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BKE > SEC Filings for BKE > Form 10-Q on 8-Dec-2011All Recent SEC Filings

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Form 10-Q for BUCKLE INC


8-Dec-2011

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Financial Statements and notes thereto of the Company included in this Form 10-Q. All references herein to the "Company", "Buckle", "we", "us", or similar terms refer to The Buckle, Inc. and its subsidiary. The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the periods included in the accompanying financial statements.

EXECUTIVE OVERVIEW

Company management considers the following items to be key performance indicators in evaluating Company performance.

Comparable Store Sales - Stores are deemed to be comparable stores if they were open in the prior year on the first day of the fiscal period being presented. Stores which have been remodeled, expanded, and/or relocated, but would otherwise be included as comparable stores, are not excluded from the comparable store sales calculation. Online sales are excluded from comparable store sales. Management considers comparable store sales to be an important indicator of current Company performance, helping leverage certain fixed costs when results are positive. Negative comparable store sales results could reduce net sales and have a negative impact on operating leverage, thus reducing net earnings.

Merchandise Margins - Management evaluates the components of merchandise margin including initial markup and the amount of markdowns during a period. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company's use of markdowns could have an adverse effect on the Company's gross margin and results of operations.

Operating Margin - Operating margin is a good indicator for management of the Company's success. Operating margin can be positively or negatively affected by comparable store sales, merchandise margins, occupancy costs, and the Company's ability to control operating costs.

Cash Flow and Liquidity (working capital) - Management reviews current cash and short-term investments along with cash flow from operating, investing, and financing activities to determine the Company's short-term cash needs for operations and expansion. The Company believes that existing cash, short-term investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years.


RESULTS OF OPERATIONS

The table below sets forth the percentage relationships of sales and various
expense categories in the Statements of Income for the thirteen and thirty-nine
week periods ended October 29, 2011 and October 30, 2010:


                               Percentage of Net Sales             Percentage             Percentage of Net Sales             Percentage
                                Thirteen Weeks Ended               Increase/              Thirty-nine Weeks Ended             Increase/
                         Oct. 29, 2011         Oct. 30, 2010       (Decrease)       Oct. 29, 2011         Oct. 30, 2010       (Decrease)

Net sales                         100.0 %               100.0 %           12.4 %             100.0 %               100.0 %           12.2 %
Cost of sales
(including buying,
 distribution, and
occupancy costs)                   56.6 %                56.5 %           12.6 %              57.5 %                57.5 %           12.1 %
Gross profit                       43.4 %                43.5 %           12.0 %              42.5 %                42.5 %           12.4 %
Selling expenses                   18.3 %                18.1 %           13.8 %              18.6 %                18.6 %           12.2 %
General and
administrative
expenses                            3.0 %                 3.1 %            8.2 %               3.4 %                 3.3 %           17.8 %
Income from
operations                         22.1 %                22.3 %           11.1 %              20.5 %                20.6 %           11.6 %
Other income, net                   0.1 %                 0.2 %          -33.3 %               0.3 %                 0.4 %          -15.3 %
Income before income
taxes                              22.2 %                22.5 %           10.7 %              20.8 %                21.0 %           11.0 %
Provision for income
taxes                               8.2 %                 8.4 %            9.3 %               7.7 %                 7.8 %            9.6 %
Net income                         14.0 %                14.1 %           11.6 %              13.1 %                13.2 %           11.9 %

Net sales increased from $243.3 million in the third quarter of fiscal 2010 to $273.4 million in the third quarter of fiscal 2011, a 12.4% increase. Comparable store sales increased by $20.7 million, or 9.1%, for the thirteen week period ended October 29, 2011 compared to the same period in the prior year. The comparable store sales increase was primarily due to a 5.8% increase in the average retail price per piece of merchandise sold during the period, a 2.2% increase in the number of transactions at comparable stores during the period, and a 0.9% increase in the average number of units sold per transaction. Sales growth for the thirteen week period was also attributable to the inclusion of a full quarter of operating results for the 3 new stores opened after the first half of fiscal 2010, to the opening of 11 new stores during the first three quarters of fiscal 2011, and to growth in online sales. Online sales for the quarter (which are not included in comparable store sales) increased 25.4% to $18.9 million.

