The Buckle, Inc. (BKE) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter earnings release. [Operator Instructions] As a reminder, this conference is being recorded. Members of the Buckle's management on the call today are: Dennis Nelson, President and CEO; Karen Rhoads, Senior Vice President of Finance and CFO; Pat Whisler, President -- Senior Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; Karl -- Kyle Hanson, Vice President, General Counsel and Corporate Secretary; Tom Heacock, Treasurer and Corporate Controller. As they review the operating releases -- results for the first quarter, which ended May 3, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement. 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 and revise any forward-looking statements, even if experience or future changes make it clear that they are protected 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 reproduction or recordings of the call should not be replied upon -- relied upon, as the information may be inaccurate. I would now like to turn the conference over to your host, Ms. Karen Rhoads. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining on the call this morning. Our May 22, 2014, press release reported that net income for the 13-week first quarter that ended May 3, 2014, was $37.3 million or $0.78 per share on a diluted basis. And that's compared to net income of $37.6 million or $0.78 per share on a diluted basis for the prior year 13-week first quarter that ended May 4, 2013. Our net sales for the 13-week first quarter increased 0.7% to $271.7 million compared to net sales of $269.7 million for the prior year 13-week first quarter. Comparable store sales for the quarter were down 0.9% in comparison to the same 13-week period in the prior year. And our online sales, which are not included in comparable store sales, increased 2.5% to $21.4 million. Gross margin for the quarter was 43.1%, down approximately 30 basis points from 43.4% for the first quarter last year. The decrease was driven by deleveraged occupancy, buying and distribution expenses, resulting from the comparable store sales decline. Our merchandise margins for the quarter were essentially flat compared to a year ago. Selling expense for the quarter was 17.6% of net sales compared to 17.5% for the first quarter of fiscal 2013. And increase in store payroll expense was partially offset by a reduction as a percentage of net sales in expense related to the incentive bonus accrual. General and administrative expenses for the quarter were 3.7% of net sales compared to 3.9% for the first quarter of fiscal 2013, with the decline primarily attributable to the reduction in equity compensation expense. Our operating margin for the quarter was 21.8% compared to 22.0% for the first quarter of fiscal 2013. Other income from -- for the quarter was $345,000 compared to $350,000…

Good morning, and thanks for joining us this morning. I'd like to start by highlighting the performance from our merchandise categories that led to our 0.7% net sales increase for the quarter. Men's merchandise sales for the quarter were up approximately 2.5%, with strong categories including denim and casual bottoms, shorts and accessories. Average denim price points increased from $90.30 in the first quarter of fiscal 2014 to $92.75 in the first quarter of fiscal 2014. For the quarter, our men's business was approximately 41% of net sales compared to approximately 40% last year, and average men's price points increased approximately 1.5% from $53.95 to $54.85. Women's merchandise sales for the quarter were down approximately 0.5%, with strong categories including casual bottoms, knit tops, sweaters, skirts and dresses and accessories. Average denim price points on the women's side increased from $98.90 in the first quarter of fiscal 2013 to $100.15 in the first quarter of fiscal 2014. For the quarter, our women's business was approximately 59% of sales compared to approximately 60% last year, and our average women's price points decreased approximately 2.5% from $48.60 to $47.40. For the quarter, combined accessory sales were up approximately 3% and combined footwear sales were down approximately 0.5%. These 2 categories account for approximately 7.5% and 6%, respectively, of first quarter net sales, which compares to approximately 7.5% and 6.5% for each in the first quarter last year. Our -- the accessory price points were down approximately 2% and average footwear price points were up approximately 4.5%. For the quarter, denim accounted for approximately 43.5% of sales and tops accounted for approximately 28.5%, which compares to approximately 44.5% and 28.5% for each in the first quarter last year. Our private label business was up slightly as a percentage of sales for the quarter and represent approximately 32% of sales. During the quarter, we opened 1 new store, closed 1 store and completed 6 substantial remodels. As of the end of the quarter, 346 of our 450 stores were on our newest format. For the full year, we still anticipate opening 17 new stores in total, including 2 that have already opened in May, 1 that's planned for June, 9 for back-to-school and 4 for holiday. And we also anticipate completing 18 full remodels during the year, including 2 yet to be completed in May, 7 for back-to-school and 3 for holiday. And with that, we welcome your questions.

First question comes from the line of Lee Giordano at CRT Capital.

I was hoping you could talk a little more about the denim category and, in particular, premium denim business. Kind of what your outlook is for that business going forward into the back half of the year and into holiday? And also what's driving -- it looks like average price points are going up, what's driving that increase?

Okay. Well, as we said on the last call, we had -- our denim inventories had got pretty low the year before, so we had added inventory to both the guys and gals business, and the branded jeans like Rock Revival, Big Star Vintage and a few smaller ones, those higher price points had been well received, and that has raised the average price of the denim. So we're seeing good response to our denim selection and looking forward to the back-to-school season. Does that cover everything, Lee?

