a6751882.htm
 
    UNITED STATES  
  SECURITIES AND EXCHANGE COMMISSION
    WASHINGTON, D.C. 20549  
       
    FORM 10-Q  
       
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
   
THE SECURITIES EXCHANGE ACT OF 1934
 
       
     For the Quarterly Period Ended April 30, 2011  
       
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
     THE SECURITIES EXCHANGE ACT OF 1934  
       
   
For the Transition Period from ____________ to ____________
 
       
    Commission File Number: 001-12951  
       
   
THE BUCKLE, INC.
 
   
(Exact name of Registrant as specified in its charter)
 
 
 
Nebraska
47-0366193
 
 
(State or other jurisdiction of
(I.R.S. Employer
 
 
incorporation or organization)
    Identification No.)
 
 
 
2407 West 24th Street, Kearney, Nebraska  68845-4915
 
 
(Address of principal executive offices)     (Zip Code)
 
 
 
Registrant's telephone number, including area code: (308) 236-8491
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of class
   Name of Each Exchange on Which Registered
 
 
Common Stock, $.01 par value
New York Stock Exchange
 
 
 
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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
 
Indicate by check mark whether the registrant  has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files). Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
 
þ Large accelerated filer; o Accelerated filer; o Non-accelerated filer; o Smaller Reporting Company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
 
The number of shares outstanding of the Registrant's Common Stock, as of June 3, 2011, was 47,355,775.
 
 
 

 
 
  THE BUCKLE, INC.    
       
  FORM 10-Q    
 
INDEX
   
       
       
       
     
Pages
     
       
 
3
       
   
 
 
17
       
 
25
       
 
25
       
       
     
       
 
26
       
 
26
       
 
26
       
 
26
       
 
26
       
 
26
       
 
26
       
 
 
27
 
 
2

 
 
           
             
BALANCE SHEETS
           
(Amounts in Thousands Except Share and Per Share Amounts)
           
(Unaudited)
           
             
   
April 30,
   
January 29,
 
ASSETS
 
2011
   
2011
 
             
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 139,292     $ 116,470  
  Short-term investments
    21,497       22,892  
  Receivables
    4,051       14,363  
  Inventory
    89,866       88,593  
  Prepaid expenses and other assets
    22,876       14,718  
           Total current assets
    277,582       257,036  
                 
PROPERTY AND EQUIPMENT
    347,959       342,413  
  Less accumulated depreciation and amortization
    (178,103 )     (173,179 )
      169,856       169,234  
                 
LONG-TERM INVESTMENTS
    65,179       66,162  
OTHER ASSETS
    2,416       2,412  
                 
    $ 515,033     $ 494,844  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
  Accounts payable
  $ 41,076     $ 33,489  
  Accrued employee compensation
    15,278       36,018  
  Accrued store operating expenses
    9,323       9,653  
  Gift certificates redeemable
    12,914       17,213  
  Income taxes payable
    9,796       -  
           Total current liabilities
    88,387       96,373  
                 
DEFERRED COMPENSATION
    8,734       7,727  
DEFERRED RENT LIABILITY
    37,617       37,430  
OTHER LIABILITIES
    7,421       7,649  
           Total liabilities
    142,159       149,179  
                 
COMMITMENTS
               
                 
STOCKHOLDERS’ EQUITY:
               
  Common stock, authorized 100,000,000 shares of $.01 par value; 47,342,895 and 47,127,926
               
     shares issued and outstanding at April 30, 2011 and January 29, 2011, respectively
    474       471  
  Additional paid-in capital
    92,900       89,719  
  Retained earnings
    280,150       256,146  
  Accumulated other comprehensive loss
    (650 )     (671 )
           Total stockholders’ equity
    372,874       345,665  
                 
    $ 515,033     $ 494,844  
                 
See notes to unaudited condensed financial statements.
               
 
 
3

 
 
THE BUCKLE, INC.
           
             
STATEMENTS OF INCOME
           
(Amounts in Thousands Except Per Share Amounts)
           
(Unaudited)
           
             
   
Thirteen Weeks Ended
 
   
April 30,
   
May 1,
 
   
2011
   
2010
 
             
SALES, Net of returns and allowances
  $ 240,092     $ 214,797  
                 
COST OF SALES (Including buying, distribution, and occupancy costs)
    137,148       121,346  
                 
           Gross profit
    102,944       93,451  
                 
OPERATING EXPENSES:
               
  Selling
    42,731       39,843  
  General and administrative
    8,859       7,421  
      51,590       47,264  
                 
INCOME FROM OPERATIONS
    51,354       46,187  
                 
OTHER INCOME, Net
    1,612       1,833  
                 
INCOME BEFORE INCOME TAXES
    52,966       48,020  
                 
PROVISION FOR INCOME TAXES
    19,497       17,910  
                 
NET INCOME
  $ 33,469     $ 30,110  
                 
                 
EARNINGS PER SHARE:
               
  Basic
  $ 0.72     $ 0.65  
                 
  Diluted
  $ 0.71     $ 0.64  
                 
Basic weighted average shares
    46,748       46,053  
Diluted weighted average shares
    47,264       46,993  
                 
See notes to unaudited condensed financial statements.
               
 
 
4

 
 
THE BUCKLE, INC.
                                   
