Buckle Inc (BKE) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to The Buckle's third-quarter earnings release call. At this time all phone participants are in a listen-only mode. Later there'll be an opportunity for your questions. (Operator Instructions) As a reminder the call is recorded. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Vice President of finance and CFO; Pat Whistler, Vice President of women's merchandising; Bob Carlberg, Vice President of men's merchandising; Kyle Hanson, corporate secretary and general counsel; and Tom Heacock, corporate controller.

As a review, the operating results for the third quarter, which ended October 30, 2010, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement, 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 statement. Such factors include, but are not limited to those described in the Company's filings with the Securities and Exchange Commission.

The Company does not undertake to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Additionally, the Company does not authorize the reproduction or dissemination of transcripts or audio recordings of the Company's quarterly conference calls without its express written consent. Any unauthorized reproductions or recordings of the calls should not be relied upon, as the information may be inaccurate.

Please go ahead.

Good morning, this is Karen and I'd like to welcome everybody to our call this morning. Our November 18, 2010, press release reported net income that for the third quarter ended October 30, 2010 was $34.4 million, or $0.73 per share on a diluted basis, which is up 3.2% from net income of $33.3 million, or $0.71 per share on a diluted basis for the prior-year third quarter that ended October 31, 2009. Year-to-date net income for the 39-week period ended October 30, 2010, was $85.2 million, or $1.81 per share on a diluted basis, compared to $85.2 million, or $1.83 per share on a diluted basis for the 39-week period that ended October 31, 2009. Net sales for the 13-week third quarter increased 5.2% to $243.3 million and that is compared to net sales of $231.2 million for the prior-year third quarter. Our comparable-store sales for the quarter increased 0.5% and our online sales, which are not included in comparable-store sales, increased 20.8% to $15.1 million. Net sales for the 39-week year-to-date period that ended October 30, 2010 increased 3.7% to $646.8 million and that's compared to net sales of $623.8 million for the prior-year 39-week period that ended October 31, 2009.

Comparable-store sales for the year-to-date period decreased 1% in our online sales -- which, again, are not included in the comparable-store sales -- increased 20.4% to $41.2 million. Gross margin for the quarter declined approximately 70-basis points to 43.5%. The decline was driven by an increase in buying distribution and occupancy costs, which had a 110-basis point impact and was partially offset by a 40-basis point improvement in merchandise margins. For the year-to-date period (inaudible) declined approximately 90-basis points to 42.5%. The decline was driven by an increase in buying distribution and occupancy costs, which had a 120-basis point impact, and was partially offset by a 20-basis point improvement in merchandise margins and a reduction in expense related to the incentive bonus accrual.

The improvement in merchandise margins for the third quarter was primarily a reflection of reduced markdowns as a strong result of strong sell-throughs on a new product and an increase in our private label business, which was partially offset by an increase in redemptions to our Primo Card loyalty program. The increase in occupancy costs during both the third quarter and for the year-to-date period was primarily the result of increases in rent and common area maintenance costs related to new and remodeled stores and additional depreciation expense related to new fixture rollouts. To a lesser extent it was also attributable to the additional depreciation expense related to our new distribution center that went live during the third quarter.

Our selling expense for the third quarter with 18.1% of net sales, which was a reduction of approximately 50-basis points from the third quarter of fiscal 2009. The reduction was driven by a decrease in expense related to the incentive bonus accrual. For the year-to-date period, selling expense was 18.6% of net sales, which was a reduction of approximately 30-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 internet-related fulfillment and marketing expenses, health insurance claims and store supplies.

General and administrative expenses for the quarter were 3.1% of net sales, which was a reduction of approximately ten-basis points from the third quarter of fiscal 2009. This reduction was driven primarily by reductions in expense related to the incentive bonus accrual and equity compensation expense. For the year-to-date period general and administrative expenses were 3.3% of net sales, which was a reduction of approximately ten-basis points from the same period in fiscal 2009. This reduction was driven primarily by reductions in expense related to the incentive bonus accrual and equity compensation.