The Company's average retail price per piece of merchandise sold increased $2.80, or 5.8%, during the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. This $2.80 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 5.9% increase in average denim price points ($1.40), a 5.2% increase in average knit shirt price points ($0.57), an 8.2% increase in average woven shirt price points ($0.23), a 15.7% increase in average sweater price points ($0.22), a shift in the merchandise mix ($0.22), and increased average price points in certain other categories ($0.16). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Net sales increased from $646.8 million for the first three quarters of fiscal 2010 to $725.9 million for the first three quarters of fiscal 2011, a 12.2% increase. Comparable store sales increased by $51.1 million, or 8.7%, for the thirty-nine week period ended October 29, 2011 compared to the same period in the prior year. The comparable store sales increase was primarily due to a 4.0% increase in the number of transactions at comparable stores during the period, a 3.2% increase in the average retail price per piece of merchandise sold during the period, and a 0.9% increase in the average number of units sold per transaction. Sales growth for the thirty-nine week period was also attributable to the inclusion of a full three quarters of operating results for the 21 new stores opened during fiscal 2010, to the opening of 11 new stores during the first three quarters of fiscal 2011, and to growth in online sales. Online sales for the year-to-date period increased 22.0% to $50.3 million. Average sales per square foot increased 8.8% from $292.39 for the thirty-nine week period ended October 30, 2010 to $318.24 for the thirty-nine week period ended October 29, 2011. Total square footage as of October 29, 2011 was 2.147 million.


The Company's average retail price per piece of merchandise sold increased $1.44, or 3.2%, during the first three quarters of fiscal 2011 compared to the first three quarters of fiscal 2010. This $1.44 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 3.0% increase in average denim price points ($0.60), a 2.3% increase in average knit shirt price points ($0.25), a 7.5% increase in average woven shirt price points ($0.20), a 6.2% increase in average active apparel price points ($0.17), a 22.5% increase in average sweater price points ($0.14), and increased average price points in certain other categories ($0.08). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Gross profit after buying, distribution, and occupancy expenses increased from $105.9 million in the third quarter of fiscal 2010 to $118.7 million in the third quarter of fiscal 2011, a 12.0% increase. As a percentage of net sales, gross profit declined from 43.5% in the third quarter of fiscal 2010 to 43.4% in the third quarter of fiscal 2011. The decrease was attributable to a 0.70% decrease, as a percentage of net sales, in actual merchandise margins and increased distribution costs (0.20%, as a percentage of net sales), which were partially offset by the leveraging of certain occupancy costs (0.80%, as a percentage of net sales).

Year-to-date, gross profit increased from $274.8 million for the thirty-nine week period ended October 30, 2010 to $308.8 million for the thirty-nine week period ended October 29, 2011, a 12.4% increase. As a percentage of net sales, gross profit was flat at 42.5% for both the first three quarters of fiscal 2011 and the first three quarters of fiscal 2010. A reduction in actual merchandise margins (0.15%, as a percentage of net sales) and increased distribution costs (0.35%, as a percentage of net sales) were offset by the leveraging of certain occupancy costs (0.50%, as a percentage of net sales).

The reduction in merchandise margins for the third quarter was the result of an adjustment for liquidated merchandise during the period, a slight reduction in merchandise margins due to increased costs in certain merchandise categories as well as a slight reduction (as a percentage of net sales) in our private label business, and continued increased redemptions through our Primo Card loyalty program.

The increase in distribution costs for both the quarter and year-to-date period was primarily attributable to additional depreciation expense related to the Company's new distribution center that began operations during the third quarter of fiscal 2010 and increased shipping costs related to the shipment of merchandise from the distribution center to the stores and the transfer of inventory between stores.

