Buckle Inc (BKE) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second-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; instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Vice President of Finance and CFO; Kyle Hanson, Corporate [Security] and General Counsel; and Tom Heacock, Corporate Controller.

As they review the operating results for the second quarter, which ended July 31, 2010, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statements.

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 that are subject to change based on factors which may be beyond the control of the company. According to 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 call without their expressed written consent. Any unauthorized reproductions or recordings of the call should not be relied upon, as the information may be inaccurate.

And at that point, I'd like to turn the conference over to Ms. Karen Rhoads. Please go ahead.

Thank you, and good morning everyone.

Our August 19, 2010, press release reported that net income for the second quarter, ended July 31, 2010, was $20.7 million or $0.44 per share on a diluted basis, and that is down 17% from net income of $25.0 million or $0.54 per share on a diluted basis for the prior-year second quarter that ended August 1, 2009.

Year-to-date our net income for the 26-week period ended July 31, 2010, was $50.9 million or $1.08 per share on a diluted basis, compared to $51.9 million or $1.11 per share on a diluted basis for the 26-week period ended August 1, 2009.

Net sales for the 13-week second quarter decreased 2.2% to $188.6 million, compared to net sales of $192.9 million for the prior-year second quarter.

Comparable store sales for the quarter decreased 7.3%, and our online sales, which are not included in comparable store sales, increased 15.7% to $11.7 million.

Net sales for the 26-week year-to-date period that ended July 31, 2010, increased 2.8% to $403.4 million, and that compares to net sales of $392.6 million for the prior-year 26-week period ended August 1, 2009.

Comparable store sales for the year-to-date period decreased 2%, and our online sales, which again are not included in comparable store sales, increased 20.1%, to $26.2 million.

Gross margin for the quarter declined approximately 270 basis points to 40%. This decline was driven by a reduction in merchandise margin, which had a 45 basis point impact, and by an increase in buying, distribution and occupancy costs, which had a 235 basis point impact. These changes were partially offset by a reduction in expense related to the incentive bonus accrual.

For the year-to-date period, gross margin declined approximately 110 basis points to 41.9%. This decline was driven by an increase in buying, distribution and occupancy costs, which had 130 basis point impact. The increase was partially offset by an improvement in merchandise margin, which had a 10 basis point impact, and by a reduction in expenses related to the incentive bonus accrual.

The reduction in merchandise margins for the second quarter was attributable to a slight increase in the sale of marked down merchandise and to an increase in redemptions through our Primo Card loyalty program.

The increase in occupancy costs during both the second quarter and the year-to-date period was primarily the result of increases in rent and common area maintenance costs related to new and remodeled stores, as well as additional depreciation expense related to new fixture rollouts and to deleverage resulting from comparable store sales declines.

Selling expense for the quarter was 19.4% of net sales in both fiscal 2010 and 2009. A reduction in expense related to the incentive bonus accrual was offset by increases as a percentage of net sales in expense related to store payroll, health insurance claims, and Internet-related fulfillment and marketing expenses.

For the year-to-date period, selling expense was 19% of net sales, which was a reduction of approximately 10 basis points from the same period in fiscal 2009. The reduction was driven by a decrease in expense related to the incentive bonus accrual, which was partially offset by increases as a percentage of net sales in expense related to store supplies, health insurance claims, and 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 20 basis points from the second quarter of fiscal 2009. The reduction was driven primarily by a reduction in expense related to the incentive bonus accrual and a reduction in equity compensation expense.

For the year-to-date period, general and administrative expenses were 3.4% of net sales, which was a reduction of approximately 20 basis points from the same period in fiscal 2009. The reduction was driven primarily by a reduction in expense related to the incentive bonus accrual.

Our operating margin for the quarter was 17.3%, compared to 19.8% for the second quarter of fiscal 2009.

For the year-to-date period our operating margin was 19.5%, compared to 20.3% for the same period of fiscal 2009.

Other income for the quarter was $0.6 million, which compares to $1.5 million for the second quarter of fiscal 2009.

And other income for the year-to-date period was $2.4 million, compared to $2.5 million last year.

Our income tax expense as a percentage of pretax net income was 37.3% for the second quarter of fiscal 2010, compared to 37.0% in the second quarter of fiscal 2009, bringing first-quarter net income to $20.7 million versus $25.0 million for the second quarter of fiscal 2009.

Year-to-date income tax expense was also 37.3% of pretax net income in fiscal 2010 and 37.0% in fiscal 2009, bringing year-to-date net income to $50.9 million for fiscal 2010, versus $51.9 million for fiscal 2009.