Our operating margin for the quarter was 22.3% compared to 22.4% for the third quarter of fiscal 2009. For the year-to-date period our operating margin was 20.6% compared to 21.1% for the same period in fiscal 2009. Other income for the quarter was $0.5 million compared to $1.2 million for the third quarter of fiscal 2009, and other income for the year-to-date income was $2.9 million compared to $3.7 million last year. Income tax expense as a percentage of pretax net income was 37.3% for the third quarter of fiscal 2010 compared to 37.0% in the third quarter of fiscal 2009, bringing third-quarter net income to $34.4 million for fiscal 2010 versus $33.3 million for fiscal 2009, an increase of 3.2%. Year to date our income tax expense was also 37.3% of pretax net income in fiscal 2010 and that compares, again, to 37.0% in fiscal 2009, bringing year-to-date net income to $85.2 million for fiscal 2010 compared to the same number, $85.2 million, for fiscal 2009.

Our press release also included a balance sheet as of October 30, 2010, which included the following; Inventory of $111.2 million, which was down approximately 6% from inventory of $118.2 million at the end of the third quarter of fiscal 2009; and total cash and assessments of $235.7 million, which compares to $230.8 million at the end of fiscal 2009 and compares to $167.2 million at the same time a year ago. The current cash and investment balance is higher than the same time a year ago, partially due to our October 2009 payment of a $1.80 per share special cash dividend that totaled $83.3 million. Also, as announced today in our morn -- in this morning's press release our board of directors did meet yesterday and authorized a $2.50 per share special cash dividend, which will be paid next month in December. During the quarter we also spent approximately $6 million to repurchase 246,800 shares of Buckle stock at an average cost of $24.26. This leaves us 552,500 shares remaining on our current authorization.

As of the end of the quarter inventory on a comparable-store basis was down approximately 9% and total markdown inventory was up compared to the same time a year ago. The increase in our markdown inventory was the result of an increase in the 20%-off category. We also ended the quarter with $171.3 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $9.9 million and depreciation expense was $7.6 million. For the year-to-date period capital expenditures were $47.4 million and depreciation expense was $21 million. Year-to-date capital spending is broken down as follows; $30.2 million for new store construction, store remodels, and store technology upgrades; and $17.2 million for capital spending at the corporate headquarters and distribution facility, [including] payments made as work progressed and our new distribution center in Carny. As previously mentioned, we transitioned to our new (inaudible) facility in the latter part of September and the new facility is our only operating distribution center. We now expect our fiscal 2010 capital expenditures to be in the range of $56 million to $60 million for the full year.

For the quarter, UPTs increased approximately 1.5%, the average transaction value increased approximately 4% and the average unit retail increased 2.5%. For the year-to-date period, UPTs increased approximately 3%, the average transaction value increased approximately 6% and the average unit retail increased approximately 3%. Buckle ended the quarter with 421 retail stores in 41 states compared to 404 stores in 41 states at the end of the third quarter of fiscal 2009.

And today, since Dennis is travelling and calling in remotely, I'd like to now turn the call over to Tom Heacock, our corporate controller.

Good morning and thanks for joining us. I'd like to start by highlighting the performance from our various merchandise categories that led to our 5.2% net sales increase for the quarter. Our men's merchandise sales for the quarter were up approximately 7.5%. Our strong categories that included denim, woven shirts and accessories. Average denim price points decreased from $85.90 in the third quarter of fiscal 2009 to $84.50 in third quarter of fiscal 2010, and for the quarter our men's business was approximately 38% of net sales compared to approximately 37% last year, and the average men's price points decreased approximately 2% from $53 to $52.

Women's merchandise sales for the quarter were up approximately 4%. Strong categories included denim, woven tops and accessories. Our average denim price points decreased from $92.40 in the third quarter of fiscal 2009 to $92.10 (inaudible) fiscal 2010. For the quarter our women's business was approximately 62% of net sales compared to approximately 63% last year, and the average women's price points increased approximately 3% from $45.10 to $46.55. For the quarter combined accessory sales were up approximately 21% and combined footwear sales were up approximately 1.5%. These two categories account for approximately [2%] and 5% respectively of third-quarter net sales, which compares to approximately 7% and 5% for each in the third quarter of fiscal 2009. Average accessory price points were up approximately 13% and average footwear price points were down approximately 3%.

