Buckle Inc (BKE) Q2 2024 Earnings Call Transcript

Good morning and thank you for standing by. Welcome to Buckle's Second Quarter Earnings Release Webcast. As a reminder, all participants are currently in a listen-only mode. A question-and-answer session will be conducted following the company's prepared remarks with instructions given at that time. 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; Adam Akerson, Vice President of Finance and Corporate Controller; and Brady Fritz, Senior Vice President, General Counsel and Corporate Secretary. As a review of operating results, 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. As a reminder, today's webcast is being recorded. And I'd now like to turn the conference over to your host, Tom Heacock.

Good morning and thanks for joining us this morning. Our August 23, 2024 press release reported that net income for the 13-week second quarter, which ended August 3, 2024, was $39.3 million, or $0.78 per share on a diluted basis, compared to net income of $45.6 million, or $0.92 per share on a diluted basis for the prior year 13-week second quarter, which ended July 29, 2023. Year-to-date, income for the 26-week period ended August 3 2024 was $74.1 million or $1.48 per share on a diluted basis, compared to net income of $88.6 million or $1.78 per share on a diluted basis for the prior year 26-week period ended July 29 2023. Net sales for the 13-week second quarter decreased 3.4% to $282.4 million, compared to net sales of $292.4 million for the prior year 13-week second quarter. Comparable store sales for the 13-week fiscal quarter decreased 6.6% in comparison to the same 13-week period in the prior year, and our online sales decreased 15.2% to $37 million for the 13-week fiscal quarter, compared to $43.6 million for the prior year 13-week fiscal quarter. Year-to-date net sales decreased 5.3% to $544.9 million, compared to net sales of $575.3 million for the prior year 26-week fiscal period. Comparable store sales for the year-to-date period decreased 7.7% in comparison to the same 26-week period in the prior year, and online sales decreased 14.2% to $81.4 million for the year-to-date period, compared to $94.9 million for the prior year 26-week fiscal period. For the quarter, UPT decreased approximately 1.5%. The average unit retail increased approximately 2%, and the average transaction value increased about 0.5%. Year-to-date UPT decreased approximately 3.5%. The average unit retail increased approximately 4%, and the average transaction value increased approximately 0.5%. Gross margin for the quarter was 46.9%, down 40 basis points from 47.3% in the second quarter of 2023. The current quarter decline was the result of a 90 basis point increase in occupancy costs along with a 20 basis point increase in distribution and buying costs, both of which were partially offset by a 70 basis point improvement in merchandise margins. Year-to-date gross margin was 46.5%, down 70 basis points from 47.2% in the prior year. The year-to-date decline was the result of a 110 basis point increase in occupancy costs and a 20 basis point increase in distribution and buying costs, which were partially offset by a 60 basis point improvement in merchandise margins. Selling, general, and administrative expenses for the quarter were 29.8% of net sales, compared to 27.9% for the second quarter of 2023. Year-to-date SG&A was 29.9% of net sales, compared to 28% for the same period last year. The second quarter increase was due to a 125 basis point increase in store labor-related expenses, a 65 basis point increase related to digital commerce investments, a 25 basis point increase in marketing spend, a 25 basis point increase in G&A salaries, and a 35 basis point increase in certain other SG&A expense categories. These increases were partially offset by a 60 basis point decrease in incentive compensation accruals and a 25 basis point decrease in e-commerce shipping expenses. Our operating margin for the quarter was 17.1%, compared to 19.4% for the second quarter of fiscal 2023, and for the year-to-date period, our operating margin was 16.6%, compared to 19.2% for the same period last year. Income tax expense as a percentage of pre-tax net income for both the current and prior year fiscal quarter was 24.5%, bringing second quarter net income to $39.3 million for fiscal 2024, compared to $45.6 million for fiscal 2023. Income tax expense as a percentage of pre-tax net income for both the current and prior year year-to-date periods was also 24.5%, bringing year-to-date net income to $74.1 million in 2024, compared to $88.6 million in 2023. Our press release also included a balance sheet as of August 3, 2024, which included the following: inventory of $131.4 million, down 3.4% from the same time a year ago, and $336.1 million in total cash and investments. We ended the quarter with $139.3 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $11.5 million, and depreciation expense was $5.7 million. For the year-to-date period, capital expenditures were $22.3 million, and depreciation expense was $11.1 million. Year-to-date capital spending is broken down as follows: $21.8 million for new store construction, store remodels, and technology upgrades, and $0.5 million for capital spending at corporate headquarters and distribution center. During the quarter, we opened two new stores, completed seven full remodels, one of which was a relocation into a new outdoor shopping center and closed two stores, which brings our year-to-date counts to two new stores, 12 full remodels, and six store closures. For the remainder of the year, we plan on opening five additional new stores and completing six more full remodeling projects. Buckle ended the quarter with 440 retail stores in 42 states, which is consistent with the store count at the end of the second quarter of 2023.