Our press release also included a balance sheet as of July 31, 2010, which included the following -- inventory of $108.7 million, which was up approximately 2% from inventory of $106.5 million at the end of the second quarter of fiscal 2009; and total cash and investments of $197.3 million, and that compares to $230.8 million at the end of fiscal 2009 and also $228.5 million at the same time a year ago.

As of the end of the quarter, inventory on a comparable store basis was down approximately 3%, and total markdown inventory was up slightly compared to the same time a year ago. The increase in the markdown inventory was the result of an increase in the 20% off category, partially offset by a reduction in the one-third off category.

We also ended the quarter with $168 million in fixed assets net of accumulated depreciation.

Our capital expenditures for the quarter were $16.8 million, and depreciation expense was $6.9 million.

For the year-to-date period, capital expenditures were $37.5 million, and depreciation expense was $13.4 million.

Year-to-date capital spending is broken down as follows -- $22.5 million for new store construction, store remodels, and store technology upgrades; and $15 million for capital spending at the corporate headquarters and distribution facility -- and this includes payments made on our new distribution center, which has been under construction here in Kearney, Nebraska, since last fall. We currently anticipate moving into the new facility in the latter part of September.

We also expect our fiscal 2010 capital expenditures to be in the range of $58 million to $62 million for the full year, which is down from our prior estimate. And this decrease is due to several factors, including we will have fewer fiscal year 2011 new and remodeled store projects starting prior to the end of the current fiscal year; also the average cost of our new and remodeled stores for the current fiscal year is coming in under budget; and we also reduced the amount of planned capital spending this year for remodeling and improvements at our current home office facility.

Also as an update on our share repurchase program, through yesterday we have repurchased 34,800 shares during fiscal August at an average cost of $25.62 per share. This leaves 764,500 shares remaining on our current buyback authorization.

For the quarter, units per transaction increased approximately 3.5%, the average transaction value increased 5.5%, and the average unit retail increased approximately 2%.

For the year-to-date period UPT's increased approximately 3.5%, the average transaction value increased approximately 7%, and the average unit retail increased approximately 3%.

Buckle ended the quarter with 419 retail stores in 41 states, compared to 401 stores in 41 states at the end of the second quarter of fiscal 2009.

And now at this time, since Dennis is traveling and calling in remotely, I'd like to turn the call over to Tom Heacock, our Corporate Controller.

Good morning, and thank you for joining us today.

I'd like to start by highlighting the performance of our various merchandise categories that led to our 2.2% net sales decrease for the quarter.

Men's merchandise sales for the quarter were down approximately 1%. Positive categories included denim, woven shirts and active apparel. Average denim price points for the quarter decreased from $87.60 in the second quarter of fiscal 2009 to $86.20 in the second quarter of fiscal 2010.

For the quarter our men's business was approximately 41% of net sales, compared to approximately 40% last year, and the average men's price points decreased approximately 1%, from $45.60 to $45.25.

Women's merchandise sales for the quarter were down approximately 4%. Positive categories included denim, active apparel and accessories. Average denim price points for the year-to-date -- or for the quarter increased from $89.30 in the second quarter of fiscal 2009 to $89.85 in the second quarter of fiscal 2010.

For the quarter our women's business was approximately 59% of net sales, compared to approximately 60% last year, and average women's price points increased approximately 4%, from $37.75 to $39.25.

For the quarter combined accessory sales were up approximately 5.5%, and combined footwear sales were down approximately 5.5%. These two categories accounted for approximately 9% and 5%, respectively, of second-quarter net sales, which compares to approximately 8.5% and 5.0% for each in the second quarter of fiscal 2009.

Average accessory price points were up approximately 7%, and average footwear price points were up approximately 4.5%.

For the quarter denim accounted for approximately 38% of sales, and tops accounted for approximately 36.5%, which compares to approximately 35.5% and 39.0% for each in the second quarter of last year.

Our private label business was up slightly as a percentage of net sales for the quarter and represented approximately 26% of sales.

During the quarter we opened seven new stores and completed 12 substantial remodels. As of the end of the quarter, 254 of our stores were in our newest format.

For the full fiscal year we still anticipate opening 21 new stores, including one store scheduled to open in September and two for holiday. We also still anticipate completing a total of 25 substantial remodels during the year, which includes three stores that have already moved back into their remodeled space in August, and seven stores remaining for the rest of the year.

And with that, we welcome your questions.

(Operator Instructions) Nicole Shevins, Goldman Sachs.