                                     
STATEMENTS OF STOCKHOLDERS' EQUITY
                   
(Dollar Amounts in Thousands Except Share and Per Share Amounts)
             
(Unaudited)
                                   
                                     
                           
Accumulated
       
               
Additional
         
Other
       
   
Number
   
Common
   
Paid-in
   
Retained
   
Comprehensive
       
   
of Shares
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                                     
  FISCAL 2011
                                   
BALANCE, January 30, 2011
    47,127,926     $ 471     $ 89,719     $ 256,146     $ (671 )   $ 345,665  
                                                 
  Net income
    -       -       -       33,469       -       33,469  
  Dividends paid on common stock,
                                               
    ($0.20 per share)
    -       -       -       (9,465 )     -       (9,465 )
  Common stock issued on exercise
                                               
    of stock options
    83,819       1       512       -       -       513  
  Issuance of non-vested stock, net of forfeitures
    131,150       2       (2 )     -       -       -  
  Amortization of non-vested stock grants,
                                               
     net of forfeitures
    -       -       1,621       -       -       1,621  
  Income tax benefit related to exercise of
                                               
    stock options
    -       -       1,050       -       -       1,050  
  Unrealized loss on investments, net of tax
    -       -       -       -       21       21  
                                                 
BALANCE, April 30, 2011
    47,342,895     $ 474     $ 92,900     $ 280,150     $ (650 )   $ 372,874  
                                                 
                                                 
  FISCAL 2010
                                               
BALANCE, January 31, 2010
    46,381,263     $ 464     $ 78,837     $ 275,751     $ (793 )   $ 354,259  
                                                 
  Net income
    -       -       -       30,110       -       30,110  
  Dividends paid on common stock,
                                               
    ($0.20 per share)
    -       -       -       (9,337 )     -       (9,337 )
  Common stock issued on exercise
                                               
    of stock options
    101,463       1       470       -       -       471  
  Issuance of non-vested stock, net of forfeitures
    243,765       2       (2 )     -       -       -  
  Amortization of non-vested stock grants,
                                               
     net of forfeitures
    -       -       1,500       -       -       1,500  
  Stock option compensation expense
    -       -       16       -       -       16  
  Income tax benefit related to exercise of
                                               
    stock options
    -       -       1,211       -       -       1,211  
  Unrealized loss on investments, net of tax
    -       -       -       -       34       34  
                                                 
BALANCE, May 1, 2010
    46,726,491     $ 467     $ 82,032     $ 296,524     $ (759 )   $ 378,264  
                                                 
See notes to unaudited condensed financial statements.
           
 
 
5

 
 
THE BUCKLE, INC.
           
             
STATEMENTS OF CASH FLOWS
           
(Dollar Amounts in Thousands)
           
(Unaudited)
           
             
   
Thirteen Weeks Ended
 
   
April 30,
   
May 1,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income
  $ 33,469     $ 30,110  
  Adjustments to reconcile net income to net cash flows
               
    from operating activities:
               
      Depreciation and amortization
    7,500       6,490  
      Amortization of non-vested stock grants, net of forfeitures
    1,621       1,500  
      Stock option compensation expense
    -       16  
      Deferred income taxes
    (600 )     (562 )
      Other
    311       11  
      Changes in operating assets and liabilities:
               
        Receivables
    1,580       759  
        Inventory
    (1,273 )     3,446  
        Prepaid expenses and other assets
    (7,865 )     (7,352 )
        Accounts payable
    9,744       11,177  
        Accrued employee compensation
    (20,740 )     (24,765 )
        Accrued store operating expenses
    (330 )     (474 )
        Gift certificates redeemable
    (4,299 )     (3,266 )
        Income taxes payable
    18,620       15,384  
        Deferred rent liabilities and deferred compensation
    1,194       1,138  
                 
           Net cash flows from operating activities
    38,932       33,612  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Purchase of property and equipment
    (10,590 )     (20,700 )
  Proceeds from sale of property and equipment
    -       14  
  Change in other assets
    (4 )     -  
  Purchases of investments
    (2,107 )     (15,240 )
  Proceeds from sales/maturities of investments
    4,519       6,088  
                 
           Net cash flows from investing activities
    (8,182 )     (29,838 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Proceeds from the exercise of stock options
    513       471  
  Excess tax benefit from stock option exercises
    1,024       1,169  
  Payment of dividends
    (9,465 )     (9,337 )
                 
           Net cash flows from financing activities
    (7,928 )     (7,697 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    22,822       (3,923 )
                 
CASH AND CASH EQUIVALENTS, Beginning of period
    116,470       135,340  
                 
CASH AND CASH EQUIVALENTS, End of period
  $ 139,292     $ 131,417  
                 
See notes to unaudited condensed financial statements.
               
 
 
6

 
 
THE BUCKLE, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED APRIL 30, 2011 AND MAY 1, 2010
 (Dollar Amounts in Thousands Except Share and Per Share Amounts)
(Unaudited)

Management Representation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the results of operations for the interim periods have been included. All such adjustments are of a normal recurring nature. Because of the seasonal nature of the business, results for interim periods are not necessarily indicative of a full year's operations. The accounting policies followed by the Company and additional footnotes are reflected in the financial statements for the fiscal year ended January 29, 2011, included in The Buckle, Inc.'s 2010 Form 10-K.

The Company follows generally accepted accounting principles (“GAAP”) established by the Financial Accounting Standards Board (“FASB”). References to GAAP in these notes are to the FASB Accounting Standards Codification (“ASC”).

Description of the Business

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 industry segment. The Company had 422 stores located in 41 states throughout the continental United States as of April 30, 2011 and 412 stores in 41 states as of May 1, 2010. During the first quarter of fiscal 2011, the Company opened two new stores and substantially remodeled six stores. During the first quarter of fiscal 2010, the Company opened eleven new stores and substantially remodeled three stores.

The following is information regarding the Company’s major product lines, stated as a percentage of the Company’s net sales:
 
   
Percentage of Net Sales
 
   
Thirteen Weeks Ended
 
Merchandise Group
 
April 30, 2011
   
May 1, 2010
 
             
Denims
    44.6 %     45.4 %
Tops (including sweaters)
    31.3       32.9  
Sportswear/Fashions
    9.4       8.4  
Accessories
    7.7       6.5  
Footwear
    5.4       5.3  
Outerwear
    0.7       0.9  
Casual bottoms
    0.7       0.5  
Other
    0.2       0.1  
      100.0 %     100.0 %
 
 
7

 
 
Net Earnings Per Share

Basic earnings per share data are based on the weighted average outstanding common shares during the period. Diluted earnings per share data are based on the weighted average outstanding common shares and the effect of all dilutive potential common shares, including stock options.
 
