Buckle - 10-Q quarterly report FY

For the Transition Period from ____________ to ____________

Commission File Number: 001-12951

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

___________________________________________________________

(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act). Check one.

The number of shares outstanding of the Registrant’s Common Stock, as of September 1, 2006, was 19,426,708.

THE BUCKLE, INC.

FORM 10-Q

INDEX

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

Options granted during the thirteen weeks ended July 29, 2006 were granted under the Company’s 1993 Director Stock Option Plan. Grants were made with an option price equal to the market value of the Company’s common stock on the date of grant and a contractual term of ten years. Options granted under the plan typically vest 25% on the date of grant and 25% on each of the next three successive anniversaries of the date of grant. Stock options granted in prior fiscal years, that were not vested as of the beginning of fiscal 2006, were also granted with an option price equal to the market value on the date of grant, have ten-year contractual terms, and generally vest no later than three years from the date of grant.

A summary of the Company’s stock-based compensation activity related to stock options for the fiscal quarters ended July 29, 2006 and July 30, 2005 is as follows:

The total intrinsic value of value of options exercised during the fiscal quarters ended July 29, 2006 and July 30, 2005, respectively, was $1,773 and $17,578. The aggregate grant-date fair value of stock options vested during the fiscal quarters ended July 29, 2006 and July 30, 2005 was $66 and $9,657, respectively. The Company received cash from the exercise of stock options during the thirteen and twenty-six week periods of $1,611 and $3,045, respectively. The excess tax benefit realized from the exercise of options was $548 and $1,136 for the thirteen and twenty-six week periods ended July 29, 2006. As of July 29, 2006, there was $1,796 of unrecognized compensation expense related to non-vested stock options. It is expected that this expense will be recognized over a weighted average period of 2.0 years.

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

A summary of the Company’s stock-based compensation activity related to grants of non-vested shares of common stock for the fiscal quarters ended July 29, 2006 and July 30, 2005 is as follows:

As of July 29, 2006, there was $3,538 of unrecognized compensation expense related to grants of non-vested shares. It is expected that this expense will be recognized over a weighted average period of 3.0 years.

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

THE BUCKLE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 2006 AND JULY 30, 2005

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Management considers the following items to be key performance indicators in evaluating Company performance.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net sales increased from $209.7 million in the first six months of fiscal 2005 to $212.0 million for the first six months of fiscal 2006, a 1.1% increase. Comparable store sales decreased by $6.9 million, or 3.4%, for the twenty-six week period ended July 29, 2006, compared to the same period in the prior year. The comparable store sales decrease was primarily due to a decrease in the number of transactions at comparable stores during the period, partially offset by a 4.0% increase in the average retail price per piece of merchandise sold during the period and a 3.3% increase in the average number of units sold per transaction. Sales growth for the twenty-six week period was, therefore, attributable to the inclusion of a full six months of operating results for fifteen new stores opened during fiscal 2005, to the opening of nine new stores during the first two quarters of fiscal 2006 and to growth in online sales. Average sales per square foot decreased 4.2% from $127 for the six months ended July 30, 2005, to $121 for the six months ended July 29, 2006.

The Company’s average retail price per piece of merchandise sold increased $1.05, approximately 3.0%, during the second quarter of fiscal 2006 compared to the second quarter of fiscal 2005. This $1.05 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 6.8% increase in denim price points ($0.86), an 8% increase in accessory price points ($0.25), a 9.2% increase in footwear price points ($0.23), a 4.6% increase in woven shirt price points ($0.08), a 0.9% increase in knit shirt price points ($0.08) and a 33.6% increase in active apparel price points ($0.08). These increases were partially offset by the impact of a shift in the merchandise mix and reduced price points in certain other categories. These changes are primarily a reflection of merchandise shifts in terms of brands; product styles, fabrics, details and finishes; and the mix of branded versus private label merchandise.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s average retail price per piece of merchandise sold increased $1.43, approximately 4.0%, during the first half of fiscal 2006 compared to the first half of fiscal 2005. This $1.43 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 6.2% increase in denim price points ($0.88), an 8% increase in footwear price points ($0.22), a 4.4% increase in accessory price points ($0.14), a 6.0% increase in woven shirt price points ($0.11), a 1.2% increase in knit shirt price points ($0.10) and a 29.6% increase in active apparel price points ($0.07). These increases were partially offset by reduced outerwear price points. These changes are primarily a reflection of merchandise shifts in terms of brands; product styles, fabrics, details and finishes; and the mix of branded versus private label merchandise.

