Buckle Inc (BKE) Q2 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the 2021 Second Quarter Earnings Release Call. As a reminder, the conference is being recorded. 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, Vice President, General Counsel and Corporate Secretary. As they review the operating results for the second quarter, which ended July 31, 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 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 reproductions or recordings of the call should not be relied upon as the information may be inaccurate. I would now like to turn the conference over to our host, Tom Heacock. Please go ahead.

Good morning, and thanks for joining us this morning. Our August 20, 2021 press release reported that net income for the 13-week second quarter ended July 31, 2021, was $51.4 million or $1.04 per share on a diluted basis, which compares to net income of $34.7 million or $0.71 per share on a diluted basis for the prior year 13-week second quarter, which ended August 1, 2020. Year-to-date net income for the 26-week period ended July 31, 2021, was $108.7 million or $2.20 per share on a diluted basis compared to net income of $22.9 million or $0.47 per share on a diluted basis for the prior year 26-week period ended August 1, 2020. Net sales for the 13-week second quarter increased 36.6% to $295.1 million from net sales of $216 million for the prior year 13-week second quarter. Compared to the second quarter of fiscal 2019, net sales increased 44.8% from net sales of $203.8 million. Online sales for the quarter were $43.4 million, a decrease of 5.5% compared to $46 million in the second quarter of 2020, an increase of 88.1% compared to $23.1 million in the second quarter of 2019. Year-to-date net sales increased 79.3% to $594.2 million from net sales of $331.4 million for the prior year 26-week fiscal period ended August 1, 2020. Compared to the same 26-week fiscal period in 2019, net sales increased 46.7% from net sales of $405.1 million. Online sales for the year-to-date period were $97.2 million, an increase of 24.5% compared to $78.1 million for the same 26-week fiscal period in 2020, and an increase of 104.5% compared to $47.5 million for the same 26-week fiscal period in 2019. For the quarter, UPTs decreased approximately 6.5%. The average unit retail increased approximately 2.5% and the average transaction value decreased about 4%. Gross margin for the quarter was 48.1%, up from 43.2% in the second quarter of 2020. Our year-to-date gross margin was 48.7% compared to 36.3% for the same period last year. The second quarter increase in gross margin was the result of a 50 basis point improvement in merchandise margins, coupled with 440 basis points of leverage occupancy buying and distribution costs as a result of the strong sales performance for the quarter. Selling, general and administrative expenses for the quarter were 25.1% of sales compared to 22.1% for the second quarter of 2020. And our year-to-date SG&A was 24.5% of net sales, down from 27.4% for the same period last year. The second quarter increase was due to a 250 basis point increase in incentive compensation accruals and a 130 basis point increase in store labor related expenses, which were partially offset by a 70 basis point decrease in shipping costs and 10 basis points of leverage across several other SG&A categories. Our operating margin for the quarter was 23% compared to 21.1% for the second quarter of fiscal 2020 and for the year-to-date period, our operating margin was 24.2% compared to 8.9% for the same period last 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 $51.4 million for 2021 compared to $34.7 million for 2020. Our income tax expense as a percentage of pretax net income for both the current and prior year year-to-date periods was also 24.5%, bringing year-to-date net income to $108.7 million for 2021 compared to $22.9 million for fiscal 2020. Our press release also included a balance sheet as of July 31, which included the following: Inventory of $95.3 million, which was down from inventory of $116.5 million as of August 1, 2020, and total cash and investments of $434.9 million. We ended the quarter with $99.7 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $4.6 million and depreciation expense was $4.9 million. For the year-to-date period, capital expenditures were $9.2 million and depreciation expense was $9.7 million. Our year-to-date capital spending was broken down as follows: $8.6 million for new store construction, store remodels, and technology upgrades and $0.6 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened 1 new used store, completed 2 full remodels, both of which were relocations into new outdoor shopping centers and closed 1 store. This brings our year-to-date totals to 1 new store, 7 full remodels, and 2 store closures. For the remainder of the year, we anticipate completing 6 additional full remodeling projects. Based on current store plans, we now expect our capital expenditures to be in the range of $12 million to $15 million, which includes both planned store projects and IT investments. Buckle ended the quarter with 442 retail stores in 42 states compared with 446 stores in 42 states at the end of the second quarter of fiscal 2020.

