Buckle Inc (BKE) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

Members of the Buckle 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 third quarter, which ended October 29, 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. 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 projected results expressed or implied therein would 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 call should not be relied upon as the information may be inaccurate. I'd now like to turn the conference over to our host, Karen Rhoads. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining our call. Our November 17, 2011 press release reported that net income for the third quarter ended October 29, 2011 was $38.3 million, or $0.81 per share on a diluted basis, which was up 11.6% from net income of $34.4 million, or $0.73 per share on a diluted basis for the prior year third quarter that ended October 30, 2010.

Year-to-date, our net income for the 39-week period ended October 29, 2011 was $95.4 million, or $2.02 per share on a diluted basis, which was up 11.9% from net income of $85.2 million, or $1.81 per share on a diluted basis for the 39-week period that ended October 30, 2010. Net sales for the 13-week third quarter increased 12.4% to $273.4 million, and that's compared to net sales of $243.3 million for the prior year third quarter. Our comparable store sales for the quarter increased 9.1%, and our online sales, which are not included in comparable store sales, increased 25.4% to $18.9 million.

Net sales for the 39-week year-to-date period increased 12.2% to $725.9 million, and that is compared to net sales of $646.8 million for the same period in our prior year. Comparable store sales for the year-to-date period increased 8.7%, and online sales, which, again, are not included in comparable store sales, increased 22% to $50.3 million. Gross margin for the quarter was 43.4%, down approximately 10 basis points from 43.5% for the third quarter last year. The decline was driven by a 70-basis-point reduction in merchandise margins and by increased distribution costs, which were partially offset by the leveraging of certain occupancy costs, which had about an 80-basis-point impact.

For the year-to-date period, gross margin was 42.5%, about even with the same period a year ago. A [15]-basis-point reduction in merchandise margins and increased distribution costs were offset by the leveraging of certain occupancy costs which had about a 50-basis-point impact. The increase in distribution costs for both the quarter and the year-to-date period was primarily attributable to additional depreciation expense related to our new distribution center that went live during the third quarter of last year and also to increased shipping costs.

The decline in merchandise margins for the third quarter was the result of a one-time adjustment for liquidated merchandise during the period, a slight reduction in merchandise margins due to increased costs in certain merchandise categories, as well as a slight reduction as a percentage of net sales in our private label business, and continued increased redemptions for our Primo Card loyalty program. Selling expense for the quarter was 18.3% of net sales, which was an increase of approximately 20 basis points from the third quarter of fiscal 2010. The increase was driven by increases in store payroll expense, and expense related to the incentive bonus accrual, which were partially offset by the leveraging of certain other selling expenses.

For the year-to-date period, selling expense was 18.6% of net sales, about even with the same period in fiscal 2010. Increases in store payroll expense and expense related to our incentive bonus accrual were offset by the leveraging of certain other selling expenses. General and administrative expenses for the quarter were 3% of net sales, down approximately 10 basis points from the third quarter of fiscal 2010. The reduction was driven by the leveraging of certain general and administrative expenses, which was partially offset by an increase in equity compensation expense.

For the year-to-date period, general and administrative expenses were 3.4% of net sales, which was an increase of approximately 10 basis points from the same period in fiscal 2010. The increase was attributable to an increase in our equity compensation accrual. Our operating margin for the third quarter was 22.1% compared to 22.3% for the third quarter of fiscal 2010. For the year-to-date period, our operating margin was 20.5%, which compares to 20.6% for the same period in fiscal 2010. Other income for the quarter was $0.3 million which compares to $0.5 million for the third quarter of fiscal 2010. And other income for the year-to-date period was $2.4 million, which compares to $2.9 million last year.

Income tax expense as a percentage of pretax net income was 36.8% for the third quarter of fiscal 2011, and that compares to 37.3% in the third quarter of fiscal 2010, bringing third quarter net income to $38.3 million for fiscal 2011 versus $34.4 million for fiscal 2010, an increase of 11.6%. 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 $95.4 million compared to $85.2 million for fiscal 2010, an increase of 11.9%.

Our press release also included a balance sheet as of October 29, 2011 which included the following; inventory of $140.8 million, which was up approximately 26.5% from inventory of $111.2 million at the end of the third quarter of fiscal 2010, and total cash and investments of $127.5 million, which compares to $205.5 million at the end of fiscal 2010, and $235.7 million at the same time a year ago. And please remember that at quarter end, cash and investments is lower than the same time a year ago due to the payment of a $106.7 million special cash dividend during the third quarter of this year, and last year, the Company paid a special cash dividend during the fourth quarter.

