BKE

Business Context and Reporting Period

Company: The Buckle, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 1, 2009 (Second Quarter of Fiscal 2009)
Business Overview: The Buckle is a retailer of medium to better-priced casual apparel, footwear, and accessories for young men and women. As of August 1, 2009, the company operated 401 stores in 41 states. During the quarter, the company opened nine new stores and remodeled seven.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13.6% for the quarter and 18.9% year-to-date compared to the prior year. Comparable store sales rose 8.6% for the quarter and 13.1% year-to-date, driven by higher average retail prices (up 5.0% and 6.0% respectively) and increased transaction volume.
• Margin Expansion: Gross margin improved to 42.7% (quarter) and 43.0% (YTD) from 41.4% and 41.2% in the prior year, due to better merchandise margins and cost leveraging.
• Expense Variance: General and administrative (G&A) expenses increased 91.2% for the quarter. This is primarily due to a $3.0 million gain on the involuntary conversion of a corporate aircraft recorded in the prior year's second quarter, which reduced G&A expenses then. Excluding this gain, G&A expenses were effectively flat or slightly lower as a percentage of sales.
• Investment Impairment: The company reported a $1.6 million temporary impairment and a $3.2 million other-than-temporary impairment (OTTI) on auction-rate securities (ARS) and preferred stock. The OTTI was recognized in the prior fiscal year; the temporary impairment is recorded in accumulated other comprehensive loss.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates total capital expenditures for fiscal 2009 will be approximately $44 million to $48 million, excluding a new distribution center project expected to cost $25 million to $27 million (groundbreaking planned for Q3 2009).
• Liquidity: The company maintains a strong liquidity position with $228.5 million in total cash and investments. It has an unsecured line of credit of $17.5 million, of which $10.0 million is available for letters of credit. No borrowings were outstanding as of August 1, 2009.
• Investment Risks: The company holds $26.7 million in auction-rate securities (ARS). Due to failed auctions since February 2008, liquidity is limited. While management believes it can hold these to recovery, there is a risk of further impairment if market conditions persist.
• Economic Risks: The company notes that the global recession has caused uncertainty and reduced consumer confidence, which could adversely impact discretionary spending and future results.

Key Facts for Investor Verification

• Auction-Rate Securities (ARS) Exposure: Verify the current fair value and liquidity status of the $26.7 million ARS portfolio, specifically the risk of further other-than-temporary impairments given the Lehman Brothers bankruptcy impact on preferred securities.
• Comparable Store Sales Drivers: Confirm the sustainability of the 5.0% increase in average retail price per piece, as this was a primary driver of revenue growth.
• Capital Allocation: Monitor the timeline and cost overruns for the new distribution center in Kearney, Nebraska, which is not included in the current year's $44-$48 million capex guidance.
• Inventory Levels: Inventory increased to $106.5 million from $84.0 million at the start of the year; verify that this build-up aligns with sales velocity to avoid future markdowns.