The Buckle, Inc.

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

The Buckle, Inc. is a retailer of apparel, footwear, and accessories for fashion-conscious young men and women, primarily operating through brick-and-mortar stores and a growing e-commerce platform.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

The Buckle, Inc. (BKE) primarily operates in the retail apparel sector, focusing on casual wear, footwear, and accessories for young adults. The company’s core demographic is the fashion-conscious young adult seeking trendy and stylish products. It distributes its merchandise through physical retail locations and its e-commerce platform, with most locations in small towns and shopping centers. The company was founded in 1948 and is currently based in Kearney, Nebraska.

Industry Landscape

The apparel retail industry is highly competitive, fragmented, and constantly changing. It’s characterized by high levels of seasonality, fast-changing consumer preferences, and the intense impact of broader economic conditions, especially inflation. Competitors range from large department stores and specialty chains, and online only retailers, all vying for customer attention. Online retail has grown substantially which also threatens existing store front retailers and creates a need for a very good e-commerce presence. Fast fashion has become a mainstay which changes consumer trends quite often and companies need to keep track and quickly change. There is no “moat” or long term sustainable competitive advantage for most players in the apparel retail industry.

Revenue Distribution BKE’s revenue distribution is primarily through their retail stores, with online presence contributing to revenue growth. A large percentage of revenue comes from its Men’s category followed by their Women’s Category. These are the most important aspects of the business.

What Makes the Company Different

The company is vertically integrated, which allows it more control over the quality of the products it offers, as well as the ability to respond to consumer demand more quickly. Also, its presence in rural markets may give it a competitive edge in these locations, but its overall geographic reach is limited. The company has started using artificial intelligence to improve the shopping experience and the store designs to align better with today’s consumers. However, most retailers are also catching up to these trends and it does not offer them a sustainable advantage.

Financials In-Depth:

  • Revenue: In the most recent quarter, they have $333M in net revenue, which is down 1.3% YoY. Net sales for the thirteen weeks ended August 5, 2023, decreased 1.7% to $291.1 million from $296.3 million for the thirteen weeks ended July 30, 2022, driven by a 5.9% decrease in comparable store sales, with online sales decreasing by 11.2% YoY. There has been an almost consistent decrease of revenue in the recent years.

  • Margins: BKE has very consistent gross margins of 40%-45%, indicating that the company can maintain strong cost management and a decent pricing strategy. However, the operating margins vary widely, depending on operating expenses and markdowns, thus making their financials difficult to predict. In this recent quarter the Gross Margin is 41.6% versus 45.1% a year prior, it has seen a massive drop. Operating income was $42.2 million, a 28.2% decrease compared to the operating income of $58.8 million in the comparable prior-year period, meaning operating margins were down quite a bit. Net Income for the period was $34.6 million vs $51.8 million in the prior period which is a major drop of 33%.

    • The biggest issue the company has, according to the CEO is “elevated promotional activities and markdowns.”
  • Balance Sheet: The balance sheet is relatively healthy with decent current assets ($311M) and total assets ($721M) against total liabilities ($149M) and long term liabilities ($370M). Cash and Cash equivalents total $262M. This represents a company with financial strength to get through lean times, but they need to make significant improvements to their business to have better returns.

  • Cash Flow: The cash flow situation of this company is quite bad. They have struggled to consistently generate positive cash flow over the last decade. The company has struggled to grow and expand operations as a result.

  • Debt: They have a manageable level of debt on their balance sheet. The financial leverage they use is also within a tolerable range.
  • They have a line of credit worth $250M, which is not used at all, showing they have additional credit capacity.
  • Capital expenditures They had a capital expenditure of $23.4 million in the first three quarters of 2023. They have announced expansion and renovation of 44 stores in 2023, suggesting expansion of physical stores is still a top priority of management.

Moat Assessment: 1/5

BKE has no significant moat in the apparel retail industry. Its brand, while recognizable, is not a source of sustainable competitive advantage that would generate superior results consistently over a very long period of time. Their online presence, although growing, is still in early stages and most retailers have online presence these days. The company is mainly reliant on its unique presence in rural towns, but that is not a very defensible moat and does not provide the company any real economic advantage. There is no unique operational advantage, proprietary product or process, that they have, which makes them vulnerable to their competition.

  • Intangible assets: Brands are easily copied and there is low customer loyalty.
  • Switching costs: Customers can easily switch retailers.
  • Network effects: there are no network effects in retail clothing.
  • Cost advantage: they don’t have any significant cost advantage relative to competitors.

Risks to the Moat and Business Resilience

Several factors pose risks to BKE’s business model and moat:

  • Intense Competition: As we said before, the apparel retail market is intensely competitive, making it hard for BKE to maintain a unique position. The constant influx of new entrants and the rapid changes in consumer preferences put pressure on the company’s margins and market share.
  • Economic Downturns: The apparel industry is cyclical and can be heavily affected by macroeconomic factors, such as recession, high inflation, and interest rates. The recent decrease in margins and profit indicate a tough road ahead and shows that they are susceptible to such downturns.
  • Changing Consumer Preferences: The fast pace of changing fashion trends puts pressure on the company to keep up, and they must make considerable investments in time and resources to make sure they don’t fall behind.
  • E-commerce Challenges: The company needs to invest further to keep their online presence relevant against the competition. Lack of a mature e-commerce platform puts the company at a major disadvantage.
  • Limited Geographic reach: Being limited to smaller towns creates a risk for revenue generation.

Understandability: 2/5 BKE’s business is relatively straightforward. Its core operations of selling clothing to young adults are not complex, but how the company creates a good financial outcome is very difficult to analyze because many items directly impact the end result (promotions, costs, economic downturns). The reliance on its brand value while not having a clear moat is another factor that makes it complex. Hence, while its operations are easy to grasp, the complete business including its profitability, market position, and future prospects are complex and therefore require significant effort to understand clearly.

Balance Sheet Health: 4/5 BKE’s balance sheet can be rated as a 4/5 as it has strong current assets and manageable debt, giving the company a financial cushion, but the main issue is its failure to translate this into profits and revenue generation that would make it a top performer. Although there is not high debt, their return on investment and shareholder equity is not good enough either, hence the balance sheet health is average.

Recent Concerns and Management Commentary

Management recently talked about some issues in their last quarterly filings. Their profits have fallen drastically due to increased promotional activity and higher markdowns. This is because other companies have done similar things and are also using promotions to increase sales. The company is actively thinking about ways to minimize this negative effect on their financials. They are also thinking about ways to further expand their brand recognition and online presence, with AI-driven experiences. They are seeing a recovery in sales but are also concerned about maintaining margins in these conditions. Management has expressed that their customers are shifting their interests to more dressy and feminine fashion which is where they’re shifting their focus as well.

  • In the earnings call they also mention a negative impact of inflation on their consumers, meaning they are less likely to buy their products, or they are buying at reduced quantities. They have also noted the increase in shipping and material costs, as another factor negatively impacting them.