Ladies and gentlemen, thank you for standing by, and welcome to the second quarter earnings release conference call.

[Operator Instructions] Members of Buckle's management on the call today are Dennis Nelson, President and CEO; Karen Rhoads, Senior Vice President of Finance and CFO; Pat Whisler, Senior 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 second quarter which ended August 1, 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 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 expressed written consent. Any unauthorized reproductions or recordings of the calls should not be relied upon as the information may be inaccurate.

As a reminder, this conference is being recorded. .

I'd now like to turn the call over to our host, Ms. Karen Rhoads. Please go ahead. .

Thank you. Good morning, everyone. Thanks for joining our call this morning.

Our August 20, 2015, press release reported that net income for the 13-week second quarter that ended August 1, 2015, was $23.5 million or $0.49 per share on a diluted basis, and that compares to net income of $24.5 million or $0.51 per share on a diluted basis for the prior year 13-week second quarter that ended August 2, 2014.

Our year-to-date net income for the 26-week period ended August 1, 2015, was $57.1 million or $1.18 per share on a diluted basis, and that is compared to net income of $61.8 million or $1.29 per share on a diluted basis for the prior year 26-week period that ended August 2, 2014..

Net sales for the 13-week second quarter increased 0.1% to $236.1 million compared to net sales of $235.7 million for the prior year 13-week second quarter. Our comparable store sales for the quarter were down 1.7% in comparison to the same 13-week period in the prior year, and our online sales increased 17.4% to $20.1 million.

Year-to-date, our net sales were $507.4 million for both the 26-week fiscal period ended August 1, 2015, and the 26-week fiscal period ended August 2, 2014. Our comparable store sales for the year-to-date period were down 2% in comparison to the same 26-week period in the prior year, and our online sales increased 14.9% to $44.3 million..

Gross margin for the quarter was 40.1%, down approximately 20 basis points from 40.3% for the second quarter last year.

The decrease was driven primarily by deleveraged occupancy, buying and distribution expenses resulting from the comparable store sales decline, and that was partially offset by improvements in merchandise margin, which was up about 55 basis points for the quarter.

For the year-to-date period, gross margin was 41.0%, down approximately 80 basis points from 41.8% for the same period last year.

The decrease was driven primarily by deleveraged occupancy, buying and distribution expenses resulting from the comparable store sales decline, partially offset by improved merchandise margins, which were up 10 basis points..

Selling expense was 19.7% of net sales for the second quarter of both fiscal 2015 and fiscal 2014. Increases in store payroll expense and online fulfillment and marketing expenses were offset by reductions as a percentage of net sales in expense related to the incentive bonus accrual and certain other selling expenses.

For the year-to-date period, selling expense was 18.8% of net sales compared to 18.5% for the same period in fiscal 2014. Increases in store payroll expense and online fulfillment and marketing expenses were partially offset by a reduction as a percentage of net sales in expense related to the incentive bonus accrual..

Our general and administrative expenses for the quarter were 4.7% of net sales compared to 4.2% of net sales for the second quarter of fiscal 2014, with increases as a percentage of net sales across several expense categories as a result of the comparable store sales decline for the quarter.

For the year-to-date period, general and administrative expenses were 4.5% of net sales compared to 4.0% for the same period in fiscal 2014, with increases as a percentage of net sales across several expense categories as a result of the comparable store sales decline..

Our operating margin for the quarter was 15.7% compared to 16.4% for the second quarter of fiscal 2014. For the year-to-date period, our operating margin was 17.7% compared to 19.3% for the same period last year.

Other income for the quarter was $272,000 compared to $260,000 for the second quarter of fiscal 2014, and other income for the year-to-date period was $1 million compared to $605,000 last year..

Income tax expense as a percentage of pretax net income was 37.3% for the second quarter of both fiscal 2015 and fiscal 2014, bringing second quarter net income to $23.5 million for fiscal 2015 versus $24.5 million for fiscal 2014.

