Buckle Inc (BKE) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. The members of Buckle's management are on the call today. And they are Dennis Nelson, President and CEO; Karen Rhoads, Vice President of Finance and CFO; Pat Whisler, Vice President of Women's Merchandising; Bob Carlberg, who we expect to join the call, 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 27, 2012, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following 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 and the Securities and Exchange Commission. The Company does not undertake to publicly update or revise any forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Additionally, the Company does not authorize the reproduction or dissemination of transcripts or audio recordings of the Company's quarterly conference calls without its express written consent. Any unauthorized reproductions or recordings of the call should not be relied on as the information may be inaccurate.

I would now like to turn the call over to Karen Rhoads, Vice President of Finance and CFO. Go ahead, ma'am.

Thank you. Good morning, everyone. Thank you for joining the call. We appreciate you being on the call today. And just before we get started, I would just like to note that Dennis, Pat, and Bob are each calling in remotely today. So when we get to the Q&A session, we'll try and direct the call -- or the questions accordingly since we're not all together here.

Our November 15, 2012 press release reported that net income for the third quarter ended October 27, 2012 was $41.9 million or $0.88 per share on a diluted basis. That was up 9.3% from net income of $38.3 million or $0.81 per share on a diluted basis for the prior year third quarter that ended October 29, 2011. Year-to-date, our net income for the 39 week period ended October 27, 2012 was $102.9 million or $2.16 per share on a diluted basis. That number is up 7.9% from net income of $95.4 million or $2.02 per share on a diluted basis for the 39 week period that ended October 29, 2011. Net sales for the 13 week third quarter increased 3.9% to $284.1 million, compared to net sales of $273.4 million for the prior year third quarter.

Comparable store sales for the quarter increased 2.4%. And our online sales, which are not included in comparable store sales, increased 3.8% to $19.6 million. Net sales for the 39 week year-to-date period increased 5.2% to $763.4 million, compared to net sales of $725.9 million for the same period in the prior year. Comparable store sales for the year-to-date period increased 3.2%. And our online sales, which again, are not included in comparable store sales, increased 10% to $55.4 million.

Gross margin for the quarter was 44.1%, up approximately 70 basis points from 43.4% for the third quarter last year. The improvement in gross margin was driven by a 90-basis point increase in merchandise margins, partially offset by an increase in occupancy, distribution, and buying costs. For the year-to-date period, gross margin was 42.7%, up 20 basis points from 42.5% for the same period last year. A 25 basis point improvement in merchandise margin was partially offset by an increase in occupancy, distribution, and buying costs. Selling expense for the quarter was 17.3% of net sales, which was a reduction of approximately 100 basis points from the third quarter of fiscal 2011. The reduction was driven by decreases as a percentage of net sales and expense related to store payroll, the incentive bonus accrual, bank card fees, and internet order fulfillment.

For the year-to-date period, selling expense was 18% of net sales, which was a reduction of approximately 60 basis points from the same time last year. The reduction was driven by decreases as a percentage of net sales and expense related to store payroll, the incentive bonus accrual, bank card fees, and, again, internet order fulfillment. General and administrative expenses for the quarter were 3.5% of net sales, up approximately 50 basis points from the third quarter of fiscal 2011. The increase was the result of increases in expense related to accrued vacation pay, equity compensation expense, and certain other general and administrative expenses, partially offset by a reduction as a percentage of net sales and expense related to the incentive bonus accrual. For the year-to-date period, general and administrative expenses were 3.7% of net sales, up approximately 30 basis points from the same period last year. Increases in expense related to the 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.

Our operating margin for the quarter was 23.3%, compared to 22.1% for the third quarter of fiscal 2011. For the year-to-date period, our operating margin was 21%, compared to 20.5% for the same period last year. Other income for the quarter was $200,000, which compares to about $300,000 for the third quarter of fiscal 2011. And other income for the year-to-date period was $2.3 million, compared to $2.4 million last year. Income tax expense as a percentage of pretax net income was 36.8% for the third quarter of both fiscal 2012 and 2011, bringing net income to $41.9 million for fiscal 2012 versus $38.3 million for fiscal 2011, an increase of 9.3%. Year-to-date, our income tax expense was also 36.8% for both fiscal 2012 and 2011, bringing year-to-date net income to $102.9 million for fiscal 2012, compared to $95.4 million for fiscal 2011, an increase of 7.9%.

Our press release also included a balance sheet as of October 27, 2012 which included the following. Inventory of $134.5 million, which was down approximately 4.5% from inventory of $140.8 million at the end of the third quarter of fiscal 2011. And total cash and investments of $278.6 million, which compares to $236.5 million at the end of fiscal 2011, and compares to $127.5 million at the same time a year ago. And please note at the quarter end, cash and investment balance is higher than the same time a year ago due to the payment of a $106.7 million special cash dividend during the third quarter of last year. And this year the Company will pay a special dividend in the fourth quarter.

