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Edited Transcript of BKE earnings conference call or presentation 15-Mar-19 2:00pm GMT

Q4 2018 Buckle Inc Earnings Call

KEARNEY Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Buckle Inc earnings conference call or presentation Friday, March 15, 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, Inc. fourth 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; and Bob Carlberg, Senior Vice President of Men's Merchandising.

As we review the operating results for the fourth quarter, which ended February 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 an audio recording 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 conference now to Mr. Dennis Nelson. Please go ahead, sir.

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [2]

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Thank you. Good morning, and thank you for joining us. Before we turn it over to Tom to walk through our financial results for the quarter, I want to take this opportunity to thank all of our outstanding teammates for their hard work and contributions during the past year.

As the retail environment continues to evolve, the 2 critical components of our success remain our people and our product. Our talented teams are at the forefront of our ability to successfully adapt both our differentiated product mix and service model to create the most enjoyable shopping experience for our guests.

From a product perspective, the merchandisers have done a nice job of continually evolving and broadening our exclusive selection, growing our private brands and countering the trend of lower price points in our branded denim as well as certain other categories all while maintaining our focus on profitability. We've also continued to evolve how we take our service to the guests however and wherever they want to shop.

Looking to the future, we are focused on strategic investments in both marketing and IT to deepen our understanding and relationship with our guests, presenting unified brand message to both new and existing guests and enhance our omni channel offerings.

And with that, I'll turn it over to Tom.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [3]

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Good morning. Our March 15, 2019, press release reported net income for the 13-week fourth quarter ended February 2, 2019, was $41.1 million or $0.84 per share on a diluted basis, which compares to net income of $42 million or $0.87 per share on a diluted basis for the prior year 14-week fourth quarter, which ended February 3, 2018.

Net income for the 52-week fiscal year ended February 2, 2019, was $95.6 million or $1.97 per share on a diluted basis, which compares to net income of $89.7 million or $1.85 per share on a diluted basis for the 53-week fiscal year ended February 3, 2018.

Net sales for the 13-week fourth quarter decreased 6% to $264.4 million compared to net sales of $281.2 million for the prior year 14-week fourth quarter. Comparable store sales for the 13-week fiscal period ended February 2, 2019, decreased 0.6% from comparable store net sales for the prior year 13-week period ended February 3, 2018. Online sales increased 1.3% to $33.9 million for the 13-week fiscal period compared to net sales of $33.5 million for the prior year 14-week fiscal period. Compared to the prior year 13-week period ended February 3, 2018, however, online sales for the quarter increased 7.8%.

Net sales for the 52-week fiscal year decreased 3.1% to $885.5 million compared to net sales of $913.4 million for the prior year 53-week fiscal year. Comparable store sales for the 52-week year ended February 2, 2019, decreased 0.9% from comparable store sales for the prior year 52-week period ended February 3, 2018. Online sales increased 5.6% to $103.7 million for the 52-week fiscal year compared to net sales of $98.2 million for the prior year 53-week fiscal year. And then again compared to the prior year 52-week period ended February 3, 2018, online sales for the year were up 7.5%.

For the quarter, UPTs increased approximately 4%. The average unit retail decreased approximately 3.5% and the average transaction value increased just slightly. For the full year, UPTs increased approximately 2%. The average unit retail decreased approximately 2.5% and the average transaction value decreased approximately 0.5%. Gross margin for the quarter was 45.9%, down 150 basis points from 47.4% in the prior year fourth quarter. The year-over-year decrease is the result of 115 basis point decline in merchandise margin and 35 basis points of deleveraged occupancy buying and distribution expenses.

For the year, gross margin was 41.3%, down 30 basis points from 41.6% in the prior year. With merchandise margins even with the prior year, the current year decrease is due to deleveraged occupancy buying and distribution expenses.

Selling expenses for the quarter were 21.8% of net sales compared to 22% of net sales in the prior year fourth quarter. For the full year, selling expenses were 22.8% of sales compared to 22.5% of net sales in the prior year. For both the quarter and year-to-date periods, increases in store compensation expense were offset by reductions in certain other selling expenses. General and administrative expenses for the quarter were 4.7% of net sales compared to 3.8% of net sales in the fourth quarter of fiscal 2017. For the year, general and administrative expenses were 4.9% of sales compared to 4.4% in the prior year. For both periods, the G&A increase is due to increased IT investments both in terms of increased home office payroll as well as spending for other strategic initiatives.

