Buckle Inc (BKE) Q3 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Buckle's third quarter earnings release. As a reminder, this call 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 third quarter, which ended October 30, 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 express written consent. Any unauthorized reproductions or recordings of the call should not be relied upon as the information may be inaccurate. With that, I'll turn it over to Mr. Tom Heacock. Please go ahead, sir.

Good morning, and thanks for being with us this morning. Our November 19, 2021 press release reported that net income for the 13-week third quarter ended October 30, 2021, was $62.2 million or $1.26 per share on a diluted basis compared with net income of $41.6 million or $0.85 on a diluted basis for the prior year 13-week third quarter, which ended October 31, 2020. The year-to-date net income for the 39-week period ended October 30, 2021, was $170.9 million or $3.46 per share on a diluted basis compared to net income of $64.5 million or $1.32 per share on a diluted basis for the prior year 39-week period ended October 31, 2020. Net sales for the 13-week third quarter increased 27.3% to $319.4 million compared to net sales of $251 million for the prior year 13-week third quarter. Comparable store sales for the quarter increased 27.3% in comparison to the same 13-week period in the prior year, and online sales increased 9% to $50.5 million. Year-to-date net sales increased 56.9% to $913.7 million for the 39-week fiscal period ended October 30, 2021, compared with net sales of $582.4 million for the prior year 39-week fiscal period ended October 31, 2020. Comparable store sales for the year-to-date period were up 56.7% in comparison to the same 39-week period in the prior year, and online sales year-to-date increased 18.7% to $147.7 million. For the quarter, UPTs decreased approximately 3.5%. The average unit retail increased approximately 1% and the average transaction value decreased about 2.5%. Year-to-date, UPTs decreased approximately 3% and the average unit retail increased approximately 2.5% and the average transaction value decreased approximately 0.5%. Gross margin for the quarter was 50.4%, up from 46.6% in the third quarter of 2020. Our year-to-date gross margin was 49.3% compared to 40.7% for the same period last year. The third quarter increase in gross margin was the result of a 65 basis point improvement in merchandise margins, coupled with 315 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 24.7% of net sales compared to 25% for the third quarter of 2020. Year-to-date, SG&A was 24.6% of net sales, down from 26.4% for the same period last year. The third quarter decrease was due to a 90 basis point decrease and store labor-related expenses and 85 basis points of leverage across several other SG&A expenses, which were partially offset by a 145 basis point increase in incentive and equity compensation accruals. Our operating margin for the quarter was 25.7% compared to 21.6% for the third quarter of fiscal 2020. And for the year-to-date period, our operating margin was 24.7% compared to 14.3% 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 third quarter net income to $62.2 million for fiscal 2021 versus $41.6 million for fiscal 2020. 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 $170.9 million for 2021 compared to $64.5 million for fiscal 2020. Our press release also included a balance sheet as of October 30, 2021, which includes the following: inventory of $100.6 million, which was down from inventory of $118.7 million as of October 31, 2020, and total cash and investments of $500.1 million. We ended the quarter with $99.3 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $3 million, and depreciation expense was $4.3 million. For the year-to-date period, capital expenditures were $12.2 million and depreciation expense was $14 million. Year-to-date capital spending is broken down as follows: $11.5 million for new store construction, store remodels and technology upgrades and $0.7 million for capital spending at the corporate headquarters and distribution center. During the quarter, we completed 3 full remodels, each of which were relocations in new outdoor shopping centers and closed 1 store. This brings our year-to-date totals to 1 new store, 10 full remodels and 3 store closures. For the remainder of the year, we anticipate completing 8 additional full remodeling projects. Based on current store plans, we now expect our capital expenditures to be in the range of $17 million to $20 million, which includes both planned store projects and IT investments. Buckle ended the quarter with 441 retail stores in 42 states compared with 446 stores in 42 states at the end of the third quarter last year.

Thanks, Tom. I'd 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 26% against the prior year fiscal quarter. For the quarter, our women's business was approximately 48% of sales compared to 48.5% in the prior year. Average denim price points decreased from $75.15 in the third quarter of fiscal 2020 to $74.25 in the third quarter of fiscal '21. An overall average women's price points increased about 3.5% from $44.10 to $45.65. We are excited to report another strong quarter of women's business. We continue to see a nice response to our denim selection as we expanded into more fits and provided an expanded range of bottom openings while continuing to build upon our private label assortment. As with many other categories, new arrivals for denim were heavily impacted by supply chain disruptions; in particular, deliveries from our higher price point denim brands like Rock Revival and Miss Me were impacted the most due to broad closures in Vietnam. Some of our other denim brands also saw slight delays in shipping during the quarter. For other categories, products with fashion flair performed best; tops, third layers, dressy tops, graphic tees, boots and fashion accessories were key drivers. We remain focused on building our private label selection across all categories while also continuing to introduce new brands in strategic markets. Our Youth business continues to build with denim and knits driving sales. For the Youth offering, that same unique mix that we do in our women's product has been well received. With ongoing supply chain challenges, we continue to work very closely with all of our manufacturers and brand partners to minimize the potential impacts. Our unique assortment sourced from a variety of brands and vendor partners enables us to be agile in our planning and buying. As a result of the site disruptions to our plans, we were able to react quickly to the changing environment and still deliver newness across the full women's business. Additionally, our strong sell-through performance created opportunities for us to add in existing in-season products. Footwear is a category where being diversified in our brands and looks has benefited our ability to continue to drive sales in spite of some challenges in getting new receipts as planned from brands like Hey Dude and Sorel. It's important to again thank our vendors and brands for their partnership as we all are challenged to work a little bit differently. And to the women's buying team, I honestly cannot give them enough credit for all of their hard work and hustle to stay on top of an ever-changing time in retail. And with that, I will turn it over to Bob Carlberg, Senior Vice President of Men's Merchandising, to discuss the performance of our men's merchandise category.