   
Thirteen Weeks Ended
   
Thirteen Weeks Ended
 
   
April 30, 2011
   
May 1, 2010
 
         
Weighted
   
Per
         
Weighted
   
Per
 
         
Average
   
Share
         
Average
   
Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
                                     
Basic EPS
  $ 33,469       46,748     $ 0.72     $ 30,110       46,053     $ 0.65  
                                                 
Effect of Dilutive Securities:
                                         
  Stock options and
                                               
  non-vested shares
    -       516       (0.01 )     -       940       (0.01 )
Diluted EPS
  $ 33,469       47,264     $ 0.71     $ 30,110       46,993     $ 0.64  
 
Investments

The following is a summary of investments as of April 30, 2011:
 
   
Amortized
   
Gross
   
Gross
   
Other-than-
   
Estimated
 
   
Cost or
   
Unrealized
   
Unrealized
   
Temporary
   
Fair
 
   
Par Value
   
Gains
   
Losses
   
Impairment
   
Value
 
Available-for-sale securities:
                             
  Auction-rate securities
  $ 21,275     $ -     $ (1,031 )   $ (725 )   $ 19,519  
  Preferred stock
    2,000       -       -       (1,974 )     26  
    $ 23,275     $ -     $ (1,031 )   $ (2,699 )   $ 19,545  
                                         
Held-to-maturity securities:
                                       
  State and municipal bonds
  $ 51,497     $ 456     $ (37 )   $ -     $ 51,916  
  Fixed maturities
    6,300       68       -       -       6,368  
  Certificates of deposit
    600       21       -       -       621  
    $ 58,397     $ 545     $ (37 )   $ -     $ 58,905  
                                         
Trading securities:
                                       
  Mutual funds
  $ 8,734     $ -     $ -     $ -     $ 8,734  
 
 
8

 
 
The following is a summary of investments as of January 29, 2011:
 
   
Amortized
   
Gross
   
Gross
   
Other-than-
   
Estimated
 
   
Cost or
   
Unrealized
   
Unrealized
   
Temporary
   
Fair
 
   
Par Value
   
Gains
   
Losses
   
Impairment
   
Value
 
Available-for-sale securities:
                             
  Auction-rate securities
  $ 21,725     $ -     $ (1,065 )   $ (725 )   $ 19,935  
  Preferred stock
    2,000       -       -       (1,974 )     26  
    $ 23,725     $ -     $ (1,065 )   $ (2,699 )   $ 19,961  
                                         
Held-to-maturity securities:
                                       
  State and municipal bonds
  $ 52,352     $ 428     $ (39 )   $ -     $ 52,741  
  Fixed maturities
    6,314       80       -       -       6,394  
  Certificates of deposit
    700       22       -       -       722  
  U.S. treasuries
    2,000       -       -       -       2,000  
    $ 61,366     $ 530     $ (39 )   $ -     $ 61,857  
                                         
Trading securities:
                                       
  Mutual funds
  $ 7,453     $ 274     $ -     $ -     $ 7,727  
 
The auction-rate securities and preferred stock were invested as follows as of April 30, 2011:
 
 
Nature
 
Underlying Collateral
 
Par Value
 
             
 
Municipal revenue bonds
 
98% insured by AAA/AA/A-rated bond insurers at April 30, 2011
  $ 10,400  
 
Municipal bond funds
 
Fixed income instruments within issuers' money market funds
    7,925  
 
Student loan bonds
 
Student loans guaranteed by state entities
    2,950  
 
Preferred stock
 
Underlying investments of closed-end funds
    2,000  
 
  Total par value
      $ 23,275  
 
As of April 30, 2011, the Company’s auction-rate securities portfolio was 34% AAA/Aaa-rated, 45% AA/Aa-rated, 12% A-rated, and 9% below A-rated.

The amortized cost and fair value of debt securities by contractual maturity as of April 30, 2011 is as follows:
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Held-to-maturity securities
           
Less than 1 year
  $ 21,497     $ 21,580  
1 - 5 years
    36,160       36,509  
5 - 10 years
    496       559  
Greater than 10 years
    244       257  
    $ 58,397     $ 58,905  
 
At April 30, 2011 and January 29, 2011, $19,545 and $19,961 of available-for-sale securities and $36,900 and $38,474 of held-to-maturity securities are classified in long-term investments. Trading securities are held in a Rabbi Trust, intended to fund the Company’s deferred compensation plan, and are classified in long-term investments.
 
 
9

 
 
The Company’s investments in auction-rate securities (“ARS”) and preferred securities are classified as available-for-sale and reported at fair market value. As of April 30, 2011, the reported investment amount is net of $1,031 of temporary impairment and $2,699 of other-than-temporary impairment (“OTTI”) to account for the impairment of certain securities from their stated par value. The $1,031 temporary impairment is reported, net of tax, as an “accumulated other comprehensive loss” of $650 in stockholders’ equity as of April 30, 2011. For the investments considered temporarily impaired, the Company believes that these ARS can be successfully redeemed or liquidated through future auctions at par value plus accrued interest. The Company believes it has the ability and maintains its intent to hold these investments until such recovery of market value occurs; therefore, the Company believes the current lack of liquidity has created the temporary impairment in valuation.

