Buckle Inc (BKE) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to The Buckle third-quarter earnings release. (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; Karen Rhoads, Vice President of Finance and CFO; Kyle Hanson, Corporate Secretary and General Counsel; and Tom Heacock, Corporate Controller. As they review the operating results for the third quarter ended November 3, 2007, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following 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 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.

With that being said, I would like to turn the conference now over to Karen Rhoads. Please go ahead.

Thank you. Good morning. Our November 21, 2007 press release reported that our net income for the 13-week quarter ended November 3, 2007 was $22.2 million or $0.72 per share on a diluted basis, and that compares to $17.7 million or $0.59 per share on a diluted basis for the corresponding 13-week quarter that ended October 28, 2006. Our net income for the 39-week period ended November 3, 2007 was $46.2 million or $1.50 per share on a diluted basis, compared to $33.7 million or $1.12 per share on a diluted basis for the 39-week period that ended October 28, 2006.

Please note that the prior year earnings per share numbers have been adjusted to reflect the impact of our 3-for-2 stock split that we had in January of 2007.

Our net sales for the quarter increased 17.1% to $167.6 million compared to net sales of $143.1 million for the prior year third quarter. Compared to the same 13-week period in the prior year, our comparable store sales for the quarter increased 14.3%, and total sales for that same 13-week period increased 19.9%.

Our net sales for the 39-week year-to-date period that ended November 3, 2007 increased 16.3% to $412.9 million from sales of $355.1 million for the 39-week period that ended October 28 of 2006. Compared to the same 39-week period in the prior year, our year-to-date comparable store sales increased 10.6%, and our total sales for that 39-week period increased 15.7%.

Our gross margin for the quarter improved approximately 120 basis points to 42.2%. This improvement was driven by an increase in merchandise margins, which had about a 55 basis point impact and by leveraged buying, distribution and occupancy costs which added about 75 basis points of the impact.

These improvements were partially offset by an increase in expense related to our incentive bonus accrual. And please note that the calendar shift due to the 53rd week in fiscal 2006 did have a negative impact on the quarter of about 25 basis points. And that impacted the amount we were able to leverage on buying, distribution and occupancy costs.

For the year-to-date period, our gross margin improved about 230 basis points to 39.4%. This improvement was driven primarily by an increase in merchandise margins, which had about 120 basis point impact and by leveraging our buying, distribution and occupancy costs which also had 120 basis point impact.

These improvements were partially offset by an increase in expense related to the incentive bonus accrual for the year-to-date period, and of the 120 basis points in leverage, approximately 20 basis points is attributable to the calendar shift due to the 53rd week of fiscal 2006.

Our selling expense for the quarter was 19% as a percentage of net sales, which was a reduction of about 60 basis points from the third quarter of fiscal 2006. The decrease was driven primarily by reductions as a percentage of net sales in store payroll expense, advertising expense, our stock option compensation expense and by the leveraging of certain other selling expenses. And those leverage expenses were partially offset by increases in expense related to our incentive bonus accrual and health insurance expense.

For the year-to-date period, selling expense was 19.5% as a percentage of our net sales. This was a reduction of approximately 80 basis points from the prior year. The decrease was driven primarily by reductions as a percentage of net sales in store payroll expense, advertising expense and stock option compensation expense, as well as by the leveraging of certain other selling expenses, and this was partially offset by increases in expense related to the incentive bonus accrual, health insurance expense and bankcard fees.

Our general and administrative expense for the quarter was 3.4% as a percentage of net sales, which was an increase of about 10 basis points from the third quarter of fiscal 2006. This increase was primarily attributable to increases in our equity compensation that relate to outstanding shares of nonvested stock and our expense related to the incentive bonus accrual.

And these expenses were partially offset by a reduction in compensation expense related to unrealized gain on the Company's nonqualified deferred compensation plan and by the leveraging of certain other general and administrative expenses.