Gross profit after buying, occupancy and distribution expenses decreased $2.2 million in the second quarter of fiscal 2006 to $34.1 million, a 6.0% decrease. As a percentage of net sales, gross profit decreased from 34.8% in the second quarter of fiscal 2005 to 33.3% in the second quarter of fiscal 2006. The decrease in gross profit, as a percentage of net sales, resulted primarily from a 0.4% decline (as a percentage of net sales) in actual merchandise margins as a result of an increase in markdown merchandise and from de-leveraged occupancy expense (1.2%, as a percentage of net sales) and buying expense (0.1%, as a percentage of net sales). These increases were, however, partially offset by a 0.2% reduction, as a percentage of net sales, in expense related to the incentive bonus accrual.

Year-to-date, gross profit decreased $0.4 million for the first twenty-six weeks of fiscal 2006 to $73.1 million, a 0.5% decrease. As a percentage of net sales, gross profit decreased from 35.0% for the first half of fiscal 2005 to 34.5% for the first half of fiscal 2006. The decrease in gross profit, as a percentage of net sales, resulted primarily from de-leveraged occupancy expense (0.8%, as a percentage of net sales). These increases were, however, partially offset by a 0.2% improvement, as a percentage of net sales, in actual merchandise margins and a 0.1% reduction, as a percentage of net sales, in the incentive bonus accrual.

Selling expenses increased from $21.7 million for the second quarter of fiscal 2005 to $22.1 million for the second quarter of fiscal 2006, a 1.8% increase. As a percentage of net sales, selling expense increased from 20.8% for the second quarter of fiscal 2005 to 21.6% for the second quarter of fiscal 2006. The increase was primarily attributable to increases in internet-related fulfillment and marketing expenses (0.6%, as a percentage of net sales), store salaries (0.5%, as a percentage of net sales), store fixture expense (0.3%, as a percentage of net sales), stock option compensation expense as a result of FASB Statement 123(R) adoption during fiscal 2006 (0.3%, as a percentage of net sales), bankcard fees (0.1%, as a percentage of net sales) and certain other selling expenses of 0.1%. These increases were partially offset by a 0.9% reduction, as a percentage of net sales, in the incentive bonus accrual and a 0.2% reduction, as a percentage of net sales, in payroll tax expense, as well as reductions in certain other selling expenses.

Year-to-date, selling expense increased from $42.6 million in the first six months of fiscal 2005 to $44.0 million for the first six months of fiscal 2006, a 3.3% increase. As a percentage of net sales, selling expense increased from 20.3% in fiscal 2005 to 20.8% in fiscal 2006. The increase in selling expense, as a percentage of net sales, resulted primarily from increases in internet-related fulfillment and marketing expenses (0.6%, as a percentage of net sales), stock option compensation expense (0.3% as a percentage of net sales), store salaries (0.3%,as a percentage of net sales), store fixture expense (0.2%, as a percentage of net sales), bankcard fees (0.1%, as a percentage of net sales) and certain other selling expenses. These increases were partially offset by a 0.7% reduction, as a percentage of net sales, in the incentive bonus accrual, a 0.2% reduction, as a percentage of net sales, in advertising spending and a 0.1% reduction, as a percentage of net sales, in payroll tax expense, as well as reductions in certain other selling expenses.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

General and administrative expenses decreased from $3.9 million in the second quarter of fiscal 2005 to $3.7 million in the second quarter of fiscal 2006, a 4.5% decrease. As a percentage of net sales, general and administrative expenses decreased from 3.7% for the second quarter of fiscal 2005 to 3.6% for the second quarter of fiscal 2006. The decrease in general and administrative expenses, as a percentage of net sales, resulted primarily from a 0.4% reduction, as a percentage of net sales, in the incentive bonus accrual and a 0.2% reduction, as a percentage of net sales, in compensation expense related to restricted stock grants and unrealized gains in the Company’s non-qualified deferred compensation plan. These reductions were partially offset by increases in stock option compensation expense as a result of FASB Statement 123(R) adoption during fiscal 2006 (0.1%, as a percentage of net sales), home office payroll expense (0.1%, as a percentage of net sales) and certain other general and administrative expenses totaling 0.2%. Prior year general and administrative expenses were also positively impacted by a one-time gain on the disposal of assets (0.1%, as a percentage of net sales).

