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Edited Transcript of BKE earnings conference call or presentation 24-May-19 2:00pm GMT

Q1 2019 Buckle Inc Earnings Call

KEARNEY Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Buckle Inc earnings conference call or presentation Friday, May 24, 2019 at 2:00:00pm 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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* John Eric Deysher

Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst

* 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 First 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; Kelli 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 first quarter, which ended May 4, 2019, we 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 expressed written consent. Any unauthorized reproductions or recordings of the call should not be relied upon as the information may be inaccurate.

I'll now turn it over to the company. Please go ahead.

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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 on the call this morning. Our May 24, 2019, press release reported that net income for the 13-week first quarter ended May 4, 2019, was $15.1 million or $0.31 per share on a diluted basis compared to net income of $18.3 million or $0.38 per share on a diluted basis for the prior year 13-week first quarter which ended May 5, 2015.

Net sales for the 13-week first quarter decreased 1.7% to $201.3 million compared to net sales of $204.9 million for the prior year 13-week first quarter. Comparable store sales for the 13-week fiscal period ended May 4, 2019, decreased 1.3% from comparable store sales for the prior year 13-week period ended May 5, 2018. Online sales for the quarter increased 5.6% to $24.4 million for the 13-week fiscal period, which compares to net sales of $23.1 million for the prior year 13-week fiscal period.

For the quarter, UPTs increased approximately 3.5%. The average unit retail decreased approximately 3.5%, and the average transaction value decreased just slightly.

Gross margin for the quarter was 38.1%, down 80 basis points from 38.9% in the prior year first quarter. The year-over-year decrease is the result of a 30 basis point decline in merchandise margins and 50 basis points in deleveraged occupancy buying and distribution expenses.

Selling expenses for the quarter were 23.2% of net sales, up 80 basis points from 22.4% of sales in the prior year first quarter. Selling expenses for the quarter were impacted by a 70 basis point increase in store compensation as we continue to invest in our talent and store teammates, in addition to a 10 basis points increase in certain other selling expenses.

General and administrative expenses for the quarter were 5.6% of net sales, which compares to 5.1% of net sales for the first quarter of fiscal 2018. The G&A expense increase is due to increased IT investments, both in terms of increased home office payroll, as well as spending for other strategic initiatives, along with an increase in professional fees.

Our operating margin for the quarter was 9.3% compared to 11.4% for the first quarter of fiscal 2018. Other income for the quarter was $1.3 million, which compares to $1.5 million for the first quarter of 2018. Income tax expense as a percentage of pretax net income for the quarter was 24.5% compared to 25.9% for the first quarter last year, bringing first quarter net income to $15.1 million for fiscal 2019 compared to $18.3 million for fiscal 2018.

Our press release also included a balance sheet as of May 4, 2019, which included the following: inventory of $120.8 million, which was up approximately 2.2% from inventory of $118.2 million as of May 5, 2018; and total cash and investments of $253.3 million, which compares to $238.8 million at the end of 2018 and $241 million as of May 5, 2018. At quarter end, inventory in a comparable store basis was up approximately 3%, and total markdown inventory was up compared to the prior year.

We ended the quarter with $126.9 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $2.5 million, and depreciation expense was $6.2 million. Year-to-date, capital spending is broken down as follows: $2.3 million for store constructions, store remodels and store technology upgrades; and $0.2 million for capital spending at the corporate headquarters and distribution center.

Please also note that we adopted FASB ASC 842 for lease accounting effective February 3, 2019. Adoption of the new accounting guidance for leases resulted in the recognition of approximately $373.3 million of lease liabilities and corresponding right-of-use assets of approximately $345.5 million with the offsetting balance representing a reduction in the previously recognized deferred rent balances. The adoption did not result in a material impact on the company's reported net income.

During the quarter, we closed one store and completed one full remodel. For the year, we still plan on opening 1 new store and completing 2 additional full store remodels, which includes 1 remodel already completed in May and another schedule to be completed for back to school. Based on current plans, we still expect our capital expenditures to be in the range of $8 million to $12 million, which includes both planned store projects and IT investments.

Buckle ended the quarter with 449 retail stores in 42 states, which compares to 456 stores in 43 states at the end of the first quarter last year. Additionally, our total square footage was 2.32 million square feet as of the end of the quarter compared to 2.341 million square feet at the same time a year ago.