Our operating margin for the quarter was 19.4% compared to 21.6% for the fourth quarter of fiscal 2017. And for the full year, our operating margin was 13.6% compared to 14.7% in the prior year. Other income for the quarter was $1.9 million compared to $2.8 million for the fourth quarter of fiscal 2017 and other income for the year was $5.7 million compared to $5.4 million last year.

Income tax expense as a percentage of pretax net income for the quarter was 22.6% compared to 33.8% for the fourth quarter of fiscal 2017, bringing fourth quarter net income to $41.1 million for fiscal 2018 compared to $42 million for fiscal 2017. For the full fiscal year, our income tax expense was 24.5% of pretax income compared to 35.7% in fiscal 2017, bringing net income to $95.6 million for 2018 compared to $89.7 million for fiscal 2017.

Our press release also included a balance sheet as of February 2, 2019, which included the following: inventory of $125.2 million, which was up approximately 6% from inventory of $118 million at the end of fiscal 2017 and total cash and investments of $238.8 million, which was after payment of $97.7 million in dividends during the year and compares to $237.4 million at the end of fiscal 2017. At the end of the year, total markdown inventory was up compared to the prior year. We ended the year with $130.7 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $2.1 million and depreciation expense was $6.5 million. For the full year, capital expenditures were $10 million and depreciation expense was $26.8 million.

Full year capital spending is broken down as follows: $8.3 million for new store constructions, store remodels and store technology upgrades; and $1.7 million for capital spending at the corporate headquarters and distribution center. During the quarter, we closed 3 stores and completed 1 full remodel in early November and 2 full remodels in January to bring our full year counts to 6 store remodels and 7 store closures. For fiscal 2019, we currently have 1 new store planned and anticipate completing 3 full remodeling projects. By season, 2 of the remodels will be for spring with 1 remodel and the 1 new store being completed for back to school. Based on current plans, we expect our capital expenditures to be in the range of $8 million to $12 million for the fiscal year, which includes both planned store projects and also IT investments.

Buckle ended the year with 450 retail stores in 42 states compared to 457 stores in 44 states at the end of fiscal 2017. Additionally, our total square footage was 2.335 million square feet as of the end of the year compared to 2.367 million square feet at the same time a year ago.

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

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [4]

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Thanks, Tom. I'd 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 8.5% against the prior year fiscal quarter. Compared to the same 13-week period a year ago, women's merchandise sales were down approximately 2.5%. Average denim price points decreased from $83.05 in the fourth quarter of fiscal 2017 to $76.65 in the fourth quarter of fiscal 2018. For the quarter, our women's business was approximately 43.5% of net sales compared to 45% last year, and average women's price points decreased about 5% from $46.10 to $43.75. For the quarter, we were pleased with our results in denim, knit tops, sweaters, outerwear and shoes. Denim saw increases in unit sales in all of our private label brands as well as our outside price point brands.

Ankle lengths, curvy fits and price point selections under $80 were the drivers of business for the quarter. Our higher price point denim selection continues to represent a lower percentage of both our total inventory and sales. For knits, our buy more, save more program in our private label brands as well as product that was easy to wear and soft to the hands were important factors in guest fourth quarter purchases.

Our biggest growth category was in sweaters where we successfully introduced the buy more, save more program. That program along with our fashion sweater assortment were keys to the category's success, which pulled a bit from the sales in long-sleeved fashion knit and woven category. For footwear, boots and casual footwear were key looks with our branded offering at price points over $100, helping drive our AST for the quarter.

As we move into a new year, we are building on our successes in the new translations of products for the months following where many looks translate into Q1 as women continue to shop with a buy now, wear now focus. We have seen nice responses to our new spring sweater assortment, fashion tops and ankle denims. We intentionally pushed back our bigger influx of true spring products to mid, late February, which has been beneficial for us to continue to work through longer slate products as spring weather has been delayed across the majority of our markets.

We continue to work with room in our inventory in all our key categories to react to in-season's new and upcoming trends in the market. Being nimble with our selections and inventory in-season provides us with testing opportunities that give us reason to the future women's business.

