THE BUCKLE, INC. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto of the Company included in this Form 10-Q. All references herein to the "Company", "Buckle", "we", "us", or similar terms refer toThe Buckle, Inc. and its subsidiary. The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the periods included in the accompanying condensed consolidated financial statements.
EXECUTIVE OVERVIEW
Company management considers the following items to be key performance indicators in evaluating Company performance.
Comparable Store Sales - Stores are deemed to be comparable stores if they were
open in the prior year on the first day of the fiscal period being presented.
Stores which have been remodeled, expanded, and/or relocated, but would
otherwise be included as comparable stores, are not excluded from the comparable
store sales calculation. Online sales are included in comparable store sales.
Management considers comparable store sales to be an important indicator of
current Company performance, helping leverage certain fixed costs when results
are positive. Negative comparable store sales results could reduce net sales and
have a negative impact on operating leverage, thus reducing net earnings.
Net Merchandise Margins - Management evaluates the components of merchandise
margin including initial markup and the amount of markdowns during a period. Any
inability to obtain acceptable levels of initial markups or any significant
increase in the Company's use of markdowns could have an adverse effect on the
Company's gross margin and results of operations.
Operating Margin - Operating margin is a good indicator for management of the
Company's success. Operating margin can be positively or negatively affected by
comparable store sales, merchandise margins, occupancy costs, and the Company's
ability to control operating costs.
Cash Flow and Liquidity (working capital) - Management reviews current cash and
short-term investments along with cash flow from operating, investing, and
financing activities to determine the Company's short-term cash needs for
operations and expansion. The Company believes that existing cash, short-term
investments, and cash flow from operations will be sufficient to fund current
and long-term anticipated capital expenditures and working capital requirements
for the next several years.
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RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:
Percentage of Net Sales Percentage of Net Sales
For Thirteen Weeks Ended Percentage For Thirty-Nine Weeks Ended Percentage
November 2, November 3, November 2, November 3,
2019 2018 Increase/(Decrease) 2019 2018 Increase/(Decrease)
Net sales 100.0 % 100.0 % 4.2 % 100.0 % 100.0 % 1.3 %
Cost of sales
(including buying,
distribution, and
occupancy costs) 58.3 % 60.0 % 1.3 % 60.4 % 60.6 % 1.1 %
Gross profit 41.7 % 40.0 % 8.6 % 39.6 % 39.4 % 1.7 %
Selling expenses 22.9 % 23.5 % 1.3 % 23.3 % 23.3 % 1.4 %
General and
administrative expenses 4.0 % 4.3 % (3.3 )% 4.9 % 4.9 % 0.4 %
Income from operations 14.8 % 12.2 % 26.7 % 11.4 % 11.2 % 2.8 %
Other income, net 0.5 % 0.6 % (17.1 )% 0.7 % 0.6 % 17.3 %
Income before income
taxes 15.3 % 12.8 % 24.5 % 12.1 % 11.8 % 3.5 %
Provision for income
taxes 3.7 % 3.3 % 17.8 % 3.0 % 3.0 % (2.1 )%
Net income 11.6 % 9.5 % 26.9 % 9.1 % 8.8 % 5.5 %
Net sales increased from $215.1 million in the third quarter of fiscal 2018 to
$224.1 million in the third quarter of fiscal 2019, a 4.2% increase. Comparable
store net sales for the thirteen week quarter ended November 2, 2019 increased
4.7% from comparable store net sales for the prior year thirteen week period
ended November 3, 2018 . The comparable store sales increase for the quarter was
primarily attributable to a 5.1% increase in the number of transactions and a
1.2% increase in the average number of units sold per transaction, partially
offset by a 1.5% decrease in the average unit retail. Total net sales for the
quarter were also impacted by the Company's closing of 7 stores during fiscal
2018 and the opening of 1 new store and closure of 2 stores during the first
three quarters of fiscal 2019. Online sales for the quarter increased 5.4% to
$26.9 million for the thirteen week period ended November 2, 2019 compared to
$25.5 million for the thirteen week period ended November 3, 2018 .
