Q2 2019 Earnings Call

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Good morning, and thanks for joining us this morning.

The 20, Threerd 2019 press release reported that net income for the 13 week second quarter.

On August Threerd 2019 was $16.4 million.

Yeah.

Four cents per share on a diluted basis, which compares to net income of $15.7 million.

Two cents per share on a diluted basis for the prior year 13 week second quarter.

I guess for 2018.

Oh, yes.

Net income for the 26 week period ended August three 2019.

<unk> was $31.5 million or 65 cents per share on a diluted basis, which compares to net income of $34 million or 70 cents per share on a diluted basis for the prior year 26 week period, which ended August 4th 2018.

Net sales for the 13 week second quarter increased 1.4% to $203.8 million compared to net sales of $201.1 million for the prior year 13 week second quarter.

Comparable store sales for the quarter increased 1.8% in comparison to the same 13 week period in the prior year and online sales increased 9.2% to $23.1 million.

Year to date net sales decreased 0.2% to $405.1 million for the 26 week fiscal period ended August 32019, compared to net sales of $406 million for the prior year 26 week fiscal period, which ended August 4th 2018.

Comparable store sales for the year to date period were up 8.3% in comparison to the same 26 week period in the prior year and our online sales increased 7.3% to $47.5 million.

For the quarter, you Pts increased approximately 3%.

The average unit retail decreased approximately 4% and the average transaction value decreased about 1%.

Year to date you Pete these increased approximately 3.5% the average unit retail decreased approximately 4%.

And the average transaction value decreased approximately a half percent.

Gross margin for the quarter was 38.6%.

Down 60 basis points from 39.2% in the prior year second quarter.

The year over year decrease was the result of a 70 basis point reduction in merchandise margin.

Partially offset by a 10 basis point improvement as a percentage of net sales in occupancy buying and distribution costs.

For the year to date period gross margin was 38.4% down approximately 70 basis points from 39.1% for the same period last year.

The decrease for the year to date period was the result of a 50 basis point reduction in merchandise margin.

And a 20 basis point increase in occupancy buying and distribution costs.

Selling expenses as a percentage of net sales for the quarter remained flat at 23.8%.

Year to date, selling expenses were 23.5% of sales compared to 23.1% in fiscal 2018.

For both periods increases in store payroll expense and online fulfillment and marketing expenses were offset by reductions in certain other selling expenses.

General and administrative expenses for the quarter were 5.2% of net sales compared to 5.4% of net sales for the second quarter of fiscal 2018.

Year to date DNA expenses were 5.4% of net sales compared to 5.3% in fiscal 2018.

The year to date Gionee increase is primarily attributable to increased investments both in terms of increased home office payroll as well as spending for other strategic initiatives.

Our operating margin for the quarter was 9.6% compared to 10% for the second quarter of fiscal 2018.

For the year to date period, our operating margin was 9.5% compared to 10.7% for the same period last year.

Other income for the quarter was $2.1 million compared to $1 million for the second quarter of fiscal 2018, and other income for the year to date period was $3.3 million compared to $2.5 million in the prior year.

Our income taxes as a percentage of pre tax net income for the quarter was 24.5% compared to 25.9% for the second quarter of fiscal 2018.

Bringing second quarter net income to $16.4 million for fiscal 2019 compared to $15.7 million for fiscal 2018.

Year to date income tax expense was also 24.5% of pre tax income compared to 25.9% in fiscal 2018, bringing year to date net income to 31, and a half million for fiscal 2019 compared to $34 million for fiscal 2018.

Our press release also included a balance sheet as of August 32019, which included the following inventory of $129.1 million, which was up approximately 1% from inventory of 127.9 million as of August four 2018.

And total cash and investments of $245.6 million, which compares to 238.8 million at the end of fiscal 2018, and 237.8 million as of August four 2018.

At quarter end inventory on a comparable store basis was up approximately 3%.

And total markdown inventory was down compared to the prior year.

We ended the quarter with $122.1 million in fixed assets net of accumulated depreciation.

Our capital expenditures for the quarter were 1.7 million and depreciation expense was $6.2 million.

For the year to date period capital expenditures were $4.2 million and depreciation expense was $12.4 million.

Year to date capital spending is broken down as follows.

$3.9 million for store, Buildout remodeling and technology upgrades and point $3 million for capital spending at the corporate headquarters and distribution Center.