As of the end of the quarter, inventory on a comparable-store basis was up about 20%, 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. We also ended the quarter with $174.6 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $8.3 million, and depreciation expense was $8.1 million. For the year-to-date period, our capital expenditures were $31.5 million and depreciation expense was $23.4 million.

Year-to-date capital spending is broken down as follows; $28 million for new store construction, store remodels, and store technology upgrades, and $3.5 million for capital spending at the corporate headquarters and distribution center. We currently expect our fiscal 2011 capital expenditures to be in the range of $33 million to $35 million. For the quarter, our units per transaction increased approximately 1% and the average transaction value increased approximately 7%, with the average unit retail increasing approximately 6%. For the year-to-date period, UPTs increased approximately 1%, the average transaction value increased approximately 4.5%, and the average unit retail increased approximately 3%.

Buckle ended the quarter with 429 retail stores in 43 states compared to 421 stores in 41 states at the end of the third quarter of fiscal 2010. Additionally, our total square footage was 2.147 million square feet as of the end of the third quarter, compared to 2.101 million square feet at the same time a year ago. Thanks for listening to the financial part. And I will now turn the call over to Tom Heacock, our Corporate Treasurer and 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 12.4% net sales increase for the quarter. Men's merchandise sales for the quarter were up approximately 11.5%, with strong categories including denim, woven shirts, active apparel, outerwear, accessories and footwear. Average denim price points increased from $84.50 in the third quarter of fiscal 2010 to $87.95 in the third quarter of fiscal 2011. For the quarter, our men's business was approximately 38% of net sales compared to approximately 38% last year, and the average men's price points increased approximately 8% from $52 to $56.30.

Women's merchandise sales for the quarter were up approximately 12.5%. Strong categories included denim, woven and knit tops, sweaters and footwear. Average denim price points on the women's side increased from $92.10 in the third quarter of fiscal 2010 to $98.55 in the third quarter of fiscal 2011. For the quarter, our women's business was approximately 62% of sales for both this year and last year, and average women's price points increased approximately 6% from $46.55 to $49.30. For the quarter, combined accessories sales were up approximately 6.5% and combined footwear sales were up approximately 10.5%.

These two categories accounted for approximately 8% and 5%, respectively, of third-quarter net sales, which compares to approximately 8% and 5% for each in the third quarter of fiscal 2010. Average accessory price points were down slightly and average footwear price points were up approximately 5%. For the quarter, denim accounted for approximately 50% of sales, and tops accounted for approximately 32%, which compares to approximately 48.5% and 33% for each in the third quarter last year. Our private label business for the quarter was down slightly as a percentage of net sales due to the strength and variety of selection in our branded merchandise and represent approximately [30%] of sales.

During the quarter, we opened two new stores in Providence, Rhode Island and Natick, Massachusetts, our first in each state, and completed seven substantial remodels. As the end of the quarter, 298 of our 429 stores were in our newest format. For the full fiscal year, we opened 13 new stores, which includes the opening during the first week of November of our final two new stores of the year, in Scottsdale, Arizona and Mandeville, Louisiana. We also still anticipate completing 25 substantial remodels in total during fiscal 2011. With that, we welcome your questions.

(Operator Instructions) And our first will come from KeyBanc Capital Markets with Edward Yruma. Please go ahead.

Hi, thank you for taking my question. This is Jane in place of Ed. Congratulations on a great quarter. I just had two quick questions. One was, what was the composition of the 20% increase in comp store inventory in terms of units versus cost?

Great question, Jane. On the inventory, in total, as we mentioned, inventory was up 26.5%, with the units being up about mid-teens and the rest of it being attributable to cost. And part of that cost shift would be a higher percentage of inventory in our denims at the end of the quarter compared to a year ago, as well as some of the shifts into the brands that are represented there. I don't know, Dennis, if you have anything else you want to add to that?

I think that pretty well says it right now.

Okay. And how should we think about sourcing AUC costs in Q2 and early next year? I thought that you had said you saw a slight increase in AUC costs this past quarter because, I guess, you had more branded?

Yes. A bigger makeup of our brands for both men's and women's denim. And some small increases on some of our private label denim costs, as well.

Okay. So you were seeing that also on private label side?

To a small degree.

So should we expect to see that increase a little bit more in Q4?

I think you're going to see it pretty consistent with Q3.

Oh, okay. Perfect. And just my last question was, what opportunities exist during the holiday period in terms of product and what we can focus on to drive sales in Q4?

Last year, we felt like we missed some business by being too low on our denim inventory, as well as certain top categories, and also in the men's outerwear, we did not have everything shipped to us last year, so we improved our inventory position there. So we felt that our inventory -- we wanted to capitalize on some of opportunities for holiday on several of those categories.

