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Executives

Dennis Nelson - President and Chief Executive Officer

Karen Rhoads - Vice President of Finance and Chief Financial Officer

Kyle Hanson - Corporate Secretary and General Counsel

Tom Heacock - Corporate Controller

Analysts

Tom Filandro - SIG

Anna Andreeva - JP Morgan

Margaret Whitfield - Sterne, Agee

Marc Bettinger - Wasserman & Associates

Stephanie Wissink - Piper Jaffray

[Steven Cheng] - [Red Gear Capital]

Roy Berger - Private Investor

Steve Kernkraut - Berman Capital

David Berman - Berman Capital

The Buckle Inc., (BKE) Q2 2008 Earnings Call August 21, 2008 10:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Vice President of Finance and CFO; Kyle Hanson, Corporate Secretary and General Counsel; and Tom Heacock, Corporate Controller.

As they review the operating results for the second quarter which ended August the 2nd, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement, the 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 made 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.

I'll now turn the meeting over to Ms. Karen Rhoads. Please go ahead.

Karen Rhoads - Vice President of Finance and Chief Financial Officer

Thank you and good morning. Our August 21, 2008 press release reported that our net income for the second quarter that ended August 2, 2008 was 22.3 million or $0.72 per share on a diluted basis and compares to 11.8 million, or $0.38 per share on a diluted basis for the prior year second quarter that ended August 4, of 2007.

Our year-to-date net income for the 26-week period ended August 2, 2008 was 41 million, or $1.32 per share on a diluted basis and that compares to 24 million, or $0.78 per share on a diluted basis for the 26-week period ended August 4, of 2007.

Please note, that as we highlighted in this morning's press release, our current year general and administrative expenses for both the quarter and year-to-date period have been reported net of a $3 million gain that was from the involuntary conversion of one of our Company's corporate aircraft to a monetary asset upon receipt of our insurance proceeds. The aircraft was destroyed by a tornado that hit the Kearney airport back in May. And the gain had a $0.06 per share after-tax impact on reported basic and diluted earnings per share for both the quarter and year-to-date period.

Our net sales for the 13-week second quarter increased 36.6% to $169.8 million, compared to net sales of $124.3 million for the prior year second quarter. Our comparable store sales for the quarter increased 27.8% and that's compared to the same period of the prior year.

Net sales for the 26-week year-to-date period ended August 2, 2008 increase 34.5% to $330.1 million compared to net sales of $245.4 million for the prior year 26-week period ended August 4, 2007. Our comparable store sales for the period increased 26.7% compared to the same period of the prior year.

Our gross margin for the quarter improved approximately 400 basis points to 41.4% and this improvement was driven by an increase in merchandise margins, which had about a 95 basis point impact, and then also by the leveraging of our buying and occupancy costs, which had about a 295 basis point impact. And then, these improvements were partially offset by an increase in expense related to the incentive bonus accrual.

For the year-to-date period, our gross margin improved approximately 300 basis points to 41.2%. This improvement was driven by an increase in merchandise margins which had about a 90 basis point impact on the year-to-date period and by the leveraging of buying and occupancy costs, which had about 295 basis point impact. These improvements were partially offset by an increase in expense, related to the incentive bonus accrual.

Our selling expense for the quarter was 19.7% of net sales, which was a reduction of approximately 50 basis points from the second quarter of fiscal 2007. The reduction was driven primarily by a decrease as a percentage in net sales in the store payroll expense and by leveraging certain other selling expenses. The reductions were partially offset by an increase in expense related, again, to that incentive bonus accrual and also to a lesser extent to an increase in Internet related fulfillment and marketing expenses.

For the year-to-date period, selling expense was 19.7% of net sales, which was a reduction of approximately 2 basis points compared to the same period of fiscal 2007. This reduction was driven primarily by a reduction as a percentage of net sales, in-store payroll expense, and by leveraging of certain other selling expenses. And, again, these reductions were almost equally offset by an increase in expense related to the incentive bonus accrual and, to a lesser extent, to an increase in the Internet-related fulfillment end marketing expenses.

