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The Buckle, Inc. (NYSE:BKE)

Q4 2013 Earnings Conference Call

March 14, 2014 10:00 ET

Executives

Dennis Nelson - President & CEO

Karen Rhoads - VP, Finance & CFO

Tom Heacock - Treasurer & Corporate Controller

Analysts

Edward Yruma - KeyBanc Capital Markets

Paul Alexander - Bank of America Merrill Lynch

Simeon Siegel - Nomura

Kate Fitzsimmons - JPMorgan

John Kernan - Cowen and Company

Elise DiVincenzo - First New York Securities

Operator

Ladies and gentlemen thank you for standing by and welcome to The Buckle’s fourth quarter earnings release conference call. (Operator Instructions). 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, 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, Treasurer and Corporate Controller.

As they review the opening results for the fourth quarter which ended February 1st, they would like to reiterate their policy of not giving future sales or earnings guidance and having 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 and 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 your host Ms. Karen Rhoads, please go ahead.

Karen Rhoads

Thank you. Good morning everyone and thank you for joining Buckle’s conference call. Our March 14th, 2014 press release reported that net income for the 13 week fourth quarter that ended February 1, 2014 was $59.3 million or $1.23 per share on a diluted basis and that’s compared to net income of $61.4 million or $1.28 per share on a diluted basis for the prior year 14 week fourth quarter that ended February 2, 2013.

Our net income for the 52 weeks fiscal year that ended February 1, 2014 was $162.6 million or $3.39 per share on a diluted basis compared to net income of $164.3 million or $3.44 per share on a diluted basis for the 53 week fiscal year that ended February 2, 2013. Net sales for the 13 weeks fourth quarter decreased 6% to $339 million compared to net sales of $360.6 million for the prior year fourth quarter which was a 14 week quarter.

Comparable store sales for the quarter were down 2.8% in comparison to the same 13 week period in the prior year. Our online sales which are not included in comparable store sales increased to $29.3 million. For the 13 weeks compared to the 14 week quarter a year ago that was an increase of 0.4% and if we compare the same 13 weeks a year ago online sales were up about 7.3%.

Net sales for the 52 week fiscal year ended February 1, 2014 increased 0.4% to $1.128 billion compared to net sales of $1.124 billion for the 53 week fiscal year ended February 2, 2013. Comparable store sales for the fiscal year were flat in comparison to the same 52 week period in the prior year. Our online sales which again are not included in comparable store sales increased to $89 million and for the 52 weeks compared to the 53 weeks a year ago, that was an increase of 5.3% in comparing 52 weeks to 52 weeks the increase would have been close to 7.5% for online sales.

Gross margin for the quarter was 47.6% down approximately 40 basis points from 48.0% for the fourth quarter last year. The decrease was driven by deleveraged occupancy, buying and distribution expenses resulting from the comparable store sales decline and one fewer week in the fiscal quarter this year which had approximately a 110 basis point impact on gross margin and was partially offset by a 40 basis point improvement in merchandized margins and a reduction in expense related to our incentive bonus accrual.

For the fiscal year gross margin was 44.2% down approximately 20 basis points from 44.4% in fiscal 2012. The decrease was driven by deleveraged occupancy, buying and distribution expenses which had approximately a 55 basis point impact on gross margin and was partially offset by a 25 basis point improvement in merchandize margin and a reduction in expense related to the incentive bonus accrual.

Selling expense for the quarter was 18.5% of net sales compared to 18.0% for the fourth quarter of fiscal 2012. Increases in store payroll expense, advertising expense, online marketing and fulfillment expenses, health insurance claims expense and certain other selling expenses were partially offset by a reduction as a percentage of net sales in expense related to the incentive bonus accrual. For the fiscal year selling expense was 18.3% of net sales compared to 18.0% in fiscal 2012.

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 in expense related to the incentive bonus accrual. General and administrative expenses for the quarter were 1.3% of net sales compared to 3.0% for the fourth quarter of fiscal 2012.

With the decline primarily driven by reductions in equity compensation expense and expense related to the incentive bonus accrual. For the fiscal year, general and administrative expenses were 3.1% of net sales compared to 3.5% in fiscal 2012, again primarily driven by reductions in equity compensation expense and our expense related to the incentive bonus accrual. Our operating margin for the quarter was 27.8% for the fourth quarter of fiscal 2013 compared to 27.0% for the fourth quarter of fiscal 2012. For the full fiscal year our operating margin was 22.8% in fiscal 2013 compared to 22.9% in fiscal 2012.

