BKE

Business Context and Reporting Period

Company: The Buckle, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 29, 2006 (First Quarter of Fiscal 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 April 29, 2006, the company operated 341 stores across 38 states. The company operates as a single reportable segment.

Key Financial Metrics

Liquidity: The company reported total cash and investments of $201.1 million as of April 29, 2006. It maintains an unsecured line of credit of $17.5 million, with no borrowings outstanding during the quarter.

Material Changes vs. Prior Period

• Sales Growth: Net sales increased 3.8% to $109.6 million, driven by the inclusion of 15 new stores from the prior year, four new stores opened in Q1 2006, and growth in online sales. This growth occurred despite a 1.3% decrease in comparable store sales.
• Comparable Store Sales: Declined due to a decrease in the number of transactions, partially offset by a 4.9% increase in average retail price per piece and a 2.6% increase in units per transaction.
• Margins: Gross profit margin improved to 35.6% from 35.3%, aided by better merchandise margins and increased private label sales. Operating margin increased to 12.1% from 11.6%.
• Expenses: Selling expenses rose 4.8% (to 20.0% of sales) due to internet fulfillment costs and the adoption of SFAS 123(R) for stock-based compensation. General and administrative expenses decreased 6.4% (to 3.5% of sales) primarily due to reduced professional fees related to the prior year's stock repurchase.
• Restatement: The company restated its balance sheet as of January 28, 2006, and cash flow statements for prior periods. This correction reclassified auction-rate securities from cash equivalents to investments, reducing reported cash by $12.7 million and increasing short-term and long-term investments.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates total capital expenditures for fiscal 2006 will be approximately $27.5 million. Plans include approximately 18 additional store projects (13 new, 5 remodeled/relocated) for the remainder of the year.
• Liquidity Outlook: Management believes existing cash and operating cash flows are sufficient to fund operations and expansion for the next several years. No plans for mergers or acquisitions are currently in place.
• Internal Controls: Management identified a material weakness in internal control over financial reporting related to the accounting and disclosure of investments. This weakness was not remediated as of the end of the period, though additional transaction-level controls are being implemented.
• Accounting Changes: The company adopted SFAS 123(R) in Q1 2006, resulting in $386,000 of stock option compensation expense, reducing net income by $244,000 ($0.01 per share).
• Risks: Future results may be impacted by changes in fashion trends, competitive factors, general economic conditions, and the company's ability to manage inventory levels and markdowns.

Key Facts for Investor Verification

• Restatement Impact: Verify the reclassification of auction-rate securities from cash to investments, which significantly altered the presentation of liquidity in prior periods.
• Comparable Store Sales: Note the divergence between total sales growth (3.8%) and comparable store sales decline (-1.3%), indicating growth is currently driven by store count expansion rather than same-store performance.
• Internal Control Weakness: Monitor the remediation of the material weakness regarding investment accounting and disclosure controls.
• Stock Repurchase Activity: The company purchased 8,600 shares in Q1 2006 under a plan authorized for 1,000,000 shares total.
• Seasonality: Be aware that the first quarter is typically a period of decreasing cash flows due to inventory build-up and bonus payments, with the majority of annual sales occurring in the holiday and back-to-school seasons.