The Buckle - Q2 2024

Transcript

Operator (participant)

Good morning. Thank you for standing by, and welcome to Buckle's second quarter Earnings Release Webcast. As a reminder, all participants are currently in a listen-only mode, and a Q&A session will be conducted following the company's prepared remarks and the 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 they review operating results for the second quarter, which ended July 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.

All forward-looking statements made by the company involve material risks and uncertainties and are subject to change based on the factors which may be beyond the company's controls. 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 calls should not be relied upon, as the information may be inaccurate.

As a reminder, today's webcast is being recorded. I'd now like to turn the conference over to your host, Tom Heacock.

Thomas B. Heacock (CFO)

Good morning, and thanks for joining us this morning. Our August 18, 2023, press release reported that net income for the 13-week second quarter ended July 29, 2023, was $45.6 million, or $0.92 per share on a diluted basis, which compares to net income of $50.1 million, or $1.01 per share on a diluted basis for the prior year, 13-week second quarter, which ended July 30, 2022. Year-to-date net income for the 26-week period ended July 29, 2023, was $88.6 million or $1.78 per share on a diluted basis, which compares to net income of $105.4 million or $2.13 per share on a diluted basis for the prior year, 26-week period ended July 30, 2022.

Net sales for the 13-week second quarter decreased 3.2% to $292.4 million, compared to net sales of $302 million for the prior year, 13-week second quarter. Comparable store sales for the quarter decreased 3.3% in comparison to the same 13-week period in the prior year, and our online sales decreased 5.6% to $43.6 million. Year-to-date net sales decreased 5.9% to $575.3 million for the 26-week fiscal period ended July 29, 2023, compared to net sales of $611 million for the prior year, 26-week fiscal period ended July 30, 2022.

Comparable store sales for the year-to-date period were down 6.3% in comparison to the same 26-week period in the prior year, and our online sales were down 5.6% to $94.9 million. For the quarter, UPTs decreased approximately 2%. The average unit retail increased approximately 2%, and the average transaction value increased about 0.5%. Year-to-date UPTs increased slightly. The average unit retail increased approximately 0.5%, and the average transaction value increased approximately 1%. Gross margin for the quarter was 47.3%, down 90 basis points from 48.2% in the second quarter of 2022. The current quarter decline was the result of 60 basis points of deleveraged buying, distribution, and occupancy expense, along with a 30 basis point decline in merchandise margins.

Year-to-date gross margin was 47.2%, down 150 basis points from 48.7% in the prior year. The year-to-date decline was due to 100 basis points of deleverage, buying, distribution, and occupancy expense, along with a 50 basis point reduction in merchandise margins. Selling, General and Administrative expenses for the quarter were 27.9% of net sales, compared to 26.4% for the second quarter last year. Year-to-date, SG&A was 28% of net sales, compared to 26% for the same period last year.

The second quarter increase was due to a 60 basis point increase in store labor related expenses, a 25 basis point increase in G&A salaries, a 25 basis point increase in equity compensation expense, and a 25 basis point increase in marketing spend, along with increases across several other SG&A expense categories, which had a combined 50 basis point impact. These increases were also partially offset by a 35 basis point decrease in incentive compensation accruals. Our operating margin for the quarter was 19.4%, compared to 21.8% for the second quarter of fiscal 2022. For the year-to-date period, our operating margin was 19.2%, compared to 22.7% 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 $45.6 million for fiscal 2023, compared to $50.1 million for fiscal 2022. 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 $88.6 million for fiscal 2023, compared to $105.4 million for fiscal 2022.

Our press release also included a balance sheet as of July 29, 2023, which included the following: inventory of $136.1 million, which was up 5.9% from $128.5 million as of July 30, 2022, and also $322.9 million in total cash and investments. We ended the quarter with $119.3 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $8.6 million, and depreciation expense was $5 million. For the year-to-date period, capital expenditures were $17.9 million, and depreciation expense was $9.9 million.

Year-to-date capital spending is broken down as follows: $17.2 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 six full remodels, four of which were relocations into new outdoor shopping centers, and we also opened two new stores earlier this month in Nampa, Idaho, and Poplar Bluff, Missouri, which brings our year-to-date counts to four new stores, 10 full remodels, and three store closures. For the remainder of this year, we plan on opening five additional new stores and completing 8 more full remodeling projects. Buckle ended the quarter with 440 retail stores in 42 states, compared to the 441 stores in 42 states at the end of the second quarter last year.

Now I'll turn it over to Adam Akerson, Vice President of Finance.

Adam Akerson (VP of Finance and Corporate Controller)

Thanks, Tom. Women's merchandise sales quarter were down about 6% against the prior year and represented approximately 43.5% of sales, compared to 44.5% in the prior year. Average denim price points increased from $77.80 in the second quarter of fiscal 2022 to $79.10 in the second quarter of fiscal 2023. While overall average women's price points increased about 2.5% from $41.85 to $42.85. Going up against the strongest Q2 on record, we were pleased with the strong sell-throughs in our spring assortment and ended the quarter with comfortable inventory levels across all categories. The women's denim business saw particular strength in our private label brands while being off in our brand styles, which was largely driven by planned inventory decreases.

