Buckle Inc (BKE) 2008 Q3 法說會逐字稿

Welcome to the third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS.)

I would now like to introduce your host for today, Karen Rhoads. Ma'am, you may begin.

Good morning. Thank you for participating in our call today. Our November 20, 2008 press release reported net income for the third quarter ending November 1, 2008, with $29.1 million or $0.62 per share on a diluted basis, compared to $22.2 million or $0.48 per share on a diluted basis for the prior year third quarter that ended November 3 of 2007.

Year-to-date, our net income for the 39-week period ended November 1, 2008 was $70.1 million or $1.50 per share on a diluted basis. That compares with $46.2 million or $1 per share on a diluted basis for the 39-week period ended November 3 2007. You'll note that the prior year's earnings per share numbers have been adjusted to reflect the impact of our three for two stock split paid this the form of a stock dividend on October 31, 2008.

Additionally as disclosed in this morning's press release, during the third quarter of fiscal 2008, the Company recorded a $1.8 million unrealized loss, resulting from other-than-temporary impairment of certain of our investments in auction rate securities. The unrealized loss has been recorded in the statements of income for the quarter and year-to-date period ended October 1, 2008. It had about a $0.02 per share after tax impact on the reported basic and diluted earnings per share for both the quarter and the year-to-date period.

Our net sales for the 13-week third quarter increased 25.7% to $210.6 million, compared to net sales of $167.6 million for the prior year third quarter. Our comparable store sales for the quarter increased 19.1%, compared to the same period of the prior year. Net sales for the 39-week year-to-date period that ended November 1, 2008 increased 30.9% to $540.6 million, compared to net sales of $412.9 million for the prior year 39-week period ended November 3, 2007. Our comparable store sales for the year-to-date period increased 23.7%, compared to the same period in the prior year.

Gross margin for the quarter improved approximately 140 basis points to 43.6%. This improvement was driven by the leveraging of our buying distribution and occupancy costs which had about 165 basis point impact and was partially offset by a slight reduction in merchandise margins which had about a 20 basis point impact by an increase in expense related to incentive bonus accrual. For the year-to-date period, gross margin improved 270 basis points to 42.1%. This improvement was driven by an increase in merchandise margins which had a 45 basis point impact, and by the leveraging of buying and occupancy costs which had a 240 basis point impact. These improvements were partially offset by an increase in expense related to the incentive bonus accrual.

Our selling expense for the quarter was 18.7% of net sales which was the reduction of approximately 30 basis points from the third quarter of fiscal 2007. This reduction was driven primarily by a reduction, as a percentage of net sales, in store payroll expense and by the leveraging of certain other selling expenses. These reductions were partially offset by an increase in expense related to incentive bonus accrual and to a lesser extent, to an increase in the internet related fulfillment and marketing expenses.

For the year-to-date period, selling expense was 19.3%, of net sales which were the reconduction of approximately 20 basis points from the same period of fiscal 2007. This reduction was driven primarily by a reduction as a percentage of net sales in store payroll expense and by the leveraging of certain other selling expenses. These reductions were partially offset by an increase in expense related to incentive bonus accrual and to a lesser extent, an increase in the internet related fulfillment and marketing expenses.

General and administrative expenses for the quarter were 3.3% of net sales which was a reduction of approximately 10 basis points from the third quarter of fiscal 2007. This reduction was driven by the leveraging of certain general and administrative expenses, and was partially offset by an increase in expense related to the incentive bonus accrual. For the year-to-date period, general and administrative expenses were 3.2% of net sales which was a reduction of approximately 60 basis points from the same period of fiscal 2007. If we exclude the $3 million gain recorded during the second quarter that related to the involuntary conversion of one of the Company's corporate aircraft to a monetary asset upon receiving insurance proceeds, general and administrative expenses would then be 3.7% of net sales, which was a reduction of approximately 10 basis points from the same period in fiscal 2007. This reduction was driven the leveraging of certain general and administrative expenses, which was partially offset by an increase in expense related to our incentive bonus accrual.

Our operating margin for the quarter was 21.6% compared to 19.8% for the third quarter fiscal 2007. For the year-to-date period, our operating margin was 19.6% compared to 16.2% in the prior year. Excluding the $3 million gain on the aircraft, our operating margin for the year-to-date period would be 19.1%.