As of April 30, 2011, the Company had $21,275 invested in ARS and $2,000 invested in preferred securities, at par value, which are reported at their estimated fair value of $19,519 and $26, respectively. As of January 29, 2011, the Company had $21,725 invested in ARS and $2,000 invested in preferred securities, which were reported at their estimated fair value of $19,935 and $26, respectively. ARS have a long-term stated maturity, but are reset through a “dutch auction” process that occurs every 7 to 49 days, depending on the terms of the individual security. Until February 2008, the ARS market was highly liquid. During February 2008, however, a significant number of auctions related to these securities failed, meaning that there was not enough demand to sell the entire issue at auction. The failed auctions have limited the current liquidity of certain of the Company’s investments in ARS and the Company has reason to believe that certain of the underlying issuers of its ARS are currently at risk. The Company does not, however, anticipate that further auction failures will have a material impact on the Company’s ability to fund its business. During the first quarter of fiscal 2011, the Company was able to successfully liquidate $450 of its investments in ARS at par value. The Company reviews all investments for OTTI at least quarterly or as indicators of impairment exist. Indicators of impairment include the duration and severity of decline in market value. In addition, the Company considers qualitative factors including, but not limited to, the financial condition of the investee, the credit rating of the investee, and the current and expected market and industry conditions in which the investee operates.

As of April 30, 2011 and January 29, 2011, all of the Company’s investments in ARS and preferred securities were classified in long-term investments.

Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

 
Level 1 – Quoted market prices in active markets for identical assets or liabilities. Short-term and long-term investments with active markets or known redemption values are reported at fair value utilizing Level 1 inputs.
 
Level 2 – Observable market-based inputs (either directly or indirectly) such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or inputs that are corroborated by market data.
 
Level 3 – Unobservable inputs that are not corroborated by market data and are projections, estimates, or interpretations that are supported by little or no market activity and are significant to the fair value of the assets. The Company has concluded that certain of its ARS represent Level 3 valuation and should be valued using a discounted cash flow analysis. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows, and expected holding periods of the ARS.
 
 
10

 
 
As of April 30, 2011 and January 29, 2011, the Company held certain assets that are required to be measured at fair value on a recurring basis including available-for-sale and trading securities. The Company’s available-for-sale securities include its investments in ARS, as further described in Note 4. The failed auctions, beginning in February 2008, related to certain of the Company’s investments in ARS have limited the availability of quoted market prices. The Company has determined the fair value of its ARS using Level 1 inputs for known or anticipated subsequent redemptions at par value, Level 2 inputs using observable inputs, and Level 3 using unobservable inputs where the following criteria were considered in estimating fair value:

 
Pricing was provided by the custodian of ARS;
 
Pricing was provided by a third-party broker for ARS;
 
Sales of similar securities;
 
Quoted prices for similar securities in active markets;
 
Quoted prices for publicly traded preferred securities;
 
Quoted prices for similar assets in markets that are not active - including markets where there are few transactions for the asset, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;
 
Pricing was provided by a third-party valuation consultant (using Level 3 inputs).

In addition, the Company considers other factors including, but not limited to, the financial condition of the investee, the credit rating, insurance, guarantees, collateral, cash flows, and the current and expected market and industry conditions in which the investee operates. Management believes it has used information that was reasonably obtainable in order to complete its valuation process and determine if the Company’s investments in ARS had incurred any temporary and/or other-than-temporary impairment as of April 30, 2011 and January 29, 2011.

Future fluctuations in fair value of ARS that the Company judges to be temporary, including any recoveries of previous write-downs, would be recorded as an adjustment to “accumulated other comprehensive loss.”  The value and liquidity of ARS held by the Company may be affected by continued auction-rate failures, the credit quality of each security, the amount and timing of interest payments, the amount and timing of future principal payments, and the probability of full repayment of the principal. Additional indicators of impairment include the duration and severity of the decline in market value. The interest rates on these investments will be determined by the terms of each individual ARS. The material risks associated with the ARS held by the Company include those stated above as well as the current economic environment, downgrading of credit ratings on investments held, and the volatility of the entities backing each of the issues.

The Company’s financial assets measured at fair value on a recurring basis were as follows:
 
   
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices in
                   
   
Active Markets
   
Significant
   
Significant
       
   
for Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
       
April 30, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Available-for-sale securities:
                       
   Auction-rate securities
  $ -     $ 8,171     $ 11,348     $ 19,519  
   Preferred stock
    26       -       -       26  
Trading securities (including mutual funds)
    8,734       -       -       8,734  
Totals
  $ 8,760     $ 8,171     $ 11,348     $ 28,279  
 
 
11

 
 
   
Fair Value Measurements at Reporting Date Using
 
   
Quoted Prices in
                   
   
Active Markets
   
Significant
   
Significant
       
   
for Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
       
January 29, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Available-for-sale securities:
                       
   Auction-rate securities
  $ -     $ 11,349     $ 8,586     $ 19,935  
   Preferred stock
    26       -       -       26  
Trading securities (including mutual funds)
    7,727       -       -       7,727  
Totals
  $ 7,753     $ 11,349     $ 8,586     $ 27,688  
 
Securities included in Level 1 represent securities which have a known or anticipated upcoming redemption as of the reporting date and those that have publicly traded quoted prices. ARS included in Level 2 represent securities which have not experienced a successful auction subsequent to the end of fiscal 2007. The fair market value for these securities was determined by applying a discount to par value based on auction prices for similar securities and by utilizing a discounted cash flow model, using market-based inputs, to determine fair value. The Company used a discounted cash flow model to value its Level 3 investments, using estimates regarding recovery periods, yield, and liquidity. The assumptions used are subjective based upon management’s judgment and views on current market conditions, and resulted in $877 of the Company’s recorded temporary impairment and $725 of the OTTI as of April 30, 2011. The use of different assumptions would result in a different valuation and related temporary impairment charge.

