BUCKLE INC (BKE)

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial condition and results of operations during the periods included in the accompanying consolidated financial statements included in this Form 10-K.

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 included in comparable store sales. Management considers comparable store sales to be an important indicator of current Company performance, helping leverage certain fixed costs when results are positive. Negative comparable store sales results could reduce net sales and have a negative impact on operating leverage, thus reducing net earnings.

Merchandise Margin – 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. Merchandise margin is net sales less merchandise cost of good sold (COGS), as further described in Footnote N, "Segment Reporting".

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 operating cash flow will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years.

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RESULTS OF OPERATIONS

The following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:

Fiscal 2024 Compared to Fiscal 2023

Net sales for the 52-week fiscal year ended February 1, 2025, decreased 3.4% to $1.218 billion from net sales of $1.261 billion for the 53-week fiscal year ended February 3, 2024. Comparable store net sales for the 52-week fiscal year decreased 2.7% from comparable store net sales for the prior year 52-week period ended February 3, 2024. The reduction in total net sales for the year was the result of a 4.2% decrease in the number of transactions and a 2.0% decrease in average number of units sold per transaction, partially offset by a 2.8% increase in the average unit retail. The decline in total net sales (and transactions) was partially attributable to the fact that fiscal 2024 was a 52-week fiscal year, while fiscal 2023 was a 53-week fiscal year. Online sales for the fiscal year decreased 4.3% to $197.7 million for the 52-week fiscal year ended February 1, 2025 compared to $206.5 million for the 53-week fiscal year ended February 3, 2024.

The Company’s average retail price per piece of merchandise sold increased $1.37, or 2.8%, during fiscal 2024 compared to fiscal 2023. This $1.37 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 1.9% increase in average knit shirt price points ($0.21), a 6.2% increase in average footwear price points ($0.16), a 0.6% increase in average denim price points ($0.13), an increase in average price points for certain other merchandise categories ($0.19), and a shift in the merchandise mix ($0.68). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Gross profit after buying, distribution, and occupancy costs decreased from $619.1 million in fiscal 2023 to $592.8 million in fiscal 2024. As a percentage of net sales, gross profit was 48.7% in fiscal 2024 compared to 49.1% in fiscal 2023. The gross margin decline was the result of deleveraged occupancy, buying, and distribution expenses (0.95%, as a percentage of net sales), which was partially offset by an increase in merchandise margins (0.55%, as a percentage of net sales). Merchandise shrinkage was 0.5% of net sales for both fiscal 2024 and fiscal 2023.

Selling expenses increased from $291.0 million in fiscal 2023 to $293.2 million in fiscal 2024. As a percentage of net sales, selling expenses increased from 23.1% in fiscal 2023 to 24.1% in fiscal 2024.

General and administrative expenses increased from $57.0 million in fiscal 2023 to $58.2 million in fiscal 2024. As a percentage of net sales, general and administrative expenses increased from 4.5% in fiscal 2023 to 4.8% in fiscal 2024.

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In total, selling, general, and administrative expenses were 28.9% of net sales for fiscal 2024 compared to 27.6% of net sales for fiscal 2023. The increase was the result of increases in store labor-related expenses (0.70%, as a percentage of net sales), digital commerce investments (0.25%, as a percentage of net sales), general and administrative salary expense (0.20%, as a percentage of net sales), marketing spend (0.10%, as a percentage of net sales), and certain other expense categories (0.20%, as a percentage of net sales). These increases were partially offset by a reduction in expense related to incentive compensation accruals (0.15%, as a percentage of net sales).

As a result of the above changes, the Company’s income from operations decreased from $271.1 million for fiscal 2023 to $241.4 million for fiscal 2024. Income from operations was 19.8% as a percentage of net sales in fiscal 2024 compared to 21.5% as a percentage of net sales in fiscal 2023.

Other income was $16.4 million in fiscal 2024 compared to $18.2 million in fiscal 2023. The Company’s other income is derived primarily from investment income related to the Company’s cash and investments.

Income tax expense as a percentage of pre-tax income was 24.2% for fiscal 2024 and 24.0% for fiscal 2023, bringing net income to $195.5 million in fiscal 2024 versus $219.9 million in fiscal 2023.

Fiscal 2023 Compared to Fiscal 2022

A discussion of fiscal 2022 and year-over-year comparisons between fiscal 2023 and fiscal 2022 can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, filed with the United States Securities and Exchange Commission on April 3, 2024.

LIQUIDITY AND CAPITAL RESOURCES

As of February 1, 2025, the Company had working capital of $225.3 million, including $266.9 million of cash and cash equivalents and $23.8 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 fiscal 2024, 2023, and 2022 the Company's cash flow from operations was $242.0 million, $254.6 million, and $242.4 million, respectively. Changes in operating cash flow between each of the three years is primarily a function of changes in net income, along with changes in inventory and accounts payable based on the timing and amount of merchandise purchased in each respective period. Operating cash flow is also impacted by the timing of certain other payments, including rent, income taxes, and annual incentive bonuses. The primary drivers of change in operating cash flow for fiscal 2024 compared to both fiscal 2023 and fiscal 2022 were the reductions in net income, partially offset by the impact of changes in inventory and accounts payable as the Company continued to manage and adjust to changing trends over the last several years.

