Buckle Inc

NYSE:BKE

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to Buckle's Fourth Quarter Earnings Release Conference Call. At this point, all the participant lines are in a listen-only mode. [Operator Instructions] As a reminder, today's call is being recorded.

And members of 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 Brady Fritz, General Counsel and Corporate Secretary. As they review the operating results for the fourth quarter, which ended February 1st, 2020, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement, which can be found 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 expressed written consent. Any unauthorized reproductions or recordings of the call should not be relied upon as the information may be inaccurate.

With that, I will turn the conference over to Mr. Dennis Nelson, President and CEO. Please go ahead, sir.

[Dennis Nelson, President, Chief Executive Officer]

Good morning and thank you for joining us. Before we turn it over to Tom to walk through the financial results for the quarter, I want to take this opportunity to thank all our outstanding teammates for their hard work and contributions during the past year.

Our strong operating results during the quarter which included comparable store sales growth of 3.3% and 270 basis points of operating margin expansion completed a positive fiscal year and have us well positioned heading into 2020. These results are a testament to the commitment and dedication of our many talented teammates to our mission of creating the most enjoyable shopping experience for our guests.

The fourth quarter highlights included 160 basis points of merchandize margin improvements as both our men’s and women’s merchandizing schemes did an outstanding job of providing for our guest with the unique and exclusive selection of both branded and private-label merchandize across several product categories allowing us to reduce markdowns and improve the sell-through rate for the regular-priced product.

We also did a nice job of managing operating expenses during the quarter, including a 75 basis point reduction in store labor expense. Even with the reduced payroll, our sales team continues to provide best-in-class service to our guest making us their favorite specialty store.

And with that, I will turn it over to Tom.

[Thomas Heacock]

Good morning. Our March 13, 2020 press release reported that net income for the 13-week fourth quarter ended February 1, 2020 was $47 million or $0.96 per share on a diluted basis which compares to net income of $41.1 million or $0.84 per share on a diluted basis for the prior year 13-week fourth quarter which ended February 2, 2019. Year-to-date, net income for the 52-week period ended February 1, 2020 was a $104.4 million or $2.14 per share on a diluted basis compared to net income of $95.6 million or $1.97 per share on a diluted basis for the prior year 52-week fiscal year, which ended February 2, 2019.

Net sales for the 13-week fourth quarter increased 2.5% to $271 million compared to net sales of $264.4 million for the prior year 13-week fourth quarter

Comparable store sales for the quarter increased 3.3% in comparison to the same 13-week period in the prior year, and online sales increased 7.5% to $36.4 million. Year-to-date net sales increased 1.7% to $900.3 million for the 52-week fiscal year ended February 1, 2020 compared to net sales of $885.5 million for the prior year 52-week fiscal period ended February 2, 2019.

Comparable store sales for the year were up 2.2% in comparison to the same 52-week period in the prior year, and online sales for the year increased 6.9% to $110.8 million.

For the quarter, UPTs increased approximately 0.5%, the average unit retail decreased approximately 1% and the average transaction value decreased about a 0.5%. Year-to-date, UPTs increased approximately 2%, the average unit retail decreased approximately 2.5% and the average transaction value decreased approximately 0.5%.

Gross margin for the quarter was 47.4%, up 150 basis points from 45.9% in the prior year fourth quarter. The year-over-year increase was the result of 160 basis point improvement in merchandize margin, partially offset by a 10 basis point increase in occupancy, buying and distribution costs.

For the year-to-date period, gross margin was 41.9%, up approximately 60 basis points from 41.3% for the same period last year. The increase was the result of a 40 basis point improvement in merchandize margins along with a 20 basis point improvement in occupancy, buying and distribution costs.

Selling expenses as a percentage of net sales for the quarter were 21.4% compared to 21.8% in the fourth quarter of fiscal 2018. The fourth quarter improvement is primarily attributable to a 55 basis point improvement in total store compensation expense offset by increases in online fulfillments and certain other selling expenses.

Year-to-date, selling expenses were 22.7% of net sales compared to 22.8% in fiscal 2018. The full year improvement was due a 15 basis point improvement in store compensation expense offset by increases in online fulfillments and certain other selling expenses.

General and administrative expenses for the quarter were 3.9% of net sales compared to 4.7% of net sales for the fourth quarter of fiscal 2018. And for the year-to-date period, G&A expenses were 4.6% of sales, compared to 4.9% for the fourth quarter of fiscal 2018.

Our operating margin for the quarter was 22.1% compared to 19.4% in the fourth quarter of fiscal 2018 and for the full year, our operating margin was 14.6% compared to 13.6% for the same period last year.

Other income for the quarter was $1.8 million, which compares to $1.9 million for the fourth quarter in 2018. And other income for the year-to-date period was $6.2 million compared to $5.7 million last year.

Income tax expense as a percentage of pretax net income for the quarter, was 23.8% compared to 22.6% for the fourth quarter last year, bringing fourth quarter net income to $47 million for fiscal 2019 compared to $41.1 million for fiscal 2018.

