Buckle Inc

NYSE:BKE

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to The Buckle Fourth Quarter Earnings Release Conference Call. At this time, all participants' lines are in a listen-only mode [Operator Instructions]. As a reminder, today’s call 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; Bob Carlberg, Senior Vice President of Men’s Merchandising; and Kyle Hanson, Vice President, General Counsel and Corporate Secretary.

As they review the operating results for the fourth quarter, which ended February 3, 2018, they would like to reiterate their policy of not giving future sales or earnings guidance, and have the following safe harbor statements; which is under the Private Securities Litigation Reform Act of 1995; all forward-looking statements made by the Company involve material risks and uncertainties; and are subject to change based on 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 express written consent. Any unauthorized reproduction or recordings of the call should not be relied upon as the information may be inaccurate.

With that being said, I'll turn the conference over to Mr. Tom Heacock. Please go ahead, sir.

[Tom Heacock]

Good morning. And thanks for being with us this morning. Our March 16, 2018 press release reported net income for the 14 week fourth quarter which ended February 3, 2018 was $42 million, or $0.87 per share on a diluted basis, compared to net income of $36 million, or $0.74 per share on diluted basis for the prior year 13 week fourth quarter which ended January 28, 2017. Net income for the 53 week fiscal year ended February 3, 2018 was $89.7 million or $1.85 per share on a diluted basis which compares to net income of $98 million, or $2.03 per share on diluted basis for the prior year 52 week fiscal year which ended January 28, 2017.

Net sales for 14 week fourth quarter increased 0.4% to $281.2 million, compared to net sales of $280 million for the prior year 13 week fourth quarter. Comparable store sales for the 14 week fiscal period ended February 3, 2018 decreased 3.2% from comparable store sales for the prior year 14 week period ended February 4, 2017.

Online sales increased 4% to $33.5 million for the 14 week fiscal period compared to net sales of $32.2 million for the prior 13 week fiscal period, compared to the prior year 14 week period ended February 4, 2017 however, online sales for the quarter increased just over 1%.

Net sales for the 53 week fiscal year decreased 6.3% to $913.4 million, compared to net sales of $974.9 million for the prior year 52 week fiscal year. Comparable store sales for the 53 week fiscal period ended February 3, 2018 decreased 7.2% from comparable store sales for the prior year 53 week period ended February 4, 2017. Our online sales decreased 1.6% to $98.2 million for the 53 week fiscal year compared to net sales of $99.8 million for the prior year 52 week fiscal year.

For the quarter, UPTs increased approximately 0.5%, the average unit retail decreased approximately0.5% and the average transaction value decreased just slightly. For the full year, UPTs increased approximately 1.5%. The average unit retail decreased approximately 4.5% and the average transaction value decreased approximately 3%.

Our gross margin for the quarter was 47.4%, up 250 basis points from 44.9 % in the prior year fourth quarter. The year-over-year increase is the result of a 225 basis point improvement in merchandise margin and 35 basis point benefit as the result of the fiscal 2016 sunset of our old Primo card loyalty program, which were partially offset by slightly de-leveraged occupancy, buying and distribution expenses. For the full year gross margin was 41.6%, up 90 basis points from 40.7% in the prior year.

The current year increase is due to a 120 basis point improvement in merchandise margin and a 100 basis point benefit from the Primo card sunset, which again were offset by de-leverage occupancy, buying and distribution expenses resulting from the comparable store sales decline.

Selling expenses for the quarter were 22% of net sales, consistent with the fourth quarter of last year. For the year, selling expenses were 22.5% of sales compared to 21.1% in the prior year. For the year, the increase in selling expense as a percentage of net sales was the result of increases in store compensation, online marketing and fulfillment and certain other selling expenses. General administrative expenses for the quarter were 3.8 % of net sales, compared to 3.1% of net sales for the fourth quarter of fiscal 2016. For the full year, general administrative expenses were 4.4% of sales compared to 3.9% in the prior year.

For both the quarter year-to-date period, the G&A increases due to increased professional and consulting fees, home office compensation and benefits and certain other expenses. Our operating margin for the quarter was 21.6% compared to 19.8% for the fourth quarter of fiscal 2016. For the year, our operating margin was 14.7% compared to 15.7% in the prior year.

Other income for the quarter was $2.8 million, compared to $2 million for the fourth quarter of fiscal 2016. Another income for the full year was $5.4 million, compared to $3.5 million in the prior year. Income tax expense as the percentage of pre-tax net income for the quarter was 33.8 %, compared to 37.3% for the fourth quarter of fiscal 2016, bringing fourth quarter net income to $42 million for fiscal 2017 compared to $36 million for fiscal 2016.