For the quarter denim accounted for approximately 48.5% of sales and tops accounted for approximately 33%, which compares to approximately 46% and 35% for each in the third quarter of last year. Our private label business was up slightly as a percentage of net sales for the quarter and represented approximately 32% of sales. During the quarter we opened two stores and completed seven substantial remodels. As of the end of the quarter 263 of our stores are in our newest format. For the full fiscal year we opened 21 new stores, which includes the opening two weeks ago of our newest store in Las Vegas, Nevada and we also still anticipate completing a total of 25 substantial remodels during fiscal 2010, which includes two stores that have already moved back into their remodeled space in November and one store remaining for the rest of the year.

And with that we'll open it up to your questions.

(Operator Instructions) And we'll go to Nicole Shevins with Goldman Sachs. Please go ahead.

Good morning, thanks for taking my question. My question was on the women's business. After some softer trends in the spring and summer months -- women's just picked up recently -- and I wanted to see if you could talk about what's driving that in terms of product or what's going on the conversion side?

Yes, I'd be happy to cover that. On our women's business we have strength in our denim programs. Both our private label and branded have a nice mix, good selection and price point, so that has been a contributing factor, as well as on our tops side we pride ourselves in the selection. Layering has been a keylock going into the fall months so it adds additional multiple sales, I believe, as well is our accessories. We've had some nice increases in categories, such as belts, bags, watches, things that have maybe a little bit higher price point, and then in addition to our outerwear and women's boots.

On the denim side are you seeing that any new styles are emerging for your customer, or they're catching onto something new to drive that stream?

On the denim side?

Yes.

We just try to put out a nice selection. It's not specific to any one trend but try to accommodate several unique looks as they shop and find their own personal taste level. So I think part of it drives from just a nice selection of size, inseam finish in detail.

Okay, thanks. And then just on accessories, there's been good performance there and also the price point has picked up, is that due to a mix shift or a shift toward higher-priced items and accessories?

I believe on the belt side of things we've seen a renewed interest there and the price points tend to be a little higher than our typical accessory categories, as well as our bags or purses have a nice both margin and price. Watches have seen a nice little increase, as well as some fashion hats. So the jewelry portion has been steady, but the addition of some new categories or renewed interest in categories has driven that.

Okay, thanks for taking my questions.

You're welcome.

We'll go to Anna Andreeva with JPMorgan. Please go ahead.

Great, thanks so much. Good morning, guys.

Good morning.

Morning.

I had a follow up on the denim business. I think you said denim AURs were down in the third quarter in both men's and women's, could you maybe talk about that. Is that a reflection of higher markdown or a mix shift to the more value price points that you've been introducing lately? Or I noticed you said private label was growing, is that a reflection of that?

I think it's a combination of some private label growing, as well as we've added some brands as a small part of our selection that was maybe a little less than our traditional brands that we've been carrying, so I'd say it's a combination. And then the men's also expanded the reclaim program, which is right at the $40 price point that has continued to be good, as well.

Okay. So as we get into 2011, do you think that's the trend in ARUs in the denim business, maybe some flattening out of -- because I know you're going to be lapping some pretty difficult comparisons going forward?

Myself I would say the price points I would expect to be similar or close to where we're at now. And compared to the spring numbers I would guess they would be comparable, maybe down slightly but not too much different.

Okay, great. Got you. And I guess to Karen, could you maybe talk about your view on forcing for next year. Obviously there's been a lot of concern given what cotton prices have been doing recently, how are you guys managing through that?

Yes, we can take that.

Very good.

On the ladies side and the men's, on the branded categories we have not seen increase in prices at this point in those particular categories. A lot of the ladies product continues to change in styles and detail so quickly that we really have not seen an increase in particular tops or most categories. It's still been pretty consistent and based pretty much on how much detail and trims we put on categories. On the men's side -- and the same with the brand on denims, we haven't seen an increase at this point. Some of the woven shirts and maybe some of the shorts for summer we've seen anywhere from low or high single-digit increases to some of those categories as we plan the spring product there. It varies by category and where we're sourcing different things at, but we would expect to see some pressure on that but feel that we can deal with that as we go forward.

