The Buckle, Inc.
Q2 2015 Earnings Call Transcript

Published: 20 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Earnings Release Conference Call. At this time, all parties are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Senior Vice President of Finance and CFO; Pat Whisler, Senior Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; Kyle Hanson, Vice President, General Counsel and Corporate Secretary; and Tom Heacock, Vice President of Finance, Treasurer and Corporate Controller. As they review the operating results for the second quarter, which ended August 1st, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, all forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on factors which 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 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 calls should not be relied upon as the information may be inaccurate. As a reminder, this conference is being recorded. I'd now like to turn the call over to our host, Ms. Karen Rhoads. Please go ahead.

[Karen Rhoads:]

Thank you. Good morning everyone. Thanks for joining in our call this morning. Our August 20, 2015 press release reported that net income for the 13-week second quarter, that ended August 1st, 2015, was $23.5 million, or $0.49 per share on a diluted basis. And that compares to net income of $24.5 million or $0.51 per share on a diluted basis for the prior year 13-week second quarter that ended August 2nd 2014. Our year to date net income for the 26-week period ended August 1st 2015 was $57.1 million or $1.18 per share on a diluted basis and that is compared to net income of $61.8 million or $1.29 per share on a diluted basis for the prior year 26-week period that ended August 2nd 2014. Net sales for the 13-week second quarter increased [one tenth of a percent] to $236.1 million compared to net sales of $235.7 million for the prior year 13-week second quarter. Our comparable store sales for the quarter were down 1.7% in comparison to the same 13-week period in the prior year and our online sales increased 17.4% to $20.1 million. Year to date our net sales were $507.4 million for both the 26-week fiscal period ended August 1st 2015 and the 26-week fiscal period ended August 2, 2014. Our comparable store sales for the year to date period were down 2% in comparison to the same 26-week period in the prior year. And our online sales increased 14.9% to $44.3 million, gross margin for the quarter was 40.1% down approximately 20 basis points from 40.3% for the second quarter last year. The decrease was driven primarily by deleveraged occupancy by distribution expenses resulting from the comparable store sales decline and that was partially offset by improvements in merchandize margin which was up about 55 basis points for the quarter. For the year to date period gross margin was 41.0% down approximately 80 basis points from 41.8% for the same period last year. The decrease was driven primarily by deleveraged occupancy buying and distribution expense resulting from the comparable stores sales decline partially offset by improved merchandize margins which were up 10 basis points. Selling expense was 19.7% of net sales for the second quarter of both fiscal 2015 and fiscal 2014. Increases in store pay roll expense and online fulfillment and marketing expenses were offset by reduction as a percentage in net sales in expense related to the incentive bonus accrual and certain other selling expenses. For the year to date period selling expense was 18.8% of net sales compared to 18.5% for the same period in fiscal 2014. Increases in store pay roll expense and online fulfillment and marketing expenses were partially offset by reduction as a percentage of net sales in expense related to the bonus accrual. Our general and administrative expenses for the quarter were 4.7% of net sale compare to 4.2% of net sales for the second quarter of fiscal 2014. With increases as a percentage in net sales across several expense categories as a result of the comparable store sales decline for the quarter. For the year to date period general and administrative expenses were 4.5% of net sales compare to 4.0% for the same period in fiscal 2014 with increases as a percentage of net sales across several expense categories as a result of the comparable store sales decline. Our operating margin for the quarter was 15.7% compared to 16.4% for the second quarter of fiscal 2014. For the year to date period our operating margin was 17.7% compared to 19.3% for the same period last year, other income for the quarter was $272,000 compared to $260,000 for the second quarter of fiscal 2014. And other income for the year to date period was $1 million compared to $605,000 last year. Income tax expense as a percentage of pre-tax net income was 37.3% for the second quarter of both fiscal 2015 and fiscal 2014, bringing second quarter net income to $23.5 million for fiscal 2015 versus $24.5 million for fiscal 2014. Year-to-date our income tax expense was also 37.3% for both fiscal 2015 and fiscal 2014, bringing year-to-date net income to $57.1 million for fiscal 2015 versus $61.8 million for fiscal 2014. Our press release also included a balance sheet as of August 1, 2015, it includes the following