Okay. Perfect. Thank you so much.

You're welcome.

And next we will go to the line of Nicole Shevins with Goldman Sachs. Please go ahead.

Hi, good morning, everybody.

Good morning.

So just wanted to follow-up on the inventory question. They're up 27%, which is heavier than your sales trends and a little heavier than you guys typically run the business with. So just wanted to see if you could talk a little bit more about what's going on there, and could we expect to see any incremental promotions this holiday in light of the higher inventory levels?

First, Karen, do you want to address the comparison?

Sure. Nicole, that is a good question, but looking back at our inventory, kind of as Dennis alluded to on the last question, we had had inventory fairly lean the past couple of years and, in fact, on a comparable-store basis, the past two years combined inventory was down about 14% on a comp-store basis. And so this year, the up 20% on a comp-store basis as compared to a two-year down of 14%. And then when you look at the difference between the units and the added cost component of it, feel pretty good about where the inventory is.

And we have just the same promotions and expectations at this point as last year as far as for Good Friday and the holiday season.

Okay. And then just a follow-up, on the inventory liquidation that you took, can you just mention what category that was in? And is that something that you typically do?

Sure. It is all categories, so it isn't one specific category, and as we do typically do, the timing was a little different this year. Usually, the cleanup is more at the end of the year. But it's product that isn't necessarily markdown or aged inventory but product that just isn't sellable on the sales floor for a variety of reasons.

And then what made you shift the timing this year, then?

I think just -- it just worked out to be pretty good timing. I don't know if there was a specific reason.

It's part of the liquidation process took a little longer.

Yes, okay. Thanks, Dennis

Okay. Thanks, guys.

You're welcome.

And next we go to the line of Simeon Siegel of JPMorgan.

Hi, good morning. So just to stay on inventory for a little bit longer, sorry. In terms of what from started the quarter to the end, I think guidance was a little bit lower. I think it was high-single to low-double and then it sounded like the cost guidance, as well, may have been a little different? Did anything shift in terms of the way of you're looking at it or something change over the course -- we saw the monthly results, but just any color around there of why the change and if that's something we should be considering going forward?

I think part of it is that we're seeing a little bit longer lead time, so analyzing the flow of it can vary from -- just depending on the shipping of some of that product, as well as the response of some of our brands and such have been strong and been continuing to go after those products. And as Karen mentioned, the units are not up as much as the dollars of the product, so we are comfortable with our inventory at this point.

And part of it, like Dennis said, is the flow of the product. In fact, when I looked at the last two weeks of the quarter, the pieces received during those last two weeks were up 34% from the same two-week period a year ago. So part of the inventory flow was pretty strong towards the end of the quarter.

And might the cost change be anything in terms of mix? I know it sounds like the larger pricing, we had denim and then jackets and sweaters, you had called out last quarter. Is that, as we are in this season, does that maybe impact why the cost is a little higher?

Yes. Yes, sir. And we've -- one example would be like gal's wovens, our units are up very low percentage, but the dollars are up over double-digits just because we are carrying some higher price point and more fashionable goods there.

Great. All right, thanks.

You're welcome.

And next will go to Sterne, Agee with -- excuse me, Margaret Whitfield from Sterne, Agee. Please go ahead.

Good morning, everyone. Could you comment on what product was involved in this inventory liquidation that you took in Q3? And also, I didn't hear -- I know you said the private label number, it wasn't clear. What percent has that gone down to and where do you see it trending? And finally, having just visited your Providence store, I was wondering how those two new stores are performing in the Northeast, and if there are any other stores planned to open in that region next year?

Well, as Karen mentioned, the liquidated product was from all categories. Some was light faded, some was defective for other reasons, and it was just kind of the normal part of business that got taken in a later quarter than usual. The private label is 30%, roughly, now. And the brands have done well on both men's and women's and has taken a bigger shot of that at the moment. And that -- we see that from time to time, that that's going to vary just depending on how strong the brands are doing and the success there. In the Eastern stores, we've had good openings there and we'll evaluate that future growth in those areas after the holiday season.

Thanks.

And next from the line of John Kiernan with Cowen. Please go ahead.

Good morning, guys. Thanks for taking my question.

Yes.

So I want to focus a little bit on merchandise margin, how you see that kind of evolving into next year, as the sourcing environment, at least in terms of cotton, shows some improvement? You guys, clearly, have some pricing power in denim and have raised prices. How do you see the merchandise margin evolving as the sourcing environment, at least in terms of raw material costs, seems to be improving?