Yes, that's it.

Our next question comes from the line of Gabby Carbone with Janney Capital Markets.

I'm calling in for Adrienne Tennant. So many retailers have been talking about closing the stores or slowing on new store openings and instead focusing on the DTC business. So any thoughts there? Do you continue to see the shift from brick and mortar to DTC and the investments being made in that business to drive sales going forward?

Good morning. Thanks for the question. We see the -- our online business to be just part of our strategy with our stores. We focus on the great specialty service in our stores, as well as with a wide selection. It's -- we're always working to drive people to the stores. And we do a lot of special orders with our guests in our stores from our online store. We are working on CRM that we hope to be in place by the first part of next year. And we have several projects that we think will not only help our business online, but will help also drive the guest to the store to shop as well. So we're looking to -- I mean, in the market, there's always change in neighborhoods and situations where there might be a better shopping area than the others, so we'll occasionally have store closings. But for the most part, we're looking at driving our business, both with the store and the online business together.

Our next question comes from the line of Kate Fitzsimons with JPMorgan.

Yes. My question was how are you feeling about inventory just in terms of quality, just given the increase year-over-year? And then secondly, just any thoughts on how you're planning inventory into the back half, should we still expect to see it up double digits?

There's a lot of variables. But I would say the end of the second quarter would probably be in the high-single digits on inventory. But we've had a nice response to our selection, and we feel good about our inventory at this point.

Our next question comes from the line of John Kernan with Cowen.

Just any comments you can give us on e-commerce? The growth there has been a little bit below what we've been seeing out of other specialty retailers. Is there anything you can tell us, in terms of the investments you might be making there to get that line going?

Karen or Kyle, do you have anything to add from my previous comments?

I think one of the things -- this is Kyle Hanson, and I work closely with both marketing and the development teams on the online store. And one of the things that Dennis mentioned that we feel that we've really been able to maximize our strengths on is the special orders from our stores, which are primarily fulfilled from our online store. And those sales go to the stores themselves. So those are not included in our online sales numbers.

Okay. And then I guess you guys have long been great stores of capital. Your cash balance is up big year-over-year, the dividend -- special dividend was down a little bit year-over-year last year. Can you talk about where you think the potential in terms of cash returns to shareholders, how that can look at the back half of the year?

I guess we'd decline making any forward comments on that. We'll just continue to review quarterly where we're at on opportunities and where the cash value is to make those decisions.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Can you please just touch on a little bit on the women's business, what you're seeing on the fashion part, and what changes you expect to happen as you go forward and timing of any improvements?

Okay. Pat, do you want to start with this?

Sure. Well, overall, we just continue to offer a broad variety in response to the guests' request. We say there's a key component at the relaxed lifestyle that's been a strong driver, and we have that covered and we think well from some of our private label brands, as well as some of our newer business partners. Our denim category, we continue to expand our selection there in fabric, in finishes and increased fit selection. So I just feel confident about the team's approach to the business and responding to the guest.

And I'll add, Dana, I think the team has done a very nice job with our variety of tops and selection there. And our dress and skirt business continues to add to business. So we've been very happy with that part of it.

As you see private and the branded mix, how should that change for both men's and women's?

I think right now, I would say it would be pretty consistent with the previous year. Bob, do you have any comments on that?

I'd say that's pretty accurate, we're going to say pretty consistent.

Our next question comes from the line of Edward Yruma with KeyBanc.

Just a quick question on the balance sheet. Inventory a little bit better shaped in the fourth quarter, but payables were up. Any way we should think about there?

Karen or Tom, do you want to take that?

Our merchandise payables and -- were actually...

Or is it inventories was up, payables were down. Sorry about that. Yes.

Yes. And part of that is -- part of that inventory is carrying over from the end of the year. Because I think, as we talked about on our year-end call, some of that inventory was brought in a little bit earlier this year to kind of be ahead of the Chinese New Year, so we had that early flow of inventory. And so the flow of the product during the first quarter was actually down slightly from a year ago on new receipts for the quarter. And so then that would result in fewer payables, just because of the flow -- the timing of the flow of that inventory.

Got it. And just a bigger picture question about denim price points. I know you guys have done a good job of adding more private label and having some more attractive entry price points. At this stage, are you comfortable with the variety of price points you have? And if not, where are other places you could add product?

Well, Ed, I think we're feeling pretty good about our price point selection. We got quite a variety from -- in the 50s, 60s, all the way up to well over $150. And it's just something the team has done a nice job of balancing the inventories for the selection of the guest. And as everything in our business, it keeps changing. So we're continuing to evolve and test different categories and fabrics to see how far we can push the limit but also give our guest, that are more price conscious, a good quality and value as well.

There are no further questions at this time.

All right. If there are no further questions, we again like to thank everyone for participating in the call today. And wish everyone a great Memorial weekend.

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