Buckle Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.15.12 | About: The Buckle, (BKE)

Buckle (NYSE:BKE)

Q3 2013 Earnings Call

November 15, 2012 10:00 am ET

Executives

Karen B. Rhoads - Director and Member of Executive Committee

Thomas B. Heacock - Treasurer and Corporate Controller

Dennis H. Nelson - Chief Executive Officer, President, Director and Member of Executive Committee

Robert M. Carlberg - Vice President of Men's Merchandising

Patricia K. Whisler - Vice President of Women's Merchandising

Analysts

Simeon A. Siegel - JP Morgan Chase & Co, Research Division

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

John D. Kernan - Cowen and Company, LLC, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Paul Alexander - BofA Merrill Lynch, Research Division

Edward Roche

Operator

Ladies and gentlemen, thank you for standing by. The members of the 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 in 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 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.

Karen B. Rhoads

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 because 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 margin, partially offset by an increase in occupancy, distribution and buying cost. 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 cost.

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 18.0% 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 21.0% 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 quarter end, cash in 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 1/3 and 50%-off category.

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'd like to turn the call over to Tom Heacock, our Treasurer and Corporate Controller.

Thomas B. Heacock

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%. The 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 2 categories account 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 1/3 of sales compared to approximately 30% last year.

During the quarter, we opened 1 new store and completed 7 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 2 stores that moved back into their remodel states in November. We also completed several smaller remodeling projects during the year.

With that, we welcome your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Simeon Siegel with JPMorgan.

Simeon A. Siegel - JP Morgan Chase & Co, Research Division

So it looks like your online sales growth actually came in slightly lighter than the gain in the store sales for, I believe, this first time. Are you seeing any shift in the online trends? Has there been any change of 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 a recapture opportunity there?

Karen B. Rhoads

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

Dennis H. Nelson

Yes. Basically, we've had pretty strong growth the last couple years well over 20%. And I think last year, we also introduced our new design of our Internet. And so I think it was not really a change of 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 we feel good about where we're at on that.

Karen B. Rhoads

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

Thomas B. Heacock

Sure. A year ago, in the third quarter, I think merchandise margins were down about 70 basis points and half of that was kind of a 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 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.

Simeon A. Siegel - JP Morgan Chase & Co, Research Division

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

Thomas B. Heacock

There was not that one time.

Simeon A. Siegel - JP Morgan Chase & Co, Research Division

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

Karen B. Rhoads

Correct and we use about mid. It takes on mid-single digit to start getting leverage on the buying distribution occupancy costs.

Operator

And our next question is from Margaret Whitfield with Journey Capital (sic) [Sterne Agee].

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

Sterne Agee. Yes, 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 North East 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?

Dennis H. Nelson

Okay. The private label and the men's denim has improved the total percent 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 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.

Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division

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

Dennis H. Nelson

None at this time.

Operator

And our next question is from the line of Dana Telsey with Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

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 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?

Dennis H. Nelson

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 lines, Bob and Pat, do you want to comment on the tops?

Robert M. Carlberg

Yes. On men's knits, we're also seeing some increase in the private brands there as well and we had a really nice push of color, detail and fabric. And from a pricing standpoint, I'd say it'd 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.

Patricia K. Whisler

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.

Operator

And our next question is from the line of Adrienne Tennant with Janney Capital Markets.

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

This is actually Gaby Carbone calling in for Adrienne. So I was just wondering if you're planning 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.

Dennis H. Nelson

I mean we have pretty much taken the same approach as we have this year and last year toward holiday. We have just a couple specials that we have some gifts 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.

Operator

Our next question is from the line of Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Could you just talk a little more about your remodel program? How much of the cost to complete a remodel? And then what are the benefits you're seeing from the remodels after you complete them?

Dennis H. Nelson

Well each remodel can be different depending on the particular store. We have some stores that are very strong but it's just time for an update. We might see -- a strong store might see single-digit-type growth. Other stores that if we improved 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 would still have some ongoing, but we're pretty well up to date on those as well.

Operator

And our next question is from the line of John Kernan with Cowen.

John D. Kernan - Cowen and Company, LLC, Research Division

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

Dennis H. Nelson

So the -- 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.

John D. Kernan - Cowen and Company, LLC, Research Division

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

Dennis H. Nelson

It's difficult for us because the industry would classify the ABC 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.

Operator

And our next question comes from the line of Edward Yruma from KeyBanc.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

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

Dennis H. Nelson

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

Karen B. Rhoads

No. I mean, yes, but we can't predict how the board will -- what direction they'll take on that.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

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

Dennis H. Nelson

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.

Operator

And your next question is from the line of Paul Alexander with Bank of America Merrill Lynch.

Paul Alexander - BofA Merrill Lynch, Research Division

Dennis, when you reported second quarter in August, you said that you felt really good about the products for fall and you are 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 -- how you're feeling about the product or how the team is responding to the products for holiday? And then I have a follow-up.

Dennis H. Nelson

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.

Paul Alexander - BofA Merrill Lynch, Research Division

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 the 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?

Karen B. Rhoads

Let me. 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?

Paul Alexander - BofA Merrill Lynch, Research Division

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

Dennis H. Nelson

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

Operator

[Operator Instructions] And we have a follow-up question from Paul Alexander.

Paul Alexander - BofA Merrill Lynch, Research Division

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 cost benefit with cotton down. So can you give us an idea what inventory looks like in terms of units?

Karen B. Rhoads

Sure. I mean, 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 that is the timing of the flow of the products. We continue to flow new product to the stores every day, Monday through Friday. And then Dennis or Bob or Pat, I don't know if you have further comment about the holiday products in?

Dennis H. Nelson

I think, as you mentioned, 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. We'll continue to chase inventory if we have to.

Operator

And our next question is from the line of Edward Roche with Freedom Mountain Investments.

Edward Roche

This is Ed Roche. With the large special dividend, the cash flow 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?

Dennis H. Nelson

Karen, do you have that one?

Karen B. Rhoads

Yes, I mean, cash yields are at the end of the third quarter, and again, as I can see it, part of that is just timely of the payment of the discretion in the fourth quarter this year versus third quarter last year. So we project to be paying for special dividend with cash flow from operations and we don't make any forward looking comments as far as the cash flow ends at the end of the fiscal year.

Operator

And our next question is from the line of Simeon Siegel.

Simeon A. Siegel - JP Morgan Chase & Co, Research Division

Just quickly, sorry for -- 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?

Karen B. Rhoads

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?

Dennis H. Nelson

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. Did that cover what you asked about, Simeon?

Operator

There is a question, a follow-up question from John Kernan.

John D. Kernan - Cowen and Company, LLC, Research Division

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?

Dennis H. Nelson

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. That would -- I would think that would be pretty consistent with third quarter going into fourth quarter as well, would you agree?

Robert M. Carlberg

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

Operator

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

Dennis H. Nelson

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

Operator

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

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