Year-to-date, general and administrative expense decreased from $8.0 million for the first six months of fiscal 2005 to $7.5 million for the first six months of fiscal 2006, a 5.5% decrease. As a percentage of net sales, general and administrative expense decreased from 3.8% in fiscal 2005 to 3.5% in fiscal 2006. The reduction in general and administrative expenses, as a percentage of net sales, resulted primarily from a 0.3% reduction, as a percentage of net sales, in the incentive bonus accrual and a 0.2% reduction, as a percentage of net sales, in professional fees (primarily related to fees incurred in the first quarter of fiscal 2005 as a result of the Company’s stock repurchase from its founder). These reductions were partially offset by increases in equity compensation expense (0.1%, as a percentage of net sales), home office payroll expense (0.1%, as a percentage of net sales) and certain other general and administrative expenses. Prior year general and administrative expenses were also positively impacted by a one-time gain on the disposal of assets during the second quarter (0.1%, as a percentage of net sales).

As a result of the above changes, the Company’s income from operations decreased 22.4% to $8.3 million for the second quarter of fiscal 2006 compared to $10.7 million for the second quarter of fiscal 2005. Income from operations was 8.1% of net sales for the second quarter of fiscal 2006 compared to 10.3% of net sales for the second quarter of fiscal 2005. Income from operations, for the twenty-six week period ended July 29, 2006, decreased 5.9% to $21.5 million compared to $22.9 million for the same twenty-six week period in fiscal 2005. Income from operations was 10.2% of net sales for the first six months of fiscal 2006 compared to 10.9% for the first six months of fiscal 2005.

Other income for the quarter ended July 29, 2006, increased $1.0 million or 81.7% from the quarter ended July 30,2005. For the six months ended July 29, 2006, other income increased $1.1 million or 41.2%. The increase in other income for both the three and six month periods of fiscal 2006 compared to the same periods in the prior year was primarily due to proceeds received from the settlement of Hurricane Katrina insurance claims and settlement of a lawsuit related to Visa/Mastercard interchange fees, in addition to an increase in income earned on the Company’s cash and investments, as further described in Note 7.

Income tax expense, as a percentage of pre-tax income, was 37.2% in the second quarter of fiscal 2006 compared to 36.7% for the second quarter of fiscal 2005, bringing net income to $6.6 million in the second quarter of fiscal 2006 compared to $7.6 million in the second quarter of fiscal 2005. For the first half of fiscal 2006, income tax expense was 37.1% of pre-tax income compared to 36.9% for the first half of fiscal 2005, bringing net income to $16.0 million for the first half of fiscal 2006 compared to $16.2 million for the first half of fiscal 2005.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

As of July 29, 2006, the Company had working capital of $204.2 million, including $8.5 million of cash and cash equivalents and short-term investments of $135.6 million. The Company’s primary ongoing cash requirements are for inventory, payroll, occupancy costs, dividend payments, new store expansion and remodeling. Historically, the Company’s primary source of working capital has been cash flow from operations. The first half of each fiscal year is typically a period of decreasing cash flows created by various operating, investing and financing activities. During the first half of fiscal 2006 and 2005, the Company's cash flow provided (used) by operating activities was $2.2 million and $(2.0) million, respectively.

The uses of cash for both twenty-six week periods include payment of annual bonuses accrued at fiscal year end, changes in inventory and accounts payable for build up of inventory levels, dividend payments and construction costs for new and remodeled stores. The reduction in cash flow for the first six months of fiscal 2006 compared to the first six months of fiscal 2005 resulted primarily from fewer proceeds from sales/maturities of investments, reduced purchases of property and equipment, reduced proceeds from the exercise of stock options and increased cash dividend payments, partially offset by a reduction in inventory build-up during the first half of fiscal 2006 and the repurchase of three million shares of common stock the first quarter of fiscal 2005, resulting in a cash payout of $84 million.

