Buckle Inc (BKE) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for joining us. Welcome to Buckle's first quarter earnings release. This conference is being recorded. On the call today from Buckle's management are Dennis Nelson, President and CEO; Tom Heacock, Senior Vice President of Finance, Treasurer and CFO; Kelli Molczyk, Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; and Brady Fritz, General Counsel and Corporate Secretary. As they discuss the operating results for the first quarter that ended on May 2, 2020, they want to remind everyone that they do not provide future sales or earnings guidance. They also have a safe harbor statement regarding forward-looking statements made by the company, which involve material risks and uncertainties and may change due to factors beyond the company's control. Thus, the company's future performance and financial results could differ significantly from what is suggested in these forward-looking statements. Factors that could impact this include those outlined in the company's SEC filings. The company does not commit to publicly update or revise any forward-looking statements, even if future events indicate that any forecasts made will not be met. Furthermore, the company does not permit the reproduction or distribution of transcripts or audio recordings of its quarterly conference calls without written consent. Any unauthorized reproductions or recordings of this call should not be relied upon, as the information may be incorrect. I will now turn the call over to Dennis Nelson. Please proceed.

Well, good morning, and thank you for joining us. It goes without saying that this is the most challenging quarter we ever faced. The quarter started strong as we continued the positive trend of same-store sales growth by posting a 6.3% comp and online sales growth of 33.2% for February. These trends were largely achieved by continuing to deliver fashion-right products, combined with the expertise of our teams in the stores, enhanced data-driven marketing campaigns, and continued investment in our omnichannel experience. Then the COVID-19 pandemic struck, which introduced a new set of challenges to overcome. Through it all, I'm incredibly proud of how our teams responded. Our teammates reacted admirably as we made the difficult decision to furlough over 90% of our workforce and reduced salaries for many remaining at work. Our teammates recognize it is through shared sacrifice that we will be able to maintain the financial security and flexibility necessary to navigate this trying time and emerge ready to capitalize on the opportunities ahead. By making these difficult decisions, we were able to reduce compensation and benefit-related expenses by over $13.5 million for the quarter, with additional savings continuing into the second quarter. Our buying teams worked very closely with our branded and private label vendor partners to extend payment terms, cancel and reduce orders, as well as alter the timing and flow of inventory. This allowed us to finish the quarter with inventory up just slightly, limited the amount of potential markdown inventory, and maximized our open-to-buys for future selling periods. Our real estate team, through greater relationships and good faith, was able to achieve substantial rent deferrals with our landlords. Our marketing technology teams developed and delivered appropriate and relevant content, keeping our guests engaged with the brand as their shopping patterns change. In addition, these teams worked to develop innovative solutions to enhance our omnichannel experience, including the addition of curbside pickup functionality to both our in-store app and online store. Through these efforts, our online businesses continue to grow, both with existing and new guests. Our distribution and online fulfillment teams have managed to stay on top of the increased e-commerce demand despite operating with reduced staffing to maintain proper social distancing. Our corporate office teams have worked tirelessly to respond to teammate and guest inquiries, research federal, state, and local health guidelines, and prepare the stores with the necessary supplies and protocols to reopen quickly and safely. As a result, we've been able to successfully reopen over 75% of our locations to date. Finally, our teams in the stores are adapting to the new realities of retail, providing our guests with the most enjoyable shopping experience while working to protect the health and safety of everyone in our stores. We are encouraged by the early results as stores have reopened, and we will continue to evolve the store experience to meet our guests' expectations. And so I want to take this opportunity to send my deepest appreciation to the thousands of Buckle teammates for their collective efforts in thoughtfully positioning and preparing us for success as we emerge from this pandemic. I would also like to express my sincere gratitude to our vendors and landlords for continuing to be valued partners. And with that, I'd like to turn this over to Tom.

