Buckle, Inc. (The)

Ladies and gentlemen, thank you for your patience and holding, and welcome to the second quarter earnings release call. Members of Buckles Management on the call today are Dennis Nelson, President and CEO, Tom Heacock, Senior Vice President of Finance, Treasurer and CFO, Kelly Malsik, 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 second quarter, which ended August 1, 2020, they would like to reiterate their policy of not giving future sales or earnings guidance and having 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 materials risk 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 express written consent. Any unauthorized Reproductions or recordings of the calls should not be relied upon, as the information may be inaccurate. I would now like to turn the call over to your host, Tom Heacock. Please go ahead.

Good morning, and thanks for joining us this morning. Our August 21, 2020 press release reported that net income for the 13-week second quarter ended August 1, 2020 with $34.7 million, or 71 cents per share on a diluted basis, which compares to net income of $16.4 million or $0.34 per share on a diluted basis for the prior year 13-week second quarter, which ended August 3, 2019. Year-to-date net income for the 26-week period ended August 1, 2020, was $22.9 million or $0.47 per share on a diluted basis compared to net income of $31.5 million or $0.65 per share on a diluted basis for the prior year 26-week period ended August 3, 2019. Net sales for the 13-week second quarter increased 6% to $216 million compared to net sales of $203.8 million for the prior year 13-week second quarter. Online sales for the quarter increased 99%. to $46 million, compared to net sales of $23.1 million for the prior year 13-week fiscal period. Year-to-date net sales decreased 18.2% to $331.4 million for the 26-week fiscal period ended August 1, 2020, compared to net sales of $405.1 million for the prior year 26-week fiscal period ended August 3, 2019. Online sales for the year-to-date period increased 64.3% to $78.1 million, compared to net sales of $47.5 million for the prior year 26-week fiscal period. For the quarter, UPTs increased approximately 3.5%, the average unit retail increased approximately 3%, and the average transaction value increased approximately 7%. Year-to-date, UPTs increased approximately 3%, The average unit retail increased approximately 1%, and the average transaction value increased approximately 3.5%. Gross margin for the quarter was 43.2%, up from 38.6% in the prior year's second quarter. The year-over-year increase was the result of 190 basis point improvement in merchandise margins and 270 basis points of leveraged occupancy buying and distribution costs, given the strong top-line performance for the period that stores were open and strong online sales throughout the quarter. For the year-to-date period, gross margin was 36.3%, down from 38.4% for the same period last year. The year-over-year decrease was the result of deleveraged occupancy buying and distribution costs, partially offset by a 90 basis point improvement in merchandise margins. SG&A expenses for the quarter were 22.1% of net sales compared to 29% for the same period a year ago. On a dollar basis, SG&A declined $11.2 million from $59.1 million in the second quarter of fiscal 2019 to $47.9 million for the second quarter of fiscal 2020. This decline was the result of a $12 million reduction in compensation and benefit-related expenses along with reductions in certain other operating expenses, including travel expenses and store supplies. These reductions were partially offset by increased shipping costs resulting from our strong online growth. SG&A for the year-to-date period was 27.4% of net sales compared to 28.9% for the same period a year ago. On a dollar basis, SG&A for the year-to-date period declined $26.1 million from $117 million in fiscal 2019 to $90.9 million for fiscal 2020. Again, the decline was the result of a $26 million reduction in compensation and benefit-related expenses, along with reductions in certain other operating expenses, and was partially offset by increased freight costs resulting from our strong e-com sales. Our operating margin for the quarter was 21.1% compared to 9.6% for the second quarter of fiscal 2019. For the year-to-date period, our operating margin was 8.9% compared to 9.5% for the same period last year. Other income for the quarter was $0.4 million compared to $2.1 million for the second quarter of 2019. Another income for the year-to-date period was $1 million compared to $3.3 million in the prior year. Income tax expense as a percentage of pre-tax net income for both the current and prior year fiscal quarter was 24.5%, bringing second quarter net income to $34.7 million for fiscal 2020 compared to $16.4 million for fiscal 2019. Income tax expense as a percentage of net income for both the current and prior year year-to-date periods was also 24.5%, bringing year-to-date net income to $22.9 million for 2020, compared to $31.5 million for fiscal 2019. Our press release also included a balance sheet as of August 1, 2020, which included the following. Inventory of $116.5 million, which was down approximately 10% from inventory of $129.1 million as of August 3, 2019. and total cash and investments of $294.9 million, which compares to $249.4 million at the end of fiscal 2019, and $245.6 million as of August 3, 2019. We ended the quarter with $106.1 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $1.3 million, and depreciation expense was $5.5 million. For the year-to-date period, capital expenditures were $3.5 million, and depreciation expense was $11 million. Year-to-date capital spending is broken down as follows. $2.6 million for store remodels and technology upgrades, and $0.9 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened two new Buckle U stores and one new full-line store, and we also closed three locations. which brings our year-to-date count to three new stores, one full remodel, and five store closures. For the remainder of the year, we plan on completing three additional full store remodels. Based on current store plans, we still expect our capital expenditures to be in the range of $7 to $10 million, which includes both planned store projects and IT investments. Buckle ended the quarter with 446 retail stores in 42 states, compared with 449 stores in 42 states, at the end of the second quarter of fiscal 2019. Now I'll turn the call over to Kelly Mulzik, Vice President of Women's Merchandising.

