Buckle Inc Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for your patience in holding, and welcome to the second quarter earnings release call. 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; 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 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 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 was $34.7 million or $0.71 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 second quarter. The year-over-year increase was a 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-commerce 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, and other 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 pretax 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 the 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 2 new Buckle Youth stores and 1 new full-line store, and we also closed 3 locations, which brings our year-to-date count to 3 new stores, 1 full remodel and 5 store closures. For the remainder of the year, we plan on 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 second quarter of fiscal 2019.

Thanks, Tom. I would 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 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 continue 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 everybody. 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 fabric, simplistic styling, e-silhouettes, graphic tees and slip-on footwear were drivers of sales. I continue to be extremely proud of the hard work and dedication our women's design team puts into building our business. With all the uncertainties surrounding the pandemic, the team did an amazing job managing our inventory, which shows as 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 Carlberg, Senior Vice President of Men's Merchandising, to discuss the performance of our men's merchandise categories.

Thanks, Kelli. 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 million. As our results reflect, 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 CoolMax 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 2 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 our first question comes from Steve Marotta from CL King & Associates.

Congratulations on a great quarter despite the challenges posed by the pandemic. Could you provide an update on the current state of your online digital infrastructure? What investments do you plan to make in the next 6 to 12 months? Let's start with that.

Steve, thanks for the question. I will let Tom answer that one for you.

Yes, thank you, Steve. Yes, we feel really strong about where we're at with e-commerce 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 store, so shipping from our stores directly to guests. The next iteration of that and what we're 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 flagged before and have been working on for a while and are really excited about.

The ship-from-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 available in all stores. We began testing it on a limited basis last fall in terms of both stores and categories to gain insights, and we received a positive response in those areas. Consequently, we started to expand, and we noticed strong online growth in February prior to COVID, primarily driven by the ship-from-store feature and the increased inventory selection. As we reopened stores after COVID, having all that inventory available has proven essential. Therefore, it is implemented in all stores and nearly all product lines. We proceed carefully to ensure, from a margin perspective, that we are selling the right products and that it is sensible to sell them from the stores. Overall, it encompasses most products and categories.

I understand. Your expense structure, obviously, from an SG&A standpoint, was down significantly year-over-year. It's not all 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 what you've cut, what you would expect to be permanent, what you would expect to be more temporary with the vacillation in sales associated with the pandemic?

Yes, as you mentioned, we do not provide forward guidance. Regarding SG&A, it's challenging to predict. The main factor was compensation and benefits related to labor. Like e-commerce, store labor was a major focus, especially in the second half of last year, and we saw significant improvements in both the third and fourth quarters. COVID was the primary reason for the substantial decrease in the second quarter, and we do not anticipate that trend to continue. Much of the $12 million decrease for the quarter was concentrated in May when stores were closed, and we furloughed most of our employees. As we began to bring them back, payrolls increased, and while they were still down year-over-year at the end of July, the rate of decline was not as severe as earlier in the quarter. We have gained valuable insights; stores and malls are operating with reduced hours, leading us to manage with leaner teams. The stores have done an outstanding job reopening, working hard to serve our guests while operating with fewer staff. I expect this trend to continue, and we will maintain our focus on payroll. However, we cannot predict the extent of changes for the back half of the year.

We have another question from Richard Dearnley from Longport Partners.

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 likely some pent-up demand from the first quarter that contributed to the second quarter. However, we really need to commend our sales team for their hard work. Initially, we had to shut down, but they prepared for the reopening, and their dedication and preparation provided us with a strong start. We gained a slight advantage by opening before some of the other retailers, which was beneficial. Additionally, our sales management team did an excellent job, our merchandisers concentrated on the right products for the season, and having a great selection in key categories proved very helpful. The support from the home office in executing everything was also invaluable. That's essentially the situation regarding second quarter sales. As Tom mentioned earlier, we do not provide forecasts for future sales.

Back-to-school is not particularly significant compared to many other retailers. Did you notice any new business opportunities that were specifically related to back-to-school that you hadn't encountered before?

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

And we have no further questions at this time. And we have a question from Jon Braatz from Kansas City Capital.

Tom, can you tell us how much of your cash balances might include rent deferrals and possibly payroll tax deferrals? I'm trying to understand how much you've been able to defer.

Yes. 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 not paying dividends. That's been much more meaningful than rent deferrals to this. And any payroll tax credits or deferrals have been much smaller than both of those. So yes, we do have rent deferrals, that's part of it. And some payroll tax credit deferrals, but that's pretty small for the payroll tax part.

Are you seeing any possibility of renegotiating rents by the end of the year?

Jon, we consistently collaborate with all our landlords. As we've mentioned previously, we have many short-term leases, averaging around 90 to 100 renewals each year. This allows us to assess each location and make appropriate decisions. I believe we have a solid understanding of this, and we are continuously reviewing whether our stores are situated in the best locations for their respective communities, and this strategy has been effective.

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.

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

So 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.