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BKE > SEC Filings for BKE > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for BUCKLE INC


3-Apr-2013

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. 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 consolidated financial statements included in this Form 10-K.

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.

Net 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 following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:

                                                   Percentage of Net Sales                          Percentage Increase
                                                   For Fiscal Years Ended                               (Decrease)
                                       February 2,       January 28,       January 29,       Fiscal Year          Fiscal Year
                                          2013              2012              2011           2011 to 2012         2010 to 2011

Net sales                                     100.0 %           100.0 %           100.0 %              5.7 %               11.9 %
Cost of sales (including buying,
 distribution, and occupancy costs)            55.6 %            55.9 %            55.9 %              5.1 %               12.0 %
Gross profit                                   44.4 %            44.1 %            44.1 %              6.5 %               11.8 %
Selling expenses                               18.0 %            18.4 %            18.7 %              3.4 %               10.0 %
General and administrative expenses             3.5 %             3.5 %             3.2 %              5.8 %               20.4 %
Income from operations                         22.9 %            22.2 %            22.2 %              9.2 %               12.1 %
Other income, net                               0.3 %             0.4 %             0.4 %            -15.3 %                6.4 %
Income before income taxes                     23.2 %            22.6 %            22.6 %              8.8 %               12.0 %
Provision for income taxes                      8.6 %             8.4 %             8.4 %              9.4 %               11.3 %
Net income                                     14.6 %            14.2 %            14.2 %              8.5 %               12.5 %

Fiscal 2012 Compared to Fiscal 2011

Net sales for the 53-week fiscal year ended February 2, 2013, increased 5.7% to $1.124 billion from net sales of $1.063 billion for the 52-week fiscal year ended January 28, 2012. Comparable store net sales for the 53-week fiscal year increased by $20.6 million, or 2.1%, in comparison to the 53-week period ended February 4, 2012. The comparable store sales increase was due to a 4.8% increase in the average retail price of merchandise sold during the year, which was partially offset by a 0.5% decrease in the average number of units sold per transaction and a 2.3% decrease in the number of transactions at comparable stores during the year. Sales growth for the fiscal year was also attributable to the inclusion of a full year of operating results for the 13 new stores opened during fiscal 2011, to the opening of 10 new stores during fiscal 2012, to growth in online sales, and to the inclusion of an extra week of sales due to the fact that fiscal 2012 was a 53-week year. Online sales for the year (which are not included in comparable store sales) increased 8.4% to $84.5 million, while the 53rd week in fiscal 2012 contributed an estimated $16.1 million in net sales. Average sales per square foot for fiscal 2012 increased 2.7% from $462 to $475. Total square footage as of February 2, 2013 was 2.208 million compared to 2.156 million as of January 28, 2012.

The Company's average retail price per piece of merchandise sold increased $2.29, or 4.8%, during fiscal 2012 compared to fiscal 2011. This $2.29 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a shift in the merchandise mix ($0.97), a 13.9% increase in average footwear price points ($0.32), a 7.6% increase in average accessory price points ($0.30), a 1.3% increase in average denim price points ($0.29), a 9.8% increase in average active apparel price points ($0.23), and a 2.0% increase in average knit shirt price points ($0.22); which were partially offset by reduced average price points in certain other merchandise categories ($0.04). 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 costs increased $30.7 million in fiscal 2012 to $499.3 million, a 6.5% increase. As a percentage of net sales, gross profit increased to 44.4% in fiscal 2012 compared to 44.1% in fiscal 2011. An improvement in merchandise margins (0.25%, as a percentage of net sales) and a reduction in expense related to the incentive bonus accrual (0.10%, as a percentage of net sales) were partially offset by increases in certain other occupancy, buying, and distribution expenses (0.05%, as a percentage of net sales). Merchandise shrinkage was 0.4% of net sales for both fiscal 2011 and fiscal 2012.


Selling expenses increased from $195.3 million in fiscal 2011 to $202.0 million in fiscal 2012, a 3.4% increase. Selling expenses as a percentage of net sales decreased from 18.4% in fiscal 2011 to 18.0% in fiscal 2012. The reduction was primarily attributable to decreases in expense related to bankcard fees (0.20%, as a percentage of net sales), internet order fulfillment (0.15%, as a percentage of net sales), and certain other selling expenses (0.05%, as a percentage of net sales).

