Buckle Inc (NYSE: BKE) Q1 2020 Earnings Call Transcript

Buckle Inc (BKE) Q1 2020 earnings call dated May 22, 2020

Corporate Participants:

Dennis H. Nelson — President and Chief Executive Officer

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

Analysts:

Tiffany Kanaga — Deutsche Bank — Analyst

Steve Marotta — CL King & Associates — Analyst

Jon Braatz — Kansas City Capital — Analyst

Jenifer Taylor — MAC Funds — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Buckle’s First Quarter Earnings Release. [Operator Instructions] And as a reminder, this 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, General Counsel and Corporate Secretary.

As they review the operating results for the first quarter which ended May 2nd, 2020, 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 risk 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.

I would now like to turn the conference over to Dennis Nelson. Please go ahead.

Dennis H. Nelson — President and Chief Executive Officer

Good morning and thank you for joining us. It goes without saying that this was the most challenging quarter we ever faced. The quarter started strong as we continued the positive trend of same-store sales growth by posting a 6.3% comp and online sales growth of 33.2% for February. These trends were largely achieved by continuing to deliver fashion right product combined with the expertise of our teams in the stores, enhanced data-driven marketing campaigns, and continued investment in our omnichannel experience.

Then the COVID-19 pandemic struck, which introduced a new set of challenges to overcome. Through that all, I’m incredibly proud of how our teams responded. Our teammates reacted admirably as we made the difficult decision to furlough over 90% of our workforce and reduce salaries for many remaining at work.

Our teammates recognize it is through shared sacrifice that we will be able to maintain the financial security and flexibility necessary to navigate this trying time and emerge ready to capitalize on the opportunities ahead. By making these difficult decisions, we were able to reduce compensation and benefit-related expenses by over $13.5 million for the quarter with additional savings continuing into the second quarter.

Our buying teams worked very closely with our branded and private label vendor partners to extend payment terms, cancel and reduce orders as well as alter the timing and flow of inventory. This allowed us to finish the quarter with inventory up just slightly, limited the amount of potential markdown inventory, and maximized our open-to-buy’s for future selling periods.

Our real estate team, through greater relationships and good faith was able to achieve substantial rent deferrals with our landlords. Our marketing technology teams developed and delivered appropriate and relevant content, keeping our guests engaged with the brand as their shopping patterns change. In addition, these teams worked to develop innovative solutions to enhance our omnichannel experience, including the addition of curbside pickup functionality through both our in-store app and online store.

Through these efforts, our online businesses continue to grow both with existing and new-to-file guest. Our distribution and online fulfillment team have managed to stay on top of the increased e-commerce demand despite operating with reduced staffing to maintain proper social distancing.

Our corporate office teams have worked tirelessly to respond to teammate and guest inquiries, research federal, state and local health guidelines and prepare the stores with the necessary supplies and protocols to reopen quickly and safely. As a result, we’ve been able to successfully reopen over 75% of our locations through today.

Finally, our teams in the stores are adapting to the new realities of retail, providing our guests with most enjoyable shopping experience while working to protect the health and safety of everyone in our stores. We are encouraged by the early results of stores that reopened and we will continue to evolve the store experience to meet our guest’s expectations.

And so, I want to take this opportunity to send my deepest appreciation to the thousands of Buckle teammates for their collective efforts and thoughtfully positioning and preparing us for the success as we emerge from this pandemic. I would also like to express my sincere gratitude to our vendors and landlords for continuing to be valued partners.

And with that, I’d like to turn this over to Tom.

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

Good morning, and thanks for being with us this morning. Our May 22nd, 2020 press release reported a net loss for the 13-week first quarter ended May 2nd, 2020 of $11.8 million or $0.24 per share on a diluted basis, compared to net income of $15.1 million or $0.31 per share on a diluted basis for the prior year 13-week first quarter ended May 4th, 2019.

Net sales for the 13-week first quarter decreased 42.7% to $115.4 million compared to net sales of $201.3 million for the prior year 13-week first quarter. Online sales for the quarter increased 31.5% to $32.1 million compared to net sales of $24.4 million for the prior year 13-week fiscal period.

Gross margin for the quarter was 23.2% down from 38.1% in the prior year first quarter. The year-over-year decrease was the result of a 110 basis point decline in merchandise margins, which was largely the result of an increase in our reserve for inventory markdowns and obsolescence and deleverage occupancy buying and distribution expenses as a result of the store closures.

SG&A expenses for the quarter were 37.2% of sales compared to 28.8% for the same period a year ago. On a dollar basis, SG&A declined $14.9 million from $57.9 million in the first quarter of 2019 to $43 million for the first quarter of fiscal 2020. The decline was achieved by reducing compensation and benefit-related expenses by $13.5 million along with reducing certain other operating expenses including travel and store suppliers. These reductions were partially offset by increased shipping cost resulting from our strong online growth, increased marketing expenses and store related impairment charges.