For the full fiscal year, income tax expense was 35.7% of pre-tax income, compared to 37.3% in fiscal 2016, bringing net income to $89.7 million for fiscal 2017, compared to $98 million for fiscal 2016. Our press release also included a balance sheet as of February 3, 2018 which included the following. Inventory of $118 million which was down approximately6% from inventory of $125.7 million at the end of fiscal 2016. And total cash and investments of $237.4 million which was after payment of $133.9 million in dividends during the year, and compares to $264.6 million at the end of fiscal 2016 after payments of $84.8 million in dividends during that year. A year-end inventory in a comparable store basis was down approximately 6.5% and total markdown inventory was also down compared to the prior year.

We ended the year with $149.5 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $2.5 million and depreciation expense was $7.6 million. For the full year, capital expenditures were $13.5 million and depreciation expense was $30.7 million. For the full year, capital expending was broken down as follows. $12.5 million for new store construction, store remodels and store technology upgrades, and $1 million for capital spending at the corporate headquarters and distribution center.

During the quarter, we opened one new store, closed five stores and completed one full remodel in January bringing our full-year account to two new stores, eight full remodels and 12 store closures. We also closed one additional store in February after the end of the fiscal year. For fiscal 2018, we currently do not have any new stores planned and anticipate completing four full remodeling projects, which includes two for spring and two for back-to-school. Based on current store plans, we expect our capital expenditures to be in the range of $10 million to $15 million which includes both planned store projects and IT investments. Buckle ended the year with 457 retail stores in 44 states, compared with 467 stores in 44 states at the end of fiscal 2016.

As of the end of the year, 391 one of our 457 stores were in our newest format. Additionally, our total square footage was 2.367 million square feet as of the end of the year, compared to 2.392 million square feet at the same time a year ago.

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

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

Good morning. I'd like to start by highlighting the performance of our women's merchandising categories for the quarter. Women's merchandise sales for the fiscal quarter were down approximately 4.5% against the prior year fiscal quarter. On a 14-week comparable basis, women's merchandise sales were down approximately 9%. Average denim price points decreased from $87.35 in the fourth quarter of fiscal 2016 to $83.05 in the fourth quarter of fiscal 2017.

For the quarter, our women's business was approximately 45% of net sales compared to 47% last year. And the average women's price points remained unchanged at $46.10. We are pleased to highlight that our women's business saw strength and minimized markdowns and increased margins across multiple categories at the quarters end, as well as finishing out the year. In addition, going into a traditionally competitive promotional season for retailers with a plan for reduced inventory levels, impacted our overall performance in key categories, such as denim, top and bow wear. Our markdown denim inventory fell well below where we were a year ago which had direct impacts on our markdown sales. For regular price denim, we saw some nice gains to our inventory through the quarter and strong responses to our new regular price selection.

Key brands being our private label brands of BKE, buckle black and day-trip as well as exclusive product from brands such as Misty, Rock Revival, Flying Monkey and Can-Can. The expansion of our fifth selection and breath of our bottom openings were well received across the board. As the quarter progress seasonal product categories day momentum as guests shifted their buys to align with the buy now, wear now shopping patterns we have seen throughout the year. We continue to see nice performances to long-sleeve, sleeve and sweater categories as the country's climates remain cooler for the start of 2018.

We also anticipated the shopping behaviors for the early part of the year and shifted the influx of our spring product to the latter part of February. That intentional shift paired with the consistent review and receipt of quick-turn inventory opportunities has allowed us to adjust more nimbly to fashion trends, as well as changes in consumer shopping patterns. Our online business saw some nice bumps in all top categories, shoes and our kid's product.

In addition, our inventory fell a little short in certain categories for online like our denim, our turns, saw a nice gain. We ended the quarter and the year in a comfortable inventory position would not only decrease markdown inventory but also decreases in regular price inventory on seasonal categories such as outerwear, boots and sweaters. These positions will allow for more opportunities as we move towards the new fall season.

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

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

Thanks Kelli. Good morning, everybody and a happy Friday to you. Men's Merchandise sales for the fiscal quarter were up approximately 5% against the prior year fiscal quarter, on a 14-week comparable basis men's merchandise sales were up approximately 1%. Average denim price points decreased from $87.70 in the fourth quarter of fiscal 2016 to $84.45 in the fourth quarter of fiscal 2017. For the quarter, our men's business was approximately 55% of net sales compared to 53% last year. Average men's price points decreased approximately3.5% from $55.80 to $53.95.

Men's generated dollar increase in Q on top of the unit increases we had been showing leading up to Q4. So we were pleased with that. Denim led the way with our BKE brand continuing very strong. Two of our other larger brands of denim and Rock Revival and Salvage also performed well. Across all categories our private brands have been well received. True fall/winter categories like sweaters and outerwear were down, but did better than plans that will be ready for more new this fall. Footwear continues to be a growth department for us. Accessories were good with fragrance, hats and glasses continuing to drive this category. Spring was well received by our teammates and guests although as Kelli mentioned the buy now wear now attitude, so it started out a little slower than planned.