Other income for the quarter was $1.8 million which compares to $2.2 million for the third quarter of fiscal 2007. Other income for the year-to-date period was $6.2 million in fiscal 2008, which compared to $6.6 million in fiscal 2007. Income tax expense as a percentage of pretax net income was 36% for the third quarter, compared to 37% for the third quarter of fiscal 2007, bringing third quarter net income to $29.1 million for fiscal 2008 versus $22.2 million for fiscal 2007, an increase of 31%. Year-to-date, our income tax expense, is 36.6% of pretax net income compared to 37% for the same period in the prior year, bringing year-to-date net income to $70.1 million for fiscal 2008 versus $46.2 million for fiscal 2007, an increase of 51.7%.

Our press release also included a balance sheet as of November 1, 2008 which included the following. Inventory of $118.2 million which was up approximately 19% from inventory of $99.5 million at the end of the third quarter of fiscal 2007. In total cash and investments of $182.8 million which compares to $248.4 million at the end of fiscal 2007 and $209.2 million at the same time a year ago.

As of November 1, 2008, total cash and investments included $41.7 million of auction rate securities which compares to $145.8 million of auction rate securities as of February 2, 2008. Auction rate securities are reported at fair market value, and at the end of the third quarter their reported investment amount is net of $3.8 million in unrealized loss for impairment of fair market value on certain securities from their stated par value. The Company has determined that $2 million of the unrealized loss is temporary and is reported net of tax and accumulated other comprehensive loss of $1.3 million in our stockholders' equity section as of November 1, 2008.

And as mentioned in the press release, the Company also determined that $1.8 million of unrealized lost is other than temporary, and is recorded as a loss in the statements of income for the quarter and year-to-date period ended November 1, 2008. There were no temporary or other-than-temporary losses related to the Company's investments in auction rate securities reported February 2, 2008. Of the $41.7 million in auction rate securities as of the end of the third quarter, $8.2 million has been recorded in the short-term investments and $33.5 million have been included in long-term investments. We also ended the quarter with $116.8 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $25.6 million and depreciation expense was $5.2 million.

For the quarter, units per transaction increased approximately 2%. The average transaction value increased approximately 8%. And the average unit retail increased approximately 5.5%. The Buckle ended the quarter with 384 retail stores in 39 states, compared to 367 stores in 38 states at the end of the third quarter of fiscal 2007. With the opening of four new stores subsequent to quarter end, we currently operate 388 retail stores in 39 states. With that, I will turn the call over the Dennis Nelson, our President and CEO.

Good morning. I would like to start by highlighting the performance from our various merchandise categories that led to our 25.7% net sales increase for the quarter. Men's merchandise sales for the quarter increased approximately 21%. Highlights were denim and woven and knit shirts, each of which experienced strong double-digit sales growth.

Average denim price points increased from $75.25 in the third quarter of fiscal 2007 to $80.60 in the third quarter of fiscal 2008. For the quarter, our men's business is approximately 41.5% of net sales, compared to approximately 43% last year. The average men's price points increased approximately 11.5% from h $44.95 in the third quarter of fiscal 2007 to $50.10 in the third quarter of fiscal 2008.

Women's merchandise sales for the quarter increased approximately 29.5%. Highlights were denim, knit tops, outerwear, accessories and footwear, each of which experienced strong double-digit sales growth. Average denim price points increased from $79 in the third quarter of fiscal 2007 to $85.60 in the third quarter of fiscal 2008. For the quarter, our women's business approximately 58.5% of net sales, compared to approximately 57% last year,. And the average women's price points increased approximately 2% from $42.80 in the third quarter of fiscal 2007 to $43.75 in the third quarter of fiscal 2008.

For the quarter, combined accessory sales up approximately 38.5% and combined footwear sales were up approximately 13%. These two categories accounted for approximately 7.5% and 4.5% respectively of the third quarter net sales, which compares to approximately 6.5% and 5% for each in the third quarter of fiscal 2007. Average accessory price points were up approximately 5.5%, and average footwear price points were up approximately 6%.

For the quarter, denim accounted for approximately 43.5% of our sales, which compares to approximately 46% in the third quarter of last year. Tops accounted for approximately 39.5% of third quarter sales, which compares so approximately 37.5% 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 and represented slightly above 25% of sales. As Karen mentioned, total inventory at the end of the quarter was up approximately 19%, but our total markdown inventory at the end of the period was down compared to the same time a year ago.

During the quarter, we opened three new stores and completed four substantial remodels. At the end of the quarter, 174 of our stores were in our newest format. For the full fiscal year, we opened 21 new stores which includes four stores open during the first two weeks of fiscal November. We also still expect to complete 13 substantial remodels in total during the fiscal year. Based on this, we expect our fiscal 2008 total cap expenditures to be in the range of $42 million to $44 million. And with that, we will welcome your questions.