Our general and administrative expenses for the quarter were 2% of net sales, which was a reduction of approximately 190 basis points from the second quarter of fiscal 2007. But if we exclude the gain related to the involuntary conversion of one of the company's corporate aircraft, general and administrative expenses were 3.8% of net sales, which was a reduction of about 10 basis points compared to the prior year second quarter. This reduction was driven by the leveraging of certain general and administrative expenses, which was almost equally offset by an increase in expense related to the incentive bonus accrual.

For the year-to-date period, general and administrative expenses were 3.1% of net sales, which was a reduction of approximately 90 basis points from the same period in fiscal 2007. Again, if we exclude the gain related to the involuntary conversion of the company aircraft, our general and administrative expenses were 4.0% of net sales for both the current year and prior year. An increase in the expense related to the incentive bonus accrual was offset by leveraging certain other general and administrative expenses.

Our operating margin for the quarter was 19.6% compared to 13.2% for the second quarter of fiscal 2007, and for the year-to-date period, our operating margin was 18.4% compared to 13.7% in the prior year. Excluding the $3 million gain on our aircraft, our operating margin for the quarter and year-to-date periods were 17.9% and 17.5%, respectively. Other income for the quarter was $2.1 million, which compares to $2.3 million for the second quarter of fiscal 2007. And other income for the year-to-date period was $4.4 million in both fiscal 2008 and fiscal 2007.

Our income tax expense as a percentage of pre-tax net income was 37% for the second quarter of both fiscal 2008 and fiscal 2007, bringing second quarter net income to $22.3 million for fiscal 2008 versus $11.8 million for fiscal 2007, an increase of 88.9%. Year-to-date, our income tax expense was 37% of pre-tax net income compared to 36.8% for the same period in the prior year; and that brought our year-to-date net income to $41.0 million for fiscal 2008 versus $24 million for fiscal 2007, an increase of 70.9%. Our press release also included a balance sheet as of August 2, 2008. It included some of the following categories.

Inventory was $103.4 million, which was up about 7.5% from inventory of 96 million at the end of the second quarter of fiscal 2007. Our total cash and investment were $258.8 million, which compares to $248.4 million at the end of fiscal 2007 and also compares to $187.1 million at the same time a year ago.

As of August 2, 2008, total cash and investments included $54.2 million of auction rate securities which compares to $145.8 million of auction rate securities as of February 2, 2008. The auction rate securities are reported at fair market value and at the end of the second quarter, we reported the investment amount is net of a $1.5 million reserve to account for a temporary impairment of certain securities from their stated par value. This reserve has resulted in reporting of an accumulative other comprehensive loss of $5 million in stockholders' equity as of August 2, 2008. There no such reserve as of February 2, 2008.

Of the $54.2 million in auction rate securities as of the end of the quarter, $8.3 million have been included in our short-term investments and $35.9 million has been included in long-term investment.

We also ended the quarter with $97.8 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $7.5 million and depreciation expense was $5.2 million.

For the quarter, our units per transaction increased approximately 3%. The average transaction value increased about 7.5% and the average unit retail increased approximately 4.5%.

The Buckle ended the quarter with 381 retail stores in 39 states, compared to 368 stores in 38 states at the end of the second quarter of fiscal 2007. With the opening of one new store subsequent to the end of the quarter, we currently operate 382 retail stores in 39 states.

And with that, I would like to turn the call over to Dennis Nelson, our President and CEO.

Dennis Nelson - President and Chief Executive Officer

Good morning. I would like to start by highlighting the performance of our various merchandise categories that led to our 36.6% net in sales increase for the quarter. Men's merchandise sales for the quarter increased approximately 30%, highlights were denim, woven and knit shirts and active apparel, each of which experienced strong double-digit sales growth. Average denim price points increased from $74 in the second quarter of fiscal 2007 to $79.35 in the second quarter of fiscal 2008.

For the quarter, our men's business is approximately 46.5% of net sales compared to approximately 35.5% last year. And the average men's price points increased approximately 9.5% from $28.50 in the second quarter of fiscal 2007 to $32.20 in the second quarter of fiscal 2008.