[Tom Heacock:]

Good morning and thanks for joining us this morning. I’d like to start by highlighting the performance from our various merchandise categories for the quarter. Men’s merchandise sales for the quarter were up approximately 5% with strong categories including casual bottoms, knit shirts, shorts, and accessories. Average denim price points increased from $92.65 in the second quarter of fiscal 2014 to $94.40 in the second quarter of fiscal 2015. For the quarter, our men’s business was approximately 46% of net sales compared to 44% last year, and average men’s price points increased slightly from $50.40 to $50.75. Women’s merchandise sales for the quarter were down approximately 3.5%; with strong categories including casual bottoms, woven tops, shorts and dresses. Average denim price point decreased from $98.65 in the second quarter of fiscal 2014 to $95.45 in the second quarter of fiscal 2015. For the quarter, our women's business was approximately 54% of net sales compared to 56% last year, and our average women's price point increased approximately 6% from $43.95 to $46.50. For the quarter, combined accessories sales were up approximately 3.5%, and combined footwear sales were down approximately 7.5%. These two categories accounted for approximately 10% and 5.5% respectively of second quarter net sales, which compares to 9.5% and 6% for each in the second quarter of fiscal 2014. Average accessory price points were up approximately 10.5%, and average footwear price points were down approximately 2%. For the quarter, denim accounted for approximately 35% of sales, and tops accounted for approximately 32.5%, which compares to 36.5% and 32.5% for each in the second quarter of last year. Our private label business was up slightly as a percentage of net sales for the quarter, and represent approximately a third of sales. During the quarter, we opened one new store, and completed six full remodels. As of the end of the quarter, 377 of our 464 stores were on newest format. For all of fiscal 2015, we still anticipate opening nine new stores in total, which includes five remaining that are planned for holiday, and we also still anticipate completing 14 full remodels during the year, including three planned for holiday. And with that, we welcome your questions.

[Operator:]

[Operator Instructions] Next, first question will come from Tom Filandro with Susquehanna Financial. Please go ahead.

[Tom Filandro:]

Hi. Thank you for taking my question. Karen, can you just help us a little bit on the inventory comments? If you possibly could maybe factor out those three buckets that you identified the in-transit, the DC and the tax-free, just to give us some understanding of directionally what the underlying trend in same-store or square -- or sales per square foot inventory looks like? And maybe, Dennis, can you just tell us, overall how you're feeling about the positioning of your inventory and where are you seeing the increases? And then I have a follow-up question.

[Karen Rhoads:]

And Tom on the inventory may be probably most apples-to-apples comparison, if you look at the comp store, inventory up about 10% and versus compared to down 5.5% a year ago, so on a more normalized level I guess we would see that up more than mid-single digits on a two-year basis. So I think that, that's where -- taking out the other kind off unusual flow of the product that would be the kind of apple-to-apples compared comparison and then I'll Dennis answer your other question.

[Dennis Nelson:]

Yes, Tom, we are liking the new product we're bringing in and seeing that I think the key category is we're trying to do a better job of inventory in all our stores, some of the smaller stores have been a little low on inventory so we're trying to get a better mix there for them. We're also having the stores as for more extended sizes like in Men's XX, XXX shirts for guys and certain spin brands also on the other end carrying more small both the men's and women's we're getting more request for longer length jeans and extra-long jeans than we've been stocking, we're introducing additional lifestyle brands, our own brands that we think would attract the guest that may be is not buying it as much as they could be from us, as well as expanding our kids inventory to all stores, still not at a high level inventory but definitely getting that out and raising our inventory there as well.

