Buckle Inc (BKE) 2012 Q2 法說會逐字稿

Welcome to the Buckle conference call. Members of the Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Vice President of Finance and Chief Financial Officer; Pat Whisler, Vice President of Women's Merchandising; Bob Carlberg, Vice President of Men's Merchandising; Kyle Hanson, Corporate Secretary and General Council; and Tom Heacock, Treasurer and Corporate Controller.

As they review the operating results for the second quarter which ended July 28, 2012 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 statement, even if experiences or future changes make it clear that any projected result expressed or implied therein will not be realized.

Additionally, the Company does not authorize the reproduction or dissemination of transcript or audio recording of the Company's quarterly conference call without expressed written consent. Any unauthorized reproduction or recording of the call should be relied upon as information may be inaccurate. At this time this conference is being recorded and I would now like to turn the conference over to our host, Karen Rhoads. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining the call. Our August 16, 2012 press release reported that net income for the second quarter that ended July 28, 2012 was $23.2 million, or $0.49 per share on a diluted basis. That was down 1.4% from net income of $23.6 million or $0.50 per share on a diluted basis for the prior year's second quarter that ended July 30, 2011.

Our year-to-date net income for the 26 week period that ended July 28, 2012 was $61 million or $1.28 per share on a diluted basis, which was up 7% from net income of $57 million or $1.21 per share on a dilutive basis for the 26 week period that ended July 30, 2011.

Our net sales for the 13 week second quarter increased 1.5% to $215.5 million compared to net sales of $212.4 million for the prior year's second quarter. Comparable store sales for the quarter decreased just 8/10 of a percent and online sales, which are not included in comparable store sales, increased 12.1% to $16.0 million.

Net sales for the 26 week year-to-date period increased 5.9% to $479.2 million compared to net sales of $452.5 million for the same period in the prior year. Comparable store sales for the year-to-date period increased 3.6% and online sales, which again are not included in comparable store sales, increased 13.7% to $35.7 million.

Gross margin for the quarter was 40.1%, down approximately 90 basis points from (technical difficulty) [41]% for the second quarter last year. The decline was driven by the deleveraging of certain buying, occupancy and distribution costs, which had about a 75 basis point impact, and by a 25 basis point reduction in merchandise margins which were partially offset by a reduction in expense related to our incentive bonus accrual.

For the year-to-date period gross margin was 41.9%, down approximately 10 basis points from 42.0% for the same period last year. The decline was driven by a slight reduction in merchandise margins.

Selling expense for the quarter was 19.2% of net sales, which was a reduction of approximately 80 basis points from the second quarter of fiscal 2011. The reduction was driven by decreases as a percentage of sales and expense related to the incentive bonus accrual and bank card fees.

For the year-to-date period selling expense was 18.3% of net sales which was a reduction of approximately 50 basis points from the same period last year. The reduction was driven by decreases as a percentage of net sales and expense related to the incentive bonus accrual and bank card fees.

General and administrative expense for the quarter was 4% of net sales, up approximately 30 basis points from the second quarter of fiscal 2011. Increases in expense related to our accrued vacation pay and equity compensation expense were partially offset by reductions as a percentage of net sales and expense related to the incentive bonus accrual and certain other general and administrative expenses.

For the year-to-date period general and administrative expenses were 3.9% of net sales, up approximately 20 basis points from the same period last year. Increases in expense related to accrued vacation pay and equity compensation expense and these expenses were partially offset by reductions as a percentage of net sales and expense related to our incentive bonus accrual and against certain other general and administrative expenses.

Our operating margin for the quarter was 16.9% compared to 17.3% for the second quarter of fiscal 2011. For the year-to-date period our operating margin was 19.7% compared to 19.5% for the same period last year. Other income for the quarter was $400,000 which compares to about $500,000 for the same period of fiscal 2011. And other income for the year-to-date period was $2.2 million compared to $2.1 million last year.

Income tax expense as a percentage of pre-tax net income was 36.8% for the second quarter of both fiscal 2012 and 2011, bringing net income to $23.2 million for fiscal 2012 versus $23.6 million for fiscal 2011.