Okay, and it's too early to talk about fall. Given your lead times that are pretty quick I would imagine you still have a few months before you begin placing that?

Correct.

Okay. Okay, great, thanks so much and best of luck.

Thank you.

We'll go with Edward Yruma with KeyBanc. Please go ahead.

Hi, this is Jessica on for Edward. I was just wondering on how you're thinking about inventory going forward and if there is an additional inventory reduction opportunity, or should we assume inventories will all move in line with comp going forward?

As we move forward we've -- it's a little lower than it has been in the past but I think we have our inventory working for us pretty well in the different categories, as well as in men's knits there's less branded product right now and some of the private label product that is working there is that lower price points so that brought down some of the inventory number. But it's really something that as we shop and plan it's kind of product driven and depending what we feel best for the selection and what's going on could vary. But I would guess the inventory levels would remain for the total Company probably close to a year ago, give or take, low to single digits.

Okay, thank you.

You're welcome.

We'll go to Lee Giordano with Imperial Capital. Please go ahead.

Oh, hi, thanks. Good morning, everybody. Could you talk a little bit about your marketing plans for the holiday season? Any big changes versus last year and are you planning any special promotions that we should look for?

Bob, do you want to take that?

Yes. Not promotions so much of price but more about driving business into the store. The first big promotion will be with Affliction and Sinful that'll start Monday the 22nd and we're doing a similar promotion to what we've done in the past as part of the George St. Pierre fight in Montreal and they partially sponsored that, although they go well past that MMA business. And then of course with the Sinful there's a lot of embellishment on the Sinful that aren't necessarily MMA but it's about -- it's around that event and they have an opportunity to get a T-shirt with a $32 value for $10 or for free if they bought product. So all of our promotions in some way try to drive business into those brands and that in the past has been very successful.

And then for a new promotion we start on November 29th and we'll be doing a rock revival promotion and that one we have some watches that would be in the retail value of $99 to $155 that will be given away for free with a two-pair jean purchase and you could buy them for 50% off with a jean purchase. And it's probably biggest GWP price point that we've ever given away so it should be very exciting and from what we've shown the teammates so far they're pretty excited to have a watch instead of a T-shirt or a bag as part of the GWP.

Thanks and good luck for the holiday.

Thanks.

We will go to Laura Champine with Cowen and Company. Please go ahead.

Hey, guys, it's Rob in for Laura today. Just expanding little bit more on the inventories at the end of Q3. As previous caller mentioned it was down pretty significantly and I guess we're just wondering if you guys could expand a little bit on how you're planning for Q4, what level of demand you're seeing, whether it's a particular category that's down more than any others? Any additional color would be really great. Thanks.

As far as categories, Karen, it was the men's knits that was down?

Cor -- you're correct, that was probably -- Probably the most? Yes, the largest single shift, yes.

Yes, and we're continuing to keep the same strategy of looking for same fashions and making a great selection in the stores but sometimes the vendors can be late, sometimes the quality doesn't pass inspection so we have cancellations. So we 'e always developing product, working on product and sometimes it -- it's not widgets so sometimes it doesn't come through as we expect and so we have to cancel or return certain product. But overall we're continuing to like what we're seeing and planning to do business.

Okay, that's great. Thanks, guys, good luck.

Thank you.

Thank you.

We will go to Liz Pierce with ROTH Capital Partners. Please go ahead.

Thanks. Good morning, nice job.

Thank you.

A question on the denim. There has been chatter lately on denim, other types of non-denim fabric coming into play, are you guys seeing any of that?

I'd say for fall, as our sales show that the denim is strong and that's where we have are inventory for the most part. For spring we have other fabrics, especially in men's shorts and testing a few casuals and it'll probably be a little bit more in some casual bottoms for the ladies for spring. We see certain seasons were that will have some meaning and such, but still feel very good about presenting a strong selection of denim and fits, different fabrics, different colors and that assortment.

And weights.

And different weights of fabric, as well. Thank you.

Weights of denim fabric --

Correct, yes.

-- (inaudible) of non-denim?

No, weights of denim fabric. Being lighter weight, as well.

Okay. Are you seeing in terms of different leg openings on denim? Is that helping also because we haven't had -- we've been such a strong skinny cycle for three years?

