Buckle Inc (BKE) 2006 Q4 法說會逐字稿

Welcome to The Buckle Incorporated conference call announcing financial results for the fourth quarter and fiscal 2006 year ended February 3rd, 2007. A replay of the call will be available for a two-week period beginning March 13, 2007 at 1:30 p.m. Eastern Standard Time, by dialing 1-800-475-6701 and entering the access code 865593. Your speakers today are Ms. Karen Rhodes, Chief Financial Officer, and Mr. Dennis Nelson, President and Chief Executive Officer. Also on today's call is Tom [Heacock], Corporate Controller. Today's call will be limited to one hour.

Before I turn the call over to Ms. Rhodes, I would like to note that during this call that certain statements and responses to questions may contain forward-looking information. While management believes that expectations included in forward-looking statements are reasonable, actual results may differ materially from those projected or assumed.

The Buckle's future financial conditions and results of operations as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties. The Company prefaces this call with the Safe Harbor statement 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 than those expressed or implied in any such forward-looking statements. Such factors include by 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 result expressed or implied therein will not be realized. This call, the webcast, and its replay are property of The Buckle Incorporated. It is not for rebroadcast or use by any other party without prior consent of The Buckle Incorporated. If you do not agree with these terms, please disconnect now. By remaining online, you are bound by these terms.

With that said, I would now like to turn the conference over to Ms. Rhodes.

Thank you and good morning. I would like to start out our call this morning with highlighting some of our financial results, both for the fourth quarter, and for the full 53-week fiscal 2006. Our March 13, 2007 press release reported that net income for the 14-week quarter ended February 3rd, 2007 was 22.1 million, which was $0.73 per share on a diluted basis, and that compares to $19.1 million, or $0.64 per share on a diluted basis, for the corresponding 13-week quarter that ended January 28th of 2006.

Our net income for the 53-week fiscal year ended February 3rd, 2007 was 55.7 million, or $1.86 per share on a diluted basis, and that compares to $51.9 million, or $1.69 per share on a diluted basis, for the 52-week fiscal year that ended January 28th, 2006. The prior year's earnings per share numbers have been adjusted to reflect the impact of our 3:2 stock split, which occurred January 12th of 2007.

As outlined in our press release, please note that the adoption of Statement of Financial Accounting Standards No.123-R had a $0.03 and $0.05 after tax impact on our reported earnings per share for the fiscal 2006 fourth quarter and year-to-date periods respectively. This impact for both the fourth quarter and the full fiscal year include $0.02 per share related to the accelerated vesting of certain stock options during the fourth quarter.

In addition to the stock option compensation expense, our fourth quarter also was impacted by the Company's achievement of its performance goals related to fiscal 2006 grants of non-vested stock. This changed the Company's estimate of the number of shares that would ultimately vest, and it resulted in an incremental compensation expense for the fourth quarter, that had an additional $0.02 after tax impact on our earnings per share.

Our net sales for the 14-week fourth quarter increased 14.1% to $175 million, compared to net sales of $153.4 million for the prior year's 13-week fourth quarter. Our comparable store sales for the quarter increased 4.8% compared to the same 14-week period in the prior year. Net sales for the full fiscal year increased 5.8% to $530.1 million, compared to $501.1 million in fiscal 2005. Our comparable store sales for the full fiscal year were flat in comparison to the same 53-week period of the prior year.

On our gross margin for the fourth quarter, we had improvement of approximately 130 basis points to 43.2%. This improvement was driven primarily by an increase in merchandise margin, which had a 90 basis point impact, and by leveraged occupancy and distribution costs, which combined had a 60 basis point impact. These improvements were partially offset by increases in expense related to the incentive bonus accrual, and the stock option compensation expense, as a result of FASB 123-R adoption during fiscal 2006.

For the full fiscal year, our gross margin improved approximately 40 basis points to 39.1%. This improvement was the result of a 60 basis point improvement in merchandise margin, which was partially offset by increases in occupancy and distribution costs and to the stock option compensation expense.

Our selling expense for the fourth quarter was 20.3% of net sales, which was an increase of approximately 40 basis points from the fourth quarter of fiscal 2005. The increase was driven primarily by an increase in stock option compensation expense, and was partially offset by a reduction as a percentage of net sales in store payroll expense and certain other selling expenses.

For the full fiscal year, our selling expense was 20.3% of net sales, which was an increase of approximately 30 basis points from fiscal 2005. The increase was driven by increases in stock option compensation expense, internet related fulfillment and marketing expenses, and bank card fees. These expenses were partially offset by reduced expense as a percentage of net sales, related to our incentive bonus accrual for the year.