Year-to-date income tax expense was also 36.8% for both fiscal 2012 and 2011, bringing year-to-date net income to $61 million for fiscal 2012 compared to $57 million for fiscal 2011, an increase of 7%.

Our press release also included a balance sheet as of July 28, 2012 which included the following -- inventory of $124.5 million which was down approximately 2% from inventory of $126.8 million at the end of the second quarter of fiscal 2011. In total cash and investments of $233.4 million which compares to $236.5 million at the end of fiscal 2011 and $198.1 million at the same time a year ago.

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

We also ended the quarter with $173.3 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $10.8 million and depreciation expense was $8.3 million. For the year-to-date period our capital expenditures were $19.6 million and depreciation expense was $16.2 million.

Year to date capital spending is broken down as follows -- $18.1 million for new store construction, store remodels and store technology upgrades and $1.5 million for capital spending at the corporate headquarters and distribution center. We currently expect our fiscal 2012 capital expenditures to be in the range of $30 million to $34 million.

For the quarter UPTs decreased approximately 1%. The average transaction value increased approximately 3.5% and our average unit retail increased approximately 4.5%. For the year-to-date period UPTs decreased approximately 1.5%, the average transaction value increased 5.5% and the average unit retail increased approximately 7%.

Buckle ended the quarter with 439 retail stores in 43 states and that is compared to 427 stores in 41 states at the end of the second quarter of fiscal 2011. Additionally, our total square footage was 2.196 million square feet as of the end of the quarter compared to 2.138 million square feet at the same time a year ago. And at this time I would 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 1.5% net sales increase for the quarter.

Men's merchandise sales for the quarter were up approximately 4% with strong categories including denim, knit shirts, active apparel and accessories. Average denim price points decreased from $88.80 in the second quarter of fiscal 2011 to $87.80 in the second quarter of fiscal 2012. For the quarter our men's business was approximately 42% of net sales compared to approximately 41% last year and the average men's price point increased approximately 2% from $48.35 to $49.25.

Women's merchandise sales for the quarter were down just slightly with strong categories including casual bottoms, woven tops, active appear, accessories and footwear. Average denim price points increased from $92.95 in the second quarter of fiscal 2011 to $94.45 in the second quarter of fiscal 2012. For the quarter our women's business was approximately 58% of net sales compared to approximately 59% last year and the average women's price point increased approximately 3.5% from $40.60 to $42.10.

For the quarter combined accessories sales were up approximately 15% and combined footwear sales were up approximately 7%. These two categories accounted for approximately 10% and 6% respectively of second quarter net sales which compares to approximately 9% and 5.5% for each -- for the same period last year. Accessory price points were up approximately 13.5% and average footwear price points were up approximately 11%.

For the quarter denim accounted for approximately 36% of sales and tops accounted for approximately 34%, which compares to approximately 38.5% and 34.5% for each in the second quarter of last year.

Our private label business was up as a percentage of net sales for the quarter and represented approximately 30% of sales compared to approximately 28% last year.

During the quarter we opened eight new stores and completed six substantial remodels. As of the end of the quarter 318 of 439 stores were in our newest format. For the full fiscal year we still anticipate opening 10 new stores including one remaining for September and one for holiday, and we also anticipate completing 21 substantial remodels in total and several smaller remodels during the fiscal year. And with that we will open it up to your questions.

(Operator Instructions). Paul Alexander, Bank of America.

Could you give us a sense of how similar you are thinking fall product and trends are going to be to spring? Do you think fall will be an opportunity to break from the trends you saw in spring and re-accelerate things with new products or new brands? Or do you think you are going to face of the same kind of headwinds you did through spring or will there be any new dynamics we need to consider? Thanks.

Good morning, Paul. I guess we don't really make forward statements on that, but we feel good about the product arriving in July and the response to the new merchandise from our teammates and guests at the end of the second quarter. So we feel good about fall and look to improve on things.

Thanks. And just one follow up on inventory. You guys seem to get through that a little better than we expected. Can you talk about how you did that? Did you send any inventory back to the vendor?

No, I think our team did it -- was constantly reviewing and planning and working and they are very talented at knowing when to back off on certain things and move forward when we need to. And I mean if there was any product sent back it was a very small percent of the total inventory. So it is just a complement to our teams and managing the inventory.

