Buckle Inc (BKE)

TOP CONTRIBUTORS

Kevin Michalzuk

Shawn Woodhull

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.^[1]

Company Overview

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,^[1] 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.^[1]

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.^[1]

Product

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.

Service

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.

Growth

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.

Seasonality

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.^[2]

• Back-to-School: Because the overwhelming majority of the customers of Buckle's stores (target customers are between 12 to 24 years old) are students in middle schools, high schools and universities, Buckle traditionally gets a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for Buckle's competitors such as Abercrombie & Fitch, American Eagle Outfitters and Aeropostale. Most of the back-to-school sales are included the third fiscal quarter.

• Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Buckle is no different, as the company's fourth quarter sales are nearly $100 million greater than its first quarter sales. A lackluster performance during the holiday season can lead to extensive promotional selling of leftover inventory which drags down Buckle's bottom line.

Industry Overview

Porter's Five Force

Rivalry among Existing Firms

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.^[1]

Threat of New Entrants

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.

Threat of Substitutes

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.

Buyer Power

'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.

Supplier Power

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.^[1]

SWOT

Strengths

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.^[1]

Weaknesses

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.

Opportunity

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.^[1]

Threats

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.^[1]

Competitor Analysis

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.

Specialty Retailers

• Abercrombie & Fitch Company (ANF) - Abercrombie & Fitch Co., through its subsidiaries, operates as a specialty retailer of casual apparel for men, women, and kids. The company sells casual sportswear apparel, including knit and woven shirts, graphic t-shirts, fleece, jeans and woven pants, shorts, sweaters, outerwear, personal care products, and accessories under the Abercrombie & Fitch, Abercrombie kids, and Hollister brands. It also offers bras, underwear, sleepwear, and at-home products for women under the Gilly Hicks brand. The company sells products through its stores; direct-to-consumer operations; and Websites, which include abercrombie.com, abercrombiekids.com, hollisterco.com, and gillyhicks.com. As of January 30, 2010, it operated 1,096 stores in North America, Europe, and Asia.^[3] Abercrombie & Fitch is a sizable competitor of Buckle. Abercrombie has much more size and reach - with over a 1,000 stores and an international unit. Additionally, Abercrombie strictly sells proprietary products. Their brand is well recognized and targets the same demographic as Buckle. It is interesting to see, ANF has a desirable gross margin to BKE probably because their proprietary brands return a higher margin than Buckle's private label business. This preferable margin though doesn't make it past SGA expenses as BKE has more than three times the operating margin and profit margin.

• Aeropostale (ARO) - Aeropostale, Inc. operates as a mall-based specialty retailer of casual apparel and accessories. It designs, markets, and sells merchandise principally targeting 14 to 17 year-old young women and men. The company offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, and outerwear, as well as accessories, including sunglasses, belts, socks, and hats. It also offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. In addition, the company sells its products through its e-commerce Website, aeropostale.com. As of March 15, 2010, it operated 895 Aeropostale stores in 49 states and Puerto Rico; 44 Aeropostale stores in Canada; and 15 P.S. from Aeropostale stores in 6 states.^[4] Aeropastle targets the youngest portion of Buckle's demographic. Because they take a low cost leader approach and only cross several years into BKE's target market - Aeropsatle is not a key competitor to Buckle. Nonetheless, it is interesting to see ARO's favorable rations. Unfortunately because of their place in the market many remain bullish on Aeropastle on increasing price competition amongst teen competitors, ongoing high teen unemployment, and increasing cost of goods as commodities continue to run.

• American Eagle Outfitters (AEO) - American Eagle Outfitters, Inc. operates as an apparel and accessories retailer in the United States and Canada. The company offers denim wear, sweaters, graphic T-shirts, fleece, outerwear, and accessories under the American Eagle Outfitters brand name targeting 15 to 25 year old men and women; and clothing and accessories for kid’s ages 2 to 10 through online under the 77kids by American Eagle brand name and for babies under the brand name little77. It also provides a collection of Dormwear, intimates, and personal care products for girls under aerie by American Eagle brand name. As of January 29, 2011, the company operated 929 American Eagle Outfitters stores, 148 aerie stand-alone stores, and 9 77kids stores. In addition, it sells merchandise through its e-commerce Web sites, including ae.com, aerie.com, and 77kids.com. Further, the company’s online business, AEO Direct, ships its products to 76 countries worldwide. American Eagle Outfitters, Inc. was founded in 1977 and is headquartered in Pittsburgh, Pennsylvania.^[5] American Eagle is very similar to Abercrombie & Fitch in its competition to BKE. AEO has considerable size on Buckle, despite the apparent benefits of scale Buckle is still able to return a higher Operating and Profit Margin - by keeping costs low.