We continue to partner with our marketing teams to enhance the online shopping experience by refining product descriptions, adjusting online tools, improving search and elevating our product shots, so guests are better able to visualize the unique details and styling of our products. Additionally, we have renewed our focus on utilizing social influencers, working with several individuals who represent our brand well. Although it's in its early phases, we have seen a nice response in social engagement.

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 categories.

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Robert M. Carlberg, The Buckle, Inc. - SVP of Men's Merchandising [5]

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Thanks, Kelli. The men's merchandise sales for fiscal quarter were down approximately 3.5% against the prior year fiscal quarter. Compared to the same 13-week period a year ago, men's merchandise sales were up approximately 1.5%. Average selling price points decreased from $84.45 in the fourth quarter of fiscal 2017 to $83.20 in the fourth quarter of fiscal 2018. For the quarter, our men's business was approximately 56.5% of net sales compared to 55% last year and the average men's price points decreased approximately 3% from $53.95 to $52.45.

During the quarter, denim continued to grow with BKE leading the way. Our selection of fit finish, fabrics, brands and details continues to lead the marketplace. For tops, both wovens and knits saw growth, highlighted by a nice balance of plaids, prints and polos along with our successful program.

True fall/winter categories had a shorter selling season due to early and substantial markdown from our competitors. We had planned for that both with sweaters and outerwears. While we maintained sale numbers, we pushed inventories down by the high double digits. For the quarter, footwear was our strongest growth category as a percent with boots and casual wear leading footwear. The unusual cold February made it difficult to forecast spring selling. We continue to see fall and winter products sell well during the month and saw nice sell-through on certain spring categories, highlighted by prints in many categories and elastic waist shorts.

Now turning to results on a combined basis. Accessory sales for the fiscal quarter were down approximately 4.5% against the same 13-week period a year ago while footwear sales were up about 19%. These 2 categories account for approximately 9% and 7%, respectively, of fourth quarter net sales, which compares to 9.5% and 6% for each in the fourth quarter of fiscal 2017. Average accessory price points were down approximately 5% and average footwear price points were down just slightly. Again, on a combined basis for the quarter, denim accounted for approximately 45% of sales and tops accounted for approximately 32%, which compares to 46% and 31.5% for each in the fourth quarter fiscal 2017. Our private label business continues to grow and represented approximately 42% of sales for the quarter versus 37.5% -- and 37.5% for the year.

Last week, we kicked off our annual spring brand event with new and fresh GWPs. We've received positive feedback from both our teams in the stores and our guests. Additionally, we staged 23 in-store events in 2018 where we invited brands and influencers to provide an experience for our guests in the stores as well as in the mall to drive traffic. We look to build on the in stores and momentum and expand the program in 2019.

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 is from the line of Tiffany Kanaga with Deutsche Bank.

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

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We were impressed by your reduced selling expenses in the quarter as you drove leverage on that line despite sales being down. But could you dig into the puts and takes around potential selling expense growth in 2019, especially if you're seeing pressure from labor and wages and your competitors upping the ante by investing more in digital and marketing initiatives? You mentioned some strategic investments in your opening remarks, so perhaps you could provide some additional color there as well.

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Thomas B. Heacock, The Buckle, Inc. - Senior VP of Finance, Treasurer, CFO & Director [3]

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I think I -- let me start with the selling -- question on selling expenses. We were pleased with that, and I think especially in the fourth quarter. You know we have continued to make investments in our store teams. And obviously, like Dennis mentioned, our people are our key drivers of our business so we continue to invest strategically there. But the increase in store payroll in the fourth quarter was less than it was for the remainder of the year, so we're pleased there. There also was a little bit of shift. And as we look at it for this year and then also for next year, to some degree, it makes sense to look at selling and G&A together. There was a little bit of a reclassification of expenses to better match our internal reporting. So that's -- I mean, looking at the fourth quarter, outside, G&A, it looks like it's up more and selling down. So that's part of it. Looking ahead to '19, hard to say. I mean, the biggest piece of selling is obviously store payroll and our ability to manage that, and we try and be as smart as we can, so -- but at the same time, invest in our people and make sure that we have the talent to take care of our guests and provide unique and differentiated experience and win our guests. So...

