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The Buckle Shares Buckle Under Lower Denim Price Points

By Asit Sharma - May 28, 2019 at 9:08AM

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Is pessimism overshadowing value in the fashion chain's shares?

As apparel, footwear, and accessories retailer The Buckle (BKE 11.45%) continues to adapt its business to the changing conditions of physical store-based selling, it's also dealing with evolving consumer preferences. These include the rising popularity of mid-priced jeans, a category outside of the company's traditional premium sweet spot. Buckle stock lost nearly 6% on May 24 after the organization reported fiscal first-quarter 2019 earnings in which both revenue and same-store sales sagged. Below, we'll review the factors behind the quarter's performance, and other key details from the last three months of operations. Note that all comparative numbers in the following discussion refer to the prior-year quarter.

The Buckle: The raw numbers

Metric Q1 2019 Q1 2018 YOY Change (Decline)
Revenue $201.2 million $204.9 million (1.8%)
Net income $15.1 million $18.3 million (17.5%)
Diluted earnings per share $0.31 $0.38 (18.4%)

Data source: The Buckle. YOY = Year over year. 

What happened with The Buckle this quarter?

  • The Buckle's revenue decline was paced by a 1.3% drop in comparable store sales. Online sales, however, increased by 5.6% to $24.4 million. 
  • Women's merchandise sales dipped 4.5%, as average denim prices dropped to $76.70 compared with $82.45 in the prior-year quarter. Consumers have recently opted for denim apparel at sub-$80 price points, and Buckle's top line is subject to some pressure as the company introduces more competitively priced products.
  • Average women's price points (across denim, shorts, footwear, fashion, and accessories) dropped 5% to $42.65.
  • Men's merchandise sales were "up slightly" compared with the prior-year period, with average denim prices falling to $86.70 from $88.05 in the prior-year quarter. Management cited men's footwear, shorts, and private label brands as enjoying a particularly strong quarter.
  • Average men's price points slipped 2.5% to $50.60.
  • The company's weaker revenue caused slight gross margin compression. Buckle's gross margin dipped by 80 basis points to 38.1%. Management attributed the lower margin in part to higher occupancy, buying, and distribution expenses relative to the revenue level.
  • Slimmer gross profits, combined with higher general and administrative expenses driven by rising payroll expenses, resulted in an operating margin of 9.3% -- a decline of 200 basis points.
  • The company continues to optimize its retail footprint, ending the quarter with 449 stores, compared with 456 stores in the first quarter of 2018 and 450 stores in the prior sequential quarter.
Sewing machine stitcher sewing blue denim.

Image source: Getty Images.

Management's comments

During Buckle's earnings conference call, CEO Dennis Nelson was asked to comment on the company's exposure to potentially higher import tariffs due to the ongoing U.S.-China trade dispute. Nelson observed the following:

In the past, last year, we had about a 50% exposure to China, and we are consistently reviewing our sourcing, and we're adding new vendors to address that. And some of our key vendors are looking at other places of production outside of China as we work through this process. Our flexibility helps us manage our product development as we work with national brands and private brands, and we've already diversified and have made product in a lot of different countries to give us options.

The CEO also noted that the company has enjoyed long-term relationships with its key Chinese suppliers, and hinted that Buckle's preference is to maintain its Chinese sourcing relationships where possible while weathering through this period, as opposed to completely moving production outside the country.

Looking forward

While investors panned lower sales and a corresponding drop in profits this quarter, it's important to note that The Buckle has taken a number of steps to stem the decline in its business, from closing underperforming stores, to ramping up online sales, to adjusting merchandise to incorporate more non-premium denim offerings.

For example, management relayed during Buckle's earnings call that a recently launched, under-$50 private-label women's fashion denim brand, Willow & Root, has received a warm reception from customers. As I discussed last quarter, as Buckle initiates this type of pragmatic product change, pessimism surrounding its long turnaround may be creating an opportunity for value seekers: Shares now trade at just nine times forward one-year earnings.

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