Buckle Inc (BKE) 2015 Q2 法說會逐字稿

Welcome to the second-quarter earnings release conference call.

(Operator Instructions)

Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Senior Vice President of Finance and CFO; Pat Whisler, Senior Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; Kyle Hanson, Vice President, General Counsel, and Corporate Secretary; and Tom Heacock, Vice President of Finance, Treasurer, and Corporate Controller.

As they review the operating results for the second quarter which ended August 1, 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 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 information may be inaccurate.

As a reminder, this conference is being recorded.

I'd now like to turn the call over to our host, Ms. Karen Rhoads. Please go ahead.

Thank you. Good morning, everyone. Thanks for joining our call this morning.

Our August 20, 2015, press release reported that net income for the 13-week second quarter that ended August 1, 2015, was $23.5 million, or $0.49 per share on a diluted basis. And that compares to net income of $24.5 million, or $0.51 per share on a diluted basis, for the prior-year 13-week second quarter that ended August 2, 2014.

Our year-to-date net income for the 26-week period ended August 1, 2015, was $57.1 million, or $1.18 per share on a diluted basis. And that is compared to net income of $61.8 million, or $1.29 per share on a diluted basis, for the prior-year 26-week period that ended August 2, 2014.

Net sales for the 13-week second quarter increased 0.1% to $236.1 million compared to net sales of $235.7 million for the prior-year 13-week second quarter. Our comparable-store sales for the quarter were down 1.7% in comparison to the same 13-week period in the prior year, and our online sales increased 17.4% to $20.1 million. Year to date, our net sales were $507.4 million, for both the 26-week fiscal period ended August 1, 2015, and the 26-week fiscal period ended August 2, 2014. Our comparable-store sales for the year-to-date period were down 2% in comparison to the same 26-week period in the prior year, and our online sales increased 14.9% to $44.3 million.

Gross margin for the quarter was 40.1%, down approximately 20 basis points from 40.3% for the second quarter last year. The decrease was driven primarily by deleveraged occupancy, buying, and distribution expenses resulting from the comparable-store sales decline, and that was partially offset by improvements in merchandise margin, which was up about 55 basis points for the quarter. For the year-to-date period, gross margin was 41%, down approximately 80 basis points, from 41.8% for the same period last year. The decrease was driven primarily by deleveraged occupancy, buying, and distribution expenses resulting from the comparable-store sales decline, partially offset by improved merchandise margins, which were up 10 basis points.

Selling expense was 19.7% of net sales for the second quarter of both FY15 and FY14. Increases in store payroll expense, and online fulfillment and marketing expenses, were offset by reductions, as a percentage of net sales, in expense related to the incentive bonus accrual and certain other selling expenses. For the year-to-date period, selling expense was 18.8% of net sales, compared to 18.5% for the same period in FY14. Increases in store payroll expense, and online fulfillment and marketing expenses, were partially offset by a reduction, as a percentage of net sales, in expense related to the incentive bonus accrual.

Our general and administrative expenses for the quarter were 4.7% of net sales, compared to 4.2% of net sales for the second quarter of FY14, with increases, as a percentage of net sales, across several expense categories, as a result of the comparable-store sales decline for the quarter. For the year-to-date period, general and administrative expenses were 4.5% of net sales, compared to 4% for the same period in FY14, with increases, as a percentage of net sales, across several expense categories, as a result of the comparable-store sales decline.

Our operating margin for the quarter was 15.7%, compared to 16.4% for the second quarter of FY14. For the year-to-date period, our operating margin was 17.7%, compared to 19.3% for the same period last year.

Other income for the quarter was $272,000 compared to $260,000 for the second quarter of FY14. And other income for the year-to-date period was $1 million compared to $605,000 last year.

Income tax expense, as a percentage of pre-tax net income, was 37.3% for the second quarter of both FY15 and FY14, bringing second-quarter net income to $23.5 million for FY15 versus $24.5 million for FY14. Year to date, our income tax expense was also 37.3% for both FY15 and FY14, bringing year-to-date net income to $57.1 million for FY15 versus $61.8 million for FY14.

