May 18, 2017
Executives
Dennis Nelson - President and CEO Karen Rhoads - SVP of Finance & CFO Kelli Molczyk - VP of Women's Merchandising Bob Carlberg - SVP of Men's Merchandising Kyle Hanson - VP of General Counsel and Corporate Secretary Tom Heacock - VP of Finance, Treasurer and Corporate Controller.
Analysts
Tiffany Kanaga - Deutsche Bank Kyle Kavanaugh - Palisade Capital
Operator
Ladies and gentleman, thank you for standing by. Welcome to the First Quarter Earnings Release Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.
[Operator Instructions] As a reminder, this conference is being recorded. Members of the Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Senior Vice President of Finance and CFO; Kelli Molczyk, Vice President of Women's Merchandising; Bob Carlberg, Senior Vice President of Men's Merchandising; Kyle Hanson, Vice President General Counsel and Corporate Secretary, and Tom Heacock, Vice President of Finance, Treasurer and Corporate Controller.
As they review the operating results for the first quarter which ended April 29, 2017, they would like to reiterate their policy of not giving future sales or earnings guidance and have the following Safe Harbor statement. Safe Harbor statement under the Private Securities Litigation Reform Act of 1995, all forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors which may be beyond the Company's control.
Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any financial results or any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission.
The Company does not undertake to publicly update or revise any forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Additionally, the Company does not authorize the reproduction or dissemination of transcripts or audio recordings of the Company's quarterly conference calls without its express written consent.
Any unauthorized reproductions or recordings of the call should not be relied upon, as the information may not be or may be inaccurate. I now like to turn the conference over to your host, Karen Rhoads.
Please go ahead.
Karen Rhoads
Thank you. Good morning, everyone.
Thank you for joining the call. Our May 18, 2017, press release reported that net income for the 13-week first quarter that ended April 29, 2017, was $16.3 million or $0.34 per share on a diluted basis.
That is compared to net income of $23.1 million or $0.48 per share on a diluted basis for the prior-year 13-week first quarter that ended April 30, 2016. Our net sales for the 13-week first quarter decreased 12.8% to $212.3 million compared to net sales of $243.5 million for the prior-year 13-week first quarter.
Comparable store sales for the quarter were down 12.7% in comparison to the same 13-week period in the prior year and our online sales decreased 7.2% to $21.8 million. Gross margin for the quarter was 38.5%, down approximately 40 basis points from 38.9% for the first quarter of last year.
The decrease was driven primarily by deleveraged occupancy, buying and distribution expenses resulting from the comparable store sales decline which had about a 300 point basis point impact. That was partially offset by a 70 basis point improvement in merchandise margins for the quarter.
Furthermore, gross margins benefited approximately 200 basis points as a result of the fiscal 2016 sunset of our old Primo card loyalty program. And under that program, the rewards were recorded as cost of goods sold at the time of redemption.
Selling expense was 22.1% of net sales for the first quarter of fiscal 2017 and that compared to 19.5% of net sales for the first quarter of fiscal 2016 with increases as a percentage of net sales in store pay roll, online marketing and fulfillment, health insurance and certain other selling expenses. This was partially offset by a reduction in expense related to the incentive bonus accrual.
General and administrative expenses for the quarter were 4.6% of net sales and that's compared to 4.4% of net sales for the first quarter of fiscal 2016, with increases as a percentage of net sales across several general and administrative expenses categories. Our operating margin for the quarter was 11.8% compared to 15% for the first quarter of fiscal 2016.
Other income for the quarter was $0.9 million compared to $0.4 million for the first quarter of fiscal 2016. Income tax expense as a percentage of pretax net income was 37.3% for the first quarter of both fiscal 2017 and fiscal 2016, bringing our first quarter net income to $16.3 million for fiscal 2017 versus $23.1 million for fiscal 2016.
Our press release also included a balance sheet as of April 29, 2017. The balance sheet included the following; inventory of $119.4 million which was down approximately 14% from inventory of $138.8 million as of April 30, 2016, and total cash and investments of $276.7 million which compares to $264.6 million at the end of fiscal 2016 and $223.9 million as of April 30, 2016.