Net sales increased from $621.1 million for the first three quarters of fiscal
2018 to $629.3 million for the first three quarters of fiscal 2019, a 1.3%
increase. Comparable store net sales for the thirty-nine week period ended
November 2, 2019 increased 1.8% from comparable store net sales for prior year
thirty-nine week period ended November 3, 2018 . The comparable store sales
increase for the thirty-nine week period was primarily attributable to a 2.3%
increase in the number of transactions and a 2.8% increase in the average number
of units sold per transaction, partially offset by a 3.1% decrease in the
average unit retail. Total net sales for the year-to-date period were also
impacted by the Company's closing of 7 stores during fiscal 2018 and the opening
of 1 new store and closure of 2 stores during the first three quarters of fiscal
2019. Online sales for the year-to-date period increased 6.6% to $74.4 million
for the thirty-nine week period ended November 2, 2019 compared to $69.8 million
for the thirty-nine week period ended November 3, 2018 . Average sales per square
foot increased 1.6% from $236.21 for the thirty-nine week period ended
November 3, 2018 to $240.03 for the thirty-nine week period ended November 2,
2019 . Total square footage as of November 2, 2019 was 2.320 million compared to
2.337 million as of November 3, 2018 .
The Company's average retail price per piece of merchandise sold decreased
$0.70 , or 1.5%, during the third quarter of fiscal 2019 compared to the third
quarter of fiscal 2018. This $0.70 decrease was primarily attributable to the
following changes (with their corresponding effect on the overall average price
per piece): an 8.4% reduction in average footwear price points (-$0.33 ), a 7.7%
reduction in average accessories price points (-$0.31 ), and a 1.1% reduction in
average denim price points (-$0.21 ); partially offset by an increase in average
price points for certain other merchandise categories ($0.13 ) and a shift in the
merchandise mix ($0.02 ). These changes are primarily a reflection of merchandise
shifts in terms of brands and product styles, fabrics, details, and finishes.
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For the year-to-date period, the Company's average retail price per piece of
merchandise sold decreased $1.37 , or 3.1%, compared to the same period in fiscal
2018. This $1.37 decrease was primarily attributable to the following changes
(with their corresponding effect on the overall average price per piece): a 2.5%
reduction in average denim price points (-$0.43 ), a 9.8% reduction in average
accessories price points (-$0.41 ), a 1.6% reduction in average knit shirt price
points (-$0.17 ), a 4.0% reduction in average footwear price points (-$0.14 ), a
3.3% reduction in average woven shirt price points (-$0.10 ), a reduction in
average price points for certain other merchandise categories (-$0.04 ), and a
shift in the merchandise mix (-$0.08 ). These changes are primarily a reflection
of merchandise shifts in terms of brands and product styles, fabrics, details,
and finishes.
Gross profit after buying, distribution, and occupancy expenses increased from
$86.2 million in the third quarter of fiscal 2018 to $93.5 million in the third
quarter of fiscal 2019. As a percentage of net sales, gross profit increased
from 40.0% in the third quarter of fiscal 2018 to 41.7% in the third quarter of
fiscal 2019. The gross margin increase was the result of an improvement in
merchandise margins (0.60%, as a percentage of net sales) and leveraged
occupancy, buying, and distribution expenses (1.10%, as a percentage of net
sales).
Year-to-date, gross profit increased from $244.8 million for the thirty-nine
week period ended November 3, 2018 to $248.9 million for the thirty-nine week
period ended November 2, 2019 . As a percentage of net sales, gross profit
increased from 39.4% for the first three quarters of fiscal 2018 to 39.6% for
the first three quarters of fiscal 2019. The gross margin increase for the
year-to-date period was the result of leveraged occupancy, buying, and
distribution expenses (0.30%, as a percentage of net sales), partially offset by
a reduction in merchandise margins (0.10%, as a percentage of net sales).
Selling expenses increased from $50.6 million in the third quarter of fiscal
2018 to $51.3 million in the third quarter of fiscal 2019. As a percentage of
net sales, selling expenses decreased from 23.5% for the first three quarters of
fiscal 2018 to 22.9% for the first three quarters of fiscal 2019. The
improvement was primarily the result of reduced store compensation expense
(0.75%, as a percentage of net sales), which was partially offset by increases
across certain other selling expenses (0.15%, as a percentage of net sales).
