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The Buckle (NYSE:BKE)
Q3 2018 Earnings Conference Call
Nov. 26, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the conference call. For today's call, members of Buckle's management on the call today are Dennis Nelson, president and CEO. We have Tom Heacock, senior vice president of finance, treasurer and CFO; Kelli Molczyk, vice president of women's merchandising; and Bob Carlberg, senior vice president of men's merchandising.

As they review the operating results for the third quarter, which ended November 3, 2018, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following safe harbor statements. 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 statement.

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.

And now, I would like to turn the conference over to our host, Mr. Tom Heacock. Please go ahead, sir.

Tom Heacock -- Senior Vice President of Finance, Treasurer and CFO

Good afternoon, and thanks for joining us this afternoon. Our November 26, 2018 press release reported a net income for the 13-week third quarter ended November 3, 2018, was $20.5 million or $0.42 per share on a diluted basis, which compares to net income of $19.9 million or $0.41 per share on a diluted basis for the prior-year 13-week third quarter that ended on October 28, 2017. Year-to-date net income for the 39-week period ended November 3, 2018 was $54.5 million or $1.12 per share on a diluted basis, which compares to net income of $47.7 million or $0.99 per share on a diluted basis for the prior-year 39-week period ended October 28, 2017. Net sales for the 13-week third quarter decreased 4.1% to $215.1 million compared to net sales of $224.3 million for the prior-year 13-week third quarter.

Comparable store sales for the 13-week period ended November 3, 2018, decreased 1.4% from comparable store sales for the prior-year 13-week period ended November 4, 2017. Online sales for the period increased 8.8% to $25.5 million for the 13-week fiscal period, compared to net sales of $23.4 million for the prior-year 13-week fiscal period. Year-to-date net sales decreased 1.8% to $621.1 million for the 39-week fiscal period ended November 3, 2018, compared to net sales of $632.2 million for the prior-year 39-week fiscal period, which ended October 28, 2017. Comparable store sales for the year-to-date period were down 1.1% in comparison to same 39-week period in the prior year, and online sales increased 7.8% to $69.8 million, which compares to net sales of $64.7 million for the prior-year 39-week fiscal period.

For the quarter, UPTs increased approximately 0.5%. The average unit retail decreased approximately 2%, and the average transaction value decreased about 1.5%. Year to date, UPTs increased approximately 1%. The average unit retail decreased approximately 2%, and the average transaction value decreased approximately 1%.

Gross margin for the quarter was 40%, down 50 basis points from 40.5% in the prior-year third quarter. The year-over-year decrease was the result of a 95 basis points of deleveraged occupancy buying and distribution costs, partially offset by a 45 basis point improvement in merchandise margin. For the year-to-date period, gross margin was 39.4%, up 40 basis points from 39% for the same period last year. The increase was the result of a 50 basis point improvement in merchandise margins, which was partially offset by a 10 basis point increase as a percentage of net sales in occupancy buying and distribution costs.

Selling expenses for the quarter were 23.5% of net sales compared to 22.6% of net sales for the third quarter of fiscal 2017. For the year-to-date period, selling expenses were 23.3% of sales, compared to 22.8% in fiscal 2017. For both the quarter and year-to-date periods, the increase is primarily the result of increased store compensation expense. General and administrative expenses for the quarter were 4.3% of net sales compared to 4.1% of net sales for the third quarter of fiscal 2017.

Year to date, G&A expenses were 4.9% of net sales, compared to 4.6% in fiscal 2017. The current-year G&A increase is primarily attributable to increased IT investments, both in terms of increased home-office payroll as well as spending for other strategic initiatives, which was partially offset by reductions in professional and consulting fees and also equity compensation expense. Our operating margin for the quarter was 12.2%, compared to 13.8% for the third quarter of fiscal 2017 and for the year-to-date period, our operating margin was 11.2%, compared to 11.6% for the same period last year. Other income for the quarter was $1.3 million, compared to $0.8 million for the third quarter of fiscal 2017 and other income for the year-to-date period was $3.8 million, compared to $2.6 million in the prior year.

Income-tax expense as a percentage of pre-tax net income for the quarter was 25.9%, compared to 37.3% for the third quarter of fiscal 2017, bringing third-quarter net income to $20.5 million for fiscal 2018, compared to $19.9 million for fiscal 2017. Year to date, income-tax expense was also 25.9% of pre-tax to net income this year, compared to 37.3% for fiscal 2017, bringing year-to-date net income to $54.5 million for fiscal 2018, compared to $47.7 million for fiscal 2017. Our press release also included the balance sheet as of November 3, 2018, which included the following. Inventory of $145.5 million, which was up approximately 13% from inventory of $128.8 million as of October 28, 2017 and total cash and investments of $241.8 million, which compares to $237.4 million at the end of fiscal 2017 and $275.8 million as of October 28, 2017.

