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The Buckle, Inc. is a medium-sized firm in the retail space that recently reported 2Q 2021 results (QE 8/1/2020). There are excerpts from the 10Q

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The Buckle, Inc. is a medium-sized firm in the retail space that recently reported 2Q 2021 results (QE 8/1/2020). There are excerpts from the 10Q Report below and the unaudited financial statements from the report are appended at the end of this exam.

Several pertinent questions are raised from a study of this information.

  1. How would you define the current level of debt for this firm qualitatively and quantitively? This will necessitate defining what you mean by debt.
  2. Damodarans data suggests that the book value of debt compared to capital for this industry segment is 42%. How is The Buckle positioned relative to this industry benchmark? Is that good, bad, or indifferent at this point in time?
  3. What would be the implications for the company if it were to decide to increase financial leverage by increasing the debt ratio but not changing the total capital (i.e., exchange debt for some portion of current equity)? In responding to this consider the impact upon company operations, creditors, and shareholders. Current share price is $28.10 per share and interest on any new debt is anticipated to be 6%.
  4. Given the companys financial condition as outlined in the 10Q and your assessment of cash flows, how likely is it that the firm will need additional funds? Would you have concerns about meeting any debt service requirements?

In responding to these questions, you should concentrate on the concepts and logic but use data or analysis if it strengthens your argument. I am looking for a demonstration of the implications of capital structure decisions in the context of this company and at this time.

Excerpts from the latest The Buckle, Inc. 10 Q

The Company is a retailer of medium to better priced casual apparel, footwear, and accessories for fashion conscious young men and women. The Company operates its business as one reportable segment. The Company sells its merchandise through its retail stores and e-Commerce platform. The Company had 446 stores located in 42 states throughout the United States as of August 1, 2020 and 449 stores in 42 states as of August 3, 2019. During the twenty-six-week period ended August 1, 2020, the Company opened 3 new stores, substantially remodeled 1 store, and closed 5 stores, which includes 3 new stores, no substantially remodeled stores, and 3 closed stores for the second quarter. During the twenty-six-week period ended August 3, 2019, the Company opened 1 new store, substantially remodeled 3 stores, and closed 2 stores, which includes 1 new store, 2 substantially remodeled stores, and 1 closed store during the second quarter.

The Company temporarily closed all of its brick-and-mortar stores beginning March 18, 2020 to protect the health and welfare of its guests, teammates, and communities as a result of the COVID-19 pandemic. The Company began the process of reopening certain stores the week of April 26, 2020, following all appropriate federal, state, and local reopening guidelines. As of August 1, 2020, 431 of the Company's 446 stores were open. Of the 15 stores which were closed, 2 had not yet reopened due to damage sustained during the closure period. The remaining 13 stores are located in California and had previously reopened but were subsequently closed again during July in accordance with state guidelines. The store closings had a significant impact on the Company's revenue for the twenty-six-week period ended August 1, 2020, which was down $73,692 or 18.2% from the same twenty-six-week period in the prior year. The Company's online store remained open without interruption and experienced significant growth during the twenty-six-week period ended August 1, 2020, growing $30,555 or 64.3% compared to the same twenty-six-week period in the prior year. (p. 7, Buckle, Inc. 10Q, 8/1/2020)

As of August 1, 2020, the Company had working capital of $244.5 million, including $265.7 million of cash and cash equivalents and $12.6 million of 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 the first two quarters of fiscal 2020 and fiscal 2019, the Company's cash flow from operations was $49.2 million and $35.5 million, respectively. Changes in operating cash flow between periods 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. The increase for the first half of fiscal 2020 compared to the first half of fiscal 2019 is due to changes in inventory and accounts payable as the Company managed and adjusted to changing trends as a result of COVID-19 and also due to the deferral of a significant portion of the Company's May and June store rent payments.

The uses of cash for both twenty-six-week periods primarily include payment of annual bonuses accrued at fiscal year-end, inventory purchases, construction costs for new and remodeled stores, other capital expenditures, and purchases of investment securities. The first half of fiscal 2019 also included cash used for dividend payments.

During the first two quarters of fiscal 2020 and 2019, the Company invested $2.6 million and $3.9 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company also spent $0.8 million and $0.3 million in the first two quarters of fiscal 2020 and 2019, respectively, in capital expenditures for the corporate headquarters and distribution facility.

During the remainder of fiscal 2020, the Company anticipates completing three additional full store remodel projects. Management estimates that total capital expenditures during fiscal 2020 will be approximately $7.0 to $10.0 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 a consistent record of generating positive cash flow from operations each year and, as of August 1, 2020, had total cash and investments of $294.9 million, including $16.5 million of long-term investments.