Changes in the fair value of the Company’s financial assets measured at fair value on a recurring basis are as follows:
 
   
Thirteen Weeks Ended April 30, 2011
 
   
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
   
Available-for-Sale Securities
   
Trading Securities
       
   
Auction-rate
     
Preferred
   
Mutual
       
   
Securities
     
Stock
   
Funds
   
Total
 
Balance, beginning of year
  $ 8,586       $ -     $ -     $ 8,586  
  Transfers into Level 3
    2,787  
(a)
    -       -       2,787  
  Transfers out of Level 3
    -         -       -       -  
  Total gains and losses:
                                 
      Included in net income
    -         -       -       -  
      Included in other
                                 
        comprehensive income
    -         -       -       -  
    Purchases, Issuances,
                                 
  Sales, and Settlements:
                                 
Purchases
    -         -       -       -  
Issuances
    -         -       -       -  
Sales
    (25 )       -       -       (25 )
Settlements
    -         -       -       -  
Balance, end of quarter
  $ 11,348       $ -     $ -     $ 11,348  
 
 
(a)
Transferred from Level 2 to Level 3 due to lack of observable market data due to reduction in market activity. The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period in which the transfer occurred.
 
 
12

 
 
   
Thirteen Weeks Ended May 1, 2010
 
   
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
   
Available-for-Sale Securities
   
Trading Securities
       
   
Auction-rate
   
Preferred
   
Mutual
       
   
Securities
   
Stock
   
Funds
   
Total
 
Balance, beginning of year
  $ 8,637     $ -     $ -     $ 8,637  
  Transfers into Level 3
    -       -       -       -  
  Transfers out of Level 3
    -       -       -       -  
  Total gains and losses:
                               
      Included in net income
    -       -       -       -  
      Included in other
                               
        comprehensive income
    -       -       -       -  
  Purchases, Issuances,
                               
    Sales, and Settlements:
                               
       Purchases
    -       -       -       -  
       Issuances
    -       -       -       -  
       Sales
    (28 )     -       -       (28 )
       Settlements
    -       -       -       -  
Balance, end of quarter
  $ 8,609     $ -     $ -     $ 8,609  
 
Comprehensive Income

Comprehensive income consists of net income and unrealized gains and losses on available-for-sale securities. Unrealized losses on the Company’s investments in auction-rate securities have been included in accumulated other comprehensive loss and are separately included as a component of stockholders’ equity, net of related income taxes.
 
   
Thirteen Weeks Ended
 
   
April 30, 2011
   
May 1, 2010
 
             
Net income
  $ 33,469     $ 30,110  
Changes in net unrealized losses on investments
               
  in auction-rate-securities, net of taxes of $(13) and $(20)
    21       34  
Comprehensive income
  $ 33,490     $ 30,144  

Supplemental Cash Flow Information

The Company had non-cash investing activities during the thirteen week periods ended April 30, 2011 and May 1, 2010 of $2,157 and $2,234, respectively. The non-cash investing activity relates to unpaid purchases of property, plant, and equipment included in accounts payable as of the end of the quarter. Amounts reported as unpaid purchases are recorded as cash outflows from investing activities for purchases of property, plant, and equipment in the statement of cash flows in the period they are paid.

Additional cash flow information for the Company includes cash paid for income taxes during the thirteen week periods ended April 30, 2011 and May 1, 2010 of $453 and $1,919, respectively.
 
 
13

 
 
Stock-Based Compensation

The Company has several stock option plans which allow for granting of stock options to employees, executives, and directors. The options are in the form of non-qualified stock options and are granted with an exercise price equal to the market value of the Company’s common stock on the date of grant. The options generally expire ten years from the date of grant. The Company also has a restricted stock plan that allows for the granting of non-vested shares of common stock to employees and executives and a restricted stock plan that allows for the granting of non-vested shares of common stock to non-employee directors.

As of April 30, 2011, 639,343 shares were available for grant under the various stock option plans, of which 449,739 were available for grant to executive officers. Also as of April 30, 2011, 337,769 shares were available for grant under the Company’s various restricted stock plans, of which 285,645 shares were available for grant to executive officers.

Compensation expense was recognized during the first quarter of fiscal 2011 and fiscal 2010 for equity-based grants, based on the grant date fair value of the awards. The fair value of stock options is determined using the Black-Scholes option pricing model, while the fair value of grants of non-vested common stock awards is the stock price on the date of grant.

Information regarding the impact of stock-based compensation expense is as follows:
 
   
Thirteen Weeks Ended
 
   
April 30, 2011
   
May 1, 2010
 
Stock-based compensation expense, before tax:
           
     Stock options
  $ -     $ 16  
     Non-vested shares of common stock
    1,621       1,500  
Total stock-based compensation expense, before tax
  $ 1,621     $ 1,516  
                 
Total stock-based compensation expense, after tax
  $ 1,021     $ 955  

FASB ASC 718 requires the benefits of tax deductions in excess of the compensation cost recognized for stock options exercised during the period to be classified as financing cash inflows. This amount is shown as “excess tax benefit from stock option exercises” on the statements of cash flows. For the fiscal quarters ended April 30, 2011 and May 1, 2010, the excess tax benefit realized from exercised stock options was $1,024 and $1,169, respectively.

No stock options were granted during fiscal 2011 or fiscal 2010. On November 17, 2010, the Board of Directors authorized a $2.50 per share special cash dividend to be paid on December 21, 2010 to shareholders of record at the close of business on December 3, 2010. To preserve the intrinsic value for option holders, the Board also approved, pursuant to the terms of the Company’s various stock option plans, a proportional adjustment to both the exercise price and the number of shares covered by each award for all outstanding stock options. This adjustment did not result in any incremental compensation expense.