Our press release also included a balance sheet as of August 1, 2015. It includes the following: inventory of $150.8 million, which was up approximately 17.5% from inventory of $128.2 million at the end of the second quarter of FY14; and total cash and investments of $190.8 million, which compares to $203.3 million at the end of FY14 and $230.5 million at the same time a year ago. As of the end of the quarter, inventory on a comparable-store basis was up approximately 10%, compared to the same time a year ago, and total markdown inventory was up on an absolute dollar basis, but down as a percentage of total inventory.

Please note that the comparable-store inventory increase for this year is in comparison to comparable-store inventory levels that were down 5.5% at the same time a year ago. Additionally, the overall increase in inventory was attributable to several factors, including an increase in in-transit and DC inventory, and tax-free shifts that shifted back-to-school shopping in certain states from fiscal July into fiscal August. We also ended the quarter with $177.7 million in fixed assets, net of accumulated depreciation.

Our capital expenditures for the quarter were $9.7 million, and depreciation expense was $8.1 million. For the year-to-date period, capital expenditures were $21 million, and depreciation expense was $15.8 million. Year to date, our capital spending is broken down as follows: $12.8 million for new store construction, store remodels, and store technology upgrades; and $8.2 million for capital spending at the corporate headquarters and distribution center. We still expect our FY15 capital expenditures to be in the range of $35 million to $39 million, which includes primarily new store and store remodeling projects, IT investments, and the completion of a new office building in Kearney, Nebraska, which some of our teams moved into during April.

For the quarter, UPTs decreased approximately 1.5%, the average transaction value increased approximately 3%, and the average unit retail increased approximately 4.5%. For the year-to-date period, UPTs decreased approximately 1%, the average transaction value increased approximately 3.5%, and the average unit retail increased approximately 4.5%.

Buckle ended the quarter with 464 retail stores in 44 states, compared to 456 stores in 44 states at the end of the second quarter of FY14. Additionally, our total square footage was 2.352 million square feet as of the end of the quarter, compared to 2.309 million square feet at the same time a year ago.

And at this time, I'd like to turn the call over to Tom Heacock, our Vice President of Finance, Treasurer, and Corporate Controller.

Good morning, and thanks for joining us this morning. I'd like to start by highlighting the performance from our various merchandise categories for the quarter.

Men's merchandise sales for the quarter were up approximately 5%, with strong categories including casual bottoms, knit shirts, shorts, and accessories. Average denim price points increased from $92.85 in the second quarter of FY14 to $94.40 in the second quarter of FY15. For the quarter, our men's business was approximately 46% of net sales, compared to 44% last year, and average men's price points increased slightly from $50.40 to $50.75.

Women's merchandise sales for the quarter were down approximately 3.5%, with strong categories including casual bottoms, woven tops, shorts, and dresses. Average denim price points decreased from $98.65 in the second quarter of FY14 to $95.45 in the second quarter of FY15. For the quarter, our women's business was approximately 54% of net sales, compared to 56% last year, and our average women's price points increased approximately 6% from $43.95 to $46.50.

For the quarter, combined accessories sales were up approximately 3.5%, and combined footwear sales were down approximately 7.5%. These two categories accounted for approximately 10% and 5.5%, respectively, of second-quarter net sales, which compares to 9.5% and 6% for each in the second quarter of FY14. Average accessory price points were up approximately 10.5%, and average footwear price points were down approximately 2%.

For the quarter, denim accounted for approximately 35% of sales, and tops accounted for approximately 32.5%, which compares to 36.5% and 32.5% for each in the second quarter of last year. Our private-label business was up slightly as a percentage of net sales for the quarter, and represent approximately a third of sales.

During the quarter, we opened one new store, and completed six full remodels. As of the end of the quarter, 377 of our 464 stores were in our newest format. For all of FY15, we still anticipate opening nine new stores in total, which includes five remaining that are planned for holiday. And we also still anticipate completing 14 full remodels during the year, including three planned for holiday.

And with that, we welcome your questions.

(Operator Instructions)

Tom Filandro, Susquehanna Financial.

