The Buckle Cracks--Just a little

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

 

Most retailers have given up on announcing monthly same store sales and revenue, but the Buckle (NYSE: BKE) continues to steadfastly update analysts and investors every month. This creates some short-term angst and lowers expectations when the news is bad.

The Buckle crossed below its 200 day moving average of $43 when revenue at stores open at least a year was nearly flat in May, missing analyst expectations. Same store sales were 0.2% against the 3.3% analyst expectations. Have consumers made the switch to cheaper alternatives? At this point it’s hard to know since most of the competition has foregone reporting monthly figures.

Since May, comps have not been up to 2011 standards and the company missed analyst expectations when Q2 revenue came in at $215.5 million below the projected $217 million.

 Preview of Q2

May

Four weeks

  • Comp same store sales up +0.2%
  • Net sales increased  +2.7% to $69.9 million

June

Five weeks

  • Comp same store sales (2.5%)
  • Net sales ( 0.3%) at $79.4 million

July

Four weeks

  • Comps (0.1%)
  • Net sales up +2.4% to $66.2 million

 13 weeks (Q2 2012)

  • Comps (0.8%)
  • Net sales  increased +1.5% to $215.5 million

Q2 2012 comes in below comps and revenue growth seen in Q2 2011. Same store sales Q2 2012 are (0.8%) compared to +8.9% in 2011. Revenue growth came in far below 2011 too at +1.5% compared to +12.6%. First half numbers are comps at +3.6% and revenue up +5.9% and not bad enough to send investors out before the probable paying of a third quarter special dividend. The regular dividend of 20¢ was paid in July. Buckle dropped from a pre-announcement high of $40 to $37 today. We may get to see the August numbers before ex-dividend to get an idea of how back-to-school went. If comps continue to decline during the all important BTS, then an exodus after the dividend is paid could be a concern. 

Unbuckling Buckle

The Buckle is not the low-priced alternative in teen-adult retail. It lies somewhere between the higher priced True Religion and the promotional discount pricing of Aeropostale (NYSE: ARO). It depends on what you are looking for. ARO sells tees cheap $8-$10 and TRLG is in the $70’s-$80’s. ANF comes in at $20-$35. Denim is pricey at TRLG at $200-$300 and ARO is $15-$30. ANF and BKE are at $90 to $100. AEO is close to ARO in pricing. We can think of Buckle as reasonable but not discount. It may hold up better than the market is thinking. While not the low cost leader, it’s not so pricey that the consumer gets sticker shock looking at the price tags.

A big problem with ARO is the selection – it’s cheap but limited. Some of their recent negative comps may stem from utter boredom when the shopper walks in the door.  While ARO has 21 items in denim on their website, the Buckle lists 1,441. The Buckle carries denim across most major brands including the pricey True Religion and the much cheaper BKE brand at $26-$36. The styles are seemingly endless and the color selection broad. There is something for everyone at BKE.

Denim is a critical piece of business for Buckle at nearly 50% of revenue. Management’s grasp of what they are doing with a segment like denim is impressive. There is detail and sharing of thought processes in the conference call that lends credibility to their decision making process. While they may have a miss here and there (May?) they seem to know what they need to do to stay competitive. This is in sharp contrast to management at ARO that appeared to flounder and grasp at generalities when asked late last year how they were going to fix their fashion misses.

Some snips from the CC Q1

Dennis H. Nelson - President and CEO:

Well, we've been very successful with some of our branded denim in the stores that are definitely at higher price points, close to $100, up to we're selling some Rock Revival's that are in the 160s give or take, and so we've had good response there both -- on the Rocks both in men's and women's. So, our BKE brand is still doing well and working for us. But we've added the layers on in the branded business that have raised those price points up for us.

With regard to color denim we had some color in more casuals early as the team was shopping we added some color in through the spring, you know, probably more in the shorts or crops for the most part. We have a degree of color coming in as we go through back-to-school. But in total, it's still going to be a small part of our Denim mix. I think with the earlier warm weather compared to last year's weather you probably had some guess going for the denim shorts and some of the other categories that might have – we had a strong gain in the active wear part of our business so that might have had an effect. But for the quarter we're very happy with our denim.

What I see in these remarks is a specific strategy regarding colored denim. It has been very big for a few quarters. Nobody can predict how long it will last. Buckle refuses to overboard in it, but adds it to the core styles. They will be ready to get rid of it when it flags. There should not be a huge overhang of colored denim to sell in the 60% off bins.

