In its most recent earnings call on May 24, 71-year-old retail chain Buckle told a story of falling denim prices and ailing margins that could spell trouble for the retailer in an uncertain future.
With the ring of the opening bell on Friday, investors began punishing the retailer for a lackluster first quarter, driving Buckle’s stock down 6 percent after it revealed a 1.7 percent decrease in revenue during the first quarter and a 1.3 percent decline in comparable store sales.
Although Buckle pointed to positive sales growth for its accessories, activewear and footwear, the true danger to its business may be in the margins. In the first quarter, gross margins decreased by 80 basis points to 38.1 percent at Buckle, a result of a 30 basis point decline in merchandise margins and a 50 basis point decline in buying and distribution expenses, according to the company.
Additionally, Buckle told reporters its average unit retail had decreased by 3.5 percent during the quarter and that its average transaction value had also decreased slightly. Perhaps most alarming, Buckle’s operating margin fell to 9.3 percent from 11.4 percent in the first quarter last year.
However, for Buckle, no category fell off quite so fast as denim in the first quarter. Average women’s denim prices dropped to $76.70 compared to $82.45 in the first quarter of last year. Men’s denim followed suit on a smaller scale, with the average price falling from $88.05 in FY18 to $86.70 in Q1.
Although Buckle typically maintains a fairly even mix between men and women’s apparel, this quarter also saw men’s merchandise sales take 1.5 percent share away from women’s while denim dollars decreased on flat units sold for both.
Buckle’s VP of women’s merchandising Kelli Molczyk said these numbers point to consumers buying patterns that favor denim in the sub-$80 range.
“With guests’ buying patterns continuing to focus on price points of under $80 in denim, under $60 in footwear and under $40 in tops, we fell a bit short in our dollar performance during the quarter in categories such as denim, shorts, footwear, fashion wear and accessories—but we’re encouraged by the increases in unit sales we drove at regular price in those same categories,” Molczyk said, although denim was not one of those categories.
Considering that denim makes up an estimated 42.5 percent of Buckle’s sales, this could spell trouble for the retailer if its margins do not improve. The retailer’s only response so far has been to release an own-label denim brand called Willow & Root that focuses on the under-$50 range in fashion denim.
As its private-label business made up 34.5 percent of all sales in the quarter, Buckle could look to Willow and Root as a way to increase margins and lower merchandise costs in response to lower price points.
“For denim, ankle length and destructed detailing led the way in guest purchases,” Molczyk explained, pointing to the retailer’s faith in its new label. “We saw growth in not only our private brand denim but also in our exclusively-at-Buckle denim where we developed exclusive fit and detailing for Buckle-only labels that we’ve built with outside brand partners.”
However, another threat may be looming for Buckle before it is able to tackle this shift in consumer sentiment. According to Dennis Nelson, Buckle’s president and CEO, the retailer has “about a 50 percent exposure” to China, putting its margins at further risk as the trade war continues to heat up.
Nelson said that his company will rely on the strong relationships it has built with its vendors and brands to weather the tariff storm, should it come.
“Some of our key vendors are looking at other places of production outside of China as we work through this process, and our flexibility helps us manage our product development as we work with national brands and private brands, and we’ve already diversified and have made product in a lot of different countries to give us options,” Nelson said.
He continued, “We have a long-term view, as well as our vendors that love doing business with us, so I think we’ll continue to work on that to handle this potential increase in tariffs the best we can.”