Other income for the quarter was $2.2 million compared to $1.2 million for the fourth quarter of fiscal 2012 and other income for the full fiscal year was $3.5 million compared to $3.5 million last year. Income tax expense as a percentage of pretax net income was 38.6% for the fourth quarter of fiscal 2013 compared to 37.9% in the fourth quarter of fiscal 2012, bringing our fourth quarter net income to $59.3 million for fiscal 2013, versus $61.4 million for fiscal 2012.

For the full fiscal year income tax expense was 37.6% of pretax net income in fiscal 2013 and 37.2% in fiscal 2012 bringing year-to-date net income to $162.6 million for fiscal 2013 versus $164.3 million for fiscal 2012. Our press release also included a balance sheet as of February 1, 2014 which included the following: Inventory of $124.1 million which was up approximately 19.5% from inventory of $103.9 million at the end of fiscal 2012. And total cash and investments of 228.5 million which compares to 179.8 million at the end of fiscal 2012. As of the end of the quarter inventory on a comparable store basis was up approximately 18% in total mark down inventory was up compared to the end of fiscal 2012. We also ended the quarter with $158.6 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $3.6 million and depreciation expense was $8.6 million. For the full fiscal year capital expenditures were $28.8 million and depreciation expense was $32.6 million.

Year-to-date capital spending is broken down as follows, $21 million for new store construction, store remodels and store technology upgrades and $7.8 million for capital spending at the corporate headquarters and distribution center and that includes $5.4 million for the purchase of a new airplane to replace a plane that have been sold at the end of fiscal 2012.

We currently expect our fiscal 2014 capital expenditures to be in the range of $48 million to $53 million which includes primarily new store and store remodeling projects, IT investments and the construction of a new office building as part of our home office campus here in Kearney, Nebraska.

For the quarter UPTs increased approximately 3.0%, the average transaction value increased approximately by tenth of a percent as the average unit retail decreased approximately 2.5%. For the full fiscal year UPTs increased approximately 3.5%, the average transaction value increased approximately 2.5% and the average unit retail decreased approximately 1.0%.

Additionally our average sales per square foot for the year was $461 compared to $475 in fiscal 2012 and our average sales per store was 2.3 million compared to 2.4 million in fiscal 2012. Buckle ended the year with 450 retail stores in 43 states compared to 440 stores in 43 states at the end of fiscal 2012.

Additionally our total square footage was 2.271 million square feet as of the end of the year compared to 2.208 million square feet at the end of fiscal 2012. And now I would like to turn the call over to Tom Heacock, our Corporate Controller and Treasurer.

Tom Heacock

Good morning and thanks for joining us this morning. I would like to start by highlighting performance from our various merchandized categories for both the quarter and for the full fiscal year. Men’s merchandise sales for the quarter were down approximately 5% compared to the prior year 14 week fiscal quarter and were up just slightly compared to the same 13 week period last year.

Strong categories included denim and casual bottoms and sweaters. Average denim price points for the quarter increased from $87.40 in the fourth quarter of fiscal 2012 to $88.45 in the fourth quarter of fiscal 2013. For the quarter our men’s business was approximately 44.5% of net sales compared to approximately 44% last year and our average men’s price point were flat at $59.90.

For the full fiscal year men’s merchandise sales were up approximately 1.5% with strong categories including denim and casual bottoms, knit shirts, sweaters, shorts and accessories. Average denim price points for the full year increased from $87.85 in fiscal 2012 to $89.15 in fiscal 2013. For the year our men’s business was approximately 41.5% of sales compared to approximately 41% last year and our average men’s price point increased slightly from $55.25 to $55.60.

Women’s merchandise sales for the quarter were down approximately 7% compared to the prior year 14 week fiscal quarter and sales were down approximately 1% compared to the same 13 week period in the prior year. Strong categories in the women side included casual bottoms, knit tops, sweaters, outwear, accessories and footwear. Average denim price points for the quarter decreased from a $101.10 in the fourth quarter of fiscal 2012, to $98.85 in the fourth quarter of fiscal 2013.