Year-to-date, selling expenses increased from $144.4 million for the first three
quarters of fiscal 2018 to $146.4 million for the first three quarters of fiscal
2019. As a percentage of net sales, selling expenses remained flat at 23.3%.
General and administrative expenses decreased from $9.2 million in the third
quarter of fiscal 2018 to $8.9 million in the third quarter of fiscal 2019. As a
percentage of net sales, general and administrative expenses decreased from 4.3%
in the third quarter of fiscal 2018 to 4.0% in the third quarter of fiscal 2019,
driven by reductions (as a percentage of net sales) across several expense
categories.
Year-to-date, general and administrative expenses increased from $30.7 million
for the first three quarters of fiscal 2018 to $30.8 million for the first three
quarters of fiscal 2019. As a percentage of net sales, general and
administrative expenses remained flat at 4.9%.
As a result of the above changes, the Company's income from operations was $33.3
million in the third quarter of fiscal 2019 compared to $26.3 million in the
third quarter of fiscal 2018. Income from operations was 14.8% of net sales in
the third quarter of fiscal 2019 compared to 12.2% of net sales in the third
quarter of fiscal 2018.
Year-to-date, income from operations was $71.6 million for the thirty-nine week
period ended November 2, 2019 compared to $69.7 million for the thirty-nine week
period ended November 3, 2018 . Income from operations was 11.4% of net sales for
the first three quarters of fiscal 2019 compared to 11.2% of net sales for the
first three quarters of fiscal 2018.
Other income decreased from $1.3 million in the third quarter of fiscal 2018 to
$1.1 million in the third quarter of fiscal 2019. Other income for the
year-to-date period increased from $3.8 million for the thirty-nine week period
ended November 3, 2018 to $4.4 million for the thirty-nine week period ended
November 2, 2019 . The Company's other income is derived primarily from
investment income related to the Company's cash and investments.
Income tax expense as a percentage of pre-tax income was 24.5% in the third
quarter of fiscal 2019 compared to 25.9% in the third quarter of fiscal 2018,
bringing net income to
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Income tax expense as a percentage of pre-tax income was 24.5% for the first
three quarters of fiscal 2019 compared to 25.9% for the first three quarters of
fiscal 2018, bringing year-to-date net income to $57.5 million for fiscal 2019
compared to $54.5 million for fiscal 2018.
LIQUIDITY AND CAPITAL RESOURCES
As ofNovember 2, 2019 , the Company had working capital of$237.6 million , including$213.8 million of cash and cash equivalents and$31.9 million of short-term investments. The Company's cash receipts are generated from retail sales and from investment income, and the Company's primary ongoing cash requirements are for inventory, payroll, occupancy costs, dividend payments, new store expansion, remodeling, and other capital expenditures. Historically, the Company's primary source of working capital has been cash flow from operations. During the first three quarters of fiscal 2019 and fiscal 2018, the Company's cash flow from operations was$64.9 million and$48.6 million , respectively.
The uses of cash for both thirty-nine week periods primarily include payment of annual bonuses accrued at fiscal year end, inventory purchases, dividend payments, construction costs for new and remodeled stores, other capital expenditures, and purchases of investment securities.