Yes, we're selling -- like in the ladies we're selling a selection of bottom openings. We've sold skinniest, as well is certain stores and regions have sold 22-inch bottoms, with probably 18 to 20 being the majority. That adds to the selection, as well as the brands and the different fit silhouettes. And then on the men's they've also added new fits, as well as bottom openings to their selection, which has been a plus, as well.

Okay. And on the two promotions that you've been talking about, it seems those are pretty much geared toward the men -- maybe the watch is more of a unisex but certainly it seems like the Sinful and Affliction would be little bit more of the men's, is there anything you're doing for women?

The Sinful is a real strong brand for the women's side --

Okay, sorry --

-- so those two brands are probably not quite equal, it might be a little bit more on the men's side, but when we've done it before we've done it with the Affliction/Sinful just like this one and it's been a big help to the women's side, as well.

And is the watch -- is that pretty much unisex?

Yes.

Okay. How are the layaway sales in the quarter?

Karen, do we comment on that?

Layaway sales were good. I don't have the specific number in here with me but, yes, layaway sales were good.

Is it something that can -- would you say that it's higher than last year?

Layaway's, yes. Layaway sales were higher (inaudible) year ago.

As compared to last year.

Yes.

And then finally were you -- did you see any regional variations?

I would say they're small. Still in some of the more difficult housing areas there's a little inconsistency, but as each year evolves it still seems like its the experience and quality of the store manager leadership in a store that's driving the business.

Okay, great. Thank you, good luck.

Thank you.

(Operator Instructions) We will go to Bill Dezellem was Tieton Capital. Please go ahead.

Thank you. Would you please discuss the transition to the new distribution center and what hiccups you may or may not have had in the quarter and any incremental cost that will not be repeating as we move into the fourth quarter, please?

Sure. We did move into the distribution center that last week of September. It was -- as far as moving the product from here over to the new center that all went very smooth. We shipped out product every day that first week into the new distribution center. There were, obviously, some tweaks that needed to be made and not everything performed perfectly by any means there, but we continued to move product every day out of the new center. Still working on some programming, specifically with her back-stock inventory and how the back stock moves back out to the stores. So continuing to work on some of that programming but overall we've been pleased how that transition happened. The consultants that we worked with Johnson Stevens felt that the conversion was very successful from others that they had seen in the past. It's a great facility and overall I think it's been a very positive move.

Were the any material costs in the third quarter that you would not anticipate repeating in the fourth quarter?

No. We'll have -- there was just -- the third quarter would have a partial quarter of depreciation so we will have additional depreciation expense in the fourth quarter and going forward.

Additional question. Relative to the special dividend announced today, would you please discuss the thought process behind, number one, a larger dividend than you paid last year from a one-time perspective, and then secondly, discuss the timing and its difference this year versus last year and what led to that?

Dennis, you want me to take that?

Their line disconnected.

Oh, okay. All right, we've lost Mr. Nelson off the call. On the timing, at the September board meeting the board really felt that we needed to give it a little more time to see how business went going -- getting into the fall and also at that time we were still looking to see if we got a clearer guidance as far as the direction of the taxability of the dividends going forward, so that was one of the concerns that we wanted to wait and see. As far as the dollar amount, Bill, I think that there, again, we just looked at current levels of cash, looked at cash flow projections for 2011. We don't have the distribution center, which was in the last half -- last probably quarter of 2009. And in 2010 during the period of time we were building that facility we spent about $25 million, so we took into consideration we don't have that capital expenditure. Our store project for fiscal 2011 will be down from what we had in 2010. As Tom mentioned, this year we had 21 new stores and 25 full remodels so it was 46 full construction projects, as well as several mini projects and right now we don't have that many on the list currently for 2011, so kind of looking forward, as well.

Thank you.

And we have no further questions in queue at this time.

All right, thank you. Do you want to repeat the playback number for the people on the line then?

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Thank you. Thanks, everyone, for joining us on the call.

Karen?

Yes.

I accidentally bumped that and Dennis was off after the $2.50 special dividend question.

Yes.

Was there any other questions for myself?

Why don't we connect back in, okay?