Year-to-date, our income tax expense was also 37.3% for both fiscal 2015 and fiscal 2014, bringing year-to-date net income to $57.1 million for fiscal 2015 versus $61.8 million for fiscal 2014..

inventory of $150.8 million, which was up approximately 17.5% from inventory of $128.2 million at the end of the second quarter of fiscal 2014; and total cash and investments of $190.8 million, which compares to $203.3 million at the end of fiscal 2014 and $230.5 million at the same time a year ago.

As of the end of the quarter, inventory on a comparable store basis was up approximately 10% compared to the same time a year ago, and total markdown inventory was up on an absolute dollar basis but down as a percentage of total inventory.

Please note that the comparable store inventory increase for this year is in comparison to comparable store inventory levels that were down 5.5% at the same time a year ago.

Additionally, the overall increase in inventory was attributable to several factors, including an increase in in-transit and DC inventory and a tax-free shift that shifted back-to-school shopping in certain states from fiscal July into fiscal August. We also ended the quarter with $177.7 million in fixed assets, net of accumulated depreciation. .

$12.8 million for new store construction, store remodels and store technology upgrades; and $8.2 million for capital spending at the corporate headquarters and distribution center.

We still expect our fiscal 2015 capital expenditures to be in the range of $35 million to $39 million, which includes primarily new store and store remodeling projects, IT investments and the completion of a new office building in Kearney, Nebraska, which some of our teams moved in to during April..

For the quarter, UPT decreased approximately 1.5%. The average transaction value increased approximately 3%, and the average unit retail increased approximately 4.5%. For the year-to-date period, UPT decreased approximately 1%. The average transaction value increased approximately 3.5%, and the average unit retail increased approximately 4.5%. .

Buckle ended the quarter with 464 retail stores in 44 states compared to 456 stores in 44 states at the end of the second quarter of fiscal 2014. Additionally, our total square footage was 2.352 million square feet as of the end of the quarter compared to 2.309 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. .

Good morning, and thanks for joining 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 up approximately 5%, with strong categories including casual bottoms, knit shirts, shorts and accessories. Average denim price points increased from $92.85 in the second quarter of fiscal 2014 to $94.40 in the second quarter of fiscal 2015.

For the quarter, our men's business was approximately 46% of net sales compared to 44% last year, and average men's price points increased slightly from $50.40 to $50.75..

Women's merchandise sales for the quarter were down approximately 3.5%, with strong categories including casual bottoms, woven tops, shorts and dresses. Average denim price points decreased from $98.65 in the second quarter of fiscal 2014 to $95.45 in the second quarter of fiscal 2015.

For the quarter, our women's business was approximately 54% of net sales compared to 56% last year, and our average women's price points increased approximately 6% from $43.95 to $46.50..

For the quarter, combined accessories sales were up approximately 3.5%, and combined footwear sales were down approximately 7.5%. These 2 categories accounted for approximately 10% and 5.5%, respectively, of second quarter net sales, which compares to 9.5% and 6% for each in the second quarter of fiscal 2014.

Average accessory price points were up approximately 10.5%, and average footwear price points were down approximately 2%. .

For the quarter, denim accounted for approximately 35% of sales and tops accounted for approximately 32.5%, which compares to 36.5% and 32.5% for each in the second quarter of last year. Our private label business was up slightly as a percentage of net sales for the quarter and represent approximately 1/3 of sales. .

During the quarter, we opened 1 new store and completed 6 full remodels. As of the end of the quarter, 377 of our 464 stores were our newest format.

For all of fiscal 2015, we still anticipate opening 9 new stores in total, which includes 5 remaining that are planned for holiday, and we also still anticipate completing 14 full remodels during the year, including 3 planned for holiday..

And with that, we welcome your questions. .

[Operator Instructions] And our first question will come from Tom Filandro with Susquehanna Financial. .

Karen, can you just help us a little bit on the inventory comments? If you possibly could maybe factor out those 3 buckets that you identified, the in-transit, the DC and the tax-free. Just to give us some understanding of, directionally, what the underlying trend in same-store square -- or sales per square foot inventory looks like.

