Buckle Inc (BKE) 2013 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.

(Operator Instructions)

As a reminder, this conference is being recorded. Members of Buckle's management team 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 opening -- the operating results for the third quarter, which ended November 2, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement.

All forward-looking statements made by the Company involve material risks and uncertainties and are subject to changes -- change based on factors which may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise any forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Additionally, the Company does not authorize the reproduction or dissemination of transcripts or audio recordings of the Company's quarterly conference calls without its expressed written consent. Any unauthorized reproductions or recordings of the call should not be relied upon, as the information may be inaccurate.

I would now like to turn the conference over to Ms. Karen Rhoads. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining the call. Our November 21, 2013, press release reported that net income for the 13-week third quarter that ended November 2, 2013, was $40.6 million, or $0.85 per share on a diluted basis. And that is compared to net income of $41.9 million, or $0.88 per share on a diluted basis, for the prior-year 13-week quarter that ended October 27, 2012.

Year to date, our net income for the 39-week period ended November 2, 2013, was $103.3 million, or $2.15 per share on a diluted basis. That is compared to net income of $102.9 million, or $2.16 per share on a diluted basis, for the prior-year 39-week period ended October 27, 2012.

Net sales for the 13-week third quarter increased 0.9% to $286.8 million, compared to net sales of $284.1 million for the prior-year 13-week third quarter. Our comparable-store sales for the quarter were down 0.5% in comparison to the same 13-week period in the prior year. And our online sales, which are not included in comparable-store sales, increased 11.9% to $22 million.

Net sales for the 39-week year-to-date period increased 3.4% to $789 million, compared to net sales of $763.4 million for the same period in the prior year. Our comparable-store sales for the year-to-date period were up 1.2% in comparison to the same 39-week period in the prior year. And our online sales, which again, are not included in comparable-store sales, increased 7.9% to $59.7 million.

Gross margin for the quarter was 44%, down approximately 10 basis points from 44.1% for the third quarter last year. A 30-basis-point improvement in merchandise margins was offset by a 40-basis-point increase as a percentage of net sales in occupancy, distribution, and buying expenses, due to the slight comparable-store sales decrease and a shift in the weeks for the fiscal period. For the year-to-date period, gross margin was 42.8%, an improvement of approximately 10 basis points from 42.7% for the same period last year. A 25-basis-point improvement in merchandise margins was partially offset by an increase in occupancy, distribution, and buying expenses.

Our selling expense for the quarter was 18.1% of net sales, compared to 17.3% for the third quarter of FY12. Increases in store payroll expense, health insurance claims expense, and certain other selling expenses were partially offset by a reduction as a percentage of net sales and expense related to incentive bonus accrual. For the year-to-date period, selling expense was 18.3% of net sales, compared to 18% for the same period in FY12. Increases in store payroll expense and health insurance claims expense were partially offset by reductions as a percentage of net sales in certain other selling expenses.

Our general and administrative expenses for the quarter were 3.6% of net sales, compared to 3.5% for the third quarter of FY12, primarily driven by an increase in equity compensation expense. For the year-to-date period, general and administrative expenses were 3.9% of net sales, compared to 3.7% for the same period in FY12, primarily driven by increases in equity compensation expense, as well as certain other general and administrative expenses.

Our operating margin for the quarter was 22.3% for the third quarter of FY13, compared to 23.3% for the third quarter of FY12. And for the year-to-date period, our operating margin was 20.6%, compared to 21% for the same period last year. Other income for the quarter was $400,000 compared to $200,000 for the third quarter of FY12. And other income for the year-to-date period was $1.2 million compared to $2.3 million last year.

Our income tax expense as a percentage of pretax net income was 37% for the third quarter of FY13, compared to 36.8% in the third quarter of FY12, bringing third quarter net income to $40.6 million for FY13 versus $41.9 million for FY12. And year to date, our tax expense was also 37% for FY13 and 36.8% for FY12, bringing year-to-date net income to $103.3 million for FY13, versus $102.9 million for FY12.

Our press release also included a balance sheet as of November 2, 2013. This balance sheet included the following -- inventory of $146.3 million, which was up approximately 9% from inventory of $134.5 million at the end of the third quarter of FY12; and total cash and investments of $195.6 million, which compares to $179.8 million at the end of FY12, and $278.6 million at the same time a year ago.

