Buckle Inc (BKE) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first-quarter earnings release call.

Members of The Buckle's management on the call today are Dennis Nelson, President and CEO, Karen Rhoads, Vice President of Finance and CFO; Pat Whisler, Vice President of Women's Merchandising; Bob Carlberg -- Secretary and General Counsel (sic - see Website); and Tom Heacock, Treasurer and Corporate Controller.

As they review the operating results for the first quarter, which ended April 30, 2011, 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 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 calls without its expressed written consent. Any unauthorized reproductions or recordings of the call should not be relied upon, as the information may be inaccurate.

I'd now like to turn the conference over to your host, Karen Rhoads. Please go ahead.

Thank you and good morning, everyone. Thanks for joining the call.

Our May 19, 2011, press release reported that net income for the first quarter ended April 30, 2011, was $33.5 million, or $0.71 per share on a diluted basis, and that was up 11.2% from net income of $30.1 million, or $0.64 per share on a diluted basis, for the prior-year first quarter that ended May 1, 2010.

Net sales for the 13-week first quarter increased 11.8% to $240.1 million, compared to net sales of $214.8 million for the prior-year first quarter. Our comparable-store sales for the quarter increased 8.1% and our online sales, which are not included in comparable-store sales, increased 18.6% to $17.1 million, which was approximately 7.1% of net sales.

Gross margin for the quarter declined approximately 60 basis points to 42.9%. The decline was driven by an increase in distribution costs, which had a 40 basis-point impact, and by a 30 basis-point decline in the actual merchandise margins, which were partially offset by a reduction as a percentage of net sales in incentive bonus accrual. The increase in distribution costs for the quarter was primarily attributable to the additional depreciation expense related to our new distribution center, which went live during the third quarter of last year, and also due to increased shipping costs.

Selling expense for the quarter was 17.8% of net sales, which was a reduction of approximately 70 basis points from the first quarter of fiscal 2010. The reduction was driven by a decrease in expense related to various store supplies, the incentive bonus accruals, and health insurance claims. Just to note here, the actual incentive bonus accrual had an increase in dollar amount, but was lower as a percentage of net sales.

General and administrative expenses for the quarter were 3.7% of net sales, which was an increase of approximately 20 basis points from the first quarter of fiscal 2010. The increase was attributable to a one-time charge related to a store closure shortly after the end of the quarter, and due to increases in certain other general and administrative expenses.

Our operating margin for the quarter was 21.4%, compared to 21.5% for the first quarter of fiscal 2010. Other income for the quarter was $1.6 million, which compares to $1.8 million for the first quarter of fiscal 2010. Income tax expense as a percentage of pretax net income was 36.8% for the first quarter of fiscal 2011, compared to 37.3% in the first quarter of fiscal 2010, bringing first-quarter net income to $33.5 million for fiscal 2011 versus $30.1 million for fiscal 2010, an increase of 11.2%.

Our press release also included our balance sheet as of April 30, 2011, which included the following. Inventory of $89.9 million, which was up approximately 6% from inventory of $84.7 million at the end of the first quarter of fiscal 2010, and total cash and investments of $226 million, which compares to $205.5 million at the end of fiscal 2010 and also compares to $236.1 million at this same time a year ago.

As of the end of the quarter, inventory on comparable-store basis was up approximately 2% and total markdown inventory was down compared to the same time a year ago. The reduction in markdown inventory was the result of decreases in the 20% and the half-off categories, partially offset by an increase in the one-third-off category. We also ended the quarter with $169.9 million in fixed assets, net of accumulated depreciation.

Our capital expenditures for the quarter were $10.6 million and depreciation expense was $7.5 million. Capital spending for the quarter was broken down as follows -- $8.6 million for new store construction, store remodels, in-store technology upgrades; and $2 million for capital spending at the corporate headquarters and distribution center. We still expect our fiscal 2011 capital expenditures to be in the range of $30 million to $35 million.