 
14

 

A summary of the Company’s stock-based compensation activity related to stock options for the fiscal quarter ended April 30, 2011 is as follows:

               
Weighted
         
         
Weighted
   
Average
         
         
Average
   
Remaining
     
Aggregate
 
         
Exercise
   
Contractual
     
Intrinsic
 
   
Shares
   
Price
   
Life
     
Value
 
                           
Outstanding - beginning of year
    600,506     $ 4.54                
Granted
    -       -                
Expired/forfeited
    -       -                
Exercised
    (83,819 )     6.12                
Outstanding - end of quarter
    516,687     $ 4.29       2.81  
 years
  $ 21,289  
                                   
Exercisable - end of quarter
    516,687     $ 4.29       2.81  
 years
  $ 21,289  
 
The total intrinsic value of options exercised during the fiscal quarters ended April 30, 2011 and May 1, 2010 was $3,016 and $3,332, respectively. As of April 30, 2011, there was no unrecognized compensation expense as all outstanding stock options were vested.

Non-vested shares of common stock granted during the first quarter of fiscal 2011 and fiscal 2010 were granted pursuant to the Company’s 2005 Restricted Stock Plan and the Company’s 2008 Director Restricted Stock Plan. Shares granted under the 2005 Plan typically vest over a period of four years, only upon certification by the Compensation Committee of the Board of Directors that the Company has achieved its pre-established performance targets for the fiscal year. Shares granted under the 2008 Director Plan vest 25% on the date of grant and then in equal portions on each of the first three anniversaries of the date of grant.

A summary of the Company’s stock-based compensation activity related to grants of non-vested shares of common stock for the fiscal quarter ended April 30, 2011 is as follows:
 
         
Weighted Average
 
         
Grant Date
 
   
Shares
   
Fair Value
 
             
Non-Vested - beginning of year
    436,546     $ 26.07  
Granted
    245,500       35.59  
Forfeited
    (114,350 )     28.42  
Vested
    (31,872 )     28.87  
Non-Vested - end of quarter
    535,824     $ 29.76  
 
As of April 30, 2011, there was $9,867 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 approximately 2.3 years. The total fair value of shares vested during the fiscal quarters ended April 30, 2011 and May 1, 2010 was $1,161 and $1,871, respectively.

 
15

 
 
9.
Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The new disclosures about fair value measurements are presented in Note 5 to these financial statements. The adoption of this statement had no effect on the Company’s financial position or results of operations.
 
 
16

 
 
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. All references herein to the “Company”, “Buckle”, “we”, “us”, or similar terms refer to The Buckle, Inc. and its subsidiary. 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.

EXECUTIVE OVERVIEW

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

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 excluded from 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.

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.
 
 
17

 

RESULTS OF OPERATIONS

The table below sets forth the percentage relationships of sales and various expense categories in the Statements of Income for the thirteen-week periods ended April 30, 2011 and May 1, 2010:

   
Percentage of Net Sales
       
   
Thirteen Weeks Ended
   
Percentage
 
   
April 30, 2011
   
May 1, 2010
   
Increase/(Decrease)
 
                   
Net sales
    100.0 %     100.0 %     11.8 %
Cost of sales (including buying,
                       
  distribution, and occupancy costs)
    57.1 %     56.5 %     13.0 %
Gross profit
    42.9 %     43.5 %     10.2 %
Selling expenses
    17.8 %     18.5 %     7.2 %
General and administrative expenses
    3.7 %     3.5 %     19.4 %
Income from operations
    21.4 %     21.5 %     11.2 %
Other income, net
    0.6 %     0.8 %     -12.0 %
Income before income taxes
    22.0 %     22.3 %     10.3 %
Provision for income taxes
    8.1 %     8.3 %     8.9 %
Net income
    13.9 %     14.0 %     11.2 %
 
Net sales increased from $214.8 million in the first quarter of fiscal 2010 to $240.1 million in the first quarter of fiscal 2011, an 11.8% increase. Comparable store sales increased by $16.1 million, or 8.1%, for the thirteen week period ended April 30, 2011 compared to the same period in the prior year. The comparable store sales increase was primarily due to a 5.8% increase in the number of transactions at comparable stores, a 2.3% increase in the average number of units sold per transaction, and a 0.1% increase in the average retail price of merchandise sold during the quarter. Sales growth for the thirteen week period was also attributable to the inclusion of a full quarter of operating results for the 21 new stores opened during fiscal 2010, to the opening of 2 new stores during the first quarter of fiscal 2011, and to growth in online sales. Online sales for the quarter (which are not included in comparable store sales) increased 18.6% to $17.1 million. Average sales per square foot increased 8.4% from $97.69 for the first quarter of fiscal 2010 to $105.85 for the first quarter of fiscal 2011. Total square footage as of April 30, 2011 was 2.108 million.

The Company’s average retail price per piece of merchandise sold increased $0.04, or 0.1%, during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. This $0.04 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 10.9% increase in average woven shirt price points ($0.27), a 7.0% increase in average active apparel price points ($0.25), a 5.4% increase in average accessory price points ($0.17), and increased price points in certain other categories ($0.08). These increases were partially offset by a shift in the merchandise mix (-$0.39), a 0.6% decrease in average denim price points (-$0.13), a 1.0% decrease in average knit shirt price points (-$0.11), and a 3.9% decrease in average footwear price points (-$0.10). 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 expenses increased from $93.5 million for the first quarter of fiscal 2010 to $102.9 million for the first quarter of fiscal 2011, a 10.2% increase. As a percentage of net sales, gross profit decreased from 43.5% in the first quarter of fiscal 2010 to 42.9% in the first quarter of fiscal 2011. The decrease was attributable to an increase in distribution costs (0.40%, as a percentage of net sales) and a reduction in merchandise margins (0.30%, as a percentage of net sales), which were partially offset by a reduction in the incentive bonus accrual (0.10%, as a percentage of net sales). The increase in distribution costs for the quarter was primarily attributable to additional depreciation expense related to the Company’s new distribution center that went live during the third quarter of fiscal 2010 and increased shipping costs.