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [4]

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Yes. And also, on the selling expense, we should see some improvement in our lease costs as we go through the year as well as just trying to be smarter as we look at travel plans and such with the sales team, especially. On our investments, we're investing in our marketing and IT people to be able to handle the projects and support what we have going on. We're now able to improve our CRM so we can better serve and stay in touch with our guests, and that will also be beneficial data for our marketing as we go forward. The ship to store has also worked very well as long -- as well as with the apps, the guests reservation product in our stores. And we're just looking for progress this year so that our guests can -- as I mentioned earlier, shop however and wherever they want to shop as mobile is a big traffic driver for us. And then also, with the CRM improvements, it should help us in our loyalty and Buckle card marketing as we go forward.

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

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And if I could ask one more. Considering that your women's denim price points have come down about 25% since 2014, but that decline still accelerated as we went through 2018, where do we now stand in terms of a time line for stabilization? And what do you think that level will be? Additionally, do you see a need to materially change your brand mix or your private label penetration to get there from where we are today?

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

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Yes. And that's been our challenge that we've been working with as -- like the Rock Revival and similar brands that we're selling from $120 to $160. That there's -- it's still a small business there and it's successful. However, the volume is down substantially from that. I think our teams have done a good job establishing our own brands and we're building on those, and that's working well as well as adding some fashion brands. But they are selling from anywhere from $50 to $90, the majority of those, compared to when we were selling the majority of our jeans from $100 to $160. So that's been our challenge over the years, and we have to listen to our guests and provide the fashions and styles and fits, which we continue to do, but it's at a different price point. And for the near future, we would still see some pressure probably on prices, but our unit sales have been up slightly now for a few months. And we think we can build off that momentum as well as our teams getting the -- really enjoying our selection and working with the guests on that to build their new favorite fits.

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Operator [7]

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Next, we'll go to Steve Marotta with CL King.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [8]

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As far as inventory being up 6% again slightly negative comp, can you talk a little bit about inventory mix and the potential for markdowns to accelerate given what looks a little bit heavier versus sales?

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

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I think we're comfortable with our markdowns. We had the -- especially, we were down in our markdowns last year, so we had a tough comparison. But we're feeling good about what that inventory level is. Bob, do you want to mention some of the early shipments that you brought in to get a good start on spring?

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Robert M. Carlberg, The Buckle, Inc. - SVP of Men's Merchandising [10]

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Yes. We -- kind of opposite -- on the guest side, we brought in quite a bit. There was some new categories in elastic waist shorts that came in early. And with the prints that started to work last year, we brought in quite a bit more than we normally would have to start off spring.

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [11]

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And I believe we've also -- we got pretty low on our denim inventories on both sides at the start of the year last year. And so we've made some investments there so we were not missing sales, and that's another part of that.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [12]

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And I missed the women's denim price points this year and last year. Could you please review that for me?

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [13]

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Do we have that?

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Kelli D. Molczyk, The Buckle, Inc. - VP of Women’s Merchandising [14]

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Yes, we do.

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [15]

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Got it. The average denim price points in the fourth quarter decreased from $83.05 to $76.65 this year.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [16]

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Lastly, what do you expect the tax rate this year?

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

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I think our expectation for '19 would be around 24.5%, pretty close to what it was for the full year '18.

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Operator [18]

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(Operator Instructions) And next, we'll go to the line of John Deysher with Pinnacle.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager [19]

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Just kind of a big picture question. But as you know, Levi's is coming public and there's a spinoff coming for Wrangler and Lee. And I know they're primarily on the manufacturing side, but I was just curious if you have any insights there as to how this might impact your business, if at all. Obviously, it might raise the profile of the category, but I'd just be curious, if any, insight you might have on these transactions.

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Dennis H. Nelson, The Buckle, Inc. - President, CEO & Director [20]

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John, my take is that there would be little impact just because they're going public. We do have a Levi's business with our ladies' team especially in the spring with the Levi's shorts. And we have a nice relationship with them as far as developing products and working with that. So we just see that as a plus. And we're testing the Wrangler styles, a couple in the ladies' side as well just to see where that goes. So we like working with them. They're very good brands. But just because they're going public, we don't see that as a negative for us.

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John Eric Deysher, Bertolet Capital LLC - President, Chief Compliance Officer and Portfolio Manager [21]

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Okay. I didn't imply it was a negative. I was just curious as to your thoughts.

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Operator [22]

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And Mr. Nelson, there are no further questions coming in.

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

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Okay. If no other questions, thank you for being part of our call this morning. Have a good day.

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Operator [24]

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