For the year-to-date period, general and administrative expenses were 3.8% of net sales. This was an increase of approximately 30 basis points from the prior year. This increase was primarily attributable to increases in the equity compensation expense as I mentioned before related to our outstanding shares of nonvested stock and expense related to the incentive bonus accrual. These expenses were partially offset by leveraging of certain other general and administrative expenses.

Our operating margin for the quarter was 19.8% compared to 18.1% for the third quarter of 2006. For the year-to-date period, our operating margin grew to 16.2% compared to 13.4% in the prior year. Our other income for the third quarter was $2.2 million, which was even with $2.2 million a year ago for the third quarter of fiscal 2006.

For the year-to-date period, other income was $6.6 million compared to $6.1 million for the prior year year-to-date period. This increase in other income was due to an increase in income earned on our cash and investments and partially offset by the impact of some non-recurring other income items that were recognized during the second quarter of fiscal 2006 and those items related to previously mentioned proceeds from insurance claims in lawsuit settlement with Visa/MasterCard in the prior year.

Our income tax expense as a percentage of pre-tax net income for the quarter was 37.1% compared to 37.0% for the third quarter of fiscal 2006, bringing the third-quarter net income to $22.2 million versus $17.7 million for the prior year. This is an increase of 25.7%. And year-to-date our income tax expense was 37.0% of pre-tax net income compared to that same 37.0% in the prior year year-to-date period, bringing year-to-date net income to $46.2 million in the current year versus $33.7 million in the prior year, an increase of 37.2%.

Our press release also included a balance sheet as of November 3, 2007 which included some of the following. Our inventory was $99.5 million, which was down slightly from inventory of $100 million at the end of the third quarter of fiscal 2006, and our total cash and investments were $209.2 million compared to $183.4 million at the end of fiscal 2006, and that compares to $179.3 million at this same time a year ago.

We ended the quarter with $101.8 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $10.6 million, and our depreciation expense was $5 million. We now expect our full-year capital expenditures to be approximately 26 to $27 million.

For the quarter our units per transaction decreased slightly, our average transaction value increased approximately 2%, and the average unit retail increased approximately 3%.

The Buckle ended the quarter with 367 retail stores in 38 states compared to 352 stores in 38 states at the end of the third quarter of fiscal 2006. With the opening of two new stores during fiscal November, we currently operate 369 retail stores in 38 states.

And with that, I will turn the call over to Dennis Nelson, our President and CEO.

Good morning. I would like to start by discussing the performance of our various merchandise categories that led to our 17.1% net sales increase for the fiscal quarter.

Men's merchandise sales for the third quarter increased approximately 21%. Highlights were denim, woven and knit shirts, sweaters. Each of these experienced double-digit sales growth. The average denim price points increased from $70.85 in the third quarter of fiscal 2006 to $75.25 in the third quarter of fiscal 2007.

For the quarter our men's business was approximately 43% of net sales compared to approximately 42% last year, and the average men's price points increased from $44.65 in the third quarter of fiscal 2006 to $44.95 in the third quarter of 2007.

Women's merchandise sales for the second quarter increased approximately 14.5%. Highlights were denim, woven and knit tops, outerwear and footwear, each of which experienced double-digit sales growth. The average denim price points increased from $74.65 in the third quarter of fiscal 2006 to $79.00 in the third quarter of fiscal 2007.

For the quarter our women's business was approximately 57% of net sales compared to approximately 58% last year, and the average women's price points increased from $41.75 in the third quarter of fiscal 2006 to $42.80 in the third quarter of fiscal 2007.

For the quarter, combined accessory sales were down approximately 3%, and combined footwear sales were down approximately 7.5%. These two categories accounted for approximately 6.5% and 5% respectively of the third-quarter net sales, which compares to approximately 8% and 6.5% for each in the third quarter of fiscal 2006.

Average accessory price points were down approximately 6%, and average footwear price points were down approximately 13.5%. For the quarter denim accounted for approximately 46% of our sales, which compares to approximately 47.5% in the third quarter last year.

Our private-label business was down slightly as a percentage of net sales for the quarter due to the strength and variety of selection in our branded merchandise but continues to represent approximately one-third of sales.