My first one was on selling expenses. Dollars were down about 2% year-over-year. How should we be thinking about that for back-to-school and holiday? You know, if sales trends remain a little soft, is there room to cut back expenses at the store level? Or is that something you're not planning for now?

The largest single expense item under selling would be our payroll, and so our sales management team continually works with our stores on budget hours, and so that line item is somewhat variable with our sales. I mean, in times -- and because we are base plus commission, also as sales go up, the payroll goes up as well, not just with more budget hours but with the sales commission.

Dennis, I don't know if you have any additional comment on the other portions of that selling expense, which would be the more marketing and travel and selling, supplies.

I would guess that they would remain constant. I would think the payroll is being managed pretty well and should stay steady. And the marketing, we do not have anything unusual planned for the fall season that would add to that, so I would see those being pretty constant.

Okay, great, thanks.

Then just a second one -- you know, for back-to-school we've heard from a number of retailers that customers are shopping a little differently or they might be a little more price-sensitive. Is there anything new that you are planning for back-to-school to compete with that and to help drive traffic and transactions?

No, we consistently keep the strategy of flowing new product in, every week, every day to create the excitement in our stores. And if we have certain items that need some help to be marked down, we will do that on an individual basis and as needed in the store. But our strategy is just, provide a new, great selection and service in our stores to take care of our guests.

Great, thanks for taking my questions.

Margaret Whitfield; Sterne, Agee.

Good afternoon -- or good morning, rather.

I wondered if you could comment on denim trends. I mean, denim had been the stalwart business for you, and the growth rate seems to be decelerating. Is this a function of the customers' seeking more wear-now apparel? If you could comment on what you're seeing there. Any resistance to those higher price points?

And I guess the women's business is weaker than the men's at this point, so I would appreciate more color, Dennis, if you could.

Well, I think on the ladies' denim, last year the second quarter was up like 19%, and we were positive this quarter there. We have a wide selection of brands, silhouette styles, details and a variety of color. So we think we are offering a nice selection in the ladies' styles and such in denim.

And we feel that the -- we're real happy with the new fits and details that we are doing in the men's business.

So we feel good about our denim business.

Does the women's business have easier comparisons coming up in Q3 and Q4?

I don't recall. I don't have that information with me, and I don't recall specifically to be able to say. I don't know if Karen can answer that.

I think gals' denim was pretty good last year through the whole second half of the year.

Yes.

Anything new on the tops side, Dennis? Any new brands that are catching fire? Or is Affliction still your number one brand?

Well, on the men's side Affliction is still very good for us. But we're selling -- if you go to the website, you'll see a variety of brands, an assortment of looks from -- anything from the West Coast brands, also like from an OBEY look to an Affliction look, and quite a few things in between.

In the ladies we also will have a few of the brands and still selling the Sinful and some different price points, but a lot of our ladies' items are private label. And there's a -- this year I think we are doing a nice job. We have a variety of looks in wovens, knits, and sweaters, and with the best ideas, and a lot of the items are very good for layering and building on wardrobes, which our teams are very good at. So we think we have a nice selection going into the season.

And in private label, shrunk to 26% of sales. How do you see that faring in the back half?

We see it being pretty steady. And, yes, I would say it's going to be pretty consistent going into the back half, of the last year.

Margaret, actually just to touch on that private label question, for the quarter private label was actually up slightly from the same quarter a year ago, but I think for the year last year we were the 28%, 29%, but for the quarter I think we were up just slightly.

Thank you, Karen.

Edward Yruma, KeyBanc.

I was surprised to see that you were able to leverage G&A in the quarter, considering the comp. Was there any kind of one-time incentive comp reversals in that? And should we expect you to be able to leverage G&A forward if comps stay negative?

Yes, Edward, you are correct.

I mean, there's two parts of it. The incentive bonus accrual, because it is based on growth in those three key categories, that was less for the quarter than a year ago. But we did have also, looking at our restricted stock and how that vests, we didn't have any reversal, but we had, for the fiscal 2010 grants, re-looking at the possibility of both halves of that vesting, and we made an adjustment there, and so that was -- the restricted stock was a smaller accrual for the quarter then, as well.

So that was not really a one-time event. That was just a smaller accrual then? So is this like a good G&A number to think about as we go through the rest of the year? Or --?

I would say for the second quarter it's going to be lower because we made the adjustment to the restricted stock, which we didn't make in the first quarter. So the second quarter was a little bit lower due to that adjustment -- would you say, Tom? Is that a fair way to say that?

Correct.

And should we expect that going forward? Or --?