Buckle’s Q1 2012

Revenue increased 10% and same store sales were +7.4% with online sales at +15%. Gross margins were up 0.4% to 43.3% driven by leveraging fixed costs like rent and distribution. Buckle has some of the lowest rent expenses among the peer group included in this write-up. SG&A decreases helped increase operating margins by 0.6%. Selling expense benefited from reduces bank card fees, and internet-related fulfillment and marketing expenses.

Q1 comps and sales

<img src="/media/images/user_69/q1comps_large.jpg" />

The results that show cracks in otherwise good numbers are decreasing number of units per transaction and the nearly flat increase in transactions. Same store sales were up 7.4% only through price increase, and higher prices may fizzle as the primary driver of increasing comps. Comps were down in June and July and flat in May. The full results of the second quarter will be released August 16.

AEO, ANF, ARO and BKE

Which of these things is not like the other? The simple Sesame Street answer is Buckle because it starts with “B”. But there are more important differences that separate The Buckle from this small group of peers – American Eagle (NYSE: AEO), Abercrombie & Fitch (NYSE: ANF), and Aeropostale (NYSE: ARO)

<img src="/media/images/user_69/comps_2_large.jpg" />

Buckle has an enviable track record over the years of high operating and net margins that are remarkably stable over the years and quarters. The company barely blinked during the margin-eating high cost of cotton last year and the promotional environment running rampant through the retail world in the last few quarters.

Operating margin is a good indicator for management of a company’s success. Operating margin can be positively or negatively affected by comparable store sales, merchandise margins, occupancy costs, and the ability to control operating costs. BKE takes occupancy cost out of cost of sales (as do many retailers). Abercrombie’s occupancy is an operating cost and gross margins are not directly comparable to the other three.

What are the margins saying about the businesses?

Aeropostale did not hold onto the 38% high gross margins of 2010. High cotton prices cut into gross but an even bigger problem was fashion misses that had them clearing the shelves at what is euphemistically known as promotional pricing.

ANF has gross margins that have been in slow decline for several years but it’s the fast-falling operating margins that grab our attention and keep the price per share moving down -- more than halved from the 52-week high of $78. Abercrombie is unable to leverage high costs across the international expansion and lukewarm comps at home. The move overseas has been a disaster with double-digit same store sales declines and too many stores doing too little business.

American Eagle also saw gross margins slide with declining same store sales and high cotton prices taking them down by nearly 10% from the high in 2007. Eleven out of 18 quarters had negative same store sales since Q4 2007. Q4 2011 and Q1 2012 same store comps are +10% and +17% respectively, and margins are reflecting the improvement.

A few more inter-company comps

The ideal retailer would have high same store sale comps, efficient use of space with high sales per square foot and low occupancy costs.

<img src="/media/images/user_69/ic_large.jpg" />

In short nobody has it all. ANF pays a big price for its locations and its upscale image. The high fixed cost of occupancy contributes to Abercrombie’s low margins as they struggle to go global and fall short. The Buckle with its low rent has some of the best operating and net margins in the clothing retail sector (Francesca’s and lululemon are also 20%+). Part of the Buckle advantage is the low cost of occupancy.

ARO does an amazing amount of sales per square foot. That came under pressure and dropped as they were forced to cut prices to move an excess of inventory in 2011. BKE has steadily improves sales/sf. Average sales per square foot increased 6.8% from $105.85 in Q1 2011 to $113.04 in Q1 2012.

The Buckle sales per square foot lag a little—they are improving. Comps and rent are better than the listed peers. There is a great advantage in being consistently good even if not the best.

The Buckle’s dividend

The dividend is the other anomaly separating BKE from most of its peers. They pay a quarterly dividend but since 2008 BKE has paid a special cash dividend in the third or fourth quarter.

<img src="/media/images/user_69/div_large.jpg" />

Buckle sold investments and took it out of cash. Cash levels decreased in 2009-2010. In 2011, there was sufficient coverage from free cash flow. If the revenue growth continues to slow through the back half to 5%, estimated cash from operations could drop to $200 million and after average capex guidance of $34 million, free cash flow would be $169 million. Last year’s dividend cost $145 million and it’s not a given the company will pay at last year’s levels if free cash flow falls. The lure of this dividend is supporting the price per share even as comps and sales decline year-over-year. If August back-to-school is disappointing, investors may exit after ex-dividend. The price per share would drop.

It’s a well-run business with a strong track record of conservative cash flow funded expansion and steady high margins and growth. Management knows the business and rarely misses the trend. At present, it looks like they may have missed and presented investors with a buying opportunity. Timing is critical-— buy too soon for the dividend and you could get left holding a fast falling stock if investors who stayed for the dividend leave fast  for greener pastures and higher comps. 



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