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

Buckle ended the quarter with 422 retail stores in 41 states, compared to 412 stores in 41 states at the end of the first quarter of fiscal 2010. Additionally, our total square footage was 2.108 million square feet as of the end of the first quarter, compared to 2.057 million square feet as of this same time a year ago.

And at this point, I'd like to turn the call over to Tom Heacock, our Corporate Controller and Treasurer.

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 11.8% net sales increase. Men's merchandise sales for the quarter were up approximately 14.5%, and strong categories included denim, woven shirts, active apparel, and accessories. Average denim price points increased from $89.70 in the first quarter of fiscal 2010 to $89.80 in the first quarter of fiscal 2011.

For the quarter, our men's business was approximately 39.5% of net sales, compared to approximately 39% last year, and the average men's price points increased approximately 3.5% from $49.75 to $51.55.

Women's merchandise sales for the quarter were up approximately 10%, with strong categories including denim, knit tops, active apparel, accessories, and footwear. Average denim price points decreased from $91.20 in the first quarter of fiscal 2010 to $90.30 in the first quarter of fiscal 2011.

For the quarter, our women's business was approximately 60.5% of net sales, compared to approximately 61% last year, and the average women's price points decreased approximately 1% from $44.35 to $43.80.

For the quarter, combined accessory sales were up approximately 32% and combined footwear sales were up approximately 14.5%. These two categories accounted for approximately 7.5% and 5.5%, respectively, of first-quarter net sales, which compares to approximately 6.5% and 5.5% for each in the first quarter of fiscal 2010. Average accessory price points were up approximately 5.5% and average footwear price points were down approximately 4%.

For the quarter, denim accounted for approximately 44.5% of sales and tops accounted for approximately 31.5%, which compares to approximately 45.5% and 33% for each in the first quarter of last year.

Our private label business was flat as a percentage of net sales for the quarter and represent approximately 30% of net sales.

During the quarter, we opened two new stores and completed six substantial remodels. As of the end of the quarter, 274 of our 422 stores were in our newest format.

For the full fiscal year, we now anticipate opening 13 new stores, including four for spring, six for back-to-school, and three for holiday, with plans for the remainder of the year including new stores in Providence, Rhode Island, and Natick, Massachusetts, our first in each state. We also still anticipate completing 25 substantial remodels during fiscal 2011.

And with that, we welcome your questions.

(Operator Instructions). Nicole Shevins, Goldman Sachs.

My question was on your merchandise margin being down 30 basis points this quarter. What were the drivers behind that decline?

Good morning, Nicole, Dennis. I think there was a little bit of markdown on some of the gals' denim, in clearing part of that.

But in general, I think just the margins on some of the brands might have been a little less than the previous year. And before, we had some sourcing at very good prices, exceptionally good prices for the previous spring compared to this spring.

And then, on some of the ladies denim with markdowns, I think that was a bit of an issue last quarter. Do you think you've run through that problem or should we expect to see some of that trickle into the second quarter?

We think we're in pretty good shape on that denim markdown, so it should be a normal process going forward.

And then, just the last one, on the markdowns that you've taken. Were they taken to stimulate sales proactively or was it more reactionary based on sellthrough levels?

It was more our routine just clearing out older product or some product that had slower turn than expected.

Thanks, and then, just a question on tops also. It seems like your top performance, it's lagging your denim trends a bit. Is there anything new that you're planning to do with that classification, especially in second quarter since it tends to be skewed more toward tops?

Bob or Pat, do you want to comment on that?

I don't know if there's anything specifically new on the men's side, but there are -- on the tops side, there's the striped tees and some new screens on the t-shirts that have helped the knits as well, and the woven shirts, as Tom mentioned, continue to be very strong and should be good on through spring and summer.

And on the women's side, I would say we were just consistently shopping for new knits and brands, which has been working well for us, so we have a good variety of brands in our private-label Daytrip and our top set is performing well.

Edward Yruma, KeyBanc Capital Markets.