Great, thank you.

Margaret Whitfield, Sterne, Agee.

I wonder if you could comment a little more on what's going on with the women's denim business which has been weaker than men's and for the last several months. Is it a function of warm weather arriving early in quarter two or limited color denim or just what do you think is going on there in your women's denim business, and what is the outlook?

Well, Margaret, good morning. As we mentioned, we were getting good response from the teammates at the end of the quarter on new receipts. I definitely think last year was a very good year for denim and we were very strong because probably of the cooler weather, we usually don't speak on the weather, but it was a plus and you had kind of the opposite this summer with the extreme heat. We might have missed a little opportunity on the color, but we think the team did a pretty nice job with it. We are looking forward to the fall season.

Wondered if there was any new promotions that you've planned for quarter three to drive traffic, Dennis. And also finally for Karen, what is the minimum cash that you would like to have on the books as we head into the back half?

Bob, do you want to take the promotion question?

On the promotion side we have -- in third quarter we will have a Fox promotion, that has gotten a little bit bigger on the women's side. And then we will have our annual October denim promotion which is always a good kickoff for us getting into holiday.

Karen?

On the minimum cash, I don't know that I can state specifics there. We will review that with the Board again in September at the Board meeting and provide them at that point in time our cash requirements and cash flow projections and go from there.

What is the date of that meeting, Karen?

That's Monday, what, the 17th or so?

Yes.

Thank you.

September, I'm sorry.

September 17, right. Thank you.

Simeon Siegel, JPMorgan.

I was wondering if you could share how you are thinking about the comp metrics going forward. I know discussions typically come back to the impressive run you have had in increasing price and trying to understand where they go from there.

So, you spoke about the promotions in terms of opportunities to drive traffic. I know accessories have been doing well. Does that create an opportunity maybe to drive incremental UPTs? And then just looking at the back half gross margins, when you are accounting for the leaner inventory positioning you guys have and AUC benefits you should get, I know you saw merchandise margin declines in the back half of last year, so how do you look at any potential recapture there? Thanks.

As we stated, we don't really make forecasts on the future events. We will approach the inventory as we have over the years and make investments where we think there is continued growth, but still kind of manage it in what we would consider a fairly conservative approach. Our stores continue to become stronger with our management and sales team and I think our merchandisers are doing well. So we are looking -- as I mentioned before, we are looking forward to fall, but don't have any other specifics at this time.

And then just a quick follow-up. So I know you mentioned the private label increased this year over last year. Do you guys have a target objective there? I don't remember. And then out of the remaining third-party offerings you have how much of that product is exclusive to Buckle?

Well, we focus -- we don't set a specific number of what we want private label to be. We evaluate the product with the brands and we have our plans. But depending how strong the brands look and are performing cuts into the percent of what our private label is. So private label will continue to grow, it's just a matter of how much of the brands will grow.

And the -- I'm sorry, what was the other part of the question? Oh, the exclusives of the third party. I would say the majority of our product from the brands is exclusive. I don't know if that would be 80% plus; it might vary by season and sometimes in-season will pick up some of their product that is out of their line if something is performing and we don't have time to either tweak the fit or the color or styling details.

And then on that first question, so in terms of the accessories with the strength there, is there an opportunity, does that drive the UPTs or is it a different type of accessory purchase?

I mean, they certainly help the unit per transactions and we seem to have more excitement and interest in those categories right now. So it should be a plus.

Dennis, I was just going to add to that. The one thing on the UPTs for the accessories with us buying more of the premium product, the Nixon watches, the Diesel watches and the Oakley glasses, that was where quite a bit of the increase came. And maybe because of that price point you didn't see as much of a change in the UPTs because the accessories have become more expensive.

All right, thanks a lot, guys. Good luck.

John Kernan, Cowen.

Wanted to touch back on the colored denim trend that seems to be going on. It seems like you guys are buying into this a little bit more. Where do you see the opportunity in this in the back half of the year within your own assortment? Thanks.

Some of the brands that we work with have shown a little more of the styling in some color, but -- that looks good to us and looks fresh from what the market is doing, but it will still be -- at this point we still expect it to be a small part of our total inventory mix.

