Buckle Inc

NYSE:BKE

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for your patience and standing by. And welcome to The Buckle’s Second Quarter Earnings Release. At this time, all of your participant phone lines are in a listen-only mode. And later, there will be an opportunity here for your questions [Operator Instructions]. And just a brief reminder, today's conference is being recorded.

Members of the Buckle’s management on the call today are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Kelli Molczyk, Vice President of Women’s Merchandising; and Bob Carlberg, Senior Vice President of Men’s Merchandising. As they review the operating results for the second quarter, which ended August 4, 2018, they would like to reiterate their policy of not giving future sales or earnings guidance, and have the following Safe Harbor statement.

Safe Harbor statement, under the Private Securities Litigation Reform Act of 1995, all forward-looking statements made by the Company’s involve material risks and uncertainties that are subject to change based factors, which may be beyond the Company’s control. Accordingly, the Company’s future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company’s filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise any forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Additionally, the Company does not authorize the reproduction or dissemination of transcripts or audio recordings of the Company’s quarterly conference calls without its expressed written consent. Any unauthorized reproduction or recordings of the call should not be relied upon as the information may be inaccurate.

At this point, I'd now like to turn the conference over to Tom Heacock. Please go ahead.

[Tom Heacock]

Good morning, and thanks for joining us this morning. Our August 24, 2018 press release reported a net income for the 13-week second quarter, which ended August 4, 2018, was $15.7 million or $0.32 per share on a diluted basis compared to net income of $11.5 million or $0.24 per share on a diluted basis for the prior year 13-week second quarter, which ended on July 29, 2017. Year-to-date net income for the 26-week period ended August 4, 2018 was 34 million or $0.70 per share on a diluted basis which compares to net income of 27.8 million or $0.57 per share on a diluted basis for the prior year 26-week period ended July 29, 2017.

Net sales for the 13-week second quarter increased 2.8% to $201.1 million compared to net sales of our $195.7 million for the prior year 13-week second quarter. Comparable store sales for the 13-week fiscal period ended August 4, 2018 increased 1.4% from comparable store sales for the prior year 13-week period ended August 5, 2017. Online sales increased 8.6% to $21.2 million for the 13-week fiscal period which compares to net sales of $19.5 million for the prior year 13-week fiscal period.

Year-to-date net sales decreased 0.5% to $406 million for the 26-week fiscal period ended August 4, 2018 compared to net sales of $407.9 million for the prior year 26-week fiscal period ended July 29, 2017. Comparable store sales for the year-to-date were down 0.9% in comparison to the same 26-week period in the prior year and online sales decreased 7.3% to $44.3 million, which compares to net sales of $41.3 million for the prior year 26-week fiscal period.

For the quarter, UPTs increased approximately 4%, the average unit retail decreased approximately 3% and the average transaction value increased about 1%. Year-to-date, UPTs increased approximately 1.5%, the average unit retail decreased approximately 2% and the average transaction value decreased approximately 0.5%.

Gross margin for the quarter was 39.2%, up 130 basis points from 37.9% for the prior year second quarter. The year-over-year increase was a result of 100 basis point reduction as a percentage of net sales in occupancy, buying and distribution costs and 30 basis point improvement in merchandise margin. For the year-to-date period, gross margin was 39.1%, up approximately 90 basis points from 38.2% for the same period last year. The increase for the year-to-date period was the result of 35 basis point reduction in occupancy, buying and distribution costs and 55 basis point improvement in merchandise margin.

Selling expenses for the quarter were 23.8% of net sales compared to 23.9% of net sales for the second quarter of fiscal 2017. Year-to-date, selling expenses were 23.1% of sales compared to 22.9% in fiscal 2017. General and administrative expenses for the quarter were 5.4% of sales compared to 5.1% of net sales for the second quarter of fiscal 2017. And year-to-date G&A expenses were 5.3% of sales compared to 4.9% of fiscal 2017. The current year G&A increase is primarily attributable to increased IT investments, both in terms of increased home office payroll, as well as spending for other strategic initiatives.