Future conditions, however, may reduce the availability of funds based upon factors such as a decrease in demand for the Company's product, change in product mix, competitive factors, and general economic conditions as well as other risks and uncertainties which would reduce the Company's sales, net profitability, and cash flows. Also, the Company's acceleration in store openings and/or remodels or the Company entering into a merger, acquisition, or other financial related transaction could reduce the amount of cash available for further capital expenditures and working capital requirements. (p. 17, Buckle, Inc. 10Q, 8/1/2020)

THE BUCKLE, INC. THE BUCKLE, INC. CXONDENSER CXINSCHLIDATEI BALANCH SHEETS (Amounts in Thousands Excepl Slure and Per Slure Ameunis) (Unandited) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands Except Per Share Amounts) (Unaudited) August February 1, 2020 ASSETS Thiricco Wecks Baded August 1 August 3. 2020 2019 Twenty-Six Wecks Ended August 1. August 3, 2020 2019 S 5 S CURRENT ASSETS Cash and cash equivalents Sharminvements Receivables Inventory Propies and where set Tobler 265,714 12AXY 2,394 116,479 20388 413612 220969 12.512 3.136 121,258 21.015 37 RNO SALES, Nct of cturns and allowances $ 216,025 S 203.817 S 331.438 $ 405,130 COST OF SALES (Including buying, distribution, and occupancy costs) 122649 125,120 211,231 249,280 PROPERTY AND EQUIPMENT Less occutulated depreciation and an 431,999 1345,20 10,079 452,25 (338.357) 112.848 Gross profil 93382 78.697 120.207 155,350 OPERATING LEASE RIGHT-OF-USE ASSETS LONG-TERM INVESTMENTS OTHER ASSETS 305,914 16,585 UR 350.00 15,6 I OPERATING EXPENSES: Selling Gencral and administrative 48,535 Tools 855,123 567.890 38.257 9.599 47.851) 10.560 71,761 19.096 901,857 95.144 21,870 117.014 59,095 LIABILITIES AND STOCKHOLDERS' EQUITY INCOME FROM OPERATIONS 45,532 19,6012 29,350 38.3.16 26.491 OTHER INCOME, Nct 404 2,086 978 3,341 CURRENT LIABILITIES Accounts payable Arrial emple comensation Arriere apating expe Gift certificates redeemable Current portion of operating lesse lichilities Inoxne laxes payable Terreni Mobilities 43,142 S 0 19 21,579 12,611 5142 17,837 15,319 INCOME BEFORE INCOME TAXES 45.936 21.688 30,328 41,677 173,50 2.731 172.541 INCOME TAX EXPENSE 11264 5,314 7,430 10.211 DEFERRED COMPENSATION NON-CURRENT OPERATING LEASE LIABILITIES Tonalities 26.536 251.430 441,316 15,863 290,238 479,742 NET INCOME 34,682 S 16,174 S 22.898 $ 31466 CUMMITMENTS EARNINGS PER SHARE: Basic 0.71 S 0.34 S 0.47 $ 0.65 STOCKIKILLERS' BOLLY: Comme stock, authorized 100,000.00 shares at $0.01 prva: 9,407.731 and 9,205,61 stares sed olsandi alam 1, 2020 and Feisty 1, 202D respectively Athiliui mit-in utilal Recitaluri Total stuckholders'city 494 154,517 259.295 414 307 492 152.258 236 M 389,148 567.890 Diluted 0.71 S 0.34 S 047 0.65 855,523 Tallibilities and suckholders' equily Basic weighted average scares Diluted weighted average shares 48,714 48.911 48,550 48,760 48,719 48,918 48,551 48,747 THE BUCKLE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Twenty-Six Weeks Ended August 1, August 3, 2020 2019 22,898 $ 31,466 11,010 2,633 (632) 58 12,427 2,533 (608) 279 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization Amortization of non-vested stock grants, net of forfeitures Deferred income taxes Other Changes in operating assets and liabilities: Receivables Inventory Prepaid expenses and other assets Accounts payable Accrued employee compensation Accrued store operating expenses Gift certificates redeemable Income taxes payable Other assets and liabilities 1,278 4,779 547 21,734 (13,538) 3,279 (2,708) (3,287) 1,115 534 (3,878) (2,923) 13,520 (9,940) 4,131 (3,329) (9,793) 1,124 Net cash flows from operating activities 49,166 35,543 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Change in other assets Purchases of investments Proceeds from sales/maturities of investments (3,382) 111 (15,953) 15,175 (4,152) 99 (25,167) 27,930 Net cash flows from investing activities (4,049) (1,290) CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of common stock Payment of dividends (372) (68) (24,615) Net cash flows from financing activities (372) (24,683) NET INCREASE IN CASH AND CASH EQUIVALENTS 44,745 9,570 CASH AND CASH EQUIVALENTS, Beginning of period 220,969 168,471 CASH AND CASH EQUIVALENTS, End of period 265,714 $ 178,041 THE BUCKLE, INC. THE BUCKLE, INC. CXONDENSER CXINSCHLIDATEI BALANCH SHEETS (Amounts in Thousands Excepl Slure and Per Slure Ameunis) (Unandited) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands Except Per Share Amounts) (Unaudited) August February 1, 2020 ASSETS Thiricco Wecks Baded August 1 August 3. 