General and administrative expenses increased from $37.0 million in fiscal 2011 to $39.2 million in fiscal 2012, a 5.8% increase. As a percentage of net sales, general and administrative expenses were 3.5% for both fiscal 2011 and fiscal 2012. A reduction in expense related to the incentive bonus accrual (0.30%, as a percentage of net sales) was offset by increases in equity compensation expense (0.15%, as a percentage of net sales) and vacation pay expense (0.15%, as a percentage of net sales).

As a result of the above changes, the Company's income from operations increased $21.9 million to $258.2 million for fiscal 2012, a 9.2% increase compared to fiscal 2011. Income from operations was 22.9% as a percentage of net sales in fiscal 2012 compared to 22.2% as a percentage of net sales in fiscal 2011.

Other income decreased from $4.2 million in fiscal 2011 to $3.5 million in fiscal 2012. 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 37.2% in fiscal 2012 compared to 37.0% in fiscal 2011, bringing net income to $164.3 million in fiscal 2012 versus $151.5 million in fiscal 2011, an increase of 8.5%.

Fiscal 2011 Compared to Fiscal 2010

Net sales for the 52-week fiscal year ended January 28, 2012, increased 11.9% to $1.063 billion from net sales of $949.8 million for the 52-week fiscal year ended January 29, 2011. Comparable store net sales for the fiscal year increased by $72.2 million, or 8.4%, in comparison to the 52-week year ended January 29, 2011. The comparable store sales increase was due to a 4.6% increase in the average retail price of merchandise sold during the year, a 0.9% increase in the average number of units sold per transaction, and a 2.9% increase in the number of transactions at comparable stores during the year. Sales growth for the fiscal year was also attributable to the inclusion of a full year of operating results for the 21 new stores opened during fiscal 2010, to the opening of 13 new stores during fiscal 2011, and to growth in online sales. Online sales for the year (which are not included in comparable store sales) increased 25.0% to $78.0 million. Average sales per square foot for fiscal 2011 increased 8.0% from $428 to $462. Total square footage as of January 28, 2012 was 2.156 million compared to 2.102 million as of January 29, 2011.

The Company's average retail price per piece of merchandise sold increased $2.12, or 4.6%, during fiscal 2011 compared to fiscal 2010. This $2.12 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 3.6% increase in average denim price points ($0.78), a 2.2% increase in average knit shirt price points ($0.24), a 7.6% increase in average woven shirt price points ($0.21), an 18.9% increase in average sweater price points ($0.18), a 7.3% increase in average active apparel price points ($0.15), increased average price points in certain other merchandise categories ($0.15), and a shift in the merchandise mix ($0.41). 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 costs increased $49.5 million in fiscal 2011 to $468.7 million, an 11.8% increase. As a percentage of net sales, gross profit remained flat at 44.1% in both fiscal 2010 and fiscal 2011. A decrease in merchandise margins (0.20%, as a percentage of net sales) and increases in distribution and shipping 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 occupancy costs (0.50%, as a percentage of net sales).


The reduction in merchandise margins was the result of increased costs in certain merchandise categories, 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 and shipping costs 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. Merchandise shrinkage was 0.4% of net sales for both fiscal 2010 and fiscal 2011.

Selling expenses increased from $177.6 million in fiscal 2010 to $195.3 million in fiscal 2011, a 10.0% increase. Selling expenses as a percentage of net sales decreased from 18.7% in fiscal 2010 to 18.4% in fiscal 2011. The reduction was primarily attributable to a reduction in health insurance claims expense (0.15%, as a percentage of net sales), reduced bankcard fees (0.10%, as a percentage of net sales), and the leveraging of certain other selling expenses (0.15%, as a percentage of net sales); which were partially offset by an increase in store payroll expense (0.10%, as a percentage of net sales).

General and administrative expenses increased from $30.8 million in fiscal 2010 to $37.0 million in fiscal 2011, a 20.4% increase. As a percentage of net sales, general and administrative expenses increased from 3.2% in fiscal 2010 to 3.5% in fiscal 2011. The increase was primarily attributable to increases in expense related to the incentive bonus accrual (0.30%, as a percentage of net sales) and equity compensation expense (0.15%, as a percentage of net sales). These increases were partially offset by a reduction in the year-end accrual for vacation pay and by the leveraging of certain other general and administrative expenses (0.15%, as a percentage of net sales).

As a result of the above changes, the Company's income from operations increased $25.6 million to $236.3 million for fiscal 2011, a 12.1% increase compared to fiscal 2010. Income from operations was 22.2% as a percentage of net sales in both fiscal 2010 and fiscal 2011.