Selling expenses increased from $44.1 million for the third quarter of fiscal 2010 to $50.1 million for the third quarter of fiscal 2011, a 13.8% increase. As a percentage of net sales, selling expenses increased from 18.1% for the third quarter of fiscal 2010 to 18.3% for the third quarter of fiscal 2011. The increase was primarily attributable to increases in store payroll expense (0.30%, as a percentage of net sales) and expense related to the incentive bonus accrual (0.10%, as a percentage of net sales), which were partially offset by the leveraging of certain other selling expenses (0.20%, as a percentage of net sales).

Year-to-date, selling expenses increased from $120.6 million in the first three quarters of fiscal 2010 to $135.3 million in the first three quarters of fiscal 2011, a 12.2% increase. As a percentage of net sales, selling expenses were 18.6% in both the first three quarters of fiscal 2011 and the first three quarters of fiscal 2010. Increases in store payroll expense (0.20%, as a percentage of net sales) and expense related to the incentive bonus accrual (0.10%, as a percentage of net sales) were offset by the leveraging of certain other selling expenses (0.30%, as a percentage of net sales).

General and administrative expenses increased from $7.5 million in the third quarter of fiscal 2010 to $8.1 million in the third quarter of fiscal 2011, an 8.2% increase. As a percentage of net sales, general and administrative expenses decreased from 3.1% in the third quarter of fiscal 2010 to 3.0% in the third quarter of fiscal 2011. The decrease was primarily attributable to the leveraging of certain general and administrative expense (0.20%, as a percentage of net sales), which was partially offset by an increase in equity compensation expense (0.10%, as a percentage of net sales).

Year-to-date, general and administrative expense increased from $21.2 million for the first three quarters of fiscal 2010 to $24.9 million for the first three quarters of fiscal 2011, a 17.8% increase. As a percentage of net sales, general and administrative expenses increased from 3.3% in fiscal 2010 to 3.4% in fiscal 2011. The increase was primarily attributable to an increase in equity compensation expense (0.10%, as a percentage of net sales).


As a result of the above changes, the Company's income from operations increased 11.1% to $60.4 million for the third quarter of fiscal 2011 compared to $54.3 million for the third quarter of fiscal 2010. Income from operations was 22.1% of net sales for the third quarter of fiscal 2011 compared to 22.3% of net sales for the third quarter of fiscal 2010. Income from operations, for the thirty-nine week period ended October 29, 2011, increased 11.6% to $148.5 million compared to $133.1 million for the thirty-nine week period ended October 30, 2010. Income from operations was 20.5% of net sales for the first three quarters of fiscal 2011 compared to 20.6% of net sales for the first three quarters of fiscal 2010.

Other income decreased from $0.5 million for the third quarter of fiscal 2010 to $0.3 million for the third quarter of fiscal 2011. Other income for the year-to-date period decreased from $2.9 million for the thirty-nine week period ended October 30, 2010 to $2.4 million for the thirty-nine week period ended October 29, 2011. The Company's other income is derived primarily from interest and dividends received on the Company's cash and investments.

Income tax expense as a percentage of pre-tax income was 36.8% in the third quarter of fiscal 2011 and 37.3% in the third quarter of fiscal 2010, bringing net income to $38.3 million in the third quarter of fiscal 2011 compared to $34.4 million in the third quarter of fiscal 2010, an increase of 11.6%. Income tax expense was also 36.8% of pre-tax income in the first three quarters of fiscal 2011 and 37.3% in the first three quarters of fiscal 2010, bringing year-to-date net income to $95.4 million for fiscal 2011 compared to $85.2 million for fiscal 2010, an increase of 11.9%.

LIQUIDITY AND CAPITAL RESOURCES

As of October 29, 2011, the Company had working capital of $139.8 million, including $48.0 million of cash and cash equivalents and short-term investments of $30.4 million. The Company's cash receipts are generated from retail sales and from investment income, and the Company's primary ongoing cash requirements are for inventory, payroll, occupancy costs, dividend payments, new store expansion, remodeling, and other capital expenditures. Historically, the Company's primary source of working capital has been cash flow from operations. During the first three quarters of fiscal 2011 and fiscal 2010, the Company's cash flow from operating activities was $85.8 million and $84.1 million, respectively.