During the first half of fiscal 2006 and 2005, the Company invested $9.8 million and $8.9 million, respectively, in new store construction, store renovation and store technology upgrades. The Company also spent approximately $1.1 million in the first half of fiscal 2006 in capital expenditures related to the expansion of its corporate headquarters and distribution center compared to $5.0 million spent in the first half of fiscal 2005.

During the remainder of fiscal 2006, the Company anticipates completing approximately twelve additional store construction projects, including approximately eight new stores and approximately four stores to be remodeled and/or relocated. As of July 29, 2006, nine additional lease contracts have been signed.

Management now estimates that total capital expenditures during fiscal 2006 will be approximately $27.5 million. The Company believes that existing cash 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 July 29, 2006, had total cash and investments of $184.9 million. The Company does not currently have plans for a merger, acquisition or accelerated store expansion. The Company’s plans for new store expansion and remodels/relocations during the next three years are reasonably consistent with its past three fiscal years’ average. Based upon past results and current plans, management does not anticipate any material changes in the Company’s need for cash in the upcoming year. However, future conditions 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 $17.5 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 $10 million. Borrowings under the line of credit provide for interest to be paid at a rate equal to the prime rate established by the Bank. The Company has, from time to time, borrowed against these lines during periods of peak inventory build-up. There were no bank borrowings during the first half of fiscal 2006 or 2005.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, and 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 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 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 BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As referenced in the tables 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 or 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 tables identify the material obligations and commitments as of July 29, 2006:

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company has available an unsecured line of credit of $17.5 million of which $10 million is available for letters of credit, which is excluded from the preceding table. 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 the second quarter of fiscal 2006 or the second quarter of fiscal 2005. The Company had outstanding letters of credit totaling $999 and $895 at July 29, 2006 and January 28, 2006, respectively. The Company has no other off-balance sheet arrangements.

The Company's business is seasonal, with the Christmas season (from approximately November 15 to December 30) and the back-to-school season (from approximately July 15 to September 1) historically contributing the greatest volume of net sales. For fiscal years 2003, 2004, and 2005, the Christmas and back-to-school seasons accounted for approximately 40%, 38% and 37% of the Company’s fiscal year net sales. Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation has had a material effect on the results of operations during the thirteen-week periods ended July 29, 2006, and July 30, 2005.

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment,” which was effective for fiscal years beginning after June 15, 2005. SFAS 123(R) requires an entity to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The Company adopted SFAS 123(R) effective with the first quarter of fiscal 2006 utilizing the modified prospective approach, with the Black-Scholes option pricing model used to calculate the fair value of stock options. Compensation expense was recorded for new awards based on their grant date fair value. Additionally, for the portion of previously issued and outstanding awards, that were not vested as of the beginning of the fiscal year, compensation expense was recorded based on previously disclosed SFAS 123 methodologies and valuations, beginning with the first quarter of fiscal 2006. The adoption of “SFAS No. 123(R): Share-Based Payments” had a $0.01 and $0.02 per share impact on both the Company’s reported after-tax basic and diluted earnings per share for the second quarter and for the first half of fiscal 2006, respectively. The adoption had no impact on reported basic or diluted per share net earnings for the second quarter or first half of fiscal 2005, as the Company has elected to utilize the modified prospective approach.

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.

THE BUCKLE, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has evaluated the disclosure requirements of Item 305 of S-K “Quantitative and Qualitative Disclosures about Market Risk,” and has concluded that the Company has no market risk sensitive instruments for which these additional disclosures are required.

ITEM 4 - CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that material information, which is required to be timely disclosed, is accumulated and communicated to management in a timely manner. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer. In performing this evaluation, management considered its controls over the accounting for and disclosure of its investments. As a result of the errors identified during the first quarter of fiscal 2006, management determined that a material weakness in internal control over financial reporting related to the accounting for and disclosure of investments had not been remediated as of January 28, 2006 and was remediated as of the end of the period covered by this report.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by the Company in the Company’s reports that it files or submits under the Exchange Act is accumulated and communicated to the management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Management has implemented additional transaction level controls over the accounting for and disclosure of its investments and believes that these expanded transaction level control activities for the classification of individual investments have allowed the Company to fully remediate this material weakness.

There were no other changes in the Company’s internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

THE BUCKLE, INC.

PART II -- OTHER INFORMATION

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.