2020 2019 Twenty-Six Wecks Ended August 1. August 3, 2020 2019 S 5 S CURRENT ASSETS Cash and cash equivalents Sharminvements Receivables Inventory Propies and where set Tobler 265,714 12AXY 2,394 116,479 20388 413612 220969 12.512 3.136 121,258 21.015 37 RNO SALES, Nct of cturns and allowances $ 216,025 S 203.817 S 331.438 $ 405,130 COST OF SALES (Including buying, distribution, and occupancy costs) 122649 125,120 211,231 249,280 PROPERTY AND EQUIPMENT Less occutulated depreciation and an 431,999 1345,20 10,079 452,25 (338.357) 112.848 Gross profil 93382 78.697 120.207 155,350 OPERATING LEASE RIGHT-OF-USE ASSETS LONG-TERM INVESTMENTS OTHER ASSETS 305,914 16,585 UR 350.00 15,6 I OPERATING EXPENSES: Selling Gencral and administrative 48,535 Tools 855,123 567.890 38.257 9.599 47.851) 10.560 71,761 19.096 901,857 95.144 21,870 117.014 59,095 LIABILITIES AND STOCKHOLDERS' EQUITY INCOME FROM OPERATIONS 45,532 19,6012 29,350 38.3.16 26.491 OTHER INCOME, Nct 404 2,086 978 3,341 CURRENT LIABILITIES Accounts payable Arrial emple comensation Arriere apating expe Gift certificates redeemable Current portion of operating lesse lichilities Inoxne laxes payable Terreni Mobilities 43,142 S 0 19 21,579 12,611 5142 17,837 15,319 INCOME BEFORE INCOME TAXES 45.936 21.688 30,328 41,677 173,50 2.731 172.541 INCOME TAX EXPENSE 11264 5,314 7,430 10.211 DEFERRED COMPENSATION NON-CURRENT OPERATING LEASE LIABILITIES Tonalities 26.536 251.430 441,316 15,863 290,238 479,742 NET INCOME 34,682 S 16,174 S 22.898 $ 31466 CUMMITMENTS EARNINGS PER SHARE: Basic 0.71 S 0.34 S 0.47 $ 0.65 STOCKIKILLERS' BOLLY: Comme stock, authorized 100,000.00 shares at $0.01 prva: 9,407.731 and 9,205,61 stares sed olsandi alam 1, 2020 and Feisty 1, 202D respectively Athiliui mit-in utilal Recitaluri Total stuckholders'city 494 154,517 259.295 414 307 492 152.258 236 M 389,148 567.890 Diluted 0.71 S 0.34 S 047 0.65 855,523 Tallibilities and suckholders' equily Basic weighted average scares Diluted weighted average shares 48,714 48.911 48,550 48,760 48,719 48,918 48,551 48,747 THE BUCKLE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Twenty-Six Weeks Ended August 1, August 3, 2020 2019 22,898 $ 31,466 11,010 2,633 (632) 58 12,427 2,533 (608) 279 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization Amortization of non-vested stock grants, net of forfeitures Deferred income taxes Other Changes in operating assets and liabilities: Receivables Inventory Prepaid expenses and other assets Accounts payable Accrued employee compensation Accrued store operating expenses Gift certificates redeemable Income taxes payable Other assets and liabilities 1,278 4,779 547 21,734 (13,538) 3,279 (2,708) (3,287) 1,115 534 (3,878) (2,923) 13,520 (9,940) 4,131 (3,329) (9,793) 1,124 Net cash flows from operating activities 49,166 35,543 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Change in other assets Purchases of investments Proceeds from sales/maturities of investments (3,382) 111 (15,953) 15,175 (4,152) 99 (25,167) 27,930 Net cash flows from investing activities (4,049) (1,290) CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of common stock Payment of dividends (372) (68) (24,615) Net cash flows from financing activities (372) (24,683) NET INCREASE IN CASH AND CASH EQUIVALENTS 44,745 9,570 CASH AND CASH EQUIVALENTS, Beginning of period 220,969 168,471 CASH AND CASH EQUIVALENTS, End of period 265,714 $ 178,041

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