And again, it depends upon the performance, so I mean that is hard to predict, Edward.

Got you.

And I noticed you commented on higher promotional activity but yet your inventories seem to be in check, at least on an absolute basis.

Can you talk a little bit about how you think about promotions going forward, and if you think, given the current environment, that you'll need to continue to be promotional, or was that really kind of an -- hopefully an event that you only saw in the second quarter?

Well, we will continue to take our same strategy, as I mentioned. If we have items that need to be marked down, we will do so, but we see it pretty much business as usual. And we did bring a few -- a group of denim down to $99 before tax-free so that the guest had an incentive to buy some jeans that maybe were $10 to $15 higher than that before. And we've maybe had a couple of styles early that we put on incentive, just to kind of combat some of the -- all the sale denim going on in the mall. But overall we feel pretty good about our situation.

Great. And maybe one final question -- I know that you have recently done some tests to kind of extend the price point reach of your denim, and you've added some denim at a lower price points and at the higher price points. Can you talk a little bit about that and how you think about where the denim AUR should trend going forward?

Well, we're -- had the Reclaim label for men's in. That's a $39.50 price point. We've been pleased with that business and slowly growing that.

In the ladies' I think we are delivering our first Daytrip denim soon, which is going to be around a $50 price point, and so that is yet to be seen.

But for the most part we expect the prices to be pretty close to where we've been.

Laura Champine, Cowen and Company.

Your costs obviously have been decelerating on a one- and two-year basis, and we think we are seeing in the stores less diversity of styles. Do you think the issue with the comp right now is more on a style front, or do you just think that your competitors are much more promotional and that's not your strategy?

Well, promotion is not our strategy. For the most part, as you know, it is delivering newness and great denim fits and brands. And we will keep that going.

I think from what we're hearing in the retail world, that there is a little less traffic out there, and I think that's kind of the difference for our comp sales.

So it seems like it is mostly macroeconomic issues driving your comp lower?

That would be my guess.

Lee Giordano, Imperial Capital.

Just a question on your sourcing costs. Can you talk generally about the trends you're seeing in sourcing, and looking at the back half of the year what you might expect there?

We see certain categories where there could be some cost increase to 5% to 10%, but what we've always done is continually try to do new product and new styling and such so that if we can create the value and such, that we can pass on some of that cost into the new product. And we're -- probably see a little bit more of that in the early part of spring, even than what we've seen for holiday so far.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about the gross margin and what you see as the markdown cadence versus IMU? Just the complexion?

And next, just on the men's and the women's business, how do you see product trends there and preparation for holiday? How should we be looking at it? Thank you.

Karen, do you want to address the gross margin and then I will address the other?

On the gross margins, we see IMU's being fairly consistent, but I think that part of that margin decrease really was a little bit more of the sale product -- wouldn't you say, Tom?

I know Tom has looked at that also.

Well, I think of that 45 basis points or so that merchandise margins were down, about half of that was probably markdowns, and the other half was increased Primo Card redemptions.

Yes, yes.

And on the men's and women's products, as I mentioned earlier, we see a pretty good balance of product from the different top categories. We are also liking the outerwear selection that we will start delivering this next month for both men's and women's, and the -- even though the footwear was down in the second quarter, we are liking our new -- the boots and some of the new styles there. So we think we have a good balance to go along with our denim strength for the fall and holiday season.

Bill Dezellem, Tieton Capital.

Given the environment that we are in here, as you look at the remodeled stores and the new stores that you're bringing out in the last six to 12 months, are you finding that the results are different than what you had experienced in the past? Or are those stores right on track?

Well, I would say with the new stores we've had some very good openings and several good openings, and a couple that were probably not as strong as we thought they would be. And the remodels have been doing well, maybe not as strong as a couple of years ago when we were having big gains in a lot of categories, but still very happy with the success of our remodels.

And relative to the new stores, you had mentioned a couple did not go as well as what you had anticipated. Would that be normal, where -- in terms of just the mix? Because presumably in the past you always haven't had outstanding openings.

Yes, I mean it's not totally unusual. If it's a newer area or a situation maybe with a newer shopping area that might be a little slower to start than a prime area that we are well-known in or such like that. So it's not totally unusual, no.

And did we hear in the opening remarks that there is some adjustment being made to either new store or remodeled store opening plans?

No, we did not announce those. At this time we are looking at nine new stores that we've committed for 2011, and we're probably looking at about 18 full remodels for the same time period.

Linda McDonough, Waterloo Advisors.