Our operating margin for the quarter was 10% compared to 8.9% for the second quarter of fiscal 2017. And for the year-to-date period, our operating margin was 10.7% compared to 10.4% for the same period last year. Other income for the quarter was $1 million compared to $0.9 million for the second quarter of fiscal 2017. And other income for the year-to-date was $2.5 million compared to 1.8 million in the prior year. Income tax expense as a percentage of pretax net income for the quarter was 25.9% compared to 37.3% for the second quarter of fiscal 2017, bringing second quarter net income to $15.7 million for fiscal 2018 versus $11.5 million for fiscal 2017. Year-to-date, income tax expense was also 25.9% of pretax net income compared to 37.3% for fiscal 2017, bringing year-to-date net income to $34 million for fiscal 2018 compared to $27.8 million for fiscal 2017.

Our press release also included the balance sheet as of August 4, 2018, which included the following; inventory of $127.9 million, which was up approximately 5% from inventory of $121.7 million as of July 29, 2017; and total cash and investments of $237.8 million, which compares to $237.4 million at the end of fiscal 2017 and $262.1 million as of July 29, 2017. At quarter end, inventory on a comparable store basis was up approximately 2.5% and total markdown inventory was down compared to the prior year. We ended the quarter with $141.2 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $2.6 million and depreciation expense was $7 million.

For the year-to-date period, capital expenditures were $6.1 million and depreciation expense was $13.9 million. Year-to-date, capital spending is broken down as follows; $5.2 million for store remodels and store technology upgrades and $0.9 million for capital spending at the corporate headquarters and distribution center. For fiscal 2018, we do not currently have any new stores planned. During the quarter, we completed three full remodeling projects and anticipate completing one additional full store remodel prior to holiday.

Based on current plans, we still expect our capital expenditures to be in the range of $10 million to $15 million for the year, which includes both planned store projects and IT investments. We also closed one store during the quarter, ending the period with 455 retail stores in 43 states compared with 463 stores in 44 states at the end of the second quarter of fiscal 2017. Additionally, our total square footage was 2.339 million square feet as of the end of the quarter compared with 2.373 million square feet at the same time a year ago.

And now, I'll turn it over to Kelli Molczyk, our VP of Women's Merchandising.

[Kelli Molczyk, Vice President, Women’s Merchandising]

Good morning. I'd like to start by highlighting the performance of our women's merchandize categories for the quarter. Women's merchandise sales for the fiscal quarter were down approximately 1.5% against the prior year fiscal quarter. Compared to the same 13-week period a year ago, women's merchandise sales were down approximately 3.5%. Average denim price points decreased from $81.25 in the second quarter of fiscal 2017 to $75.85 in the second quarter of fiscal 2018. For the quarter, our women's business was approximately 46.5% of net sales compared to 49.5% last year, and average women's price points decreased about 4.5% from $40.50 to $38.70.

For women's we were able to successfully manage the business during the quarter, allowing us to both increase margins and reduce markdowns. For denim, we are happy to see the performance in unit sales, driven by fashion denim detailing, alternative inseams and a breath of bottom opening. Important to note the receipt of about 30% of our denim for the quarter was received in the month of July with about 40% of that being delivered the very last week of the month or the quarter.

Outside full-length denim or denim shorts gained momentum later in the season with us ending the quarter in a very comfortable inventory position. Outside denim and shorts, we saw nice turns in our fashion wovens and fashion paint categories, as well as building on incentive programs where guests find more savvy price point as they buy multiples of select styles and categories. Continuing to consistently evaluate and review in-season purchases with available buy now wear now product has added business for our stores and our online business.

In addition to more consistent newness for certain stores and online, we've made adjustments to our online presentation of products on the women’s side, and have seen individual skew list, as well as a total increase in our online business. Newness and products, styling and brands continues to drive the women's business. We keep introducing new brands as we find those relevant to Buckle, as well as build on past and positive reads within received with new brands and products. Q2 seem to be somewhat of a seasonless shopping pattern where bare short-sleeve and long-sleeve products saw strength, as well as all lengths in our bottoms as long as they were new and relevant to our guests.

The team has worked to refocus our youth business by resourcing our products for sharper retails and mini-me type looks. We've added stores to this business and are seeing nice increases in unit sales, a nice addition to the business as we continue to build loyalty to Buckle. We end the quarter in a very comfortable inventory position by category and as the total for the women's side. We continue to leave room for opportunities in the business, which allows us maneuverability with ever changing women's fashion trends.

