The Buckle (BKE) Q4 2017 Earnings Conference Call Transcript

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The Buckle (BKE -2.42%)
Q4 2017 Earnings Conference Call
March 16, 2018 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to The Buckle Fourth-Quarter Earnings Release Conference Call. [Operator instructions] As a reminder, today's 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 Kyle Hanson, vice president, general counsel, and corporate secretary. As they review the operating results for the fourth quarter, which ended February 3, 2018, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following safe harbor statement, which is 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 being said, I'll turn the conference over to Mr. Tom Heacock.

Please go ahead, sir.

Tom Heacock -- Chief Financial Officer

Good morning, and thanks for being with us this morning. Our March 16, 2018, press release reported a net income for the 14-week fourth quarter, which ended February 3, 2018, was $42 million, or $0.87 per share on a diluted basis, compared to net income of $36 million, or $0.74 per share on a diluted basis for the prior year 13-week fourth quarter, which ended January 28, 2017. Net income for the 53-week fiscal year ended February 3, 2018, was $89.7 million, or $1.85 per share on a diluted basis, which compares to net income of $98 million, or $2.03 per share on a diluted basis for the prior-year 52-week fiscal year, which ended January 28, 2017. Net sales for the 14-week fourth quarter increased 0.4%, to $281.2 million, compared to net sales of $280 million for the prior-year 13-week fourth quarter.

Comparable-store sales for the 14-week fiscal period ended February 3, 2018, decreased 3.2% from comparable-store sales for the prior-year 14-week period ended February 4, 2017. Online sales increased 4%, to $33.5 million for the 14-week fiscal period, compared to net sales of $32.2 million for the prior-year 13-week fiscal period. Compared to the prior-year 14-week period ended February 4, 2017, however, online sales for the quarter increased just over 1%. Net sales for the 53-week fiscal year decreased 6.3%, to $913.4 million, compared to net sales of $974.9 million for the prior-year 52-week fiscal year.

Comparable-store sales for the 53-week fiscal period ended February 3, 2018, decreased 7.2% from comparable-store sales for the prior-year 53-week period ended February 4, 2017. Our online sales decreased 1.6%, to $98.2 million for the 53-week fiscal year, compared to net sales of $99.8 million for the prior-year 52-week fiscal year. For the quarter, UPTs increased approximately 0.5%, the average unit retail decreased 0.5%, and the average transaction value decreased just slightly. For the full year, UPTs increased approximately 1.5%, the average unit retail decreased approximately 4.5%, and the average transaction value decreased approximately 3%.

Our gross margin for the quarter was 47.4%, up 250 basis points from 44.9% in the prior-year fourth quarter. The year-over-year increase is the result of a 225-basis-point improvement in merchandise margin and a 35-basis-point benefit as the result of the fiscal 2016 sunset of our old Primo Card loyalty program, which were partially offset by slightly deleveraged occupancy, buying, and distribution expenses. For the full year, gross margin was 41.6%, up 90 basis points from of 40.7% in the prior year. The current-year increase is due to a 120-basis-point improvement in merchandising margin and 100-basis-point benefit from the Primo Card sunset, which, again, were offset by deleveraged occupancy, buying and distribution expenses, resulting from the comparable-store sales decline.

Selling expenses for the quarter were 22% of net sales, consistent with the fourth quarter of last year. For the year, selling expenses were 22.5% of sales, compared to 21.1% in the prior year. For the year, the increase in selling expense as a percentage of net sales was the result of increases in store compensation, online marketing and fulfillment, and certain other selling expenses. General administrative expenses for the quarter were 3.8% of net sales, compared to 3.1% of net sales for the fourth quarter of fiscal 2016.

For the full year, general administrative expenses were 4.4% of sales, compared to 3.9% in the prior year. For both the quarter and year-to-date period, the G&A increase is due to increased professional and consulting fees, home office compensation and benefits, and certain other expenses. Our operating margin for the quarter was 21.6%, compared to 19.8% for the fourth quarter of fiscal 2016. For the year, our operating margin was 14.7%, compared to 15.7% in the prior year.

Other income for the quarter was $2.8 million, compared to $2 million for the fourth quarter of fiscal 2016, and other income for the full year was $5.4 million, compared to $3.5 million the prior year. Income tax expense as a percentage of pre-tax net income for the quarter was 33.8%, compared to 37.3% for the fourth quarter of fiscal 2016, bringing fourth-quarter net income to $42 million for fiscal 2017, compared to $36 million for fiscal 2016. For the full fiscal year, income tax expense was 35.7% of pre-tax income, compared to 37.3% in fiscal 2016, bringing net income to $89.7 million for fiscal 2017, compared to $98 million for fiscal 2016. Our press release also included a balance sheet as of February 3, 2018, which included the following: inventory of $118 million, which was down approximately 6% from inventory of $125.7 million at the end of fiscal 2016; and total cash and investment of $237.4 million, which was after payment of $133.9 million in dividends during the year and compares to $264.6 million at the end of 2016 after payments of $84.8 million dividends during that year.