Hi. Thank you for taking my question. Karen, can you just help us a little bit on the inventory comments? If you possibly could maybe factor out those three buckets that you identified the in-transit, the DC and the tax-free, just to give us some understanding of directionally what the underlying trend in same-store or square -- or sales per square foot inventory looks like? And maybe, Dennis, can you just tell us, overall how you're feeling about the positioning of your inventory and where are you seeing the increases? And then I have a follow-up question.

Tom, on the inventory, maybe -- probably the most apples-to-apples comparison, if you look at the comp store inventory up about 10% versus compared to down 5.5% a year ago, so on a more normalized level, I guess, we would see that up in more of that mid-single digits on a two-year basis. So I think that, that's where -- taking out the other unusual flow of the product that, that would be apples-to-apples comparison and then I'll let Dennis answer your other question.

Yes Tom. We are liking the new product we're bringing in and seeing that. I think the key category is we're trying to do a better job of inventory in all our stores. Some of the smaller stores have been a little low on inventory so we're trying to get a better mix there for them. We're also having the stores ask for more extended sizes like in men's, the XXL, XXXL shirts for guys in certain brands. Also on the other hand, carrying more smalls, both the men's and women's, we're getting more requests for longer-length jeans and extra long jeans than we've been stocking. We're introducing additional lifestyle brand -- our own brands that we think will attract the guest that maybe is not buying as much as they could be from us, as well as expanding our kids' inventory to all stores, still not at a high level inventory, but definitely getting that out and raising our inventory there as well.

Great. Thank you, Dennis, for the comprehensive answer to that. So quick one for Pat and Bob, possibly, a lot of talk about emerging trends in denim, we're hearing wash, destruction, some stretch fabrication in men's, hoping that both Bob and Pat, maybe you can give us some insight into what they're seeing in their business? And just the units have been down in the classification over the past two years -- do either of you feel that we're at a stage now where we could see a unit recovery in the broader classification of denim? Thank you.

Pat, you want to go first?

Sure. On the wash, destruction and stretch, I'll talk about that a little bit for both men's and -- I'll let Bob take the men's call, but for women's, that is something we're very familiar with. It -- stretch has been a great driver for the business and the guests really respond well to that. I think we have a nice mix of both wash and finishes, details, probably on a more comprehensive mix of price points than we've had in a while. Dressing, some of the lifestyle fashion -- excuse me -- some of the more trend items -- it's cycling into a wear-now type of situation for women's denim so we were very pleased with some of the summer silhouettes and more of that type of tops and shorts and feel good about our mix on the full-length going forward.

Thank you, Pat.

And I think on men's denim, actually, we've been growing pretty well in men's denim for quite awhile. And I think being close to Pat and the girls team, we've been running stretch and lightweight, along with specialty, lyocell, CoolMax for several years. So I think we were early on that and that just continues to expand and what our guest is telling us is they like the comfort of that and what we've delivered so far this fall has been well received and feel pretty good about the men's denim selection. On the destruction side, a lot of people moved away from that for quite awhile when the clean dark was in but what we always try to work on is selection so there's always everything from light to dark, from a cleaner look to a more destructed finished so we can just move the percentages a little bit but we are seeing destruction being very good.

Okay. Thank you both very much and best of continued success.

Thanks, Tom.

Ed Yruma, KeyBanc.

Hi. This is Jessica Schmidt on for Ed. Thanks for taking my question. I just wanted to ask about back-to-school. I know that the shift in some tax-free holidays weighed on your performance in July, but were you able to recover this once the tax-free holidays took place? And I guess just how should we be thinking about the shift into August?

We can't currently talk about August at all, Jessica, sorry.

Okay. Thank you.

Yes.

Simeon Siegel, Nomura Securities.

Hi. Thanks. Good morning, guys.

Good morning.

So Karen, maybe just ask the other -- asking that in another way, can you comment at all on the different geographic, exposure, trends you saw within the country just to try to quantify what the impact was from a tax-free shift in July? And then I don't know if you answered Tom specifically on the inventory piece but could you say what percentage was attributed to the inventory just due to the sales shift because presumably, that inverted the following week or two?

