Business Context and Reporting Period
Company: The Buckle, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended October 28, 2006 (Fiscal 2006 Q3).
Business Overview: The Buckle is a retailer of medium to better-priced casual apparel, footwear, and accessories for young men and women. As of October 28, 2006, the company operated 352 stores in 38 states. The business is seasonal, with significant sales volume occurring during the back-to-school and Christmas seasons.
Key Financial Metrics
| Metric (in thousands, except per share) | 13 Weeks Ended Oct 28, 2006 | 39 Weeks Ended Oct 28, 2006 | 39 Weeks Ended Oct 29, 2005 |
|---|---|---|---|
| Net Sales | $143,084 | $355,088 | $347,744 |
| Gross Profit | $58,649 | $131,744 | $129,745 |
| Gross Margin % | 41.0% | 37.1% | 37.3% |
| Income from Operations | $25,841 | $47,388 | $47,997 |
| Net Income | $17,661 | $33,654 | $32,764 |
| Diluted EPS | $0.89 | $1.69 | $1.59 |
| Cash & Cash Equivalents | $10,053 | $10,053 | $20,580 (Restated) |
| Short-term Investments | $131,299 | $131,299 | $134,672 |
| Total Liabilities | $78,279 | $78,279 | $74,473 |
| Working Capital | $208,834 | $208,834 | $193,428 |
Liquidity: The company reported total cash and investments of $179.3 million as of October 28, 2006. It maintains an unsecured line of credit of $17.5 million, with no borrowings outstanding during the period.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.6% in the third quarter and 2.1% year-to-date compared to the prior year. This growth was driven by the opening of 15 new stores and growth in online sales, which offset a decline in comparable store sales.
- Comparable Store Sales: Comparable store sales decreased 0.1% in the third quarter and 2.1% year-to-date. The decline was primarily due to fewer transactions, partially offset by higher average retail prices (up 6.1% in Q3) and more units per transaction.
- Profitability: Net income increased 6.5% in the third quarter and 2.7% year-to-date. Operating income increased 3.0% in Q3 but decreased 1.3% year-to-date due to de-leveraged occupancy and distribution expenses.
- Cash Flow: Net cash provided by operating activities increased to $18.8 million for the 39-week period (from $13.3 million in the prior year). However, net cash decreased overall by $13.4 million due to financing activities (dividends and stock repurchases) and investing activities.
- Inventory: Inventory levels increased significantly to $99.97 million from $68.73 million at the beginning of the fiscal year, reflecting build-up for the holiday season.
Guidance, Outlook, and Risks
- Capital Expenditures: Management estimates total capital expenditures for fiscal 2006 will be approximately $21.0 million. Plans include completing three additional store construction projects and signing eleven additional lease contracts.
- Outlook: Management believes existing cash and operating cash flow are sufficient to fund operations and expansion for the next several years. No plans for mergers or acquisitions are currently in place.
- Accounting Changes: The company adopted SFAS 123(R) regarding share-based payments in Q1 2006, resulting in a $0.04 per share reduction in year-to-date net income. The company is also assessing the impact of FIN 48 (Accounting for Uncertainty in Income Taxes), effective in fiscal 2007.
- Risks: Key risks include seasonality, changes in fashion trends, competitive factors, and general economic conditions. The company noted that future conditions could reduce fund availability if demand decreases or if store expansion accelerates.
- Restatement: The company restated prior period cash flow statements to correct the classification of auction-rate securities, moving them from cash equivalents to investments. This did not impact net income.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify the sustainability of the 2.1% year-to-date decline in comparable store sales and the reliance on new store openings for top-line growth.
- Inventory Levels: Monitor the significant increase in inventory ($31.2 million increase YTD) to ensure it aligns with holiday demand and does not lead to future markdowns.
- Stock Repurchases: Confirm the status of the remaining 253,400 shares available under the 1,000,000 share repurchase plan and the impact on share count.
- Investment Portfolio: Review the composition of the $169.2 million in short-term and long-term investments, particularly regarding auction-rate securities mentioned in the restatement note.
- Operating Leverage: Assess the impact of rising occupancy and distribution expenses on gross margins as the company continues to expand its store footprint.