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Edited Transcript of BKE earnings conference call or presentation 22-Nov-19 3:00pm GMT

Q3 2019 Buckle Inc Earnings Call

KEARNEY Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Buckle Inc earnings conference call or presentation Friday, November 22, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis H. Nelson

The Buckle, Inc. - President, CEO & Director

* Kelli D. Molczyk

The Buckle, Inc. - VP of Women’s Merchandising

* Robert M. Carlberg

The Buckle, Inc. - SVP of Men's Merchandising

* Thomas B. Heacock

The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director

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Conference Call Participants

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* David Berman

Berman Capital Management LP - General Partner and President

* Richard Dearnley

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - MD & Director of Research

* Tiffany Ann Kanaga

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Buckle's third quarter earnings release. (Operator Instructions) As a reminder, today's call is being recorded.

Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Kelly Molczyk, Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; and Brady Fritz, General Counsel and Corporate Secretary.

As they review the operating results for the third quarter, which ended November 2, 2019, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following safe harbor statement, which is under the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors, which may be beyond the company's control. Accordingly, the company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the company's filings with the Securities and Exchange Commission. The company does not undertake to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

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

With that being said, I'll turn the call over to Mr. Tom Heacock. Please go ahead, sir.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [2]

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Good morning, and thanks for joining us this morning. Our November 22, 2019, press release reported that net income for the 13-week third quarter ended November 2, 2019, was $26 million or $0.53 per share on a diluted basis compared to net income of $20.5 million or $0.42 per share on a diluted basis for the prior year 13-week third quarter that ended November 3, 2018. Year-to-date, net income for the 39-week period ended November 2, 2019, was $57.5 million or $1.18 per share on a diluted basis compared to net income of $54.5 million or $1.12 per share on a diluted basis for the prior year 39-week period ended November 3, 2018.

Net sales for the 13-week third quarter increased 4.2% to $224.1 million compared to net sales of $215.1 million for the prior year 13-week third quarter. Comparable store sales for the quarter increased 4.7% in comparison to same 13-week period in the prior year, and online sales increased 5.4% to $26.9 million. Year-to-date, net sales increased 1.3% to $629.3 million for the 39-week fiscal period ended November 2, 2019, compared to net sales of $621.1 million for the prior year 39-week fiscal period, which ended November 3, 2018. Comparable store sales for the year-to-date period were up 1.8% compared to the same 39-week period in the prior year, and online sales increased 6.6% to $74.4 million.

For the quarter, UPTs increased approximately 1%, the average unit retail decreased approximately 1.5% and the average transaction value decreased about 0.5%. Year-to-date, UPTs increased approximately 2.5%, the average unit retail decreased approximately 3% and the average transaction value decreased approximately 0.5%. Gross margin for the quarter was 41.7%, up 170 basis points from 40% in the prior year third quarter. The year-over-year increase was the result of a 60 basis point improvement in merchandise margin, along with a 110 basis point improvement as a percentage of net sales in occupancy, buying and distribution costs.

For the year-to-date period, gross margin was 39.6%, up approximately 20 basis points from 39.4% for the same period last year. The increase was the result of a 30 basis point improvement in occupancy, buying and distribution costs, partially offset by a 10 basis point reduction in merchandise margin. Selling expenses for the quarter were 22.9% of net sales compared with 23.5% of net sales for the third quarter of fiscal 2018. The improvement was primarily the result of reduced store payroll expense during the quarter.

Year-to-date, selling expenses remained flat with the prior year at 23.3% of sales. General and administrative expenses for the quarter were 4% of net sales compared with 4.3% of net sales for the third quarter last year. Year-to-date, G&A expenses remained flat with the prior year at 4.9% of net sales. Our operating margin for the quarter was 14.8% compared to 12.2% for the third quarter of fiscal 2018. And for the year-to-date period, our operating margin was 11.4% compared to 11.2% for the same period last year.