The uses of cash for both thirty-nine week periods include payment of annual bonuses accrued at fiscal year end, changes in inventory and accounts payable for build-up of inventory levels, dividend payments, construction costs for new and remodeled stores, and other capital expenditures.

During the first three quarters of fiscal 2011 and 2010, the Company invested $28.0 million and $30.2 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company also spent $3.5 million and $17.2 million in the first three quarters of fiscal 2011 and 2010, respectively, in capital expenditures for the corporate headquarters and distribution facility. Capital spending for the corporate headquarters and distribution facility during fiscal 2010 included payments made as work progressed on the Company's new $25.0 million distribution center in Kearney, Nebraska. The Company transitioned to the new distribution center in late September 2010 and the new facility is the only operating store distribution center.

During the remainder of fiscal 2011, the Company anticipates completing approximately four additional store construction projects, including approximately two new stores and approximately two stores to be substantially remodeled and/or relocated. Management estimates that total capital expenditures during fiscal 2011 will be approximately $33 to $35 million. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has a consistent record of generating positive cash flow each year and, as of October 29, 2011, had total cash and investments of $127.5 million. The Company does not currently have plans for a merger or acquisition and has fairly consistent plans for new store expansion and remodels. Based upon past results and current plans, management does not anticipate any large swings in the Company's need for cash in the upcoming years.


Future conditions, however, may reduce the availability of funds based upon factors such as a decrease in demand for the Company's product, change in product mix, competitive factors, and general economic conditions as well as other risks and uncertainties which would reduce the Company's sales, net profitability, and cash flows. Also, the Company's acceleration in store openings and/or remodels or the Company entering into a merger, acquisition, or other financial related transaction could reduce the amount of cash available for further capital expenditures and working capital requirements.

The Company has available an unsecured line of credit of $17.5 million with Wells Fargo Bank, N.A. for operating needs and letters of credit. The line of credit provides that outstanding letters of credit cannot exceed $10.0 million. Borrowings under the line of credit provide for interest to be paid at a rate equal to the prime rate established by the bank. The Company has, from time to time, borrowed against these lines during periods of peak inventory build-up. There were no bank borrowings during the first three quarters of fiscal 2011 or 2010.

Dividend payments - During the first three quarters of fiscal 2011, the Company paid total cash dividends of $135.1 million as follows: $0.20 per share in each of the three quarters and a special cash dividend of $2.25 per share in the third quarter. During the first three quarters of fiscal 2010, the Company paid total cash dividends of $28.0 million as follows: $0.20 per share in each of the three quarters. The Company paid a special cash dividend of $2.50 per share during the fourth quarter of fiscal 2010.

Stock repurchase plan - During the first three quarters of fiscal 2011 and 2010, the Company also used cash for repurchasing and retiring shares of its common stock. In fiscal 2011, the Company purchased 8,600 shares at a total cost of $0.3 million. In fiscal 2010, the Company purchased 246,800 shares at a total cost of $6.0 million. As of October 29, 2011, the Company had 543,900 shares remaining on its existing share repurchase authorization.

Auction-Rate Securities - As of October 29, 2011, total cash and investments included $16.3 million of auction-rate securities ("ARS") and preferred securities, which compares to $20.0 million of ARS and preferred securities as of January 29, 2011. All of the $16.3 million of ARS and preferred securities as of October 29, 2011 has been included in long-term investments. ARS have a long-term stated maturity, but are reset through a "dutch auction" process that occurs every 7 to 49 days, depending on the terms of the individual security. During February 2008, a significant number of auctions related to these securities failed, meaning that there was not enough demand to sell the entire issue at auction. The failed auctions have limited the current liquidity of the Company's investments in ARS and the Company has reason to believe that certain of the underlying issuers of its ARS are currently at risk. The Company does not anticipate, however, that further auction failures will have a material impact on the Company's ability to fund its business.