Thanks, Tom. I would like to start by highlighting the performance of our women's merchandise categories for the quarter. Women's merchandise sales to the fiscal quarter were up approximately 6% against the prior year fiscal quarter. Average denim price points increased from $72.55 in the second quarter of fiscal 2019 to $74.60 in the second quarter of fiscal 2020. For the quarter, our women's business was approximately 46.5% of net sales compared to 46% last year, and average women's price points increased about 6% from $36.50 to $38.65. For the quarter, the women's business saw nice responses to several key categories. Our selection in denim was well-received as we continued to evolve the category by building, creating, and offering our guests the biggest selection in fits, finishes, bottom openings, rises, inseams, and waist sizes. Our focus remains on creating denim for every body. Our private label and exclusive product continues to grow as a larger part of our overall denim business. In addition to denim, we also had a nice response to our selection of shorts that we expanded throughout the quarter. As the effects of COVID evolved, we navigated through our on-order and adjusted our flow and overall inventory by category, as well as made shifts in the types of products that we delivered throughout the quarter. We saw a favorable response to these changes as comfort fabrics, simplistic styling, eased silhouettes, graphic tees, and flip-on footwear were drivers of sales. I continue to be extremely proud of the hard work and dedication our women's buying team puts into building our business. With all the uncertainties through and around the pandemic, the team did an amazing job managing our inventory, which shows that several of our key categories ended the quarter with average price points up and our markdown position down, contributing to healthy margins. With our inventory in a comfortable position, we retain the flexibility to act and react to what's ahead. Our focus remains on on-trend, livable, and functional denim-friendly products. And with that, I'll turn it over to Bob Karlberg, Senior Vice President of Men's Merchandising, to discuss the performance of our men's merchandise categories.

