Bke People
Source: Buckle.

An improving economy typically puts shoppers in a better position to spend money, but even though some businesses have benefited from better macroeconomic conditions, the apparel retail industry has suffered recently. Even though Buckle (NYSE:BKE) has managed to survive the tough times better than some of its peers in the industry, many investors worried that Thursday morning's third-quarter report from Buckle might well show signs of weakness. With a slight shortfall in its most important numbers, Buckle showed that it too is susceptible to a tough market. Let's look at Buckle's quarterly results to see what we can find out about the state of the industry and the company's ability to take maximum advantage of its profit opportunities.

Unfastening The Buckle
Buckle's fiscal third-quarter numbers indicated a further slowdown in the pace of the retailer's long-term growth. On the revenue side, sales of $292.2 million were up 1.9% from year-ago levels, reflecting a 0.3% decrease in comparable-store sales. Net income was flat from the third quarter of the previous fiscal year, and on a diluted basis, earnings per share eased downward by a penny to $0.84, less than the $0.86 per share consensus among analysts.

Bke Jeans Small

Source: Buckle.

Looking more closely at the results, Buckle appeared to take steps to minimize the fallout from its decelerating growth. Costs of sales rose at a slightly higher 2.4% pace than revenue, leading to a drop of about three-tenths of a percentage point in gross margins. But Buckle did a good job of keeping operating expenses in check, preserving as much of the company's profit as possible.

One highlight of the report came from the online side of Buckle's business. The company said that online sales rose 3.8%, showing the relative success of the company's e-commerce initiatives. Nevertheless, Buckle is just in the beginning stages of maximizing the potential of that channel, and right now, online sales represent less than 8% of the company's total revenue.

What's to come for Buckle?
Buckle's results didn't come as a big surprise, given that the retailer provides monthly sales figures. Comp growth of 0.8% in August and 2.2% in September gave way to a 4.4% plunge in October, reflecting an industrywide phenomenon during the first full month of fall. Analysts blamed the poor conditions partly on unfavorable weather, but also on a lack of innovative fashion offerings throughout the retail community.

Bke Store Small

Source: Buckle.

Yet investors need to put Buckle's results into context. Compared to the even worse numbers that many of its closest competitors have posted recently, Buckle has held up pretty well from the financial perspective. With the key holiday season ramping up, Buckle's November same-store sales figures will tell a lot about whether the company can stand up to its competition and deliver the products its customers want to buy.

Interestingly, Buckle's balance sheet has improved considerably in the past year. Shareholder equity has jumped by 18%, with rising asset levels accountable for nearly all the gains. Receivables made up some of the increase in overall assets, but cash and equivalents have climbed more than $50 million in the past year, showing Buckle's financial health and flexibility to consider strategic options that more cash-strapped competitors don't have.

Over the long run, Buckle has enjoyed a customer base that's more loyal than those of many other retailers, and that has helped the company sustain its profitability even under tough conditions. Given the pace at which styles go in and out of fashion, Buckle can't rely entirely on its customers staying the course if it doesn't come up with offerings that are attractive and inspire even more loyalty.

Looking forward, tough conditions for apparel investors might last a long time, and Buckle will struggle to outperform if the overall environment remains unfavorable. Yet with a relatively small network of stores, Buckle has plenty of growth potential when trends start to turn positive again. Combined with better operational expertise from its management, Buckle has the ability and the potential to buck the downward trajectory for the apparel retail industry in time -- and reward those investors who had the patience to stick with the company.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.