For the quarter our women’s business was approximately 55.5% of net sales compared to approximately 56% last year and our average women’s price points decreased approximately 6% from $52.95 to $49.80. For the full fiscal year women’s merchandise sales were down just slightly with strong categories including casual bottoms, woven tops, sweaters, active apparel, skirts and dresses, outwear, accessories and footwear. Average denim price points for the full year decreased from $98.55 in 2012 to $98.40 in fiscal 2013. For the year our women’s business was approximately 58.5% of sales compared to approximately 59% last year and our average women’s price points decreased approximately 2% from $49.5 to $48.15.

For the quarter combined accessory sales were down approximately 1.5% and combined footwear sales were up approximately 5% compared to the prior year 14 week fiscal quarter. Compared to the same 13 weeks last year accessory sales were up approximately 3.5% and footwear sales were up approximately 13%. These two categories accounted for approximately 9% and 5% respectively of fourth quarter net sales which compares to approximately 8.5% and 4.5% for each in the fourth quarter of last year. Average accessory price points were down approximately 6% and average footwear price points were up approximately 15%.

For the full fiscal year combined accessory sales were up approximately 2.5% and combined footwear sales were up approximately 10.5% and these two categories account for approximately 8.5% and 6% respectively of net sales for the full year which compares to approximately 8.5% and 5.5% for each in fiscal 2012.

Average accessory price points for the full year were down approximately 3.5% and average footwear price points were up approximately 15%. 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% for each in the fourth quarter of last year.

For the full year denim accounted for approximately 45.5% of sales and tops accounted for approximately 30% which compares to approximately 46.5% and 31% for each in fiscal 2012. Our private label business was up slightly as a percentage of sales for both the fourth quarter and for the year and represented just over 34% of sales for the full year.

During the quarter we completed three substantial remodels and closed two stores post-holiday bringing our account for the full year to 13 new stores, eight full remodels and three store closures.

We also closed one additional store just after the end of the fiscal year. As of the end of the year, 341 of our 450 stores were in our newest format. For fiscal 2014 we anticipated opening 17 new stores including four for spring, nine for back to school and four for holiday and we also anticipate completing seven full remodels during the year.

By season we anticipate eight of the remodel stores will be completed for spring, seven for back to school and two for holiday. Planned new store openings for the spring include stores in Lake Jackson, Texas which already opened in February. Anchorage, Alaska which will be a new state for us and two in the Dallas, Texas market. Also please note that four of our planned new stores for the year will be in mills projects which are a hybrid of outlet, entertainment and full price retail and we plan on operating these in our standard format. And with that we will open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Edward Yruma from KeyBanc. Please go ahead.

Edward Yruma - KeyBanc Capital Markets

Specifically on the G&A number, Karen I think you did cite that incentive comp accrual was one of the reasons why it was down year-over-year but I think the 4.5 million was the lowest it's been since ’03. I was wondering if you can talk a little bit more about the drivers there or if there was a reversal?

Karen Rhoads

There was a reversal Ed and we had been accruing in Q1 through Q3 for achieving both performance targets for the 2013 grants of restricted stock and we did not attain those performance targets so there was a reversal of the accrual related to the fiscal 2013 grant from the prior three quarters. So the expense has been - total restricted stock expense have been averaging about 2.5 million per quarter and with the true up in the fourth quarter, the fourth quarter was actually a credit of about that same amount. Does that help?

Edward Yruma - KeyBanc Capital Markets

Got it, so about a 7.5 then?

Karen Rhoads

Well the 2.5 per quarter is the total expense, the reversal is only related to the 2013 grants. There is also expense related to prior year grants.

Edward Yruma - KeyBanc Capital Markets

And just a bigger picture question, I think the spread between your inventory growth and your sales growth is the widest it's been in some time. I guess just how do you feel about inventory overall given the promotional environment and how quickly can you get inventory more aligned with sales? Thanks.

Dennis Nelson

Well last year we came off the holiday season very low in denim and part of that was in the gals, we were still transitioning from our previous maker of our BKE brand and working with different vendors. So our inventory on our gals denim was very low at the beginning of last year as well as the men’s was coming off a strong holiday season. So we have increased our inventory in both guys and gals denim to take care of our guest. Also we found that last year we had problems with some deliveries with the Chinese New Year seems to be extending each year with the workers not coming back to the plant. So we brought in more products to be ready for the spring season in January than previous and so we feel good about that.

