BUCKLE INC quarterly report, Q1 FY2016

Business context and reporting period

The Buckle, Inc. is a single-segment U.S. retailer of casual apparel, footwear, and accessories. This 10-Q covers the 13 weeks ended April 30, 2016, compared with the 13 weeks ended May 2, 2015. The request metadata labels the period “2015 Q1,” but the filing reports first-quarter fiscal 2016.

The company operated 468 stores in 44 states at quarter-end, versus 463 stores a year earlier; it opened no stores and substantially remodeled six during the quarter. Online sales are included in comparable-store sales.

Financial performance

MetricQ1 FY2016Q1 FY2015Change
Net sales$243.5 million$271.3 millionDown 10.2%
Gross profit / margin$94.7 million / 38.9%$113.6 million / 41.9%Profit down 16.6%; margin down 3.0 percentage points
Operating income / margin$36.4 million / 15.0%$52.8 million / 19.5%Income down 31.0%
Net income$23.1 million$33.6 millionDown 31.2%
Diluted EPS$0.48$0.70Down $0.22
Operating cash flow$12.3 million$21.8 millionDown $9.4 million

Cash and cash equivalents were $153.4 million and short-term investments were $39.5 million at April 30, 2016. Working capital was $272.0 million; total cash and investments were $223.9 million. The company had no bank borrowings and reported no debt. Its $25 million unsecured credit line, including up to $10 million for letters of credit, expires July 31, 2017. Total liabilities were $139.3 million and stockholders’ equity was $425.5 million.

Capital expenditures were $7.8 million. The company paid $12.2 million in dividends ($0.25 per share). Cash and cash equivalents declined $7.8 million during the quarter.

Material changes and management commentary

  • Comparable-store sales fell 11.1%. Management attributed the decline chiefly to 9.3% fewer transactions, with smaller reductions in units per transaction and average retail price. Excluding a $3.0 million accrual for estimated future rewards under the new Guest Loyalty program, net sales fell 9.1% and comparable-store sales fell 10.0%.
  • Online sales declined 2.8% to $23.5 million. Average sales per square foot decreased 11.3% to $93.83.
  • Gross margin declined as comparable-sales weakness deleveraged occupancy, buying, and distribution costs (1.90 percentage points of sales) and merchandise margins fell (1.20 points); lower incentive-bonus accruals partially offset the pressure.
  • Operating expenses decreased in dollars but rose as a share of sales: selling expenses were 19.5% versus 18.1%, and general and administrative expenses were 4.4% versus 4.3%.
  • Management expects approximately $31 million to $35 million of fiscal 2016 capital expenditures, including about 18 additional store projects during the rest of the year—approximately five new stores and 13 remodels and/or relocations. It expects cash, investments, and operating cash flow to fund anticipated needs for the next several years.

Risks, contingencies, and unusual items

  • Retail results are seasonal, with holiday and back-to-school periods historically contributing about 35% of annual sales. Management cautions that interim results are not necessarily indicative of full-year results.
  • The company held auction-rate securities with $6.5 million par value and $6.0 million estimated fair value; $0.5 million was recorded as temporary impairment. Failed auctions limit liquidity. Management expects eventual recovery and says it can hold the securities, but further impairment remains possible.
  • Inventory was $138.8 million, including a $10.6 million adjustment for markdowns and/or obsolescence. Actual demand, markdowns, and fashion trends could affect inventory values and margins.
  • Operating lease commitments totaled $370.1 million, including $67.4 million due within one year. Purchase obligations totaled $10.3 million. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. New revenue, inventory, lease, and stock-compensation accounting standards were under evaluation; management did not expect a material effect from the inventory standard.

Most important facts for investors to verify

  • Confirm the intended reporting period: the filing is for Q1 fiscal 2016, not 2015 Q1 as stated in the request metadata.
  • Track comparable-store sales and transaction trends, and assess the effect of the Guest Loyalty rewards accrual on reported revenue.
  • Monitor gross-margin recovery, markdown levels, and inventory aging amid continued sales weakness.
  • Review operating cash flow, planned capital spending, dividend payments, and the company’s ability to meet lease and other commitments.
  • Assess auction-rate securities’ valuation and liquidity, including the assumptions underlying estimated recovery periods and fair value.