• Express (EXPR) - Express, Inc. operates specialty retail stores in the United States. The company’s stores offer apparel and accessories for women and men between 20 and 30 years old across various aspects of the lifestyles comprising work, casual, jeanswear, and going-out occasions. It also sells gift cards. As of January 29, 2011, the company operated 591 stores, including 547 dual-gender stores, 25 women’s stores, and 19 men’s stores located primarily in high-traffic shopping malls, lifestyle centers, and street locations in 47 states throughout the United States, the District of Columbia, and Puerto Rico. In addition, it operates seven Express stores in Saudi Arabia, Kuwait, and the United Arab Emirates through its Development Agreement with Alshaya Trading Co.; and sells its products through e-commerce Website, express.com.^[6] The most interesting observation in comparing BKE with EXPR is their high return on equity ratios. Despite both having relatively high ROE ratios, both companies get their in their own distinct ways. For BKE, it is margins that really drive the high ROE, its EBIT margin was 22.19% in 2010 compared to EXPR with 10.45% margin. However, Express is able to derive a higher ROE by turning over its product a little more frequently through heavy incentives and markdowns, the opposite strategy of BKE and significantly higher leverage ratio. Buckle had a financial leverage ration of 1.41 in 2010 compared to Express with 6.38 leverage. Both companies have admirable ROE's - but arrive at the metric in distinct ways.

• GAP (GPS) - The Gap, Inc. operates as a specialty retailing company. The company offers clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brand names. Its products include wardrobe basics, such as denim, khakis, and T-shirts; fashion apparel; casual apparel and accessories; maternity apparel; women’s underwear, sleepwear, loungewear, and sports and active apparel; and shoes and accessories. The company also franchises agreements with unaffiliated franchisees to operate Gap and Banana Republic stores worldwide. As of March 24, 2010, it operated approximately 3,100 stores in the United States, the United Kingdom, Canada, France, Japan, and Ireland. The company also offers its products through catalogs, as well as gap.com, bananarepublic.com, oldnavy.com, piperlime.com, and athleta.com Web sites.^[7] GAP operates a portfolio of specialty retailers, although a single brand may not be a meaningful competitor of Buckle, the conglomerate of GAP, Inc certainly offers scalability and resources that BKE cannot match. Similar to American Eagle and Abercrombie & Fitch it is interesting to observe the differences in gross, operating, and profit margin to demonstrate how cost effective Buckle is able to operate. It is interesting to note that none of Buckle's competitors have been successful or interesting in implementing its cost savvy operating methods.

• Pacific Sunwear of California (PSUN) - Pacific Sunwear of California, Inc., together with its subsidiaries, operates as a specialty retailer in the action sports, fashion, and music influences of the California lifestyle. The company sells casual apparel; and a selection of accessories and footwear to teens and young adults. It operates mall-based chain of retail stores under the Pacific Sunwear and PacSun names. The company also operates an e-commerce Website at pacsun.com, which sells PacSun merchandise online. As of January 30, 2010, it leased and operated 894 stores in 50 states and Puerto Rico.^[8] Pac-Sun is the most similar retailer to Buckle. It is apparent when observing the two firms, how effective BKE has been in taking market share from Pacific Sunwear. The customer centric focus of Buckle has allowed it to effectively dismantle the operations and health of Pac-Sun.

• Wet Seal (WTSLA) - The Wet Seal, Inc., a specialty retailer, operates stores that sell fashionable and contemporary apparel and accessory items designed for female customers. The company operates two primarily mall-based chains of retail stores under the Wet Seal and Arden B names. Its Wet Seal stores provide fashionable and basic apparel, and accessories for teenage girls; and Arden B stores offer contemporary collections of fashion, basic separates, and accessories for the feminine contemporary woman. In addition, the company operates Web-based stores, including wetseal.com that provides Wet Seal merchandise; and ardenb.com, which offers Arden B apparel and accessories. As of May 1, 2010, it had 501 stores, including 422 Wet Seal stores and 79 Arden B stores in 47 states, the District of Columbia, and Puerto Rico.^[9] Like all the other specialty retail stores, despite having less scale and proprietary products that demand higher margins, BKE is able to surpass Wet Seal in returns and margins.

