Buckle Inc (BKE) Q1 2023 Earnings Call Transcript

Well, good morning, and thank you for standing by, and welcome to Buckle's First Quarter Earnings Release Webcast. 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; and Adam Akerson, Vice President of Finance and Corporate Controller. As they review operating results for the first quarter, which ended April 29, 2023, 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 is as follows. 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 calls should not be relied upon as the information may be inaccurate. And as a reminder, today's webcast is being recorded. And now I will turn things over to your host, Tom Heacock. Tom, over to you.

Good morning, and thank you for joining us today. Our press release from May 26, 2023, reported that net income for the 13-week first quarter ending April 29, 2023, was $42.9 million, or $0.86 per share on a diluted basis. This is a decrease compared to net income of $55.3 million, or $1.12 per share on a diluted basis, for the same period last year, which ended April 30, 2022. Net sales for the first quarter decreased by 8.5% to $282.8 million, down from $309.1 million during the prior year’s first quarter. Comparable store sales dropped by 9.2% compared to the same 13-week period last year, while our online sales fell by 5.6% to $51.3 million. For this quarter, units per transaction saw an approximate increase of 2.5%. The average unit retail price declined by about 0.5%, but the average transaction value rose by roughly 1.5%. Gross margin for the quarter stood at 47.1%, which is down 210 basis points from 49.2% in the first quarter of 2022. This decline was due to a 140 basis point impact from the de-leveraging of buying, distribution, and occupancy expenses, alongside a 70 basis point decrease in merchandise margins. Selling, general, and administrative expenses represented 28.1% of net sales, which is an uptick from 25.6% in the first quarter of 2022. The increase was mainly caused by a 200 basis point rise in store labor-related expenses and increases across various other SG&A categories, collectively impacting 150 basis points. This was partially offset by a reduction in accruals for incentive compensation expenses, contributing a 100 basis point impact. Our operating margin for the quarter was 19.0%, down from 23.6% in the first quarter of fiscal 2022. The income tax expense as a proportion of pretax net income for both the current and prior year fiscal quarters was 24.5%, leading to a first-quarter net income of $42.9 million for fiscal 2023 compared to $55.3 million for fiscal 2022. Our press release also included a balance sheet as of April 29, 2023, showing an inventory of $137.7 million, a 13.7% increase from $121.2 million as of April 30, 2022, along with $300 million in total cash and investments. At the end of the quarter, we had $116.1 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter totaled $9.3 million, with depreciation expenses at $4.9 million. The first quarter's capital spending included $8.8 million for new store construction, store remodels, and technology upgrades, and $0.5 million for capital spending at the corporate headquarters and distribution center. During this quarter, we opened 2 new stores, completed 4 full remodels—3 of which were relocations into new outdoor shopping centers—and closed 3 stores. For the remainder of the year, we plan to open 7 additional new stores and complete 13 more full remodel projects. Buckle finished the quarter with 440 retail stores across 42 states, compared to 439 stores in 42 states at the end of the first quarter of fiscal 2022. Now, I will turn things over to Adam Akerson, Vice President of Finance.

Thanks, Tom. Women's merchandise sales for the quarter were down about 10.5% against the prior year and represented approximately 47.5% of sales compared to 48.5% in the prior year. Average denim price points increased from $76.60 in the first quarter of fiscal '22 to $79.80 in the first quarter of fiscal '23 while the overall average women's price point increased about 4.5% from $45.45 to $47.40. On the men's side, merchandise sales for the quarter were down about 8% against the prior year, representing approximately 52.5% of total sales compared to 51.5% in the prior year. Average denim price points increased from $86 in the first quarter of fiscal '22 to $88.80 in the first quarter of fiscal '23. For the quarter, overall average men's price points increased approximately 3.5% from $50.75 to $52.60. On a combined basis, accessory sales for the quarter were up approximately 9.5% against the prior year, while footwear sales were down about 39%. These 2 categories accounted for approximately 11% and 8%, respectively, for the first quarter net sales, which compares to 9% and 12% for each in the first quarter of fiscal '22. For the quarter, average accessory price points were up approximately 12% and average footwear price points were up 6.5%. For the quarter, denim accounted for approximately 41.5% of total sales and tops accounted for approximately 27%, which compares to 40% and 27.5% for each in the first quarter of fiscal '22. Our buying teams continue to introduce new brands and provide a diverse assortment of private-label products. For the quarter, private label represented 44% of sales versus 42.5% in the first quarter of 2022. During a difficult spring selling season, we were pleased with the performance of both our men's and women's business. Outside of footwear, which accounted for approximately half of the total sales decline for the quarter, we saw good selling across several categories. Denim on the men's side performed well, and we believe our selection of polos, short-sleeved tees and shorts have us well positioned moving into the summer selling season. On the women's side, denim shorts performed well, and we anticipate that carrying through to the back-to-school season, pairing well with continued newness in our summer and fashion tops. And with that, we'll go to your questions. Thank you.

A couple of questions. Obviously, it's a little bit difficult first quarter in terms of sales. At the store level, are you adjusting labor costs to reflect the current environment? So are you seeing a little bit of that? Are you doing a little bit of that?

Yes, we are doing our best. I mean with the sales leverage down with such, we have had to increase some wages due to inflation and stuff for our teams. But our teams are continually working the schedules and adjusting to handle that the best we can. Although the cost is up over the last 2 years, where we had kind of unusually low costs, it's still below several years ago as far as the cost percent. So it is on our radar, and we continue to work with that.

Okay. On the footwear side, obviously, there was a lot of weakness in footwear sales. And it's coming off some difficult comps, but is there anything specific to footwear that's behind the weakness? Are there a few new styles or do we have enough shoes? Anything specific to footwear that you see that's behind the weakness?

