The Buckle Has a Lousy Quarter- Kind of. Well, Not Exactly. Can the Outsized Returns Continue?

As I’ve recently written, Tilly’s and Zumiez were kind of caught by surprise by their very positive end of October quarterly results.  But because the surprise was of the positive kind, nobody seemed to care.  Though perhaps they should.

The Buckle, on the other hand, reported a 14.6% decline in revenues from $280 million in last year’s quarter to $239 million in this years.

“Comparable store net sales for the thirteen week quarter ended October 29, 2016 decreased by $42.6 million, or 15.3%, compared to the prior year thirteen week period ended October 31, 2015. The comparable store sales decline for the quarter was primarily attributable to a 10.8% reduction in the number of transactions at comparable stores during the quarter and a 5.6% reduction in the average retail price per piece of merchandise sold; which were partially offset by a 1.7% increase in the average number of units sold per transaction. Comparable store sales for the quarter were also impacted by both reward redemptions and accruals for estimated future rewards (which are recorded as reductions to revenue) related to the Company’s new Guest Loyalty program, which launched during the fiscal quarter ended April 30, 2016. Absent the $3.9 million impact related to the new loyalty program, total net sales for the quarter were down 13.2% and comparable store net sales were down 13.9%.”

Their gross profit margin declined from 41.9% to 40.5%.  Income from operations declined 34.6% from $56.3 to $36.8 million.  As a percentage of revenue, it was down from 20.1% to 15.4%.  Net income fell 34.8% from $35.9 to $23.4 million.  As a percentage of revenue, that’s from 12.8% to 9.8%.

Just for a little perspective, the net income as a percentage of revenue for Tilly’s in their quarter was 4.2% and for Zumiez it was 4.8%.  Even with the decline, then, The Buckle’s is more than twice that of either Tilly’s or Zumiez, who were generally lauded for their performance.

Meanwhile, their balance sheet is just fine, with $213 million in cash and short term investments, inventory that’s declined with sales, no long-term debt and a comfortable current ratio and rising equity (that happens when you make a nice profit).

Often, a strong balance sheet allows a company with fundamental problems to avoid dealing with them until the balance sheet finally goes to hell.  I could rattle off a list of companies in our industry where that happened, but I’m not sure that would be well received.

Is that what’s going on with The Buckle?  Maybe, but their bottom line suggests it might be something else.

The Buckle, Zumiez, and Tilly’s all saw their common stock prices start to fall in early 2015.  Since then, Tilly’s and Zumiez have all recovered some (Zumiez a little, Tilly’s a lot), but The Buckle remains in a downtrend.  My sense is that investors are holding The Buckle to a historical standard they just can’t continue to achieve in this market.

Why were they and are they so profitable?  I have written that I thought they did a magnificent job integrating their house brands with the brands they purchased.  I would also note that denim was 44.9% of their revenue during the quarter.

But house brands are now 35% of sales.  We learn in the conference call that the average selling price for men’s denim fell from $92.70 in last year’s quarter to $89.15 in this year’s.  The comparable numbers for women are from $95.50 to $87.20.

Maybe they’ve pushed house brands a little too hard, and perhaps the bet on denim is no longer paying off.  But they are still twice as profitable as two of their competitors (The Buckle has 470 stores).

One investor/analyst asked them some pretty direct questions about their results (Harsher than analysts usually ask, so good for him).  Their answers weren’t particularly satisfying, though CEO Dennis Nelson did acknowledge that they don’t have the benefit of the $150 jean, with the price tending to be under $100 now.

Then again, what’s he supposed to say?  “Why the hell would you expect us to be significantly more profitable than our direct competitors over the long run?”

If there’s a secret sauce that’s allowed them to do that I don’t know what it is and it sounds like they don’t either.  Or they know what it was but can’t duplicate it.  My concern might be that their secret sauce, whatever it was (maybe the denim and private label?), allowed them to ignore and not invest in other areas like inventory management, online, systems in general.  The analyst who asked the tough questions expressed some concern that they were behind the omni-channel curve.

He went on to ask why, if The Buckle management was bullish on the company’s prospects, they weren’t buying back stock?  The answer was that management is afraid if they did that the float (number of shares available to trade) wouldn’t be great enough.  As you are probably aware, companies have done a lot of boosting of EPS by buying back shares.

So what do you think?  Can The Buckle continue to earn bottom line returns that are twice that of Zumiez and Tilly’s?  Or is its return on revenue likely to sink towards that of its competitors?  And if they’ve achieved those outsized returns by not investing in areas that needed attention, and because of trends that are not continuing, what are its prospects?

That could make for an interesting conversation around the board of directors table.