Rising Costs And Strategy Risks Dim Retailer's Profit Prospects

Key Takeaways

• Decreasing profitability due to a decline in net income and EPS, impacting future earnings growth amid rising operating costs.
  
• Expansion strategy amidst declining sales and increased costs might not yield anticipated returns, potentially affecting future profitability.
  
• Buckle's strategic improvements in e-commerce, merchandise margin expansion, new store openings, digital marketing, and workforce investment suggest a path to increased profitability and market share.

Catalysts

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

• Decline in net income and diluted earnings per share (EPS) compared to the prior year suggests decreasing profitability, impacting future earnings growth.
  
• Decrease in net sales, comparable store sales, and a significant drop in online sales indicate challenges in sales volume growth, which could affect future revenue and market share.
  
• Increased occupancy and distribution costs, despite improvement in merchandise margins, could pressure gross margins if these cost trends continue, impacting net margins.
  
• Rise in selling, general, and administrative (SG&A) expenses as a percentage of net sales, driven by store and labor-related costs and digital commerce investments, suggests higher operating costs that may reduce future operating margins.
  
• Expansion strategy involving opening new stores and remodeling, amidst declining sales and increased operating expenses, might not yield the anticipated returns on investment, potentially affecting future profitability.

Assumptions

• Analysts are assuming Buckle's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.7% today to 15.2% in 3 years time.
• Analysts expect earnings to reach $189.0 million (and earnings per share of $3.75) by about October 2027, down from $205.4 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 10.1x on those 2027 earnings, down from 10.5x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Risks

• The engagement of third parties to improve website shoppability and other e-commerce initiatives resulted in improved conversion rates and on-site metrics, hinting at a potential recovery and stronger future performance in online sales which could positively influence revenue.
  
• The mention of merchandise margin expansion, driven by solid demand and sell-through of private brands, along with denim sell-through, indicates a healthy product mix that could lead to improved profitability and net margins.
  
• The opening of new stores in markets not previously served by Buckle, combined with strategic investments in store remodels and technology upgrades, suggests an expansion strategy that could increase market share and contribute positively to revenue growth.
  
• A balanced approach to digital marketing spend, focusing on both guest acquisition and retention, showed late-quarter improvements in traffic to the company's e-commerce site, which could translate to stronger online sales and positively affect future revenues.
  
• The company’s strategy to invest in its workforce to remain competitive, though it has increased selling costs in the short term, could improve the customer experience and loyalty, potentially leading to higher sales and better operating margins over time.

Valuation

• The analysts have a consensus price target of $31.0 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 $1.2 billion, earnings will come to $189.0 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $43.41, the analyst's price target of $31.0 is 40.0% lower.
• 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.