As Karen mentioned, total inventory at the end of the period was down slightly, and our markdown inventory at the end of the period was also down compared to the same time a year ago.

During the third quarter, we opened five new stores, bringing our year-to-date count through the end of the third quarter to 18 new stores. We opened two new stores in fiscal November of this year, which completes our new store openings for the year and puts the total at 20 new stores for 2007.

During the third quarter, we also completed one substantial remodel. We finished one additional remodel during fiscal November, which completes our substantial remodeling projects for the year and puts the total for fiscal 2007 at seven stores.

In closing, we are pleased with our results for the quarter and feel that both our people and our product have us well positioned as we move into the holiday season.

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

(OPERATOR INSTRUCTIONS). Shaun Smolarz, Sidoti.

My first question is, with year-to-date results being very strong, how concerned are you that 2008 could be a difficult year given like tough comparisons to this year?

I guess there is not what I would consider for myself a concern. We started the year knowing that the back half of this year had some tougher comparisons and we performed well. We just continue to focus on being a better specialty store and continually improve our management in our stores, and we will continue to work on providing a great selection of product like our team has done this year, and we think we will perform well.

Okay. And my next question just relates to like the expense structure. SG&A rose about 16% in the third quarter this year. And hypothetically if comps were to slow down in 2008 and for argument's sake, say they are flat. Is the cost structure flexible enough where we can keep expenses on a dollar basis down enough to be similar to the sales growth rate?

Yes, I do think that we have a pretty good handle on our cost controls. A lot of -- under the selling expense, a lot of it is very variable based upon our sales volume. So.

And also the bonus structure, that caused some of the increases this year in the third quarter, which is a very positive increase because it means we are performing well in all three of the categories required for bonus structure, which is growth in comparable store sales, growth in gross margin and growth in prebonus pretax net income. So we think we're pretty flexible to have controls in place.

That's very good. And my next question is, what do you attribute your increase in transaction volume or store traffic to, given that overall mall traffic is down this year? Is it mostly coming from existing customers shopping more frequently, or is it that you have attracted a lot of new customers?

Well, I think we're getting maybe some more frequent visits from some of our regulars. But I think we are also finding that we have been able to expand the age group of some of our guests that have been shopping our stores. So maybe if the mother is shopping with the family or such, maybe she is finding something for herself; or we are just getting that guest that is in the mid to late 20s, maybe as a little bit more of a regular shopper than we had before.

And haven't you tried selling merchandise to like a younger demographic like that tweens on the website? And are you looking to expand it into the actual brick and mortar stores?

If you are referring to the children's sizes that we had on the Internet, that was a very small test with some of our West Coast brands, and that was not meaningful at all at this point. And we will not be putting it in the stores.

Okay. And my final question relates to last year the Board approved a split adjusted $2.00 special dividend. It seems like the Company's balance sheet was stronger at the end of the third quarter this year than last year. So could you discuss some of the factors that led to last year's approval of the special dividend?

I think last year the Board of Directors had a special committee that evaluated uses of cash, looked at kind of the full gamut of what was best for shareholders, and at that point in time decided to pay back some of that cash in that form of special dividend.

It was made as a special dividend and not as a recurring dividend. So I do not think that that dividend could be indicative of another one. But the Board is very conscious of our levels of cash and investment and continue to look at that at each Board meeting.

Thomas Filandro, SIG.

Just a question, I want to expand a little bit on this leverage question on SG&A and then control of expenses. At a 14% comp, I would have thought you would have had more leverage on the expense side of the equation. So can you dig a little deeper into what -- more deeply into the offsetting factors?

And secondly, Karen, maybe more specifically in terms of the fourth quarter and just on an annual basis, what kind of comp could you produce or do you need to produce to leverage the expense structure?

And then I have some follow-ups as well.

I think for the third quarter, I mean some of that leverage -- you know, as we talked about, we did have additional expense this year compared to a year ago on the nonvested stock that was issued as part of the executive compensation to district area executives of the Company.