Thanks very much for taking my question. I wanted to ask a little bit about the incentive bonus accruals. I know you said the basket was up in aggregate, but you did leverage it, and I'm kind of curious why, given your performance is arguably a little bit better this year than last. So, has there been a change to compensation plans or other things that would cause that leverage?

No, I mean, the program is patterned very similar to a year ago, and again, it's always based on growth and just how those categories -- each of those categories contribute to the overall pool, so it's not on dollar one of profits. It's growth in all three of the categories that contribute to the pool, which the dollars come from growth in comparable-store sales, growth in gross margin, and growth in pre-bonus pretax net income.

Got you. And Dennis, I know you mentioned that you had some favorable sourcing last year. How does the rest of the sourcing look for the remainder of the year and do you think you'll be able to take up pricing, because I think this is your now second quarter of flattish to down AUR?

Well, we see it pretty much as the last call. We see not much change from the first quarter and the second quarter, and the third and fourth quarter, we might see slightly increased costs through some of the denim and some of the product.

As mentioned before, the sweaters and outerwear have seen most of that cost increase. And in most cases, the team has worked with a product in a fashion sense where the -- we will be able to take up retails to cover a good part of those increased costs.

Anna Andreeva, JPMorgan.

Karen, a question on distribution costs. I think you said they were up 40 basis points in the quarter. Should we expect a similar magnitude of the deleverage as we go through the next two quarters until they anniversary, then you DC in the third quarter?

You know, a portion of it -- probably about approximately half of it was due to the additional depreciation expense, which, you're right, will be recurring in the second quarter, and we won't start --

Second or third?

Well, it'll still be an increase in the second quarter, but then we'll -- it'll be more comparable once we get to the third and fourth quarters.

But part of it is the freight costs, too, where we've continued to see some increased freight costs. We had a nice flow of new product into the stores and balancing some of that inventory between the stores where we -- so a part of it is the additional freight costs. Does that help?

And do you (multiple speakers) additional freight costs to continue for the next few quarters?

I think there'll be still some freight charges there that will add some, but I think the balancing of some of the product between stores and the special orders will probably level out, so I would see it not at this same level.

Okay, okay, got you. And Karen, I think you called out there was a one-time charge in your G&A line item. Did you quantify that charge?

I don't know if I have that off the top -- do you, Tom? No. But it was the store that we closed at the close of business last Saturday. So -- but we can get that.

(Multiple speakers). Okay, yes. That would be great. Maybe we can follow up offline. Because just looking at your D&A expenses, you've done a really great job over the last few quarters managing that line item very tightly, so should we expect to see some leverage as we go forward?

In the G&A?

Yes, in the G&A bucket.

And again, you know, that one -- you're right. We have continued to maintain that pretty tight, so we always continue to look at providing leverage there, but that's a line item that's probably a little bit harder to leverage. And that one can depend also on the incentive bonus accrual, whether that's up or down in there, but we continue to look at that category and try to maintain that pretty tight.

Okay, got you. And just looking at the balance sheet, you guys ended with, I think, $5.00 in cash per share. Any plans to maybe become more aggressive on the share buybacks? And how much cash do you need on the balance sheet to run the business?

We continue -- continually look at that cash with our Board of Directors. There aren't any current plans that we could talk about today, I don't think, with the Board or without -- our next Board meeting coming up, but outside of just letting you know that that is an area that the Board does take great interest in and we do look at that on a quarterly basis and talk about the different opportunities with our cash.

Is that it for Ms. Andreeva? Tom Filandro, SIG.

Thank you very much, and Karen, congratulations to you. I wish you all the best as you enter the next phase of your life.

A couple of questions for you guys. I guess the first question is, if the clearance inventory entering the second quarter is in a much better position, does that suggest we could see somewhat of a reversal, ex the distribution-cost issue, in the maintain margin?

And since we have the -- second question is, since we have the merchant team on the call today, Dennis, maybe we can talk a little bit more about what opportunities exist in the summer and back-to-school season? I really would like to hear some commentary about the knit business in particular, given how weak it was from a pricing standpoint, I believe, last year and possibly the year before. Thank you.