Yes, in our branded casual footwear, there's increased inventory from the brand in the market that has cut into what we were doing. But also a year ago, we had kind of a pent-up demand for that category. And so we had unusually high sales, the first part of spring on the brand. And so we were anniversary-ing tough comps. We will still have some headwinds as we go through the year, but not at the same degree. I think the sales were about $12 million in the first quarter a year ago on that. And the rest of the year, not counting December, I think it drops to $8 million. So we'll have a little less headwind there, but it's kind of the part of the fashion cycle that goes on.

Not to name names, but are we talking about Hey Dude?

That would be the key one, yes.

Okay. All right. And lastly, Dennis, I think you mentioned 7 new stores for the remainder of the year. And that's a little bit different than what we've seen in the past where it's been somewhat limited. What's your thinking behind the additional new stores? Are there some retail openings that seem very attractive at this time, maybe because other retailers left? But why the new store growth?

So what we've seen over the last couple of years are changes in markets and now we're considering more power centers and other situations with our success that we've learned from. We feel good about some of these markets. We also see with the people moving and changes from the last couple of years, that new opportunities are being created due to good developments. We've met some new real estate people who have given us very good opportunities to work with and we're opening new outlet stores where before you had to be an outlet store to participate. They have seen our success and welcomed us to their projects where there is excellent traffic, and we feel that our product will work well in their centers. That's given us some additional opportunities as well.

Great. I guess I wanted to ask if you saw any differences in performance by regions. Anything that you would call out? And then on the merchandise margin, what is driving that contraction seeing that your private label penetration actually increased 150 basis points year-over-year?

Okay. Yes. On the margin, our footwear margins before were very good, and we've seen a little drop back there. For the most part, I think we're also selling some branded denim. That has been very good, but the margin is not as good as private label, where we had low inventories a year ago on that. A couple of those things are the main points. Some of the fashion tops, where there's better margin, had a little softness in the first quarter which probably had an effect as well.

Okay. Thanks. And about the regional performance?

I'm sorry. What?

Sorry. Any call-outs on the regional performance?

Sorry, yes. The southern parts, especially Texas, have seen good traffic. In the majority of others, there has been enough seasonal weather that's been challenging and had an effect on most other stores.

I wanted to build on a question earlier, considering store growth just a little bit. One of the positive features with Buckle over the years has been a very measured approach to store growth, although store counts have declined since about 2015 up until last year. Do you expect that this trajectory towards positive location growth to be a longer-term trend? Or is it dependent on the results of the new stores that you're opening this year?

Well, in our meetings, what we're seeing is a lot of good opportunities to reposition stores, whether we move out of malls that have lost traffic. We have been able to open at power centers and other outlet opportunities. I don't know if each year will be a similar amount of stores, but we're certainly open to new stores where the opportunity presents itself. We are starting to look at '24 and seeing some possibilities there, but we're not ready to announce how many new ones there will be.

Sure. And then with respect to the new stores that are opening, are these primarily in adjacent geographic locations to where the company already has a significant number of stores? Or are these further afield?

Most of them are in regions where we do very well.

Okay. And then finally, just expanding on that a little more. Buckle has maintained a very high return on equity and capital investment for many years, even when sales took a hit. Has the lack of growth left some value on the table with respect to that in your thinking? Or how does the company approach that view and the decline in the count of stores over the last several years until the recent upward trend?

As I mentioned, we've moved some of our stores out of malls. In many cases, we've been able to expand square footage, providing updated store locations that people have enjoyed. We look at opportunities to maximize our results, and I guess we feel really good about each situation we're considering and changing. With everything we see going on, there are going to be some good opportunities. We're still looking at covering the downside and letting the upside take care of itself, which has served us well over the years.

Sure. And then if I may, one last question on e-commerce sales. Is the company's e-commerce sales experience concentrated in the areas where you have stores? Or have you seen e-commerce drive brand extension in areas where you don't have geographic locations?

Our total sales are probably best in the states where we are strongest and continue to do well. Many times, we see guests go online to see the newness and then go to the store to buy. While our strength is very good, we also do a reasonable amount outside of our territories.

Given your store footprint, which tends to be in smaller cities, close but not near the urban centers, do you have any favorite economic macro indicators or metrics that you like to look at to give you a feel for the forward-looking retail climate?

We don't have any specific ones. We look at a lot of different information. Usually, most of the centers have traffic indicators. We look at sales of others in the centers. We have certain retail stores that we look at depending on the market. In our areas where we are strong, we are pretty open to a lot of situations. We have some outstanding mall stores throughout the Midwest and the larger cities and feel very comfortable with those. We are not in the Northeast cities or Southern Florida cities or the L.A. or San Francisco area. But outside of that, we are open to review the majority of markets.

Okay. And then my other question is kind of micro based. Last year, there was a lot of disruption in freight forwarding and companies getting inventory. Have you guys experienced any of that? Or has that been pretty smooth for you so far?

I'd say, for the most part, it's been pretty smooth at this point.

Great. I just wanted to ask about inventory. I see that the growth has moderated sequentially from the fourth quarter. I wanted to know if you see any, I guess, like pockets of inventory where you feel it's still high. And do you have any views or expectations on when you think the inventory growth will be more aligned with the sales growth?

Yes. Here again, for the first quarter, we brought in more spring product than for the second quarter, and we're very comfortable with our inventory levels at this point. Probably the start in the third quarter will be more in line with how sales are going.

And we have no further questions. So I will turn things back to Buckle for any closing remarks.

If there are no further questions, we'll conclude today's call, and thank you all for your participation and hope everyone has a wonderful holiday weekend. So thank you very much.

Thank you. And again, that does conclude today's earnings release. We thank you all for your participation. Enjoy your summer. We'll see you next quarter.