Year-to-date income tax expense was 24.2% of pre-tax net income compared to 24.5% for fiscal 2018 bringing full year net income to $104.4 million for fiscal 2019 compared to $95.6 million in 2018. Our press release also included a balance sheet as of February 1, 2020 which included the following: inventory of $121.3 million, which was down approximately 3% from inventory of $125.2 million at the end of fiscal 2018 and total cash and investments of $249.4 million, which was after payment of $112.9 million in dividends during the year and compares to $238.8 million at the end of 2018.

At quarter end, inventory on a comparable store basis was down approximately 1.5% and total markdown inventory was lower compared to last year. We ended the quarter with $113.8 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $1.8 million and depreciation expense was $5.8 million.

For the year-to-date period, capital expenditures were $7.3 million and depreciation expense was $23.8 million. Year-to-date capital spending is broken down as follows: $6.4 million for store buildout, remodeling and technology upgrades, and $0.9 million for capital spending at the home office and distribution center.

During the quarter, we opened one new Buckle youth store in Twin Falls, Idaho, completed two full remodeling projects and closed two stores, bringing our year-to-date counts to two new stores, five full remodels and four store closures.. For fiscal 2020 we have one new store and two new Buckle Youth stores planned and anticipate completing four full remodels; by season we anticipate one remodel completed for spring, one for summer, one before back-to-school and one before holiday.

So far in 2020, we have also closed two stores with no additional closings planned at this time. Based on current plans, we expect our capital expenditures for 2020 to be in the range of $7 million to $10 million, which includes both planned store projects and IT investments.

Buckle ended the year with 448 retail stores in 42 states compared to 450 stores in 42 states at the end of fiscal 2018.

And now I will turn it over to Kelli Molczyk, Vice of Women's Merchandizing.

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

Thanks, Tom. I would like to start by highlighting the performance of our women’s merchandize categories for the quarter. Women’s merchandize sales for the fiscal quarter were up approximately 6.5% against the prior year fiscal quarter. Average denim price points decreased from $76.65 in the fourth quarter of fiscal 2018 to $76 in the fourth quarter of fiscal 2019.

For the quarter, our women’s business was approximately 43.5% of net sales which was consistent with the same quarter a year ago and average women’s price points decreased about 0.5% from $43.75 to $43.50. For the quarter women’s products saw some nice increases in key categories. Denim performance improved largely driven by increased inclusivity with our t selection, our breadth of brands and looks and the reduction of markdown inventories. The team has done a nice job of continuing to focus on exclusivity first within our selection, whether that be through our private-label brands or development with outside brand partners, which continues to drive traffic to our stores, as well as dot-com. Sweaters once again drove the largest gains in our r tops assortment, while our knit selection remains strong with continued guest preferences around moderate price points simply stated fashion, supersoft fabrics, and easy to wear, easy-to-pair silhouettes.

For accessories, our varying selection belts, fragrance, hats, hair and specialty bracelets drove unit sales as well as dollars in the department. And for footwear, our casual assortment, alongside our functional and fashion business was well received throughout the quarter.

I continue to be proud of our team’s management of inventory, especially to come off of this more promotional time period for retail with a reduction in markdown inventory. In addition, we continue to prove – improve our sell-throughs in key categories while working with cleaner inventory levels. With the start of our fresh year and season, the response to the women’s management products has been well received by our stores and guests.

We look forward to a New Year and the opportunity in stores and online for our women’s business. The market continues to evolve which is encouraging and we have a very talented and passionate team working hard to deliver the best for our Buckle guests.

And with that, I will 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 of Men's Merchandising]

Thanks, Kelli. The men’s merchandize sales for the fiscal quarter were at 3% in comparison to the prior year fiscal quarter. Average denim price points decreased from $83.20 in the fourth quarter of fiscal 2018 to $82.80 in the fourth quarter of fiscal 2019. For the quarter, our men’s business was approximately 56.5% of net sales which was consistent with the same quarter a year ago and average men’s price points decreased approximately 1.5% from 52.45 to 51.60.

I am proud of the way our team has continued to design, develop and deliver high quality and unique merchandize. The fourth quarter marked a ninth consecutive quarter of expansion in our men’s business. Categories of particular strength were casuals, outerwear, accessories, footwear and youth. Denim and button fronts were flat with sweaters having a slight but planned decrease. We did very little discounting during the quarter resulting in a continued strong margins, inventory is in good shape and at some cases slightly better than planned. We are happy with the amount of markdown needed to clear fall and holiday goods in January and February, which will allow us to keep fresh as we head into fall 2020.