Our year-end inventory on a comparable-store basis was down approximately 6.5%, and total markdown inventory was also down compared to the prior year. We ended the year with $149.5 million fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $2.5 million, and depreciation expense was $7.6 million. For the full year, capital expenditures were $13.5 million, and depreciation expense was $30.7 million.

For the full year, capital expanding was broken down as follows: $12.5 million for new store constructions, store remodels, and store technology upgrades, and $1 million for capital spending at the corporate headquarters and distribution center. During the quarter, we opened one new store and closed five stores and completed one full remodel in January, bringing our full-year count to two new stores, eight for remodels, and 12 store closures. We also closed one additional store in February after the end of the fiscal year. For fiscal 2018, we currently do not have any new stores planned and anticipate completing four full remodeling projects, which includes two for spring and two for back-to-school.

Based on current store plans, we expect our capital expenditures to be in the range of $10 million to $15 million, which includes both planned store projects and IT investments. Buckle ended the year with 457 retail stores in 44 states, compared with 467 stores in 44 states at the end of fiscal 2016. As of the end of the year, 391 of our 457 stores were in our newest format. Additionally, our total square footage was 2.367 million square feet as of the end of the year, compared to the 3 -- 2.392 million square feet at the same time a year ago.

And now I will turn it over to Kelli Molczyk, our vice president of women's merchandising.

Kelli Molczyk -- Vice President of Women's Merchandising

Good morning. I'd like to start by highlighting the performance for our women's merchandise categories for the quarter. Women's merchandise sales for the fiscal quarter were down approximately 4.5% against the prior-year fiscal quarter. On a 14-week comparable basis, women's merchandise sales were down approximately 9%.

Average denim price points decreased from $87.35 in the fourth quarter of fiscal 2016 to $83.05 in the fourth quarter of fiscal 2017. For the quarter, our women's business was approximately 45% of net sales, compared to 47% last year, and the average women's price points remained unchanged at $46.10. We're pleased to highlight that our women's business saw strength and minimized markdowns and increased margins across multiple categories at the quarter's end as well as finishing out the year. In addition, going into a traditionally competitive promotional season for retailers with a plan for reduced inventory levels impacted our overall performance in key categories, such as denims, tops, and footwear.

Our markdown denim inventory fell well below where we were a year ago, which had a direct impact on our markdown sales. For regular-priced denim, we saw some nice gains to our inventory through the quarter and strong responses to our new regular-priced selection. Key brands, being our private label brands of BKE, Buckle Black, and DayTrip, as well as exclusive products from brands such as Miss Me, Rock Revival, Flying Monkey, and KanCan. The expansion of our fit selection and breadth of our bottom openings were well-received across the board.

As the quarter progressed, seasonal product categories gained momentum as guests shifted their buys to align with the "buy now, wear now" shopping patterns we have seen throughout the year. We continue to see nice performances to long sleeves, sleep, and sweater categories as the country's climate remained cooler for the start of 2018. We also anticipated the shopping behaviors for the early part of the year and shifted the influx of our spring products to the latter part of February. Those intentional shifts, paired with the consistent review and receipt of quick-turn inventory opportunities, has allowed us to adjust more nimbly to fashion trends as well as changes in consumer shopping pattern.

Our online business saw some nice bumps in all top categories, shoes, and our kids' products. In addition, where inventory fell a little short in certain categories for online, like our denims, our churn saw a nice gain. We ended the quarter and the year in a comfortable inventory position, with not only decreased markdown inventory, but also decreases in regular-priced inventory on seasonal categories, such as outerwear, boots, and sweaters. These positions will allow for more opportunities as we move toward the new fall season.

And with that, I'll turn it over to Bob Carlberg, our senior vice president of men's merchandising, to discuss the performance of our men's merchandise category.

Robert Carlberg -- Senior Vice President of Men's Merchandising

Thanks, Kelli. Good morning, everybody, and happy Friday to you. Men's merchandise sales for the fiscal quarter were up approximately 5% against the prior-year fiscal quarter. On a 14-week comparable basis, men's merchandise sales were up approximately 1%.

Average selling price points decreased from $87.70 in the fourth quarter of fiscal 2016 to $84.45 in the fourth quarter of fiscal 2017. For the quarter, our men's business was approximately 55% of net sales, compared to 53% last year, and average men's price points decreased approximately 3.5%, from $55.80 to $53.95. Men's generated a dollar increase in Q4 on top of the unit increases we've been showing leading up to Q4, so we're pleased with that. Denim led the way, with our BKE brand continuing very strong.

Two of our other larger brands of denim, Rock Revival and Salvage, also performed well. Across all categories, our private brands have been well-received. True fall/winter categories, like sweaters and outerwear, were down, but did better than planned, so we'll be ready for more new this fall. Footwear continues to be a growth department for us.

Accessories were good, with fragrance, hats, and glasses continuing to drive this category. Spring was well-received by our teammates and guests, although as Kelli mentioned, the "buy now, wear now" attitude sort of started out a little slower than planned, but sales became better later in the month. We are confident in the spring/summer inventory in both quality and quantity. From a marketing perspective, we are currently focusing support toward our key merchandising programs, including new brand introductions, new arrivals from our largest volume brands, and new exclusive collections from our national brand partners.

