Buckle (NYSE: BKE) puts a denim-based, Midwestern twist on teen apparel. The company sells its own private label merchandise along side popular brand name apparel and accessories to young men and women between the ages of 15 and 30 years. The company's stores share the name of the firm, Buckle, and the company operates 420 stores throughout the continental U.S.Guess, Quiksilver and Lucky Brand Jeans to appeal to young consumers, while at the same time earning high profit margins from its own private label merchandise.
Buckle was founded as a men's clothing store, by the name of Mills Clothing, in Nebraska in 1948 and over time grew into a clothing store, named Buckle, for young men and women specializing in denim jeans. Buckle operates 420 stores across 41 states in the US. In addition to its brick-and-mortar stores, Buckle operates an e-commerce website which features a style and trend guide (the "Style Shop") to complement its merchandise offerings. In 2010, Buckle.com accounted for 6.6% of net sales.
Buckle targets 15 to 30 year old men and women with apparel and other related merchandise, such as footwear, swimwear, sunglasses, jewelry, watches and purses. Buckle's proprietary brands - BKE, Buckle Black, BKE Boutique, Daytrip and Reclaim - represented 33% of sales in fiscal 2010. Their best selling brand, BKE, covers all product categories for both men and women. On a company-wide basis Denim sales account for 45% of revenue. In 2010 Buckle sold 4.8 million pairs of jeans, a 11.5% increase from 2009. A complete breakdown of product line sales is illustrated in Figure 1.
Denim sales is the core of Buckle, 2010 marked the eleventh consecutive year of category growth as Denim accounted for 45% of sales. Buckle differentiates itself by offering a plethora of styles, finishes, brands, and price points allowing patrons the opportunity to ensure the optimal satisfaction. BKE diversified product offerings also offer sales associates to sell a "look" as a opposed to a product, leading to more sales per transaction. BKE, Buckle's proprietary brand, accounted for 33% of fiscal 2010 sales and demands a higher margin.
Buckle prides itself on exceptional service. The Company emphasizes personalized attention to its customers and provides customer services such as free hemming, free gift-wrapping, easy layaways, the Buckle private label credit card, and a frequent shopper program. They also remain committed to developing their sales staff, in 2010 management continued to expand their training and leadership platform.
Over the last ten years Buckle has grown significantly, with the number of stores increasing from 274 at the beginning of 2001 to 420 at the end of fiscal 2010. In fiscal 2010, BKE opened 21 new stores including 2 in New York and 2 in New Jersey, the first in their respective states. Management plans to add 12 new stores in 2011, including in Rhode Island and Massachusetts the first in their respective states. Buckle continues to target the Northeast where Nearly 6 million Americans between 15 and 24 years of age live, representing a significant opportunity for Buckle to gain new customers, particularly in New York (2.6 million 15-24 year olds) and New Jersey(1.1 million). In 2009, BKE did not have a singal store in the 9 northeast states. Buckle has a total of five stores in the Northeast but none in New-England. They are also continuing their signature store design fully remodeling 25 stores in 2010 and planning to remodel an additional 25 stores in 2011.
Due to the surge of shopping in the second half of the fiscal year created by the back-to-school and holiday seasons, Buckle's performance in the third and fourth quarters is incredibly important to the company's success. The second half of the year accounts for almost 60% of total sales.
High - Buckle, competes across a highly competitive industry in which consumers are incentivized by fashion, selection, quality, price, location and shopping experience. Buckle competes with many specialty retailers, department stores, local or regional department stores, boutique specialty shops, and mail order and internet retailers - are just some of Buckle's competitors. Abercrombie & Fitch and Hiollister (ANF), Aeropostale (ARO), American Eagle (AEO), Ascena Retail Group (ASNA) the parent company of Maurices, Express (EXPR), Forever 21, GAP (GPS), Metropark, Pac-Sun (PSUN), Vanity, Wet Seal (WTSLA), Bon-Ton (BONT), Dillard's (DDS), Macy's (M), Nordstrom (JWN),- are the competitors Buckle listed in their 2010 Annual Report.
High - The retail store industry is always emerging, especially in the trendy fashion scene in which BKE operates. The barriers to entry are insignificant and companies can often times become obsolete or go bankrupt if they are unable to stay current with consumer fashion trends.
Low - Because clothing offers few alternatives and Buckle offers a wide range of products that align with their target market fashion preferences their is little threat of substitutes. Competition is a much larger threat to the industry.
'High/Medium - Individual consumers have low switching costs on where they purchase their jeans, and therefore, Buckle has limited power in raising prices if raw material costs (e.g. cotton) increase. Furthermore, consumer trends have a whole are a real concern to retailers - where style trends can make a once prospering specialty retailer obsolete by the end of a season. Buckle's merchandise team works to ensure Buckle is able to anticipate, identify, and adapt to changing consumer demands, however its ability to do so in the future is not guaranteed.
Low/Medium - Buckle is not materially dependent any one vendor. In 2010, only two vendors accounted for more than 10% of net sales. Koos Manufactoring, Inc. (the manufacturer of the majority of BKE proprietary brands) accounted for 26.5% of net sales and Miss Me/Rock Revival accounted for 12.9%. Other significant vendors include MEK, Silver Jeans, Buffalo Jeans, Hurley, Billabong, Afflication, Sinful, Archaic, Obey, Roar, RVCA, Fox, and Fossil. Although individually these vendors cannot materially affect Buckle's operations their 's ability to carry a wide and diversified product line that aligns with consumer trends is vital to their operations.