General and administrative expenses for the fourth quarter were 4.8% of net sales, which was an increase of approximately 120 basis points from the fourth quarter of fiscal 2005. This increase was primarily attributable to increases in equity compensation relating again to the stock options into the non-vested stock grant, as well as increased expense related to the incentive bonus accrual, partially offset by reductions as a percentage of net sales, and certain other general and administrative expenses.

For the full fiscal year, general and administrative expenses were 3.9% of net sales, which was an increase of approximately 40 basis points from the prior fiscal year. This increase for the year-to-date period was driven by an increase, again in the equity compensation expense, and in increases in certain other general and administrative expenses, partially offset by reductions as a percentage of net sales in expense related to the incentive bonus accrual for the year, and corporate aircraft expenses.

Our operating margin for the fourth quarter was 18.1% compared to 18.5% for the fourth quarter of fiscal 2005. For the full fiscal year, our operating margin was 14.9%, and this compares to 15.2% for fiscal 2005. Other income during the fourth quarter increased approximately 31% to $3 million, and that was driven primarily by an increase in income earned on the Company's cash and investments.

For our full fiscal 2006 year, other income increased approximately 48% to $9 million. This increase was driven by income earned on the Company's cash and investments, as well as by insurance proceeds that we received during the second quarter of fiscal 2006 related to Hurricane Katrina and Hurricane Rita losses from the prior year, and the settlement of a lawsuit related to the Visa/MasterCard interchange fees.

Income tax expense as a percentage of pretax net income for the fourth quarter was 36.2%, compared to 37.4% for the fourth quarter of fiscal 2005. Bringing fourth quarter net income to $22.1 million for fiscal 2006, versus $19.1 million for fiscal 2005. This was an increase of 15.3%. For the full fiscal year, income tax expense as a percentage of pretax net income was 36.7% in fiscal 2006, compared to 37.0% in fiscal 2005, bringing net income to $55.7 million for fiscal 2006 versus $51.9 million for fiscal 2005. This was an increase of 7.4%.

For the fourth quarter, our units per transaction increased approximately 1.5%. The average transaction value increased approximately 6.5%, and the average unit retail increased approximately 4.5%. For the full fiscal year, our UPTs increased approximately 2.5%, the average transaction value increased approximately 7%, and our average unit retail increased approximately 5%.

Our press release also included a balance sheet as of February 3rd, 2007, which included the following. Our inventory end of the year at $70.3 million, which was up approximately 2.3% from inventory of 68.7 million at the end of fiscal 2005. Our total of cash and investments were $183.4 million, compared to $199.8 million at the end of fiscal 2005. We ended the year with $93.8 million in fixed assets net of accumulated depreciation.

Our capital expenditures for the year were 21.9 million net of payables, and our depreciation expense was 19.4 million for fiscal 2006. Given our strong financial position, we remain committed to enhancing value for our shareholders. And with that in mind, we increased our quarterly dividend rate twice during fiscal 2006.

We declared and paid a $3.00 per share special dividend during the fourth quarter of the fiscal year, and we repurchased 654,300 split-adjusted shares of our common stock during the fiscal year, at a split adjusted average price of $24.52. The Buckle ended the fiscal year with 350 retail stores in 38 states, compared to 340 stores in 38 states at the end of fiscal 2005.

And with that, we will wrap up the financial piece. And I will turn the presentation over to Mr. Dennis Nelson, our President and CEO.

Good morning. I will discuss the merchandise performance for the fourth quarter and full year results ending in 2/3/07.

Our men's merchandise sales for the fourth quarter increased 10% over '06 and for the year increased 5.4%. Highlights for men's denim increased in the low teens in fourth quarter, and was up high single digits for the year. For the full year, our average price per denim was $70.16 versus $66.30 in '05. Our men's knit shirts increased double digits in the fourth quarter and for the year. For the fourth quarter, men's was 45% of our sales, with average price per piece at $46.21 versus $42.76 last year. For the year, men's was 43.7% of sales, with average price per item at $42.41 versus $40.20 in '05.

Our lady's business was up 18% in the fourth quarter, and 6% for the year. Our lady's denim sales were up high double digits for the fourth quarter, and for the year we were up in low double digits. Average price per item of denim was $74.02, versus $69.96 for last year. In the fourth quarter and the full year, knits and sweaters were up strong double digits.

