BUCKLE INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
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.
The company’s management considers the following as key performance indicators to assess the performance of the company.
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 included in 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. 18 --------------------------------------------------------------------------------
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) January 29, January 30, February 1, Fiscal Year 2020 to Fiscal Year 2019 2022 2021 2020 2021 to 2020 Net sales 100.0 % 100.0 % 100.0 % 43.6 % 0.1 % Cost of sales (including buying, distribution, and occupancy costs) 49.6 % 55.5 % 58.1 % 28.2 % (4.2) % Gross profit 50.4 % 44.5 % 41.9 % 63.0 % 6.1 % Selling expenses 20.6 % 21.2 % 22.7 % 39.4 % (6.5) % General and administrative expenses 3.9 % 4.6 % 4.6 % 23.1 % - % Income from operations 25.9 % 18.7 % 14.6 % 99.7 % 27.8 % Other income, net 0.2 % 0.3 % 0.7 % (22.9) % (52.9) % Income before income taxes 26.1 % 19.0 % 15.3 % 97.6 % 24.1 % Income tax expense 6.4 % 4.6 % 3.7 % 103.2 % 22.6 % Net income 19.7 % 14.4 % 11.6 % 95.8 % 24.6 %
Fiscal 2021 vs. Fiscal 2020
Results for the 52-week period ended
Net sales for the 52-week fiscal year ended
January 29, 2022, increased 43.6% to $1.295 billionfrom net sales of $901.3 millionfor the 52-week fiscal year ended January 30, 2021. Comparable store net sales for the 52-week fiscal year increased 43.8% from comparable store net sales for the prior year 52-week period ended January 30, 2021. Total sales growth for the year was the result of a 43.5% increase in the number of transactions and a 2.0% increase in the average unit retail, partially offset by a 1.9% decrease in the average number of units sold per transaction. Online sales for the fiscal year increased 15.9% to $220.8 millionfor the 52-week fiscal year ended January 29, 2022compared to $190.6 millionfor the 52-week fiscal year ended January 30, 2021. Average sales per square foot for fiscal 2021 increased 50.6% from $311to $468. Total square footage as of January 29, 2022was 2.292 million compared to 2.301 million as of January 30, 2021. The Company's average retail price per piece of merchandise sold increased $0.93, or 2.0%, during fiscal 2021 compared to fiscal 2020. This $0.93increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 3.9% increase in average knit shirt price points ( $0.40), a 9.0% increase in average accessory price points ( $0.36), an increase in average price points for certain other merchandise categories ( $0.20), and a shift in the merchandise mix ( $0.30); which were partially offset by a 1.8% decrease in average denim price points ( -$0.33). 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 from $400.7 millionin fiscal 2020 to $653.0 millionin fiscal 2021. As a percentage of net sales, gross profit was 50.4% in fiscal 2021 compared to 44.5% in fiscal 2020. The gross margin increase was the result of leveraged occupancy, buying, and distribution expenses (5.05%, as a percentage of net sales) and an improvement in merchandise margins (0.85%, as a percentage of net sales). Merchandise shrinkage was 0.3% of net sales for fiscal 2021 compared to 0.4% of net sales for fiscal 2020. Selling expenses increased from $191.2 millionin fiscal 2020 to $266.4 millionin fiscal 2021. As a percentage of net sales, selling expenses decreased from 21.2% in fiscal 2020 to 20.6% in fiscal 2021. General and administrative expenses increased from $41.5 millionin fiscal 2020 to $51.1 millionin fiscal 2021. As a percentage of net sales, general and administrative expenses decreased from 4.6% in fiscal 2020 to 3.9% in fiscal 2021. 19 -------------------------------------------------------------------------------- In total, selling, general, and administrative expenses were 24.5% of net sales for fiscal 2021 compared to 25.8% of net sales for fiscal 2020. The decrease was the result of a decrease in store labor-related expenses (1.15%, as a percentage of net sales) and sales leverage across several other expense categories (1.30%, as a percentage of net sales), which were partially offset by an increase in expense related to incentive compensation accruals (1.15%, as a percentage of net sales). As a result of the above changes, the Company's income from operations increased from $168.0 millionfor fiscal 2020 to $335.5 millionfor fiscal 2021. Income from operations was 25.9% as a percentage of net sales in fiscal 2021 compared to 18.7% as a percentage of net sales in fiscal 2020. Other income was $2.3 millionin fiscal 2021 compared to $2.9 millionin fiscal 2020. The Company's other income is derived primarily from investment income related to the Company's cash and investments. Income tax expense as a percentage of pre-tax income was 24.6% in fiscal 2021 and 23.9% in fiscal 2020, bringing net income to $254.8 millionin fiscal 2021 versus $130.1 millionin fiscal 2020.
