Buckle Inc (BKE) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The Buckle's 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 with instructions provided. (Operator Instructions). As a reminder, this conference is being recorded today, August 18, 2011.

Members of 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, Vice President of Men's Merchandising; Kyle Hanson, Corporate Secretary and General Counsel; and Tom Heacock, Treasurer and Corporate Controller.

As they review the operating results for the second quarter which ended July 30, 2011, they would like to reiterate their policy of not giving future sales of 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 the 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 statement even if experience or future changes make it clear that any projected results expressed or implied there within 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 its express written consent. Any unauthorized reproductions or recordings of the call should not be relied upon as the information may be inaccurate.

At this time, I would now like to turn the conference over to Karen Rhoads, Vice President of Finance and CFO. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our call today.

Our August 18, 2001 (sic), press release reported that net income for the second quarter ended July 30, 2011 was $23.6 million or $0.50 per share on a diluted basis. That was up 13.5% from net income of $20.7 million or $0.44 per share on a diluted basis for the prior year's second quarter that ended July 31, 2010.

Our year-to-date net income for the 26-week period ended July 30, 2011 was $57 million or $1.21 per share on a diluted basis, which was up 12.1% from net income of $50.9 million or $1.08 per share on a diluted basis for the 26-week period that ended July 31, 2010.

Net sales for the 13-week second quarter increased 12.6% to $212.4 million, and that's compared to net sales of $188.6 million for the prior-year second quarter. Comparable store sales for the quarter increased 8.9% and our online sales, which are not included in our comparable store sales, increased 21.8% to $14.3 million. Net sales for the 26-week year-to-date period increased 12.2% to $452.5 million compared to net sales of $403.4 million for the same period in the prior year.

Our comparable store sales for the year-to-date period increased 8.5% and our online sales, which again, are not included in comparable store sales, increased 20.1% to $31.4 million.

Gross margin for the quarter improved approximately 100 basis points to 41%. The improvement was driven by an 80 basis point improvement in merchandise margins and by the leveraging of certain occupancy costs which had about a 70 basis point impact.

These improvements were partially offset by increased distribution costs. For the year-to-date period, gross margin improved approximately 10 basis points to 42%. The improvement was driven by a 20 basis point improvement in merchandise margin and by the leveraging of certain occupancy costs which had a 40 basis point impact. These improvements were partially offset by increased distribution costs. The increase in distribution costs for both the quarter and the year-to-date period were primarily attributable to additional depreciation expense related to our new distribution center, which went live during the third quarter of last year, and also some increased shipping costs.

Selling expense for the quarter was 20% of net sales, which was an increase of approximately 60 basis points from the second quarter of fiscal 2010. The increase was driven by increases in expense related to the incentive bonus accrual and store payroll. For the year-to-date period, selling expense was 18.8% of net sales, which was the reduction of approximately 20 basis points from the same period in fiscal 2010.

The reduction was driven by decreases in expense related to certain store supplies and health insurance claims which were partially offset by an increase in expense related to our incentive bonus accrual.

General and administrative expenses for the quarter were 3.7% of net sales, which was an increase of approximately 40 basis points from the second quarter of fiscal 2010. The increase was attributable to an increase in equity compensation expense and an increase related to the incentive bonus accrual.

For the year-to-date period, general and administrative expenses were also 3.7% of net sales, which was an increase of approximately 30 basis points from the same period in fiscal 2010. The increase was attributable to an increase in equity compensation expense, an increase in expense related to incentive bonus accrual, and current-year expense related to the early termination of two store leases.

Our operating margin for the second quarter was 17.3% in both the current year and prior year. For the year-to-date period, our operating margin was 19.5% in both the current year and prior year.

Other income from the quarter was $0.5 million, which compares to $0.6 million for the second quarter of fiscal 2010. And other income for the year-to-date period was $2.1 million compared to $2.4 million for last year.