We've seen success from recent in-store events, so we've introduced new brands and focused on guest activation with strong turnouts for each event. We'll continue to focus on these as we move forward. Our brand event, which is the largest event of the spring season, is currently under way, and we've seen some good excitement, anticipation for the event. Now turning to results on a combined basis.

Accessory sales for the 14-week quarter were down approximately 9% against the prior-year 14-week period, while footwear sales were up about 5%. These two categories accounted for approximately 9.5% and 6%, respectively, in fourth-quarter net sales, which compares to 10% and 5.5% for each in the fourth quarter of fiscal 2016. Average accessory prices were up approximately 3.5%, and average footwear prices were up approximately 0.5%. Again, on a combined basis for the quarter, denim accounted for approximately 46% of sales, and tops accounted for approximately 31.5%.

This compares to 45.5% and 31% for each in the fourth quarter of fiscal 2016. Our private-label business continues to grow and represents approximately 40.5% of sales for the quarter and 36% for the year. And with that, we welcome your questions. Thank you for listening.

Questions and Answers:

Operator

[Operator instructions] And first to the line of Tiffany Kanaga with Deutsche Bank. Please go ahead.

Tiffany Kanaga -- Deutsche Bank -- Vice President

Hi, thanks so much for taking my questions. Would you please [Inaudible] again how you achieved your best gross margin gain in several years? Was there a benefit from the extra week that you can quantify? And in particular, any impact from accruals relating to buying, distribution, and occupancy? Additionally, do you think you can achieve further gains of this magnitude ahead? Thanks.

Tom Heacock -- Chief Financial Officer

On the second part of the question, we don't give guidance, so we can't talk about that or discuss that. But in terms of looking at the gains in gross margin, most of that was merchandise margin-related and Primo-related. So 220 was merchandise margins. We saw the benefit there from reduced markdowns, as Kelli called out.

Big category was women's denim, where we saw reduced denim markdowns. We also saw the benefit of increases in private label and reduced shrinkage in the fourth quarter. This is our annual inventory process, so those things all benefited merchandise margins. Deleverage was about 10 basis points for the quarter.

And some of that -- I mean, there was some benefit from the extra week. But really, we can compare to the whole year, it probably benefit from a little bit stronger comps in the fourth quarter than the year and then that extra week, but I don't know that we can quantify how much that had.

Tiffany Kanaga -- Deutsche Bank -- Vice President

And if I can also ask, I understand you don't give guidance, but can you talk about what kind of tax rate you anticipate for 2018, given reform? And how you're thinking about your tax reform savings Could we see some reinvestment behind strategic initiatives? And if so, how much and, more specifically, where?

Tom Heacock -- Chief Financial Officer

I'll let Dennis answer the second part of that question. As far as an expectation for next year, we got a little benefit this year with having one month at a lower rate. But I think 26% would be the rate that we expect for next year going forward having the full-year benefit.

Dennis Nelson -- President and Chief Executive Officer

In regards to investing those savings, we have, actually, forever, had a strong cash basis and as always looked at what we can do to invest in our business to be a better-specialty store. And our focus is to continually improve our online, keep our stores up to date, invest in our people. But that is all consistent with what our strategy from almost Day 1.

Tiffany Kanaga -- Deutsche Bank -- Vice President

Thanks so much.

Operator

Next, we'll go to Steve Marotta with C.L. King & Associates. Please go ahead.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

Good morning, everybody. Just as a benchmark. What was the private label as a percent of sales in the fourth quarter of '16? In other words, it was 14.5% in the most recently reported quarter, and that compares to what last year, please?

Tom Heacock -- Chief Financial Officer

That was up about 1% as a percent of sales for both the quarter and the year. So it's 39% a year ago.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

OK. Do you expect that to -- you can't give guidance. As it pertains to the February comp number, I was a little confused about the release. It was -- February comp was down 5%, but net sales increased 2% for the quarter without material store growth.

I don't understand. Could you explain the differential?

Tom Heacock -- Chief Financial Officer

A lot of it has to do with the extra week in the year for fiscal 2017. So when we're comparing total sales, total sales is fiscal period to fiscal period, which is not necessarily the same four weeks a year ago on a calendar basis. So that's the bulk of the disparity between those two numbers.

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

Thank you.

Operator

[Operator instructions] And allowing a few moments, no further questions coming in.

Tom Heacock -- Chief Financial Officer

If there are no further questions, we can wrap up the call and wish everyone a good rest of the day and enjoyable weekend, so thank you very much for joining us.

Operator

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

Duration: 22 minutes

Call Participants:

Tom Heacock -- Chief Financial Officer

Kelli Molczyk -- Vice President of Women's Merchandising

Robert Carlberg -- Senior Vice President of Men's Merchandising

Tiffany Kanaga -- Deutsche Bank -- Vice President

Dennis Nelson -- President and Chief Executive Officer

Steven L. Marotta -- C.L. King & Associates -- Senior Vice President

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