And then how do we look at SG&A dollar growth going into the back half of the year? Obviously there was a little bit of deleverage in Q1, a little bit of leverage in Q2, how do we view that SG&A dollar growth relative to sales entering the back half of the year? Thanks.

I think some of that is hard to say and it depends on the top-line trends and especially with the selling, with so much of that being variable with payroll and the incentive compensation that it is really hard for us to say. Obviously the goal is to have that to grow in line with sales and open it a little bit slower. But without knowing what our top-line is that it is hard for us to say I guess at this point.

Okay, thanks.

Travis Williams, Stephens.

I guess, guys, if you could help us out with the remodels, maybe if you could remind us sort of the cost of a basic remodel or average cost and then what typically -- what type of sales lift do you see there maybe in the first 12 months? That would be my first question, then I've got a couple follow-ups.

Okay. Well, if we do a full store remodel and such then it would cost equivalent of a new store which we are projecting about $700,000 right now. So it would be close to that neighborhood. We have some projects that will vary on our remodels. In smaller markets that the mall and the community doesn't substantiate that type of investment we might spend anywhere from $50,000 to $100,000 and really refresh the store and give it a nice environment to shop.

And then we will also do -- we were in a store this week we remodeled where we didn't do the full package but we came very close. There's a couple things we can take out of the store that keeps -- that the majority would see it as a full remodel but might reduce the expense about 20%.

And then the associated sales lift you've typically seen over time?

It kind of depends on how mature the store is and how much it is dominating the market. But in a lot of cases it would be in double digits. It also depends a little bit if we expand the space 20% or if we move from a B to an A location it can have an effect. So there is different variables there, but usually you will get a double-digit increase but it can vary to better than that as well as lower than that as well.

And then, Karen, maybe if you could just comment on the selling expense declined a little over 2% I believe on the quarter. You guys have a pretty variable (technical difficulty) line. But I guess it was probably even better than we had anticipated. Is there anything that is in that number that would cause it to be more one time in nature or as far as the reduction there?

Well, again, one of the line items that -- where we would have seen a reduction is the incentive bonus accrual. And the incentive bonus accrual is going to be geared to performance and growth. And so that will vary based on growth in comparable store sales, gross margin and pre-bonus pre-tax net income.

So for the quarter that number was less than it was a year ago. Also with our point of sale being completely ruled out we are able to take PIN based debit in all of our stores. And so we are seeing some savings on the bank card fees by being able to take that PIN-based debit in the stores. And, Tom, I don't know if there's anything else you would like to add to that?

I don't think so.

Okay.

And then my last question if you guys don't mind, inventories look great. I guess if you could just maybe comment whether or not there is any category specific that is either a little bit heavier or a little bit lighter even as you look into the fall season that would be helpful. And best of luck, guys.

Thank you, Travis. I would say we are real comfortable with our inventory levels right now and I think the teams have done a nice job of placing our dollars where they are working for us pretty well. And our fashion business, it is ever changing and we will try to keep up with it, but we are looking forward to fall.

All right, thanks.

Edward Yruma, KeyBanc Capital Markets.

In terms of the incentive comp changes, was there actually an accrual reversal in the quarter or was it simply that you were accruing less due to the weaker comps?

Well, it's always -- I mean it is always a year to date accrual and adjusting for any prior periods. But the assumption -- so every month we project out where we think we will be out for the year. So for the second quarter, based on like the comparable store sales and some of the other metrics, the overall year to date metrics that go into that formula were reduced.

Got you and -- I'm sorry?

I don't know if that helps, Ed, or if that is answering your question there.

No, no, that certainly does. And in terms of thinking more broadly about the consumer, obviously your comps showed a little bit of weakness and you kind of identified a couple puts and takes. But have you noticed any demonstrable change in the way the consumer is shopping? Have they been more focused on promotional items? And if any regions have been kind of particularly weak? Thank you.

I think on the price point issues, I mean naturally there is always a certain group of guests that have enjoyed some of our new price points on our gals Daytrip jeans in the mid $50 to high $50 ranges had a nice response as well as we were able to reduce some of the men's BKE jeans from the low mid $70's to the mid to high $60 range and that has been received well. So -- but overall it comes down to if we are fashion right and have a good value for our product in most of those cases.