Income tax expense as a percentage of pretax net income was 36.8% for the second quarter of fiscal 2011 compared to 37.3% in the second quarter of fiscal 2010, bringing our second-quarter net income to $23.6 million for fiscal 2011 versus $20.7 million for the fiscal 2010 period, an increase of 13.5%.

Year-to-date income tax expense was also 36.8% of pretax net income in fiscal 2011 and 37.3% in fiscal 2010, bringing year-to-date net income to $57 million compared to $50.9 million for fiscal 2010, an increase of 12.1%. Our press release also included a balance sheet as of July 30, 2011, which included the following -- inventory of $126.8 million, which was up approximately 16.5% from inventory of $108.7 million at the end of the second quarter of fiscal 2010; and a total of cash and investments of $198.1 million, which compares to $205.5 million at the end of fiscal 2010 and to $197.3 million at the same time a year ago.

As of the end of the quarter, inventory on a comparable-store basis was up approximately 9%, 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%, 50%, and 75% off categories, partially offset by an increase in the one-third off category.

We also ended the quarter with $175.2 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $12.6 million, and depreciation expense was $7.8 million. For the year-to-date period, our capital expenditures were $23.2 million, and depreciation expense was $15.3 million. Year-to-date capital spending is broken down as follows -- $20.3 million for new store construction, store remodels and store technology upgrades; and $2.9 million for capital spending at the corporate headquarters and distribution center. We still expect our fiscal 2011 capital expenditure to be in the range of $30 million to $35 million.

For the quarter, UPT's were up slightly. The average transaction value increased approximately 4.5% and the average unit retail increased approximately 4%. For the year-to-date period, UPT's increased approximately 1.5%. The average transaction value increased approximately 3.5%. And the average unit retail increased 2%.

Buckle ended the quarter with 427 retail stores in 41 states compared to 419 stores in 41 states at the end of the second quarter of fiscal 2010. Additionally, our total square footage was 2,138,000 square feet as of the end of the second quarter compared to 2.092 million square feet at the same time a year ago.

At this point, I would like to turn the call over to Tom Heacock, our Corporate Controller and Treasurer.

Good morning and thanks for joining us.

I would like to start by highlighting the performance from our various merchandise categories that led to our 12.6% net sales increase for the quarter. Men's merchandise sales for the quarter were up approximately 13.5%. Strong categories included denim, woven and men's shirts, active apparel, accessories and footwear. Average denim price points increased from $86.20 in the second quarter of fiscal 2010 to $88.80 in the second quarter of fiscal 2011. For the quarter, our men's business was approximately 41% of net sales compared to approximately 41% last year, and the average men's price points increased approximately 7% from $45.25 to $48.35.

Women's merchandise sales for the quarter were up approximately 12%. Strong categories included denim, woven and knit tops, active apparel, accessories, and footwear. Average denim price points increased from $89.85 in the second quarter of fiscal 2010 to $92.95 in the second quarter of fiscal 2011.

For the quarter, our women's business was approximately 59% of net sales compared to approximately 59% last year, and average women's price points increased approximately 3.5% from $39.25 to $40.60.

For the quarter, combined accessories sales were up approximately 13% and combined footwear sales were up approximately 29.5%. These two categories accounted for approximately 9% and 5.5%, respectively, of second-quarter net sales, which compares to approximately 9% and 5% for each in the second quarter of last year.

Average accessory price points were up 1.5% and average footwear price points were also up approximately 1.5%.

For the quarter, denim accounted for approximately 38.5% of sales and tops accounted for approximately 34.5%, which compares to approximately 38% and 36.5% for each in the second quarter of last year.

Our private label business was flat as a percentage of net sales for the quarter and represented approximately 28% of sales.

During the quarter, we opened seven new stores and completed 10 substantial remodels. As of the end of the quarter, 289 of our 427 stores were in our newest format. For the full fiscal year, we still anticipate opening 13 new stores, including one already opened this month in Providence, Rhode Island and three for holiday. Planned new stores for holiday include stores in Natick, Massachusetts; Scottsdale, Arizona; and Mandeville, Louisiana. We also still anticipate completing 25 substantial remodels in total during the year.

