The Buckle, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 and 26 weeks ended July 30, 2011, the second quarter and first half of fiscal 2011—not 2010 Q2 as stated in the request metadata. Financial statements are unaudited; dollar figures below are in millions unless noted.
Business context and reporting period
Buckle operates as a single-segment retailer of casual apparel, footwear and accessories. At July 30, 2011, it operated 427 stores in 41 states. During the first half, it opened nine stores, substantially remodeled 16 and closed two. The business is seasonal, with back-to-school and holiday periods historically driving its highest sales.
Financial performance
| Metric | 13 weeks ended July 30, 2011 | Change vs. prior year | 26 weeks ended July 30, 2011 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $212.4 | +12.6% | $452.5 | +12.2% |
| Gross profit | $87.1 | +15.6% | $190.1 | +12.6% |
| Gross margin | 41.0% | 40.0% prior year | 42.0% | 41.9% prior year |
| Operating income | $36.8 | +13.1% | $88.1 | +12.0% |
| Operating margin | 17.3% | Unchanged | 19.5% | Unchanged |
| Net income | $23.6 | +13.5% | $57.0 | +12.1% |
| Diluted EPS | $0.50 | $0.44 prior year | $1.21 | $1.08 prior year |
Comparable-store sales increased 8.9% in the quarter and 8.5% year to date. Online sales rose 21.8% to $14.3 million in the quarter and 20.1% to $31.4 million year to date; online sales are excluded from comparable-store sales. Management attributed growth to higher transaction counts, higher average prices, new stores and online sales.
Quarterly gross-margin improvement reflected better merchandise margins from reduced markdowns and occupancy-cost leverage, partly offset by higher distribution costs. For the first half, selling expenses declined as a share of sales to 18.8% from 19.0%, while general and administrative expenses rose to 3.7% from 3.4%, partly due to equity compensation, incentive accruals and costs from terminating two store leases.
Cash flow, liquidity and debt
First-half operating cash flow was $32.6 million, compared with $20.6 million a year earlier. Investing cash outflow was $17.1 million and financing cash outflow was $17.0 million, including $18.9 million of dividends. Cash and cash equivalents declined $1.6 million to $114.9 million. Inventory increased to $126.8 million from $88.6 million at fiscal year-end, contributing to operating cash use.
At July 30, cash and short- and long-term investments totaled $198.1 million; working capital was $206.3 million. The company reported no bank borrowings. It had an unsecured $17.5 million credit line, including a $10.0 million limit for letters of credit, and $3.0 million of letters of credit outstanding. The filing provides no conventional funded-debt balance; contractual obligations include $5.953 million of long-term debt and purchase obligations, with the table not further clarifying that line item.
Outlook, risks and unusual items
Management estimated fiscal 2011 capital expenditures of approximately $30–$35 million and expected about 13 additional store projects during the remainder of the year, including approximately four new stores and nine remodels or relocations. Management said cash, investments and operating cash flow should fund anticipated capital and working-capital needs for several years. No earnings guidance was provided.
A key investment and liquidity risk is the auction-rate securities portfolio. At quarter-end, auction-rate and preferred securities had a par value of $21.0 million and reported fair value of $17.4 million, including $0.9 million of temporary impairment and $2.7 million of other-than-temporary impairment. Some valuations rely on significant unobservable inputs; failed auctions and issuer credit risks could affect liquidity and valuation. The company said it did not expect further auction failures to materially impair its ability to fund operations, but additional impairments remain possible.
Other risks cited include changes in fashion, product mix, competition and general economic conditions; markdowns and inventory obsolescence; and fluctuations in sales, store-expansion spending and operating costs. Management reported no material change in previously disclosed risk factors, no legal proceedings and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the correct reporting period: this is fiscal Q2 2011, ended July 30, 2011.
- Track comparable-store and online sales growth and whether merchandise-margin gains persist as markdowns and loyalty-card redemptions change.
- Monitor inventory levels, cash conversion and the effect of store expansion and distribution costs on margins and cash flow.
- Review auction-rate security valuations, liquidity, impairment assumptions and any subsequent redemptions or credit-rating changes.
- Compare actual fiscal 2011 capital expenditures and store projects with management’s estimates; assess the long-term operating-lease commitments of $362.5 million.