As of the end of the quarter, inventory on a comparable-store basis was up approximately 7%. And total markdown inventory was up, compared to the end of the third quarter last year. We also ended the quarter with $164.9 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $6.3 million, and depreciation expense was $8.1 million. For the year-to-date period, our capital expenditures are $25.2 million and depreciation expense was $24 million.

Year to date, capital spending is broken down as follows -- $17.5 million for new store construction, store remodel and store technology upgrades; and $7.7 million for capital spending at the corporate headquarters and distribution center, including $5.4 million for the purchase of a new airplane to replace a plane that was sold last fiscal year.

We also, just this week, broke ground on a new 80,000-square-foot building that will provide additional office space as part of our home office campus here in Kearney, Nebraska. We plan to complete some of the initial site preparation by the end of December, and then begin construction of the building in the first quarter of next year. We now expect our FY13 capital expenditures to be in the range of $30 million to $32 million.

For the quarter, UPTs increased approximately 3.5%. The average transaction value increased approximately 2%, and the average unit retail decreased approximately 1.5%. For the year-to-date period, UPTs increased approximately 3.5%. The average transaction value increased approximately 3.5%, and the average unit retail decreased just slightly.

Buckle ended the quarter with 452 retail stores in 43 states, compared to 440 stores in 43 states at the end of the third quarter of FY12. Additionally, our total square footage was 2.273 million square feet as of the end of the quarter, compared to 2.204 million square feet at the same time a year ago.

And now, at this point in 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 would like to start by highlighting the performance from our various merchandise categories that led to our net sales increase of 0.9% for the quarter.

Men's merchandise sales for the quarter were up approximately 2.5%. Strong categories included denim and casual bottoms, knit shirts, shorts, and accessories. Average denim price points increased from $85.60 in the third quarter of FY12, to $88.70 in the third quarter of FY13. For the quarter, our men's business was approximately 39% of net sales, compared to approximately 38.5% last year, and our average men's price points increased approximately 2% from $56.20 to $57.35.

Women's merchandise sales for the quarter were down just slightly, with strong categories including casual bottoms, woven tops, sweaters, active apparel, skirts and dresses, accessories, and footwear. Average denim price points decreased from $99.90 in the third quarter of FY12, to $98.25 in the third quarter of FY13. For the quarter, our women's business was approximately 61% of net sales, compared to approximately 61.5% last year, and our average women's price points decreased approximately 2.5% from $52.15 to $50.75.

For the quarter, combined accessory sales were up approximately 3%, and combined footwear sales were up approximately 13%. These two categories accounted for approximately 8% and 6%, respectively, of third-quarter net sales which compares to -- with approximately 8% and 5.5% for each in the third quarter last year.

Average accessory price points were down approximately 3%, and average footwear price points were up approximately 17.5%. For the quarter, denim accounted for approximately 48.5% of sales, and tops accounted for approximately 30.5%, which compares to approximately 50.5% and 30.5% for each in the third quarter of last year. Our private-label business was up slightly as a percentage of net sales for the quarter and represented approximately 35% of sales.

During the quarter, we opened one new store, closed one store, and completed two substantial remodels. As of the end of the quarter, 341 of our 452 stores were in our newest format. For the full fiscal year, we opened 13 new stores in total, plan to complete a total of 8 substantial remodels, which includes 2 stores that moved into their remodel locations already in November, and 1 additional for the first week of December. Right now, current plans for FY14 include 16 new stores, and 14 to 16 full remodels.

And with that, we will open it up to your questions.

(Operator Instructions)

Our first question comes from the line of Paul Alexander with Bank of America. Please go ahead.

Hi. Thanks for the question. On the selling expense, in the past you have been able to offset increases in certain items within the selling expense bucket, but this quarter it seems to be a little bit different with the increases in store payroll and health insurance. What happened differently this quarter, or is there some kind of investment phase happening in store payroll, or some kind of external pressure on the health insurance? Thank you.

I think some of it, looking back at a year ago, selling expenses were down about 100 basis points, and about 40 of that was payroll. So a year ago, we were probably especially good on the payroll. And then this year that flipped with comps in September being a little bit slower, that we didn't manage the payroll quite as well, and that was up about 40 basis points.

And then I think the same is true for health insurance a year ago. It was down slightly, and then kind of corrected and was back up this year. So no real structural changes. I think the calendar shift also had a little bit of impact on the payroll, but those are probably the main factors.