Buckle has a history and a reputation for its denim selection and attention to the individual customer experience. It uses a diverse product portfolio to appeal and draw out their intended target audience. Buckle's key differentiators are a lot more easier to emulate through in-person transactions. Nonetheless, Buckle has been expanding its online platform reaching 6.6% of net sale sin 2010.
There are many well-established competitors with a larger market share and possible better brand equity than Buckle. With the recent economic slowdown, many consumers of BKE are dipping down into a more affordable price range. Further, BKE is sensitive to consumer spending and general economic conditions.
Buckle management continue to focus on a realistic growth platform, having recently penetrated the northeastern United States. Opening its first four stores in the region during 2010. Buckle will continue to target the region with plans of opening its first store in Massachusetts and Rhode Island during 2011. In addition to its growth strategy, management is also improving margins by promoting and growing its proprietary brand and continue to hone its supply chain operations. In 2010, Buckle completed the construction of a new 240,000 square foot distribution center in Kearney, Nebraska - the company's only operating store distribution center. The company also leverages their management information systems (MIS) to improve efficiencies.
Competitiors remain the most prominent threat to BKE. Many of the Company's competitors are considerably larger and have substantially greater financial, marketing, and other resources than Buckle. 369 of 420 Buckle stores are located in shopping malls, for continued successful growth BKE will have to continue to be effective at competing for favorable locations and lease terms, where competition for prime locations can be intense. Further, the retail apparel industry often has unpredictable fashion swings with trends changing very often. Buckle needs to keep ahead of the curve which is a huge challenge for all clothing retailers. They have done this so far; however, the main threat for BKE is loosing market share.
Anytime I refer to Buckle's "Peer's," "Peer Group," "Comparable," or "Comparable Peer's" I am including the following companies all of which were listed as competitors in Buckle's 2010 Annual Report and unless otherwise noted am referring to a mean average of the companies included.
It becomes fully apparent when analyzing across its department store peers, how Buckle has truly positioned itself in the marketplace as a boutique retailers with personalized services but yet the platform to leverage department store like selection. Because of the size of Buckle's operation relative to department stores it is hard to draw much on an individual analysis. But yet a big picture view is necessary to better understanding Buckle Inc and the industry dynamics.
In addition to those listed above Metropark, Forever 21 and Vanity were listed as competitors but were not included in comparison analysis because they remain privately held and principal information remains private. Maurices (Ascena Retail Group) was not included because Ascena Retail Group, its publicly traded holding company, also operates Dress Barn and Justice retail stores which are not competitors of Buckle and make up the majority of the companies revenue. Hollister is listed as a direct competitor and is owned and operated by Abercrombie & Fitch. In addition to those listed certain local regional department stores and small specialty stores as well as with mail order and internet retailers compete with Buckle.
As of April 30th 2011, BKE had a market cap of $2.2 billion dollars. Nearly half the size of the peer group we used in comparison. Buckle had 420 stores in operation with of 5,00 square feet per location, much smaller than the peer group averages of 994 stores and 55,247 square feet. It is important to note that the peer group consists of four department stores - Macy's (M), Nordstrom (JWN), Bon-Ton (BONT), and Dillard's (D) - all of which have much larger stores that focus on serving a more broadly defined target market. These department stores are considered peers, because similar to Buckle, the majority of their sales are attributed to non-proprietary brand name products. Of the remaining retailers in the considered peer group, only Pac-Sun (PSUN) - have minority sales in privately branded products. When you take the department stores out of consideration, BKE better reflects the peer group average with an average of 5,150 square feet per location and 979 locations. But again their is fundamental differences between the average specialty retailer and Buckle. Buckle's fewer store locations exposes their promising growth potential. However, if BKE ever wants to reach the size of its larger retail competitors Abercrombie & Fitch, American Eagle or Pacific Sunwear it will need to look to international markets. In addition, as Buckle continues to expand domestically it may soon reach a point of less desirable new store locations. However, with a sustainable growth rate it appears management is aware of these challenges and that is not an immediate threat to its growth prospects.
The margins of Buckle are incredible. Buckle improved margins for the tenth consecutive year in 2010 and continue to lead its peer group. I believe these margins are a result of three factors: a lean inventory system, premier store locations, and customer centric shopping experience.
Buckle is able to effective manage its working capital to ensure liquidity and solvency. It also is effective in reinvesting the free cash flows in high return projects.
Buckle continues to remain liquid with very limited solvency risk. They have never incurred debt to fuel growth and as demonstrated by the metrics above are very effective at investing capital and free cash flows to derive an economic benefit. This is not a coincidence, there is no reason to believe management cannot be just as effective in the foreseeable future.
Revenue per square foot and same store sales growth are often time the metrics used in analyzing retailers. BKE remains well above its peer group in Revenue per square foot despite having below par same store sales growth in 2010. It's strong revenue per square foot metric is derived from its core differentiators - being able to augment a well educated sales staff with a diversified line of product offerings to offer customers "look" as opposed to a product - with leads to more customer satisfactions, loyalty, and a greater percentage of bundle sales (transaction of two or more products). When combined with managements preferences for higher-end leasing space, it is my belief BKE will continue to be in the top quartile of revenue per square foot in its peer group. In addition, Buckle continues to position itself well for same store sales growth and revenue per square foot by continuously reinvesting in existing stores with a remodeling effort.