During fiscal 2024, 2023, and 2022, the Company invested $40.3 million, $35.9 million, and $29.5 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $2.0 million, $1.4 million, and $0.9 million in fiscal 2024, 2023, and 2022, respectively, in capital expenditures for the corporate headquarters and distribution facility.

During fiscal 2025, the Company anticipates opening 7 new stores and completing approximately 18-22 store remodels and/or relocations. Management estimates that total capital expenditures during fiscal 2025 will be approximately $50.0 to $55.0 million, which includes primarily planned store projects and technology investments. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has had a consistent record of generating positive cash flow each year and, as of February 1, 2025, had total cash and investments of $318.8 million, including $28.1 million of long-term investments.

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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 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 $25.0 million with Wells Fargo Bank, N.A. for operating needs and letters of credit. The line of credit agreement has an expiration date of July 31, 2025 and provides that $10.0 million of the $25.0 million line is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on SOFR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2024, 2023, and 2022. The Company had no bank borrowings as of February 1, 2025 and was in compliance with the terms and conditions of the line of credit agreement.

Dividend payments - During fiscal 2024, the Company paid total cash dividends of $198.0 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.50 per share in the fourth quarter. During fiscal 2023, the Company paid total cash dividends of $196.7 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.50 per share in the fourth quarter. During fiscal 2022, the Company's paid total cash dividends of $202.9 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.65 per share in the fourth quarter.

Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2024, fiscal 2023, or fiscal 2022. As of February 1, 2025, 410,655 shares remained available under the Company's current 1,000,000 share repurchase plan that was approved by the Board of Directors on November 20, 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations.

1.Revenue Recognition. Retail store sales are recorded, net of expected returns, upon the purchase of merchandise by customers. Online sales are recorded, net of expected returns, when the merchandise is tendered for delivery to the common carrier. Shipping fees charged to customers are included in revenue and shipping costs are included in selling expenses. The Company recognizes revenue from sales made under its layaway program upon delivery of the merchandise to the customer. Revenue is not recorded when gift cards and gift certificates are sold, but rather when a card or certificate is redeemed for merchandise. A current liability for unredeemed gift cards and certificates is recorded at the time the card or certificate is purchased. The liability recorded for unredeemed gift certificates and gift cards was $17.0 million and $16.7 million as of February 1, 2025 and February 3, 2024, respectively. Gift card and gift certificate breakage is recognized as revenue in proportion to the redemption pattern of customers by applying an estimated breakage rate. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. Sales tax collected from customers is excluded from revenue and is included as part of accrued store operating expenses on the Company's consolidated balance sheets.

The Company establishes a liability for estimated merchandise returns, based upon the historical average sales return percentage, that is recognized at the transaction value. The Company also recognizes a return asset and a corresponding adjustment to cost of sales for the Company's right to recover returned merchandise, which is measured at the estimated carrying value, less any expected recovery costs. Customer returns could potentially exceed the historical average, thus reducing future net sales results and potentially reducing future net earnings. The accrued liability for reserve for sales returns was $2.6 million as of both February 1, 2025 and February 3, 2024.

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The Company's Buckle Rewards program allows participating guests to earn points for every qualifying purchase, which (after achievement of certain point thresholds) are redeemable as a discount off a future purchase. In addition, through partnership with Bread Financial and Comenity Bank (collectively the "Bank"), the Company offers a private label credit card ("PLCC") program. Buckle Rewards members with a PLCC earn additional points under the Buckle Rewards program for every qualifying purchase on their PLCC card. Reported revenue is net of both current period reward redemptions and accruals for estimated future rewards earned under the Buckle Rewards program. A liability has been recorded for future rewards based on the Company's estimate of how many earned points will turn into rewards and ultimately be redeemed prior to expiration. As of February 1, 2025 and February 3, 2024, $10.3 million and $10.4 million was included in accrued store operating expenses as a liability for estimated future rewards.

2.Inventory. Inventory is valued at the lower of cost or net realizable value. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. Management makes adjustments to inventory and cost of goods sold, based upon estimates, to account for merchandise obsolescence and markdowns that could affect net realizable value, based on assumptions using calculations applied to current inventory levels within each different markdown level. Management also reviews the levels of inventory in each markdown group and the overall aging of the inventory versus the estimated future demand for such product and the current market conditions. Such judgments could vary significantly from actual results, either favorably or unfavorably, due to fluctuations in future economic conditions, industry trends, consumer demand, and the competitive retail environment. Such changes in market conditions could negatively impact the sale of markdown inventory, causing further markdowns or inventory obsolescence, resulting in increased cost of goods sold from write-offs and reducing the Company’s net earnings. The adjustment to inventory for markdowns and/or obsolescence was $9.2 million as of February 1, 2025 and $9.1 million as of February 3, 2024.

3.Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more than likely that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Estimating the value of these assets is based upon the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, such value would be increased. Adjustment would be made to increase net income in the period such determination was made.

4.Leases. The Company's lease portfolio is primarily comprised of leases for retail store locations. The Company also leases certain equipment and corporate office space. Store leases for new stores typically have an initial term of 10 years, with options to renew for an additional 1 to 5 years. The exercise of lease renewal options is at the Company's sole discretion and is included in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Certain store lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Lease agreements do not contain any residual value guarantees, material restrictive covenants, or options to purchase the leased property.