During the first three quarters of fiscal 2019 and 2018, the Company invested$5.0 million and$6.7 million , respectively, in new store construction, store renovation, and store technology upgrades. The Company also spent$0.5 million and$1.1 million in the first three quarters of fiscal 2019 and 2018, respectively, in capital expenditures for the corporate headquarters and distribution facility. During the remainder of fiscal 2019, the Company anticipates completing two additional full remodel projects. Management estimates that total capital expenditures during fiscal 2019 will be approximately$7.0 to$9.0 million , which includes primarily planned store projects and technology investments. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has a consistent record of generating positive cash flow from operations each year and, as ofNovember 2, 2019 , had total cash and investments of$261.5 million , including$15.7 million of long-term investments. The Company does not currently have plans for a merger or acquisition and has fairly consistent plans for new store expansion and remodels. Based upon past results and current plans, management does not anticipate any material swings in the Company's need for cash in the upcoming years. Future conditions, however, may reduce the availability of funds based upon factors such as a decrease in demand for the Company's product, change in product mix, competitive factors, and general economic conditions as well as other risks and uncertainties which would reduce the Company's sales, net profitability, and cash flows. Also, the Company's acceleration in store openings and/or remodels or the Company entering into a merger, acquisition, or other financial related transaction could reduce the amount of cash available for further capital expenditures and working capital requirements. The Company has available an unsecured line of credit of$25.0 million withWells Fargo Bank, N.A . for operating needs and letters of credit. The line of credit agreement has an expiration date ofJuly 31, 2021 and provides that$10.0 million of the$25.0 million line is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on LIBOR. The Company has, from time to time, borrowed against these lines of credit. There were no bank borrowings during the first three quarters of fiscal 2019 or 2018. The Company had no bank borrowings as ofNovember 2, 2019 and was in compliance with the terms and conditions of the line of credit agreement. 19 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations are based uponThe Buckle, Inc.'s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations. The critical accounting policies and estimates utilized by the Company in the preparation of its condensed consolidated financial statements for the period endedNovember 2, 2019 have not changed materially from those utilized for the fiscal year endedFebruary 2, 2019 , included inThe Buckle Inc.'s 2018 Annual Report on Form 10-K, except as described in Note 1 to the condensed consolidated financial statements.
1. Revenue Recognition. Retail store sales are recorded, net of expected
returns, upon the purchase of merchandise by customers. Online sales are
recorded, net of expected returns, when merchandise is tendered for delivery
to the common carrier. Shipping fees charged to customers are included in
revenue and shipping costs are included in selling expenses. The Company
recognizes revenue from sales made under its layaway program upon delivery of
the merchandise to the customer. Revenue is not recorded when gift cards and
gift certificates are sold, but rather when a card or certificate is redeemed
for merchandise. A current liability for unredeemed gift cards and
certificates is recorded at the time the card or certificate is purchased.
The liability recorded for unredeemed gift cards and gift certificates was
respectively. Gift card and gift certificate breakage is recognized as
revenue in proportion to the redemption pattern of customers by applying an
estimated breakage rate. The estimated breakage rate is based on historical
issuance and redemption patterns and is re-assessed by the Company on a
regular basis. Sales tax collected from customers is excluded from revenue
and is included as part of "accrued store operating expenses" on the
Company's condensed consolidated balance sheets.
The Company establishes a liability for estimated merchandise returns, based
upon the historical average sales return percentage, that is recognized at the
transaction value. The Company also recognizes a return asset and a
corresponding adjustment to cost of sales for the Company's right to recover
returned merchandise, which is measured at the estimated carrying value, less
any expected recovery costs. Customer returns could potentially exceed the
historical average, thus reducing future net sales results and potentially
reducing future net earnings. The accrued liability for reserve for sales
returns was $2.8 million as of November 2, 2019 and $2.2 million as of
February 2, 2019 .
The Company's Guest Loyalty program allows participating guests to earn points
for every qualifying purchase, which (after achievement of certain point
thresholds) are redeemable as a discount off a future purchase. Reported revenue
is net of both current period reward redemptions and accruals for estimated
future rewards earned under the Guest Loyalty program. A liability has been
recorded for future rewards based on the Company's estimate of how many earned
points will turn into rewards and ultimately be redeemed prior to expiration. As
of November 2, 2019 and February 2, 2019 , $9.1 million and $10.9 million was
included in "accrued store operating expenses" as a liability for estimated
future rewards.
Through partnership with Comenity Bank , the Company offers a private label
credit card ("PLCC"). Customers with a PLCC are enrolled in our B-Rewards
incentive program and earn points for every qualifying purchase on their card.
At the end of each rewards period, customers who have exceeded a minimum point
threshold receive a reward to be redeemed on a future purchase. The B-Rewards
program also provides other discount and promotional opportunities to
cardholders on a routine basis. Reported revenue is net of both current period
reward redemptions, current period discounts and promotions, and accruals for
estimated future rewards earned under the B-Rewards program. A liability has
been recorded for future rewards based on the Company's estimate of how many
earned points will turn into rewards and ultimately be redeemed prior to
expiration, which is included in "gift certificates redeemable" on the Company's
consolidated balance sheets.