Tom, I'll take the first part of the question. I think the markdowns are in good shape, and we're happy with our inventory levels.

So, we've been maintaining very high merchandise margins, and we feel the team is very good and doing a nice job, so we're not projecting we can improve on that, but we'll continue to work it hard and do the best we can there.

As far as some of the product ideas, Bob, do you want to start with that?

Specifically to your knit question, in the first quarter we saw some strengthening there in the knits.

We've got some new brands in there. We've got new looks that are working. Some of the striped tees that are working, tanks that are working, and Affliction continues to bring out new series, so, overall, the knit business in the first quarter, I think, stabilized and started to come up a little bit. For now, we feel good about the opportunities in the knits.

I would say, for the women's side, a similar comment to I made previously, but the team is constantly shopping for newness in brands, and those that we have tested early on have performed well.

So we'd be looking to expand our offering on those brands. They come in various categories, including West Coast, our private-label brand of Daytrip that would be more fashion novelty, as well as other brands that we have established and have ongoing business with, adding new series for women's as well.

Just one question, a follow-up, if I may, on the Affliction event. Did you guys feel the Affliction event was a successful event? What impact, if any, does that have on the maintain margin? And are there plans for any incremental events, either with Affliction or other brands, for the summer or back-to-school season? Thank you.

Bob, do you want to take that one?

Sure. Well, I think all of our promotions, and we can go over some of those again, all involve a GWP that's unique to The Buckle and is valuable to the guest. That helps us increase the dollar per transaction as well as the units per transaction. And we own those GWPs in a way that, I would say, it's mostly revenue neutral. It doesn't cost us anything to go through those GWPs.

And any incremental events, Bob, planned?

Going forward, we do actually have another promotion with Affliction and Sinful where we'll be giving away some customized Harleys, and that promotion starts on May 30. It will also have a GWP component to it.

And then from there, we'll do our -- excuse me, that's going to start 6/6 to 6/27; and then on July 4 to July 25, we'll do our annual denim back-to-school promotion; and then, 7/25 to 8/14, we'll do a promotion with [Rockford viable]; and again, all of them are similar where we really look for a unique GWP that is something that the guests would like to have and would strive to get and would spend extra money. It was that particular brand to get that GWP.

Margaret Whitfield, Sterne, Agee.

You reported nice excelling expense leverage, Karen, in the quarter. I wondered if you see opportunities ahead for similar leverage?

You know, again, a lot of that is topline driven, too, so it depends on where we come in on that topline.

But definitely, Kari Smith, our Vice President of Sales, and her team continue to work with the stores on managing payroll, which would be one of the larger expense items in the selling expense category, and overall, I think that we have tried to stay on top of the promotions, the supplies of other categories in the selling expense line item. Dennis, I don't know if you have any other callouts on that or specifics you'd like to add?

I think like you mentioned, it will be the store results with sales, how that will affect their payroll, and then, how the incentive bonus works out. So, we think the team is doing a really nice job, and the stores are -- the leadership there is great, and the store managers are doing very well, so we would expect them to do a good job there.

And your inventories are up only a little over 1%. Are you a little short or where do you think ending inventories might be at the end of Q2?

We hope to build them and would expect to build the inventories from that level with -- our denim sales have been very good, and we'll have a lot of new product coming in for the back-to-school season. So, we're excited about that, and I would think that would increase levels by the end of the second quarter.

And in terms of second half, how is the basket for pricing between your brands and the brands you take in the store? What kind of price increase might we see overall? And are you buying units down?

No. We are probably actually buying overall, between both men's and women's, buying units up, and the majority of our brands have, for the most part, held price on the majority of the styles.

We've had one or two vendors that maybe would be -- costs would be up low single digits somewhere, or mid single digit, and part of our private label will be up low to mid single digit and part of it will be maintaining pretty much the prices we have now.

Finally, on stores, 13 openings this year. Why the slowdown in new openings? And does next year look better for the addition of stores, closer to the 20, 21 you've been running at?