The Company records its lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company obtains an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company has elected to apply the practical expedient to account for lease components (e.g. fixed payments for rent, insurance, and real estate taxes) and non-lease components (e.g. fixed payments for common area maintenance) together as a single component for all underlying asset classes. Additionally, the Company elected as an accounting policy to exclude short-term leases from the recognition requirements.

5.Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity (net of the effect of income taxes), using the specific identification method, until they are sold. Held-to-maturity securities are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses included in earnings, using the specific identification method.

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

As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management’s review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which are similar to those of other comparable retail companies.

The following table identifies the material obligations and commitments as of February 1, 2025:

(a) See Footnote D of the consolidated financial statements.

The Company has available an unsecured line of credit of $25.0 million, which is excluded from the preceding table. The line of credit agreement has an expiration date of July 31, 2025 and provides that $10.0 million of the $25.0 million line of credit is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during fiscal 2024, 2023, and 2022. The Company had outstanding letters of credit totaling $2.2 million and $3.2 million as of February 1, 2025 and February 3, 2024, respectively. The Company has no other off-balance sheet arrangements.

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RELATED PARTY TRANSACTIONS

Included in other assets is a note receivable of $1.5 million as of both February 1, 2025 and February 3, 2024, from a life insurance trust fund controlled by the Company’s Chairman. The note was created over three years, beginning in July 1994, when the Company paid life insurance premiums of $0.2 million each year for the Chairman on a personal policy. The note accrues interest at 5% of the principal balance per year and is to be paid from the life insurance proceeds. The note is secured by a life insurance policy on the Chairman.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are disclosed in Footnote A of the consolidated financial statements.

FORWARD LOOKING STATEMENTS

Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management’s discussion and analysis contains certain forward-looking statements, which reflect management’s current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company’s business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial condition and results of operations during the periods included in the accompanying consolidated financial statements included in this Form 10-K.

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 included in comparable store sales. Management considers comparable store sales to be an important indicator of current Company performance, helping leverage certain fixed costs when results are positive. Negative comparable store sales results could reduce net sales and have a negative impact on operating leverage, thus reducing net earnings.

Net Merchandise Margins – Management evaluates the components of merchandise margin including initial markup and the amount of markdowns during a period. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse effect on the Company’s gross margin and results of operations.

Operating Margin – Operating margin is a good indicator for management of the Company’s success. Operating margin can be positively or negatively affected by comparable store sales, merchandise margins, occupancy costs, and the Company’s ability to control operating costs.

Cash Flow and Liquidity (working capital) – Management reviews current cash and short-term investments along with cash flow from operating, investing, and financing activities to determine the Company’s short-term cash needs for operations and expansion. The Company believes that existing cash, short-term investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years.

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RESULTS OF OPERATIONS

The following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:

Fiscal 2023 Compared to Fiscal 2022

Net sales for the 53-week fiscal year ended February 3, 2024, decreased 6.3% to $1.261 billion from net sales of $1.345 billion for the 52-week fiscal year ended January 28, 2023. Comparable store net sales for the 53-week fiscal year decreased 8.0% from comparable store net sales for the prior year 53-week period ended February 4, 2023. The reduction in total net sales for the year was the result of a 7.3% decrease in the number of transactions, partially offset by a 1.0% increase in the average unit retail and a 0.2% increase in the average number of units sold per transaction. Total net sales for the year were impacted by an extra week of sales due to the fact that 2023 was a 53-week fiscal year while 2022 was a 52-week fiscal year. Online sales for the fiscal year decreased 10.3% to $206.5 million for the 53-week fiscal year ended February 3, 2024 compared to $230.4 million for the 52-week fiscal year ended January 28, 2023.

The Company’s average retail price per piece of merchandise sold increased $0.47, or 1.0%, during fiscal 2023 compared to fiscal 2022. This $0.47 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 2.2% increase in average denim price points ($0.42), a 5.2% increase in average accessory price points ($0.26), an 8.1% increase in average footwear price points ($0.25), a 2.0% increase in average knit shirt price points ($0.22), and an increase in average price points for certain other merchandise categories ($0.32); which were partially offset by a shift in the merchandise mix (-$1.00). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Gross profit after buying, distribution, and occupancy costs decreased from $676.0 million in fiscal 2022 to $619.1 million in fiscal 2023. As a percentage of net sales, gross profit was 49.1% in fiscal 2023 compared to 50.3% in fiscal 2022. The gross margin decline was the result of deleveraged occupancy, buying, and distribution expenses (1.00%, as a percentage of net sales) along with a decline in merchandise margins (0.20%, as a percentage of net sales). Merchandise shrinkage was 0.5% of net sales for fiscal 2023 compared to 0.4% of net sales for fiscal 2022.

Selling expenses decreased from $293.9 million in fiscal 2022 to $291.0 million in fiscal 2023. As a percentage of net sales, selling expenses increased from 21.9% in fiscal 2022 to 23.1% in fiscal 2023.

General and administrative expenses increased from $54.0 million in fiscal 2022 to $57.0 million in fiscal 2023. As a percentage of net sales, general and administrative expenses increased from 4.0% in fiscal 2022 to 4.5% in fiscal 2023.