[Tom Filandro:]

Thank you, Dennis, for the comprehensive answer to that so quick one for Pat and Bob possibly, a lot of talk about emerging trends in denim, we're hearing wash, destruction, some stretch fabrication in men's, hoping that both Bob and Pat maybe you can give us some insight into what they are seeing in their business and just the units have been down in the classification over the past two years -- do either of you feel that we are at a stage now where we could see a unit recovery in the broader classification of denim?

[Bob Carlberg:]

Pat you want to go first.

[Pat Whisler:]

Sure. On the wash destruction and stretch, I'll talk about that a little bit for both men's and -- I'll let Bob take the men's call but for women's, that is something we are very familiar with. It -- stretch has been a great driver for the business and the guest really responds well to that. I think we have a nice mix of both wash and finishes, details, probably on a more comprehensive mix of price points than we've had in a while. Dressing some of the lifestyle fashion -- excuse me -- some of the more trend items -- it's kind of cycling into a wear now type of situation for women's denim so we were very pleased with some of the summer [indiscernible] and more of that type of tops and shorts and feel good about our mix on the full-length going forward.

[Bob Carlberg:]

And I think I men's denim, actually we been growing pretty well in men's denim for quite a while and I think being close to Pat and the girls team we've been running stretch and lightweight along with specialty lifestyle CoolMax for several years so I think we were early on that and that just continues to expand and what our guest is telling us is they like the comfort of that and what we've delivered so far this fall has been well received and feel pretty good about the men's denim selection, on the destruction side, a lot of people moved away from that for quite a while when McLean dark was in but what we try to work on the selection so there's always everything from light to dark from a cleaner look to a more destructed finished so we can just kind of move the percentages a little bit but we are seeing destruction being very good.

[Operator:]

And the next question comes from Ed Yruma with KeyBanc. Please go ahead.

[Jessica Schmidt:]

Hi this is Jessica Schmidt on for Ed. Thanks for taking my question. I just wanted to ask about back to school. I know the shift in some tax for your holidays weight on your performance in July but were you able to recover this one for tax free holidays took place. And I guess just how should we be thinking about the shift into August?

[Pat Whisler:]

We can't currently talk about August Jessica sorry.

[Jessica Schmidt:]

Okay thank you.

[Operator:]

And our next question comes from Simeon Siegel with Nomura Securities.

[Simeon Siegel:]

So Karen maybe just as the other -- asking about another way can you comment at all the different geographic exposure kind of trends you saw within the country just to try to quantify what the impact was from the tax-free shift in July and then I don't know if you answered Tom specifically on the inventory piece but could you say what percentage was attributed to the inventory just due to the CellCept because presumably that invert of the following week or two.

[Dennis Nelson:]

No I think those would be very difficult to respond to accurately and I mean --

[Karen Rhoads:]

Yes, we have not heard that publicly that is correct.

[Simeon Siegel:]

And then just maybe follow up real strong e-commerce growth. How large do you think that business can grow overtime and then how do the e-commerce margins do versus the store margins?

[Dennis Nelson:]

Well, the e-commerce we are very happy with that. We think there'll be continued growth. We're seeing some nice sales in almost all the categories. What it can get to, I'm not sure. But we think there'll be steady growth and we continue to look at new ways to analyze and invest in that business so hopefully that answers that question, Simeon.

[Simeon Siegel:]

Yes, that’s good and do you guys know how the merch margins are online versus in stores?

[Dennis Nelson:]

We don’t really calculate that because there is so many factors involve. But online is a very good business for us and a profitable business.

[Operator:]

And our next question comes from Paul Alexander with BB&T Capital Markets. Please go ahead.

[Paul Alexander:]

Hi. Thanks just a follow-up on the denim question may be asking a little more pointed way, the tone on denim has been really optimistic with emerging trends and new interest particularly when women's for the last couple quarters but the women's denim really turned around yet so any thoughts on that and do think maybe you fall be the inflection point there can women's be a comp driver in fall?

[Dennis Nelson:]

Well, I think so. The last quarter was the tax-free shift probably affected the total denim for that quarter as well as warm it's been the -- our Capri business -- are denim short business has been very good and so we look forward to the fall season.