During the quarter, we opened one new store in Kalispell, Montana completed two full remodeling projects and closed one store, bringing our year to date counts to one new store three full remodels and two store closures. We also anticipate completing one additional full store remodel prior to holiday.

Based on current plans, we still expect our capital expenditures to be in the range of $8 million to $12 million, which includes both planned store projects and investments.

Buckle ended the quarter with 449 retail stores in 42 states compared with 455 stores in 43 states at the end of the second quarter of fiscal 2018.

Additionally, our total square footage was 2.32 million square feet at the end of the quarter compared to 2.339 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. Thanks, Tom I would like to start by highlighting the performance of our women's merchandise categories for the quarter.

Merchandise sales for the fiscal quarter were up approximately 8.5% against the prior year quarter average denim price points decreased from $75.85 in the second quarter fiscal 2018 to $72.55 in the second quarter fiscal 2019.

For the quarter, our women's business was approximately 46% of net sales compared to 46.5% last year.

An average realized price points decreased about 6% from $38.70.

To $36.50.

Our continued focus on timing deliveries to align with the guest shifted shopping patterns for the spring and summer season resulted in a positive quarter in several categories and they are winning business.

For denim ankle link curvy fit in various patterns and distracted finishes created excitement within our assortment driving Q2 purchases are exclusively develop branded denim as well as our private label denim brands resonated with guests shopping their favorite fit and finding new details for additional purchase price point denim remains important and with retails predominantly around an under $80.

We continue to introduce new brands into our denim roster, where we have recently added wrangler denim and top story and have expanded our selection like levis.

As a tie to our initiatives and offering products for everybody.

We recently launched a new fall marketing campaign around a denim for everybody message to reinforce and highlight all the different body types and styles that we can fit in our denim and have been encouraged by early feedback to the campaign.

For top we're pleased to see so many different looks working different sleeveless light to heavier weight fabrics and tanks to sweaters for all well received our graphic fee business fashion side or mix and Bralette assortment offered a wide breadth of options for guest apparent where their favorite denim fashion short during the quarter.

Just as we are doing with denim, we continuing to evolve our brand offering and tops to have something for everybody.

In addition to key brands like Billabong quite CRO and three people. We are building upon our private private label assortment to expand our selection and offer newness for each and every guest shopping our stores.

Women's shoes, and accessories carried nicely through the quarter with new brands, and new categories, creating excitement and giving guests reasons to add to their cars and accessories, our specialty bracelets fragrance Belton hearings added dollars and units for the category, while his shoes, our casual mix of footwear and flat foreign sandals made for easy periods of the apparel.

The team did a nice job of controlling inventory in seasonal categories from spring and summer and we look forward to building from Q2 with opportunities for the fall and holiday month.

For fall, we continue to plan various events aimed at enhancing guest engagement, which includes pardoning partnering with urban cowboy a boutique bettenberg breakfast in Nashville, Tennessee to offer the ultimate Nashville experience as well as partnering with the American cancer Society as the official sponsor of their national Denim days in October and with that ill turn it over to Bob Carlberg Senior Vice President of men's merchandising to discuss the performance of our men's merchandise category.

Thank you Kelly men's merchandise sales for the fiscal quarter were up 2.5% in comparison to the prior year fiscal quarter average selling prices increased from 85 20 in the second quarter of fiscal 2018 to 85 60 in the second quarter of fiscal 2019.

For the quarter, our men's business was approximately 54% of net sales compared to 53.5% last year and average men's price points decreased approximately 2.5% from 40, 655% to 40 545.

We are proud of the way our talented buying team is continue to partner with vendors design, great product build brands and serve our guests as a result, the second quarter represented our seventh consecutive quarter of positive comp sentiments side strong categories, including denim, but in France youth and footwear for the quarter shorts were the only disappointing category that we are able to adjust both inventory and selection setting us up for next year.

Our private brands continue to be strong with sales and selection to represent all our lifestyles.

This is our newest private brand, which when all store for the first time in the second quarter, our traditional West Coast brand showed nice growth with early Luca influx, leading the way.

Starting in mid July we ran our annual guest loyalty promotion, which resulted in another strong finish to the quarter. This event not only rewards our loyal guests with special pricing during the event, but also encourages them to shop fall earlier.

In addition, although we have carried youth product for many years, we started testing the concept of used only stores during the quarter with the opening of two pop up locations in Idaho.

Although we are still early in the test were pleased with deposit response to the product and the experience will continue to monitor the performance of these locations throughout back to school and holiday before determining if this is a long term strategy for our business.