Our gals footwear increased low double digits in the fourth quarter, and for the year was down low double digits. Lady's merchandise sales were 55% for the quarter, with the average retail of $41.62 versus $40.82 last year. Sales of lady's merchandise for the full year was 56.2% versus 56.1 last year, and our average price for the fiscal '06 was $39.15 versus $37.38 last year.

The Buckle product is two-thirds branded and one-third private label. Our men's selection of denim is primarily our private label BKE denim, priced between $55 and $75, as well as Lucky brand and Guess? jeans. In the woven and knit shirts, key vendors are 7 Diamonds, Roar, Lucky Brand and West Coast brands, such as Hurley, Obey, Affliction, and Billabong.

For this coming Back-to-School, we will be testing a private label denim for guys in the low to mid $40 price range. In the Lady's merchandise BKE denim is also priced in the mid-$50s to mid-$70. Also Lucky Brand, Silver Jeans, and Big Star are important denim vendors for us. We also carry other labels such as Miss Me, Guess? Jeans, which are not in all stores in ladies. We also sell IT jeans and also tested MEK denim at the $120 to $135 price point, which we will roll out a few styles for all stores for Back-to-School.

In tops, brands include Lucky Brand, West Coast brands, such as Roxy, Billabong, Hurley, and Obey. The majority of our gal's tops are from smaller brands or private label. In accessories, bags, purses, and necklaces did well in the fourth quarter, with belts and bracelets being soft.

In the fourth quarter, we named Bob Carlberg, VP of Men's Merchandise. Bob has been with The Buckle for 23 years, involved with the Men's buying team for about 17 years, with the last 6 years being a full-time merchandiser. We have also had the men's buying team split between the home office in Kearney and our office in Kansas City, and we have recently moved all of our men's buying team to Kansas City.

In fiscal '07, we expect CapEx to be in the 27 to $30 million range. Our real estate plans for 2007 is for 20 new stores and 7 to 8 full remodels. We have opened one new store in February, and we expect an additional four stores in the first quarter, five new stores in the second quarter, and six in the third quarter, and four in the fourth quarter. All locations are in our existing 38 states. We have 5 stores that will open in Florida, 4 in the Northwest area between Oregon and Washington state, 2 in the Phoenix area, 2 in the Dallas-Fort Worth area, with the others spread out. Remodels, we have one under construction now and expect the other six to be complete in the third quarter.

In 2008, we would expect to open 20 new stores as well, and would estimate another 8 full remodels. We will also be converting previous warehouse space in our main building here in Kearney, to office space and conference rooms. And we are also working on a couple of new fixtures that we plan to roll out to all stores by Back-to-School. In conclusion, I am proud of how we finished the last quarter of '06 and with the strength of our team, I am optimistic about '07.

So thank you and, operator, we will take questions now.

Thank you. [OPERATOR INSTRUCTIONS] And your first question comes from the line of [Shawn Mollard]. Please go ahead.

Hi, good morning. I had a question on SG&A expense. It seems like SG&A expense total was up about 22% in the fourth quarter year-over-year. Just wanted to know if you could go into a little more detail as to factors that led to that overall total increase?

Yes, Shawn. A good share of that increase does relate back to the two pieces of the equity compensation. The stock option compensation, we had some shares that accelerated vesting in December. And so that accelerated expense into the fourth quarter, that previously we had been amortizing straight line, and would have gone over the next 8 quarters as well, based on our original anticipated vesting date. That stock option expense is spread into all three categories, cost of goods sold, selling, and G&A.

However, the other piece of that is the non-vested stock grants that were part of our incentive pay package for fiscal 2006. On those shares, we did hit both of our performance targets, which previously we had estimated just hitting the first target. That increased equity compensation in the fourth quarter, and that piece is all in G&A, Shawn.

And also you had mentioned the incentive bonus accrual also was part of total SG&A?

Yes, the incentive bonus accrual is higher for the fourth quarter, but it is actually lower for the year-to-date.

So you would say that those two factors led to the 20% increase in SG&A?

Correct.

Okay. And looking out to this year, fiscal 2007, in terms of being able to give us an idea of what you think SG&A would increase for the year '07?

At this point in time, I don't think that we would set those numbers. But I guess just to kind of recap on the equity piece of the compensation, the stock option compensation expense because that was accelerated into the fourth quarter of fiscal 2006, that will reduce the '07 and '08 expense related to those stock options.

Okay. I see that in the fourth quarter of fiscal 2005, SG&A was up about 7%. So it did seem like a big increase in this past year in '06.