No. I think those would be very difficult to respond to accurately and I mean --

We have not shared that publicly; that is correct. Yes.

Okay. All right and then just maybe a follow-up. Really strong e-commerce growth. I mean how large do you think that business can grow over time and then are the -- how did the e-commerce merch margins do versus the store margins?

Well, the e-commerce, we are very happy with that. We think there will be continued growth. We're seeing some nice sales in almost all the categories. What it can get to, I'm not sure. But we think there will be steady growth and we continue to look at new ways to analyze and invest in that business so hopefully, that answers that question, Simeon.

Yes. No, that's good and then do you guys know how the merch margins are online versus in-stores?

We don't really calculate that because there's so many factors involved, but online is very good business for us and a profitable business.

Great. All right. Thanks a lot, guys. Best of luck for the rest of the year.

Yes. Thank you.

Paul Alexander, BB&T Capital Markets.

Hi. Thanks. Just to follow-up on the denim question and maybe asking a little more pointed way, the tone on denim has been really optimistic with emerging trends and new interest, particularly in women's for the last couple quarters but the women's denim business hasn't really turned around yet. So any thoughts on that and do you think maybe fall will be the inflection point there? Can women's be a comp driver in fall?

Well, I think so. The last quarter was the tax-free shift probably affected the total denim for that quarter. As well as warm it's been, our capri business -- our denim short business has been very good and so we look forward to the fall season.

Great and then just a follow-up on e-commerce discussion, you mentioned, Dennis, looking at additional ways to analyze and invest in that business. Anything specific, any investments that you're considering that you can share with us?

Kyle, do you want to comment on that?

Sure, Dennis. Well, one of the things that we have seen is a lift in new visitors to the site and it's primarily through our paid search program. And in just analyzing our improved conversion rates, it's primarily through our email and affiliate marketing investments and that's also helped lead to an increase in our average order size.

All right. Thank you.

Yes.

Steve Marota, C.L. King & Associates.

Good morning, everybody. I'm going to ask a similar question in a different way. Is it possible to quantify the tax holiday shift on comp store sales result in the second quarter?

That's not something we're going to provide, Steve. Sorry.

No problem. Was there any shift in SG&A spend, either into or out of the second quarter that was not previously planned for at the beginning of the quarter?

No. Not that I can think of.

Okay. And lastly, with merchandise margins up 55 basis points during the second quarter, can you comment on what categories were the best and maybe second-best?

Margin-wise? Well -- do we have that, Tom?

I think -- I mean, some of that, the first quarter was down slightly and then we saw a nice improvement in the second quarter. And some of that, I think the comparison, looking back a year ago was a little bit easier in the second quarter than the first quarter. And by category, I don't know if there's anything specific we'd want to call out. Like Pat commented, there's been a nice expansion of brands and some of the platforms that helped drive that and maybe a little bit fewer markdowns but no, nothing too significant to call out.

Thank you.

Thank you.

Liz Pierce, Brean Capital.

Thanks for taking my question. So a couple things on just semantics, when you guys talk about performance categories -- when you call that out, on casual bottoms and shorts, would capris, even if they're denim, be called out separately or are they part of the other categories?

They would be part of the denim category, Liz.

Okay. Just wanted to make sure and clarify. And then, in the children's business, in the kids' business, Dennis, I think you said it's expanding to all stores. And is that -- because I thought that the boys was pretty much in all stores or maybe if you could just clarify the -- what's incremental on that?

Okay. Bob, do you want to highlight that? I think you're more in tune than I am.

At holiday, we are about to 250 doors and last back-to-school, we'd have been at 200, so in a small way, we were in all stores to date -- so I don't know if we could, like Dennis said earlier, it's still a small part of the business. It's growing very nicely. Certainly we would have added to some of the inventory being in all stores.

Is that both boys and girls for the 200 and 250, or is that just boys?

That was boys and this back-to-school, we have little gals' denim in all stores; correct?

Yes.

And tops in how many of those stores? We've recently rolled out a very small selection to all stores on the girls' tops, a very small selection that was received very well and then we did introduce BKE use some, on little girls side just recently at the end of the quarter.