And last year, if you remember, in the fourth quarter, we had some additional expense. We had some acceleration of stock options that vested in December of '06, which created some additional expense in the fourth quarter. And then also on the restricted stock or the nonvested shares, the bulk of that expense last year fell in the fourth quarter because of the way that we were accounting for that in the first three quarters, whether or not there were some assumptions made in the first three quarters of a year ago as far as whether or not we would achieve our two levels of target performance for vesting of that non -- the restricted stock.

And so we do have more expense year-to-date from those shares of nonvested stock that were granted. And that will actually even out in the fourth quarter where a year ago some of the equity compensation was weighted heavier in the fourth quarter than it was in the prior three quarters. So I do not know if that kind of helps explain that.

Can you be -- I don't know if you are able to -- can you be more specific on the actual impact? Meaning fourth quarter last year, there is a $0.03 -- I'm making up numbers -- there is a $0.03 impact that goes away this year?

Well, I think last year in the fourth quarter we had total equity compensation for stock options in nonvested shares of about $3.2 million. And is that -- I think that is about where that was. So that would probably be this year a more normalized number of about $1 million.

Perfect. Very helpful. Thank you. So I guess just based on that, I cannot do the quick math, but you would not need the kind of comps that you are achieving now. I mean what kind of comp do you need to leverage in the fourth quarter and then more broadly on an annual basis?

I think for the SG&A I do not know that I have that number off the top, Tom.

But on the occupancy, we usually have looked at that as it takes about a 2% comparable store sales growth to leverage the occupancy, buying and distribution expense up in the cost of goods sold. And the selling expense is a little bit more variable. So I do not have that exact number for you.

In the general and administrative, there are some costs that are more fixed where selling is a lot more variable based on that sales volume.

Fair enough. That is very helpful. Can you discuss also anything on the newer market performance, the higher productivity market -- anything happening there, Dennis, relative to the rest of the chain?

Well, we have been pleased with our openings of our new stores. I believe that is your question on those new markets. Is that correct?

Yes. I mean just in terms of their ramp-up, their productivity, any nuances in the businesses in terms of four-wall? Anything you can tell us to give us some insight into the newer market performance.

I do not know if on the new stores that have been recently opened that I have any specific numbers on that that we can share. Although, as I mentioned, we have been happy with our openings and feel good about the situations that we have opened this year.

Can you tell us what was the 53rd week impact? I do not know if you gave this last year. I apologize if you have. The 53rd week impact on sales and earnings in the fourth quarter last year?

It was about $10 million in sales.

And the EPS impact?

I do not know I have that off the top.

Is it fair to assume just use a typical margin rate and tax-effect it and we could get a range?

Yes, I think that would be fair.

Okay. Is Kyle listening?

Yes, she is.

I'm glad she is. Is she also looking at a screen of stock performance?

Unfortunately we do not have a screen in here.

Well, I will give you the screen. The stock is down $3.87. It is down over 10% today on a 22% increase in earnings per share. If this is not a perfect example of why a company like you guys should begin to provide guidance, I just really cannot give you a better reason to provide guidance.

I think providing an EPS range at the beginning of any quarter would be something that the investment community would really be very in support of. I just want to make sure you guys hear that on a public forum. And Happy Thanksgiving to all of you.

Thank you. And I guess in relation to the earnings estimates that were out there, I know that your estimate and Shaun Smolarz's estimates were I think $0.70 and $0.72. So we feel like we performed very much in line with your estimates as far as the active involvement from the analysis part from both of your firms.

Thanks. Unfortunately the First Call was above that, and you are down 10% on a $0.02 differential on the First Call. Have a Happy Thanksgiving all.

Marc Bettinger, Stanford Financial Group.

Congratulations on the quarter. Karen, it looks like in the first quarter your gross margin was up 200 basis points, the second quarter was up 410, third quarter you are up 120. Can you talk about kind of the slowdown and if this is kind of going forward?

I do not know that it is really a slowdown. The third quarter is a much better quarter than the first two quarters. So if you look at the actual numbers relative to the performance, I think the third quarter was actually very good.