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--------------------------------------------------------------------------------2. Inventory. Inventory is valued at the lower of cost or net realizable value.
Cost is determined using an average cost method that approximates the
first-in, first-out (FIFO) method. Management makes adjustments to inventory
and cost of goods sold, based upon estimates, to account for merchandise
obsolescence and markdowns that could affect net realizable value, based on
assumptions using calculations applied to current inventory levels within
each different markdown level. Management also reviews the levels of
inventory in each markdown group and the overall aging of the inventory
versus the estimated future demand for such product and the current market
conditions. Such judgments could vary significantly from actual results,
either favorably or unfavorably, due to fluctuations in future economic
conditions, industry trends, consumer demand, and the competitive retail
environment. Such changes in market conditions could negatively impact the
sale of markdown inventory, causing further markdowns or inventory
obsolescence, resulting in increased cost of goods sold from write-offs and
reducing the Company's net earnings. The adjustment to inventory for
markdowns and/or obsolescence was
conditions, or changes in demand or price that would indicate that its
inventory valuation may not be materially accurate at this time.
3. Income Taxes. The Company records a deferred tax asset and liability for
expected future tax consequences resulting from temporary differences between
financial reporting and tax bases of assets and liabilities. The Company
considers future taxable income and ongoing tax planning in assessing the
value of its deferred tax assets. If the Company determines that it is more
than likely that these assets will not be realized, the Company would reduce
the value of these assets to their expected realizable value, thereby
decreasing net income. Estimating the value of these assets is based upon the
Company's judgment. If the Company subsequently determined that the deferred
tax assets, which had been written down, would be realized in the future,
such value would be increased. Adjustment would be made to increase net
income in the period such determination was made.
4. Leases. During the first quarter of fiscal 2019, the Company adopted ASU
2016-02, Leases (Topic 842). As a result of the adoption of the standard, the
Company recognized net ROU assets and lease liabilities of approximately
on the present value of the total fixed payments for retail store and
corporate office operating leases. Refer to Footnote 1, Basis of
Presentation, and Footnote 6, Leases, for further details.
5. Investments. Investments classified as short-term investments include
securities with a maturity of greater than three months and less than one
year. Available-for-sale securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity (net of the effect of income taxes), using
the specific identification method, until they are sold. Held-to-maturity
securities are reported at amortized cost. Trading securities are reported at
fair value, with unrealized gains and losses included in earnings, using the
specific identification method.
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OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND COMMERCIAL COMMITMENTS
As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management's review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company's financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which the Company believes to be similar to those of other comparable retail companies. The following table identifies the material obligations and commitments as ofNovember 2, 2019 : Payments Due by Period Contractual obligations (dollar amounts in Less than 1 After 5 thousands): Total year 1-3 years
4-5 years years
Purchase obligations
$ 2,096 $ 539 Deferred compensation 15,410 - - - 15,410 Total contractual obligations$ 29,510 $ 4,989 $ 6,476 $ 2,096 $ 15,949 The Company has available an unsecured line of credit of$25.0 million , which is excluded from the preceding table. The line of credit agreement has an expiration date ofJuly 31, 2021 and provides that$10.0 million of the$25.0 million line is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during the first three quarters of fiscal 2019 or the first three quarters of fiscal 2018. The Company had outstanding letters of credit totaling$3.3 million and$2.0 million as ofNovember 2, 2019 andFebruary 2, 2019 , respectively. The Company has no other off-balance sheet arrangements.
SEASONALITY
The Company's business is seasonal, with the holiday season (from approximatelyNovember 15 to December 30 ) and the back-to-school season (from approximatelyJuly 15 to September 1 ) historically contributing the greatest volume of net sales. For fiscal years 2018, 2017, and 2016, the holiday and back-to-school seasons accounted for approximately 35% of the Company's fiscal year net sales. Quarterly results may vary significantly depending on a variety of factors including the timing and amount of sales and costs associated with the opening of new stores, the timing and level of markdowns, the timing of store closings, the remodeling of existing stores, competitive factors, and general economic conditions. FORWARD LOOKING STATEMENTS Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management's discussion and analysis contains certain forward-looking statements, which reflect management's current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company's business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company. 22
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