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In total, selling, general, and administrative expenses were 27.6% of net sales for fiscal 2023 compared to 25.9% of net sales for fiscal 2022. The increase was the result of increases in store labor-related expenses (1.35%, as a percentage of net sales), general and administrative salary expense (0.30%, as a percentage of net sales), marketing spend (0.25%, as a percentage of net sales), equity compensation expense (0.20%, as a percentage of net sales), and certain other expense categories (0.20%, as a percentage of net sales); which were partially offset by a decrease in expense related to incentive compensation accruals (0.60%, as a percentage of net sales).

As a result of the above changes, the Company’s income from operations decreased from $328.1 million for fiscal 2022 to $271.1 million for fiscal 2023. Income from operations was 21.5% as a percentage of net sales in fiscal 2023 compared to 24.4% as a percentage of net sales in fiscal 2022.

Other income was $18.2 million in fiscal 2023 compared to $6.9 million in fiscal 2022. The Company’s other income is derived primarily from investment income related to the Company’s cash and investments.

Income tax expense as a percentage of pre-tax income was 24.0% for both fiscal 2023 and fiscal 2022, bringing net income to $219.9 million in fiscal 2023 versus $254.6 million in fiscal 2022.

Fiscal 2022 Compared to Fiscal 2021

A discussion of fiscal 2021 and year-over-year comparisons between fiscal 2022 and fiscal 2021 can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the United States Securities and Exchange Commission on March 29, 2023.

LIQUIDITY AND CAPITAL RESOURCES

As of February 3, 2024, the Company had working capital of $222.8 million, including $268.2 million of cash and cash equivalents and $22.2 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 fiscal 2023, 2022, and 2021 the Company's cash flow from operations was $254.6 million, $242.4 million, and $311.8 million, respectively. Changes in operating cash flow between each of the three years is primarily a function of changes in net income, along with changes in inventory and accounts payable based on the timing and amount of merchandise purchased in each respective period. Operating cash flow is also impacted by the timing of certain other payments, including rent, income taxes, and annual incentive bonuses. The increase in operating cash flow for fiscal 2023 compared to fiscal 2022 is primarily attributable to changes in inventory and accounts payable as the Company continued to manage and adjust to changing trends, along with a reduction in income tax payments corresponding to the reduction in net income. The reduction in operating cash flow compared to fiscal 2021, was attributable to changes in inventory and accounts payable as the Company built inventory back to more normalized levels in 2022 and 2023 in addition to the payment of incentive bonuses in the first quarter of both 2023 and 2022 based on the Company's strong financial results in fiscal 2022 and fiscal 2021.

During fiscal 2023, 2022, and 2021, the Company invested $35.9 million, $29.5 million, and $18.3 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $1.4 million, $0.9 million, and $0.8 million in fiscal 2023, 2022, and 2021, respectively, in capital expenditures for the corporate headquarters and distribution facility.

During fiscal 2024, the Company anticipates opening 8 new stores and completing approximately 15-19 store remodels and/or relocations. Management estimates that total capital expenditures during fiscal 2024 will be approximately $32.0 to $38.0 million, which includes primarily planned store projects and technology investments. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has had a consistent record of generating positive cash flow each year and, as of February 3, 2024, had total cash and investments of $315.4 million, including $25.0 million of long-term investments.

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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 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 $25.0 million with Wells Fargo Bank, N.A. for operating needs and letters of credit. The line of credit agreement has an expiration date of July 31, 2025 and provides that $10.0 million of the $25.0 million line is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on SOFR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2023, 2022, and 2021. The Company had no bank borrowings as of February 3, 2024 and was in compliance with the terms and conditions of the line of credit agreement.

Dividend payments - During fiscal 2023, the Company paid total cash dividends of $196.7 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.50 per share in the fourth quarter. During fiscal 2022, the Company paid total cash dividends of $202.9 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.65 per share in the fourth quarter. During fiscal 2021, the Company's paid cash dividends of $347.8 million as follows: $0.33 per share in each of the first three quarters, $0.35 per share in the fourth quarter, and a special cash dividend of $5.65 per share in the fourth quarter.

Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2023, fiscal 2022, or fiscal 2021. As of February 3, 2024, 410,655 shares remained available under the Company's current 1,000,000 share repurchase plan that was approved by the Board of Directors on November 20, 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations.

1.Revenue Recognition. Retail store sales are recorded, net of expected returns, upon the purchase of merchandise by customers. Online sales are recorded, net of expected returns, when the merchandise is tendered for delivery to the common carrier. Shipping fees charged to customers are included in revenue and shipping costs are included in selling expenses. The Company recognizes revenue from sales made under its layaway program upon delivery of the merchandise to the customer. Revenue is not recorded when gift cards and gift certificates are sold, but rather when a card or certificate is redeemed for merchandise. A current liability for unredeemed gift cards and certificates is recorded at the time the card or certificate is purchased. The liability recorded for unredeemed gift certificates and gift cards was $16.7 million and $16.8 million as of February 3, 2024 and January 28, 2023, respectively. Gift card and gift certificate breakage is recognized as revenue in proportion to the redemption pattern of customers by applying an estimated breakage rate. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. Sales tax collected from customers is excluded from revenue and is included as part of accrued store operating expenses on the Company's consolidated balance sheets.

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The Company establishes a liability for estimated merchandise returns, based upon the historical average sales return percentage, that is recognized at the transaction value. The Company also recognizes a return asset and a corresponding adjustment to cost of sales for the Company's right to recover returned merchandise, which is measured at the estimated carrying value, less any expected recovery costs. Customer returns could potentially exceed the historical average, thus reducing future net sales results and potentially reducing future net earnings. The accrued liability for reserve for sales returns was $2.6 million as of February 3, 2024 and $3.0 million as of January 28, 2023.

