Buckle: Beginning of a Vicious Cycle?

Buckle Inc. (BKE, Financial) is a teen retailer with ~500 stores across the U.S. It’s a stock that might show up on value screeners.

Investors who like low PE ratios and dividends may be tempted to buy. Buckle currently has a trailing 12-month PE ratio of 9 with a dividend of 3.78%. Below you can see how the company’s revenues were generated by division for the fiscal year that ended in January. What sticks out is that the company has a large concentration of sales related to denim at 42.5%.

From the company 10-K

Buckle’s financial metrics compare favorable when matched up against other teen retailers such as American Eagle Outfitters (AEO, Financial), Abercrombie & Fitch (ANF, Financial), Gap (GPS, Financial) and Urban Outfitters (URBN, Financial). Buckle has the highest return on equity (ROE), return on assets (ROA) and return on capital (ROC) percentages and also the lowest valuation metrics.

Numbers from GuruFocus

Earlier in the week, the company issued a press release. Buckle announced that same-store sales for July fell 10.9% for stores open at least one year when compared against the same period last year. Furthermore, the press release contained more bad news showing that July wasn’t a fluke.

"Comparable store net sales for the 13-week second quarter ended July 30 decreased 10.8% from comparable store net sales for the 13-week period ended Aug. 1, 2015. Net sales for the 13-week fiscal quarter ended July 30 decreased 10.1% to $212.2 million from net sales of $236.1 million for the prior year 13-week fiscal quarter ended Aug. 1, 2015.

Comparable store net sales year to date for the 26-week period ended July 30 decreased 10.9% from comparable store net sales for the 26-week period ended Aug. 1, 2015. Net sales for the 26-week fiscal period ended July 30 decreased 10.2% to $455.7 million from net sales of $507.4 million for the prior year 26-week fiscal period ended Aug. 1, 2015."

Buckle is a well-run company with a track record of success. The company has not had negative net income in the last 15 years despite enduring very tough economic conditions and operating in a very competitive industry. The chairman of the board owns 33% of shares outstanding so management’s incentives are aligned with shareholders. On the other hand, the stock has close to 50% of its float shorted so there are many people rooting against this stock.

Buckle has two difficult challenges to overcome. First, brick-and-mortar stores in general are facing an immensely difficult retail environment. I wrote a post a couple of months ago discussing the challenges of physical store retailers here.

The primary argument was that mobile commerce has evolved to the point where consumers can impulse buy anything at anytime from anywhere. As a result, consumers are spending a larger percentage of discretionary income before they even step foot into a store.

Second, Buckle’s inventory may be out of favor. The company relies heavily on denim. If denim is out of fashion and consumers favor styles such as athleisure, then it’s difficult for Buckle to rebrand itself since it’s so heavily associated with a certain product category. It would be like if the Men’s Wearhouse, which is known for formal wear, started selling motorcycle gear, it would drive away their core customers yet would likely not attract new customers.

Retailers with unpopular merchandise inevitably experience the vicious cycle. People avoid the stores because they don’t like what they see so the retailer needs to cut prices to drive traffic. If the retailer continually offers unpopular merchandise, then the customers become accustomed to discounts and start delaying purchases until items go on sale.

For these reasons, I would caution investors to consider if the price of Buckle’s stock is worth the risk.

Disclosure: The author does not own any stocks mentioned in this article.

Start a free seven-day trial of Premium Membership to GuruFocus.