Correct. And I think it was because of some of those kind of more one-time expenses.

Okay. And could you just repeat for the year fiscal 2006 UPT, and average transaction size and the AUR?

I sure can. For the full fiscal year?

Yes.

Is that correct?

Yes.

Our units per transaction increased 2.5%. Average transaction value increased 7.0%, and the average unit retail increased 5.0%.

And did you disclose what the actual numbers are? What the actual number of units per transaction are?

No, we did not disclose that.

So just a percentage changes you disclosed?

Correct.

All right. Thank you very much. I will jump back into the queue.

All right. Thank you.

Thank you and your next question comes from the line of Gary Merwitz. Please go ahead.

Good morning. Just a couple questions on the merchandise margin. First, I don't know if you will provide that, but if you can give me the specific number for this year and this quarter, versus last year. And then just wondering, two follow-ups. One, how do you kind of keep driving that? And how does the merchandise margin what you have experienced thus far compare to kind of the cycle in the late '90s where things deteriorated? Thanks very much.

On the first part, I'm sorry, you want the specific dollars of margin?

I am sorry, I missed that, what did you say?

I was just making sure I was clear on the first part of your question there, you want the dollars of the merchandise margin?

Percentage is fine.

Merchandise margin for the fourth quarter was 43.2%, and for the 53-week period 39.1%.

Great. And then could you address the follow-ups? Do you need me to repeat those?

Could you repeat it, please?

I was just wondering, one, how do you continue to drive that merchandise higher? And two, as you look at your business now, as compared to if you look at the cycle that you went through the late '90s, kind of early 2000s, when you had reached a nice merchandise margin, probably around where you are now or maybe a little bit better and then things deteriorated, just wondering how this current cycle if you want to call it that compares?

Sure, well, we hope to continue to add some private label to our mix to improve on our merchandise margins. We feel we have done a pretty nice job on that margin right now, but we hope through eliminating better mistakes, a little better planning, and adding some private label, that we are optimistic that we can continue some improvement there.

And in the late '90s, early 2000s, we were pretty dependent on strong brands. Doc Martin was a huge brand for us at those times, Tommy Hilfiger we had a big run with, so when those brands lost favor with our guests, there wasn't new brands to replace them, and we weren't in a position as we are today with the private label and developing product, to be able to give our guests the selection, and what we want. But we have with our addition of our BKE denim, we are not counting on another vendor, or have a vendor take their brand to the department stores or other stores, which hurt us back with the Tommy.

Just as we build stronger merchandise teams, we are developing a lot of product a lot of merchandise that is especially unique to us. Even with our key vendors, a lot of the product we buy from them is special make-ups, and styles and colors and designs that we work early with their first even kind of preline break, work with them on giving them ideas on what we would like so we can remain kind of unique and special to the marketplace.

Thank you.

Thank you.

Thank you. And the next question comes from the line of John Curti. Please go ahead.

Good morning. I wanted to ask a couple of questions regarding the remodels, how extensive will those 7 or 8 be? The cost to do that, and then what kind of sales lifts have you been getting from say, a full remodel?

The 7 or 8 full remodels cost about the equivalent of a new store. And depending on the situation of the store, sometimes we get double-digit gains, or very strong gains, especially if we move our location into a better position. Sometimes these stores, we are doing it for a competitive reason, they are doing very well in the marketplace, and we might not see a big bump, but it sets us up well going forward. Let's see.

And then last year we did several smaller projects where we would go in, maybe change some counters, the flooring, possibly some dressing rooms, and replace all the fixtures. And we would spend maybe 75,000 to $100,000, and update a store that we didn't want to invest the 600,000-plus in, and it would still give it a very nice facelift. Kind of that is how we approach each one, from either competitive reasons, or the volume that we think we can increase to do the full remodel.

In terms of the new store openings, are those 20 that you mentioned, is that a net number, or is that before closing?

For this year, we did close one store in February. We will review at the end of the year with a couple of closings, the few closings we have done the last two years, we have eliminated most of the ones that we wanted to, that the lease was up, or we had kickouts to do so.

There will be a couple situations probably in '08, where we will move out of older malls into newer lifestyle centers, situations like that. If I had to estimate right now, there might be two or three closings next January, but that is kind of a guess.

And do you have leases signed for most of the store openings for this year?

Well, they are either signed, or they are negotiating and in the process of will be signed.