I would say for the first half of the year, I don't know that we saw a lot of increase last year. And, naturally, in a lot of different categories this year, we're not seeing the pressure as we did for third quarter. We'll still have a little bit of denim coming in on the private label side, with a little bit of increased cost over a year ago. But overall, we feel that the climate for sourcing is good, and we would expect it to be a little improvement over last year, but similar to the first half of last year.

Okay. And then the SG&A dollar growth in Q2 and Q3 -- you've, obviously, put up some really nice top line numbers. But I guess SG&A dollar growth, growing in excess of sales in both quarters, do you think is more of an opportunity to kind of leverage that spend going forward? Is there's anything in SG&A that is really the major contributor to that? How do you see that evolving next year going forward?

Well, I think those are categories that we continue to look at. The costs, both variable and fixed costs, the selling does have a lot of variable costs which are going to flow a little bit more directionally with sales versus the SG&A. And this year, if you remember, we talked about it at the end of Q2 -- a year ago, by the end of Q2, we were estimating that we were not going to achieve the second target on the vesting of our restricted stock grants for fiscal 2010. So there was a less accrual related to that. And then in this year, in 2011, we continued to accrue that equity compensation at the full vesting levels of the 2011 grant.

So that would be a little bit of the added costs of this year that's in there. But also, on the incentives, on the cash piece of the incentive compensation, that's driven by performance in three different categories -- comparables store sales growth, gross margin growth, and pre-bonus pre-tax net income. And so with those three categories all performing stronger than a year ago, there's additional dollars in that accrual as well.

Okay. That's helpful. Thanks, guys.

And next we'll go to the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Thank you. I wanted to circle back also to the inventory but approach it from a little different direction. Have you felt the last couple of quarters, or maybe the over the course of this year, that your inventory has continued to be a little bit light and that you have missed sales, as you felt like you did in the Christmas season last year?

Yes, I would say -- I think we've been much closer to being right. You're never, never perfect on it. You always want to have more of the winners, but if we had to make a call out, I'd say in some of the categories, we were a little light on product.

So you, to some degree, you've been playing catch-up for the course -- over the course of the last year and you're feeling like now you are caught up? Is that what we're hearing?

Yes, that is correct.

And then second question, would you go into a bit more detail on the merchandise margin? You mentioned some things that caused downward pressure this quarter. I didn't fully grasp all of them. Maybe add some more color on them also, please?

Okay. Well, a component of it is we still see -- continue to see a little bit of increase in our Primo Card redemption. There were some cost pressures, just in certain categories, kind of as we had been talking about all year long with cotton prices. Then there was the liquidated merchandise that we took in there. Tom, am I missing any component of that there?

And then I think just a slight decrease as a percentage of sales in private label were the main factors that drove the merchandise margins. But the biggest factor was the liquidated merchandise.

Thank you. And given that that liquidated merchandise, just the timing was different than in prior years, would you please call out how many basis points that actually in and of itself represented?

It was about half. It represented almost half of the shift in the merchandise margin.

Great. Thank you all.

Thank you.

(Operator Instructions) And we'll go to the line of Travis Williams with Stephens. Mr. Williams, your line is open.

Sorry. My line was muted. Thanks for taking my question, guys. To follow up on the gross margin discussion, could you talk to us a bit about the transition to the new DC and what we might see over the next year or so in terms of your ability to scale that as the business grows? I would assume you've got a little bit of margin upside there as we lap that and then begin to scale that capacity?

Karen, do you want that?

Yes, I was going to say, we have, in the fourth quarter, we do fully anniversary the added depreciation and occupancy costs for the distribution center, and I don't think at this point in time we're ready to talk about any performance and any leverage regarding the distribution center.

Okay. And then my follow-up question, or second question, if you look at the eCom business, it has been growing very nicely, in fact, accelerated this last quarter. Can you talk a little bit about the composition of your direct business over the online channel, perhaps discuss the split between maybe full-priced selling and true clearance merchandise? And maybe put that in the context of -- from a margin standpoint? That would be helpful.

I don't know that we split that out to study it that way. Do we, Karen?

We do look at some of those categories, but the online store just sells such a full representation of the entire product that I don't think that that's anything that we specifically want to call out.

I guess maybe another way to go at it, just more broadly speaking is, typically online gross margins are in line with stores if they're selling a fair mix of full price. Is that a fair statement to say that you're online margins, at least in the gross margin line, are similar, or is it much more of a clearance channel?

No, I would say they are similar.

Okay, thanks.

Thank you.

And there are currently no further questions in the queue. Please continue. (Operator Instructions)

All right. If there are no further questions, we do thank everyone, again, for joining the call today. We appreciate the opportunity to share our results with you, and have a good day.

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