The Company's Buckle Rewards program allows participating guests to earn points for every qualifying purchase, which (after achievement of certain point thresholds) are redeemable as a discount off a future purchase. In addition, through partnership with Bread Financial and Comenity Bank (collectively the "Bank"), the Company offers a private label credit card ("PLCC") program. Buckle Rewards members with a PLCC earn additional points under the Buckle Rewards program for every qualifying purchase on their PLCC card. Reported revenue is net of both current period reward redemptions and accruals for estimated future rewards earned under the Buckle Rewards program. A liability has been recorded for future rewards based on the Company's estimate of how many earned points will turn into rewards and ultimately be redeemed prior to expiration. As of February 3, 2024 and January 28, 2023, $10.4 million and $10.1 million was included in accrued store operating expenses as a liability for estimated future rewards.

Effective July 1, 2022, the Company entered into a new five year agreement (the "Agreement") with the Bank, to continue providing guests with PLCC services. Each PLCC bears the Buckle brand logo and can only be used at the Company's retail locations and eCommerce platform. The Bank is the sole owner of the accounts issued under the PLCC program and bears full risk associated with guest non-payment.

As part of the Agreement, the Company receives a percentage of PLCC sales from the Bank, along with other incentive payments upon the achievement of certain performance targets. All amounts received from the Bank under the Agreement are recorded in net sales in the consolidated statements of income.

2.Inventory. Inventory is valued at the lower of cost or net realizable value. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. Management makes adjustments to inventory and cost of goods sold, based upon estimates, to account for merchandise obsolescence and markdowns that could affect net realizable value, based on assumptions using calculations applied to current inventory levels within each different markdown level. Management also reviews the levels of inventory in each markdown group and the overall aging of the inventory versus the estimated future demand for such product and the current market conditions. Such judgments could vary significantly from actual results, either favorably or unfavorably, due to fluctuations in future economic conditions, industry trends, consumer demand, and the competitive retail environment. Such changes in market conditions could negatively impact the sale of markdown inventory, causing further markdowns or inventory obsolescence, resulting in increased cost of goods sold from write-offs and reducing the Company’s net earnings. The adjustment to inventory for markdowns and/or obsolescence was $9.1 million as of February 3, 2024 and $6.3 million as of January 28, 2023.

3.Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more than likely that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Estimating the value of these assets is based upon the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, such value would be increased. Adjustment would be made to increase net income in the period such determination was made.

4.Leases. The Company's lease portfolio is primarily comprised of leases for retail store locations. The Company also leases certain equipment and corporate office space. Store leases for new stores typically have an initial term of 10 years, with options to renew for an additional 1 to 5 years. The exercise of lease renewal options is at the Company's sole discretion and is included in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Certain store lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Lease agreements do not contain any residual value guarantees, material restrictive covenants, or options to purchase the leased property.

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The Company records its lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company obtains an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company has elected to apply the practical expedient to account for lease components (e.g. fixed payments for rent, insurance, and real estate taxes) and non-lease components (e.g. fixed payments for common area maintenance) together as a single component for all underlying asset classes. Additionally, the Company elected as an accounting policy to exclude short-term leases from the recognition requirements.

5.Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity (net of the effect of income taxes), using the specific identification method, until they are sold. Held-to-maturity securities are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses included in earnings, using the specific identification method.

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

As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management’s review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which are similar to those of other comparable retail companies.

The following table identifies the material obligations and commitments as of February 3, 2024:

(a) See Footnote D of the consolidated financial statements.

The Company has available an unsecured line of credit of $25.0 million, which is excluded from the preceding table. The line of credit agreement has an expiration date of July 31, 2025 and provides that $10.0 million of the $25.0 million line of credit is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during fiscal 2023, 2022, and 2021. The Company had outstanding letters of credit totaling $3.2 million and $3.3 million as of February 3, 2024 and January 28, 2023, respectively. The Company has no other off-balance sheet arrangements.

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RELATED PARTY TRANSACTIONS

Included in other assets is a note receivable of $1.5 million as of February 3, 2024 and $1.4 million as of January 28, 2023, from a life insurance trust fund controlled by the Company’s Chairman. The note was created over three years, beginning in July 1994, when the Company paid life insurance premiums of $0.2 million each year for the Chairman on a personal policy. The note accrues interest at 5% of the principal balance per year and is to be paid from the life insurance proceeds. The note is secured by a life insurance policy on the Chairman.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are disclosed in Footnote A of the consolidated financial statements.

FORWARD LOOKING STATEMENTS

Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management’s discussion and analysis contains certain forward-looking statements, which reflect management’s current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company’s business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial condition and results of operations during the periods included in the accompanying consolidated financial statements included in this Form 10-K.

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 included in comparable store sales. Management considers comparable store sales to be an important indicator of current Company performance, helping leverage certain fixed costs when results are positive. Negative comparable store sales results could reduce net sales and have a negative impact on operating leverage, thus reducing net earnings.

Net Merchandise Margins – Management evaluates the components of merchandise margin including initial markup and the amount of markdowns during a period. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse effect on the Company’s gross margin and results of operations.