And with that, I'll turn it over to Bob Carlberg, Senior Vice President of men's merchandising to discuss the performance of our men's merchandize categories.

[Bob Carlberg, Senior Vice President, Men’s Merchandising]

Thanks, Kelly. Men's merchandise sales for the fiscal quarter were up approximately 9.5% against the prior year fiscal quarter. Compared to the same 13-week period a year ago, men's merchandise sales were up approximately 6%. Average selling prices decreased from 87.55 in the second quarter of fiscal 2017 to 85.20 in the second quarter of fiscal 2018. For the quarter, our men's business was approximately 53.5% of net sales compared to 50.5% last year, and average men's price points decreased approximately 3% from 47.85 to 46.55. Men's growth was well balanced with all departments growing expect for casual bottoms, which is a small part of our business; denim, short-sleeve bottom pants, graphic tees, the buy more save more programs, footwear, hats and fragrance, were all standouts from Q2.

As you heard from Tom, our markdown is well control and we are comfortable with the amount and quality of our inventory at the end of the quarter. The earlier response to our fall products has been good, and as we discussed the last two years, we deliver light weight products and spring summer colors early, and wait until the end of August and into September to deliver sweaters and other heavier nets. The response has been excellent to our added inventory and long sleeve graphic tees. Boots are also having a nice start, which is encouraging for our footwear season as it has already been growing at double-digits.

Now turning to results on a combined basis. Accessory sales for the fiscal quarter were down approximately 4.5% against the same 13-week period a year-ago. While footwear sales were up about 8.5%. These two categories accounted for approximately 9.5% and 6.5% respectively of second-quarter net sales, which compares to 10.5% and 6.5% for each in the second quarter fiscal 2017. Average accessory price points were down about 1% and average footwear price points were up approximately 1.5%. On a combined basis for the quarter, denim accounted for approximately 32.5% of sales and tops accounted for approximately 34.5%. This compares to 32% and 34% for each in the second quarter of fiscal 2017. Our mix of private label product remains steady during the quarter, representing approximately 32.5% of net sales.

And with that, we welcome your questions. Thank you.

[Operator]

[Operator Instructions] First we go to line of Tiffany Kanaga of Deutsche Bank. Your line is open.

[Tiffany Kanaga, Deutsche Bank]

Are you able to quantify the calendar shift impact to gross margin? Or put another way, on a non-shifted basis, would you've seen your occupancy gross margin leverage or delverage? And additionally, you posted another positive merchandise margin performance. So can you help walk us through the key drivers there, especially as AUR decelerated in the quarter? Thanks.

[Bob Carlberg, Senior Vice President, Men’s Merchandising]

The first question on the impact of the shift in weeks, I don’t know that we’ll give up the gross margin, but the overall impact to revenue was about $5 million. And so I think we still would have seen leverage of occupancy buying and distribution without the shift in the weeks, but have not quantified that. The second question on merchandize margins, is that it Tiffany?

[Tiffany Kanaga, Deutsche Bank]

Yes.

[Bob Carlberg, Senior Vice President, Men’s Merchandising]

Again, I think we've seen nice growth consistent in past quarters, continue to build our private label business and have a nice representation of product and build that, which is obviously good for margins. And then the bigger driver for the second quarter was probably a reduction in markdowns.

[Tiffany Kanaga, Deutsche Bank]

And if I could sneak in another one, thanks for all the details from Kelli on Women's. I’d love to get some additional big picture color around how you’re approaching the business, which continues to underperform. What do you think are the biggest missing pieces between your performance today versus achieving positive comps in women's, and what's the timeline to get there. Additionally, what's the updated timeline in your view for when we might expect price points to stabilize on that side of the floor given that the declines deepened compared to the first quarter?

[Kelli Molczyk, Vice President, Women’s Merchandising]

We're working through a shift, I would say, in our product assortment. So that takes a little bit of time to work through what we have and continue to find the right spots, the right locations for the right products. We've introduced more brands within the past six months, so it’s finding the right locations in our stores that respond to those brands. And as far as the timeline, I think the price points will probably be pretty similar for the next quarter. So we're seeing a lot of strength in some of that denim that's in that $69 to $75 price point versus the over $100 denim that we were a year ago. So we have a lot of good things to build on.

[Operator]

[Operator Instructions] Next we go to line of Steven Marotta of C.L. King & Associates. Your line is open.

