Jeans-focused fashion retailer The Buckle (NYSE:BKE) enjoyed one of its best trading days in years following the release of the company's fiscal third-quarter earnings on Nov. 22. Shares rose 20.5% as the company's top line and profit margins didn't buckle but exhibited surprising progress.

As I've recently discussed, the denim specialist is an overlooked retail story that should appeal to risk-tolerant income investors, as well as value seekers. Let's review the quarter as well as specific factors that catalyzed investors' enthusiasm on Friday. (Note that all comparative numbers in the following discussion refer to those of the prior-year quarter.)

The Buckle: headline numbers

Metric Q3 2019 Q3 2018 Change 
Revenue $224.1 million $215.1 million 4.2%
Net income $26.0 million $20.5 million 26.8%
Diluted earnings per share $0.53 $0.42 26.2%

Data source: The Buckle.  

Highlights from the quarter

Close up of several pairs of dark jeans.

Image source: Getty Images.

  • Comparable sales rose by 4.7%, well above the flattish trend of the last several quarters.
  • Online sales increased by 5.4% to $26.9 million. 
  • Women's merchandise sales increased by 3%. Average denim price points slipped from $74.90 to $73.35. Across all categories, the average women's price point dipped by roughly 2% to $41.70.
  • Management cited strength in jeans bottoms, and specifically, dark wash jeans, as factors behind the higher sales volume in women's products.
  • Men's merchandise sales increased by 6%, an atypically vigorous quarterly result. Average denim price points increased by $0.05 to $82.95, while the overall average price point decreased by 1.5% to $49.65. The segment accounted for 51.5% of total Buckle net sales against 50.5% in the comparable prior-year quarter.
  • Men's merchandise enjoyed growth in all categories except outerwear. Management observed that footwear continues to lead the men's segment, with particular momentum in the "Hey Dude" brand of travel shoes.
  • Gross margin expanded by 170 basis points to 41.7%. Executives attributed the higher gross profitability to 60 basis points of improvement in merchandise margin, and 110 basis points of leverage from lower occupancy, distribution, and buying costs.
  • The company did not complete any store remodels during the quarter, but has two renovations slated for completion in November, which will bring the current-year count to five remodels and one new store opening.
  • Buckle noted that its two experimental pop-up youth stores in Idaho are performing well and that at present, it intends to keep the stores open year-round.

Management's perspective

While men's merchandise sales boosted the company's total revenue during the quarter, women's clothing helped Buckle deliver better profit margins. During the company's earnings conference call, Vice President of Women's Merchandising Kelli Molczyk illuminated how the segment lifted its profits: 

Overall, we were pleased with how we managed inventory through the quarter, reducing mark downs and improving overall margins. Across all women's categories, we sustained improvement in our overall sell-through throughout the quarter on off inventory. With where our inventory is positioned, we feel we are in more nimble as women's fashion continue to change and evolve.

In general, Buckle has avoided an excessive inventory buildup in recent quarters and has leaned toward reducing markdowns to support its margins. These actions have helped as it's followed the broader industry in gradually lowering its denim price points. 

The Buckle has also demonstrated an ability to improve both comps and overall sales even as it closes underperforming stores. The company ended the third quarter with 449 stores (all located within the U.S.) encompassing 2.32 million square feet. That compares with 453 stores containing 2.34 million square feet of retail space in the third quarter of 2018. By allocating resources to store renovations rather than expansion, and improving inventory management, The Buckle is bucking larger retail trends that are pummeling many brick-and-mortar fashion chains. It appears that investors have noticed and may be ready to endorse the ongoing turnaround with significant share purchases.