As of the end of the quarter, inventory on a comparable store basis was down approximately 5% 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 and 50% off categories. We also ended the quarter with $170.6 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $6.5 million, and depreciation expense was $8.5 million. For the year-to-date period, our capital expenditures were $26.1 million, and depreciation expense was $24.7 million. Year-to-date, our capital spending is broken down as follows; $24.1 million for new store construction, store remodels, and store technology upgrades; and $2 million for capital spending at the corporate headquarters and distribution center.

For the quarter, our unit per transaction decreased approximately 1%, the average transaction value increased approximately 3.5% and the average unit retail increased approximately 4%. For the year-to-date period, UPTs decreased approximately 1%, the average transaction value increased approximately 4.5%, and the average unit retail increased 6%. Buckle ended the quarter with 440 retail stores in 43 states, compared to 429 stores in 43 states at the end of the third quarter of fiscal 2011. Additionally, our total square footage was 2.204 million square feet as of the end of the quarter, compared to 2.147 million square feet at the same time a year ago.

And now at this time, I would like to turn the call over to Tom Heacock, our Treasurer and Corporate Controller.

Good morning, and thanks for joining us. I'd like to start with the highlights from our merchandise categories that led to our 3.9% net sales increase for the quarter. Men's merchandise sales for the quarter were up approximately 5.5% with strong categories including denim, knit shirts, accessories, and footwear. Average denim price points decreased from $87.95 in the third quarter of fiscal 2011 to $85.60 in the third quarter of fiscal 2012. For the quarter, our men's business was approximately 38.5% of net sales, compared to approximately 38% last year. And the average men's price points decreased slightly from $56.30 to $56.20.

Women's merchandise sales for the quarter were up approximately 3%, with strong categories including denim and casual bottoms, woven tops, active apparel, outerwear, accessories, and footwear. Average denim price points increased from $98.55 in the third quarter of fiscal 2011 to $99.90 in the third quarter of fiscal 2012. For the quarter, our women's business was approximately 61.5% of sales, compared to approximately 62% last year. And average women's price points increased approximately 5.5% from $49.30 to $52.15.

For the quarter, combined accessory sales were up approximately 7.5%, and combined footwear sales were up approximately 11%. These two categories accounted for approximately 8% and 5.5% respectively of third quarter net sales, and this compares to approximately 8% and 5% for each in the third quarter of last year. Average accessory price points were up approximately 8.5%, and average footwear price points were up approximately 16%. For the quarter, denim accounted for approximately 50.5% of sales and tops accounted for approximately 30.5%, which compares to approximately 50% and 32% for each in the third quarter last year. Our private label business was up as a percentage of sales for the quarter, and represented approximately one-third of sales compared to approximately 30% last year.

During the quarter, we opened one new store and completed seven substantial remodels. As of the end of the quarter, 323 of our 440 stores were in our newest format. For the full fiscal year, we opened 10 new stores, which includes our last new store for the year which opened on November 1. We also completed 21 substantial remodels, which includes two stores that moved back into their remodeled space in November. We also completed several smaller remodeling projects during the year.

And with that, we welcome your questions. Operator?

(Operator Instructions)

Simeon Siegel, JPMorgan.

So it looks like your online sales growth actually came in slightly lighter than the gain in the store sales for, I believe, is the first time. Are you seeing any shift in the online trends? Has there been any change in strategy there, maybe merchandising decisions behind that channel? And then can you just remind us about the composition of last year's gross margin decline, what might not be recurring this year? I think merch margins were down about 40 basis points. So how much of that decline was attributable to maybe the AUC, and do you see recapture opportunity there? Thanks.

Dennis, do you want to address the online growth first?

Yes, basically we've had some pretty strong growth the last couple years, well over 20%. I think last year we also introduced our new design of our internet. And so, I think it was not really a change in strategy and didn't see heavy promotion on the online site for this quarter. And didn't get the increase that maybe we had hoped for, but feel good where we're at on that.

And then, Tom, do you want to address the gross margin?

Sure. I think a year ago in the third quarter, I think merchandise margins were down about 70 basis points and 50% of that was nonrecurring cleanup of some inventory that was sold to a liquidator that we didn't have this year. And so the rest was merchandise margins and some of that was cost. And then this year, merchandise margins were up 90 basis points. So I think we saw a nice increase in private label, some improvements in sourcing, and that was really the main cause of the increase this year.