As of the end of the quarter, inventory on a comparable store basis was down approximately 13.5% compared to the same time a year ago, while total markdown inventory was down compared to the same time a year ago. We also ended the quarter with $164.9 million in fixed assets net of accumulated depreciation.
Our capital expenditures for the quarter were $3.9 million and depreciation expense was $7.9 million. Capital spending for the quarter is broken down as follows; $3.5 million for new store construction, store remodel and store technology upgrades; and $400,000 million for capital spending at the corporate headquarters and distribution center.
We still expect our fiscal 2017 capital expenditures to be in the range of $25 million to $30 million, which includes primarily new store and store remodeling project and certain IT investment. For the quarter, UPTs increased approximately 3.5%, the average transaction value decreased approximately 3.5% and the average unit retail decreased approximately 6.5%.
Buckle ended the quarter with 462 retail stores in 44 states, compared to 468 stores in 44 states at the end of first quarter of fiscal 2016. Additionally, our total square footage was 2.367 million square feet as of the end of the quarter, and as compared to 2.383 million square feet at the same time a year ago.
And at this time, I'd like to turn the call over to Tom Heacock, our Vice President of Finance, Treasurer and Corporate Controller.
Tom Heacock
Good morning and thanks for being with us this morning. I'd like to start by highlighting the performance from our various merchandise categories for the quarter.
Men's merchandise sales for the quarter were down approximately 11%. Our average denim price points decreased from $95.85 in the first quarter of fiscal 2016 to $90.65 in the first quarter of fiscal 2017.
For the quarter, our men's business was approximately 47% of net sales, compared to 45.5% last year, and our average men's price points decreased approximately 5.5% from $56.10 to $53.10. Women's merchandise sales for the quarter were down approximately 16%, and our average denim price points decreased from $93.95 in the first quarter of first quarter of fiscal 2016 to $85.50 in the first quarter of first quarter of fiscal 2017.
For the quarter, our women's business was approximately 53% of net sales, compared to 54.5% last year, and our average women's price points decreased approximately 9% from $50.20 to $45.60. For the quarter, combined accessory sales were down approximately 13% and combined footwear sales were down approximately 16%.
These two categories accounted for approximately 8.5% and 6.5%, respectively, of first quarter net sales which compares to 8% and 6.5% for each in the first quarter last year. Average accessory price points were down approximately 4%, and average footwear price points were down approximately 9% for the quarter.
For the quarter, denim accounted for approximately 42% of sales, and tops accounted for approximately 30%, which compares to 43.5% and 28% for each in the first quarter of last year. Our private label business was up just slightly as a percentage of sales for the quarter and represented approximately 34% of sales.
During the quarter, we didn't open any new stores, but did complete two full remodels and closed five stores. As of the end of the quarter, 390 of our 462 stores were in our newest format.
For the full year fiscal 2017, we still anticipate opening two new stores which includes one for back to school and one for holiday. And we also still anticipate completing seven full remodels in total, which includes three that have already moved back in the remodel space in May and two additional for back to school.
With that, we'll welcome your questions.
Operator
Thank you. [Operator Instructions] And we'll go to line of Tiffany Kanaga with Deutsche Bank.
Please go ahead.
Tiffany Kanaga
I would like to dig into online business, which is declined at a high single digit rate for the third straight quarter while most of your peers are seeing more robust growth in that channel. Do you think that investment in the platform could help jump start growth or does the fact that you're seeing decline in both in store and online indicate to you that you have more work to do around product?
And if so, what are you plans in that direction?
Dennis Nelson
Tiffany, this is Dennis. While we continue to look at new ways to market the online and make improvements there, I think some of the decline is due to the retail prices being down and average is 6.5% I believe for the Company and that has some effect.
We've also reduced probably some of the markdown in denim which sometimes when we need to clear certain denim that sales well online. So, I think the combination of those factors has made the difference there and that you will continue to work on growing that business.
Tiffany Kanaga
And I would like to follow up, given the unfavorable weather to start the month and negative commentary from competitors. Can you discuss quarter-to-date trends at all and if you think the good momentum from April can carry forward for you?
Dennis Nelson
Tiffany, we don’t give forward guidance, so I'll pass on that one. Thank you.
Operator
[Operator Instructions] We have a follow-up question from Tiffany Kanaga with Deutsche Bank. Please go ahead.