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 31.5% against the prior year fiscal quarter. For the quarter, our women's business was approximately 45% of sales compared to 46.5% in the prior year. Average denim price points increased from $74.60 in the second quarter of fiscal 2020 to $74.65 in the second quarter of fiscal 2021. Overall average women's price points increased about 3.5% from $38.65 to $40. It was an exciting quarter as we saw continued strong responses to new products in every category. Our denim across all fits, brands, and classifications drove our growth. We worked hard to balance our core fits and stretch fabrics with new fashion fits and rigid fabrics, which has significantly expanded the variety in our denim selection. Our private label denim continues to represent a larger share of our mix and was a key contributor in driving our denim sales for the quarter. Outside of denim, our offering in shorts in a variety of fabrics, including denim, was also strong as guests continued their 'buy now' purchasing patterns. The second quarter also brought fashion shifts as guests re-emerged from their homes and returned to normal activities, moving away from simple and casual items into fashion tops, dresses, two-piece sets, graphic tees, fashion footwear, and accessories. With the expanded number of brands and live sales we now offer in our stores, we are excited about the opportunities we've created to continue capturing new guests and engaging our loyal guests. Our used business also saw a nice lift in sales throughout the quarter as kids started back to school. Our teams have done an amazing job of putting Buckle use on the map through our four freestanding used locations, along with an expanded assortment in our regular stores. We've added used top-to-bottom assortment to another 75 of our Buckle stores, which takes us to 350 stores with the presence of used product. Despite supply chain challenges during the quarter, the team continues to work very closely with our brand partners on creative solutions to minimize the impact on our women's business. This will be an ongoing focus for us as things continue to evolve over the coming months. I want to sincerely thank all of our vendors and brand partners that are working extremely hard for Buckle, as well as our teams here in the office, in our distribution center, and in our stores for continuing to keep Buckle at the forefront of fashion. And with that, I'll turn it over to Bob Carlberg, Senior Vice President of Men's Merchandising, to discuss the performance of the men's merchandise categories.

Thanks, Kelli. Men's merchandise sales for the fiscal quarter were up 40.5% against the prior year fiscal quarter. For the quarter, our men's business was approximately 55% of net sales compared to 53.5% in the prior year. Average denim price points decreased from $87.85 in the second quarter of fiscal 2020 to $8.10 in the second quarter of fiscal 2021. Our overall average men's price points increased slightly from $45.80 to $45.85. Q2 was another standout quarter as we delivered fresh new products for our guests. Denim led our men's dollar increase with continued strength in our private brands, BKE still being our largest, along with strong trends in Rock Revival in our street brand. Short-sleeve shirts, especially graphic tees showed incredible growth driven by the best balance of brands, lifestyles, colors, and graphics I've ever seen. Our teams do a great job of curating the looks from all American to country to street to West Coast, enabling our teammates to serve any age and lifestyle. Shorts and accessories are our next largest growth department. Shorts were very strong overall as we expanded our elastic waist business without losing our flat front and longtime good cargo business; almost all accessory categories performed well, led by hats, fragrance, and Oakley glasses. Used growth has been fun to see not only in our four used-only doors, but the expansion in our full-line stores has also been very successful. It's much smaller dollars, but I'm excited to say that our button-front business is back and growing. I can't say enough to thank our sales and support teammates, as well as our guests for all they have done to make this happen. We've made the best of a challenging year for both building and sourcing products, as you can see from our results. Now turning to results on a combined basis, accessory sales for the fiscal quarter were up approximately 43% against the prior year fiscal quarter, while footwear sales were up about 14.5%. These two categories accounted for approximately 10% and 8%, respectively, of second quarter net sales. This compares to 10% and 9.5% for each in the second quarter of fiscal 2020. Our average accessory price points were up approximately 5.5%, and average footwear price points were up about 2%. Again, on a combined basis for the quarter, denim accounted for approximately 33.5% of sales, tops accounted for approximately 31%. This compares to 32% and 30.5% for each in the second quarter of fiscal 2020. For the quarter, our private label business represented approximately 30% of sales. And with that, we welcome your questions. Thank you.

Yes. I realize that you guys don't give guidance and don't necessarily think that the growth that you've experienced recently is completely related to the stimulus payments that we've seen. But I wonder if you could comment on the sustainability of the recent growth based upon what you're seeing?

Well, we feel really good about what we have going on with our stores and our online presence. One thing we've noticed is we've added over 40% new guests over this past year. In addition, we've relocated some of our mall stores into outdoor power centers and lifestyle centers, which we've had a very good response to. I'm especially proud of our teams. We always take a specialty store approach, and we have great talent in our stores that provide an excellent experience for our guests. Our merchandise teams continually hear that they know and understand our guests better than anyone else, and that is why we've been able to provide on-target fashion that is selling very quickly at regular prices; markdowns are definitely down. There are some challenges with the supply line, but that's been ongoing for a year and a half. What we see as a plus for us is that a lot of our product is exclusive in addition to private label with our brands, and we have many exclusive products that our guests look forward to buying. If they're not available for a few weeks, we see them continually shopping to find their favorite denim fits.

Okay. Great. So the supply chain and shipping costs seem to be elevated for everybody, and that was my next question, so thanks for addressing that. But coming into the holiday, you don't see that as a big problem, then? Or how do you feel about that?