Tom, sorry, I actually meant the fourth quarter of last year, within that 40 basis point drop. So taking that logic and just looking forward, was there anything one-time in the fourth quarter or related to AUC?

There was not.

Okay.

No one-time.

Okay. And then lastly, can you just remind us what comp you guys leverage expenses? It looks like occupancy, you probably saw that 20 basis points of deleverage there this quarter?

Correct, and we usually say about mid -- it takes about a mid single-digit to start getting leverage on the buying distribution and occupancy costs.

Got it, all right. Thanks a lot, guys. Good luck for holiday.

Our next question is from Margaret Whitfield from Journey Capital.

Sterne Agee. Your private label business rose a couple of points. I wondered if this is because of a pickup in the men's denim where the price points fell a little bit? And also wondered if you could talk about how those new stores in the Northeast region are doing, Dennis, and what your thoughts are on store openings for next year? And finally, where do you think the inventories might fall at year end? Thank you.

Okay. Yes, the private label in the men's denim has improved a total 1%, and a little better sourcing that brought the price down, but we've been very happy with that. In the East, we're just starting to anniversary some of those that are a year old, a little over that. So we're seeing progress there and feel very comfortable with our stores there. Next year, we have 13 new stores planned at this time. I think the last call we were estimating 10 stores, but we're at 13 now. And the approach to inventory is going to be pretty consistent to what we've been doing the rest of the year, continually flowing new product that would expect to have a conservative slant to the inventory.

Of the 13 new stores, are any of them scheduled for the Northeast?

Not at this time.

Dana Telsey, Telsey Advisory Group.

As you look at the improved gross margin that you've had, is there any particular category or brand that it's coming from? And can you give us some color on men's and women's tops and bottoms, what you're seeing in each of the product categories and how you're positioned for the holiday season in terms of pricing? Thank you.

On the improved gross margin, I believe the increase in the private label and maybe some better choices on the overall selection helped the growth there, but as the men's private label denim has been a plus on that. On the product-wise, Bob and Pat, do you want to comment on the tops?

Yes, on men's knits, we're also seeing some increase in the private brands there as well, and we've had a really nice push of color, detail, and fabric. And from a pricing standpoint, I would say it would be fairly close to where we've been in the third quarter. And wovens have been very consistent for us, and private brands are also taking a little bit larger percentage there as well.

And for the ladies side, we've also been really pleased with the selection overall. Our wovens have been strong and our fashion knit tops have also been a nice plus for us. The pricing and the value going into holiday, we're real pleased with.

Adrienne Tennant, Janney Capital Markets.

Hello, this is actually [Debbie Capone] calling in for Adrienne. Sorry about that earlier.

No problem.

So I was just wondering if you're planning on any new promotions this holiday season to drive traffic? It seems like the environment out there is getting more promotional, so any color there would be great.

No, we are pretty much taking the same approach as we have this year and last year toward holiday. We have just a couple specials, but we have some gift with purchase things for the Thanksgiving weekend. And we're just focusing on continually offering new product as it flows in and getting a real nice reception to our products. So we have no promotional activity planned.

Okay, great. Thanks. I have one more --

And she has left the queue. Lee Giordano, Imperial Capital.

Could you just talk a little more about your remodel program, how much does it cost to complete a remodel? And then what are the benefits you're seeing from the remodels after you complete them? Thanks.

Each remodel can be different depending on the particular store. We have some stores that are very strong, but I think it's just time for an update. They might see -- a strong store might see single-digit type growth. Other stores that if we improve the location or expand maybe the space 20% or so, they could see double-digit gains. So they can vary as such. This next year, we're looking at maybe 5 to 10 substantial remodels, which will be down from this past year. And a lot of the smaller projects, we'll still have some ongoing, but we're pretty well up to date on those as well.

John Kernan, Cowen.

Just wanted to follow a little bit back up on the merchandise margin and what the outlook is for average unit costs going into the first half of next year? And what your long-term thoughts are and your potential for merchandise margin expansion, given the increasing portion of the mix to accessories and private label? And then I've got one quick follow-up after that. Thanks.

Our merchandise margins have been very strong for some time now, and we think there's times for opportunities that can improve that in the different categories or as we increase private label. But also, our brands continue to do very well, and so you don't have the same margin there. But we feel good about how we're positioning, not only for holiday, but the start of spring, and see that to continue to be good for us.

Okay, thanks. And then what portion of your store base would you deem in A and B malls in the breakdown between A, B, and C mall-type? Thanks.

It's difficult for us because the industry would classify the A, B, C malls differently than we do, as we have smaller markets that the industry might consider a B mall, but to us could be an A store. So I don't have a good breakdown on that, but we feel very good about our real estate for all our stores right now.

Edward Yruma, KeyBanc.

