Most apparel retailers have experienced a weak business environment due to macro-economic headwinds. However, Buckle (BKE +1.59%) is a relatively better-run chain of mall-based apparel retail stores than most. Let's take a look at its underlying business in the most recent quarter and how it compares to peers like Guess? (GES +0.00%) and American Eagle Outfitters (AEO +0.78%).
Analyzing the results
Buckle caters to young adults and has a specific focus on denims, which account for approximately 45% of its revenue. Its third-quarter results had both bad and good news. On the negative side, its comparable-store sales declined 0.5% year over year. However, if we look at the 5% decline in comps at Guess ? and American Eagle, Buckle turns out to be a far better-run chain than its peers.
One of the main reasons behind Buckle's better performance on comps has been its measured growth strategy. This has insulated it from the boom-and-bust cycles that retailers with higher square footage growth are vulnerable to. Its store count of 452 is less than half of its peers and is growing at a measured pace of 10-15 net new stores a year while taking up around the same number of store remodels.
The bright spot in its third quarter report was a 0.9% year-over-year growth in revenue. This shows that the new stores that the company opened have added to the top line. The November sales figures were also encouraging at 4.6% year over year growth, despite a 0.6% comps decline. This indicates that new stores and e-commerce sales were more than enough to wipe off the loss due to comps decline.
The measured approach works well
On a year-to-date basis, comps growth was positive at 1.1%. This also shows that its "measured growth" policy is working in its favor in a hostile retail environment where peers are struggling. As a part of its measured growth policy, in its third quarter, it opened one new store, closed one store, and completed two substantial remodels. Going forward, for fiscal 2014, the company plans to open 16 new stores and take up 14 to 16 full remodels.
As the portfolio of brands and designs retailed by Buckle become more diverse and strong over time, the company will have more pricing power and improved profitability. In its third quarter, earnings came in at $0.85 per share on a diluted basis.
As a result of its "measured growth" policy, while maintaining a strong balance sheet with about $200 million in cash and investments and zero debt, the company has been returning value to investors quite liberally. Its ongoing dividend yield is close to 2%, but the company has paid handsome special dividends as well in each of the past six years , ranging from a 3% payout a few weeks ago to a massive 9% payout in December 2012.
At Guess?, on the other hand, the comps decline was across the board in all geographies, including the emerging markets. Even the new store openings weren't enough to offset the comps decline and as a result, it suffered consolidated revenue declined 2.4% year over year to $613.5 million. In constant currency terms, revenue declined 4.1%. The only bright spot was a year over year growth of 3% in license revenue. On the back of lower sales, earnings also declined 7% year over year.
As opposed to a "measured growth" of 10-15 stores a year of Buckle, Guess? grows by approximately 100 net stores a year, including franchisees. Despite this, it is struggling and goes to show that Buckle's policy is far better positioned to tackle the headwinds.
American Eagle's comps have also been in a free-fall mode, registering a 5% decline in the third quarter after having registered a 7% decline in the second quarter. Management is projecting a mid single-digit decline in the upcoming fourth quarter. The only positive was a 17% year over year growth at AEO Direct during the third quarter, which offset the decline in comps. Even the 39 new store openings that were completed by Thanksgiving, almost three times those of Buckle, could not offset the negative impact of comps decline.
Takeaway
Buckle's approach of slow and steady growth looks promising, as the company has been able to withstand the effects of a weak economic environment quite well. The company also returns cash in good amounts to shareholders through both regular and special dividends, which makes it a good stock to invest in.