And with that, we welcome your questions.

(Operator Instructions). Margaret Whitfield, Sterne, Agee.

Good morning and congratulations on the quarter. I wondered if you could give us a sourcing update in terms of what you are seeing out there in terms of average unit costs and what you are planning for price increases, both on your own brands and what you are seeing from the vendors. Thank you.

Good morning, Margaret.

On the -- as pretty much advertised in the previous call, the biggest increase were probably in some of our sweaters and outerwear, which were a couple of our smallest categories, which could have been anywhere in the higher single digits to low double digits increase in cost. The denim, you know, for this third to start of the fourth quarter, a lot of the brands still were holding price as before. We probably have -- in certain vendors with the private-label denim, we're seeing -- see mid-single-digit increase in some of the cost.

But in a lot of the other categories, would be fairly consistent with second-quarter increases on -- like the guy's wovens and some of those categories. Bob or Pat, do you have any other comments?

I think that covers it. I think the retail should be pretty consistent to what we have seen on the floor so far in Q2 and what we've just delivered.

Yes, I would agree with both of those statements.

And on real estate, are you planning an increase in the number of new stores for next year, Dennis? Are you finding some good locations?

We expect to have 10 to 12 stores, but we continue to look at opportunities and it's possible that we could increase that, but at this point, that is what we are projecting.

Thank you.

Travis Williams, Stephens.

Thanks for taking my questions. First off, I guess I just was hoping you could give us a little color on inventory growth. I guess if we take the inventory growth as reported and sort of turn it back into an inventory for foot growth number, it obviously is going to come up higher than your 9% comp growth you are talking about. And maybe the easiest way for you guys to sort of help us with that is to talk about what type of inventory growth could be attributable to the DTC business and/or maybe new store openings scheduled for Q3?

Okay. Well, the inventory growth, you know, we've been very conservative on our inventory growth over the last couple years and maybe even before that. And part of it is just on the flow of deliveries on product. But we are comfortable with the increases and feel good about starting the back-to-school season with that level of inventory. And Travis, I'm not sure -- you said something about DCC (sic)?

I'm just saying your direct-to-consumer business, your online business --

Oh, yes.

I'm assuming that a large part of the differential there from the way we're looking at it versus the way that you were able to look at it is that you've got a certain amount -- your DTC -- your e-commerce business is definitely growing quite a bit. Is that a fair assessment?

Yes, it was up over 20% for the year, so we're very happy with our online business, and we treat that just like our other stores, but in a different way.

And then my second line of questioning, maybe for Karen is just with respect to the incentive comp accruals and the equity stock comp expense -- I guess a little higher than expected on operating expenses from our perspective. And maybe that really relates to what you are up against from 2Q last year. Could you just kind of give us a little more color there?

Travis, you are exactly right. A year ago in Q2 was, at that point in time, based on our estimates, we had projected that we would not hit the second half of our target on the performance for the restricted stock. And so there were adjustments made in Q2 a year ago to adjust for that equity compensation on the restricted stock.

Okay. And then how might we think about that moving into 3Q and 4Q, given the larger accrual this quarter? Are you sort of back on track with that?

Yes. And kind of going back to fiscal 2010, in Q1, we accrued the full equity compensation, at that time still estimating we would hit both performance targets. And so then in Q2, when we changed those projections, we had a true-up from Q1 and Q2, so Q2 would have been the lowest equity compensation accrual of the year, but then you are correct. In Q3 and in Q4 a year ago, we continued to accrue the one-half equity compensation, because we did for the year fall short of that second performance target, and so one-half of those shares of restricted stock that were granted for fiscal 2010 were forfeited at the end of that fiscal year. But Q2 had the biggest impact because of the true-up from Q1. Does that make sense?

Okay, thank you.

Okay.

Nicole Shevins, Goldman Sachs.