Women's merchandise sales for the quarter increased approximately 33%. Highlights were denim, knit tops, active apparel and accessories, each of which experienced strong double-digit sales growth. The average denim price points increased from $78.50 in the second quarter of fiscal 2007 to $80.55 in the second quarter of fiscal 2008.

For the quarter, our women's business is approximately 53.5% of net sales compared to approximately 34.5% last year. And the average women's price points were increased approximately 1% from $35.35 in the second quarter of fiscal 2007 to $35.75 in the second quarter of fiscal 2008.

For the quarter, combined accessories sales were up approximately 32% and combined footwear sales were up approximately 7.5%. These two categories accounted for approximately 8% and 5%, respectively, of second quarter net sales, which compares to approximately 8% and 6.5% for each in the second quarter of fiscal 2007. The average accessory price points were up approximately 2.5% and average footwear price points were down approximately 2.5%.

For the quarter, denim accounted for approximately 35% of our sales which compares to approximately 37.5% in the second quarter of last year. Tops accounted for approximately 31% of the second quarter sales which compares to approximately 36.5% last year.

Our private-label business was down slightly as a percentage of net sales for the quarter, due to the strength and variety of selection in our branded merchandise and represented approximately 25% of sales.

As Karen mentioned total inventory at the end of the quarter was up approximately 7.5%. But our total markdown inventory at the end of the period was down compared to the same time a year ago. During the quarter we opened seven new stores and completed four substantial remodels. At the end of the quarter 167 of our stores were in our newest format.

For the full fiscal year, we now anticipate opening 21 new stores, including one store during fiscal August and six stores for holiday. We also still anticipate completing 13 substantial remodels in total during the fiscal year. And based on this, we now expect our fiscal 2008 total Cap Expenditures to be in the range of $43 million to $44million, which has been updated to include the anticipated purchase of a new corporate aircraft during the third quarter.

And with that, we welcome your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Tom Filandro with SIG. Please go ahead.

Tom Filandro

Kudos, again, for bucking the trend. An amazing job, so great quarter.

Dennis Nelson

Thanks Tom.

Tom Filandro

Couple of questions. First can you just -- there's lots of talk out there about upward pressure on costs. I think you mentioned some costs related to the Internet and we are hearing it, both the product side as well as operationally. Can you just provide maybe a view of how we should think about IM use for the balance of the year and into 2009? And can we still expect leverage on the selling expense side when we exclude, of course, incentive bonus over that same period?

Dennis Nelson

Well, on the cost side of our product, we are seeing some increases in certain categories. And what we're finding though is some of that is due to more uniqueness details or fashion styling or improved quality in certain products. So in those cases, we are able to keep our margins and feel good about it. So to a small degree, there is some pressure there. At this point, I don't see that as a big concern. When the fuel -- the surcharges on the fuel, we do have some expenses there. I'm not sure if Karen has any comments on that part.

Karen Rhoads

I mean, we do see increased -- from fuel costs not just the surcharges on shipping costs but also like our bags. Some of the products that are poly-based. So we are seeing some increased cost there and are just working to try and minimize those or to make sure that we're buying in the right quantities and the right times. So we are just trying to make sure we are playing that as smart as we can.

Tom Filandro

Okay. So, Karen, just generally speaking the comp, obviously, you had some very strong comps. So you have the opportunity to leverage. Is the overall comp needed to leverage the slightly higher expense structure above what it had been previously? Or what's the typical number we can look at in terms of thinking about leverage on, say, selling expenses?

Karen Rhoads

I think that's a good question. We haven't put that pencil to see what that change in that number would be. But I guess just with the costs that we are seeing it probably stands to raise that it would take a little more comp to leverage than it would have in the past.

Tom Filandro

Okay. And Then I just have a quick question on cash and investments are approaching, what? About $9 per share. Maybe I will ask this question indirectly. Maybe you can tell us at what cash level per share were you at when you initiated the last special dividend? And does the current economic climate -- although it doesn't seem to be impacting you guys, does the current economic climate at all keep your comfort level of cash maybe higher than it was in previous years sort of an indirect way of asking a clear question.

Dennis Nelson

Do you recall the cash level of the last one?

Karen Rhoads

CFO I don't off the top.

