and gross margin declines.

Revenues during the first and second quarter fell 10.3% and 10.2% respectively compared to the same quarters in the prior year.  Third quarter revenue decline accelerated to 14.6% and fourth quarter revenues fell 15.7%.

Sales per store fell 14.7% from $2.18 to $1.86 million during the year.  Comparable store sales were down 13.5% after declining 4.4% the previous year.  The Buckle’s online sales “…decreased 5.4% to $99.8 million for the 52-week fiscal year ended January 28, 2017 compared to $105.5 million for the 52-week fiscal year ended January 30, 2016.”  For the year, then, online sales represented 10.2% of total revenue.

In the past, I’ve noted with some admiration the quality job The Buckle did in integrating the merchandising of owned and purchased brands.  I thought that was an advantage they had.  It may still be.

As noted in the quotes above, denim is an important part of their strategy.  As a percentage of revenues, it’s fallen from 43.7% two years ago to 42.5% last year and 42.2% in the most recent year.  CEO Dennis Nelson responded to a question about strategies to improve sales in the conference call as follows:

“I think the last year has been a situation where it’s more about managing the business than trying to generate extra sales, like where the trend has become for several years we were selling the denim that was well over $100 to $150. There’s still a market for there. And I think we’ve managed the inventory for the right level of that sales. But we’re now selling probably more jeans in the $75, $80 area then we’re the $120 to $150.”

That issue with denim isn’t unique to The Buckle, but they have a dependence on the category.

They also have a strategy that’s apparently focused on opening more stores, but right now that isn’t happening.  Total number of stores declined by one in fiscal 2016 after rising by 8, 9, and 10 in the three previous years.  They expect to open 2 new stores in 2017 (as well as 7 full remodels), but also acknowledge that there will be a few more closings during the year.  That implies fewer total stores at the end of this year.

One thing they have going for them are 88 store leases expiring this fiscal year.  Given the pressure on some malls, it can be a beneficial time for a retailer to be renegotiating a lease.  Assuming, of course, that the mall isn’t going to hell.

But back to the omnichannel.  I’ve pretty much determined it’s definitely a thing.  One of the analysts asked, “Do you view this whole online trend as a tsunami that’s going to overtake the retail industry?  Or do you view it as something of a temporary phenomenon.”

It’s somewhere between disconcerting and remarkable that he felt the need to ask that question.  Here’s CEO Nelson’s answer.

“We understand the online e-comm is here to stay and will have certain growth. And we intend to continue to improve and do a better job there to get more of that business. But we also still feel that, for specialty stores, we offer a great shopping experience with our talent we have in the stores. And we also focus on unique, exclusive special product that cannot be found, in most cases, elsewhere.”

You may interpret that differently, but I hear him referring to ecommerce like it’s an inconvenience that they must deal with.  Focusing time and money on various omnichannel initiatives, of course, is taken to be a competitive requirement by many retailers.  But for it to be more than a defensive move, they need to generate enough additional sales margin to more than pay for all the initiatives- not just cannibalize existing brick and mortar sales.  CEO Nelson pretty much says that in the conference call.  Referring to their online system, he says:

“I think we have a pretty good system in place. Some of it comes down to marketing. But also part of it is to be able to do so profitably where people are not giving out big sales, huge discounts and then do free shipping back and forth. We’ve seen quite a bit in the press about that being a negative to a lot of retailers. So, it’s probably not so hard to generate more sales if you don’t care about the bottom line.”

Hey, he’s not wrong!

It appears the Buckle has decided to focus on their stores and the customer experience.  That doesn’t mean they ignore the omnichannel, but neither does it mean rushing in like the Light Brigade at Balaklava, as some of their competitors have done.  How might they be right?  If their customer experience is truly distinctive, if they pick the right malls to be in, if they actually have “exclusive special product,” and if the ongoing consolidation of brick and mortar keeps eliminating competitors.

That’s a tall order.  But then so is finding a true competitive advantage in the online world.