I was wondering, could you quantify what the bonus accrual number was this quarter versus year-over-year?

Typically we don't give that specific number out.

Is there any way to -- it's only because it had been mentioned several times in the comments how that had sort of helped the leverage on the SG&A line, so I guess a couple of these questions refer to this, trying to drill down into sort of what the base level of SG&A is. Without those changes would you have had some leverage?

Probably not.

Okay. So there's -- is -- will that be released in the Q? Or is there any other way to --? I guess thinking about it going forward into Q3 and Q4 on an absolute-dollar level for SG&A, am I understanding correctly that the second quarter that was just reported, the number will go up on an absolute basis? And even as a percentage in the next two quarters?

Well, on an absolute basis, yes, it will go up in the back half because (multiple speakers) the back half is a stronger half, and so the incentive -- there's two parts of the bonus --

The store managers, which is based on net profit of their stores, and so as net profit goes up, and it's typically larger in the second half, so that bonus is bigger.

And then the incentive bonus accrual is growth in comparable store sales, gross margin, and pre-bonus, pretax net income. And again historically we would see those numbers being larger in the back half of the year, where we would do -- 58% to 60% of our revenue would be in the back half.

Sure. Right. But I guess the better way to ask it then is, do you expect to have leverage on SG&A in the back half of the year?

That would depend upon performance. I mean, all those metrics are moving all the time based on performance, and so I guess at this point in time I don't think we could commit because it will depend upon performance overall.

So I guess absent any changes in the bonus accrual, there probably would not be leverage? Is that a good way to think of it? Or --?

Probably so.

The other question was just about the gross margin levels. Tom, you gave a little bit of color there where you talked about a little bit more product being 20% off, but less being 30% off.

How do you feel about sort of where all the inventory is going into the -- in the third quarter versus where you were for the second? I mean, do you think it's fair to think about a similar year-over-year change in gross margin, or do you think it could be a little bit better?

Well, I mean we are comfortable with our inventory and where our markdown levels are right now, and we just monitor how the third quarter goes to -- we are delivering a lot of fresh product and such, so at this point we would feel comfortable with it.

Okay, I guess. What I don't know though is sort of what your comfort level is with which particular gross margin level. I would say that gross margin in this quarter was probably a little bit disappointing, so I'm trying to get a sense of going into the third quarter should we expect -- is your comfort level to have a gross margin year-over-year change similar to what we saw in the second quarter?

My guess would be we would be able to do better than the second quarter.

I'm sorry -- the change better year-over-year? Or absolute level?

That we would not be down like we were in the second quarter.

Okay. All right, that's helpful. Thank you.

(Operator Instructions) Linda Tsai, MKM Partners.

Yes, could you talk about some of the fashion trends you're seeing out there as you've bought for Spring 2011? And then, how you're thinking of your ability to pass on price increases for next year? Is there more of an opportunity in private label or branded product?

Well, we've only started writing on certain categories for Spring. So you know, we are looking at a few different sourcing measures to keep the costs in line. We are looking to do more details and more uniqueness to offset some of the price increases. I would guess we would have more secondary fabrics, casual fabrics for the juniors going into the spring season than maybe we had last year.

On a lot of the ladies stuff it is a little far out for us to be forecasting our fashion trends.

And on the men's side, same with a lot of our knit business, we'll be much closer to spring than now, but we have been happy with our woven business and shirtings and shorts going forward, and we are just previewing a lot of the brands for next spring here in the near future, so I can't really comment on that.

So for the price increases it sounds like the opportunity is more in tops so far?

As far as the increases? Or (multiple speakers)

The ability to pass on some of the price increases.

Yes, I would say so. I believe that would be true.

And in the men's shorts there's some increases there that are probably in the high single digits or a little more, but we are trying to offset that with maybe belting them or adding other details to create more value in the shorts.

And then just one last question -- on the private label denim, how did that fare for you in the quarter, given your introduction of -- or slight increase in the lower price points?

You know, our lower-priced jeans have had a good reception, so we've been pleased with that.

Great, thank you.

Thank you, and there are no more questions in the queue at this time. Please continue.

Well, I think if there are no more questions, I think we are done with our part of the presentation.

Okay. There are no more questions. Are you wanting me to close the call?

Yes. We would like to thank everyone for joining us on the call today, and we will turn it back over to you.

Thank you very much. And ladies and gentlemen, this conference will be available for replay after 12.30 PM today until September 2, 2010, at midnight.

You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and using the access code 167165. International participants may dial 1-320-365-3844 using the same access code. (Operator instructions)

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.