Tom Filandro

Is there -- Dennis, is there generally or Karen, is there a comfort level of cash that you want to have on the balance sheet?

Karen Rhoads

I mean we do look at that and share that with the Board of Directors as far as where we think our minimal operating cash needs to be. And we will continue to do that at our next Board meeting next month.

Tom Filandro

And has that, internally, has that view changed given the environment or it would be very similar to what you felt in the past?

Dennis Nelson

My outlook would be it would be similar, maybe slightly more conservative, although we were conservative to begin with.

Tom Filandro

And one final question. Just can you help us understand this bonus accrual impact? I know it's spread between gross margins, selling, and then the other expense line. How should we think about incentive comps go forward for the, again, balance of this year and into 2009? It's obviously a difficult number for us to model, but maybe you can give us some understanding of how to view that go forward.

Karen Rhoads

Again, that's a good question. You know, it's not just a straightforward percentage that we can tell you to model it after because -- and I know we've gone through this but it's based on growth in three categories. Comparable store sales growth. Gross margin growth. And growth in pre bonus, pre-tax net income. And so in the back half, if those numbers continue to grow at very strong levels, then that incentive bonus will increase as well. If the gross backs off then it -- we look at it each quarter projecting where those growth categories will be for the year and then we apply it to the income for that year-to-date period. So I don't know how to explain it any more detailed than that. back. Tom, I don't know if I (multiple speakers)

Tom Filandro

Basically we keep seeing these kinds of trends in the business which are probably modeled more conservatively, internally than you're going to see I would say deleveraging effect. You'll see less of a leveraging on the selling side, on the fixed cost side of the business, because of incentive bonus accruals. Or if comps moderate to a more -- more in line with your internal budgeted plans then we would not see the incentive bonus working against us?

Karen Rhoads

Correct.

Tom Filandro

Thank you. Great job. Best of luck for fall and holiday.

Dennis Nelson

Thanks Tom.

Operator

Our next question comes from the line of Anna Andreeva with JP Morgan.

Anna Andreeva

Hi great. My first question I was just hoping to follow up on the incentive comp. And I know you guys don't break it out, but if I'm not mistaken in the back half of last year you started accruing it a little bit more appropriately. So going forward this should be more apples to apples versus you had underaccrued in the first half of '07. Is that the correct way to think about it?

Karen Rhoads

I think each quarter as I mentioned we have to project where we anticipate that we are going to end up for the year for each of those targets. And then we apply those percentages back to the income for that current period. And for, especially, for the first quarter of fiscal 2008, I think we were more conservative in our view of where were going to end up for the year. And then we did adjust that again in the second quarter and in the third quarter. So I think that then in fiscal 2008, I think what you are referring to, Anna, is we have probably been not as conservative in how we are viewing the year and where we anticipate it coming out.

Anna Andreeva

Okay. So I'm thinking about it correctly though? As we go through the year you guys started comping very nice double digits last year in the back half.

Karen Rhoads

Right.

Anna Andreeva

As we go through incentive comps should be more apples to apples. Correct?

Karen Rhoads

Correct.

Anna Andreeva

Okay, great. That's helpful. And, Dennis, just any reads on back to school? I know it's still early, but any opportunities you feel from last year maybe you lost the business then you feel good about this year whether in terms of specific brands or categories. It looks like footwear is comping nicely now and that should be an opportunity as we go through the year. If you could talk about that?

Dennis Nelson

I really can't address the August month at this point. I think from our review of the second quarter you saw we were real happy with our men's business continued to be strong and has some nice growth areas. You know to and the key categories with denim and knits for the second quarter, performed as we expected. So we have been pleased with the first-half results. And the merchandisers did a nice job and we're confident that we will have good business going forward.

Anna Andreeva

Are you doing anything differently looking at back to school in terms of marketing? I know you don't do a lot of marketing outside of what you do on the store level, but how should we think about maybe some of the promotions you are going to be executing?

Dennis Nelson

We had a try on our denim event in July and we had continued the Affliction promotion kind of end of June and July with that going on. And we were happy with that for second quarter. Our next event is end of October, November, a denim event that we did similar to what we did last year and it's possible that we might have kind of a fun tie in with a band group this fall. And it's possible that we are working on an Affliction event for this fall, but we don't have that put together yet.