Thank you, Kelli. Men's merchandise sales for the fiscal quarter were up 28% against the prior year fiscal quarter. For the quarter, our men's business was approximately 52% of net sales compared to 51.5% in the prior year. Average denim price points decreased from $84.60 in the third quarter of fiscal 2020 to $81.55 in the third quarter of fiscal 2021. And overall, average men's price points decreased about 1% from $49.55 to $49.15. Our men's business had another outstanding quarter with unit sales in each department up over 20%. Demand was strong across all brands and life sales. One of Buckle's greatest strengths is the diversity of guests we can serve. If 1 brand or lifestyle is late, we are able to help the guests see substitutions that make sense for them. Our new color palettes, fabrics and styling across all categories were very well received by our guests. As we all know, getting product to our doors has taken more planning and work than ever. Our team and partners have managed it very well, and we have been catching up on inventory month-to-month as we move through fall and prepare for holiday. Outside of Rock Revival denim, we had very little men's product disrupted by the country-wide shutdown in Vietnam. Even with a large delay in our Rock deliveries, we continued growing denim in the double digits, with denim being the largest dollar gain followed by knits. During the quarter, our Salvage brand was even stronger than normal as a strong substitute for rock denim. In other categories our highest growth was in knits as we have our best inventory position there and continue to expand our brands and lifestyles. Our private brands have grown in breadth and volume as we cover every niche and lifestyle across our collections. I want to mention our button front business that was most impacted early by COVID that has come roaring back; button fronts like outerwear and sweaters are dominated by our private brands. Now turning to results on a combined basis. Accessory sales for the fiscal quarter were up approximately 27.5% against the prior year fiscal quarter and footwear sales were up about 23%. These 2 categories accounted for approximately 8.5% and 9.5%, respectively, of third quarter net sales, which compares to 8.5% and 10% for each in the third quarter of fiscal 2020. Average accessory price points were up approximately 7% and average footwear price points were up about 0.5. Again, on a combined basis for the quarter, denim accounted for approximately 41.5% of sales and tops accounted for approximately 32%. This compares to 42% and 32% for each in the third quarter of fiscal 2020. For the quarter, our private label business increased to 44% of sales compared to 39% in the third quarter of 2020. With this being my final earnings call before my return at the end of our fiscal year, I want to take the opportunity to thank Dennis and Buckle teammates past and present for such an incredible journey on this segment of the business and the culture that Dennis and many other great people have created. I also wanted to specifically thank the men's buying team; it has been a true joy to work with each of them. Your talent, creativity and drive has enabled us to succeed in the face of such adversity over the past few years and have positioned us well to further capitalize on the opportunities ahead. The future looks bright, and I look forward to watching where you take us. And with that, we welcome your questions. Thank you.

And first, we will take questions from Jon Braatz with Kansas City Capital.

Dennis, what are you seeing maybe ahead in 2022 in terms of new stores, maybe the future of Buckle Youth stores and so on. Obviously, you have a nice cash position. Would you anticipate much in terms of new stores going forward?

I want to take a moment before answering your question. As this is Bob's last earnings call, I would like to thank Bob for his 38 outstanding years at Buckle. Bob is a very talented merchant and has developed an excellent men's merchandise team. He's been a great partner, and we appreciate all that he has accomplished at Buckle and we want to wish Bob all the best in the future. Jon, we do have 1 new store planned for 2022. The Youth stores, we will expand our inventory selection in our stores, although we don't have a specific Youth store plan to open separate from our regular store. But also, over the next 1.5 years, we're going to have 20-plus relocations and remodels of stores. Most of those will be moving from probably mall locations to outdoor centers or shopping strip centers where we will have the exposure on the street with our guests, and we've had some very good success in the past 2 years making those changes. So thank you.

Okay. Dennis, regarding the Buckle Youth merchandise, when you put that merchandise into a store, are you taking out merchandise? I'm trying to get sort of an incremental impact that the Youth segment is having on your stores.