Third quarter typically is a much more regular price selling quarter than quarters one and two. And so actually to continue to improve margin and get the leverage on the occupancy costs was pretty good in the third quarter with our comparisons from a nice third quarter a year ago.

So does that mean the third quarter is less affected by markdowns?

I think the third quarter is always less markdowns than quarters one and two. It is a more full-price selling season.

Okay. So then Q1 and Q2 kind of rebounded to more normalized margin levels?

Correct.

Okay. So is it safe to assume that going into the fourth quarter you are looking at something around the same kind of gross margin increase you did -- that you got in the third quarter?

I mean again the fourth quarter would be a more full-price selling season. So we would -- I guess our comparisons -- again, we would have tougher comparisons in the fourth quarter as we did in the third quarter.

Okay. So should we assume less leverage from the 120?

I have not studied it close enough to comment.

Okay. As far as -- do you think it is possible given the near 10% comp that you are looking at for this year for you to comp positively next year?

Yes, we would -- we do not give projections on that, but we would not be looking to go backwards.

Okay. Karen, just remind me on the private-label, I think direct sourcing is about 10% of the private-label.

We will review that again at the end of the year. That is kind of varied with a lot of that, the denim coming from Mexico rather than from Asian sources. So I do not know Dennis if you have for the current year an idea of the direct sourcing from Asia.

Is that the question, from Asia?

All I'm saying is just collectively direct sourcing accounts for what of your private label?

Well, the 30% or a third roughly that we're doing private-label, most of that is direct sourcing with the manufacturer whether it is Mexico or Asia. And then we work with a lot of vendors. That kind of is a blended version of not necessarily branded, but it is working with vendors, and it is very close to being private-label.

Okay. So the one-third on the private-label, that is near 100% directly sourced from Mexico or Asia?

Yes.

Okay. So that is near 100%. All right. And then you are saying the branded also, because so much of it is from overseas, is that it tends to have a higher margin?

No, I did not say it was from overseas. I said we work with a lot of vendors. Some of the brands, major denim brands or West Coast brands that we work with that we use their label, their brand as what we sell. And then we have kind of a mixture in between that are vendors that we develop unique or special product with that is not direct sourced by us but is very close to having the same effect as private-label is.

Okay. So then is it safe to say that your private-label and your branded, the merchandise margins are not much different?

No, our branded margins would not be as good as our blended private-label or our full private-label.

Okay. And do you see any change in those margins going forward on the direct sourcing or on the branded side?

We would feel that they would for the most part be pretty consistent.

Okay. So then I guess overall if you are looking at a near 17% gross operating margin for the year, what is left in terms of initiatives to drive the margins higher?

Well, we are going to approach it to the deliver the product our guests want, and hopefully that will drive sales, and in most cases, we will be able to maintain or improve our margin. And if what is in the market is stronger branded or they are creating the things that our guests want, then it might put a little more pressure on margins. Then again we have a lot of product where there might be opportunities to increase margin.

But some of that is going to be dictated by what is happening in the fashion market and what we're working on. And we work on product, like a lot of people, four to six months out; but then we work on a lot of product on a much shorter basis so we can stay trend right. So it is not like we are bringing in a set and changing the margins on private-label going forward.

Okay. So there's nothing with initiatives in terms of either lower cost or lower markdowns, increased price points that would be driving the margin? It is really more mix?

I would say it could be a combination of things, but I have no direction I can give you on that at this time other than what I did.

Okay. And can you discuss the fashion of I guess what is real hot these days?

As we've mentioned, we continued to improve our denim business, both men's and ladies. And the knit business on both our men's and ladies' side has been very strong. There has been improvement in wovens in both men's and ladies, and the gals' footwear has done well. The men's footwear has been off with kind of a lack of what is going on out there, but we have reduced inventories. So I think we have that well under control.

But we have probably added a few more brands and a little more variety in our mix, and it seems like our guests have responded very well to that. And it is driving sales and we think will continue to help us grow our business.