At quarter end, inventory on a comparable store basis was up approximately 9% and total markdown inventory was up, compared to the same period last year. We ended the quarter with $136.5 million in fixed assets net of accumulated depreciation. Our capital expenditures for the quarter were $1.8 million and depreciation expense was $6.4 million. For the year-to-date period, capital expenditures were $7.9 million and depreciation expense was $20.3 million.

Year to date, capital spending is broken down as follows: $6.7 million for store remodels and store technology upgrades and $1.2 million for capital spending at the corporate headquarters and distribution center. During the quarter, we did not open any new stores or complete any full-store remodels. On November 5, after the end of the quarter, we finished our fourth full remodel for the fiscal year. At this time, we do not have any new store openings or any additional remodels planned for the fourth quarter.

Based on these plans, we now expect our total capital expenditures for the year to be in the range of $9 million to $12 million, which includes both planned store projects and also IT investments. We also closed two stores during the quarter to end the period with 453 retail stores in 43 states, compared to 461 stores in 44 states at the end of the third quarter of fiscal 2017. Additionally, our total square footage was 2.337 million as of the end of the quarter, compared to 2.370 million square feet at the same time a year ago. And now, I'll turn the call over to Kelli Molczyk, our vice president of women's merchandising.

Kelli Molczyk -- Vice President of Women's Merchandising

Thanks, Tom. I would like to start by highlighting the performance of our women's merchandise categories for the quarter. Women's merchandise sales for the fiscal quarter were down approximately 8.5% against the prior-year fiscal quarter. Compared to the same 13-week period a year ago, women's merchandise sales were down approximately 7%.

Average denim price points decreased from $81.35 in the third quarter of fiscal 2017 to $74.90 in the third quarter of fiscal 2018. For the quarter, our women's business was approximately 49.5% of net sales, compared to 51% last year and average women's price points decreased about 4% from $44.45 to $42.75. For the women's business, denim sales continued to be impacted by lower average price points, as we still continue to see shifts in guest preferences to fashion denim at regular price points under $75. Our overall denim inventory was higher at quarter end, driven by price points of $75 and under, as well as planned early receipts of certain other styles.

Drivers of new denim purchases for the quarter were alternative inseams and shorter and extended length, fashion hemlines as well as subtle added detailing. For fashion wear, fashion sweaters and soft and cozy simple knits were drivers for sales through the quarter. We also continue to drive unit sales with monthly offerings in our buy more, save more program of knits and sweaters. We saw the impacts of simple and comfortable popover fashion tops trading sales with button front and synthetic woven.

Our more price point private label brands also helped drive unit sales, while regional buys and outside brands aided in dollar performance for knits and sweaters. Later deliveries in heavier weight outerwear and functional winter footwear paid off as we neared the quarter's end and we saw lift to performance in both categories. Similar themes carried over into outerwear and footwear, comfortable fashion that guests are buying and wearing during the same time. We feel comfortable with our inventories in key categories, as we move into Q4 and plan to manage a bit more inventory from our warehouse that are capitalized on in-season sales in specific markets.

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.

Bob Carlberg -- Senior Vice president of Men's Merchandising

Thanks, Kelli. Men's merchandise sales for the fiscal quarter were down approximately 2% against the prior-year fiscal quarter. Compared to the same 13-week period a year ago, men's merchandise sales were up approximately 0.5%. Average denim price points decreased from $85.30 in the third quarter of fiscal 2017 to $82.90 in the third quarter of fiscal 2018.

For the quarter, our men's business was approximately 50.5% of net sales compared to 49% last year and average men's price points decreased approximately 2% from $51.50 to $50.40. During the quarter, we saw growth in all categories, except long bottoms, sweaters and accessories. The denim response has been good with unit sales up. However, the lowering of the average retail, as mentioned earlier, took the dollars to a slight decrease.

Our private brands, driven by BKE continue to dominate our denim selection. We are comfortable with the quality and level of our fall-winter product inventories. Overall, markdowns are down, giving us room for adjustments after Thanksgiving if needed. For our holiday promotions, both our men's and women's business have continued with our practice of giving our guests added value through GWPs.

This year, we will start the promotion on -- I'm sorry, we did start the promotion on Thanksgiving or the day after that the store was not opening. Participating brands are BKE, Gimmicks, American Fighter, Oakley and Rock Revival in addition to our Buckle credit card. As we did for the first time last year, the Oakley and Rock Revival GWPs are gift cards redeemable after Christmas, which will give us a boost in January. Further, we have increased our buy more, save more product on the floor, which is planned with no impact to merchandise margins.