Like I said, there are challenges just like there have been. With the shutdown in Vietnam, we're going to have some delays. What's been beneficial is our success since things reopened for a long time. Our teams have been planning with our vendors, and we have a long-term great working relationship with our partners. They go out of their way to help us, and we are always working with them to develop more product. There are going to be some expense impacts, but I think we've managed a lot of that pretty well, identifying opportunities as we've gone along. So we think we can manage our business effectively.

Great. Congratulations on an outstanding quarter.

Our next question comes from an indiscernible source.

I think demand has slightly decreased given the current environment, but it’s not specific to the Buckle. Is it really a bad thing if demand softens a bit to better align with the current flow of goods, which is somewhat challenging? Essentially, demand is currently exceeding supply, and the supply chain situation may not improve soon. Would it be so terrible if demand eased a little to create better alignment between these two factors?

Well, we don't like to hold back what we can sell today, but if there is any slowing that helps us catch up, then I guess that is a small win.

We do have a question from the line of Kyle Kavanaugh from Palisade Capital.

I was just curious; could you just comment on the online sales year-over-year dynamic? And also the leverage of occupancy? Was that just sales growth? Or did you also have rents or anything going on the rent side as well?

Well, on the online business, last year, I think we had two months up 100% and another one around 90% or 88%. So being off 5% this quarter, I don't see that particularly shocking, especially seeing how many of our guests were returning to stores and having a great response there. Regarding occupancy, I think the largest part was the growth in sales, although we feel very good about our renewals and where our store leases are as we go forward.

Our next question comes from the line of Dave Ujjval from Ujjval Investments.

This is Ujjval Dave. I have a question about inside ownership. One prominent aspect of Buckle has been significant inside ownership, especially by the founder, Daniel, and you, Dennis. This is a great word of confidence in the business. But Dennis, you have been steady with your stake remaining stable over many years. If I look at the 2020 proxy statement, you held more than 3.2 million shares, which was nearly 6.6% of the total outstanding shares. However, as per the recent SEC Form 4 filings, you have been drawing out a very significant amount of shares on a regular basis. Since April of this year, you have sold more than 36% of your total ownership. Now your ownership, if I do the calculation right, is around 4.2% compared to 6.6% just 12 to 15 months back. I'm just wondering if there is any particular force behind this expense selling? Should we expect any retirement news or management changes at Buckle in the near future?

Well, Dave, I've been working on some estate planning, and we have no announcements at this time.

Our next question comes from the line of David Berman from Berman Capital.

I see on a 2-year basis, sales are up 45% and inventory is actually down 26%, similar to the last quarter. I've never seen any discrepancies like this before. One of the things that you might be good at is turning your inventories fast. I think in the last few years, that's slowed a little bit. So are we seeing a permanent improvement in the business that you want to keep at this level? Just curious whatever you want to have your inventories at going forward?

Well, it's not a level of inventory that we want to maintain. We know we're missing some sales at this level, but it's just difficult to catch up on the inventories with our sales growth being over 36% and higher in the first quarter. Planning is challenging, given some disruptions in the supply chains. We are planning to get closer to a normal level by this fall. With the recent issues in Vietnam, it might take a bit longer, but we still have a great selection and a substantial part of our planned inventory is coming in. The team is doing their best to get that level up.

But with sales performing so well despite the low inventory, why wouldn’t you prefer this? The margin is clearly quite favorable as well.

Well, we don't want to disappoint some of our guests. We hope to improve that a little bit while still keeping high inventory turnover.

We have a follow-up question from the line of Kyle Kavanaugh.

Just wondering if you could comment on the current competitive environment. Are some of your sales gains or market share gains just a result of everyone being cooped up, or is the environment fundamentally different now?

Regarding malls and shopping areas, we're in a substantial number of very good malls that have good traffic, and they're great for us. We've also found malls that are no longer the best shopping destination and have moved to power centers, where we've been very successful. We still have some outdoor lifestyle centers that we've improved locations in as well. We analyze each community for the best shopping experience and set us up for future opportunities. It seems like we're gaining extra market share, with more guests realizing they can shop with us where they used to think they were too old or that we didn't have their sizes or that our price points used to be too high. Back in the '08 to '15 range when many of our denims were $60, we might have lost some guests, but now they see us in the $75 to $80 average price range, and they are starting to understand we offer affordable quality and popular fits. We've established ourselves as a great destination for denim, along with catering to various lifestyles. Our selection is great, and our sales teams deliver an excellent experience.

And just a little follow-up regarding your online strategy. Are there any current changes, emphasis, or priorities?

We're continuing to look to better serve our guests with different payment methods. Our marketing team continues to hire staff to enhance the shopping experience. We are certainly looking to improve that just like we do across the rest of the company.

And there are no further questions in the queue.

If there are no questions, we can wrap up the call today and thank everyone for participating. Enjoy the rest of the day. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing services. You may now disconnect.