Initial spring deliveries towards the end of December and January had an encouraging start and good comments from our sales team and guests. Now turning to results on a combined basis. Accessory sales for the fiscal quarter were up approximately 6.5% against the prior year of fiscal quarter and footwear sales were up about 28.5%. These two categories accounted for approximately 9.5% and 8.5% respectively of fourth quarter net sales. This compares to 9% and 7% for each in the fourth quarter of fiscal 2018. Average accessory price points were down approximately 4% and average footwear price points were down about 10%. Again on a combined basis for the quarter denim accounted for 44% of sales and tops accounted for approximately 31.5%. This compares to 45% and 32% for each in the fourth quarter of fiscal 2018.

Our private-label business continued to grow and represented approximately 43.5% of sales for the quarter and 39% for the year. Excuse me. I also want to mention combined basis for the quarter, denim accounted for approximately 44% - oh we did that. I apologize and with that, we welcome the questions. Thank you.

[Operator]

[Operator Instructions] And first we have Tiffany Kanaga with Deutsche Bank. Please go ahead.

[Tiffany Kanaga, Deutsche Bank]

Hi. Thanks for taking my questions. Given your sourcing exposure to China, can you talk to what you are currently seeing at your manufacturing partners over there? And what kind of delays or impacts from a supply chain perspective you might expect as we move through the year?

[Dennis Nelson, President, Chief Executive Officer]

Well, presently, we are seeing, maybe, one to four weeks delay depending on the product from China both the men’s and the ladies, probably predominantly in the denim categories. And in the gal’s tops we are seeing similar delays as well. But our partners at last year working with us through the tariff situation, I think are doing a good job in addressing the needs the best everybody can to temper the impact of the Coronavirus.

[Tiffany Kanaga, Deutsche Bank]

As a follow-up question, you see number of other retailers discuss slowing in-store trends in recent days. Can you give any color around what you are seeing with respect to mall traffic, as well as your online trends as consumers are beginning to change their behaviors due to the Coronavirus? And additionally, can you talk to any measures you might be taking in preparation for any sustained slowdown at the mall?

[Dennis Nelson, President, Chief Executive Officer]

No, we don’t comment on the future or give out updates on that. We just do the sales reports monthly. But we are continually working with our partners and stay in touch with the deliveries and working on product and staying in close contact for planning for the future if need to be any changes.

[Tiffany Kanaga, Deutsche Bank]

Thank you very much.

[Dennis Nelson, President, Chief Executive Officer]

Yes.

[Operator]

[Operator Instructions] And we will go to the line of Steve Marotta with CL King Associates. Please go ahead.

[Steven Marotta]

Good morning, everybody. Can you remind us what your aggregate exposure to China is as a percent of COGS, say in the last fiscal year or even on a runrate basis if that’s preferable?

[Dennis Nelson, President, Chief Executive Officer]

I don’t know, if I have a set percent or on the ladies side, I would say, a lot our brands and vendors are continuing to explore other sourcing outside of China. We are still pretty dependent on gal’s denim out of China as we tried some of the other countries and have not been able to achieve the quality and fit that we need in the ladies merchandize. And Bob, do you want to comment on the men’s sourcing?

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

Sure. We did start to diversify sourcing about five or six years ago. We do have denim being made in three other countries and in those cases, deliveries are on time and in some cases they were to deliver early which helps us mitigate the China challenge. One other thing that we do on the sourcing is we ask it to be ship ready before CNY. That's been in the past to take care of the lag of delivery from CNY, but it helped in this year because when - the production workers were the main reason that that they didn't come back, but the office workers could pack and ship. So that mitigated the delivery challenges that other people had.

[Steven Marotta]

And can you also update us on where you stand digitally? What are the most or recently completed initiatives and what you are expect to complete this year?

[Dennis Nelson, President, Chief Executive Officer]

Well, in the fourth quarter, we started doing ship from store and that had a nice impact on our e-com business. And we are continually working on that as well and with our e-com IT team and our marketing director, or now have several initiatives to improve our e-com site and our social and so we are looking forward to seeing that happen here in the next few months.

[Steven Marotta]

Helpful. Thank you.

[Dennis Nelson, President, Chief Executive Officer]

Yes, sir.

[Operator]

And we do have a follow-up from Tiffany Kanaga. Please go ahead.

[Tiffany Kanaga, Deutsche Bank]

Thanks for taking my next question. With oil having taken a sharp pronounce and considering your geographic footprint, would you remind us what trends you’ve historically seen with respect to your sales or traffic when oil has moved dramatically?

[Dennis Nelson, President, Chief Executive Officer]

I am not sure I can recall that far back, but it seems like the – there is some effect in certain markets. But I think less so now than maybe several years ago, when it was very dependent on the oil business and it seems like the Houston market and different ones have diversified. So I think it would have a little bit of a less effect in the majority of those oil markets than it used to be.

[Tiffany Kanaga, Deutsche Bank]

Thanks.

[Operator]

To the presenters, there are no further questions in queue.

[Dennis Nelson, President, Chief Executive Officer]

If there are no further questions, we can wrap up the call and we thank everybody for their participation, and wish everyone a wonderful rest of the day and a great weekend. Thank you very much.

[Operator]

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