Also it's still a small part of our business but some of the children’s product that we have added in our stores contributes to the growth as well and we feel good about our inventory and I think you will see we will manage that well through the year.

Operator

Thank you. And our next question is from Paul Alexander from Bank of America. Please go ahead.

Paul Alexander - Bank of America Merrill Lynch

Just a follow-up on that inventory question, could you break down what’s inside the elevated mark-down inventory, is any of it some of this escalated investment in denim and you know why is it that with heavier investment in denim, the women’s denim business is not performing as well?

Dennis Nelson

We’re coming off of multiple years of very strong denim performance but we still have a very good regular price business and feel good about our selection. Our total mark down dollars are up slightly but as a percent of our inventory it is down from the year before.

Paul Alexander - Bank of America Merrill Lynch

If I could just get a follow-up on the Internet sales, noted that on a comparable week basis they actually grew 7% but you know it's still below the industry growth rate for e-comm. Why do you think your online growth has been weaker than peers? Do you need to invest in systems there? Are you at all worried that you might be losing online share? Thank you.

Dennis Nelson

That’s a good question. We believe the -- we have not been promotional with our online sales and have not had any free shipping specials. We continually run our business regular price like our stores and also over the last year we have added that if a guest orders or buys something that they can special order that out of the store and have free shipping and pick up at the stores and I know that has cut into the online business as well. So we think it's been a good way to run the business in a profitable way.

Operator

Thank you. Our next question is from Simeon Siegel from Nomura. Please go ahead.

Simeon Siegel - Nomura

I think you said you posted a 40 basis point merch margin increase in the fourth quarter which seems impressive in light of the promotional environment. Can you talk to what you would expect merch margin trends to go forward, and then just quickly Karen given the puts and takes between the selling and SG&A that you are referring to can you just give us any color on the expected SG&A dollar growth for 2014? Thanks.

Karen Rhoads

I think on the expected SG&A for 2014 I think we work through that kind of on a more normalized basis. The reversal in the fourth quarter was really a one-time reversal related to those 2013 grants where the performance targets were not achieved and during every quarter in 2014 we will continue to evaluate the targets for the new grants.

With the 2013 grants forfeited there will be a slight reduction in expense because the expense is spread over a period of time so we will have a little bit of slight decrease from not having those grants included in the quarterly accrual.

Dennis Nelson

And in regard the margins, I mean we feel good about our selection and where we’re at as we start the year but our margins have continually improved and they are at a level now that we don’t promise continued improvement there but we will do our best to work at improving that.

Operator

Thank you. Our next question is from Kate Fitzsimmons from JPMorgan. Please go ahead.

Kate Fitzsimmons - JPMorgan

My question is on CapEx, it’s going up pretty sizably this year compared to last year, how should we think about this as it relates to other uses of cash in 2014. You guys have historically been pretty generous in returning excess cash to shareholders. So just any thoughts there would be helpful and then I also noticed that you guys recently appointed a new EVP of Stores. Just what do you expect her focus to be in 2014 and what should we be on the lookout for in 2014? Thank you.

Dennis Nelson

Regarding the CapEx we have been short of office space and at our home office and have finally started or soon will start on our building to just make it more efficient and a better situation work environment as well as give people the space they need to do their business and that’s the biggest part. We also will be adding the 17 stores is up from the last few years just because we found opportunities we thought would be great long term investments, as well as the remodels jump substantially this year. Here again based on opportunities that we felt were very good for our future stores and some of that’s just matter of timing with the spaces in the mall or the lifestyle centers to be available to make the right situation. So we think those are all good investments.

On our Executive VP of Stores, Kari Smith, who has been with us about 35 years. She has been an excellent leader with our sales team and management. We’re just involving there even more into the total business in addition to leading the stores and I mean she just does a fabulous job and we will just increase her involvement but in total you probably won't see a big change from outside the company.

Operator

Thank you. (Operator Instructions). And we will go to John Kernan with Cowen and Company. Please go ahead.

John Kernan - Cowen and Company

Quick question on the driver of comps, you’re in transactions being under some pressure for a while and UPT has really been a big driver. Can you talk about what is that driving that and will you continue to drive that going forward?

Dennis Nelson

Well I think branded denim price points are still working well and that has been a plus there but I think we spend a lot of time on developing stronger leaders in our stores and teams and they continue to improve on servicing the guest and putting outfits and creating loyal guest and I think that has been a big plus there as far as developing our business and improving the transaction value.