And maybe, Dennis, can you just tell us overall how you're feeling about the positioning of your inventory? And where are you seeing the increases? And then I have a follow-up question. .

Tom, on the inventory, maybe probably the most apples-to-apples comparison, if you look at the comp store inventory, up about 10% and versus -- compared to down 5.5% a year ago. So on a more normalized level, I guess, we would see that up more in that mid-single digit on the 2-year basis.

So I think that that's where -- taking out the other kind of unusual flow of the product, that, that would be kind of apples-to-apples comparison. And then I'll let Dennis answer your other question. .

Yes. Tom, we are liking the new product we're bringing in. And seeing that, I think, the key category is -- we're trying to do a better job of inventorying all our stores. Some of the smaller stores have been a little low on inventory, so we're trying to get a better mix there for them.

We're also having the stores ask for more extended sizes, like in men's, the XX, XXX shirts for guys in certain brands; also, on the other end, carrying more smalls. Both the men's and women's, we're getting more requests for longer length jeans and extra-long jeans than we've been stocking.

We're introducing additional lifestyle brands, our own brands that we think will attract the guest that maybe is not buying as much as they could be from us as well as expanding our kids inventory to all stores. Still not at a high level inventory, but definitely getting that out and raising our inventory there as well. .

Great. So quick ones for Pat and Bob, possibly. A lot of talk about emerging trends in the denim. We're hearing washed, destruction, some stretch fabrication in men's. Hoping you that both Bob and Pat maybe can give us some insight into what they are seeing in their business. And just the units have been down in the classification over the past 2 years.

Do either of you feel that we're at a stage now where we could see a unit recovery in the broader classification of denim?.

Pat, you want to go first?.

Sure. On the washed, destruction and stretch, I'll talk about that a little bit for both men's -- and I'll let Bob take the men's call. But for women's, that is something we're very familiar with as stretch has been a great driver for the business, and the guest really responds well to that.

I think we have a nice mix of both washed and finishes detail. Probably a more comprehensive mix of price points than we've had in a while, stressing some of the lifestyle, fashion and some of the more trend items.

It's kind of cycling into a wear-now type situation for women's denim, so we were very pleased with some of the summer silhouettes and more of that type of crops and shorts and feel good about our mix on the full length going forward. .

Yes. And I think on men's denim, actually, we've been growing pretty well in men's denim for quite a while. And I think being close to Pat and the girls' team, we've been running stretch and lightweight, along with specialty yarns, YSL, COOLMAX for several years. So I think we were early on that, and that just continues to expand.

And what our guest is telling us is they like the comfort of that. And what we've delivered so far this fall has been well received and feel pretty good about the men's denim selection. On the destruction side, a lot of people moved away from that for quite a while when the clean dark was in, but what we always try to work on is selection.

So there's always everything from light to dark, from a cleaner look to a more destructed finish, so we can just kind of move the percentages a little bit. But we are seeing destruction being very good. .

And our next question comes from Ed Yruma with KeyBanc. .

This is Jessica Schmidt on for Ed. I just wanted to ask about back-to-school. I know the shift in some tax-free holidays weighed on your performance in July.

But were you able to recover this once the tax-free holidays took place? And I guess, just how should we be thinking about the shift into August?.

We can't currently talk about August at all, Jessica, sorry. .

And our next question comes from Simeon Siegel with Nomura Securities. .

So Karen, maybe just ask the other -- asking that one another way. Can you comment at all on the different geographic exposure, kind of trends you saw within the country? Just to try to quantify what the impact was from the tax-free shift in July.

And then I don't know if you answered, Tom, specifically on the inventory piece, but could you say what percentage was attributed to the inventory just due to the sales shift? Because presumably, that inverted the following week or 2. .

No. I think those would be very difficult to respond to accurately. And I mean... .

Yes. We have not shared that publicly. That is correct, yes. .

Okay, all right. And then just maybe a follow-up. Really strong e-commerce growth.

I mean, how large do you think that business can grow over time? And then are the -- how did the e-commerce merch margins do versus the store margins?.