Other income for the quarter was $0.6 million compared to $1.3 million for the first quarter of 2019. The income tax benefit as a percentage of the pre-tax net loss for the quarter was 24.5% compared to income tax expense of 24.5% for the first quarter of fiscal 2019 bringing first quarter net loss to $11.8 million for fiscal 2020 compared to net income of $15.1 million for fiscal 2019.

Our press release also included a balance sheet as of May 2nd, 2020, which included the following; inventory of $121.7 million which was up just slightly from inventory of $120.8 million as of May 4th 2019, and total cash and investments of $218.6 million which compares to $249.4 million at the end of fiscal 2019 and $253.3 million as of May 4th, 2019.

We ended the quarter with $110.1 million in fixed assets, net of accumulated depreciation. Our capital expenditures for the quarter were $2.2 million and depreciation expense was $5.5 million. Year-to-date capital spending is broken down as follows; $1.5 million for store remodels and technology upgrades and $0.7 million for capital spending at the corporate headquarters and distribution center.

During the quarter, we closed two stores and completed one full remodel. For the remainder of the year, we plan on opening one new store and two new Buckle used [Phonetic] stores as well — as well as completing three additional full store remodels. Based on current store plans, we still expect our capital expenditures to be in the range of $7 million to $10 million, which includes both planned store projects and IT investments.

Buckle ended the quarter with 446 retail stores in 42 states compared with 449 stores in 42 states at the end of the first quarter of fiscal 2019. With respect to transactional metrics and category information, UPTs for the quarter decreased about 1%; the average unit retail increased approximately 1.5%; and the average transaction value increased approximately 0.5%.

Average men’s denim-price points decreased from $86.70 in the first quarter of fiscal 2019 to $84.85 in the first quarter of fiscal 2020. So overall, men’s price points increased approximately 0.5% from $50.60 to $50.95. Similarly, women’s denim-price points decreased from $76.70 in the first quarter of 2019 to $75.85 in the first quarter of 2020. Overall women’s price points increased approximately 3% from $42.65 to $44.

On a combined basis for the quarter, denim accounted for approximately 46% of sales and tops accounted for approximately 27.5% which compares to 42.5% and 30% for each in the first quarter of 2019. In addition, our private label penetration continued to grow and represented 38.5% of sales for the quarter.

And with that, we welcome your questions.

Questions and Answers:

Operator

[Operator Instructions] And we will being with the line of Tiffany Kanaga with Deutsche Bank. Please go ahead.

Tiffany Kanaga — Deutsche Bank — Analyst

Hi, thank you for taking our questions. I’d like to dig into your gross margin performance. Thank you for outlining the inventory reserve charge in the quarter. Are there other COVID related impacts to call out, which you view as more one-time in nature? And would you expect inventory reserve charges in the second quarter as well? Additionally, how are you thinking about your promotional cadence ahead, given the competitive backdrop and your inventory position?

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

On the first part of the question, and then I’ll let Dennis take the second part. On the first part, really the only impact was related to the markdown reserve, looking at merchandise margins and selling, I mean those were strong and continued strong through the quarter. Merchandise margins continue to be positive through February and March and then were down just slightly in April.

But overall, for the quarter, actual merchandise margins were positive absent the additional adjustment to the reserve for obsolescence or markdowns, which was again, just a few categories of seasonal product where we missed some of that spring selling season and are carrying that over a little lighter than we normally would.

Dennis H. Nelson — President and Chief Executive Officer

Yes, and good morning. We were fortunate or the team had done a really nice job as we went through a strong February. We were sitting with very nice gross margins, merchandise margins as well as very little markdown activity as we went into March.

And then with the adjustments that the team worked with our vendors and such as I mentioned in our script, we feel very good for our inventory situation. And it’s very early, but we’ve been encouraged and we’ve had a good start in the stores. So at this time, we’re not projecting more write-downs, and we think we’re delivering a lot of fresh product that the guests are excited about. And so, at this point, we do not have aggressive markdowns planned.

Tiffany Kanaga — Deutsche Bank — Analyst

Thanks. And if I could ask a follow-up question, can you discuss in a little more detail how traffic trends in your open stores have fared versus expectations or on a more quantitative basis. I know you mentioned being encouraged by early results. And what might you anticipate for the timeline to getting the rest of the fleet back open?

Dennis H. Nelson — President and Chief Executive Officer

Well we’re about — this week we are about 330 stores. We expect by June 1 or at least my best guess is, it will be 90% open by the 1st of June or slightly better. We added a 105 stores the first week of May, 115 last week and we’ve added 74 this week to get to that total from the — a few test stores, we did early in April that we were able to do.

And so it’s really — as I mentioned, we’re encouraged. But it’s hard to specify or there’s a lot of variations of what’s going on. So — or such where if a neighboring store isn’t open, but they’re in driving distance of another store, we’ve seen a nice bump from that. So we feel about as good as we can be, as we start this next week.

Operator

: Next we will go to the line of Steve Marotta with CL King & Associates.