And now I'll turn it over to Kelli Molczyk, our 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 down approximately 4.5% against the prior year fiscal quarter. Average denim price points decreased from $82.45 in the first quarter of fiscal 2018 to $76.70 in the first quarter of fiscal 2019. For the quarter, our women's business was approximately 49% of net sales compared to 50.5% last year, and average women's price points decreased about 5% from $44.85 to $42.55.

With guests buying patterns continuing to focus on price points of under $80 in denim, under $60 in footwear and under $40 in tops, we fell a bit short in our dollar performance the quarter in categories such as denim, shorts, footwear, fashion wear and accessory, but we're encouraged by the increases in unit sales we drove at regular price in those same categories. In addition, we saw increases in both our dollar and unit sales in fashion bottoms and sweaters.

For denim, ankle length and destructed detailing led the way in guest purchases. We saw growth in not only our private brand denim but also in our exclusively-at-Buckle denim where we developed exclusive fit and detailing for Buckle-only labels that we've built with outside brand partners. We launched a new private label denim brand, Willow & Root, focused on fashion denim fit at retails under $50 and received a nice response to the brand offering.

For tops, we intentionally shifted a larger portion of our spring newness to the second half of the quarter. Of that newness, fashion tanks, spring lightweight sweaters and fashion solids were the drivers at retail as well as our more boutique-like looks.

For footwear, guests responded nicely to our closed-toe selection and casual tennis and casual boots as well as our newness in fashion wedges.

Fashion wear and dresses, rompers, sets and jumpsuits were also nice additions to the quarter.

For accessories, our dollars are gaining traction with our branded fragrance specialty bracelets and earrings.

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

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

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Thank you, Kelli. Men's merchandise sales for the fiscal quarter were up slightly in comparison to the prior year fiscal quarter. Average denim price points decreased from $88.05 in the first quarter of fiscal 2018 to $86.70 in the first quarter of fiscal 2019. For the quarter, our men's business was approximately 51% of net sales compared to 49.5% last year, and average men's price points decreased approximately 2.5% from $51.95 to $50.50. For the quarter, denim held steady with a slight loss in dollars on flat units and denim, our private brands, especially BKE performed well.

Footwear continues to be our strongest growth department.

Accessories for the quarter saw nice sell-throughs with particular strength in fragrance and necklace bracelets. Our large investment in elastic-waist shorts was well received by both guests and teammates. This allowed growth in both dollars and units in our shorts category. Other strong categories for the quarter were men's button fronts and youth product.

Now turning to results on a combined basis. Accessory sales for the fiscal quarter were down approximately 1% against the same 13-week period a year ago, while footwear sales were up about 9.5%. These 2 categories accounted for approximately 8.5% and 7.5%, respectively, of first quarter net sales, which compares to 8.5% and 6.5% for each in the first quarter of fiscal 2018. Average accessory price points were down approximately 7.5%, and average footwear price points were down about 0.5%. Again, on a combined basis for the quarter, denim accounted for approximately 42.5% of sale, and tops accounted for approximately 30%, which compares to 43% and 30.5% for each in the first quarter of fiscal 2018. Our private label business continues to grow and represented approximately 34.5% 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 in line, Tiffany Kanaga with Deutsche Bank.

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

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Can you detail for us your sourcing exposure to China, what impact you felt so far from tariffs and how you might be preparing for additional increases? Also, if we do go to 25% for the next tranche of apparel, how would you consider passing through increases to your pricing given your current initiatives to reduce denim price points to more competitive levels?

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

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In the past, last year, we had about a 50% exposure to China, and we are consistently reviewing our sourcing, and we're adding new vendors to address that. And some of our key vendors are looking at other places of production outside of China as we work through this process, and our flexibility helps us manage our product development as we work with national brands and private brands, and we've already diversified and have made product in a lot of different countries to give us options. That said, having a very good long-term relationship with our key vendors, both national brands and our private brands, helps us during this potential tariff situation as things like every -- we have a long-term view as well as our vendors that love doing business with us, so I think we'll continue to work on that to handle this potential increase in tariffs the best we can. So we're looking to continue with the best value and quality in our products, and I think we'll have options. And with our vendors, we'll be able to do so going forward.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [4]

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And if I can ask a follow-up. Would you give some additional brand color and call-outs around what's working well for you and where in your assortment you still see white space to add new brands to your mix?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [5]

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Well, we don't necessarily call out new brands. We continue to have a lot of exclusive product with our brands, and we continue to evolve with key partners in the $60 to $80 price point in denim. We are shopping like in ladies with several new footwear companies or -- but not necessarily brand new to us but expanding our selection with them. And I'll refer to Bob and Kelli if they want to add to that.