Now turning to results on a combined basis accessory sales for the fiscal quarter were up approximately 1.5% against the prior year fiscal quarter, while footwear sales were up about 18%.

These two categories accounted for approximately 9.5, and 7.5% respectively second quarter net sales. This compares to 9.5% and 6.5% for each in the second quarter fiscal 2018.

Average accessory price points were down approximately 13% and average footwear price points were down about 4% again on a combined basis for the quarter denim accounted for approximately 33% of sales and tops accounted for approximately 34%, which compares to 32.5 and 34.5% for each in the second quarter fiscal 2018.

Our private label business continues to grow and represented approximately 33% of our sales for the quarter and with that we welcome your questions. Thank you.

Ladies and gentlemen, if you wish to ask a question. Please press Star then one on your Touchtone phone you will hear a tone, indicating that you've been placed in Q and may remove yourself from the queue by pressing the pound if using a speakerphone. Please pick up the handset before pressing the numbers once again for questions. At this time. Please press Star then one.

And our first question will come from the line.

Tiffany Kanaga with Deutsche Bank. Please go ahead.

Hi, Thanks for taking my questions to follow up on your disclosure last call about 50% of your sourcing coming from China would you breakdown for US what portion of your Chinese product is impacted by list for tariffs in September and what percentage comes later in December . Additionally is there any update around how you're looking to mitigate that impact whether for price increases or changing your mix were shifting vendors.

Good morning.

Well, we still see the taros, having a very small effect on our business throughout this year.

We worked substantially with our branded vendors.

That we're not seeing that affect us.

And we've also worked with.

A number of our makers with over a long period of time and.

We're seeing very few situations that.

That will have an effect on this year as we confirm prices.

Landed prices.

Early on before placing orders and.

I think we have a good handle on that throughout this year.

Great and if I could ask a follow up question would you dig into the drivers of the steeper decline in merchandise margin in the quarter, which was a bit unusual for you and provide a few comments around where you might expect it to trend into back to school and holiday with the mall, having been so promotional.

Well I think we were going against.

Some strong margin numbers I think our margin numbers are still.

Have quality to them.

And as Tom mentioned in the narrative, the our markdowns are down and.

We are.

Liking the look of our product coming in inventories up.

1% total.

So we're comfortable with our situation as we go into the second half of the year.

All right. Thank you so much thank you.

Thank you then before we go to John Deysher with Pinnacle reminder, its star then one to queue for questions Star then one.

John Deysher your line is open.

Hello looks like you are making solid progress.

I have a basic question, which.

What are you.

On the denim side why is the women's denim.

Under more pricing pressure.

Men's denim poet dynamic occurs.

Driving that.

I would say, it's mostly a fashion.

Change over the years.

As you remember several years ago, we sold a lot of denim over a $100 substantially in 120 and and higher.

And as those the environment changed on the brands and such you know, even though we'll still have.

Some.

Brands that we continue that we have good niche as selling on in different parts of our country.

The majority of our new brands and our private label are in the $80 range and below and so thats it.

As such a substantial change in.

The retail prices.

Let's just kind of the way the trend has gone and what makes sense in the market.

But we are happy with with our selection the new fit sends the.

Response to our new styles as we go forward so.

As usual, we're we're looking into the market and trying to deliver what our guests are looking for and what they will love and how is your favorite fits as we go forward and so it's just.

I, just just a different brand and price points that he is working in the market right now.

Right I get that from.

Several years ago, but more specifically quarter to date I mean, why is ladies denim down.

7% and 4% in the most recent quarter wearers Mems SP on genes is actually up.

5% is there any specific thing that.

Hello can explain that.

Well in the men's the vendors have remained more consistent theres been less change.

In the brands and the price points, we're selling just a consistency there so weve.

Held up I think last year there was.

A small drop in some of the retails I don't remember the percent now, but thats kind of leveled out and and.

Now I would guess we would see the men's continues to be.

Consistent with past retailers as we go forward delayed east for the second half is still possible there could be a low single digit decline at retail prices.

But as I say we.

I think our ladies.

Denim presentation is working well and feel good about it as we go forward.

Okay.

Thank you.

Thanks for asking.

Thank you then if there are any additional questions. Please press star then one.

Allowing time for participants to queue up there are no questions at this time.

There are no questions. We can we can wrap up the call. So hope everyone enjoys the rest of day and has a wonderful weekend and thanks for joining US today, then ladies and gentlemen.

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Yeah.