Now turning to results on a combined basis. Accessory sales for the fiscal quarter were down approximately 7.5% against the same 13-week period a year ago, while footwear sales were up about 2.5%. These two categories accounted for approximately 8% and 7%, respectively, of third-quarter net sales, which compares to 8.5% and 6.5% for each in the third quarter of fiscal 2017. Average accessory price points were down approximately 3% and average footwear price points were up approximately 3.5%.

Again, on a combined basis for the quarter, denim accounted for approximately 43% of sales and tops accounted for approximately 34.5%, which compares to 43.5% and 34% for each in the third quarter of fiscal 2017. Our mix of private-label product increased during the quarter, representing just under 40% of net sales. And with that, we welcome your questions. 

Questions and Answers:

Operator

Thank you [Operator instructions] Our first question, from the line of Tiffany Kanaga with Deutsche Bank. Please go ahead.

Tiffany Kanaga -- Deutsche Bank -- Analyst

Hi. Thanks for taking our questions. I know you touched on it a little. But would you dig into your inventory position for us, which caught our eye being up almost 13% year over year, despite negative sales growth? In particular, how does the inventory position shape your expectation for merchandise margin in the fourth quarter, especially, as we're going up against a tough compare on that front?

Dennis Nelson -- President and Chief Executive Officer

Thank you, Tiffany. The way we planned inventory this year is we felt we were low in our inventory last year in both guy's and gal's denim. So that's a big part of our increase, as well as knits, which is a key category for us. So we planned that also.

The timing of the month, I think, had some effect on it, but we have quite a few new receipts. And I think, if we look, even though inventory's up 13%, it was over a smaller number a year ago. Like two years ago. I think, we were actually $3 million higher than this particular inventory.

We feel good about our key groups and feel margins will be good, but we'll just have to see how the next eight weeks proceed.

Tiffany Kanaga -- Deutsche Bank -- Analyst

All right. And if I could get one more. We've noticed some deeper discounts for Buckle's Black Friday this year. Can you comment on your promotional strategy for holiday beyond what you've already said around the GWPs and what you're seeing in the mall, overall?

Dennis Nelson -- President and Chief Executive Officer

Well, we did a little additional on some of our sale groups. It seems like our third and half-off groups needed a little extra attention. People don't seem to shop us for sale, so we wanted to kind of make an extra point there to help clear up some of the older product that way. And it seems like there's more discounting in the malls as well.

Tiffany Kanaga -- Deutsche Bank -- Analyst

All right. Thank you so much.

Dennis Nelson -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question, from the line of Steve Marotta with CL King & Associates. Your line is open.

Steve Marotta -- CL King & Associates -- Analyst

Good evening, everybody. Can you comment, please, on the denim AURs? It remains under pressure. Can you talk a little bit about when you think that the merchandise mix within your stores will either begin to be flat on a denim-AUR basis year over year or perhaps increase as well?

Dennis Nelson -- President and Chief Executive Officer

I think, for the fourth quarter, we would still see them down in the single digit, especially in ladies, maybe leveling out on the men's. A lot of that is driven by the -- what's going on with the brands and the demand of our guests. And a lot of the fashion and styling that's working right now is at the lower price points from when we had a lot of the brands that were $100 plus. And so we kind of see the fourth quarter being similar to the third quarter for this season.

Steve Marotta -- CL King & Associates -- Analyst

But down a little bit, year over year, you're saying?

Dennis Nelson -- President and Chief Executive Officer

Do you have fourth quarter of last year? I...

Tom Heacock -- Senior Vice President of Finance, Treasurer and CFO

Not off the top of my head, no.

Dennis Nelson -- President and Chief Executive Officer

Yeah, I was comparing it to what we just reported on third quarter, thinking those numbers would be similar. We'd have to get that information for you.

Steve Marotta -- CL King & Associates -- Analyst

That too, OK. And my last question has to do with store footprint at roughly 453 stores. Are you comfortable with that level? I assume it probably won't drift upward very much. Would it drift downward? Can you talk a little bit about how you think about your store footprint, given the digital omnichannel age we live in?

Dennis Nelson -- President and Chief Executive Officer

We think we're pretty close. We might have a couple more closings at the end of the year. We have to review that yet. But we continue to look at prime areas that we feel the economics make sense and what's going on right now.

But we continue to look at opportunities as they come up.

Steve Marotta -- CL King & Associates -- Analyst

OK, thank you.

Operator

[Operator instructions] I have no additional questions at this time, so please continue.

Tom Heacock -- Senior Vice President of Finance, Treasurer and CFO

There's no additional questions. We don't need to keep everybody today. We can wrap it up and be quick and let everyone get on with their day. So thank you very much for your participation and have a great week and a wonderful holiday.

Operator

[Operator signoff]

Duration: 21 minutes

Call Participants:

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

Tiffany Kanaga -- Deutsche Bank -- Analyst

Dennis Nelson -- President and Chief Executive Officer

Steve Marotta -- CL King & Associates -- Analyst

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