Anna Andreeva

Okay and I guess also just wondering, looking at your store remodels. Any color you can give us of how are other stores comping versus the rest of the chain? Also maybe you could talk about performance in some of the new markets? I know you have those two stores in Baltimore. How are those doing? Because the concern has been how do these stores performed (inaudible) you guys move outside of your home base? So any color you could get there would be great.

Dennis Nelson

We have been happy with our new store openings and some of the it's only been a few months. So it's difficult to get a clear read on those, but you know we feel good about those markets and having good response from our teams and our guests in the new areas. So we are fine with that. Was there another part of the question? Did we lose them?

Karen Rhoads

Anna?

Dennis Nelson

Hello? Lori, with AT&T. Are you on?

Operator

Yes I do apologize. This is the conference operator. I lost my connection with you for just a moment. We had Anna's line open and then I had to momentarily close her line. So Anna, if we have not finished your question if you can queue back up by pressing star one. I do apologize for your disruption. We will open Anna's line again. Please continue.

Anna Andreeva

Finally done a great job on inventories. How should we expect inventories to shake out at the end of the third quarter?

Dennis Nelson

We are taking the same approach as we have. We are trying to do as much business as possible, but still with the idea that it's not an easy world out there and trying just to be smart about it. But you know when we find product that we can get excited about and we think our guests will like, then we are going after it. Basically the same approach as we have been doing for several years.

Anna Andreeva

Okay. So we should expect flattish to slightly down inventories [first] quarter forward as you exit the third quarter?

Dennis Nelson

That would be my best guess.

Anna Andreeva

Okay. Perfect. Thanks so much and congratulations. Great quarter.

Dennis Nelson

Thanks Anna.

Operator

And our next question comes from line of Margaret Whitfield with Sterne, Agee. Please go ahead.

Margaret Whitfield

Good morning and congratulations on a strong quarter. Dennis, on the merchandise aside, your private label you said was down slightly. I wondered what brands are performing the best for you currently in the store?

Dennis Nelson

Well, in our denim lines, our own brand, our BKE brand, is doing well, but on the Gals side we are selling the Big Star, the MEK jeans and several of the others are doing well. And on the Guys side, to a little lesser degree in denim, the Big Stars and the MEKs are also doing well. And then we are doing very well with the variety of brands in our knit categories.

Margaret Whitfield

Okay. Would you imagine the toss business would remain strong and creep up as a percent of total?

Dennis Nelson

Based on the second quarter trend, it seems like that would still have a good potential to do so.

Margaret Whitfield

Okay, I know, I think you began selling your clearance online. Was that six, nine months ago? And I wondered what benefit that has had to your gross margin since that time and how that is going?

Dennis Nelson

We're happy with the way that's worked so far. I don't know, do you have any comment on the margin of that?

Karen Rhoads

No, just that we do establish inventory reserves. And so at the end of the fiscal year, at the end of February 2nd, 2008, we did establish reserve for those markdown goods. So that as we are selling those goods now during the current year we're still able to get decent margin on those, because we had made those reserves at the start of the year. And then we adjust that reserve appropriately every quarter.

Margaret Whitfield

And when will you break out e-commerce? When will you discuss the level of business you are doing there?

Dennis Nelson

We had decided that when it hits 5% of our company sales that we will disclose.

Margaret Whitfield

Okay. Thank you.

Dennis Nelson

You are welcome.

Operator

And our next question is from the line of Marc Bettinger with Wasserman & Associates. Please go ahead.

Marc Bettinger

Thank you. Dennis, Karen, congratulations on a great quarter.

Dennis Nelson

Thank you. Good morning Marc.

Marc Bettinger

Just a quick recap on one of the numbers. Denim for the quarter was about 35% and tops was 41%?

Dennis Nelson

Correct.

Marc Bettinger

Okay. Karen, the merchandise margin [up] 25 basis points, is that primarily due to lower markdowns and more branded offset by more brands, lower private label?

Karen Rhoads

I mean (inaudible) definitely a combination and very strong sell-through of the product.