Fiscal 2020 vs. Fiscal 2019
A discussion of fiscal 2019 and year-over-year comparisons between fiscal 2020 and fiscal 2019 can be found in PART II, ITEM 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended
January 30, 2021, filed with the United States Securities and Exchange Commissionon March 31, 2021.
CASH AND CAPITAL RESOURCES
January 29, 2022, the Company had working capital of $142.7 million, including $254.0 millionof cash and cash equivalents and $12.9 millionof 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 2021, 2020, and 2019 the Company's cash flow from operations was $311.8 million, $227.4 million, and $130.7 million, respectively. Changes in operating cash flow between each of the three years is primarily a function of changes in net income, along with changes in inventory and accounts payable based on the timing and amount of merchandise purchased in each respective period. Operating cash flow is also impacted by the timing of certain other payments, including rent and income taxes. The Company's growth in operating cash flow for fiscal 2021 compared to both fiscal 2020 and fiscal 2019 is attributable to the strong increase in both net sales and net income for the year. During fiscal 2021, 2020, and 2019, the Company invested $18.3 million, $5.5 million, and $6.4 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $0.8 million, $2.2 million, and $0.9 millionin fiscal 2021, 2020, and 2019, respectively, in capital expenditures for the corporate offices and distribution facility. During fiscal 2022, the Company anticipates opening 5 new stores and completing approximately 15-20 store remodels and/or relocations. Management estimates that total capital expenditures during fiscal 2022 will be approximately $22.0to $27.0 million, which includes primarily planned store projects and technology investments. 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 flow each year and, as of January 29, 2022, had total cash and investments of $286.2 million, including $19.4 millionof long-term investments.
However, future conditions may reduce the availability of funds depending on factors such as a decline in demand for the Company’s product, a change in product mix, competitive factors and general economic conditions as well as other risks and uncertainties that would reduce the Company’s sales. , net profitability and cash flow. In addition, the acceleration of the Company’s store openings and/or renovations, or the completion of a merger, acquisition or other financial transaction could reduce the amount of cash available for other expenses. fixed assets and working capital requirements.
20 -------------------------------------------------------------------------------- The Company has available an unsecured line of credit of
$25.0 millionwith Wells Fargo Bank, N.A.for operating needs and letters of credit. The line of credit agreement has an expiration date of July 31, 2023and provides that $10.0 millionof the $25.0 millionline is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on SOFR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2021, 2020, and 2019. The Company had no bank borrowings as of January 29, 2022and was in compliance with the terms and conditions of the line of credit agreement. Dividend payments - During fiscal 2021, the Company paid total cash dividends of $347.8 millionas follows: $0.33per share in each of the first three quarters, $0.35per share in the fourth quarter, and a special cash dividend of $5.65per share in the fourth quarter. During fiscal 2020, the Company's Board of Directors suspended the Company's quarterly cash dividends during the first two quarters of the fiscal year as a result of the global COVID-19 pandemic. During the last two quarters of the fiscal year, the Company paid total cash dividends of $128.5 millionas follows: $0.30per share in both the third and fourth quarters and also a special cash dividend of $2.00per share in the fourth quarter. During fiscal 2019, the Company paid total cash dividends of $112.9 millionas follows: $0.25per share in each of the first three quarters, $0.30per share in the fourth quarter, and a special cash dividend of $1.25per share in the fourth quarter. Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2021. During fiscal 2020, the Company repurchased 25,000 shares of its common stock at an average price of $14.83per share. During fiscal 2019, the Company repurchased 4,552 shares of its common stock at an average price of $14.92per share. As of January 29, 2022, 410,655 shares remained available under the Company's current 1,000,000 share repurchase plan that was approved by the Board of Directors on November 20, 2008.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon
The Buckle, Inc.'sconsolidated 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, net of expected returns, upon the purchase of merchandise by customers. Online sales are recorded, net of expected returns, when the merchandise is tendered for delivery to the common carrier. 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 $16.5 millionand $14.3 millionas of January 29, 2022and January 30, 2021, respectively. Gift card and gift certificate breakage is recognized as revenue in proportion to the redemption pattern of customers by applying an estimated breakage rate. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. 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. The Company establishes a liability for estimated merchandise returns, based upon the historical average sales return percentage, that is recognized at the transaction value. The Company also recognizes a return asset and a corresponding adjustment to cost of sales for the Company's right to recover returned merchandise, which is measured at the estimated carrying value, less any expected recovery costs. 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 $3.0 millionas of January 29, 2022and $2.6 millionas of January 30, 2021. 