Department Stores

• Dillard's (DDS) - Dillard's, Inc., together with its subsidiaries, operates as an apparel and home furnishing retailer in the United States. The company offers a selection of merchandise, including fashion apparel for women, men, and children, as well as accessories, cosmetics, home furnishings, and other consumer goods. Its merchandise selections comprise lines of brand merchandise, such as Antonio Melani, Gianni Bini, Roundtree & Yorke, and Daniel Cremieux. It also sells its merchandise on-line through its Web site, dillards.com. In addition, the company operates as a general contracting construction company. As of January 29, 2011, it operated 308 retail department stores located primarily in the southwest, southeast, and midwest regions of the United States.^[10]

• Macy's Inc. (M) - Macy’'s, Inc., together with it subsidiaries, operates department stores and Internet Websites in the United States. The company’s retail stores and Websites sell a range of merchandise, including men’s, women’s, and children’s apparel; and accessories, cosmetics, home furnishings, and other consumer goods. As of January 30, 2010, it operated 850 stores in 45 states, the District of Columbia, Guam, and Puerto Rico under the names Macy’s and Bloomingdale’s, as well as Websites under macys.com and bloomingdales.com names.^[11]

• Bon-Ton Stores (BONT) - The Bon-Ton Stores, Inc., through its subsidiaries, operates department stores in the mid-size and metropolitan markets of the United States. Its stores offer brand-name fashion apparel and accessories for women, men, and children, as well as provide cosmetics, home furnishings, and footwear. As of January 29, 2011, the company operated 275 stores under various nameplates, including the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s, and Younkers in 23 northeastern, midwestern, and upper Great Plains states; and under the Parisian nameplate in Detroit, Michigan.^[12]

• Nordstrom (JWN) - Nordstrom, Inc., a fashion specialty retailer, offers apparel, shoes, cosmetics, and accessories for women, men, and children in the United States. The company offers a selection of brand name and private label merchandise. It sells its products through various channels, including ‘Nordstrom’ full-line stores, ‘Nordstrom Rack’ off-price stores, ‘Last Chance’ clearance stores, and ‘Jeffrey’ boutiques; and through catalog and the Internet. Nordstrom, Inc. also provides a private label card, two Nordstrom VISA credit cards, and a debit card for Nordstrom purchases. Its credit and debit cards feature a shopping-based loyalty program. The company also designs and contracts to manufacture private label merchandise sold in its retail stores. As of April 8, 2011, it operated 210 stores, including 116 Nordstrom stores, 91 Nordstrom Racks, 2 Jeffrey boutiques, and 1 Last Chance store located in 29 states. The company was founded in 1901 and is based in Seattle, Washington.^[13]

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.

Additional Competitors

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.

Buckle Inc. Financial and Operating Metrics

Comparison Figures

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^[1]. 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^[1]. 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.

Returns and Margins

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.

• Lean Inventory: Buckle's efficient and effective daily inventory system is leading catalyst to its impressive historical margins. Each store will receive no more than one of each size of their products and then assess what is selling on a daily basis to determine inventory in the future. The daily inventory turnover drives customer traffic as patrons are encouraged to visit the store more regularly to see the latest products. Any inventory that hasn’t sold quickly is shipped to another store where the product has received higher demand. Management believes the benefit or limiting the amount of marked-down products exceeds the cost of this daily inventory shipment.

• Premier Store Locations: Buckle's management seeks the most prominent locations in malls, often times requesting increased traffic areas. It is managements belief that the incremental costs incurred from the more demanded space is more than offset by increased revenue from the marginal traffic and compliments the daily inventory system.

• Customer Focus: As previously discussed, Buckle often times does what its competitors are not willing or able to do. Most stores are equipped with an in-house alterations individual, in addition to the unique initiatives discussed previously. BKE also employs a “customer tracker” where frequent shoppers are documented with their sizes in clothing, previous purchases, and fashion preferences. As new clothing comes in the store that employees feel are good for customers, they simply call the customers up individually to inform them of the new item. This is the type of customer attention that separates Buckle.

Days of Working Capital Finance Needed

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.

Liquidity Ratios

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.

Retailer Specific Operating Metrics

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.

References

1. ↑ ^{1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10} 2010 Buckle Annual Report
2. ↑ BKE 2009 10-K "Selected Quarterly Financial Data" pg. 49
3. ↑ Abercrombie & Fitch Co. Business Summary
4. ↑ Aeropostale, Inc. Business Summary
5. ↑ American Eagle Outfitters, Inc. Business Summary
6. ↑ Express, Inc. Business Summary
7. ↑ GAP Inc. Business Summary
8. ↑ Pacific Sunwear of California Inc. Business Summary
9. ↑ Wet Seal Inc. Business Summary
10. ↑ Dillard's Inc. Business Summary
11. ↑ Macy's Inc. Business Summary
12. ↑ Bon-Ton Stores Inc. Business Summary
13. ↑ Nordstrom Inc. Business Summary