(OPERATOR INSTRUCTIONS.) Our first question comes from Margaret Whitfield.

Good morning. Congratulations. Wondered with the deteriorating retail environment if you could give us an update on how your trends have progressed thus far in November.

We are going to continue our business as usual with no guidance for this month or going forward.

Okay. You did have a slight merchandise margin decline in the quarter. Could you comment on that and what you expect go forward?

Well --

Sorry, Dennis. I was going to say, part of that was additional redemptions on our Premo card which is our loyalty card for the quarter. Actual merchandise margins were really pretty flat, but part of the margin in there is the Premo card redemption.

Okay. Real estate, I'm wondering what you're seeing, Dennis, in terms of availability and rents and what your plans are for next year in terms of openings as well as remodels.

We -- since early on this year, we had pretty well lined up about 20 new stores for next year and approximately the same amount of remodels. We will be going forward with those. We think there are some very good opportunities in the real estate market. Some prime locations are coming available. On the rents, we feel like we are doing a good job as being very competitive with what we are paying for the real estate. But each situation is different and for competitive reasons, we are not going to get in too much detail there.

Any additional Northeast openings apart from Buffalo next year as you see it today?

We are opening in Lehigh Valley in Pennsylvania. I believe there is another suburb in the Philadelphia area that we will be opening later in the year next year. And also, there is a regional shopping center in southern New Jersey. I don't remember the name of the center that will be opening for the Northeast area.

Okay. You're doing substantial remodels, what happens to the comps? I know you keep them in the comp base. How much is the square footage expanded? How is the performance in year one after you remodel?

We get various results, depending on how strong the store was at the beginning. Or when we did remodel, some are remodeled in place with no expansions. Some are improved locations with normally not larger than 20% square footage growth. Sometimes it's very close to the same. Rare occasions we would expand greater than 30% or 40% square footage. There is no general guideline to go by, but we have seen very strong response to our stores with the new store design, new fixtures. The product is much more visible and easy to shop in the new store design compared to the old one.

With the challenging environment and the difficult comp comparisons you fact next year, I wonder if you can give us any color on how you can succeed in this environment -- any new merchandise areas of note or any brands that might be helpful to you in navigating through these turbulent times?

We are always testing new labels. We're continuing the same process as we have for several years of shopping the markets and blending a selection of branded vendors with our private label to offer what we think is a great selection. We will take the same process. Knowing that it is difficult out there, we will try to use our best judgment on that, but we will still be out there trying to do business.

Thank you and best of luck.

Thank you.

Our next question comes from Anna Andreeva from JP Morgan.

Good morning. Thanks so much. Karen, I was hoping to follow up -- the decline in merchandise margins. Did you say merchandise margins were flat outside of the Premo card redemptions? Could you talk about that? Was there pressure on the IMU side to call out as -- it sounds like markdowns were well below last year during the quarter.

Like I said on the merchandise margin decline, most of that change was from an increase in the redemptions on the Premo card. Dennis, you might speak to the IMUs. But it seemed to me like all of that was pretty comparable to same quarter a year ago.

I would agree. I don't think there has been really any change in our initial mark ups. There might be category or two that's flat or slightly different, but in other cases I think we have improved it some as well.

Okay. Outside of the redemptions, were merchandise margins up?

They were pretty flat or slightly up, right Karen?

Okay.

I'm calling in as well.

Got you. How should we think about merchandise margins going forward? Should we expect additional pressure in the fourth quarter from redemption side or it's just too soon to tell?

I think it would be too soon to tell.

Okay.

One other thing that Tom mentioned; he is in here with us, too. During the quarter, our private label as a percentage of sales did decline a little bit with the strength in variety of the branded product we had in the store. That would have had a little bit of impact on the actual merchandise margin as well with that being a smaller percent.

Sure. It makes sense. I was wondering if you could also talk about inventory. The highest level we've seen in some time from you guys. Could you talk about the composition of inventories and how do you expect to end the year -- the inventory per square foot?

Dennis, I will take the first part of this and then you may want to take it. Just to let all the listeners know, too, Dennis is calling in from the road also. He is not in here with Tom and I. On the inventory part of it, a year ago at the end of the October, inventory was down. Part of that -- our comparison was a tight inventory level from a year ago. That would account for part of the increase this year. As far as the markdown categories, those all look very clean compared to a year ago. As far as fourth quarter, Dennis, I will turn that over and let you answer that part.

I would expect at the end of the fourth quarter, our inventory would probably be up in mid single-digits, give or take a little.

That's good to hear. Was there any difference price versus units in that 19% increase?

Yes. Inventory is up more in dollars than in units.