But sales became better later in the month. We are confident in the spring/summer inventory in both quality and quantity. From a marketing perspective, we are currently focusing support toward our key merchandising programs including new brand introductions, new arrivals from our largest volume brands and new exclusive collections from our national brand partners. We've seen success from recent in-store events where we've introduced new brands and focused on guest activation with strong turnouts for each event. We will continue to focus on these as we move forward. Our brand event which is the largest event of the spring season is currently underway. And we've seen some good excitement and anticipation for the event.

Now turning to results on a combined basis. Accessory sales for the 14 week quarter were down approximately 9% against the prior year 14 week period, while footwear sales were up about 5%. These two categories accounted for approximately 9.5% and 6% respectively in fourth quarter net sales, which compares to 10% and 5.5% for each in the fourth quarter of fiscal 2016. Average accessory prices are up approximately3.5% and average footwear prices were up approximately0.5%.

Again on a combined basis for the quarter, denim accounted for approximately46% of sales and tops accounted for approximately 31.5%. This compares to 45.5% and 31% for each in the fourth quarter of fiscal 2016. Our private label business continues to grow and represents approximately 40.5% of sales for the quarter, and 36% for the year.

And with that we welcome your question. Thank you for listening.

[Operator]

[Operator Instructions]

And first to go online of Tiffany Kanaga with Deutsche Bank. Please go ahead.

[Tiffany Kanaga, Deutsche Bank]

Hi, thanks so much for taking my questions. Would you repeat again to how you achieved your best gross margin gain in several years? Was there a benefit from the extra week that you can quantify? And in particular any impact from accruals, relating to buying, distribution and occupancy. Additionally, do you think you can achieve further gains of this magnitude ahead? Thanks.

[Tom Heacock]

On the second part of the question, we don't give guidance so we can't talk about that or discuss that. But in terms of looking at the gains and gross margin, most of that was merchandize margin related and Primo related. So 220 was merchandise margins, we saw the benefit there from reduced markdowns as Kelli called out, big category was women's denim where we saw reduced denim markdowns. We also saw the benefit of increases in private label and reduced shrinkage in the fourth quarters. These are annual inventory process of those things all benefited merchandise margins. De-leverage was about 10 basis points for the quarter and some of that -- there was some benefit from the extra week. But really looking compared to the whole year probably benefit from a little bit stronger comps in the fourth quarter than the year and then that extra week. But I don't know that we can quantify how much that had.

[Tiffany Kanaga, Deutsche Bank]

And if I could also ask I understand you don't give guidance, but can you talk at all about what kind of tax rate you anticipate for 2018 given reform. And how you're thinking about your tax reform savings? Could we see some reinvestment behind strategic initiatives? And, if so, how much and more specifically where? Thanks.

[Tom Heacock]

I'll let Dennis answer the second part of that question. As far as an expectation for next year and we got a little benefit this year with having one month at a lower rate. So I think 26% would be the rate that we expect for next year going forward having the full year benefit.

[Dennis Nelson, President and Chief Executive Officer]

In regards to investing those savings, we have actually forever had a strong cash basis, and as always looked at what we can do to invest in our business to be a better specialty store. And our focus is to continue to improve our online. Keep our stores up-to-date, invest in our people, but that is all consistent with our strategy from almost day one.

[Operator]

Next we go to us Steve Marotta with CL King and Associates. Please go ahead.

[Steve Marotta, CL King and Associates]

Good morning, everybody. Just as a benchmark what was the private label as a percentage sales in the fourth quarter of 2016? In other words it was 14.5% in the most recently reported quarter and that compares to what last year please?

[Tom Heacock]

That was up about 1% as percentage sales for both the quarter and the year. So it's 39 a year ago.

[Steve Marotta, CL King and Associates]

Okay. Do you expect that to increase -- you can't give guidance? As it pertains to the February comp number, I was a little confused about the release; it was February comp was down 5% but net sales increased 2% for the quarter without material store growth. I don't understand. Could you explain that differential?

[Tom Heacock]

A lot of it has to do with the extra week in the year for fiscal 2017. So when we're comparing total sales, total sales is fiscal period to fiscal period which is not necessarily the same four weeks a year ago on a calendar basis. So that's the bulk of the disparity between those two numbers.

[Operator]

No further questions coming in.

[Tom Heacock]

There are no further questions. We can wrap up the call and wish everyone a good rest today. And an enjoyable weekend. So thank you very much for joining us.

[Operator]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.