Our women's top business was highlighted by the performance of graphics, sheer fabrics, and product with shine. While we came into the quarter with plans to chase product in our tops categories, we were unable to source enough newness to drive growth. Women's footwear business saw a nice response to our selection of casual styles, but the open-toe and sandals business was impacted by the delayed spring temperatures. On the men's side, merchandise sales for the quarter were down about 1% against the prior year, representing approximately 56.5% of total sales, compared to 55.5% in the prior year. Average denim price points increased from $87.60 in the second quarter of fiscal 2022 to $89.50 in the second quarter of fiscal 2023.

For the quarter, overall average men's price points increased approximately 4% from $47.30-$49.25. Growth in the men's denim category continued to lead the way with a nice mix of growth in both private and branded styles. For tops, we are excited about the performance in a wide variety of looks and styles of our short sleeve button-ups. Footwear remains challenging with both difficult comparisons and a difficult competitive landscape, but we continue to identify other accessories that have resulted in nice add-on business. We feel good about our overall inventory positioning as we enter the back to school and fall selling season. On a combined basis, accessory sales for the quarter were up approximately 3.5% against the prior year, while footwear sales were down about 13.5%.

These two categories accounted for approximately 11.5% and 7.5%, respectively, of second quarter net sales, which compares to 11% and 8.5% for each in the second quarter of fiscal 2022. For the quarter, average accessory price points were up approximately 7.5%, and average footwear price points were up about 9.5%. We are encouraged by the performance in our youth business, seeing particular strengths as we entered the back-to-school selling season, ending the quarter with sales up 5% year-over-year. For the quarter, denim accounted for approximately 33% of sales, and tops accounted for approximately 30%, which compares to 32% and 30.5% for each in the second quarter of fiscal 2022.

We continue driving growth in our private brands, with private label representing 41% of sales versus 40% in the second quarter of fiscal 2022. With that, we welcome your questions.

Operator (participant)

Thank you. As a reminder for participants, if you'd like to ask a question, please raise your hand in the Zoom app. Prior to asking your question, please state your name and your firm affiliation. First person with their hand raised is Mauricio Serna. Mauricio, you should be allowed to talk now.

Mauricio Serna (Executive Director)

Hi. Yes, can you hear me now?

Operator (participant)

Yes. Yes, we can.

Mauricio Serna (Executive Director)

Perfect. Perfect. Good morning, Mauricio Serna from UBS. Thanks for taking my questions. Congrats on the results. I guess just wanted to ask if you could elaborate a little bit more on what were the drivers behind the merchandise margin contraction, 30 basis points. Is this related to, you know, cost pressure, inflation? How do you see that, you know, evolving on the back half of the year? Secondly, you mentioned, you mentioned something on the women's side being affected, you know, given that you were unable to source enough newness. You know, if you could maybe give us an idea of, like, how much, like, newness usually represents of your business, or how relevant is that to your, to, to the overall business growth? Thank you.

Dennis H. Nelson (CEO)

Okay. thank you for your question. I think the margin decrease was largely a part of the opportunity we had last year with the footwear, where we had substantial volume and a better margin, and that probably had the biggest effect on the margin part of our business. you know, we're still very strong in most of those categories. On the ladies' side, you know, with the weather being difficult in the first several months of not truly getting summer weather, so to speak, we were not getting the early sell-throughs on certain fashion products, so we did not pursue, you know, going back to that, and focused on our back-to-school season. That's, that's kind of why we didn't go aggressively with more new styles on the gal side.

Operator (participant)

There are no further questions in the queues. As a reminder, if you'd like to ask a question, please raise your hand in the Zoom app. You'll find it at the bottom of your application. Perfect. We have Mauricio again. Mauricio, you should be able to unmute now.

Mauricio Serna (Executive Director)

Thank you. Thanks so much for, for the follow-up. I guess, like, just maybe if, if you could, you elaborate a little bit more on. You know, you mentioned that you feel very good about your inventory for back to school. I mean, what, what are your thoughts on, like, how, how the season has, how the back-to-school season has played out? Maybe, you know, if I, if I think about the inventory composition, I think it's still up 6% year-over-year. You know, in Q2, like, how do you feel about that? Like, in terms of, you know, the, the composition of it, and if you're comf- what makes you feel so comfortable about it, you know, heading into second half of the year? Thank you.

Dennis H. Nelson (CEO)

Well, a little historical data probably on our inventory is the, you know, in, in 2019, our inventory was probably in the $135 million ballpark, if I remember right, and then it was down in 2021, quite a bit. Last year, it increased to more of a normal level. You know, our business has grown substantially since that time period. You know, we have most of our receipts are new and good response from our stores and our guests on the new selection. We feel very comfortable with the selection at this point.

Operator (participant)

Okay, no further questions in the queue. If you do have a question, please raise your hand. You'll find the Raise Hand feature at the bottom of your application. Okay, there are no further questions, so I'll now turn the call back over to Buckle for any closing remarks. Thank you.

Brady M. Fritz (General Counsel and Corporate Secretary)

Thank you, everybody, for your participation today and your interest in Buckle, and everybody enjoy the rest of the day and have a wonderful weekend.