Business Context and Reporting Period
Company: The Buckle, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 3, 2003 (First Quarter of Fiscal 2003)
Business Overview: The Buckle is a retailer of medium to better-priced casual apparel and footwear for fashion-conscious young men and women. As of May 3, 2003, the company operated 310 stores across 37 states. During the quarter, the company opened six new stores and substantially renovated three stores.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $81.7 million | $79.9 million |
| Gross Profit | $22.9 million | $23.1 million |
| Gross Margin | 28.0% | 28.9% |
| Operating Income | $3.6 million | $5.5 million |
| Net Income | $3.0 million | $4.3 million |
| Diluted EPS | $0.14 | $0.20 |
| Cash & Equivalents | $82.1 million | $102.4 million (End of Q1 2002) |
| Working Capital | $141.1 million | N/A |
| Long-Term Debt | $0 | $0 |
Cash Flow: Net cash used in operating activities was $0.9 million for the quarter, compared to $9.5 million provided in the prior year period. This shift is typical for the first quarter due to seasonal inventory build-up and bonus payments.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 2.3% year-over-year. However, comparable store sales decreased by 0.7% ($0.5 million). Total sales growth was driven by the inclusion of 11 stores opened in the prior year and 6 new stores opened in the current quarter.
- Profitability Decline: Operating income decreased 35.2% to $3.6 million, and net income decreased 30.4% to $3.0 million.
- Margin Compression: Gross margin declined from 28.9% to 28.0%, primarily due to higher occupancy costs, partially offset by improved merchandise margins.
- Expense Increases: Selling expenses rose 9.9% (to 20.2% of sales) due to higher salaries, advertising, and supply costs. General and administrative expenses increased 8.2% (to 3.4% of sales), largely due to a loss on the disposal of assets from a store relocation.
- Other Income: Decreased 12.9% due to reduced interest income.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Management estimates total capital expenditures for fiscal 2003 will be approximately $19.6 million (before landlord allowances of $2.8 million). This includes plans for approximately 21 additional store projects (9 new, 12 remodeled/relocated).
- Liquidity: The company maintains $17.5 million in available credit lines ($7.5 million operating line and $10.0 million for letters of credit) with no borrowings outstanding as of May 3, 2003. Management believes existing cash and operating cash flow are sufficient to fund operations and expansion.
- Seasonality: The business is highly seasonal, with the Christmas and back-to-school seasons historically accounting for approximately 40% of annual net sales.
- Risks: Key risks include changes in fashion trends, competitive factors, general economic conditions, and the accuracy of estimates regarding inventory obsolescence, merchandise returns, and healthcare costs.
- Accounting Policies: The company follows APB Opinion No. 25 for stock-based compensation. Pro forma net income, if fair value accounting (FAS 123) were applied, would be $1.9 million ($0.09 EPS) for the quarter.
Investor Verification Checklist
- Comparable Store Sales: Verify the 0.7% decline in comparable store sales and its impact on future growth projections.
- Occupancy Costs: Investigate the drivers behind the increase in occupancy costs that compressed gross margins.
- Capital Allocation: Monitor the execution of the $19.6 million capital expenditure plan and the timeline for the 21 planned store projects.
- Inventory Levels: Review inventory turnover and markdown reserves given the seasonal nature of the business and the cash outflow for inventory in Q1.
- Store Relocation Impact: Assess the long-term impact of the store relocation that caused a loss on disposal of assets in the current quarter.