Steve Marotta — CL King & Associates — Analyst

Good morning, everybody. You mentioned earlier on the call, curbside pickup capabilities. Can you talk about if that’s in all stores and are there other digital amenities that you’re providing for your customers in order to potentially avoid a specific trip inside of a store. Again, I guess what else are you doing digitally in order to service the customer?

Dennis H. Nelson — President and Chief Executive Officer

Yeah, curbside we can do in about every store, but it’s a very small part of our business at this point, but we have some projects going forward that would be able to improve that experience and be more beneficial if that’s where the demand of our guest is, but we’re still seeing a lot of our guests want to be in the store to see the product to selection and such. Tom, do you have anything else to add on that?

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

I don’t think so, I think that — I mean that’s been a continual focus for a while through the back half of last year, first part of this year, and I think it’s even more important now to be flexible and be able to offer the guest options of what product, expanding the selection of product with in-store being available online, and then giving them a whole bunch of delivery options whether they want curbside, pick-up in store or ship to their house. So continual evolution there.

Steve Marotta — CL King & Associates — Analyst

And I know you mentioned that you believe 90% of your stores will be opened by June 1st or that’s the target. And this is a very difficult question to answer, I understand. But do you have any targets in your mind when productivity might be normalized? Do you see that on or around September 1st or December 1st or not till next year? What are your thoughts there?

Dennis H. Nelson — President and Chief Executive Officer

Well, that’s a tough one. We’re certain that there is probably going to be more uncertainty, and so, we’re just trying to make the best out of every day and our teams are really excited to be back at the stores and seeing their guest and the guests coming in right now are excited to be out and be shopping again. So we just hope that continues and maybe get stronger as we get in — further into the season, and people will get more comfortable to come out.

Steve Marotta — CL King & Associates — Analyst

Helpful. Thank you.

Dennis H. Nelson — President and Chief Executive Officer

Thanks, Steve.

Operator

Next, we will go to the line of Jon Braatz with Kansas City Capital. Please go ahead.

Jon Braatz — Kansas City Capital — Analyst

Good morning Dennis, Tom.

Dennis H. Nelson — President and Chief Executive Officer

Good morning.

Jon Braatz — Kansas City Capital — Analyst

Denim is a rather basic item. Do you think, when we — when we emerge fully from COVID-19 that denim would be a better performer than, let’s say, other apparel.

Dennis H. Nelson — President and Chief Executive Officer

Well, I know the soft comfy and casual wear has been the talk this last month or so, but we’re still seeing some very nice interest or results on our denim. We work very hard on having the quality of the fit, the fabric, they’re very comfortable. A lot of our guests have their favorite brand and like the idea of the quality fabrics and the uniqueness and exclusive product that we have. So denim has been strong, all the way for the last 50 years for us. We see it continuing.

Jon Braatz — Kansas City Capital — Analyst

Okay, good. And Dennis, you mentioned or Tom mentioned that you’re getting some rent relief. When you open up the stores and maybe only doing 25% of normal sales or 30% of whatever. Are you still responsible that — for that full rent payment, or are you negotiating with the landlords on the land — on the rental payments sort of in its entirety.

Dennis H. Nelson — President and Chief Executive Officer

Yeah, I think our working with our landlords right now are in a confidential status so can’t really give you much color on that.

Jon Braatz — Kansas City Capital — Analyst

Okay, all right, thank you.

Dennis H. Nelson — President and Chief Executive Officer

All right, thank you.

Operator

[Operator Instructions] We’ll go to the line of Jenifer Taylor with MAC Funds. Please go ahead.

Jenifer Taylor — MAC Funds — Analyst

Hi, good morning and thank you for taking the question. And we all have our fingers crossed, the environment improves here certainly. I’m wondering and I know it’s — for all reasonable reasons not to move forward on comp sales, do you think that there is a chance that you could give a little color as we move forward just on your guest count per store as a — just as a metric just to see how many people are out in certain areas holistically across the store base? So we understand just where it was vis-a-vis a year ago. I mean we all realize numbers are going to be spotty and down and be moving around based on all kinds of activities, but I was just wondering if there might be a way that we can get almost a utilization rate, if you will of what was normal for the store versus a year ago or something like that?

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

Jennifer we don’t have traffic counters in our stores. So I don’t really have any metrics to share there. And like I say, the majority of our stores have only been open two to three weeks at the most. We will release our May sales in June as we traditionally do, and hopefully that will give you a feel of our business.

Jenifer Taylor — MAC Funds — Analyst

Yeah, that’s fine. Thank you.

Thomas B. Heacock — Senior Vice President of Finance, Treasurer, Chief Financial Officer & Director

Yeah, thank you.

Operator

[Operator Instructions] There are no further questions.

Dennis H. Nelson — President and Chief Executive Officer

If there are no further questions, we’ll conclude the call for today and thank everyone for participating and wish you all a great all day weekend, whatever that looks like. So thank you everybody.

Operator

[Operator Closing Remarks]