Just on your recently announced special dividend, obviously it was a bit higher than you've seen in past years. Does this signal that we should expect a reduced or no special dividend next year?

I have no forward comment on that. Do you, Karen?

No, we can't predict how the Board will -- what direction they'll take in that.

Got you. And maybe a longer-term question, I know you've completed the last set of your remodels. Is there anything you're doing going forward to continue to revamp the store environment? Or at this stage, are you very happy with the condition of the fleet? Thanks.

From our -- we started the store design that is for the most part close to what we're doing now about 10 years ago. So as these stores come up, in most cases, we only are adding like a couple extra dressing rooms, fine-tuning the -- maybe the counter and some smaller additions. In some of the markets, some of the flooring changes, sometimes the sign changes, but we're not having to strip it down and start over. The stores have aged well and with the new fixtures we've added and some of the updates with color and stuff, it's -- they're looking very good right now.

Paul Alexander, Bank of America-Merrill Lynch.

Dennis, when you reported second quarter in August, you said that you felt really good about the product for fall and you were getting a great response from the team. Can you -- or the buying team, the stores, et cetera. Can you give us some idea of how you're feeling about the product or how the team is responding to the product for holiday? And then I have a follow-up. Thanks.

Yes, in my travels and comments from our Manager meetings this fall, the team seemed excited about the new selection and the product coming into our stores. So we still feel positive on that.

All right. And then the follow-up, I'm not sure if I got the square footage number, if I heard it right, but it looks like for a second quarter new door productivity is pretty soft. Could you reconcile that with your comments that the stores in the East are doing well? Are there other stores elsewhere in the country that aren't doing as well, or is there a timing issue? What might be impacting that? Thanks.

I think, Paul, one of the things in the total sales number too is that the online sales as we commented are not included in the comp store sales. But for the third quarter, with the slowdown in the growth of the online sales, are you factoring that part out when you're looking at the new square footage productivity?

Yes, I'm just taking out the DTC revenues to get to a store sales number.

I can't say that I've studied that well enough to be able to give a good comment on that, Paul.

(Operator Instructions)

Paul Alexander.

Me again, thanks. Just one question on inventory. With comp store inventory down a bit here, how do you feel about how much inventory you have for holiday? And I understand there may be a cost component there with private label up and maybe getting a little bit of a cost benefit with cotton down. So can you give us an idea what inventory looks like in terms of units? Thanks.

Sure, part of what the inventory -- if you remember, a year ago at the end of the third quarter, total inventory was up about 26.5%, and so part of it is the timing of the flow of product. We continue to flow new product to the stores everyday Monday through Friday. And then Dennis or Bob or Pat, I don't know if you have any further comment about the holiday product.

No, I think as you mention, we continue to flow new product to our stores. And last year, I think at the end of this quarter, our inventory was up like 26% total. And so, we're comfortable with our inventory going into holiday, and we'll continue to chase inventory if we have to.

Edward Roche, Freedom Mountain Investments.

This is Ed Roche. With the large special dividend, the cash level on the balance sheet has dropped quite a bit. Can you just comment on that versus your expected cash needs for the next coming year?

Karen, do you have that one?

Yes, cash is up at the end of the third quarter. And, again, part of that is the finding of the payment of the special dividend in the fourth quarter this year versus third quarter last year. So we project to pay for the special dividend with cash flow from operations, and we don't make any forward-looking comments as far as actual end at the end of the fiscal year.

Simeon Siegel.

Just quickly, sorry if I missed it, but did you quantify what you think the AUC benefit should be for gross margins in the fourth quarter? Because I think you're still going up against that cost?

No, I don't think we did make a comment on that. And I don't know, Bob or Dennis, if you have any comment on the average unit cost for the fourth quarter compared to a year ago?

I would guess in the men's area, the cost would probably be down some. And the ladies will probably be consistent or close to, maybe even up slightly from a year ago. Does that cover what you asked about, Simeon?

Yes, that's great. Thanks.

And there are no further questions -- wait, there is a question, a follow-up question from John Kernan.

Just one quick follow-up. The AUR plan for the fourth quarter as well, anything that's embedded in your -- that you could talk to that's embedded in your outlook for AUR? Thanks.

Our average unit retail, I would expect the ladies denim price points to be pretty consistent with third quarter. And, Bob, if you would -- my comment would be on men's, I would think that would be pretty consistent with third quarter going into fourth quarter as well, would you agree?

Yes, I think third quarter is a good indicator for it.

Does that answer that, John?

Yes, thanks.

And there are no further questions at this time. So I'll turn it back to Management for any other remarks.

Thank you for being part of the call and enjoy the holidays.

Ladies and gentlemen, thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.