I mean is that a permanent shift in the way the denim buyer is shopping or you just have a select group that likes that value piece?

It is just a -- it's almost like an additional group that -- on some of these newer price points that we are attracting they're maybe getting a younger guest that before the prices maybe held them back a little bit.

Thank you.

Adrienne Tennant, Janney Capital Markets.

Dennis, I was wondering if you could talk a little bit more about -- you had earlier said that you were not necessarily pursuing a lot more color than what we are currently seeing either in stores or online. I was wondering what the philosophy there is, is it just commoditized at this point?

And then secondarily, what are you seeing with regard to over $100 denim trends, either men's, women's -- you can speak to it however you want versus the under $100 trends? Are you still seeing a pickup in that premium triple digit denim category? And then I have two follow-ups, please. Thank you.

As you mentioned, the color -- there is a lot of basic lower price out there that does not seem real interesting to us, so we are not seeing -- at least at this point we're not seeing a lot of excitement or freshness in that product. And I guess as we shop our vendors that could change, but that is kind of why we are keeping the same level for the most part going forward.

And as our denim prices increase in the second quarter on the gals, I think that shows that we've got a nice selection of branded goods that are performing well and they are liking the selection. The men's price points came down a little bit, as I mentioned. We were able to bring our men's BKE denim prices down a little bit with the change of sourcing and we would feel good about what we are seeing in the branded denim going forward. So we feel good about our selection there.

And then just in early August we have heard some retailers talk about maybe Olympics and then less mark down overall in the mall and then the heat. So I was wondering can you give us any color as to whether any of those things may have played a factor thus far in the quarter.

And then from a competitive landscape we are seeing very, very sharp price points -- not for denim that is comparable to yours, I agree, but out of retailers like an Abercrombie, like American Eagle. They don't directly compete against you, but I was wondering any commentary on when the mall goes more promotional would you react to that going forward? Is there any kind of -- philosophically would you chase those promotions or do you want to stay pretty true to your price points?

Yes, I have no comment on August and we would -- I mean the mall has been promotional forever and we have consistently held our strategy and that would be our plan.

Okay, fair enough. And for Karen, can you remind us the incentive bonus accruals? They go into the store level and I was wondering what level of employees, is it that the managers or is it all sales associates that also get that incentive bonus?

(Technical difficulty) bonus accruals that is geared to growth. Where I mentioned earlier that the components of growth and comparable store sales, gross margin and pre-bonus pre-tax net income, that is for some of our area district managers as well as the corporate management.

Our store managers, their incentive is structured differently. Our store managers receive a percentage of the net profit of their store. And so theirs is calculated a little bit differently and (inaudible). They have opportunities monthly to earn bonuses based on top-line performance. But at the end of the year at the stores we are really looking at the net income of each store for them.

Okay. Do sales associates also get commission on their sales as well?

They do. The majority of our salespeople are on a base plus commission. They also have some opportunities to earn some bonus dollars for being the top sales people for the period. At the end of the year there is shrinkage incentive bonus. Our assistant managers would have opportunity for some monthly dollars based on attaining sales performance targets that are set each month.

Okay, thank you very much. Good luck for fall.

(Operator Instructions). Janine Stichter, Telsey Advisory.

I was wondering if you could talk a little bit about some of the stores that you've opened in less mature regions, whether it is New Jersey or Pennsylvania, just what you are seeing there. And then as we think about 2013 how we should be modeling new store growth. Do you think it will be similar to the 10 stores you did in 2012?

Really in the eastern area we have been happy with our growth in several of our stores and a couple of them are still new where it is kind of still open of how successful they will be. And then 2013 we expect to open 10 new stores and at this time we will probably be single digit remodels of some sort, we haven't finalized that. But we've really with what we have done the last several years and this year we are pretty well caught up on major remodels at this time.

Great, thank you.

(Operator Instructions). Speakers we have no additional questions at this time. Please do continue.

I think we are good then, thank you.

And does that conclude your conference call, sir?

Yes, sir, thank you.

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