John Kernan - Cowen and Company

Okay and then just on some of the CapEx investments, I think are centered towards some IT stuff and online initiatives. Can you talk about some of the omnichannel initiatives you’re putting in place now to see, to drive some pick up in the e-comm business.

Tom Heacock

I think on the CapEx like Dennis I mean looking at the increase for next year the biggest part of that would be the increase in the number of store projects, with the increase in new stores and the increase in remodel and then the office building and then every year we have investments in technology and so that’s kind of a constant. I think right now we’re working on programs for customer loyalty like we have for a couple of years and something that might require a little bit more investment this year than in the past but otherwise I mean that’s just a constant focus I think of investing in technology to improve things to make them better and make it better for our guests and teams in the stores.

John Kernan - Cowen and Company

Okay and then just any comments around some of the newer markets and store performances in those newer markets that you’ve gone into recently?

Dennis Nelson

I think in the last year we -- all the store openings were in existing states. But we were very happy with our openings last year and we continue to make progress in different regions. Again the biggest impact on our business in the stores is our manager and the teams they develop and so region wise I don’t see any great exceptions to different areas, it basically comes down to the quality of the store manager and the experience the guest has there that has an impact on the store.

Operator

Our next question is from the line of (indiscernible). Please go ahead.

Unidentified Analyst

I have two related questions to you primary demographic, first do you think you are being negatively affected by the so called omnichannel where expectations are for 24/7 online, mobile, price ops kind of experience where you might actually be being showrooms or fitted at Buckle and then having customers make purchase -- purchases somewhere else online?

Dennis Nelson

Well I think the key to our success along with our people is in our selection with our brands we almost probably 70% - 80% exclusive styles in most seasons and so to find that exact product or sometimes it's an exclusive fit for us as well as design so that the guest cannot go elsewhere to buy that product and then among our own brands we have several of our own labels in both men’s and women’s that our teams merchandise and design and are also exclusive and now we have a great look, fit but it's unique styling and has been very successful as well. So it would be very difficult for somebody just to shop as to then go elsewhere to make the purchase.

Unidentified Analyst

And my follow-on is what is it -- in your primary demographic do you think that you’re seeing any signs that they just may not have a same kind of discretionary purchasing power that they once had or do you think that they are delaying purchases compared to historical norms?

Dennis Nelson

Well I’m not sure how to approach that part but I think the misunderstanding is that we’re only high school and college shop for a lot of investors think that’s our only customer and we have actually developed where some of our stores where we have a little longer history will tell us that they have more guest over the age of 25 than under the age of 25. So we’re able to sell to junior high, high school, college and we have majority of probably of our store managers and office staff or probably in their 30s give or take or little over and they shop our stores extensively and that’s kind of how we see our guest that once they realize that we can fit in [ph] and put the outfits and we have such a wide variety of styling and categories, lifestyle for our guests that we continue to expand that guests and so for some of our guests yes maybe there is some economic issues but overall we have a wide selection and I think are in pretty good shape.

Operator

(Operator Instructions). We have a question from Elise DiVincenzo from First New York. Please go ahead.

Elise DiVincenzo - First New York Securities

Just a question on the inventory, just given the magnitude of the increase year-over-year, do you think you can give some color around how much markdown inventory was up just so we have a sense. And then secondly maybe if you can just clarify on the denim inventory, I think Dennis you said you’re under inventory last year and so this year it should be up or it is up but it's down as a percent of the mix. So does that mean the other categories were up even more than that 20% growth? Just help me rectify those two statements. Thanks.

Dennis Nelson

Okay. I would say most of the increase would be in the denim inventory. Our other categories overall were pretty much right on target and we feel good about that. We mark down dollars if I understood the question right, it's up just slightly in dollars but as we mentioned earlier as a percent of our total inventory is down. Did we answer your question okay?

Elise DiVincenzo - First New York Securities

Okay so mark down is down as a percent of the inventory and then denim is also down as a percent of the inventory?

Dennis Nelson

We don’t break that out unless you’ve another comment.

Operator

Thank you. And at this time there are no further questions in queue.

Karen Rhoads

All right with no further questions we want to thank everyone for joining in the call today. And enjoy the weekend.

Operator

Thank you. And ladies and gentlemen this conference will be made available for replay after 11 o’clock through March 28. (Operator Instructions). That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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