Just moving on within the -- pretty intrigued by your women's business lately, outperforming men's which is quite a reversal in the trend there. Could you talk about that? What is driving that in women's category? Any particular brands to call our that have been outperforming?

I think it's our total denim business was strong again. I think we have a great selection of styles, fits and brands. As we've mentioned in the past, we feel in a number of our stores, our guests -- our age that are shopping us has expanded. I think there are a lot of ladies over 25 as well asunder 25 that are finding that we have a great selection of denim. That's been good for our business -- and also, the word of mouth is getting out there which is a plus.

Our response to -- as we mentioned in our deal to -- or knit tops has been very good. The outerwear and accessories have picked up. It's just a nice selection to -- that we had a response to the new fashions.

No one particular brand, outside of private label, that's new to the business?

No. Nothing new.

Just on the regional performance, any differences to call out there?

No. I don't think in October, we had really seen any changes from earlier in the year. Naturally, there is a few regions that is a little stronger than the mid range and a couple that might be below that a little bit. But overall, all are doing well.

Still seeing that nice strength in the Texas and Midwest?

Correct.

That's great. Thank you so much. Congrats on a great quarter again.

Thank you. Have a good holiday.

You, too.

Next question comes from Ronald Bookbinder from Global Hunter.

Thank you. Nice job on the third quarter. You mentioned that the women's price points have increased. You talked about that you're expanding the market of the woman that shops in the store. Do you see that you're getting some benefit from a trading down -- that people might be trading out of boutiques and coming in to your store for denim?

I would say that's very possible. There is no way I could verify that.

Do you see going forward that as the smaller independent retailers are under pressure, do you see an opportunity to continue to gain market share?

We are in so many different markets, it's hard -- we hear from our vendors that there is smaller stores that are having credit difficulties. But for us to really know -- have a good handle on how many, where and all that, our focus is going to be to continue to try to improve our specialty store and offer a great selection, and improve our service which we feel we have over the last couple of years. Hopefully that will bring the guests to us, regardless of what is going on out there.

You're payables leverage declined a bit in third quarter. Are terms getting tighter for you guys at all or is that just a seasonality function?

Karen, do you have a comment on that?

I think that's more just the seasonality and the flow of the merchandise there towards the end of the quarter. Yes.

Looking at freight costs -- with the decline in energy prices, are you seeing benefit yet from freight costs as you look to your spring bookings?

Ron, that's a good question. I don't know the answer to that on off the top. We will have to get with our logistics people and see what they are seeing on the freight costs.

Looking at the private label -- the production costs, have you seen any declines in -- or better pricing coming out of Asia on the production costs of private label or even on the branded goods?

On a lot of our private label denim, a lot of that is made in Mexico. We are testing maybe a few items out of Asia there. We feel quality, styling and everything, we have been getting good prices. A lot of the things we are working on going forward, we are still in the process of developing and pricing, so it's difficult to comment on that.

Looking at the CapEx for next year for 2009, do you look for CapEx to be down? Are you going to open and remodel less stores? Or since you have such a strong balance sheet, are you going to take advantage of this market and roll out the real estate?

I wouldn't say business is usual, but we are currently shopping for great shopping centers, very good locations. We're very patient on finding the -- what we think will be good shopping markets for us. Last year, we started seeing that early in the year. We have roughly 20 planned for next year. I know we have one that was moved from '09 to 2010 based on the developer. We see -- instead of spending our money on advertising dollars, we find very good shopping centers, good locations, and using that as our marketing. As well as our sales team, we feel is our best advertising.

We will also continue to remodel stores when we have the opportunity. Sometimes that's the toughest thing to do, because -- to find temporary space or to improve locations when we want in good malls that's not always easy to do. That seemed to loosen up We have 20 remodels next year as well.

Thank you, and continued good luck.

Next question from Marc Bettinger from Wasserman and Associates.

Congratulations on a great quarter.

Thank you, Marc.

Are you seeing -- can you point to any area of deterioration in the business?

Let me think. I think through third quarter, we were pretty happy with what is going on. That's all we are commenting on now. Naturally, if we have a store that might be underperforming some of our other stores, we usually find it's due to a manager that is maybe not as experienced or lost focus or something like that. But in general, I think our business is pretty much as it's been through the year in that third quarter.

Okay. Karen, is it fair to say that by the end of the year, the balance sheet is going to end up with $200 million in cash investments, give or take?

Probably so, That's pretty close, Marc.

Given the real estate market with a lot of stores closing down, a lot of stores -- companies scaling back on CapEx, is there any reason to think that with the excess capital that you're going to have that you would likely accelerate from 20 stores next year?