Thanks, Tom. Women's merchandise sales for the quarter were down about 3% against the prior year fiscal quarter and represented approximately 43.5% of total sales. On a 13-week comparable basis, women's merchandise sales were down approximately 5.5%. Average denim price points increased from $79.10 in the second quarter of fiscal 2023 to $80.60 in the second quarter of fiscal 2024, while overall average women's price points increased about 0.5% from $42.85 to $43.15. On the men's side, merchandise sales for the quarter were down about 3.5% against the prior year fiscal quarter, representing approximately 56.5% of total sales. On a 13-week comparable basis, men's merchandise sales were down approximately 6.5%. Average denim price points decreased from $89.50 in the second quarter of fiscal 2023 to $89.20 in the second quarter of fiscal 2024. For the quarter, overall average men's price points increased approximately 2% from $49.25 to $50.20. On a combined basis, accessory sales for the 13-week quarter were down approximately 4% against the prior year 13-week comparable period, while footwear sales were down about 27%. These two categories accounted for approximately 11.5% and 5.5%, respectively of the second quarter net sales, which compares to 11.5% and 7.5% for each in the second quarter of fiscal 2023. For the quarter, average accessory price points were up slightly, while average footwear price points were up 5%. For the quarter, denim accounted for approximately 35.5% of sales, and Tops accounted for approximately 30%, which compares to 33% and 30% for each in the second quarter of fiscal 2023. Compared to the same 13 weeks a year ago, our combined denim categories continued to outperform the total business and were down about 1.5%. Denim built momentum throughout the quarter and was down just slightly in fiscal July. We were particularly pleased with the performance of our women's denim business being down just slightly for the quarter and up about 4.5% in fiscal July. Our women's business also saw strength in other bottom categories with growth in both casual fashion pants and shorts for the quarter. On a combined basis, our Tops category were down about 7%. Our men's short sleeve woven business was strong for the quarter, as were our women's basics and trend silhouettes. Additionally, we were pleased with the merchandise margin expansion for the quarter, even with down sales. We continue to be excited about the performance along with the depth, quality, and variety of our private brands. For the quarter, private label represented 43% of sales versus 41% in the second quarter of 2023. With that, we welcome your questions.

Thank you. Our first question is from Mauricio Serna. I'll go ahead and unmute you at this time.

Great. Good morning and thanks for taking my question. I guess, I just wanted to get a bit more details on what is driving the online channel, significant underperformance, any particular initiatives that the company is doing there? And then on the merchandise margin, it's nice to see another quarter of expansion actually accelerating versus the previous quarter. Maybe you could elaborate what is driving that in terms of maybe more higher private label penetration or cost controls or management around promotions, that'll be super helpful, thank you.

Good morning, Mauricio. I'll let Dennis take the merchandise margin question first and then we'll jump into the e-commerce question.

Okay, good morning. Our denim continues to be very good in sell-through and newness and we're having some nice margin expansion there, as well as our private brands continue to have solid demand and sell-through. So that's been very good as well. The kids' margins are improved and just overall outside of footwear, we're very happy with the margin growth there.

And then on the e-commerce initiatives, I mean, that's been a big priority for this year, knowing that there was a gap between in-store performance and e-commerce performance last year and in the first part of this year. So at the start of the quarter, we engaged third parties to come in and help us and assist our teams to really do a comprehensive review of our website, focusing on the shopability of the site, looking at our analytics capabilities. And so throughout the quarter, we've made a lot of iterative improvements to the site as it relates to navigation, filters, checkout, product display, and groupings. The next iteration that is focusing on onsite search, but we really feel like we've made a lot of improvements to the site itself, the shopability of the site, the experience of a guest on the site, and their ability to find product. Throughout the quarter, that led to increases in conversion, increases in a lot of onsite metrics in terms of positive interaction, positive guest shopping experience on the website, also increase in AOV. So really, the next version of where we're focusing is traffic. I think we talked in the first quarter, traffic has been challenged to the site. During the quarter, we really reviewed our digital spend, marketing spend as it relates to driving traffic to e-comm. A lot of it prior to probably mid-July was focused on guest acquisition. We really pivoted and reallocated our budget and our dollars to a more balanced approach, focused on retention and acquisition. And I think that's paid a lot of dividends. You don't necessarily see it in the Q2 numbers, but we saw positive results in terms of traffic really late in the quarter as some of those initiatives kicked in.

There are no further questions in queue. It looks like Mauricio has another question. Mauricio, I'll go ahead and unmute you at this time.

Great. Yes, I just had another follow-up. Thank you, first of all, for answering the previous questions, maybe on the operating expenses. You know, I remember, in last quarter, there was like a timing issue that led to elevated growth in general and administrative expenses. But now I still see like it was up, you know, like total operating expenses were up 3.2%, you know, some increases in both in selling and general and administrative this time around. I'm just curious if you could elaborate a little bit more on what is driving that increase, given that sales are still down and any initiatives that the company's doing there to manage down those expenses, that'll be super helpful. Thank you.

Thank you, Mauricio. We view our expenses in two main categories: selling and general and administrative (G&A). The G&A expenses have remained fairly stable from Q1 to Q2, with year-over-year increases primarily driven by home office payroll as we continue to invest in our team. In terms of selling expenses, we saw the largest dollar increase in Q2, primarily due to store payroll. This increase is influenced by several factors, including changes in the calendar and fiscal periods which led to more hours worked. Additionally, to stay competitive, we have had to respond to wage inflation, ensuring that we can attract and retain the best talent for our stores while taking care of our guests. These are the main drivers. Furthermore, on the selling side, we also mentioned our third-party partnerships that support our e-commerce efforts.

Okay. Our next question is from Alan. Alan, I'll go ahead and unmute you at this time. I think you should be able to unmute?

Oh, sorry about that. Can you hear me now?

Yes.

Yes. Thank you.

Okay. Yes, with the five new stores you're opening, are those in the areas now that aren't served or haven't been served previously by a store that may have been closed?

We have one new store we just opened this week in California that is an unserved market for us. The four other stores later this year are in the markets we are in, but we feel will be good additions or not distract too much from any of our other business. They should be very good long-term investments. One of them might make a change after the first of the year of a store taking over from another store, but basically new markets on those.

There are no further questions. I can go ahead and turn it back over to Buckle for any closing remarks.

Well, thank you for participating today. If there are no further questions, we can wrap up the call. We thank everyone for participating and hope you all enjoy the rest of the day.