Well, the e-commerce we're very happy with that. We think there'll be continued growth. We're seeing some nice sales in almost all the categories. What it can get to, I'm not sure. But we think, there'll be steady growth, and we continue to look at new ways to analyze and invest in that business. So hopefully that answers that question, Simeon. .

Yes. No, that's good.

And then do you guys know how the merch margins are online versus in stores?.

We don't really calculate that because there's so many factors involved. But online is a very good business for us and a profitable business. .

And our next question comes from Paul Alexander with BB&T Capital Markets. .

Just a follow-up on the denim question and maybe asking in a little more pointed way. The tone on denim had been really optimistic with emerging trends and new interest, particularly in women's, for the last couple of quarters, but the women's denim business hasn't really turned around yet.

So any thoughts on that? And do you think maybe fall will be the inflection point there? Can women's be a comp driver in fall?.

Well, I think so. The last quarter with the tax-free shift probably affected the total denim for that quarter as well as the -- as warm as it's been, the -- our capri business, our denim short business has been very good. And so we look forward to the fall season. .

Great. And then just a follow-up on the e-commerce discussion. You mentioned, Dennis, some -- looking at additional ways to analyze and invest in that business.

Anything specific? Any investments that you're considering that you can share with us?.

Kyle, do you want to comment on that?.

Sure, Dennis. Well, one of the things that we have seen, there's a lift in new visitors to the site, and that's primarily through our paid search programs. And in just analyzing our improved conversion rates, it's primarily to our email and affiliate marketing investments, and that's also helped lead to an increase in our average order size. .

And our next question comes from Steve Marotta with CL King & Associates. .

I'm going to ask a similar question in a different way.

Is it possible to quantify the tax holiday shift on comp store sales result in the second quarter?.

That's not something we're going to provide, Steve, sorry. .

No problem.

Was there any shift in SG&A spend either into or out of the second quarter that was not previously planned for at the beginning of the quarter?.

No, not that I can think of. .

Okay.

And lastly, with merchandise margins up 55 basis points during the second quarter, can you comment on what categories were the best and maybe second best?.

Margin-wise, do we have that, Tom?.

I think, I mean, some of that -- the first quarter was down slightly, and then we saw a nice improvement in the second quarter. And some of that, I think, the comparison looking back a year ago was a little bit easier in the second quarter than the first quarter. And by category, I don't know there's anything specific we want to call out.

Like Pat commented there's some nice expansion in the brands and some of the private labels that have helped drive that and maybe a little bit fewer markdowns. But no, nothing too significant to call out. .

Our next question comes from Liz Pierce with Brean Capital. .

So a couple of things on just semantics.

When you guys talk about performance categories, when you call that out on casual bottoms and shorts, would capris, even if they're denim, be called out separately? Or are they part of the other categories?.

That would be part of the denim category, Liz. .

Okay. Just wanted to make sure -- clarify. And then in the children's business, in the kids business, Dennis, I think you said it's expanding to all stores.

And is that -- because I thought that the boys was pretty much in all stores or maybe if you could just clarify kind of the -- what's incremental on that?.

Okay. Bob, do you want to highlight that? I think you're more in tune than I. .

At holiday, were about 250 doors, and last back-to-school, we had been at 200. So in a small way, we were all stores. To the -- so I don't know if we could -- like Dennis said earlier, it's still a small part of the business. It's grown very nicely. Certainly would have added to some of the inventory being in all stores. .

Is that both boys and girls for the 200 and 250? Or is that just boys?.

That was boys.

And this back-to-school, we have little girls denim in all stores, correct?.

Yes. .

And tops in how many of the stores?.

We've recently rolled out a very small selection to all stores on the girls tops, very small selection, but it was received very well. And then we did introduce BKE, used on the little girls side just recently at end of the quarter. .

I'm sorry, you introduced BKE?.

Denim, yes, for the little girls. We haven't had that in our mix before, so we just introduced that as well for girls. .

Got it.