As we mentioned in the last quarterly report, we look for opportunities for great centers, very good locations, good economics that make sense for us, as well as we promote our managers from within.

So, we have several points there we want to make sure we are ready for to grow, and this year it was more or less the opportunities that were offered that we felt met that criteria. Next year, we already have about five new stores verbally approved on, and we'll be shopping at the Las Vegas convention ICSC next week to kind of review several other new opportunities going forward.

Lee Giordano, Imperial Capital.

Just as a follow-up to that last question on store growth, is there a particular geography that you're focused on as far as locations?

No, not at this time. We're open to pretty much any of the 43 states we'll have by the end of the year, and naturally we'll review some new territories as well, going forward.

And then, also, can you talk a little about your overall outlook for consumer spending and the mindset of the Buckle customer in particular? Have you seen any changes in shopping patterns due to higher gas prices?

I'd say through the first quarter, we did not really see any changes there, and I'm not really hearing too much from the stores as far as that as a detriment. And going forward, I guess we'll just have to see how that plays out.

Bill Dezellem, Tieton Capital Management.

I have a couple of follow-up questions to prior questioners. First of all, relative to your sourcing costs, which quarters last year did you have better-than-normal sourcing costs after the first quarter? So Dennis, I think you'd mentioned Q1 was a better-than-normal cost?

I'd probably say -- the best I remember would have been some excellent sourcing prices through at least the first three quarters. Bob or Pat, is that how you would remember it?

Yes, I mean, for sure like Q4 and Q1 of last year and the year previous was when it seemed like we were getting the best deals.

That's helpful. And secondarily, you'd mentioned that your freight costs, you're expecting those to now be contained, and if we heard correctly, in part because you anticipate shifting less product between stores. Is that -- first of all, assuming that that was a correct perception on our part of what you were saying, are you shifting less product between stores because the merchandise is in better shape now or is it actually just less expensive to do a markdown rather than shift the product around, really a cost-benefit analysis?

I think, Bill, what we were kind of trying to get across is maybe more normalized, not less shifting in the back half of the year, but maybe a more normalized run in the first quarter. We had a little bit more than normal moving around of inventory.

But we still feel like doing -- balancing that inventory and getting the right product to the right store is very effective for our stores.

Yes. And also, our special orders were up in that first quarter over 20%, so that expense of freight is also in there.

(Operator Instructions). Dana Telsey, Telsey Advisory Group.

Could you talk a little bit about back-to-school, how back-to-school will be different this year from last year, whether it's in terms of brands and products and events that you're doing as compared to last year?

And then, just in terms -- you mentioned about real estate, occupancy costs and what you're seeing there, especially on lease renewals? Thank you.

Okay. Bob, do you want to start with the men's product for back-to-school changes from the previous year?

There's not a lot of major changes. Probably more emphasis on certain brands that have been trending up, and we feel comfortable with where we're headed as far as percents of those brands into each category. And then, like we mentioned, the new Affliction series continue, and we'll have a little bit more private label in the knit side to start back to school.

Okay. Pat?

On the women's side, I would say we are going to have a nice blend on the brands going into back-to-school and are working hard to get our on-time deliveries for our private-label program of BKE, and the combination of those two we would expect to be very good for us.

In the top half of things, we'll probably have a few less sweaters early on, and we think that will be picked up in the woven and knit category layering, which is always key for us. It looks to be very strong and is supported in all categories. I'd say we're in a strong position for our accessories and watches, belts, things that have been nice, strong categories, first spring, as well as our footwear presentation looks to complement the product as well.

And on the occupancy cost, I would think they would be pretty consistent to where we are at the moment. And was there another part of that question, Dana?

And then the other part is new store productivity, what you've seen in terms of new store productivity and store size. Thank you.

Store size has been pretty much our average size. There's a couple of them that might be closer to 5,500 square feet. The four we've opened this year have basically only been open about a month or less, and we've been pleased with the openings.

There are no more questions in queue.

Thank you.

We appreciate everyone listening to the call today and for everyone's questions. Thank you very much.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.