The Buckle, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 5, 2018 (fiscal 2018 first quarter), compared with the thirteen weeks ended April 29, 2017. The filing period is 2018 Q1, notwithstanding the 2017 Q1 request metadata. Results are unaudited, and interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 2018 | Comparable period | Change |
|---|---|---|---|
| Net sales | $204.9 million | $212.3 million | Down 3.5% |
| Gross profit / margin | $79.7 million / 38.9% | $81.7 million / 38.5% | Profit down 2.5%; margin up 0.4 percentage points |
| Operating income / margin | $23.3 million / 11.4% | $25.0 million / 11.8% | Down 7.1% |
| Net income | $18.3 million | $16.3 million | Up 12.6% |
| Diluted EPS | $0.38 | $0.34 | Up $0.04 |
| Operating cash flow | $19.3 million | $28.2 million | Down $8.9 million |
Gross margin improved as higher merchandise margins more than offset deleveraged occupancy, buying, and distribution costs. Selling expense was $45.9 million (22.4% of sales); general and administrative expense was $10.6 million (5.1% of sales), up 8.4%, primarily due to home-office technology payroll and professional fees. The effective tax rate fell to 25.9% from 37.3%, principally reflecting the reduction in the U.S. federal corporate tax rate; this contributed to higher net income despite lower sales and operating income.
Cash and cash equivalents were $168.4 million, short-term investments $54.7 million, and working capital $276.9 million at May 5, 2018. Cash and investments totaled $241.0 million, including $17.9 million of long-term investments. Total assets were $538.2 million and stockholders’ equity was $399.2 million. The company had no bank borrowings; it had a $25.0 million unsecured credit line, including $10.0 million available for letters of credit, and $3.0 million of outstanding letters of credit. Dividends paid were $12.3 million. Capital expenditures were approximately $3.5 million during the quarter.
Material changes and business context
- Comparable-store net sales declined 3.1%; management attributed the decline to fewer transactions, lower average retail price per piece, and fewer units per transaction. Average sales per square foot fell 3.0% to $78.59.
- Online sales increased 6.1% to $23.1 million and represented 11.3% of net sales, versus 10.3% a year earlier. The company operated 456 stores in 43 states, compared with 462 stores in 44 states a year earlier; it closed one store during the quarter.
- Operating cash flow declined year over year, with movements in working capital—including accrued employee compensation, accounts payable, inventory, and taxes—affecting cash generation.
- The company adopted revenue standard Topic 606 on February 4, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $0.4 million and changed certain revenue timing and presentation; management said the impact on quarterly results was not material.
Outlook, risks, and unusual items
- Management estimated fiscal 2018 capital expenditures of $10 million to $15 million, primarily for store remodels and technology, and anticipated four additional store construction, substantial remodel, or relocation projects. It believed cash, investments, and operating cash flow would fund anticipated needs for the next several years.
- The company cited demand, product mix, fashion trends, competition, and general economic conditions as factors that could weaken sales, profitability, and cash flow. Retail results are seasonal, with holiday and back-to-school periods historically accounting for about 35% of annual sales.
- A 2017 payment-card data security incident involved certain guest card information from purchases at some stores between October 28, 2016 and April 14, 2017. The company said it contained the malware and enhanced security, but potential assessments, fines, penalties, or other liabilities could not be reasonably estimated.
- The company reported $311.5 million of future operating lease payments and expected adoption of the new lease standard to significantly increase reported assets and liabilities. It also held auction-rate securities with $1.7 million par value and a $0.1 million temporary impairment; further impairment remained possible.
- Other notable estimates include a $3.5 million sales-return reserve and $10.7 million of inventory markdown and obsolescence adjustments at May 5, 2018.
Important facts for investors to verify
- Confirm the period: this filing covers Q1 fiscal 2018 ended May 5, 2018, not Q1 2017.
- Track comparable-store sales, transaction trends, online growth, and whether improved merchandise margins can offset sales weakness and expense deleverage.
- Assess the sustainability of earnings growth given the lower tax rate and the decline in operating income and operating cash flow.
- Monitor the data-security incident for any quantified liabilities or further disclosures, and review the assumptions behind return reserves, inventory valuation, and auction-rate securities.
- Consider future lease liabilities and planned capital spending alongside the company’s cash, investments, and seasonal working-capital needs.