Thanks, Kelly. Men's merchandise sales for the fiscal quarter were up 5% in comparison to the prior year fiscal quarter. Average denim price points increased from $85.60 in the second quarter of 2019 to $87.85 in the second quarter of 2020. For the quarter, our men's business was approximately 53.5% of net sales compared to 54% last year, and average men's price points increased approximately 1% from 45.45 to 45.80. As our results reflected, Buckle managed through the COVID crisis incredibly well. The strength of our entire men's team was evident in the way we responded to a challenging and ever-changing situation. I've never been more proud of our team. We took a planning approach that mitigated risk, was respectful of our strong vendor partnerships, and still allowed us to provide a strong presentation as we reopened our stores. This approach also allowed us to maintain our normal low markdown cadence and end the quarter in an excellent inventory position. Spring-summer categories were especially good throughout the quarter. Footwear, shorts, and accessories were standout departments. Overall, there was a large amount of fresh product, including more color and fashion styling. We are attracting a younger fashion guest as well as taking care of the tried-and-true buckle guest. Denim stayed strong as we added more destruction, light finishes, as well as lightweight and cool max fabrics. Our private brands continue to capture a growing share of our business with BKE at the core and each of our private brands attracting a different guest. Additionally, our newest street denim category performed well throughout the quarter. Now turning to results on a combined basis, accessory sales for the fiscal quarter were up approximately 6% against the prior year fiscal quarter, while footwear sales were up about 32%. These two categories accounted for approximately 10% and 9.5%, respectively, of the second quarter net sales, which compares to 9.5% and 7.5% for each in the second quarter of fiscal 2019. Average accessory prices were up approximately 4.5%, and average footwear price points were up about 0.5%. Again, on a combined basis for the quarter, denim accounted for approximately 32% of sales, and tops accounted for approximately 13.5%, which compares to 33% and 34% in the second quarter of fiscal 2019. For the quarter, our private label business represented approximately 31% of sales. And with that, we welcome your questions. Thank you.

And ladies and gentlemen, if you would like to ask a question at this time, please press 1, then followed by 0. And our first question comes from Steve Murata from CL King & Associates. Please go ahead.

Good morning, everybody. Congratulations on a terrific quarter given all the pandemic issues. Can you please update us on the online digital infrastructure at this moment in time, where it is, what investments you intend to make over the next six to 12 months, and all those. Let's start there.

Okay, good morning, Steve. Thanks for the question. I will let Tom answer that one for you.

Yeah, thank you, Steve. Good morning. We feel really strong about where we're at with e-comm and a lot of what we've done. We have a really talented IT team that does a lot of the development for our website. So a lot of the projects, a lot of the things we're doing are internally developed. One of the big drivers of growth has been ship from store. Like we talked about, we've expanded our online selection of inventory, starting in a limited way in the fourth quarter, expanded it in February, and have expanded to even more categories, more SKUs through the first part of the year. And that's been a big driver of our growth to be able to offer our in-store inventory for sale online for online orders and also be able to fill it directly from stores, so shipping from our stores directly to guests. The next iteration that I'm working on for fall is really the next expansion of Omnichannel, allowing guests to buy online, pick up in-store, and then offering buy it today, get it today, so they can shop their local store, buy it online, and pick it up. And COVID has really accelerated the demand for a lot of those things, and those were things that we had in-flight before and have been working on for a while and are really excited about.

The shiproom store that you mentioned first, is that now 100% across stores and categories? And if not, when would you expect it would be?

It's in all stores. And so, you know, we had, again, started last fall on a limited basis in terms of both stores and categories to test it and learn. And it's a really nice response to those categories. So, you know, started expanding it. Saw a nice online growth in February before COVID, which, you know, shipped from store and that expanded inventory selection was a big driver of that. As we've reopened stores post-COVID, you know, again, it seemed really important to have all that inventory available. So it is all stores and almost all SKUs. There are some requirements. I mean, we're smart about it and making sure from a margin perspective we're selling the right product and it makes sense to sell that product from in-store. But it is most products, most categories.

I understand. Your expense structure, obviously, from an SG&A standpoint, we've down significantly year over year. That's not – all uh terrifically surprising i think the magnitude was a little bit given that sales were up in the quarter i know that you don't give forward guidance but can you talk a little bit about about what you've cut what you would expect to be permanent what you would expect to be more temporary with the vacillation and sales associated with the pandemic yeah i mean like you mentioned we don't give forward guidance so so looking ahead for for sgna it's hard to say