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [6]

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For women's, we just continued to shop the market and evaluate where it makes sense, so I wouldn't say we have any predetermined plans on where we might add brands. But if something pops up that makes sense, we would obviously want to review it.

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Robert M. Carlberg, The Buckle, Inc. - SVP of Men's Merchandising [7]

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And for men's products, same. I mean, we're continuing to look at continue brands. But like most things, we'll test and react as we go. We've seen some growth in like Hey Dude and some of those places that we have started small, and that's usually how we'll go about it is to look for that and then look to build it.

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Operator [8]

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Our next question is from Steve Marotta with CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [9]

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Could you please remind us from an omnichannel initiative standpoint what's been accomplished in the last 6 months and what you would anticipate accomplishing in the next 6 months and where that gets you from an inventory book standpoint and from a customer interaction standpoint?

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [10]

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Yes. Thank you, Steve. Good question. And I think that's an area of focus, certainly, over the last several years, and we have made progress and continue to make progress and have plans for this year. Where we're at today, I mean, we launched our mobile app and the primary several years ago. Primary functionality there was to reserve in store apps that were showing guests new inventory in store with the ability to reserve that and pick that up in store. We've continued to evolve that and take that functionality online where guests can also shop their local store and see availability of inventory in their local store online and reserve it now from the website as well as the mobile app. We've also, for a long time, for at least a couple of years, had buy online, ship to store with free shipping. And this year looking -- our primary focus now is to continue to evolve and drive that. We're looking at testing with certain categories ship from store, so expanding the offering of inventory online and SKUs, more selection for our guests and actually shipping it from the store, and then obviously follow-up to that would be buy online, pick up in store.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [11]

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Will the buy online, pick up in store be dated between now and year-end?

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [12]

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I don't think we have plans for that to happen this year. We're starting with ship from store and buy online. I mean, testing and see what the reaction is and what that does for the business and then would probably have buy online, pick up in store potentially later this year in the fourth quarter but probably into next year.

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Operator [13]

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(Operator Instructions) Next we have a John Deysher with Pinnacle.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager [14]

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I was just curious on the increase in the selling and the general administrative expenses, whether you anticipate those to continue in future quarters. Will it all be -- that was be elevated throughout the year.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [15]

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Yes. Looking at the increases and the cost of the increases on the selling side, pretty consistent with the year ago. And what we called out there was an increase in payroll. And some of that -- as minimum wages have gone up and as unemployment has been low, we've had to be more competitive on rates for both teammates and managers to make sure that we're able to retain that talent and keep the people that are key to our business and going to drive us forward in the future. So I think we'll still continue to see some pressure over the rest of the year. Hopefully, we can -- the impact, I think looking at the first quarter, it was about 70 basis points of selling expense, and some of that was February. We had a decent number of store closures in February, and business was a little bit softer in February so that impacted store payroll as well, but it's continual area of focus and making sure that we're finding that right balance of having the right teammates, maintaining the longevity and talent of our team but being as close as we can with payroll and watching it as tight as we can. Similar on the G&A side, a lot of that is payroll related. We've always been very lean in the home office, in our corporate teams, but we're continuing to invest in IT key talent to continue to drive our omnichannel initiatives and making sure that we have the team to be able to support the business and then drive growth. So I think that will continue into the fourth quarter.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager [16]

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Okay. And what was the increase in professional fees related to?

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [17]

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Just ongoing consulting and professional fees, not one specific thing. And that was probably -- of the G&A increase, that was the smallest part of it, the increase.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager [18]

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Okay. So that was the minor part of the increase in the G&A.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [19]

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Correct.

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Operator [20]

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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 [21]

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If there are no further questions, we can wrap it up and be short today and wish everyone a good rest of the day and a wonderful long holiday weekend.

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Operator [22]

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