We will certainly try the take advantage of anything we think is a AAA mall and AAA location. But where we promote our managers from within and we know they make a definite different in our business, we will try not to outgrow what we are comfortable with our manager level.

Fair enough. You bought stock around the 18 level. Stock down more than 60% from when you first declared the split. Any sense of potentially stepping up the buyback?

When we have our Directors meeting in a few weeks, I'm sure that will be a topic.

Any comment on potential insider buying?

I don't think we would comment on that.

Okay. In terms of the business, is there any opportunity that you see with -- in relation to markdowns or IM price base or cross-based IMUs going forward?

I'm not sure what you mean by that.

First of all, do you see further opportunities in markdowns?

At this point, our strategy is to run our business as we have in the past. If we have certain things that need help to sell, we will mark them down but we don't plan any storewide sales or any real strategic difference from what we have done in the past.

What I'm asking is are markdowns as good as they get here? Demand appears to be strong, your inventories are terrific --

We are running the same specials as we did last year for Thanksgiving weekend. Naturally, we will monitor the business and go from there.

Okay. As far as the IMU opportunities, just either in terms of -- if you feel like it's possible to tweak up price points or any sourcing opportunities that may increase the IMUs?

I think there is definitely going to be some opportunities out there, but there is nothing I can speak directly to at this point.

All right. Listen, congratulations on just a phenomenal performance in a tough environment. Good luck.

Thank you very much.

Happy holidays.

Happy holidays

Next question comes from [Brett Henderson from Tomoni's]. Your line is open.

Good morning. It's [Brett Henderson from Tacomas Capital]. How are you guys doing?

Good.

Just a clarification. When you were talking about substantial remodels for next year being similar, do you mean similar to this year or similar to the 20 stores you are opening next year?

Similar to the 20 new stores we're opening. That will be an increase on remodels. I think we were 13 this year, and I think it comes to 20 as planned next year.

Have you guys ever said -- I imagine the landlord kicks in some and maybe increasingly so lately, but what your net CapEx is on average remodels?

Karen, do you have that?

Not off the top. I would hate to misspeak on that, Brett. We would have to look that up and follow up on that question. On the remodel.

That's fine. Then, Karen on the -- I appreciate the fact that you don't give guidance. I hate to be focused on a penny here and a penny there. With that in mind, a timing shift in the number of weekends between Thanksgiving and Christmas this year, would you guys care to comment on what that historically would shift from November to December in terms of comps? Just so when we see your November comp release, we know how to read it?

We have not commented on that. We will still have the Friday and Saturday after Thanksgiving in the November period. We just would like to wait until we report those results. No comment.

Okay. Your comps have been just completely awesome, relative to the rest of the world. For whatever reason, if comps were to slow down, how fast -- I appreciate your customer service, but the selling expense per store is understandably up. How much is that tied to level of sales versus investments you guys might be making in customer service? If comps were to take a shift from like the 10% to 20% range to the 0 to 5% up range, how fast could selling expense shift with it on a per store basis?

The largest selling expense would be our payroll. Our sales management team works closely with the stores and that portion of it I think they would adjust and control appropriately pretty quick. They are usually pretty on top of that. Selling supplies are a variable expense. Marketing, we could adjust accordingly. I feel like if the selling expense, a lot of those items could be adjusted. Dennis, if you have additional comment on that?

We've improved that percentage cost over the last year or better. I think the stores can be pretty quick to adjust that. Naturally, there is minimum staff levels that are required regardless. Even now, if there is weather-related or mall-related or whatever if the traffic is down, it's not unusual to have managers see if somebody wants to leave early or take some breaks or whatever. They stay on it pretty well.

That was what I was looking for. Thanks. One comment and I'll let you guys run and maybe follow-up off-line. You guys -- I appreciate the fact that when everyone else was buying back stock at what in hindsight, were levels they shouldn't have buying stock back at. You guys weren't. You guys took a break. In case you get anybody telling you that it's better to sit on your cash, I think it's great that you can do this and you are doing it. I appreciate it.

Thanks, Brett.

I'm showing no further questions at this time.

Okay. Thank you.

Thank you very much, everyone.

Good-bye.

Ladies and gentlemen, this conference will be available for replay after today, November 20, 2008 until December 4, 2008. You may access the AT&T replay system at any time by dialing 1-800-475-6701 and entering the access code 968603. International participants. dial 320-365-3844. The numbers again are 1-800-875-6701 and 320-365-3844, access code 968603. This does conclude our conference for today. Thank you for your participation and using AT&T. Have a wonderful day.