Operating Margin – Operating margin is a good indicator for management of the Company’s success. Operating margin can be positively or negatively affected by comparable store sales, merchandise margins, occupancy costs, and the Company’s ability to control operating costs.

Cash Flow and Liquidity (working capital) – Management reviews current cash and short-term investments along with cash flow from operating, investing, and financing activities to determine the Company’s short-term cash needs for operations and expansion. The Company believes that existing cash, short-term investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years.

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RESULTS OF OPERATIONS

The following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:

Fiscal 2022 Compared to Fiscal 2021

Net sales for the 52-week fiscal year ended January 28, 2023, increased 3.9% to $1.345 billion from net sales of $1.295 billion for the 52-week fiscal year ended January 29, 2022. Comparable store net sales for the 52-week fiscal year increased 3.3% from comparable store net sales for the prior year 52-week period ended January 29, 2022. Total sales growth for the year was the result of a 4.6% increase in the average unit retail and a 0.1% increase in the number of transactions, partially offset by a a 0.8% decrease in the average number of units sold per transaction. Online sales for the fiscal year increased 4.3% to $230.4 million for the 52-week fiscal year ended January 28, 2023 compared to $220.8 million for the 52-week fiscal year ended January 29, 2022.

The Company’s average retail price per piece of merchandise sold increased $2.13, or 4.6%, during fiscal 2022 compared to fiscal 2021. This $2.13 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 5.2% increase in average denim price points ($0.95), a 3.0% increase in average knit shirt price points ($0.32), a 5.9% increase in average accessory price points ($0.27), a 6.9% increase in average woven shirt price points ($0.18), a 7.3% increase in average sportswear price points ($0.16), and an increase in average price points for certain other merchandise categories ($0.43); which were partially offset by a shift in the merchandise mix (-$0.18). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Gross profit after buying, distribution, and occupancy costs increased from $653.0 million in fiscal 2021 to $676.0 million in fiscal 2022. As a percentage of net sales, gross profit was 50.3% in fiscal 2022 compared to 50.4% in fiscal 2021. The gross margin decrease was the result of a decline in merchandise margins (0.45%, as a percentage of net sales), partially offset by leveraged occupancy, buying, and distribution expenses (0.35%, as a percentage of net sales). Merchandise shrinkage was 0.4% of net sales for fiscal 2022 compared to 0.3% of net sales for fiscal 2021.

Selling expenses increased from $266.4 million in fiscal 2021 to $293.9 million in fiscal 2022. As a percentage of net sales, selling expenses increased from 20.6% in fiscal 2021 to 21.9% in fiscal 2022.

General and administrative expenses increased from $51.1 million in fiscal 2021 to $54.0 million in fiscal 2022. As a percentage of net sales, general and administrative expenses increased from 3.9% in fiscal 2021 to 4.0% in fiscal 2022.

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In total, selling, general, and administrative expenses were 25.9% of net sales for fiscal 2022 compared to 24.5% of net sales for fiscal 2021. The increase was the result of increases in store labor-related expenses (1.00%, as a percentage of net sales) and certain other expense categories (0.80%, as a percentage of net sales), which were partially offset by a decrease in expense related to incentive compensation accruals (0.40%, as a percentage of net sales).

As a result of the above changes, the Company’s income from operations decreased from $335.5 million for fiscal 2021 to $328.1 million for fiscal 2022. Income from operations was 24.4% as a percentage of net sales in fiscal 2022 compared to 25.9% as a percentage of net sales in fiscal 2021.

Other income was $6.9 million in fiscal 2022 compared to $2.3 million in fiscal 2021. The Company’s other income is derived primarily from investment income related to the Company’s cash and investments.

Income tax expense as a percentage of pre-tax income was 24.0% in fiscal 2022 and 24.6% in fiscal 2021, bringing net income to $254.6 million in fiscal 2022 versus $254.8 million in fiscal 2021.

Fiscal 2021 Compared to Fiscal 2020

A discussion of fiscal 2020 and year-over-year comparisons between fiscal 2021 and fiscal 2020 can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, filed with the United States Securities and Exchange Commission on March 30, 2022.

LIQUIDITY AND CAPITAL RESOURCES

As of January 28, 2023, the Company had working capital of $197.3 million, including $252.1 million of cash and cash equivalents and $21.0 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 fiscal 2022, 2021, and 2020 the Company's cash flow from operations was $242.4 million, $311.8 million, and $227.4 million, respectively. Changes in operating cash flow between each of the three years is primarily a function of changes in net income, along with changes in inventory and accounts payable based on the timing and amount of merchandise purchased in each respective period. Operating cash flow is also impacted by the timing of certain other payments, including rent, income taxes, and annual incentive bonuses. The reduction in operating cash flow for fiscal 2022 compared to fiscal 2021 is primarily attributable to changes in inventory and accounts payable as the Company built its inventory back to more normalized levels, as well as the payment of incentive bonuses in the first quarter of fiscal 2022 based on the Company's strong financial results in fiscal 2021. These factors also had a significant impact on operating cash flow compared to fiscal 2020, but were offset by strong increases in both net sales and net income for both fiscal 2022 and fiscal 2021 compared to fiscal 2020.

During fiscal 2022, 2021, and 2020, the Company invested $29.5 million, $18.3 million, and $5.5 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $0.9 million, $0.8 million, and $2.2 million in fiscal 2022, 2021, and 2020, respectively, in capital expenditures for the corporate offices and distribution facility.