No. In the majority of stores, we are not taking out product. The good news about our relocations, in the majority of our relocations, we are expanding store size by at least 1,000 square feet in a lot of cases. And so that makes for a great way for us to expand that selection without adding more store personnel for a separate store and saving the expense of a separate build-out.

This year has been remarkable for everyone, and I have to commend you and your team for outshining your competitors. However, it's clear that some macroeconomic factors have benefited all companies. Looking ahead to 2022 and beyond, considering your current position, how sustainable do you believe some of your recent strategies are in maintaining a higher margin? You are projected to be around 25%, whereas a couple of years ago in 2013 and 2014, you were at 22%. Will you be able to hold on to some of these strategies to keep margins higher than what we've previously observed?

Well, we won't make any predictions, but we have a lot of good things going. We have great excitement in the stores, very talented teammates with our store managers and their leaders in the stores. Our merchandise teams are very strong, and they're great at knowing our guests. Our marketing has improved. We have substantially more new guests each quarter than the previous year and a strong support staff here at the office. So we have a lot of things to be excited about. And I think even in 2019, we were starting to make progress on a lot of our investments, changes. Our focus has always been to have continued improvement within our company. And I want to thank all our teammates and staff for all their hard work and appreciate what they're doing because we take a continued focus on improving our guest service, our presentation, the product. And over time, these continued improvements, kind of like compound interest, we gain from it and get stronger as we grow. So that’s kind of our approach, and we think we’ll continue to do well.

Our next question is from Peter Brachii with Brachii Capital Management.

Couple of questions. I think I heard you say that your SG&A was actually down this quarter. Are you guys experiencing any kind of wage inflation at the store level or in distribution?

Our model in the store, we're primarily for most of our teammates a base plus commission. So there's natural increases in wage, and a lot of our teammates are doing really well with the strong business we're seeing in a lot of areas. And you read the press, and our experience has been no different; it's incredibly competitive for talent. So we have had to make some adjustments to wages here for some of our positions in the office, the same for some of our positions in the store. I mean, recruiting is a constant focus, especially in our fulfillment centers here for e-commerce sales in our distribution center, and we've also had a really strong focus on recruiting through the fall in the stores. I mean, that's been really successful. We had some added incentives for both referrals and new applicants and really in a good spot there.

Great. Great. I'm sorry, go ahead.

All things considered.

Sure. And speaking of your sales associates, you guys have always been great with having your in-store associates spending time with customers to make sure they get the right fit, the right brand for them personally. And I'm just wondering if you can give some color on how that squares with your online sales increasing fairly dramatically. Are people buying online and then coming in for a more custom fit if they're not happy when they get it at home? Or how do you think about that?

I think we have a lot of guests that shop online and then come into the store to find what they would like best. And then as they become more acquainted, they find their favorite fits in our stores. They become more comfortable ordering online because they know that our quality and consistency and fitting works well for them, and we're always there. And also, we started testing in 2019 to ship from store and expanded that last year as the business grew during the year. That has been a big help to our e-com business as our third quarter over 2019, e-com was up 81%. So I think second quarter was up 94%. So it's a combination of things that are working very well there.

Great. Great. And 1 final question. How do you feel about having ample inventory for holiday?

Well, we're hoping that we keep the flow going. I mean, with up 27% in the third quarter, we were able to get our inventory, which was still down in the high teens. I think it had been running down over 20%. With the success of the stores and our business, it’s difficult to catch up, but it's a good problem, and we're still working hard. If we get everything coming in that's planned, we should be able to offer a nice selection.

I just want to follow up on that last question. Regarding the supply chain in general, how would you say it is for both private label and branded items compared to 3 months ago?

Steve, it's a little difficult to call out. I think some of our vendors are in pretty good shape on shipping product, and others still have a challenge. I'd say it's slightly improved, but still a challenge.

That's helpful. And also, can you update us on any digital initiatives that launched over the last 3 months that have helped you connect digitally with your customers and have them transact digitally?

Dennis mentioned this is Tom. Dennis mentioned a lot of the heavy lifting for our omni initiatives was done prior to this year. So in terms of opening up the availability of in-store inventory for online purchase, so to browse that inventory, buy online, pick up in-store, ship from store, those were all done, which were a lot of our biggest initiatives this year. I mean, we have a tool that we're rolling out, experimenting with and implementing and hoping to grow where our teammates in the stores have the ability to take their service to the guests. So it's really bridging that gap between teammates in stores and online and taking that service to the guests wherever they are. That's been well received. We hope to continue to grow that. We continue to look at payment options. We've added payment options and added Afterpay, both in-store and online during the quarter. Those are probably some of our more significant initiatives this year. Both and all those things have been well-received. We continue to see growth both online and in store. I think it's a function of all of those investments.

We have no further questions in queue.

With no questions, we can wrap it up for today. So thank you, everybody, for being on the call and participating, and have a wonderful day.

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