Private Label Expansion To Improve Margins Amid Challenges From Declining Sales

Key Takeaways

• Increased private label offerings in denim drive improved margins, impacting net margins positively by capitalizing on higher-margin products.
  
• Strategic investments and relocations in digital channels and retail stores enhance customer experience, boosting sales and revenue growth.
  
• Declining sales, increased costs, and reduced profitability indicate potential challenges for Buckle's future earnings and revenue growth trajectory.

Catalysts

Operates as a retailer of casual apparel, footwear, and accessories for young men and women in the United States.

• Buckle's increase in private label offerings, particularly in denim, has been a major driver for improved merchandise margins. This trend is likely to continue impacting net margins positively as private label products typically have higher margins compared to branded items.
  
• Investments in digital channels are starting to impact the guest experience and key metrics across e-commerce. As these investments pay off, online sales could see growth, which will positively impact overall revenue.
  
• The company plans to continue its strategy of store relocations to outdoor shopping centers, which have historically shown to have potential for low double-digit sales growth. This effort can drive revenue in the retail sector of their business.
  
• Planned store remodels and smaller updates across several stores are anticipated to enhance customer experience and could lead to increased sales in remodeled locations, positively affecting overall revenue.
  
• The company is indicating future store expansions with a net addition of 2 or 3 stores for 2025. This expansion is expected to contribute to top-line growth, impacting revenue positively.

Buckle Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Buckle's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.2% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $210.7 million (and earnings per share of $4.18) by about December 2027, up from $197.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, up from 13.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Buckle Future Earnings Per Share Growth

Risks

• The decrease in net income from $51.8 million to $44.2 million year-over-year for the third quarter, and from $140.3 million to $118.3 million for the year-to-date period, suggests a declining profitability trend, which could impact future earnings.
  
• Net sales decreased by 3.2% in the third quarter and 4.6% year-to-date compared to the prior year, indicating challenges in maintaining revenue growth, potentially affecting long-term revenue outlook.
  
• Rising selling, general, and administrative expenses, which increased as a percentage of net sales from 27.4% to 29.1% for the quarter, could pressure net margins if the trend continues.
  
• The slight decrease in gross margin, due to increased occupancy and distribution costs, from 48.5% to 47.7% in the third quarter of 2023, suggests growing cost pressures, which could negatively impact net margins.
  
• Online sales declined by 9.2% year-to-date, showing potential challenges in e-commerce growth, a vital area for retail business expansion, which could impact overall revenue growth.

Valuation

• The analysts have a consensus price target of $47.0 for Buckle based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $210.7 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.0%.
• Given the current share price of $51.78, the analyst's price target of $47.0 is 10.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.