I'm sorry you introduced BKE -- it's BKE?

Denim. Yes, for the little girls. We haven't had that in our mix before. So we just introduced that as well.

Got it. And so I'm curious who you -- is the parent coming in with a child or is the parent picking this up when they are in the store and recognize that you're now offering products for the family?

Yes. I would say some of each that our very loyal guests that have children are bringing them in and some that are just shopping to discover that we have it. And the stores do a nice job of introducing it when they see a lady with potentially could have children or know someone that have children so they make a nice introduction on that to get that started.

And will that become part of more of your outbound marketing in the email and I presume that's the greatest way to leverage what you have in the stores?

Yes. We will continue to update and work on that and we -- our back-to-school and our holiday, we expect to be the best part of that business.

Got it. And then just a final question on footwear, which has been under a little bit of pressure. Any thoughts on -- is it just what's happening in terms of denim and silhouettes and changing the footprint, if you will? What people are wearing with that? Or what are your thoughts about that?

Well, it's -- our -- on the ladies' side, are sandals, flips, and such, we sold them pretty nicely. I think our inventory was lower in those categories than last year and last year, I think we also brought in some of the boots a little earlier and with the tax-frees earlier last year, I think that had some effect on the footwear. As far as silhouettes with denim, Pat, do you want to comment?

Well, I would just tag onto what Dennis has already said but our seasonal sandals, flips, the more wear-now things that are a little bit lower in price points performed well and we're happy with those. And we did shift some of our tall boots, or actual leathers, maybe a little bit later for wear-now for the upcoming quarters.

Got it. Thank you. Best of luck, guys.

Thank you.

Thanks, Liz.

Lee Giordano, Sterne Agee -- I'm sorry.

Hi, this is actually Michael Gunther on for Lee. Thanks for taking my question. How are you guys thinking about the store opening cadence for the last year because obviously, it slowed down a little bit in terms of what you're planning for this year. So what are your plans for next year and maybe in the future after that?

Well, we're still looking at new stores as where we want to see opportunities for -- well we think it's a great situation long term. And we're not just calling out a certain number of stores and trying to fill it. We are shopping continuously for new positions that we feel good about and we'll probably have a better idea for next year at the next call. As well as we're continuing to reposition some of our existing stores where we are able to expand them, give or take, around 20% and update the looks there so that's our growth plan at this point.

Thank you.

Yes.

Adrienne Yih, Wolfe Research.

Hi. Good morning. My question is on the operating side, the selling expense in particular. It was essentially flattish in dollars and I'm wondering, is that something that we should expect to go forward? And then where do you breakeven? Where do you get leverage on your -- on the fixed components of the business? Thank you.

The actual selling expense category, that particular category probably has more variable expenses in it than general and administrative expenses which would have more fixed cost in there. But we continue to see the selling expense vary a little bit more along with sales. We are a pay-for-performance Company so a lot of times as sales grow, in the past, we've had the question why we don't -- or maybe something gives it much leverage in selling is because we do pay the majority of our teammates in the stores are at a base plus commission. So we feel strongly in the pay-for-performance. And then, in the cost of goods sold, we feel like right now that probably that low to mid single-digit would be where the leverage is and the leverage -- and that's on an annual basis because when we look at the leverage with Q1 and Q2 with the sales lowering in absolute dollars, that's a little more leverage than it does in the back half. So the back half, that comp can be a little bit lower to get that leverage on the cost of goods sold because the absolute dollars of sales are greater so hopefully that makes sense.

That totally makes sense. Did you mention -- I know you gave some the components, did you mention the number of transactions by any chance?

We did not.

Were those -- can you give us any color on that?

I don't have that off the top of my head. Sorry.

Okay. Great. And then, in terms of -- it sounded like some of the fashion components, you were going to do that through private label; is there any meaningful change in the percentage of private label, on a go-forward strategy versus historical?

I mean, we still do well with brands but I would guess in the back half, we'll have somewhere between a low to mid-single digit growth in private brands. Some of them when we start a brand, too, we'll start that out like in a test mode to make sure we have the right fits and the category works in our best stores before rolling it out in total. So it will -- the growth there will probably be slow.