[Paul Alexander:]

Great. And then just a follow-up on e-commerce discussion you mentioned Dennis looking at additional ways to analyze invest in that business. Anything specific, any investments that you are considering that you can share with us?

[Dennis Nelson:]

Kyle, do you want to comment on that?

[Kyle Hanson:]

Sure, Dennis. Well, one of the things that we have seen is a lift in new visitors to the site and it's primarily through their paid search programs. And in just analyzing our improved conversion rates it's primarily through our email and affiliate marketing investments and that's also help lead to an increase in our average order size.

[Operator:]

Our next question comes from Steve with CRK & Associates. Please go ahead.

[Unidentified Analyst:]

Good morning everybody I’m going to ask you some more question in a different way, is it possible to quantify the tax holiday shift on comp store sales results in the second quarter?

[Karen Rhoads:]

That’s not something we’re going to provide, sorry.

[Unidentified Analyst:]

No problem. [With bringing] in shift in SG&A spend either into or out of the second quarter that was not previously planned for at the beginning of the quarter?

[Karen Rhoads:]

No, not for that I think of.

[Unidentified Analyst:]

Okay. And lastly with merchandise margins up 55 basis points during the second quarter, can you comment on what categories or the best and maybe second best?

[Dennis Nelson:]

I think -- I mean some of that you know the first quarter was down slightly in that we saw a nice improvement in the second quarter and some of that I think the comparison looking back a year ago was a little bit easier in the second quarter than the first quarter and by category I don't know that there's anything specific we'd want to call out like Pat commented there's some nice expansion of brands in some of the private label that help drive that and maybe a little bit fewer markdowns but no nothing too significant to call out.

[Operator:]

The next question comes from Liz Pierce with Brean Capital. Please go ahead.

[Liz Pierce:]

Thanks for taking my question. So a couple things on just semantics when you guys talk about performance categories when you call that out, on casual bottoms and shorts, would Capri even if they are denim be called out separately or are they part of the other categories?

[Dennis Nelson:]

That would be part of the denim category, Liz.

[Liz Pierce:]

Okay. I just wanted to make sure to clarify. And then in the children business, in the kids business Dennis, I think you said it’s expanding to outsource and is that because I thought that boys was pretty much in all stores or maybe if you can just clarify kind of what's incremental on that?

[Dennis Nelson:]

Bob, do you want to highlight that I think you are more in tune than I.

[Bob Carlberg:]

At holiday we are about 250 doors and last back-to-school we'd been at 200. So in a small way we were all stores today. So I don’t know if we could like Dennis said earlier it’s still a small part of the business it’s growing very nicely certainly would have added to some of the inventory been in all stores.

[Liz Pierce:]

Is that both boys and girls for the 200 and 250, or is that just boys?

[Dennis Nelson:]

That was boys and just back-to-school we have little girls denim in all stores, correct, and the tops in how many of the stores?

[Karen Rhoads:]

We've recently rolled out a very small collection of stores on the girls tops, very small selection but was received very well. And then we then introduced BKE on little girls side just recently at the end of the quarter.

[Liz Pierce:]

I’m sorry, you introduced BKE?

[Karen Rhoads:]

Denim, yes, for the little girls. We hadn't had that in our mix before, so we just introduced that as well for the girls.

[Liz Pierce:]

And so I’m showing who you -- is the parent coming in the with the child or is the parent picking this up when they are in the store and recognize that you are now offering products for the kind of the family?

[Dennis Nelson:]

Yes, I would say some of each that are very loyal guest that have children are bringing the man and some that are just shopping to discover that we have it and the stores do nice job of introducing that when they see a lady with -- could potentially have children or know someone that have children, so they kind of make a nice introduction on that to get that started.

[Unidentified Analyst:]

And will that become part of more of your kind of outbound marketing in the email and I presume that's the greatest way to leverage what you have in the stores?

[Dennis Nelson:]

Yes, we will continue to update and work on that and -- we are back-to-school in our holiday, we expect to be the best part of that business.

