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BKE > SEC Filings for BKE > Form 10-Q on 12-Dec-2013All Recent SEC Filings

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Form 10-Q for BUCKLE INC


12-Dec-2013

Quarterly Report


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-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 consolidated 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 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           Percentage of Net Sales           Percentage
                         Thirteen Weeks Ended             Increase/           Thirty-nine Weeks Ended            Increase/
                November 2, 2013     October 27, 2012    (Decrease)    November 2, 2013     October 27, 2012    (Decrease)

Net sales                100.0 %               100.0 %        0.9  %            100.0 %               100.0 %        3.4  %
Cost of sales
(including
buying,
distribution,
and occupancy
costs)                    56.0 %                55.9 %        1.1  %             57.2 %                57.3 %        3.2  %
Gross profit              44.0 %                44.1 %        0.6  %             42.8 %                42.7 %        3.6  %
Selling
expenses                  18.1 %                17.3 %        5.6  %             18.3 %                18.0 %        5.3  %
General and
administrative
expenses                   3.6 %                 3.5 %        1.8  %              3.9 %                 3.7 %        7.9  %
Income from
operations                22.3 %                23.3 %       (3.2 )%             20.6 %                21.0 %        1.3  %
Other income,
net                        0.2 %                 0.1 %      110.2  %              0.2 %                 0.3 %      (48.1 )%
Income before
income taxes              22.5 %                23.4 %       (2.9 )%             20.8 %                21.3 %        0.6  %
Provision for
income taxes               8.3 %                 8.6 %       (2.4 )%              7.7 %                 7.8 %        1.1  %
Net income                14.2 %                14.8 %       (3.2 )%             13.1 %                13.5 %        0.3  %

Net sales increased from $284.1 million in the third quarter of fiscal 2012 to $286.8 million in the third quarter of fiscal 2013, a 0.9% increase. Comparable store sales for the thirteen week quarter ended November 2, 2013 decreased by $1.3 million, or 0.5%, compared to the prior year thirteen week period ended November 3, 2012. The comparable store sales decrease for the quarter was primarily due to a 2.3% decrease in the number of transactions at comparable stores during the period and a 1.5% reduction in the average retail price per piece of merchandise sold, which were partially offset by a 3.6% increase in the 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 2 new stores opened after the first half of fiscal 2012, to the opening of 13 new stores during the first three quarters of fiscal 2013, and to growth in online sales. Online sales for the quarter (which are not included in comparable store sales) increased 11.9% to $22.0 million for the thirteen week period ended November 2, 2013 compared to $19.6 million for the thirteen week period ended October 27, 2012.

Net sales increased from $763.4 million for the first three quarters of fiscal 2012 to $789.0 million for the first three quarters of fiscal 2013, a 3.4% increase. Comparable store sales increased by $8.7 million, or 1.2%, for the thirty-nine week period ended November 2, 2013 compared to the prior year thirty-nine week period ended November 3, 2012. The comparable store sales increase for the thirty-nine week period was primarily due to a 3.6% increase in the average number of units sold per transaction, which was partially offset by a 2.1% decrease in the number of transactions at comparable stores during the period and a 0.1% reduction in the average retail price per piece of merchandise sold. Sales growth for the thirty-nine week period was also attributable to the inclusion of a full three quarters of operating results for the 10 new stores opened during fiscal 2012, to the opening of 13 new stores during the first three quarters of fiscal 2013, and to growth in online sales. Online sales for the year-to-date period increased 7.9% to $59.7 million for the thirty-nine week period ended November 2, 2013 compared to $55.4 million for the thirty-nine week period ended October 27, 2012. Average sales per square foot increased slightly from $324.42 for the thirty-nine week period ended October 27, 2012 to $324.46 for the thirty-nine week period ended November 2, 2013. Total square footage as of November 2, 2013 was 2.273 million compared to 2.204 million as of October 27, 2012.

Due to the 53rd week in fiscal 2012, total net sales for the third quarter and for the year-to-date periods are compared to the prior year thirteen and thirty-nine week fiscal periods ended October 27, 2012, while comparable store sales are compared to the corresponding thirteen and thirty-nine week periods ended November 3, 2012.