Okay. And last question. Karen, did you say that the SG&A for the fourth quarter was going to have $2 million less than the fourth quarter of '06?

Of the equity compensation? Correct. Yes.

Okay. So whatever we are figuring out for this year, I mean adjust it for the 13, 14 weeks and then subtract out the $2 million?

Yes, you are right.

Got it. Okay. Thank you very much.

(OPERATOR INSTRUCTIONS). [Debby Liu], [Visium Funds].

On that last part, Karen, can I just follow up? Isn't that $2 million split among or between SG&A and gross margin? There is some in COGS as well.

There is a small -- you are correct -- there is a small piece of it that goes up into the cost of goods sold. But the restricted stock portion or the nonvested shares portion is all in general and administrative, and then that stock option expense has always been allocated to the three categories based on where the people who earn the options are. Their payroll is allocated if that makes sense.

Right. So is it like 80/20 then?

On the stock option piece, I do not know the exact split, how much went into cost of goods sold. But you are correct. On the stock options, there has always been a portion allocated to the buying.

Okay. So the majority is in SG&A?

Correct.

Okay. All right. And then for Dennis, is there a minimum cash balance that you guys like to have, Dennis or Karen? Because you've got $180 million in cash. You have CapEx next year of about, you said $27 million, and dividends I am assuming $25 million.

Is there kind of a minimum cash balance you would like to have, and then what do you see as uses for excess cash?

We have not established a minimum balance. At each Board meeting, the Board kind of reviews where we are at and what we think the opportunities might be in deciding what we're going to do in the future.

Okay. And Dennis, what is your outlook as you look out into '08? I mean given kind of the promotional environment that we seem to be upon in the fourth quarter, as well as a potential -- us very well going into potentially a recessionary environment, how do you kind of look at the macro impacting your business?

Well, we try to be aware of what is going on and the concerns and the high price of gas and the other things. I guess you have seen that all year long our inventory has been running pretty much flat or up slightly, down slightly. And so we are just trying to play each category as smart as we can. We're trying to keep the leadtimes on certain categories as short as possible.

But as we have seen this year a lot of our business is driven by what is new in the market, what we can provide in the excitement of the product. And then another strength our Company has is the store managers and teams we develop. We continued to improve in the store, and they make a big difference for us as well. So we just kind of focus on trying to play our business as smart as we can and keep an eye on what is going on and just work it.

Okay. Great. And then last question. Do you feel like there is some additional opportunity in the first quarter based on what happened in the first quarter this year where you had some production hiccups? I guess you did not really get the amount of goods that you would have liked to sell. Do you feel like that is an opportunity you can capitalize on in the first quarter of '08?

Well, I think there is some improvement in certain departments as far as we might be able to present a little better selection than we were able to at certain times in the spring last year where we ended up being a little short of certain categories.

Okay. Thank you very much. Congrats on a good quarter.

Shaun Smolarz, Sidoti.

I had a quick follow-up question from before. I asked earlier about the possibility of a special dividend again in the fourth quarter. Is that still an option? Is that still going to be discussed, or is that highly unlikely?

Well, I'm sure the Board will discuss it, but we did not discuss that in the third quarter when we raised our dividend, our quarterly dividend. And then the next quarter, they review the business and what we are thinking at that time, and we will just review that as such.

I do not think last year deciding on a special dividend in December was any -- means that they were going to look at that on a regular basis.

Okay. Understand. All right. Thanks again.

(OPERATOR INSTRUCTIONS). At this time I'm showing no further questions in queue.

Okay. Thank you.

And no one has queued up at this point then, sir.

All right.

Alright. Would you like me to go ahead with closing the call then?

Yes, please.

Okay. Great. Ladies and gentlemen, this conference will be available for replay starting today, Wednesday, November 21 at 1.30 PM Central time, and it will be available through Wednesday, December 5 at midnight Central time. You may access the AT&T Executive Playback Service by dialing 1-800-475-6701 from within the United States or Canada; or from outside the United States or Canada, please dial 320-365-3844 and then enter the access code of 893861.

That does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You may now disconnect.