Like we called out, the biggest driver was compensation and benefits or labor-related Similar to e-comm, that was a focus, especially for store labor going back to the second half of last year. And we saw nice improvements there through both the third and fourth quarter. Again, COVID was the big driver of why it was down so much in the second quarter. We certainly wouldn't expect that to continue. But a lot of the increase, I think it was $12 million total decrease for the quarter, was really heavily weighted towards May. As stores were closed and we furloughed the majority of our teammates, and then as we brought those back, we saw payrolls build to where at the end of July they're still down year over year, but obviously not at the rate they were earlier in the quarter. I think we've learned a lot. The stores are operating or malls are operating with reduced hours, so we're running with leaner teams in the stores. The stores have done an incredible job opening up, running really fast, working hard, taking care of our guests, but they're operating with leaner teams. And I would expect that would continue, and we'll continue to focus on payroll. But, you know, the magnitude of what it will be for the back half of the year, we can't really say.

Helpful. Thank you very much.

And, ladies and gentlemen, as a reminder, if you would still like to ask a question, please press 1, then 0. And we have another question, and that comes from Richard Smith. Darren Lee from Longport Partners. Please go ahead.

Good morning. Do you have any feeling that the second quarter sales were helped from just a catch-up from the first quarter? And then has August slowed back down again, as Walmart and Target have said?

Thanks for the question, Richard. There was probably some pent-up demand from the first quarter that helped the second quarter. But I think we have to really give credit to our sales team for working hard to be, you know, first we had to close down, but they then prepared for the opening and everybody's hard work and preparation and gave us a good start. We probably got a little advantage opening before maybe a few of the other retailers. So that was beneficial. But I think with our sales management team doing a great job, our merchandisers focusing in on the right product for the season and having a great selection in the key categories were very beneficial. And then with support from the home office to help execute everything was great. So that's kind of the issue on the second quarter sales. And then, as Tom mentioned earlier, we do not give forecasts for future sales.

Right. You all, you know, back to school isn't very important relative to lots of other retailers today. Did you see any business that was, you know, new and clearly back to school that you hadn't seen before?

I think that's a little difficult to answer at the moment. You know, we're hearing that schools are opening later in some markets and some are scheduled. So hopefully we'll be able to review that soon. question at the next earnings call.

Okay. It's a major mess out there. Okay. Thank you.

Thank you.

And we have no further questions at this time, but as a reminder, if you'd still like to ask a question, please press 1, then 0. We have a question from John Bratz from Kansas City Capital. Please go ahead.

Good morning. Tom, a question for you. When you look at your cash balances, how much of those cash balances, might there be some rent deferrals and maybe payroll tax deferrals if you're doing that? I'm trying to get a sense of how much you have been able to defer.

Yeah, I mean, if you look at payables on the balance sheet, it's up year over year. The biggest driver there would be some of the rent deferrals. We haven't quantified exactly what that is, but it's meaningful but not overly significant to the increase in cash balance. Probably the bigger impact on cash increases year to date and year over year has been, you know, not paying dividends. That's been much more meaningful than rent deferrals. And any payroll tax credits or deferrals have been significant. much smaller than both of those. So, so yeah, we do have rent deferrals. That's part of it. And, and, uh, some payroll tax credit deferrals, but, but that's pretty small for the payroll tax part.

Are you seeing any, um, you know, maybe in the next, uh, by the end of the year, uh, renegotiation of rents? Um, do you see that, uh, on the horizon?

Uh, John, you know, we continually work with all our landlords and, uh, As we mentioned before, we have a lot of short-term leases. We've been averaging somewhere around 90 to 100 renewals each year. So that gives us the opportunity to evaluate each location and figure it out appropriately. So I think we have a good handle on that, and we're continuing to review if we have our store is in the best location for that particular community we're in, and that's been working well.

Okay. Tom, one follow-up. When will the rent deferrals be paid?

It depends on the landlord, but most of them should be repaid by the end of the year. Some of them we've already started to repay, and again, we paid essentially a full month of rent for April, and most of the deferrals were May and June. Some have been paid back already, and some will be paid back at various points through the rest of the year.

Okay. Thank you, Tom.

Yep. And we have no further questions in the queue right now.

There's no other questions. We can wrap it up and hope everyone enjoys the rest of the day, and thanks for participating.

And that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.