Marc Bettinger

Right, okay, so I mean that would really be lower markdowns. Right?

Karen Rhoads

Yes.

Marc Bettinger

Okay. Anything else that would really be a significant component to that?

Dennis Nelson

I think, overall, just a better job of less mistakes.

Marc Bettinger

Okay. And Karen, CapEx would be 30 or 32 still if it wasn't for the aircraft?

Karen Rhoads

Correct.

Marc Bettinger

Okay. And, Dennis, just really -- last question. In explaining the better execution that's been going on and continues through the company all this time, is there anything you can really highlight about that?

Dennis Nelson

I think it's a process we've been working on for several years just to improve and get better. And we've had a couple that have commented that our Guys business has been growing nicely. And when we did have a Men's buying office split between Kearney and Kansas City and about two years or almost two years ago we put it under our VP [Bob Carlberg] and moved all the buyers together in Kansas City. And that's been a plus to developing the Guys business. And then the Ladies team has continued to perform strongly for several years. And our sales management team just gets stronger. The culture there that we are building and creating a great shopping environment in the stores has worked out well and it's just a process that we've been at for -- to improve on for several years now.

Marc Bettinger

Do you think the competitors are -- I don't know, I guess either weakening or just losing some touch with the customers? Or you are just doing it that much better?

Dennis Nelson

I know our team is working hard and trying to learn from each other and just trying to do a better job on selection and service. And we try to see what competitors are doing, but avoid analyzing their business that way.

Marc Bettinger

Okay. And With the brands doing so strongly and the private label down as a percentage, is that giving you some opportunity to raise the prices on the private label?

Dennis Nelson

I think our pricing and such on private label is consistent with the strategy we've always had. We look at the quality and the detail and the uniqueness and creativity in the product, and price it accordingly.

Marc Bettinger

Great. Congratulations again and best of luck in the second half of the year.

Dennis Nelson

Thank you very much.

Operator

And our next question is from the line of Stephanie Wissink with Piper Jaffray. Please go ahead.

Stephanie Wissink

Thanks for taking my question. I would like to focus on the increases in average price points across the apparel categories. Just curious if you would characterize that as a function of better markdown levels, more branded product in the sales mix? Or do you think that is a reflection of your customer migrating to higher price points, if you could just give us some insight that would be very helpful? Thank you.

Dennis Nelson

You know, having fewer markdowns helps to some degree, but like last year the MEK denim that we have in our stores we had a smaller inventory of that. And that's price points that start from 100 to 150 roughly with a lot of that 135. So that's a bigger price point. And then also in a lot of the fashion knit tops that are driving the extra sales, our price points in our knit categories, I think, are up with brands like Affliction, Ed Hardy, Aqua. I mean, there are several California brands that have raised our price points in our stores. And we still have a selection of price points where we carry the West Coast from the Hurley, Billabongs and other vendors all the way up to -- in knits at Hardy would probably be our highest price point and that is a fairly new addition of a brand in our stores.

Stephanie Wissink

Is the strategy to continue to elevate the average price point or are you feeling like you are at a comfortable level for your customer?

Dennis Nelson

Actually the customers have showed us that they are willing to pay for the right fashion looks and style so we see it as kind of a market driven situation with the brands provide quality excitement, and newness that justify the price points. Then we will try to do our best to get a great selection without going overboard on those. And just, it's just kind of market driven with what is going on in the fashion world right now.

Stephanie Wissink

Thank you. That is very clear. Good luck.

Dennis Nelson

Thanks.

Operator

And our next question comes from the line of [Steven Cheng with Red Gear Capital]. Please go ahead.

Steven Cheng

Hi, good morning and congratulation. You had mentioned, Karen, you had mentioned the small reserve for auction rate securities. Did that affect you know, was there a gross margin or SG&A affect from the increase in that reserve?

Karen Rhoads

No. That reserve is only a balance sheet reserve. The comprehensive other loss shows up in the equity section, so at this time, because we believe it's a temporary impairment, it has no income statement impact.

Steven Cheng

And secondly, I'm wondering with some store closings around the industry, are you seeing your rent for stores that are coming -- where the lease is coming up, are you seeing any changes in your rent structure for those stores?