ARS and preferred securities are reported at fair market value, and as of October 29, 2011, the reported investment amount is net of a $0.9 million temporary impairment and a $2.7 million other-than-temporary impairment ("OTTI") to account for the impairment of certain securities from their stated par value. The Company reported the $0.9 million temporary impairment, net of tax, as an "accumulated other comprehensive loss" of $0.6 million in stockholders' equity as of October 29, 2011. The Company has accounted for the impairment as temporary, as it currently expects to be able to successfully liquidate its investments without loss once the ARS market resumes normal operations.

The Company reviews all investments for OTTI at least quarterly or as indicators of impairment exist. The value and liquidity of ARS held by the Company may be affected by continued auction-rate failures, the credit quality of each security, the amount and timing of interest payments, the amount and timing of future principal payments, and the probability of full repayment of the principal. Additional indicators of impairment include the duration and severity of the decline in market value. The interest rates on these investments will be determined by the terms of each individual ARS. The material risks associated with the ARS held by the Company include those stated above as well as the current economic environment, downgrading of credit ratings on investments held, and the volatility of the entities backing each of the issues. In addition, the Company considers qualitative factors including, but not limited to, the financial condition of the investee, the credit rating of the investee, and the current and expected market and industry conditions in which the investee operates. The Company believes it has the ability and intent to hold these investments until recovery of market value occurs.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.'s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations. The critical accounting policies and estimates utilized by the Company in the preparation of its condensed consolidated financial statements for the period ending October 29, 2011 have not changed materially from those utilized for the fiscal year ended January 29, 2011, included in The Buckle Inc.'s 2010 Annual Report on Form 10-K .

1. Revenue Recognition. Retail store sales are recorded upon the purchase of merchandise by customers. Online sales are recorded when merchandise is delivered to the customer, with the time of delivery being based on estimated shipping time from the Company's distribution center to the customer. Shipping fees charged to customers are included in revenue and shipping costs are included in selling expenses. The Company recognizes revenue from sales made under its layaway program upon delivery of the merchandise to the customer. Revenue is not recorded when gift cards and gift certificates are sold, but rather when a card or certificate is redeemed for merchandise. A current liability for unredeemed gift cards and certificates is recorded at the time the card or certificate is purchased. The amounts of the gift certificate and gift card liabilities are determined using the outstanding balances from the prior three and four years of issuance, respectively. The liability recorded for unredeemed gift certificates and gift cards was $11.2 million and $17.2 million as of October 29, 2011 and January 29, 2011, respectively. The Company records breakage as other income when the probability of redemption, which is based on historical redemption patterns, is remote.

The Company establishes a liability for estimated merchandise returns based upon the historical average sales return percentage. Customer returns could potentially exceed the historical average, thus reducing future net sales results and potentially reducing future net earnings. The accrued liability for reserve for sales returns was $0.8 million and $0.7 million as of October 29, 2011 and January 29, 2011, respectively.

2. Inventory. Inventory is valued at the lower of cost or market. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. Management makes adjustments to inventory and cost of goods sold, based upon estimates, to reserve for merchandise obsolescence and markdowns that could affect market value, based on assumptions using calculations applied to current inventory levels within each of four different markdown levels. Management also reviews the levels of inventory in each markdown group and the overall aging of the inventory versus the estimated future demand for such product and the current market conditions. Such judgments could vary significantly from actual results, either favorably or unfavorably, due to fluctuations in future economic conditions, industry trends, consumer demand, and the competitive retail environment. Such changes in market conditions could negatively impact the sale of markdown inventory, causing further markdowns or inventory obsolescence, resulting in increased cost of goods sold from write-offs and reducing the Company's net earnings. The liability recorded as a reserve for markdowns and/or obsolescence was $5.4 million and $5.1 million as of October 29, 2011 and January 29, 2011, respectively. The Company is not aware of any events, conditions, or changes in demand or price that would indicate that its inventory valuation may not be materially accurate at this time.


3. Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more than likely that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby . . .

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