Other income for the quarter was $1.1 million compared to $1.3 million for the third quarter of fiscal 2018, and other income for the year-to-date period was $4.4 million compared with $3.8 million last year. Income tax expense as a percentage of pretax net income for the quarter was 24.5%, and compared with 25.9% for the third quarter of fiscal 2018, bringing third quarter net income to $26 million for fiscal 2019 compared with $20.5 million for fiscal 2018. Year-to-date, income tax expense was also 24.5% of pretax net income versus 25.9% for fiscal 2018, bringing year-to-date net income to $57.5 million for fiscal 2019 compared with $54.5 million for fiscal 2018.

Our press release also included a balance sheet as of November 2, 2019, which included the following: inventory of $138.9 million, which was down approximately 4.5% from inventory of $145.5 million as of November 3, 2018; and total cash and investments of $261.5 million, which compares to $238.8 million at the end of fiscal 2018 and $241.8 million as of November 3, 2018.

At quarter end, inventory on a comparable store basis was down approximately 3.5%, and total markdown inventory was down compared to the prior year. We ended the quarter with $117.8 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $1.3 million, and depreciation expense was $5.6 million.

For the year-to-date period, capital expenditures were $5.5 million and depreciation expense was $18 million. Year-to-date capital spending is broken down as follows: $5 million for store build-out, remodeling and technology upgrades, and $0.5 million for capital spending at the corporate headquarters and distribution center. During the quarter, we didn't open any new stores or completed any full store remodels, we plan to complete 2 store remodels during November, bringing our year-to-date count to 5 full remodels and 1 new store.

Based on current plans, we now expect our capital expenditures to be in the range of $7 million to $9 million for the year, which includes both planned store projects and IT investments. Buckle ended the quarter with 449 retail stores in 42 states compared to 453 stores in 43 states at the end of the third quarter last year. Additionally, our total square footage was 2.32 million square feet as of the end of the quarter compared to 2.337 million square feet at the same time a year ago.

And now I'll turn it over to Kelli Molczyk, Vice President of Women's Merchandising.

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [3]

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Thanks, Tom. I would like to start by highlighting the performance of our women's merchandise categories for the quarter. Women's merchandise sales for the fiscal quarter were up approximately 3% against the prior year fiscal quarter. Average denim price points decreased from $74.90 in the third quarter of fiscal 2018 to $73.35 in the third quarter of fiscal 2019. For the quarter, our women's business was approximately 48.5% of net sales compared to 49.5% last year, and average women's price points decreased about 2.5% from $42.75 to $41.70.

During the quarter, we achieved positive results across several of our key categories. For denim, the introduction of new fits, darker finishes and the extension of a broader assortment of bottom openings gained momentum. Overall, our expanded offerings in fits, bottom openings, rises, inseam and waist sizes across all brands resonated well with our guests. We saw growth in our private label denim assortment, in addition to continued growth in our only at buckle exclusively built outside brands. While price point denims under $80 continue to make up a large percentage of our overall denim business, we did narrow the gap on our average denim price points from Q2. To tie into our denim performance, we partnered with the American Cancer Society as the official sponsor of Denim Days for the month of October, where we donated $1 for every pair of denim sold from participating brands. Approximately $400,000 will be donated to the ACS to support their research and programming efforts.

For women's tops, guests preferences were centered around soft hand fabrics, warm fall color pallets and simplified styling. Our fashion sweaters and cardigans within our private label brands as well as many other outside brands continue to be well received. For women's footwear, our expansion into more EVA casual looks and branded functional boots aided in our growth of the category. We did see these 2 categories replace some of our early short fashion boot sales. For accessories, several different categories continue to perform well diversifying our selection and looks. And in some areas, streamlining our buys to segmented specific markets.

Overall, we were pleased with how we managed inventory through the quarter, reducing markdowns and improving overall margins. Across all women's categories, we sustained improvement in our overall sell-through throughout the quarter on off inventory. With where our inventory is positioned, we feel we are more nimble as wins fashions continue to change and evolve.

And with that, I will turn it over to Bob Carlberg, Senior Vice President of Men's Merchandising, to discuss the performance of our men's merchandise categories.