Okay. Great. Thank you very much and best of luck for Fall.

Thank you very much.

(Operator Instructions)

Steve Marota, C.L. King & Associates.

Hi. One follow-up if you have the statistics handy, could you tell us what the percent of denim was in the mix in the first half of this year as well as percent of denim mix in the second half of last year?

Sure. We can do that.

We've got to look it up.

I've got that right here. So this year, for the first half of the year, denim represented about 38.7% of sales versus 40.3% for the same time a year ago.

Great. And you wouldn't happen to have second half of last year handy and if not, we can do that offline.

I do not have it handy; sorry about that, Steve.

No trouble whatsoever. We'll, again, do it offline. Thank you for the follow-up.

Yes. Thank you.

Andrew Hollingworth, Holland Advisors.

Hi there. Good morning. Just a couple quick questions to follow-up from the set of denim questions that have been raised. Without us knowing the effect of the state taxes, which obviously, you're not prepared to give us for July, maybe you could just give us a bit of reflection, in terms of looking with hindsight, if the group had known what it knows now about the trends away from denim towards other fabrics in the last couple of years, how might you have done things differently? Just as a -- just to give us a bit of color on this whole subject. And the two other questions on top of that is that, in terms of the drivers of like for like sales in the last X months, historically you've alluded to how much of that might be a foot forward, how much of that is trends away from denim and so on and give us, again, a feel for that even if you're not prepared to give absolute numbers, maybe some indications would be useful. And my last question would be, is it during this period of changing attitudes towards denim, let's call it the last two years, do you think there's been a slight change in your customer age profile as well?

Okay. Andrew. The -- I believe you're asking about if we should have been more in the activewear earlier or such with the --

Well, I'm more -- clearly, you decide what you think sales is right for your customers. I'm just intrigued as to whether where you should go back and do it differently, would you choose to? Or frankly, do you just take the view that this is what we believe, we'll sell for you, this is our brand and our identity for the next 15, 20 years and therefore, we wouldn't have changed a thing?

Well, you can always change a little bit but overall, I think the denim or denim-type fabrics, casual fabrics are our core. And that I think we did try some activewear with brands and such and had some success but it's to play in the big market, that's not our niche or how we can differ ourselves and the focusing on the fits and fabrics and stretches, it's a little more difficult the last year-and-a-half, two years, just because there was mostly was dark and not a lot of excitement out there. So I think our team did a good job on the ladies' side, working with that, with what's going on and keeping a very solid denim guest maybe not buying as many units of the denim but still doing a good job with it. And on the men's, they've actually grown the denim and done a nice job and they work with some twills and some other fabrics with that but the other fabrics mostly complement our business and sometimes we'll be able to do a little more than others. So I think overall, we probably would not have changed a lot of what we had done. But we're always looking to learn and improve and we're open to testing and we work with a lot of brands to see if we think the product offers something that our guest would want. So we try to keep an open mind, but the niche really comes down to denim and that's where we see going forward that there's going to be some good opportunities.

And then a follow-up question, so the ones that -- so if you had to look at the last, let's say, year or six months, whatever you want in terms of sales declines, how much of it would you think is down for how much of it's down to the denim stroke trends away from it, trends and then the customer age profile?

Well, I think our -- on the age profile, I mean, we still have a wide variety of guests shopping our stores from junior high, high school, college, but then in our stores where we have been 10, 15, 20 years or more, we probably -- our store managers would tell us that our guest is -- we probably have more guests over the age of 25 than under the age of 25. And so that shifts some of the shopping at different times of the year and that's -- we have such a wide selection of product and a wide selection of fits as far as in our denim and even in our top categories that we can hit on different lifestyles with all our guests at different ages. So that gives us an opportunity there and -- but it also creates challenges of how to narrowly focus on certain ones as well. But I think the team does a very nice job on that.

Okay. Thank you.

You're welcome.

Currently, we have no further questions in queue.

If there are no further questions, we really want to thank everybody for taking time out of their day to join us on the call today and have a great day.

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