For the third quarter, the Company's average retail price per piece of merchandise sold decreased $0.81, or 1.5%, compared to the third quarter of fiscal 2012. This $0.81 decrease was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a shift in the merchandise mix (-$0.96), a 4.1% reduction in average woven shirt price points (-$0.14), a 2.8% reduction in average accessory price points (-$0.12), and reduced average price points in certain other merchandise categories (-$0.05); which were partially offset by a 17.4% increase in average footwear price points ($0.46). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

For the year-to-date period, the Company's average retail price per piece of merchandise sold decreased $0.05, or 0.1%, compared to the same period in fiscal 2012. This $0.05 decrease was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): an 8.4% reduction in average woven shirt price points (-$0.31), a shift in the merchandise mix (-$0.20), a 2.4% reduction in average accessory price points (-$0.10), and reduced average price points in certain other merchandise categories (-$0.04); which were partially offset by a 15.6% increase in average footwear price points ($0.40) and a 1.0% increase in average denim price points ($0.20). 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 $125.4 million in the third quarter of fiscal 2012 to $126.2 million in the third quarter of fiscal 2013, a 0.6% increase. As a percentage of net sales, gross profit decreased from 44.1% in the third quarter of fiscal 2012 to 44.0% in the third quarter of fiscal 2013. An improvement in merchandise margins (0.30%, as a percentage of net sales) was offset by an increase in occupancy, distribution, and buying expenses (0.40%, as a percentage of net sales).

Year-to-date, gross profit increased from $326.1 million for the thirty-nine week period ended October 27, 2012 to $337.7 million for the thirty-nine week period ended November 2, 2013, a 3.6% increase. As a percentage of net sales, gross profit increased from 42.7% for the first three quarters of fiscal 2012 to 42.8% for the first three quarters of fiscal 2013. An improvement in merchandise margins (0.25%, as a percentage of net sales) was partially offset by an increase in occupancy, distribution, and buying expenses (0.15%, as a percentage of net sales).

Selling expenses increased from $49.3 million for the third quarter of fiscal 2012 to $52.0 million for the third quarter of fiscal 2013, an 5.6% increase. As a percentage of net sales, selling expenses increased from 17.3% for the third quarter of fiscal 2012 to 18.1% for the third quarter of fiscal 2013. The increase was primarily attributable to increases in store payroll expense (0.40%, as a percentage of net sales), health insurance claims expense (0.20%, as a percentage of net sales), and certain other selling expenses (0.35%, as a percentage of net sales); which were partially offset by a reduction in expense related to the incentive bonus accrual (0.15%, as a percentage of net sales).

Year-to-date, selling expenses increased from $137.0 million in the first three quarters of fiscal 2012 to $144.2 million in the first three quarters of fiscal 2013, a 5.3% increase. As a percentage of net sales, selling expenses increased from 18.0% in fiscal 2012 to 18.3% in fiscal 2013. The increase was primarily attributable to increases in store payroll expense (0.30%, as a percentage of net sales) and health insurance claims expense (0.15%, as a percentage of net sales); which were partially offset by reductions in certain other selling expenses (0.15%, as a percentage of net sales).

General and administrative expenses increased from $10.0 million in the third quarter of fiscal 2012 to $10.2 million in the third quarter of fiscal 2013, a 1.8% increase. As a percentage of net sales, general and administrative expenses increased from 3.5% for the third quarter of fiscal 2012 to 3.6% for the third quarter of fiscal 2013. An increase in equity compensation expenses (0.15%, as a percentage of net sales) was partially offset by a reduction in certain other general and administrative expenses (0.05%, as a percentage of net sales).

Year-to-date, general and administrative expenses increased from $28.5 million for the first three quarters of fiscal 2012 to $30.8 million for the first three quarters of fiscal 2013, an 7.9% increase. As a percentage of net sales, general and administrative expenses increased from 3.7% in fiscal 2012 to 3.9% in fiscal 2013. The increase was primarily attributable to increases in equity compensation expense (0.15%, as a percentage of net sales) and certain other general and administrative expenses (0.05%, as a percentage of net sales).

As a result of the above changes, the Company's income from operations was $64.1 million for the third quarter of fiscal 2013 compared to $66.2 million for the third quarter of fiscal 2012. Income from operations was 22.3% of net sales for the third quarter of fiscal 2013 compared to 23.3% of net sales for the third quarter of fiscal 2012.


Income from operations, for the thirty-nine week period ended November 2, 2013, was $162.7 million compared to $160.6 million for the thirty-nine week period ended October 27, 2012. Income from operations was 20.6% of net sales for the first three quarters of fiscal 2013 compared to 21.0% of net sales for the first three quarters of fiscal 2012.