And so I'm curious who you -- is the parent coming in with the child? Or is the parent picking this up when they're in the store and recognize that you're now offering product for kind of the family?.

Yes. I would say some of each, that our very loyal guests that have children are bringing them in and some that are just shopping discover that we have it. And the stores do a nice job of introducing that when they see a lady with -- who could potentially have children or know someone that have children.

So they kind of make a nice introduction on that to get that started. .

And will that become part of more of your kind of outbound marketing and email? And then I presume that's the greatest way to leverage what you have in the stores. .

Yes. We will continue to update and work on that. And we -- our back-to-school and our holiday, we expect to be the best part of that business. .

Got it. And then just a final question on footwear, which has kind of been under a little bit of pressure.

Any thoughts on -- is it just what's happening in terms of denim in silhouettes and changing kind of the footprint, if you will, what people are wearing with that? Or what are your thoughts about that?.

Well, as our -- on the ladies' side, our sandals, flips and such, we sold down pretty nicely. I think our inventory was lower in those categories than last year. And last year, I think we also brought in some of the boots a little earlier. And with the tax-frees earlier last year, I think that had some effect on the footwear.

As far as silhouettes with denim, Pat, do you want to comment?.

Well, I'd just tag on to what Dennis has already said. But our seasonal sandals, flips, the more wear-now things that are a little bit lower in price points performed well, and we're happy with those. And we did shift some of our tall boots or actual leathers maybe a little bit later for wear-now for the upcoming quarters. .

And we have a question from Lee Giordano with Sterne Agee. .

This is actually Michael Gunther on for Lee. How are you guys thinking about the store opening cadence for last year? Because, obviously, it's slowed down a little bit in terms of what you're planning for this year.

So what are your plans for next year and maybe in the future after that?.

Well, we're still looking at new stores as where we want to see opportunities for -- we think it's a great situation long term. And we're not just calling out a certain number of stores and trying to fill it. We are shopping continuously for new positions that we feel good about. And we'll probably have a better idea for next year at the next call.

As well as we're continuing to reposition some of our existing stores, where we're able to expand them, give or take, around 20% and update the looks there. So that's kind of our growth plan at this point. .

And our next question comes from Adrienne Yih with Wolfe Research. .

My question is on the operating side, the selling expense in particular. It was essentially flattish in dollars.

And I'm wondering, is that something that we should expect go forward? And then where do you breakeven? Where do you get levered on your -- on the fixed components of the business?.

The actual selling expense, that particular category probably has more variable expenses in it than general and administrative expenses, which would have more fixed costs in there. But we continue to see the selling expense vary a little bit more along with sales. We are a pay-for-performance company.

So a lot of times as sales grow -- in the past, we've had that question why we don't maybe sometimes get much leverage in selling. It's because we do pay -- the majority of our teammates in the store are at a base plus commission. So we feel strongly in the pay-for-performance.

And then in the cost of goods sold, we feel like right now that probably that low to mid-single digits would be where the leverage is, and the lever -- and that's kind of on an annual basis because when we look at the leverage, with Q1 and Q2 with the sales lower in absolute dollars, that's a little more leveraged than it does in the back half.

So the back half, that comp can be a little bit lower to get that leverage on the cost of goods sold because in absolute dollars, the sales are greater. So hopefully, that makes sense. .

Yes. That totally makes sense. Did you mention -- I know you gave some of the components.

Did you mention the number of transactions by any chance?.

We did not. .

Would those -- can you give us any color on that?.

I don't have that off the top of my head, sorry. .

Okay, great. And then in terms of -- it sounded like some of the fashion components, you were going to do that through private label.

Is there any meaningful change in the percentage of private label kind of go-forward strategy versus historical?.

I mean, we still do well with brands. But I would guess, in the back half, we'll have somewhere between low to mid-single-digit growth in private brands. In some of them, when we started brand 2, we'll start that out like in a test mode to make sure we have the right fits and the category works in our best stores before rolling that out in total.

So the growth there will probably be slow. .