Good morning, and thanks for being with us this morning. Our May 22, 2020 press release reported a net loss for the 13-week first quarter ended May 2, 2020, of $11.8 million or $0.24 per share on a diluted basis, compared to net income of $15.1 million or $0.31 per share on a diluted basis for the prior year 13-week first quarter ended May 4, 2019. Net sales for the 13-week first quarter decreased 42.7% to $115.4 million compared to net sales of $201.3 million for the prior year 13-week first quarter. Online sales for the quarter increased 31.5% to $32.1 million compared to net sales of $24.4 million for the prior year 13-week fiscal period. Gross margin for the quarter was 23.2%, down from 38.1% in the prior year first quarter. The year-over-year decrease was the result of a 110 basis point decline in merchandise margins, which was largely the result of an increase in our reserve for inventory markdowns and obsolescence, and deleveraged occupancy buying and distribution expenses as a result of the store closures. SG&A expenses for the quarter were 37.2% of sales compared to 28.8% for the same period a year ago. On a dollar basis, SG&A declined $14.9 million from $57.9 million in the first quarter of 2019 to $43 million for the first quarter of fiscal 2020. The decline was achieved by reducing compensation and benefit-related expenses by $13.5 million along with reducing certain other operating expenses, including travel and store supplies. These reductions were partially offset by increased shipping costs resulting from our strong online growth, increased marketing expenses, and store-related impairment charges. Other income for the quarter was $0.6 million compared to $1.3 million for the first quarter of 2019. The income tax benefit as a percentage of the pretax net loss for the quarter was 24.5% compared to income tax expense of 24.5% for the first quarter of fiscal 2019, bringing first quarter net loss to $11.8 million for fiscal 2020 compared to net income of $15.1 million for fiscal 2019. Our press release also included a balance sheet as of May 2, 2020, which included the following: inventory of $121.7 million, which was up just slightly from inventory of $120.8 million as of May 4, 2019; and total cash and investments of $218.6 million, which compares to $249.4 million at the end of fiscal 2019 and $253.3 million as of May 4, 2019. We ended the quarter with $110.1 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $2.2 million, and depreciation expense was $5.5 million. Year-to-date, capital spending is broken down as follows: $1.5 million for store remodels and technology upgrades and $0.7 million for capital spending at the corporate headquarters and distribution center. During the quarter, we closed 2 stores and completed 1 full remodel. For the remainder of the year, we plan on opening 1 new store and 2 new Buckle Youth stores, as well as completing 3 additional full-store remodels. Based on current store plans, we still expect our capital expenditures to be in the range of $7 million 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 first quarter of fiscal 2019. With respect to transactional metrics and category information, UPTs for the quarter decreased about 1%, the average unit retail increased approximately 1.5%, and the average transaction value increased approximately 0.5%. Average men's denim price points decreased from $86.70 in the first quarter of fiscal 2019 to $84.85 in the first quarter of fiscal 2020, while overall men's price points increased approximately 0.5% from $50.60 to $50.95. Similarly, women's denim price points decreased from $76.70 in the first quarter of 2019 to $75.85 in the first quarter of 2020, while overall women's price points increased approximately 3% from $42.65 to $44. On a combined basis for the quarter, denim accounted for approximately 46% of sales and tops accounted for approximately 27.5%, which compares to 42.5% and 30% for each in the first quarter of 2019. In addition, our private label penetration continued to grow and represented 38.5% of sales for the quarter. And with that, we welcome your questions.

And we will begin with the line of Tiffany Kanaga with Deutsche Bank.

I'd like to dig into your gross margin performance. Thank you for outlining the inventory reserve charge in the quarter. Are there other COVID-related impacts to call out, which you view as more onetime in nature? And would you expect inventory reserve charges in the second quarter as well? Additionally, how are you thinking about your promotional cadence ahead, given the competitive backdrop and your inventory position?

On the first part of the question, then I'll let Dennis take the second part. On the first part, really, the only impact was related to the markdown reserve. Looking at merchandise margins and selling, I mean those were strong and continued strong through the quarter. Merchandise margins continued to be positive through February and March, and then were down just slightly in April. But overall, for the quarter, actual merchandise margins were positive absent the additional adjustment to the reserve for obsolescence and markdowns, which was, again, just a few categories of seasonal product where we missed some of that spring selling season and are carrying that over a little later than we normally would.

Yes, good morning. The team has done an excellent job. We had a strong performance in February, achieving impressive gross margins and minimal markdown activity as we entered March. With the adjustments made alongside our vendors, we feel confident about our inventory situation. Although it's early, we are encouraged by the good start we've had in the stores. At this point, we are not anticipating additional write-downs, and we believe we are providing a lot of fresh products that our customers are excited about. Therefore, we do not have aggressive markdowns planned.