All right. And then just a follow-up. How do you feel about the inventory? I don't know if that is also an impact of calendar shift. But with comparable inventory up and markdown inventory up, is that, is that anything that you are concerned about?

Paul -- sorry. I was going to say Dennis is calling in remotely. So I think -- I am going to direct this one to Dennis, if you don't mind picking that one up.

Sure. Thanks, Paul. We feel good about our inventory and where we are at. We have built inventory some, because last year we felt we missed some denim business, especially at the end of December and going into January. So we are pretty much on plan at this point. Thank you.

Thank you. Next we will move to the line of Edward Yruma with KeyBanc. Your line is open.

Hi, thanks for taking my question. Just really quickly on capital allocation, I know that you did a double special dividend last year. I know that you kind of assess capital structure around this time of year. I guess, what should we expect? Would you consider doing another dividend this year, in light of the double dividend last year? Thank you.

Good morning, Ed. We will have our Board meeting December. As always, we review opportunities and where we see our business going. So we would probably make a decision at that point.

Got it. And maybe one quick follow-up to Paul's question. Really specifically on the markdown piece of it, how do you feel about the quality of inventory? And I guess, specifically as relates to that markdown bucket, do you expect that you will be able to get that in line by the end of fourth quarter? Thank you.

Tom, did you want to comment on the, that part of it?

Sure. I think as, and we commented, it is up slightly in absolute dollars, as far as markdown inventory. But as a percentage of sales, it is actually down slightly. I think some of that could be, we are looking at as of a point in time. And so, it was a week later this year, compared to where we ended the quarter a year ago, so I think that also had some impact. But like Dennis said earlier, I think we feel good about the composition of the inventory, and feel good about how we are positioned for holiday.

Thanks so much.

Next we will move to Kate Fitzsimons with JPMorgan. Your line is open.

Yes, hi. I wanted to ask about the merchandise margin performance. Impressive to see it up year-over-year, given the tough environment. Can you just talk about some of the puts and takes that impacted margin performance in the quarter, and longer-term thoughts on merchandise margin expansion from these levels? Thanks.

Well, as far as the part about the expansion, it's -- the team has been performing very well. And we haven't promised continued growth there, although we continue to work hard at, at improving that. The -- I think some of the private label in some of our categories expanded this year. We have added more private label in the gal's denim side this year, which has helped some there. And just maybe an improvement on some of the top categories on better sell-throughs and maintaining margin. I think the sweaters have done a little better this year over last year on the gal's side. So just kind of an overall improvements here and there, and eliminating a few mistakes.

Great. And then just a follow-up. As we are heading into holiday, should we think about you introducing any incremental events? Or making any adjustments to pricing in order to drive footsteps to the mall, just given that fourth quarter commentary seems pretty challenging to date?

We have pretty much the same specials planned for Thanksgiving weekend as we did last year. And Bob, do you want to highlight a few of the gift with purchase we have with vendors?

Yes, we are anniversarying Rock Revival and Affliction, two of our best partners where we do the gift with purchase promotions that run over Thanksgiving. And we have done that the past two years. So this will be our third year and that will run through 12-8.

Great. Thanks.

Thank you.

Next we will move to the line of Andrew Hollingworth of Holland Advisors. Your line is open.

Thank you. Good afternoon. Sorry, good afternoon here, I am calling from London. Just a couple of questions, coming back to the selling price points in ladies denim, which is [the statement] from October time. Could you perhaps expand on that a little bit? I mean, do you think that is something, where there is just sort of a couple of trends that are being missed? Or where a couple of brands just sold so well, in the way that you could ever comp in quite the same way? And just to get a little bit of color for, after a long period of good average selling prices, where the current trends are changing now, whether they are just sort of a bumping along the road?

And the second part of that would be, just in terms of the margins, whereby if we are selling more in-label at ladies denim, that is at different lower selling prices, is there a different margin structure attached to that? Or is it just the fact the selling price is different, but the underlying margin is likely to be pretty similar, but it is just a lower dollar and strike price? Thank you.