[Operator Instructions] Our next question will come from Steve Marotta with CL King & Associates. .

One follow-up.

If you have the statistics handy, could you tell us what the percent of denim was in the mix in the first half of this year as well as percent of denim mix in the second half of last year?.

Sure, we can do that. .

They'll look it up. .

Yes. We've got that right here. So this year, for the first half of the year, denim represented about 38.7% of sales versus 40.3% for the same time a year ago. .

Great. And you wouldn't happen to have second half of last year handy? And if not, we could do that offline. .

I do not have it handy, sorry, about that, Steve. .

And our next question will come from Andrew Hollingworth with Holland Advisors. .

Just a couple of quick questions to follow up from the sort of denim questions others raised. Without us knowing the effect of the state taxes, which, obviously, you're not prepared to give us for July, maybe you could just give us a bit of reflection in terms of looking with hindsight.

If the group had known what it knows now about the trends away from denim towards other sort of fabrics in the last sort of couple of years, how might you have done things differently? Just as a sort of -- just to give us a bit of color on this whole sort of subject.

And the 2 other questions I'd have with that is that, in terms of the drivers of like-for-like sales in the last sort of x months. Historically, you've sort of alluded to how much of that might be for, how might of that is trends away from denim and so on. And give us, again, a feel for those.

Even though -- even if you're not prepared to give absolute numbers, maybe some indications would be useful.

And my last question would be is that, during this period of perhaps changing attitude towards denim, I guess, over the last 2 years, do you think there's been a slight change in your customer age profile as well?.

Okay. Andrew, the -- I believe you're kind of asking about if we should have been more in the activewear earlier or such with the... .

Well, I'm more -- clearly, you decide what you think sells and is right for your customers.

I'm just intrigued as to whether -- were you to go back and do it differently, would you choose to? Or frankly, do you just take the view that this is what we believe this will sell from a -- this our brand and our identity for the next 15, 20 years and therefore, we wouldn't have changed a thing?.

Well, you could always change a little bit. But overall, I think the denim or denim-type fabrics, casual fabrics are our core.

And that -- I think we did try some activewear with brands and such and had some success, but it's to play in the big market that's not our niche or how we can differ ourself and the -- focusing on the fits and fabrics and stretches.

It's a little more difficult the last 1.5 years, 2 years just because there was -- mostly was dark and not a lot of excitement out there. So I think our team did a good job on the ladies' side, working with that with what's going on and keeping a very solid denim guest, maybe not buying as many units of the denim but still doing a good job with it.

And on the men's, they've actually grown the denim and done a nice job, and they worked with some twills and some other fabrics with that. But the other fabrics mostly complement our business, and sometimes we'll be able to do a little more than others. So I think, overall, we probably would not have changed a lot of what we had done.

But we're always looking to learn and improve, and we're open to testing. And we work with a lot of brands to see if we think the product offers something that our guests would want. So we try to keep an open mind. But the niche really comes down to denim, and that's kind of where we see going forward that there's going to be some good opportunities. .

And then a follow-up question.

So the ones -- so if you had to look at the last, let's say, year or 6 months, whatever you want, in terms of sales decline, how much of it would you think is down to amount [ph] or how much of it's down to the denim stroke [ph] trends, away from it trends and then the customer age profile?.

Well, I think our -- on the age profile, I mean, we still have a wide variety of guests shopping our store from junior high, high school, college.

But then in our stores where we have been 15, 20 years or more, we probably -- our store managers would tell us that our guest is -- we'd probably have more guests over the age of 25 than under the age of 25. And so that kind of shifts some of the shopping at different times of the year.

And that's -- we have such a wide selection of product and a wide selection of fits as far as in our denim and even in our top categories that we can hit on different lifestyles with all our guests at different ages. So that gives us an opportunity there, and -- but it also creates challenges of how to narrowly focus on certain ones as well.

But I think the team does a very nice job on that. .

And currently, we have no further questions in queue. .

If there are no further questions, we really want to thank everybody for taking time out of their day to join us on the call today, and have a great day. .

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