During fiscal 2023, the Company anticipates opening 6 new stores and completing approximately 12-17 store remodels and/or relocations. Management estimates that total capital expenditures during fiscal 2023 will be approximately $24.0 to $30.0 million, which includes primarily planned store projects and technology investments. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has had a consistent record of generating positive cash flow each year and, as of January 28, 2023, had total cash and investments of $293.7 million, including $20.6 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 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.

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The Company has available an unsecured line of credit of $25.0 million with Wells Fargo Bank, N.A. for operating needs and letters of credit. The line of credit agreement has an expiration date of July 31, 2023 and provides that $10.0 million of the $25.0 million line is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on SOFR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2022, 2021, and 2020. The Company had no bank borrowings as of January 28, 2023 and was in compliance with the terms and conditions of the line of credit agreement.

Dividend payments - During fiscal 2022, the Company paid total cash dividends of $202.9 million as follows: $0.35 per share in each of the four quarters and a special cash dividend of $2.65 per share in the fourth quarter. During fiscal 2021, the Company's paid cash dividends of $347.8 million as follows: $0.33 per share in each of the first three quarters, $0.35 per share in the fourth quarter, and a special cash dividend of $5.65 per share in the fourth quarter. During fiscal 2020, the Company's Board of Directors suspended the Company's quarterly cash dividends during the first two quarters of the fiscal year as a result of the global COVID-19 pandemic. During the last two quarters of the fiscal year, the Company paid total cash dividends of $128.5 million as follows: $0.30 per share in both the third and fourth quarters and also a special cash dividend of $2.00 per share in the fourth quarter.

Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2022 or fiscal 2021. During fiscal 2020, the Company repurchased 25,000 shares of its common stock at an average price of $14.83 per share. As of January 28, 2023, 410,655 shares remained available under the Company's current 1,000,000 share repurchase plan that was approved by the Board of Directors on November 20, 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations.

1.Revenue Recognition. Retail store sales are recorded, net of expected returns, upon the purchase of merchandise by customers. Online sales are recorded, net of expected returns, when the merchandise is tendered for delivery to the common carrier. Shipping fees charged to customers are included in revenue and shipping costs are included in selling expenses. The Company recognizes revenue from sales made under its layaway program upon delivery of the merchandise to the customer. Revenue is not recorded when gift cards and gift certificates are sold, but rather when a card or certificate is redeemed for merchandise. A current liability for unredeemed gift cards and certificates is recorded at the time the card or certificate is purchased. The liability recorded for unredeemed gift certificates and gift cards was $16.8 million and $16.5 million as of January 28, 2023 and January 29, 2022, respectively. Gift card and gift certificate breakage is recognized as revenue in proportion to the redemption pattern of customers by applying an estimated breakage rate. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. Sales tax collected from customers is excluded from revenue and is included as part of "accrued store operating expenses" on the Company's consolidated balance sheets.

The Company establishes a liability for estimated merchandise returns, based upon the historical average sales return percentage, that is recognized at the transaction value. The Company also recognizes a return asset and a corresponding adjustment to cost of sales for the Company's right to recover returned merchandise, which is measured at the estimated carrying value, less any expected recovery costs. Customer returns could potentially exceed the historical average, thus reducing future net sales results and potentially reducing future net earnings. The accrued liability for reserve for sales returns was $3.0 million as of both January 28, 2023 and January 29, 2022.

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The Company's Buckle Rewards program allows participating guests to earn points for every qualifying purchase, which (after achievement of certain point thresholds) are redeemable as a discount off a future purchase. In addition, through partnership with Bread Financial and Comenity Bank (collectively the "Bank"), the Company offers a private label credit card ("PLCC") program. Buckle Rewards members with a PLCC earn additional points under the Buckle Rewards program for every qualifying purchase on their PLCC card. Reported revenue is net of both current period reward redemptions and accruals for estimated future rewards earned under the Buckle Rewards program. A liability has been recorded for future rewards based on the Company's estimate of how many earned points will turn into rewards and ultimately be redeemed prior to expiration. As of January 28, 2023 and January 29, 2022, $10.1 million and $10.6 million was included in "accrued store operating expenses" as a liability for estimated future rewards.

Effective July 1, 2022, the Company entered into a new five year agreement (the "Agreement") with the Bank, to continue providing guests with PLCC services. Each PLCC bears the Buckle brand logo and can only be used at the Company's retail locations and eCommerce platform. The Bank is the sole owner of the accounts issued under the PLCC program and bears full risk associated with guest non-payment.

As part of the Agreement, the Company receives a percentage of PLCC sales from the Bank, along with other incentive payments upon the achievement of certain performance targets. All amounts received from the Bank under the Agreement are recorded in net sales in the consolidated statements of income.

2.Inventory. Inventory is valued at the lower of cost or net realizable value. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. Management makes adjustments to inventory and cost of goods sold, based upon estimates, to account for merchandise obsolescence and markdowns that could affect net realizable value, based on assumptions using calculations applied to current inventory levels within each different markdown level. Management also reviews the levels of inventory in each markdown group and the overall aging of the inventory versus the estimated future demand for such product and the current market conditions. Such judgments could vary significantly from actual results, either favorably or unfavorably, due to fluctuations in future economic conditions, industry trends, consumer demand, and the competitive retail environment. Such changes in market conditions could negatively impact the sale of markdown inventory, causing further markdowns or inventory obsolescence, resulting in increased cost of goods sold from write-offs and reducing the Company’s net earnings. The adjustment to inventory for markdowns and/or obsolescence was $6.3 million as of January 28, 2023 and $5.6 million as of January 29, 2022.