[Steven Marotta, C.L. King & Associates]

I just have another gross margin question. I understand the reticence in specifically breaking out what would have been otherwise. But with 100 basis points decrease in occupancy costs on a comp that’s just over 1.4% that does imply at least in general terms, some perhaps favorable rent treatments on stores that are re-upping recently. Can you talk a little bit directionally about rent and store rent in recent lease renewals?

[Dennis Nelson, President and CEO]

We've had close to 100 renewals the last couple of years. And we look at each one on particular situations and we've been able to improve rents in the majority of those situations. And evaluated going forward continued shorter term leases to give us the opportunity to do so. Naturally, your very strongest centers you have less flexibility with but in a number of cases, we've been able to reduce rents and improve situations. And also with some of the department store closings in the future that might provide some opportunity, because of co-tenancy that would be favorable.

[Steven Marotta, C.L. King & Associates]

Would you say that any of the rent relief that you've received this year has accelerated or decelerated since say the previous year or the year before that. In other words -- and I know that you wouldn’t give out what the absolute rent reductions are unless you’d like to. But would you say that it’s higher or lower for again rents that have been already negotiated for the current year versus last year?

[Dennis Nelson, President and CEO]

There has been definitely improvement from this year from last year and so we've had continued progress there.

[Steven Marotta, C.L. King & Associates]

Did some of that -- am I wrong in that gross margin analysis that some of that rent relief play into the occupancy deleverage in the quarter, or was it mostly that weak shift?

[Tom Heacock]

It was both. And I think as we’ve closed a certain number of stores that’s brought rent down. As Dennis mentioned, as we had rent reductions that certainly brought down the leverage point from where it has been historically to a lower number, so a combination of both those factors and then also the shift of the weeks.

[Steven Marotta, C.L. King & Associates]

My last question is, does the shift in the weeks. Can you go over that a little bit? I know you don't give guidance and I am not asking specifically for guidance for the third and fourth quarter. But can you talk a little bit about the dynamic of what the week’s shift will do to results in the third and fourth quarter? And clearly obviously fourth quarter would not benefit from the extra week last year.

[Tom Heacock]

So looking at the $5 million shift in the second quarter, we’ll give part of that back in the third quarter. I don’t know if it’s about half of that, somewhere about that range. And then the fourth quarter will be -- we'll give the rest back and then obviously have the impact of one fewer week.

[Operator]

We do have a follow-up from the line of Tiffany Kanaga of Deutsche Bank. Your line is open.

[Tiffany Kanaga, Deutsche Bank]

I would like to get your views on denim as a category in the back-to-school and holiday. Would you give us a style update on what you’re seeing in terms of silhouettes and fits and overall demand versus other options like leggings and athletics? Thanks.

[Tom Heacock]

We could also hit on the men’s. if you want to address that first Bob and then Kelli can take the second part.

[Bob Carlberg, Senior Vice President, Men’s Merchandising]

We’re still having good success with the embellished product on the men’s side, although, we’re certainly seeing a cleaning up of the products that we get additional guests into the store. A slimming of the silhouettes has happened along with the smaller bottom openings. So we probably have -- well, not we probably have -- we have a much better selection of that cleaner product on the floor and think that we’re getting a new guest on that side of the business.

[Kelli Molczyk, Vice President, Women’s Merchandising]

For women’s, I kind mentioned it, but we’re seeing a lot of strength across the board in different inseams, different bottom openings. We’ve introduced more of the flair bottom opening within the past quarter. We’re having good success in the ankle length denim, which is just as easy length transition into fall. And then we continue to have, like I said, strong quarter on our shorts and our crop inventory. So it’s across the board, which is nice.

[Operator]

At this point, we have no further questions in queue by phone.

[Dennis Nelson, President and CEO]

If there are no other questions, we can wrap it up for the day. I want to thank everybody for their participation. And enjoy the rest of the day, and have a great weekend.

[Operator]

Ladies and gentlemen, that does conclude the conference for this morning. We do thank you very much for your participation and using AT&T's Executive Teleconference service. A replay of today's event will be available from 11:00 AM through September 7, 2018. You can access it by dialing 800-475-6701 or alternatively at 320-365-3844 using the access code of 453068. Again, we thank you very much for all of your participation. You may now disconnect.