Business context and reporting period
The Buckle, Inc. is a U.S. retailer of casual apparel, footwear, and accessories, operating one reportable segment through stores and e-commerce. This Form 10-Q covers the 13 and 26 weeks ended August 4, 2018 (fiscal 2018 second quarter and first half), compared mainly with the periods ended July 29, 2017. The request metadata says 2017 Q2, but the filing itself is for 2018 Q2.
At August 4, 2018, the company operated 455 stores in 43 states, versus 463 stores in 44 states a year earlier. Online sales were 10.9% of first-half sales, up from 10.1%.
Financial performance and condition
| Metric | 13 weeks ended Aug. 4, 2018 | 13 weeks ended July 29, 2017 | 26 weeks ended Aug. 4, 2018 | 26 weeks ended July 29, 2017 |
|---|---|---|---|---|
| Net sales | $201.1 million | $195.7 million | $406.0 million | $407.9 million |
| Gross profit / margin | $78.9 million / 39.2% | $74.1 million / 37.9% | $158.6 million / 39.1% | $155.9 million / 38.2% |
| Operating income / margin | $20.2 million / 10.0% | $17.4 million / 8.9% | $43.4 million / 10.7% | $42.5 million / 10.4% |
| Net income | $15.7 million | $11.5 million | $34.0 million | $27.8 million |
| Diluted EPS | $0.32 | $0.24 | $0.70 | $0.57 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $30.9 million | $29.0 million |
Second-quarter sales rose 2.8%; comparable sales increased 1.4%. First-half sales declined 0.5%; comparable sales decreased 0.9%. The filing compares total sales with the prior fiscal periods shown above, but comparable-sales calculations use the corresponding periods ended August 5, 2017 because fiscal 2017 had a 53rd week.
At August 4, cash and cash equivalents were $168.9 million, short-term investments $51.6 million, and long-term investments $17.3 million. Working capital was $285.9 million. Total assets were $545.1 million and total liabilities $141.0 million. The company had no bank borrowings; it had a $25.0 million unsecured credit line expiring July 31, 2019, including $10.0 million available for letters of credit. Outstanding letters of credit were $3.8 million.
First-half investing cash flow was a $2.5 million use, including $6.1 million of property and equipment purchases; financing cash flow was a $24.5 million use for dividends. Cash increased $3.9 million during the half. The company paid $0.50 per share in dividends during the period.
Material changes versus the prior comparable period
- Second-quarter net income increased 36.4%, and first-half net income increased 22.4%. The lower 2018 effective tax rate—25.9% versus 37.3%—reflects the U.S. federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
- Gross margin improved 1.3 percentage points in the quarter and 0.9 points year to date. Management attributed the improvement to better merchandise margins and, in the quarter, leverage in occupancy, buying, and distribution costs.
- E-commerce sales increased 8.6% in the quarter to $21.2 million and 7.3% year to date to $44.3 million.
- Average retail price per piece fell 3.0% in the quarter and 1.9% year to date. The quarter’s comparable-sales increase reflected more transactions and units per transaction, partly offset by lower average selling prices; first-half comparable-sales weakness reflected lower average prices and slightly fewer transactions.
- General and administrative expense increased 8.3% in both periods, largely due to information-technology investment and strategic initiatives. First-half selling expense as a share of sales rose to 23.1% from 22.9%, with increased store payroll investment.
Outlook, risks, contingencies, and unusual items
- Management estimated fiscal 2018 capital expenditures of approximately $10 million to $15 million, primarily for store remodels and technology, and anticipated one additional full remodel during the rest of the year. Management stated that cash, investments, and operating cash flow should fund anticipated needs for the next several years; no earnings or sales guidance was provided.
- The company identified apparel demand, product mix and fashion trends, competition, general economic conditions, markdowns, and store activity as factors that could affect results and cash flows. Results are seasonal, with holiday and back-to-school periods historically important.
- A 2017 data-security incident involved access to certain guest payment-card data from in-store purchases between October 28, 2016 and April 14, 2017. The company reported that it contained the issue and enhanced security, but said potential assessments, fines, penalties, or other liabilities could not yet be reasonably estimated.
- Operating lease commitments totaled $298.9 million, including $65.8 million due within one year. The company expected adoption of the new lease standard to significantly increase reported assets and liabilities.
- ASU 606 was adopted February 4, 2018 using the modified retrospective method, increasing opening retained earnings by $0.389 million. Management said it did not materially affect period results, though it changed breakage presentation and certain balance-sheet amounts. Store long-lived-asset impairment was immaterial.
Important facts for investors to verify
- Confirm the filing period: it is the quarter ended August 4, 2018, notwithstanding the request metadata’s 2017 Q2 designation.
- Track comparable sales, average selling prices, transaction trends, and online growth, noting the filing’s different comparison dates for comparable sales due to the prior-year 53rd week.
- Assess whether gross-margin gains can persist while store payroll and technology investments increase.
- Monitor inventory and markdown exposure: inventory was $127.9 million, and the markdown/obsolescence adjustment was $10.9 million.
- Follow developments and any costs from the payment-card data incident, as potential liabilities were not quantifiable in the filing.
- Consider the substantial operating lease commitments and expected balance-sheet impact of the new lease standard.