[Unidentified Analyst:]

And then just a final question on footwear which has kind of been under a little bit of pressure, any thoughts on, is it just what's happening in terms of denim and silhouettes and changing kind of the footprint that you will, what people are wearing with that? Or what are your thoughts about that?

[Dennis Nelson:]

Well on the lady side our sandals, flips and such we sold down pretty nicely, I think our inventory was lower in those categories in last year and last year I think we also brought in some of the boots a little earlier and with the tax-frees earlier last year, I think that had some effect on the footwear, as far as silhouettes with denim, Pat do you want to come one?

[Pat Whisler:]

Well, I'll just tag on to it Dennis sorry, but our [indiscernible] sandals, flips, the more we are now, things that are little bit lower inside points performed well and we're happy with those and we did shift some of our tall boots or actual leathers maybe a little bit later for we're now for the upcoming quarters.

[Operator:]

And question from Lee Giordano with Sterne Agee. Please go ahead.

[Unidentified Analyst:]

Hi, this is actually Michael [Gunter] on for Lee, thanks for taking my question. How are you guys thinking about the store opening [kins] for last year, because obviously it's slowed down a little bit in terms of what you're planning for this year, so what are your plans for next year and may be in the future after that?

[Dennis Nelson:]

Well, we're still looking at new stores as where we want to see opportunities for -- that we think it's a great situation long-term and we're not just calling out a certain number of stores and trying to sell it, we are shopping continuously for new positions that we feel good about and we'll probably have a better idea for next year at the next call as well as we're continuing to reposition some of our existing stores we're able to expand them, give or take around 20% and update the looks there, so that's kind of our growth plan at this point.

[Operator:]

And your next question comes from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

My question is on the operating side, the selling expense in particular, it was eventually flattish in dollars and I'm wondering is that something that we should expect go forward and then where do you breakeven, where do you get leverage on your -- on the fixed components of the business? Thank you.

[Pat Whisler:]

The actual selling expense, that particular category probably has more variable expenses in it than in general, administrative expenses which would have more fixed cost in there, so we continue to see the selling expense vary a little bit more along with the sales, we are [indiscernible] for performance company, so a lot of time as sales grow, even in the past we've had that question why we don't -- maybe something to get as much leverage in selling is because we do pay the majority of our teammates in the store are at a base plus commission so we feel strongly in the pay for performance and then in the cost of goods sold, we feel like [breaking out probably] the low to mid-single digit would be where the leverage is. And that's kind of an annual basis, because when we look at the leverage with Q1 and Q2, with the sales lower in absolute dollars, that's a little more leverage than it does in the back half, so the back half that comp can be a little bit lower to get that leverage on the cost of goods sold, because the absolute dollars of sales are greater. So hopefully that makes sense.

[Unidentified Analyst:]

That totally makes sense. Did you mention, I know you gave some of the components, did you mention the number of transaction by any chance?

[Pat Whisler:]

We did not.

[Unidentified Analyst:]

Could you give us any color on that?

[Pat Whisler:]

I don’t have that off the top of my head sorry.

[Unidentified Analyst:]

And then it sounded like some of the fashion components you were going to do through private label. Is there any meaningful change in the percentage of private label kind a go forward strategy versus historical?

[Dennis Nelson:]

We still do well those brand. But I would guess in the back half we'll have somewhere between low to mid-single digit growth in private brands. Some of them when we started brand two will start that out like in a test mode to make sure we have the right fits. And the category works in our best stores before rolling that out in total. So the growth there will probably be slow.

[Operator:]

[Operator Instructions]. Our next question will come from Steve Marota with C.L. King Associates.

[Steve Marota:]

One follow up if you have the statics handy, could you tell us what the percent of denim was in the mix in the first half of this year as well as percent of denim mix in the second half of last year?

[Karen Rhoads:]

So this year for the first half of the year denim represented about 38.7% of sales versus 40.3% for the same time a year ago.

[Steve Marota:]

And you wouldn’t have to have second half of last year handy, if not, we can do that offline.