Thanks. Good morning, guys. So we've noticed some price increases on some of your private label denim in the high single-digit range, the reclaim the denim and some of the BKE styles. What's the customer attitude been to that? And have you seen any price resistance, particularly on the reclaim side? Thanks.

Good morning, Nicole. No, our response to the reclaim has still been good, and we are not really seeing any price resistance to our product. And a lot of that new product is coming in August, which we're really not able to make comments on the August month.

Okay. And then Karen, we're happy to hear that you are staying on board.

Thanks. (multiple speakers)

Yes, we're excited to keep working with you. What drove your decision to stay with the Company?

I think just a lot of the -- I mean it is a great company and kind of just -- I'm just excited to still be here and made some adjustments in the finance department, so looking really forward to it.

Great, thanks.

Bill Dezellem, Tieton Capital Management.

Thank you. A couple of questions -- first of all, circling back to the bonus accrual and all the components of that, did it accelerate at all in the second fiscal quarter relative to the first fiscal quarter? Or the negative comparisons that we're seeing are all relative to the year-ago period?

The equity compensation was very similar in Q1 and Q2 of this year. Am I understanding that question correct?

Yes, and then in addition to the equity compensation, I believe there was just a cash bonus accrual?

The cash bonus accrual -- on the cash side, because it is tied to three performance measures, it's tied to comparable store sales and gross margin growth and growth in pre-bonus pretax net income. And so it relates directly to the nice performance in all three of those categories for the quarter and for the year-to-date period.

Okay. So did that bonus accelerate at all in Q2 relative to Q1?

No -- I mean it's the same -- I mean they would have been based all on the same criteria, so relatively, it's a consistent accrual for both quarters.

(multiple speakers). Thank you. And then the other question is, how would you characterize the selling environment in each month of your quarter, if you would, please?

Do we break that down, Karen?

I'm sorry, Bill, I'm not quite sure what the question is. Could you kind of restate that for me?

Sure. The selling environment in the three months -- the three individual months of the last quarter, would you please characterize your view of them, please?

You mean at -- like at the store and the customer attitude? I mean we report -- you've obviously seen our sales and our comps for each month of the quarter. I'm not quite sure what you are looking for there.

You're absolutely correct. So we've seen the numbers. But now we're looking for some qualitative perspective behind the numbers in terms of customer attitudes, traffic in the malls, if you had to work harder or less hard to get the sales that you had in any of the months -- those types of things.

Well, I think the customer into our second quarter had a good response to our product. Markdowns were down. Our average sale was up slightly, and so I would say as much as anything, it would be pretty much business as usual.

Thank you.

John Kiernan, Cowen and Company.

Thanks for taking my question. So nice performance in terms of AUR throughout the quarter. Is there opportunity -- is there optimism towards keeping AUR's higher as we enter 2012 and the raw material cost inflation eases? And what do you think the opportunity is in terms of merch. margin for next year, given some of the easing we are seeing, at least in terms of cotton?

Well, I think it will certainly give us a little boost there and such. But we continued to have very strong merchandise margins, so as we've said before, we will continue to work and try and improve on that, but we're not making projections that will be able to grow that.

Okay. In terms of G&A and leverage on that line in the back half of the year, do you think we could potentially -- even though your comps that you're cycling get a little more harder on the top line, do you think we could see some more leverage on that line as we enter the back half of the year?

Karen, do you want to answer that one?

Sure. I mean the one thing -- in the back half of the year in the G&A, at this point in time, based on our estimates through the end of the second quarter, as I mentioned earlier, we will be accruing the full equity compensation, so that will be greater than Q3 and Q4 a year ago when we continued to accrue at just the first performance target.

I don't know, Tom, if you have anything else to add on the G&A, but that's probably the biggest difference I see.

I mean I would agree. I think looking at the second quarter, the reason that G&A was up as a percentage of sales was because of the equity compensation expense, and the comparisons get easier that way in the second half of the year.