 
18

 
 
Selling expenses increased from $39.8 million for the first quarter of fiscal 2010 to $42.7 million for the first quarter of fiscal 2011, a 7.2% increase. As a percentage of net sales, selling expenses decreased from 18.5% in the first quarter of fiscal 2010 to 17.8% in the first quarter of fiscal 2011. The reduction was primarily attributable to reductions in expense related to certain store supplies (0.45%, as a percentage of net sales), expense related to the incentive bonus accrual (0.15%, as a percentage of net sales), and health insurance claims expense (0.15%, as a percentage of net sales).

General and administrative expenses increased from $7.4 million for the first quarter of fiscal 2010 to $8.9 million for the first quarter of fiscal 2011, a 19.4% increase. As a percentage of net sales, general and administrative expenses increased from 3.5% in the first quarter of fiscal 2010 to 3.7% in the first quarter of fiscal 2011. The increase was primarily attributable to expense incurred related to a store closure (0.10%, as a percentage of net sales) and an increase in certain other general and administrative expenses (0.10%, as a percentage of net sales).
 
As a result of the above changes, the Company's income from operations increased 11.2% to $51.4 million for the first quarter of fiscal 2011 compared to $46.2 million for the first quarter of fiscal 2010. Income from operations was 21.4% of net sales for the first quarter of fiscal 2011 compared to 21.5% for the first quarter of fiscal 2010.

Other income was $1.6 million for the first quarter of fiscal 2011compared to $1.8 million for the first quarter of fiscal 2010. The Company’s other income is derived primarily from interest and dividends received on the cash and investments.

Income tax expense as a percentage of pre-tax income was 36.8% in the first quarter of fiscal 2011 compared to 37.3% in the first quarter of fiscal 2010, bringing net income to $33.5 million in the first quarter of fiscal 2011 compared to $30.1 million in the first quarter of fiscal 2010, an increase of 11.2%.

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2011, the Company had working capital of $189.2 million, including $139.3 million of cash and cash equivalents and short-term investments of $21.5 million. 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 quarter of fiscal 2011 and 2010, the Company’s cash flow from operating activities was $38.9 million and $33.6 million, respectively.
 
The uses of cash for both thirteen 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, construction costs for new and remodeled stores, and other capital expenditures.

During the first quarter of fiscal 2011 and 2010, the Company invested $8.6 million and $9.6 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company also spent $2.0 million and $11.1 million in the first quarter of fiscal 2011 and 2010, respectively, in capital expenditures for the corporate headquarters and distribution facility. Capital spending for the corporate headquarters and distribution facility during fiscal 2010 included payments made as work progressed on the Company’s new $25.0 million distribution center in Kearney, Nebraska. The Company transitioned to the new distribution center in late September 2010 and the new facility is the only operating store distribution center.

During the remainder of fiscal 2011, the Company anticipates completing approximately 30 additional store construction projects, including approximately 11 new stores and approximately 19 stores to be substantially remodeled and/or relocated. Management estimates that total capital expenditures during fiscal 2011 will be approximately $30 to $35 million. 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 each year and, as of April 30, 2011, had total cash and investments of $226.0 million. The Company does not currently have plans for a merger or acquisition and has fairly consistent plans for new store expansion and remodels. Based upon past results and current plans, management does not anticipate any large swings in the Company’s need for cash in the upcoming years.

 
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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.

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 $10.0 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 quarter of fiscal 2011 or 2010.

Auction-Rate Securities - As of April 30, 2011, total cash and investments included $19.5 million of auction-rate securities (“ARS”) and preferred securities, which compares to $20.0 million of ARS and preferred securities as of January 29, 2011. The entire $19.5 million in ARS and preferred securities as of April 30, 2011 has been included in long-term investments. ARS have a long-term stated maturity, but are reset through a “dutch auction” process that occurs every 7 to 49 days, depending on the terms of the individual security. During February 2008, a significant number of auctions related to these securities failed, meaning that there was not enough demand to sell the entire issue at auction. The failed auctions have limited the current liquidity of the Company’s investments in ARS and the Company has reason to believe that certain of the underlying issuers of its ARS are currently at risk. The Company does not anticipate, however, that further auction failures will have a material impact on the Company’s ability to fund its business.

ARS and preferred securities are reported at fair market value, and as of April 30, 2011, the reported investment amount is net of a $1.0 million temporary impairment and a $2.7 million other-than-temporary impairment (“OTTI”) to account for the impairment of certain securities from their stated par value. The Company reported the $1.0 million temporary impairment, net of tax, as an “accumulated other comprehensive loss” of $0.7 million in stockholders’ equity as of April 30, 2011. The Company has accounted for the impairment as temporary, as it currently expects to be able to successfully liquidate its investments without loss once the ARS market resumes normal operations.

The Company reviews all investments for OTTI at least quarterly or as indicators of impairment exist. The value and liquidity of ARS held by the Company may be affected by continued auction-rate failures, the credit quality of each security, the amount and timing of interest payments, the amount and timing of future principal payments, and the probability of full repayment of the principal. Additional indicators of impairment include the duration and severity of the decline in market value. The interest rates on these investments will be determined by the terms of each individual ARS. The material risks associated with the ARS held by the Company include those stated above as well as the current economic environment, downgrading of credit ratings on investments held, and the volatility of the entities backing each of the issues. In addition, the Company considers qualitative factors including, but not limited to, the financial condition of the investee, the credit rating of the investee, and the current and expected market and industry conditions in which the investee operates. The Company believes it has the ability and intent to hold these investments until recovery of market value occurs.

 
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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, 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 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 critical accounting policies and estimates utilized by the Company in the preparation of its condensed consolidated financial statements for the period ending April 30, 2011 have not changed materially from those utilized for the fiscal year ended January 29, 2011, included in The Buckle Inc.’s 2010 Annual Report on Form 10-K .

