BKE

Business Context and Reporting Period

Company: The Buckle, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and twenty-six weeks ended July 29, 2006.
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 July 29, 2006, the company operated 346 stores in 38 states. The business is seasonal, with significant sales volume occurring during the back-to-school and Christmas seasons.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Performance: Net sales decreased 1.7% in the second quarter ($102.4M vs $104.1M) but increased 1.1% year-to-date ($212.0M vs $209.7M). Comparable store sales declined 5.7% in the quarter and 3.4% year-to-date, driven by fewer transactions, partially offset by higher average retail prices (+3.0% in Q2) and new store openings.
• Profitability: Operating income decreased 22.4% in the quarter and 5.9% year-to-date. Gross margin declined to 33.3% in Q2 (from 34.8% prior year) due to increased markdowns and de-leveraged occupancy expenses.
• Expenses: Selling expenses increased as a percentage of sales (21.6% vs 20.8%) due to internet fulfillment costs, store salaries, and the adoption of SFAS 123(R) for stock-based compensation. General and administrative expenses decreased slightly.
• Other Income: Other income increased significantly (81.7% in Q2) due to proceeds from Hurricane Katrina insurance claims and a Visa/Mastercard interchange fee lawsuit settlement.
• Cash Flow: Operating cash flow turned positive year-to-date ($2.2M) compared to a negative $2.0M in the prior year, despite a reduction in cash and cash equivalents from $23.4M to $8.5M due to inventory buildup and dividend payments.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates total capital expenditures for fiscal 2006 will be approximately $27.5 million. Plans include approximately 12 additional store construction projects (8 new, 4 remodeled/relocated) for the remainder of the year.
• Liquidity: The company maintains $184.9 million in total cash and investments. Management believes existing cash and operating cash flows are sufficient to fund operations and expansion for the next several years. There are no current plans for mergers or acquisitions.
• Accounting Changes: The company adopted SFAS 123(R) in Q1 2006, resulting in $782,000 of stock option compensation expense for the first half of 2006, reducing net income by $0.02 per share.
• Restatement: The company restated prior period cash flow statements to correct the classification of auction-rate securities. A material weakness in internal controls regarding investment accounting was identified in Q1 2006 but was remediated by the end of the reporting period.
• Risks: Key risks include changes in fashion trends, competitive factors, general economic conditions, and the potential for inventory obsolescence or markdowns exceeding historical averages.

Investor Verification Checklist

• Comparable Store Sales Trend: Verify the sustainability of the 5.7% decline in comparable store sales and the reliance on new store openings to drive total revenue growth.
• Inventory Levels: Review the increase in inventory from $68.7M to $90.9M and assess the risk of future markdowns impacting gross margins.
• Internal Controls: Confirm the effectiveness of the remediated controls regarding investment classification following the restatement of prior periods.
• One-Time Gains: Note that "Other Income" includes non-recurring items (insurance and lawsuit settlements) that boosted earnings by $0.02 per share.
• Stock Repurchases: Monitor the remaining capacity of the 1,000,000 share repurchase plan (596,100 shares remaining as of July 29, 2006).