Okay, thanks. And then I guess you guys obviously have a phenomenal track record of deploying -- of returning cash to shareholders, particularly in the form of special dividends which you've been doing almost every year since 2006. Is there any reason to think that you would have a change in attitude towards doing that given some of the uncertainty in the financial markets right now? Or any thoughts on cash deployment in the back half of the year?

John, we will probably, as usual, review that with the board in September. And outside of that, I don't really have anything to add at this point.

Okay. Thanks for taking my questions.

Adrienne Tennant, Janney Capital Markets.

Good morning. Let me add my graduations on a solid quarter.

My first question is, it's actually -- did you see any back half of July slowing? We had heard that just traffic across the mall specifically with a lot of the teen retailers that had set their full-price [flowed] and perhaps maybe didn't have as much markdown. So I know that you don't run a heavy markdown business, but generally, did you see that type of cadence in July? And then secondly, is the inventory position -- do you feel in a better place to promote a little bit more say over Black Friday or during key periods to keep up with the promotional cadence that is happening across the teen in the contemporary landscape? Thank you.

Okay. Well we don't really comment on the -- by weeks in July. As I mentioned, it was pretty much as usual business for us. And for the quarter, our markdowns were lower.

And, our guest is really driven by newness, fashion and such, and so we have no planned additional -- no plans for aggressive promotions for Black Friday or any other part of the season at this point.

Okay. So then, just thinking about sort of historically how sort of your inventory growth has been at a pace slower than sales and you have had great productivity out of your inventory base. Should we think about this as sort of fuel for greater sales generation? I'm just trying to get a little bit of comfort -- the difference between sort of seeing the inventory position now versus where you have been.

Adrienne -- oh, sorry, Dennis -- just a couple comments, Adrienne. A little bit for us is the flow of the product into the store. Because we don't bring in a floor set at the beginning of the season and leave it there. We receive new product every day Monday through Friday, and our stores are being replenished on an ongoing basis. So for us, some of that can be a little bit of timing of when the product flows through our distribution center and out to the stores.

Okay.

Yes, I think going back and looking at the last couple years at the end of the second quarter, we were pretty tight on inventory. And last year, total inventory was up about 2%, and I think 3% the year before, so it's on top of a couple of years at least of pretty conservative inventory management.

Okay, yes, exactly. Okay, so maybe -- okay. That's great. Is there any differences in sort of your in-transit portion -- in-transit portion of the inventory perhaps?

I don't think there's really anything unusual there as far as compared to a year ago. I would think it would pretty much the same; wouldn't you, Karen, Tom?

Yes.

Okay. Very good. Best of luck in the back of the year.

Thank you much.

Thanks so much.

Rob Wilson, Tiburon Research Group LLC.

Thank you. Karen, you mentioned that there were some changes to the finance department, and I would like to follow up on that. Could you share with us what those changes were?

I guess the main change would be just adding some staff and realigning some of the duties. And with -- in Tom's new position as not just Corporate Controller but also Treasurer, he has helped a lot in taking over the duties regarding like the investments, which has been a big -- just a great help to me. So little changes that make a nice difference.

Okay, well, glad to see you are staying. Thanks and good job.

(Operator Instructions). [Simeon Segal], JPMorgan.

Hi, good morning. This is Simeon calling in for Brian. So the improvement in gross margin I think came to be -- it was partially offset by roughly 50 bips of the increased distribution. I does want to get a feel for how much of that goes forward. I know the DC went live in third quarter and a portion of that was shipping; so if you could give any color there for the back half of the year?

And then just to remind us, what is your -- the level of cash that you look to maintain just for on the balance sheet for comfort? Thanks.

Karen, do you want to address the DC cost?

I think on the 50 basis points of increase in the distribution, it was split pretty evenly, I think about half and half between shipping costs and depreciation related to new DC. So in the third quarter, we had a partial quarter, about a half a quarter of depreciation last year, so that comparison gets easier. And then in the fourth quarter, it will be a full-quarter depreciation a year ago, so that really goes away.

