Buckle Up for a Good Ride With This Company

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The one fashion trend that never dies is consumers love for denim jeans. Ever since blue jeans were first introduced, jeans have become part of the fabric of American culture. The trend started in the 1950s when James Dean wore them in Rebel Without A Cause. Jeans are now more popular than ever and cover all price points. Retailers that sell jeans have a multi-billion dollar market to capture. The retailers that identify the latest trends in jeans are worth investing in.

This buckle will do more than hold your pants up

Buckle (NYSE: BKE) operates over 440 retail stores in 43 states. Its mission is to be America's favorite destination for denim jeans. Buckle markets a wide selection of brand names and private-label casual apparel. In its stores, you'll find denims, casual bottoms and tops, sportswear, outerwear, accessories and footwear. Buckle emphasizes personal attention from its sales staff and provides individual services, such as free alterations, layaway plans and a frequent-shopper punch card. The company sell its apparel online as well.

Buckle fired on all cylinders for the months of May and June. In May, same-store sales rose 4.1% and total sales rose 4.2% to $72.8 million. In June, same-store sales rose 3.4% and total sales increased 3.9% to $82.5 million. As we head into the summer months and back to school, Buckle has strong tailwinds.

Buckle has strong margins in its business. In the first quarter, gross margin rose 10 basis points to 43.4%. Merchandise margins increased 35 basis points, but were offset by higher occupancy, buying and distribution costs. The operating margin remained the same as the year-ago period at 22%.

Buckle plans to open 13 new stores this year. The company also plans to substantially remodel seven stores to reflect the new format. So far, 329 of its stores have the new format.

In terms of sales mix, 60% of its customers are women. The company is building up two of its own labels in women's jeans, Day Trip and BKE. The company has been working to increase and rebuild inventories of those brands as well as increase brand selection.

In the first quarter of this year, Buckle didn't have some styles in its stores as it changed certain makers on its private-label jeans for women. That is now corrected and explains the sales increases seen in May and June.

Buckle still has room to grow. In the 43 states that the company operates in, most of its stores are in rural and smaller urban areas. For instance, the closest location to Los Angeles is in neighboring San Bernardino County. In New York, there are no stores south of Albany, N.Y. Financing an expansion is not an issue for the company, as it has $144 million in cash, no debt and operating cash flow of $204 million.

Competition

Two of Buckle's competitors are American Eagle Outfitters (NYSE: AEO) and Guess? (NYSE: GES). Both competitors target the same customer as Buckle and offer many of the same styles and items. American Eagle Outfitters operates more than 1,000 stores in North America and 49 international franchise stores in 13 countries. The company's website ships to more than 81 countries. Guess? sells its clothing at its own retail stores globally as well as in department stores and also in specialty stores, such as Buckle.

For American Eagle Outfitters, the company is gearing up for international expansion. The company will take over its six licensee stores in China and add more of its own stores in the nation. American Eagle also hired the person that helped Guess? expand in China to do the same. The company also announced it would open its first store in Mexico. Mexico is growing rapidly and there's strong demand for American retailers. American Eagle will also expand in the Philippines. The largest retailer in the Philippines, Suyen, will franchise American Eagle stores there. As the company expands into these fast-growing markets, look for the top and bottom lines to improve.

Going forward with Guess?, the focus is on returning to its roots with a focus on new designs for its denim jeans. The new designs will be in the fall product line and will be seen in the company's ever-present ad campaigns. The company is in the process of hiring a new COO and CFO, and that will help once those positions are filled.

The problem I have with Guess? is that the company is still in turnaround mode and is forecasting weak sales. Guess? has a lot of exposure to Europe and is dealing with the overall weakness across the euro zone. Furthermore, with the executive management roles still not filled, it will take some time for a complete turnaround.

Foolish assessment

The best bet in the retail sector for jeans remains Buckle. Sales are increasing and the company still has plenty of room for expansion in the U.S. American Eagle Outfitters remains attractive due to its moves overseas that will boost growth. Guess? is in the midst of a turnaround and investors should be patient and look for evidence of sales increasing and see how the new fall collection fares. Once a new COO and CFO are appointed, that will give the company some stability, but it will take time for the executives to get settled into their new roles. For now, I would stick with Buckle followed by American Eagle Outfitters.  


Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Guess? and The Buckle. The Motley Fool owns shares of Guess? and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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