1.
Revenue Recognition. Retail store sales are recorded upon the purchase of merchandise by customers. Online sales are recorded when merchandise is delivered to the customer, with the time of delivery being based on estimated shipping time from the Company’s distribution center to the customer. 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 amounts of the gift certificate and gift card liabilities are determined using the outstanding balances from the prior three and four years of issuance, respectively. The liability recorded for unredeemed gift certificates and gift cards was $12.9 million and $17.2 million as of April 30, 2011and January 29, 2011, respectively. The Company records breakage as other income when the probability of redemption, which is based on historical redemption patterns, is remote.

The Company establishes a liability for estimated merchandise returns based upon the historical average sales return percentage. 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 $0.7 million at both April 30, 2011and January 29, 2011.

2.
Inventory. Inventory is valued at the lower of cost or market. 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 reserve for merchandise obsolescence and markdowns that could affect market value, based on assumptions using calculations applied to current inventory levels within each of four different markdown levels. 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 liability recorded as a reserve for markdowns and/or obsolescence was $4.6 million and $5.1 million as of April 30, 2011 and January 29, 2011, respectively. The Company is not aware of any events, conditions, or changes in demand or price that would indicate that its inventory valuation may not be materially accurate at this time.

 
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3.
Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between 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. As of April 30, 2011 and January 29, 2011, the Company’s non-current deferred tax liability includes a $0.2 million valuation allowance recorded to reduce the value of the Company’s capital loss carryforward to its expected realizable amount prior to expiration.

4.
Operating Leases. The Company leases retail stores under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses, and/or contingent rent provisions. For purposes of recognizing lease incentives and minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use. For tenant improvement allowances and rent holidays, the Company records a deferred rent liability on the balance sheets and amortizes the deferred rent over the terms of the leases as reductions to rent expense on the statements of income.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases on the statements of income. Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability on the balance sheets and the corresponding rent expense when specified levels have been achieved or are reasonably probable to be achieved.

5.
Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year, and a portion of the Company’s investments in auction-rate securities (“ARS”), which are available-for-sale securities. 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.

The Company reviews impairment to determine the classification of potential impairments as either temporary or other-than-temporary. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is considered other-than-temporary would be recognized in net income. The Company considers various factors in reviewing impairment, including the duration and severity of the decline in market value. In addition, the Company considers qualitative factors including, but not limited to, the financial condition of the investee, the credit rating of the investee, the current and expected market and industry conditions in which the investee operates, and the Company’s intent and ability to hold the investments for a period of time sufficient to allow for any anticipated recovery in market value. The Company believes it has the ability and maintains its intent to hold these investments until recovery of market value occurs.

The Company determined the fair value of ARS using Level 1 inputs for known or anticipated subsequent redemptions at par value, Level 2 inputs using observable inputs, and Level 3 using unobservable inputs, where the following criteria were considered in estimating fair value:

 
Pricing was provided by the custodian of ARS;
 
Pricing was provided by a third-party broker for ARS;
 
Sales of similar securities;
 
Quoted prices for similar securities in active markets;
 
Quoted prices for publicly traded preferred securities;
 
Quoted prices for similar assets in markets that are not active - including markets where there are few transactions for the asset, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly;
 
Pricing was provided by a third-party valuation consultant (using Level 3 inputs).

 
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In addition, the Company considers other factors including, but not limited to, the financial condition of the investee, the credit rating, insurance, guarantees, collateral, cash flows, and the current and expected market and industry conditions in which the investee operates. Management believes it has used information that was reasonably obtainable in order to complete its valuation process and determine if the Company’s investments in ARS had incurred any temporary and/or other-than-temporary impairment as of April 30, 2011.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND COMMERCIAL COMMITMENTS

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, 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 operating lease obligations shown in the table below represent future cash payments to landlords required to fulfill the Company’s minimum rent requirements. Such amounts are actual cash requirements by year and are not reported net of any tenant improvement allowances received from landlords.

The following tables identify the material obligations and commitments as of April 30, 2011:
 
   
Payments Due by Period
 
Contractual obligations (dollar amounts in thousands):
 
Total
   
Less than
1 year
   
1-3 years
   
4-5 years
   
After 5
years
 
Long term debt and purchase obligations
  $ 8,471     $ 7,277     $ 1,194     $ -     $ -  
Deferred compensation
    8,734       -       -       -       8,734  
Operating leases
    349,650       53,705       96,344       78,232       121,369  
Total contractual obligations
  $ 366,855     $ 60,982     $ 97,538     $ 78,232     $ 130,103  

   
Amount of Commitment Expiration Per Period
 
Other commercial commitments (dollar amounts in thousands):
 
Total Amounts Committed
 
Less than
 1 year
 
1-3 years
   
4-5 years
   
After 5
years
 
Lines of credit
  $ -     $ -     $ -     $ -     $ -  
Total commercial commitments
  $ -     $ -     $ -     $ -     $ -  
 
The Company has available an unsecured line of credit of $17.5 million, of which $10.0 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 first quarter of fiscal 2011 or the first quarter of fiscal 2010. The Company had outstanding letters of credit totaling $2.7 million and $1.4 million at April 30, 2011 and January 29, 2011, respectively. The Company has no other off-balance sheet arrangements.

 
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SEASONALITY AND INFLATION

The Company's business is seasonal, with the holiday 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 2010, 2009, and 2008, the holiday and back-to-school seasons accounted for approximately 35%, 35%, and 37%, respectively, 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 April 30, 2011 and May 1, 2010. Quarterly results may vary significantly depending on a variety of factors including the timing and amount of sales and costs associated with the opening of new stores, the timing and level of markdowns, the timing of store closings, the remodeling of existing stores, competitive factors, and general economic conditions.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also re