Dennis Nelson

In general, the A malls still kind of drive the appropriate rent for those particular malls or what they're offering. What we've found is if we can improve locations. There are some malls in the A and A malls are now having spaces open that might not be open otherwise. So there are opportunities that way. And then when you get below the A malls, everything is kind of based on the situation. So there can be some opportunities at that level.

Steven Cheng

And approximately each year how many new leases come up?

Dennis Nelson

I would say that the average would be about 25.

Steven Cheng

And finally, for your new store openings are they primarily in current markets or are there any new cities or geographies that you are opening up?

Dennis Nelson

This year, we have added two in the Maryland area. We have a third coming this holiday and, otherwise, we have been in the other 38 states. Next spring, we are opening in Buffalo, New York which would be a new state, a new market. But most of the stores next year that we are planning are in the existing states.

Steven Cheng

Great, thank you.

Dennis Nelson

Okay.

Operator

Our next question comes from the line of Roy Berger, a Private Investor. Please go ahead.

Roy Berger

Yeah, this question concerns the auction rate securities that you have in long-term investments. Have any of those been affected by the recent agreements from some of the larger investment banks to repurchase the auction rate securities?

Karen Rhoads

You know, we stay in pretty close contact with the brokers that we work with on those securities. But a lot of the recent articles that have come out are those companies are taking care of like their smaller retail customers first. So I think that what they are feeling is that it's the larger institutional clients will be a little bit longer that they will still be taken care of, but they will be a little net longer-term out. So we didn't -- we did not put any in current unless we knew for sure it was being redeemed. So anything in long-term, with those changes as those brokerage firms are trying to figure it all out, some of them aren't even exactly sure how their companies are going about it. They are still kind of weeding through all of that, but we took a conservative standpoint and left it in long- term unless we knew for certain it was going to be redeemed.

Roy Berger

Let me ask it a little differently. Were any of those securities purchased from some of the investment banks that have agreed to repurchase the auction rate securities?

Karen Rhoads

Yes.

Roy Berger

Okay, thank you.

Operator

(Operator Instruction). We will go next to the line of Tom Filandro with SIG. Please go ahead.

Tom Filandro

Dennis, a question for you. I know you reintroduced or maybe more expensively introduced the reclaimed jean and the price point was definitely lower, I believe, than it was last year. So can you give us any comments on how that is performing and why the lower price point? Then I have another inventory question.

Dennis Nelson

We priced it based on actually the costs and where we thought it would be best at retail and would be more competitive with some of our competitors that are offering that price point. Yes, it started out fine.

Tom Filandro

I mean, any risk -- obviously this is the bouncing back, right? – a reclaimed jeans at $42 versus a MEK jean at [$300]. You don't want to get a trade-off in that category. So what -- in terms of marketing reclaim are you just sort of leading it in the store and letting it do its own thing or is there any specific marketing efforts out there in relation to the brand -- sub brand?

Dennis Nelson

There's no marketing efforts at this time. Tom.

Tom Filandro

Then, just a quick question on -- markdown inventories have come down consistently over the past two years, maybe even longer than that. Just is there still room to -- as we go forward -- is there still room for you guys to report another quarter in which markdown inventories are down to the prior year? Or are you at a level at which there's not much left in terms of being able to get that level lower?

Dennis Nelson

I don't know if we can really make a projection on that. I mean, we will do our best to continue to improve on that, but like as you said for two years we've improved on it. So there would probably be less room than in the past.

Tom Filandro

Fair to assume that historically this has been the best markdown position you've ever been in?

Dennis Nelson

For a long time.

Tom Filandro

Okay. Thanks again.

Dennis Nelson

Thanks.

Operator

And our next question comes from the line of Steve Kernkraut with Berman Capital. Please go ahead.

Steve Kernkraut

I have a couple of questions. First of all, given your spectacular results and given your -- the amount of cash that you have, what's your thinking, what is the Board thinking in terms of racing the dividend rate to pay out something like $1.50 a share? Where your pay out ratio would still be less than 50%, you don't need the cash for new store growth because you are funding that out of (inaudible) growth through a normal course. I just wanted to know what the thought process is?