And then on the shipping, I think we've seen growth in that item, and it's really a lot of it is just balancing inventory between the stores and doing a little bit more shipping that way. Some of it is fuel surcharges and increased rates, but we really still feel like moving the inventory and get it in a position where it can sell and helping keep our stores in stock; it's a good investment to be able to sell at a regular price versus a markdown. So I don't know that (technical difficulty) for that to ease. The third quarter will maybe moderate a little bit, but probably pretty similar.

Okay, great.

And traditionally on the cash, we looked at a comfort level of somewhere in the $100 million range.

Okay, great. And then lastly, did you give any color on where you'd like to end the third quarter in terms of inventory?

I would estimate that it would probably end up somewhere in the high single digits to low double digits. As I mentioned, we feel good about the inventory as we go into the third quarter.

Great. All right, thanks a lot.

Margaret Whitfield, Sterne, Agee.

Yes, one of my questions was just asked, but I also wondered about the tops declining to 34.5%. I wondered if you thought there were any new brands that would pick that business up from current levels.

You know, we're doing a lot of development, a lot of private label as well as our brands, and just the great selling on denim and some of the increase in shoes and other categories put some heat on it, so we have seen some nice growth on top of great growth in the past. Bob or Pat, do you have anything else to add?

Yes, not new brands necessarily, but a lot of new looks. There's new fashion that's coming in. There's new necklines, new bodies, and so I think the top category -- we've got a good base to build off of. And I think like Dennis said, the accessories and the footwear growing so much just kind of brought that down kind of inherently.

And any special promotions coming up? Excuse me. Go ahead.

I was just going to add on the women's side, we've had some nice response to our jackets, and that's in a different category from our tops. But sometimes on the early sweaters, compared to a lightweight jacket, those might trade sales and show up in a different area.

And any promotions planned for this month, August or next September?

Bob, do you want to address that?

Sure. Promotions -- kind of in The Buckle way, we are still working with GWP's to kind of help drive sales. We usually try to set a price there to get the GWP that allows them to get new items. We have a roar GWP coming in where they're going to be getting an iPhone-type accessory. And then we have our annual denim event, where we really kick off the denim for the holidays and to Wear Now, and that starts in October.

And the roar is in September?

Yes, the roar will be September -- probably September 19.

And anything this month?

We're just finishing up a promotion from Rock Revival -- again, a GWP promotion where we are giving away a bag. And we don't have final results there yet, but that started on July 25 and is just ending now.

Thank you.

Rob Wilson, Tiburon Research Group LLC.

Yes, just a small question. When you talk about a substantial remodel, is that at the end of the lease term? And do you relocate the store sometimes within the mall?

We do both. Sometimes if we want to improve location or say we add some square footage to that store, it's possible we would relocate the store, but probably the majority of them are remodels in place where we go into a temp space during the remodel, and then move back into our space. And it's pretty much like putting a new store -- be like the new store expense that we would do, so it is comparable cost as a new store. And then the small remodels in smaller markets could be -- would be -- substantially less money invested.

And maybe one more longer-term question -- is there anything that would preclude you from maintaining a 20% operating margin going forward, maybe over the next couple years? Are there any structural issues that would prevent you from continuing to do that?

No, I mean it comes down to -- we feel we have very talented merchandising staffs and supported by a great sales team in the stores that help execute it. But -- and we think our teams know our guests pretty well or understand what they're looking for, which is constant newness. And so as long as we keep executing what we do and do our best to eliminate mistakes, we have the potential to maintain those margins.

Okay. Well, thank you.

Ladies and gentlemen, there are no further questions at this time. I'll now turn it back to management.

All right. We want to thank everyone for participating in the call today, and we appreciate your interest and your questions.

Ladies and gentlemen, this conference will be available for replay after 11 AM Eastern today through September 1 at midnight. You may access the AT&T Executive Replay System at any time by dialing 1-800-475-6701, and entering the access code 212426. International participants may dial area code 320-365-3844. (Operator Instructions).

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