Other income increased from $0.2 million for the third quarter of fiscal 2012 to $0.4 million for the third quarter of fiscal 2013. Other income for the year-to-date period decreased from $2.3 million for the thirty-nine week period ended October 27, 2012 to $1.2 million for the thirty-nine week period ended November 2, 2013, with the reduction related primarily to certain state economic development incentives received during the first quarter of fiscal 2012.

Income tax expense as a percentage of pre-tax income was 37.0% in the third quarter of fiscal 2013 compared to 36.8% in the third quarter of fiscal 2012, bringing net income to $40.6 million in the third quarter of fiscal 2013 compared to $41.9 million in the third quarter of fiscal 2012.

Income tax expense was also 37.0% of pre-tax income in the first three quarters of fiscal 2013 compared to 36.8% of pre-tax income in the first three quarters of fiscal 2012, bringing year-to-date net income to $103.3 million for fiscal 2013 compared to $102.9 million for fiscal 2012.

LIQUIDITY AND CAPITAL RESOURCES

As of November 2, 2013, the Company had working capital of $226.1 million, including $130.8 million of cash and cash equivalents and short-term investments of $25.5 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 2013 and fiscal 2012, the Company's cash flow from operations was $69.3 million and $92.4 million, respectively.

The uses of cash for both thirty-nine week periods primarily 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, other capital expenditures, and purchases of investment securities.

During the first three quarters of fiscal 2013 and 2012, the Company invested $17.5 million and $24.1 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company also spent $7.7 million and $2.0 million in the first three quarters of fiscal 2013 and 2012, respectively, in capital expenditures for the corporate headquarters and distribution facility. Capital spending for the corporate headquarters and distribution center during the first three quarters of fiscal 2013 includes $5.4 million for the purchase of a new corporate airplane as a replacement for a plane that was sold by the Company in the fourth quarter of fiscal 2012.

During the remainder of fiscal 2013, the Company anticipates completing approximately 3 additional store construction projects all of which are stores that are expected to be substantially remodeled and/or relocated. Management estimates that total capital expenditures during fiscal 2013 will be approximately $30.0 to $32.0 million, which includes primarily planned new store and store remodeling projects. The Company also, during the third week of November, broke ground on a new 80,000 square foot building that will provide additional office space as a part of the Company's home office campus in Kearney, Nebraska. Current plans include the completion of initial site preparation by the end of December 2013, with construction of the building beginning in the first quarter of fiscal 2014. 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 November 2, 2013, had total cash and investments of $195.6 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 $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 bank borrowings during the first three quarters of fiscal 2013 or 2012. The Company had no bank borrowings as of November 2, 2013 and was in compliance with the terms and conditions of the line of credit agreement.

Auction-Rate Securities - As of November 2, 2013, investments included $11.1 million of auction-rate securities ("ARS") and preferred securities, which compares to $10.9 million of ARS and preferred securities as of February 2, 2013. 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 November 2, 2013, the reported investment amount is net of a $1.2 million temporary impairment and a $1.1 million other-than-temporary impairment ("OTTI") to account for the impairment of certain securities from their stated par value. The Company reported the $1.2 million temporary impairment, net of tax, as an "accumulated other comprehensive loss" of $0.8 million in stockholders' equity as of November 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.

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. The critical accounting policies and estimates utilized by the Company in the preparation of its condensed consolidated financial statements for the period ending November 2, 2013 have not changed materially from those utilized for the fiscal year ended February 2, 2013, included in The Buckle Inc.'s 2012 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 liability recorded for unredeemed gift certificates and gift cards was $15.2 million and $22.2 million as of November 2, 2013 and February 2, 2013, respectively. 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 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 $0.9 million as of both November 2, 2013 and February 2, 2013, respectively. Sales tax collected from customers is excluded from revenue and is included as part of "accrued store operating expenses" on the Company's Consolidated Balance Sheets.

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 $7.8 million as of November 2, 2013 and $6.3 million as of February 2, 2013, 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 decreasing net income. Estimating the value of these assets is based upon the Company's judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, such value would be increased. Adjustment would be made to increase net income in the period such determination was made. As of November 2, 2013 and February 2, 2013, the Company's non-current deferred tax liability includes a $0.2 million valuation allowance recorded to reduce the value of the Company's capital loss carryforward to its expected realizable amount prior to expiration.

4. Operating Leases. The Company leases retail stores under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses, and/or contingent rent provisions. For purposes of . . .

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