And if I could ask a follow-up question. Can you discuss in a little more detail how traffic trends in your open stores have fared versus expectations or on a more quantitative basis? I know you mentioned being encouraged by early results. And what might you anticipate for the timeline to getting the rest of the fleet back open?

This week, we have approximately 330 stores open. I estimate that by June 1, we will be about 90% open, or possibly even slightly better. In the first week of May, we added 105 stores, followed by 115 last week, and 74 more this week, bringing us to that total, stemming from a few test stores we opened in early April. We are encouraged by our progress, although there are many variables at play. For instance, if a nearby store is not open but is within driving distance of another location, we have noticed an increase in traffic. Overall, we feel optimistic as we approach the upcoming week.

Next we will go to the line of Steve Marotta with CL King & Associates.

You mentioned earlier on the call curbside pickup capabilities. Can you talk about if that's in all stores? And are there other digital amenities that you're providing for your customers in order to potentially avoid a specific trip inside of a store? Again, I guess, what else are you doing digitally in order to service the customer?

Yes, curbside, we can do in about every store, but it's a very small part of our business at this point, but we have some projects going forward that would be able to improve that experience and be more beneficial, if that's what the demand of our guest is. But we're still seeing a lot of our guests want to be in the store to see the product, the selection and such. Tom, do you have anything else to add on that?

I don't think so. That's been a continuous focus for some time, especially during the latter half of last year and the beginning of this year. It's becoming increasingly important to be flexible and provide guests with options regarding products. We're working on expanding the selection of products available in-store and online, along with offering various delivery options, whether it's curbside, in-store pickup, or home delivery. There's ongoing evolution in this area.

And I know you mentioned that you believe 90% of your stores will be open by June 1. That's a target. And this is a very difficult question to answer, I understand. But do you have any targets in your mind when productivity might be normalized? Do you see that on or around September 1, December 1, or not till next year? What are your thoughts there?

No, that's a tough one. We're certain that there's probably going to be more uncertainty. And so we're just trying to make the best out of every day, and our teams are really excited to be back at the stores and seeing their guests, and the guests coming in right now are excited to be out and shopping again. So we just hope that continues and maybe gets stronger as we get further into the season and people get more comfortable to come out.

Next, we will go to the line of Jon Braatz with Kansas City Capital.

Denim is a rather basic item. Do you think when we emerge fully from COVID-19 that denim would be a better performer than, let's say, other apparel?

Well, I know the soft, comfy, and casual wear has been the talk the last month or so. But we're still seeing some very nice interest or results on our denim. We work very hard on having the quality of the fit, the fabric. They're very comfortable. A lot of our guests have their favorite brand and like the idea of the quality fabrics and the uniqueness and exclusive product that we have. So denim has been strong all the way for the last 50 years for us. We see it continuing.

Okay. Good. And Dennis, you mentioned that you're getting some rent relief. When you open up the stores and maybe only doing 25% of normal sales or 30%, are you still responsible for the full rent payment? Or are you negotiating with the landlords regarding the rental payments?

Yes, I think our working with our landlords right now are in a confidential status. So I can't really give you much color on that.

We'll go to the line of Jenifer Taylor with MAC Fund.

We are hopeful that the environment improves. I'm curious, and I understand the reasons for not moving forward on comparable sales. Is there a possibility that you could provide some insight on guest counts per store as a metric to help us understand the foot traffic in certain areas or overall across the store base? This would help us compare to last year. We all know that the numbers are likely to fluctuate due to various factors, but I was wondering if there might be a way to gauge the utilization rate of what was considered normal for the store compared to a year ago.

Jenifer, we don't have traffic counters in our stores, so I don't really have any metrics to share there. And like I say, the majority of our stores have only been open 2 to 3 weeks at the most. We will release our May sales in June, as we traditionally do. And hopefully, that will give you a feel for our business.

There are no further questions.

If there are no further questions, we'll conclude the call for today, and thank everyone for participating, and wish you all a great holiday weekend, whatever that looks like. So thank you, everybody.

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