Okay. Bumping up to close to 20 this year, 20 next year, that is a little bit more than you have been opening in recent years, you are assuming feeling increased confidence about the business, and the ability to secure good real estate?

Yes. We feel good about our teams. We kind of look at the real estate as we promote all our managers from within. So we don't want to be overly aggressive, and not feel good about having the right manager for a situation, or such. But if we have a great opportunity with a mall, especially an A mall in an A location, we don't pass those up.

And so we look at each situation, that we think it is going to be a good long-term deal. And so we don't really set that, we are going to open X amount of numbers. We hope to be in that 20 range and such. And it looks like that is what will not only work out this year, but next year, but we shop those real estate markets pretty hard, as well.

Okay. And then lastly, I know you have expanded your distribution center and corporate headquarters in recent years, how many stores can your distribution center handle?

We are comfortable with the low 400s.

Before you would need another addition?

Yes.

Okay. Thank you very much.

Thank you.

Thank you. And your next question comes from the line of Debbie Liu. Please go ahead.

Hi, good morning. My question relates to the components of your sales increase. I guess I wanted to just understand a little bit about what you have been doing in the stores to drive your UPTs, as they have been increasing over the last year.

And how you think about that going forward, because the increases have been moderating. And also you are coming up on some easy comparisons, in terms of the decline in the number of transactions. Thanks.

Well, on our unit transactions, is that what you said, Debbie?

Yes, UPTs.

Okay. Well, we work real hard with our managers and our sales team, and to developing a stronger staff and such, to develop, take great care of our guests and develop kind of the advertising by word of mouth, and get a lot of references in there. So we only build the transactions by word of mouth.

And also with the fixtures, we have gone in over the last few years and where we didn't remodel stores, we went in and we have replaced at least 60% of the fixtures if not more, in almost all of the stores. That we believe help the guests feel more comfortable in shopping, and see more of our product, and touch more of our product. And we hope to get the unit transactions up by just doing a better job in our store, and building from there.

Okay. So do you, with these new fixtures, was that sort of your merchandising better by outfits, so you encourage more units to be purchased in one transaction?

Yes, I believe that is part of it. Before we started changing out a lot of our fixtures, we had a lot of rounders, not as many tables. And it was, it would hold a lot of goods for kind of the '90s, when we had a lot of product in there. And it seemed like that worked, and it was a pretty cheap way to make the presentation.

But since then we have kind of grown from there and developed a lot of new fixtures that just make it much easier to shop, and show the product, and you don't have to rely on the sales staff as strong as maybe we were in the earlier days.

Okay. Great. And then, just in terms of the transactions, it seemed like transactions ticked up in January. They were just slightly negative in February. As I mentioned, you are coming up on some easy comparisons, how do you see that trend kind of panning out in '07?

I guess we would be cautiously optimistic that the transactions would pick up. And I don't know, I didn't ask Karen if the transactions is affected a little bit by some of the store closings in February.

We could take a look at that.

Okay. Are you doing anything sort of special, in terms of advertising this year versus last year to drive them?

No, not at this time.

Okay. And then just two quick follow-ups for Karen. Can you tell me, the tax rate came in a little bit lighter this quarter versus the first three quarters. I wanted to see what you are expecting for '07. And then also the interest that you have earned in your average cash balances?

Debbie, part of that, we did spend a fair amount of cash in January on the $3.00 special dividend. So that brought our starting cash and investments at the start of the fiscal year a little bit below last year.

So even though we start out the fiscal year with a little bit less cash and investments, we think that will continue to build during the year. So that the interest income portion may be off a little bit, especially in the first quarter, just because of the cash balance being a little bit lower. I think that answers that part of the question --

Actually I was just looking for more of a rate, the rate that you earn on your cash?

It varies. Right now we do have a lot of cash in the short-term investments, that we will see on the balance sheet. And on the short-term investments, the majority of that cash would be in auction rate securities. And some of those, those would have a tax preference, mostly municipal. Maybe an average of 3.5 to 3.6 in there right now.

But that's part of also because a lot of it is tax free is why our income tax rate for the fourth quarter was a little bit lower as well, as we had a bump in the amount of tax free interest income that was part of our earnings.

Okay.

But going forward I would think we'd be right around that 37% on that income tax rate.

Okay. Great. Thank you so much.

You are welcome, Debbie.

Thank you, and you have no more questions in queue at this time. Please continue.

Okay.

I don't think we have anything else from The Buckle side.

Thank you for calling in.

Thank you. And ladies and gentlemen, this does conclude your conference for today, thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.

Thank you.