Tiffany Kanaga
Thanks for taking another one. So, I was particularly impressed by your growth margin performance in the quarter in light of some sleep decline it at some of your peers.
Considering the good performance, can you provide an update as how you're thinking about price point? And how much work might we left to arrive at optimal levels as well as, how are you viewing the promotional back drop in the mall?
And whether you feel any need to discount more as your quarter comps still remain down double digits.
Dennis Nelson
Well, we take an approach to really focus on the buy now word, where now and the teams have done a very good job both the merchandizing teams and store teams getting behind the new product. As you see, we’ve--now we have a lower price points in the store, but less inventory and so I think we're managing the business.
The teams are doing a very nice job of managing the business and so we’re just trying to maximize the retail and develop continued long-term guest as we go forward. In the second quarter, I don’t foresee much of changes as far as retail prices in such, but we have had a nice response to the new product and our approach which has made the growth in total sales a little more challenging but we think that smart business and will play well in the future.
Tiffany Kanaga
And I'll follow up with just one more. I was also a bit surprised to not see selling dollars down a little more, considering your comp declines and this line item really have a contracted much of in that past several quarters.
Have you see any opportunity here for expense rationalization, and if so, in which potential pockets? And conversely, I know that store pay role has been a primary cause of deleverage here, so at some point can we expect some release or do you anticipate this headwind to continue at the same clip?
Dennis Nelson
Karen, do you want to take any of those questions?
Karen Rhoads
Sure. On the selling expense, you're right.
The biggest portion of selling expense would be our payroll expense at the store, and kind of like Dennis talked about the product and the people side also, we want to make sure that we're investing for the future looking at the long-term view. So, we've continued to invest in our team, both our store managers and the leadership on the sales force making sure that we're able to attract and retain the top talented people.
So, we've invested more in payroll. We feel like that that is the best decision for the long term.
Also, you mentioned I think marketing was one of the categories too, and given the current retail environment we're just continuing to try and make sure that we're staying on top of whether it's new social media or other types of marketing and making sure that we're not falling behind in that regard. So, I think we were still -- we're still trying to be very smart with how we spend our dollars but we want to make sure we're investing in the right areas for the long-term growth of the Company.
Operator
And next we'll go to line of Kyle Kavanaugh with Palisade Capital Please go ahead.
Kyle Kavanaugh
A couple of questions, just could you just remind me when do you start lapping on the calendar basis for the denim price declines that are hitting you so hard and also via loyalty program?
Dennis Nelson
Karen and Tommy, do you want to the loyalty program.
Tom Heacock
Yes, I mean, there's kind of two components of the change in the loyalty. We had a new program that we launched a year ago in the first quarter and so really we're apples-to-apples on that for the whole quarter and the first quarter period a little bit of disruption in April a year ago, so we called that out in April sales release.
So, that's apple-to-apples and then we also were winding on our old Primo card program through most of last year and have expired that program and so we thought a positive to gross margin in the first quarter, we called out those about 200 basis points and we'll continue to see an impact through the rest of the year, but at a lower level and kind of step down as we move through the year.
Dennis Nelson
And Kyle on the denim pricing, I'd see the decline percentagewise and price probably consistent through second quarter and then we'll review and third quarter we'll probably see some improvement in the pricing but we'll analyze that better for the next call.
Kyle Kavanaugh
And do you have anything where you see like average prices starting to go up at this point right now throughout the store?
Tom Heacock
As we get into fall, I think we'll see an improvement there, we will not be overlapping so many of the top boots, the leather boots that we had over the last two years. And as I mentioned, the denim pricing level might improve some, so I think we'll see some progress there.
But we cover a lot of lifestyles and we've a lot of different price points and we're staying focused on the buy now, wear now, and what the guest are looking for. So it's kind of a fluid process with our merchandizing and buying towards that price point.
Kyle Kavanaugh
And then you didn’t mention on the store closures plan for this year, do you have any plan for the year?
Tom Heacock
I think most of what we will do is finish for this year, we continue to review everything and we will look at it again for next year, but at this point we think we made our changes.
Operator
[Operator Instructions]
Karen Rhoads
If there are no further questions, again we would like to thank everyone for joining the call today. We appreciate your time and this will conclude the call.
Operator
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