[Karen Rhoads:]

I do not have that handy, sorry about that Steve.

[Steve Marota:]

No trouble whatsoever, again thank you for the call.

[Operator:]

And our next question will come from Andrew Hollingsworth with Holland Advisors. Please go ahead.

[Andrew Hollingsworth:]

Just a couple of quick questions that follow up from the denim questions other [than base]. Without us knowing the effect of the state taxes which you obviously are [indiscernible] give us till July, maybe you could just give us a bit of reflection in terms of looking with hindsight if the group had known what it knows now about the trends away from dead end tools of sort of fabrics for the last couple years. How might you’ve done things differently? Just to give us a bit of color on this whole sort of subject. And the two other questions I have with that is in terms of the drivers of like for like sales in the last sort of ex month. Historically you’ve sort of alluded to how much that might be for or how much of that trend is right for denim and so on and give us again a feel for that even if you're not prepared to give absolute numbers maybe some indications will be useful. And my last question would be is during this period of changing attitudes towards denim that got for the last two years, do you think it's been a slight change in your customer age profile as well?

[Dennis Nelson:]

I believe you're kind of asking about if we should have been more in to active were earlier or such.

[Andrew Hollingsworth:]

Can you decide what you think the sales and is right for your customers? I'm just intrigued as to whether were you to back and do it differently would you’ve chose to or frankly do you just take to this is what we believe is will sell [indiscernible] brand and our identify for the next 15 to 20 years and therefore we wouldn’t have changed a thing.

[Dennis Nelson:]

Well you could always change a little bit. But overall I think the denim or denim type fabrics, casual fabrics are core and that I think we did try some active wear with brands and such and had some success. But it's the play in the big market that’s not our niche or how we can differ our self and the focusing on the fits and fabrics and stretches it's a little more difficult for the last year and half, two years just because there was -- mostly was dark and not a lot of excitement out there. So I think out team did a good job on the ladies side working with that with what's going on and keeping a very solid denim guest maybe not buying as many units of the denim but still doing a good job with it. And on the men's they’ve actually grown the denim and done a nice job and they work with some twelves and some other fabrics with that. But the other fabrics mostly complement our business and sometimes we’ll be able to do a little more than others. So I think overall we probably would not have changed a lot of what we have done but we’re always looking to learn and improve and we're open to testing and we work with a lot of brands to see if we think the product offers something that our guest would want. So we try to keep an open mind but the niche really comes down to denim and that’s kind of where we see going forward that there is going to be some good opportunities.

[Andrew Hollingsworth:]

And then a follow-up question to the ones, so if you actually had to look at the last I’d say a year or six months what have you won in terms of sales declined, how much of it would you think is down for how much it's down to the denim stroke trends [indiscernible] customer age profile?

[Dennis Nelson:]

Well I think on the age profile we still have a wide variety of guest shopping our store from junior high, high school, college but then in our stores where we have been 15, 20 years or more we probably -- our store managers would tell us that our guest is -- we probably have more guest over the age of 25 than under the age of 25 and so that kind of shifts some of the shopping at different times of the year. We have such a wide selection of product and a wide selection of fits as far as in our denim and even in our top categories that we can hit on different lifestyles with all our guest of different ages. So that gives us an opportunity there but it also creates challenges of how to narrowly focus on certain ones as well. But I think the team does a very nice job on that.

[Operator:]

Currently we have no further questions in queue.

[Karen Rhoads:]

If there are no further questions we really want to thank everybody for taking time the other day to join us on the call today and have a great day.

[Operator:]

Ladies and gentlemen, this conference will be made available for reply after 11 o’clock today until Thursday, September 3 at midnight. You can access the executive play back of this at any time by dialing 1-800-475-6701, and entering the access code 365745. International participants dial 1-320-365-3844. Those numbers again are 1-800-475-6701 and 1-320-365-3844; with the access code 365745. That does conclude our conference for today. Thanks for your participation and using AT&T executive teleconference service. You may now disconnect.