21 -------------------------------------------------------------------------------- The Company's Buckle Rewards program allows participating guests to earn points for every qualifying purchase, which (after achievement of certain point thresholds) are redeemable as a discount off a future purchase. Reported revenue is net of both current period reward redemptions and accruals for estimated future rewards earned under the Buckle Rewards program. A liability has been recorded for future rewards based on the Company's estimate of how many earned points will turn into rewards and ultimately be redeemed prior to expiration. As of January 29, 2022and January 30, 2021, $10.6 millionand $10.2 millionwas included in "accrued store operating expenses" as a liability for estimated future rewards. Through partnership with Comenity Bank, the Company offers a private label credit card ("PLCC"). Prior to October 2020, Customers with a PLCC were enrolled in our B-Rewards incentive program and earned points for every qualifying purchase on their card. At the end of each rewards period, customers who exceeded a minimum point threshold received a reward to be redeemed on a future purchase. The B-Rewards program also provided other discount and promotional opportunities to cardholders on a routine basis. Reported revenue was net of both current period reward redemptions, current period discounts and promotions, and accruals for estimated future rewards earned under the B-Rewards program. A liability was recorded for future rewards based on the Company's estimate of how many earned points would turn into rewards and ultimately be redeemed prior to expiration, which was included in "gift certificates redeemable" on the Company's consolidated balance sheets. In October 2020, the Company merged the B-Rewards program and the Buckle Rewards program enabling participating guests to earn additional points for qualifying purchases on their PLCC card under the newly enhanced Buckle Rewards program. 2.Inventory. Inventory is valued at the lower of cost or net realizable value. 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 account for merchandise obsolescence and markdowns that could affect net realizable 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 adjustment to inventory for markdowns and/or obsolescence was $5.6 millionas of January 29, 2022and $10.8 millionas of January 30, 2021. 3.Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between the 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. 4.Leases. The Company's lease portfolio is primarily comprised of leases for retail store locations. The Company also leases certain equipment and corporate office space. Store leases for new stores typically have an initial term of 10 years, with options to renew for an additional 1 to 5 years. The exercise of lease renewal options is at the Company's sole discretion and is included in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Certain store lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Lease agreements do not contain any residual value guarantees, material restrictive covenants, or options to purchase the leased property. The Company records its lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company obtains an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company has elected to apply the practical expedient to account for lease components (e.g. fixed payments for rent, insurance, and real estate taxes) and non-lease components (e.g. fixed payments for common area maintenance) together as a single component for all underlying asset classes. Additionally, the Company elected as an accounting policy to exclude short-term leases from the recognition requirements. 22 -------------------------------------------------------------------------------- Consistent with guidance in the FASB Staff Q&A regarding lease concessions related to the effects of the COVID-19 pandemic, the Company made the election to treat all lease concessions as though the enforceable rights and obligations existed in each contract and, therefore, did not apply the lease modification guidance in ASC 842. 5.Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity (net of the effect of income taxes), using the specific identification method, until they are sold. Held-to-maturity securities are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses included in earnings, using the specific identification method.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management's review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company's financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which are similar to those of other comparable retail companies. The following table identifies the material obligations and commitments as of
January 29, 2022: Payments Due by Fiscal Year Contractual obligations (dollar amounts in thousands): Total 2022 2023-2024 2025-2026 Thereafter Purchase obligations $ 16,679 $ 13,563
19,352 - - - 19,352 Operating lease payments (a) 313,794 97,256 132,845 55,646 28,047 Total contractual obligations
$ 349,825 $ 110,819
(a) See Note D to the consolidated financial statements.
The Company has available an unsecured line of credit of
$25.0 million, which is excluded from the preceding table. The line of credit agreement has an expiration date of July 31, 2023and provides that $10.0 millionof the $25.0 millionline of credit is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during fiscal 2021, 2020, and 2019. The Company had outstanding letters of credit totaling $2.7 millionand $1.8 millionas of January 29, 2022and January 30, 2021, respectively. The Company has no other off-balance sheet arrangements.
TRANSACTIONS WITH RELATED PARTIES
Included in other assets is a note receivable of
$1.4 millionas of January 29, 2022and $1.4 millionas of January 30, 2021, from a life insurance trust fund controlled by the Company's Chairman. The note was created over three years, beginning in July 1994, when the Company paid life insurance premiums of $0.2 millioneach year for the Chairman on a personal policy. The note accrues interest at 5% of the principal balance per year and is to be paid from the life insurance proceeds. The note is secured by a life insurance policy on the Chairman. 23 --------------------------------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements are presented in footnote A to the consolidated financial statements.
Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management's discussion and analysis contains certain forward-looking statements, which reflect management's current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company's business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company.
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