Yes. Well, I think a year ago, we have expanded our Day Trip denim label on the gal's side, which is price points at $59, and some in the $54 range right through there. And so, we increased our inventory there. And then last year also in our BKE denim, which is also our private brand, we were kind of transitioning from different makers, and that has worked out well. And so a year ago, we were in the high $70s, low $80s on the BKE. This year, we are $79 to $69. So both of those brands brought down the retail some, and we have been happy with that business. But I think that is the reason we went from the $99 -- I don't have that in front of me.

Yes, it was about $99, $98, I think it was.

Yes, so I think that is the main reason there. And the private brands have very good margins with those, but we are very happy with our branded business as well. Did that answer everything?

If for any reason the fashion trends move towards more in-label, or if certain couple of brands you sell well of, moving down for let's say period of time, then ultimately you would expect to see that in front of the line, but obviously your profit would go down, your margins would either be boosted or at least helped, because the on-label is still as good a margin? Is that a fair conclusion?

I think that's fair to look at it that way, yes.

Okay, great. Thank you very much for the time.

You're welcome. Good day.

Next we will move to the line of Simeon Siegel with Nomura Securities. Please go ahead.

Great, thanks. Good morning.

Good morning.

Do you see any divergence in geographic trends or by channel? I mean, it looks like the online sales accelerated sequentially, so and I guess particularly, compared to the store sales. Could there be any weather impact over the quarter that may have sent people online versus stores, or anything else you are seeing there? And Dennis, sorry if I missed it, but are you and the team seeing any particular emerging brands or trends out there? Thanks.

Well, we see our product continue to evolve, and I think the teams are doing a great job with the newness of different categories. I mean, it's a small category, but the gal's skirt business has been good. It is an item we didn't have a year ago. And so, I think the teams are on it pretty good. They are doing a nice job with color, and bringing in some of our own brands, where we are bringing in collections so to speak that sell well together. So I think the team is strong, and doing a very nice job of anticipating the direction of what is going on.

And so, I don't know that we have any big brand names so to speak that we are reintroducing. There might be some tests. They are always testing new vendors, so just continued involvement in the casual life-style that I think is good. And let's see, I think September was unusually warm. So our warm -- we actually sold some of our activewear groups a little better, longer than normal in that season. But as far as why the internet business was stronger than the store, I don't have a good handle on that.

Okay. All right, thanks. Good luck for the holiday.

Thank you.

(Operator Instructions)

And we will go to the line of John Kernan with Cowen and Company. Your line is open.

Thanks for taking my question. This is Jerry Gray on for John. Your store transaction count seems to have been trending down for about the past year and a half. I was wondering if you could give us some color on what is driving that, if you have any initiatives planned to help turn that line item around?

Well, we don't have store -- traffic counters in the stores. We hear from others that traffic in the malls or certain centers are down, but we continue to work at being a real specialty store. We have talented people in the store. And they are -- they continue to work on our guest loyalty, and lining up get-fitted appointments. And just doing an excellent job on the guest service so that we can continue to grow our business that way, and work to have our guests come in more often as well.

All right, great. And on, just on the cost side, I was wondering if heading into next year you have seen any changes to your sourcing costs? We have been hearing possibly they are trending up heading into 2014. Thanks.

Bob or Pat, do you have any comments on that?

Right now, we are not seeing any increase in pricing cost. They have actually come down a little bit, but I would say, probably more consistent with where we are at right now would be, what we would see.

Yes, I would agree with that comment. We are always just looking for unique details. We rarely go back to the exact same item, so it is difficult to compare apples-to-apples, but overall, I would say we are pretty happy with that. Okay. Does that take care of that question?

Thank you. Next we will move to follow-up from Andrew Hollingsworth with Holland Advisors. Your line is open.

Hi, just one quick one if I can. Have you given, and if you haven't I understand, a store growth [flow] base plan for next year?

Yes, I believe Tom commented. We have 16 new stores planned for next year. I think four of them are mid later, spring, six roughly back-to-school, and six for fall holidays is where the flow is right now.

Okay. Thank you.

You're welcome.

(Operator Instructions)

And at this time, no one is queuing up. Please continue.

Well, if there are no further questions, I think this would conclude our conference call for this quarter. And again, we appreciate everyone dialing in, and we appreciate the questions. So thanks a lot, and have a great day.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 10.30 AM Central Time today through December 5, 2013 at midnight. You may access the AT&T replay system any time by dialing 1-800-475-6701, and entering the access code 307978. International participants, please dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, entering the access code 307978. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.