Other income increased from $3.9 million in fiscal 2010 to $4.2 million in fiscal 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 37.0% in fiscal 2011 compared to 37.3% in fiscal 2010, bringing net income to $151.5 million in fiscal 2011 versus $134.7 million in fiscal 2010, an increase of 12.5%.

LIQUIDITY AND CAPITAL RESOURCES

As of February 2, 2013, the Company had working capital of $147.9 million, including $117.6 million of cash and cash equivalents and $26.4 million of short-term investments. 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 fiscal 2012, 2011, and 2010 the Company's cash flow from operations was $220.9 million, $209.3 million, and $179.9 million, respectively.

During fiscal 2012, 2011, and 2010, the Company invested $27.8 million, $32.5 million, and $36.2 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $2.5 million, $4.1 million, and $18.7 million in fiscal 2012, 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 includes 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 fiscal 2013, the Company anticipates completing approximately 20 store construction projects, including approximately 13 new stores and approximately 7 stores to be remodeled and/or relocated. The average cost of opening a new store during fiscal 2012 was approximately $0.9 million, including construction costs of approximately $0.7 million and inventory costs of approximately $0.2 million, net of payables. Management estimates that total capital expenditures during fiscal 2013 will be approximately $34.0 to $38.0 million, which includes primarily planned new store and store remodeling projects. 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 had a consistent record of generating positive cash flows each year and, as of February 2, 2013, had total cash and investments of $179.8 million. The Company does not currently have plans for any 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 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 $25.0 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 $20.0 million. Borrowings under the line of credit provide for interest to be paid at a rate based on LIBOR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2012, 2011, and 2010. The Company had no bank borrowings as of February 2, 2013 and was in compliance with the terms and conditions of the line of credit agreement.

Dividend payments - During fiscal 2012, the Company paid total cash dividends of $254.6 million as follows: $0.20 per share in each of the four quarters and a special cash dividend of $4.50 per share in the fourth quarter. During fiscal 2011, the Company paid total cash dividends of $144.6 million as follows: $0.20 per share in each of the four quarters and a special cash dividend of $2.25 per share in the third quarter. During fiscal 2010, the Company paid total cash dividends of $154.3 million as follows: $0.20 per share in each of the four quarters and a special cash dividend of $2.50 per share in the fourth quarter. The Company plans to continue its quarterly dividends in fiscal 2013.

Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2012. During fiscal 2011, the Company repurchased 8,600 shares of its common stock at a cost of $0.3 million. During fiscal 2010, the Company repurchased 246,800 shares of its common stock at a cost of $6.0 million. The Company's current 1,000,000 share repurchase plan was approved by the Board of Directors on November 20, 2008. As of February 2, 2013, 543,900 shares remained available for repurchase under the plan.

Auction-Rate Securities - As of February 2, 2013, total cash and investments included $10.9 million of auction-rate securities ("ARS") and preferred securities, which compares to $14.2 million of ARS and preferred securities as of January 28, 2012. Of the $10.9 million in ARS and preferred securities as of February 2, 2013, $25,000 has been included in short term investments with the remainder 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 February 2, 2013, the reported investment amount is net of a $1.5 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 $1.5 million temporary impairment, net of tax, as an "accumulated other comprehensive loss" of $0.9 million in stockholders' equity as of February 2, 2013. The Company has accounted for the impairment as temporary, as it currently believes that these ARS can be successfully redeemed or liquidated in the future at par value plus accrued interest. During fiscal 2012, the Company was able to successfully liquidate ARS with a par value of $2.9 million.

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 or until the ultimate maturity of the investments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.'s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated 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 consolidated 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.

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 liability recorded for unredeemed gift certificates and gift cards was $22.2 million and $20.3 million as of February 2, 2013 and January 28, 2012, respectively. The amount of the gift certificate liability is determined using the outstanding balances from the prior three years of issuance and the gift card liability is determined using the outstanding balances from the prior four years of issuance. The Company records breakage as other income when the probability of redemption, which is based on historical redemption patterns, is remote. Breakage reported for the fiscal years ended February 2, 2013, January 28, 2012, and January 29, 2011 was $0.8 million, $0.7 million, and $0.5 million, respectively.


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 $0.9 million and $0.8 million as of February 2, 2013 and January 28, 2012, 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 different markdown level. 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 $6.3 million and $4.9 million as of February 2, 2013 and January 28, 2012, 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 . . .

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