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Robert M. Carlberg, The Buckle, Inc. - SVP of Men's Merchandising [4]

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Thanks, Kelli. Merchandise sales in the fiscal quarter were up 6% in comparison to the prior year fiscal quarter. Average sale price points increased from $82.90 in the third quarter of fiscal 2018 to $82.95 in the third quarter of fiscal 2019. For the quarter, our men's business was approximately 51.5% of net sales compared to 50.5% last year, and average men's price points decreased approximately 1.5% from $50.40 to $49.65. We are pleased that the third quarter marked our eighth consecutive quarter of growth for men's product. All categories except outerwear were up. The outerwear decline was slight and planned as we flow sweaters and outerwear a bit later this year. We believe we found the right flows the way our guest is buying in these categories, and we'll continue in that route going forward.

Footwear continues to be our strongest growth category, with particular strength in Hey Dude, fueled by a large proportion of exclusive styles, along with our great selection of boots. Results for our 2 test used stores were positive, and we plan on keeping them open both year round. Overall, our fall assortment was well received by both our teammates and our guests, continue to be proud of the team's ability to continually develop exclusive product. It keeps our styles unique in the marketplace. This allows us to maintain a strong regular price business, even with the downward pressure almost everywhere else.

Now turning to results on a combined basis. Accessory sales for the fiscal quarter were up approximately 7% against the prior year fiscal quarter. Footwear sales were up about 24.5%. These 2 categories accounted for approximately 8.5% and 8%, respectively, of third quarter net sales. This compares to 8% and 7% for each in the third quarter of fiscal 2018. Average accessory price points were down approximately 7%, and average footwear price points were down about 8.5%. Again, on a combined basis for the quarter, denim accounted for approximately 42.5% of sales, tops accounted for approximately 34%. This compares to 43% and 34.5% for each in the third quarter fiscal 2018. Our private label business continues to grow and represented just over 40% of sales for the quarter.

And with that, we welcome your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first on the line, we have Tiffany Kanaga with Deutsche Bank.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [2]

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Would you dig into the gross margin performance this quarter to break down the key drivers behind the merchandise margin improvement despite average price points still coming down? For example, how did mix play a role in the margin increase? Additionally, with your leverage in gross margin a bit better than we might have expected, can you comment on how your leverage point has evolved? And if you think further improvements could be ahead?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [3]

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Tiffany, thank you. I believe our margin improvement was just by the management of our inventory and reduced markdowns, especially in the ladies area. And men's held up very nicely. So we were pleased with the inventory management and the sell-through at regular price and the response from our team and guests on the product. On the leverage, our sales management team took a different approach to managing payrolls in the stores, and that was effective to reduce some of our sales -- payroll expense in the store. So that was a benefit there on the leverage.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [4]

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Tiffany, on the gross margin side, historically, that was closer to mid-single digits, and that's a much lower number today. We brought rent down in certain markets and worked really hard there. So it's probably closer to 1% or just under to get leverage on the gross margin side.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [5]

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All right. And a follow-up question. With your inventory down 4.5% versus sales up over 4%. Would you elaborate on how you feel on that front, headed into the holiday season? Is levels and the quality of the inventory is where you'd like it? And also, if you're approaching the holiday, including Black Friday, any differently overall than usual, given the shorter window between Thanksgiving and Christmas?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [6]

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We are in good shape on our inventory, markdowns are reduced. And a lot of the product is new arrival. So we're excited to present that to our guests. And we have no different -- I mean our approach to the holiday season is consistent with the years previous.

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Operator [7]

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And next we'll go to Steve Marotta with CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [8]

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Can you please review women's average denim price reduction in the third quarter? I missed that. I was writing as fast as I can, but I missed that.

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [9]

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Yes. Steve, we'll have Kelli respond to that.

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [10]

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Sorry about that. It was actually -- the price decreased from $42.75 to $41.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [11]

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I think he asked about the denim.

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [12]

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Denim price point -- sorry, $74.9 in the third quarter of last year to $73.35. Is that what you're wanting?

