My friends (Will Xia, Ryan Perry, Sheng Lu, Caitlin O’Shaughnessy, Jake Gardner) and I recently conducted a case study on The Buckle — a retail clothing store — for Sonia Marciano’s NYU Stern MBA Advanced Strategy class.
While most retail clothing companies had an ROIC (return on invested capital) of 15%, The Buckle had a whopping 49.3%. That’s amazing. With such a high return on capital, we investigated.
The Buckle was a unicorn — rare mythical creature in the retail clothing industry.
The Buckle is nationwide, but it has about half the amount of stores of its competitors. There is a very good reason for this. Furthermore, it carries 285 name brands (e.g., Diesel, Fox, Under Armor, Nixon, Billa Bong, etc.) and 15 private labels.
While private labels make up only 5% of The Buckle’s SKUs, they account for 35% of sales! This is because private labels have higher profit margins, since The Buckle doesn’t have to share profits with the name brands.
It focuses on jeans and tops because … most people wear jeans and tops. According to its 10K, The Buckle claimed that it was recession proof. Since it has only went through one recession, I guess that the claim is valid.
While its number of stores have grown, so has its ROIC. It tapers in the end, but I’ll explain that later.
So, how good is The Buckle? Compared to other discretionary retailers, The Buckle rocks. And this is no fluke. We based it on a 5-year average ROIC.
Industry peers don’t even come close. It is over 3x the industry average.
To create a MECE list (mutually exclusive and collectively exhaustive), we first investigated the brands’ prices. They’re about average.
The gross margin and turnover on clothing are about the same …
So far, everything looked the same. It wasn’t until we broke down its operating expense and found the secret sauce.
The Buckle maintains extremely low rent costs, which allows The Buckle to retain more of its revenues! This saving accounts for 30% of the difference in ROIC.
Ultimately, The Buckle preemptively monopolizes cheap rent space in strategic locations.
To map it out, we compared The Buckle to Abercrombie & Fitch (A&F) in Chicago. The Buckle is in the suburban areas and A&F dominates high traffic places. However, with high traffic, there’s also high competition and high rent. The Buckle likes to be alone or in competitively advantageous locations.
Furthermore, The Buckle has a great inventory management system, which allows it to move clothes where they aren’t doing so well to stores that demand them. This way, there are no storewide markdowns, which means more net profit.
The Buckle maintains a marginally lower COGS and OPEX as a percent of revenue.
Moreover, its “Xia Perry Ratio,” a term we coined, is high. In summary, The Buckle has to pay its suppliers every 20.37 days, but gets paid for clothes sold on an average of 1.31 days. This means that The Buckle does not have to get loans and pay interest expenses to finance its supplies.
The Buckle uses the name brands to hook customers in and upsells whole outfits with its own private label.
Watch the video to understand its sales strategy. Its customer service strategy even includes personal shoppers and free in-store alterations. WOW. These services are only normally seen in upscale department stores, such as Neiman Marcus or Bergdorf Goodman.
The Buckle reduces idiosyncratic risks by having a wide portfolio of brands and not relying on key designers.
Conversely, A&F and The Gap are losing touch with millennials. While these private label brands enjoyed high profit margins, their positions was never hedged.
- How Gap became fashion’s ‘basic bitch’
- Four Signs That Abercrombie Is Completely Out Of Touch With Its Customers
In an alternate universe, taking away is competitive advantage, The Buckle is average.
Warren Buffett reportedly once told Bill Gates that a “ham sandwich could run Coca-Cola.” –The Motley Fool
What Buffett meant was that the company’s qualities were firm-bound, so that “anyone” could run the company and it’d be all right. Props to Dennis H Nelson (CEO of The Buckle).
As the company grows, investors are coercing corporate to expand into coastal cities, including California, where rent costs are high. This might be our beloved company’s downfall.
I hope that you found our research interesting. After doing this project, I am now considering a job in management consulting.
Cheers,
Lawrence Chan
P.S. I dig consulting. I even dress the part 😉
TOFURIOUS 