Karen Rhoads

I guess we can't speak to what the Board is thinking. We haven't had a Board meeting since our annual meeting on May 28 and so we will visit next month with our Board at our regularly scheduled quarterly meeting.

Steve Kernkraut

Okay but what is -- I guess management's thinking -- because the board is always looking for management to make recommendations and express their thoughts.

Dennis Nelson

I guess we want to get through the next month or so before the meeting and then we will evaluate what makes sense. So I mean we have been encouraged to raise the dividend continually and in the past people seem to be happy with our decisions on our dividend. And our history has been good as being good to the shareholders. So that's the best guess we can give right now.

Steve Kernkraut

Okay. And what is the thinking in terms of splitting the stock, given it's a high current level?

Dennis Nelson

We can discuss that at the next meeting as well. That hasn't been really brought up recently.

Steve Kernkraut

Okay. And the whole issue of a onetime dividend would, given your $9 in cash and probably don't need that much to keep on your books in terms of doing something along those lines?

Dennis Nelson

No. I think as Karen mentioned before that's just something we address at each meeting.

Steve Kernkraut

Okay, thanks very much.

Dennis Nelson

Thanks Steve.

Operator

Now we will go back to Anna Andreeva with JP Morgan. Please go ahead.

Anna Andreeva

Hi great. Thanks a lot. I was just wondering, a lot of concerns out there about sustainability of your industry-leading operating margins (inaudible) you guys keep executing and delivering more upside every quarter. So could you comment on -- and I know you don't give guidance, but structurally provided that you can continue comping, is there anything that is preventing you from reaching 14.1% operating margin, just given your low overhead and also some of the pricing structure?

Karen Rhoads

Again, I think it kind of goes back to what Dennis said. At this point, it is not -- it's something that we could promise or commit to those numbers, but we continue to look at ways to improve not just topline growth but to control expenses and to gain leverage to the bottom line as well.

Anna Andreeva

And any thoughts in starting to provide guidance?

Dennis Nelson

The Board feels that by reporting sales monthly that that's very good communication. And that giving guidance is difficult without a crystal ball. And so we will probably continue with the same pattern at this time.

Anna Andreeva

Okay. That's it. Thanks so much. Good luck.

Dennis Nelson

Thank you.

Operator

And your next question comes from the line of David Berman with Berman Capital. Please go ahead.

David Berman

Hi guys. I've never seen such a wonderful relationship between sales growth and inventory growth. Sales up 37% and inventory is up 8%. It's a huge difference. It's almost as if you had an acquisition. So I mean, I guess the question is, how much are you potentially losing on the sales and are you able to replenish the inventories? Can you just go through that a little bit please?

Dennis Nelson

The team has done a very nice job of selecting the product as well as anticipating the trends and buying for the months. And it's not an easy process, but one that we work hard on and we work together with in evaluating the market and our stores are doing a great job with the product. So we -- it's not something necessarily we've changed how we approach business, but we are just executing and the team is getting more experience and talented. And things are kind of flowing our way. So they have been able to maximize our sales with the flow of our inventory. We are shipping new product to our stores every day and with the knit business being strong and some of that being domestic has helped us to get back to winners and keep up with the stores.

David Berman

Have you traced any of the systems or any of the ways you have been going about doing it or just doing a better job? As you were saying.

Dennis Nelson

I would say, just the team is thinking through things through and working it better.

David Berman

Thank you very much.

Operator

(Operator Instructions) We have no one queuing up, so please continue.

Karen Rhoads

I think if there are no more questions that that will wrap up our call for today.

Operator

Thank you. Ladies and gentlemen, as a reminder today's conference call will be made available for replay. That begins today at 11:00 AM Central time and a replay of the conference runs until the date of September 4th at midnight Central. You may access the AT&T Teleconference Replay System by dialing 1800-475-6701. Please enter the replay access code 956639. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701. International participants 320-365-3844 and the replay access code 956639. That does conclude our conference call for today. I would like to thank you for your participation and for using AT&T's Executive Teleconference Service. You may disconnect.

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