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [13]

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Yes. And I know that average denim prices have been a significant headwind to previous comp. That seems to be abating so much -- somewhat. Is there anything on the horizon that you could talk about in differentials or denim on a year-over-year basis? And where price points -- where you think those prices are headed and why?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [14]

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Steve, this is Dennis. I think the price points will probably be consistent with the third quarter. We still sell some higher price point denim, but not the same volume as before. But we've got a nice inventory of denim and expect those price points to be pretty consistent with the last quarter.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [15]

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And can you remind us where you are in omni-channel endeavors?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [16]

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Well, we're consistently working on opportunities there. We've just started to test, in certain amount of stores, the ship from store to the guest, which has been beneficial. And this -- early this fall, we brought on a new Senior Director of Marketing, which we think will be beneficial as well as improving on our CRM use that we updated earlier in the year. So we think we have several smaller projects that we think will be good for us.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - MD & Director of Research [17]

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And lastly, can you comment a little bit about traffic trends in the third quarter? And how much stabilization you saw there? And obviously, to the extent that you can talk about your ideas on future traffic trends without specifically commenting from a guidance standpoint, obviously?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [18]

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Yes. Well, I think we've done a good job in our stores of studying this up as a destination location for finding our favorite denims and outfits and such. And so I don't know, in the past quarter, if the traffic was much different, but I think our teams are doing a good job. We've added a lead list to -- where the teams can contact the guests on product to invite them in on their favorite merchandise. So we benefited from that. So it's just working with the teams on that. And also, we've always felt that the best advertisement in our -- for our stores is a word-of-mouth from our loyal guests, and that's working well.

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Operator [19]

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(Operator Instructions) And next one, David Berman with Berman Capital.

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David Berman, Berman Capital Management LP - General Partner and President [20]

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It's interesting, looking at your sales to inventory ratios and your turns. You've always had good turns. This is the first quarter in about 8 or 9 where your inventory -- sales have grown faster than inventories. And that's really good. Have you -- what did you -- how have you -- you must have been disappointed obviously because I know you always focused on inventories in the past. What sort of changed? Was it more just the top line?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [21]

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Well, I think on the top line, I think we continue to invest in our teams, our store leaders who are promoted from within. And I think they continually are doing a great job in building guests. But I think the -- I think our store product -- the stores are excited about the new merchandise, the denim, we've added curvy fits in the gal's denim and expanded the styles and in-house brands. Then the men's continues, as Bob mentioned, 8 quarters of gains in the men's product, and we have a very good men's business where a lot of people have kind of given up on that. So just a combination of good things. The teams in -- merchandise teams and the store teams are working hard to improve. And it just came together this last quarter.

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David Berman, Berman Capital Management LP - General Partner and President [22]

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So do you think that you'll continue to keep the inventories like low? I mean are you -- is that like a goal now to try and keep that focus?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [23]

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Well, I don't think any of our goals have changed. Sometimes, there's more opportunities for going after some product and such. But we've always worked hard to keep our inventories in line. And I think part of it before was those much higher denim prices we used to do with the sales there, kind of made a difference. So I think we're just kind of catching up with how many years we've had to go against the high denim prices.

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Operator [24]

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And next, we have a question from Richard Dearnley with Longport Partners.

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Richard Dearnley, [25]

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I'm relatively new to your company. The online store increase, I think, is relatively modest. And if the initiative is new, it would seem like the base would be new. So the gains would be somewhat more dramatic than 5%. But I don't understand the base. So...

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [26]

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Yes. Well, we had substantial growth for many years and such. And then it leveled out and we've had a solid gain this quarter, and I believe e-comm was 12% of our company sales this quarter, which I believe is a high for us. And we continue to work at that. Also, we probably had less promotional goods online. So that might have factored a little bit in the gain.

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Richard Dearnley, [27]

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Okay. And then looking at the last 10 years or so, it looks as though corporate policy is to about payout of the net income for the year in dividends. Is that a policy? Or does that just happen?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [28]

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Well, each year usually, in the past, it's been December. The Board reviews its thoughts on the dividends. And I don't think we look at any past history in making those decisions.

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Operator [29]

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And to the presenters on the call, we have no further questions in queue.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [30]

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If there's no additional questions, we can wrap up the call today. We thank everybody for joining us and their participation and wish everybody a wonderful holiday week next week.

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Operator [31]

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Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation. You may now disconnect.