3.Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more than likely that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Estimating the value of these assets is based upon the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, such value would be increased. Adjustment would be made to increase net income in the period such determination was made.

4.Leases. The Company's lease portfolio is primarily comprised of leases for retail store locations. The Company also leases certain equipment and corporate office space. Store leases for new stores typically have an initial term of 10 years, with options to renew for an additional 1 to 5 years. The exercise of lease renewal options is at the Company's sole discretion and is included in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Certain store lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Lease agreements do not contain any residual value guarantees, material restrictive covenants, or options to purchase the leased property.

The Company records its lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company obtains an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company has elected to apply the practical expedient to account for lease components (e.g. fixed payments for rent, insurance, and real estate taxes) and non-lease components (e.g. fixed payments for common area maintenance) together as a single component for all underlying asset classes. Additionally, the Company elected as an accounting policy to exclude short-term leases from the recognition requirements.

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Consistent with guidance in the FASB Staff Q&A regarding lease concessions related to the effects of the COVID-19 pandemic, the Company made the election to treat all lease concessions as though the enforceable rights and obligations existed in each contract and, therefore, did not apply the lease modification guidance in ASC 842.

5.Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity (net of the effect of income taxes), using the specific identification method, until they are sold. Held-to-maturity securities are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses included in earnings, using the specific identification method.

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

As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management’s review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which are similar to those of other comparable retail companies.

The following table identifies the material obligations and commitments as of January 28, 2023:

(a) See Footnote D of the consolidated financial statements.

The Company has available an unsecured line of credit of $25.0 million, which is excluded from the preceding table. The line of credit agreement has an expiration date of July 31, 2023 and provides that $10.0 million of the $25.0 million line of credit is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during fiscal 2022, 2021, and 2020. The Company had outstanding letters of credit totaling $3.3 million and $2.7 million as of January 28, 2023 and January 29, 2022, respectively. The Company has no other off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

Included in "other assets" is a note receivable of $1.4 million as of both January 28, 2023 and January 29, 2022, from a life insurance trust fund controlled by the Company’s Chairman. The note was created over three years, beginning in July 1994, when the Company paid life insurance premiums of $0.2 million each year for the Chairman on a personal policy. The note accrues interest at 5% of the principal balance per year and is to be paid from the life insurance proceeds. The note is secured by a life insurance policy on the Chairman.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are disclosed in Footnote A of the consolidated financial statements.

FORWARD LOOKING STATEMENTS

Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management’s discussion and analysis contains certain forward-looking statements, which reflect management’s current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company’s business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial condition and results of operations during the periods included in the accompanying consolidated financial statements included in this Form 10-K.

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 included in comparable store sales. Management considers comparable store sales to be an important indicator of current Company performance, helping leverage certain fixed costs when results are positive. Negative comparable store sales results could reduce net sales and have a negative impact on operating leverage, thus reducing net earnings.

Net Merchandise Margins – Management evaluates the components of merchandise margin including initial markup and the amount of markdowns during a period. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse effect on the Company’s gross margin and results of operations.

Operating Margin – Operating margin is a good indicator for management of the Company’s success. Operating margin can be positively or negatively affected by comparable store sales, merchandise margins, occupancy costs, and the Company’s ability to control operating costs.

Cash Flow and Liquidity (working capital) – Management reviews current cash and short-term investments along with cash flow from operating, investing, and financing activities to determine the Company’s short-term cash needs for operations and expansion. The Company believes that existing cash, short-term investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years.

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RESULTS OF OPERATIONS

The following table sets forth certain financial data expressed as a percentage of net sales and the percentage change in the dollar amount of such items compared to the prior period:

Fiscal 2021 Compared to Fiscal 2020

Results for the 52-week fiscal year ended January 30, 2021 were significantly impacted by the Company's closure of all brick and mortar stores due to the COVID-19 pandemic beginning March 18, 2020.

Net sales for the 52-week fiscal year ended January 29, 2022, increased 43.6% to $1.295 billion from net sales of $901.3 million for the 52-week fiscal year ended January 30, 2021. Comparable store net sales for the 52-week fiscal year increased 43.8% from comparable store net sales for the prior year 52-week period ended January 30, 2021. Total sales growth for the year was the result of a 43.5% increase in the number of transactions and a 2.0% increase in the average unit retail, partially offset by a 1.9% decrease in the average number of units sold per transaction. Online sales for the fiscal year increased 15.9% to $220.8 million for the 52-week fiscal year ended January 29, 2022 compared to $190.6 million for the 52-week fiscal year ended January 30, 2021. Average sales per square foot for fiscal 2021 increased 50.6% from $311 to $468. Total square footage as of January 29, 2022 was 2.292 million compared to 2.301 million as of January 30, 2021.

The Company’s average retail price per piece of merchandise sold increased $0.93, or 2.0%, during fiscal 2021 compared to fiscal 2020. This $0.93 increase was primarily attributable to the following changes (with their corresponding effect on the overall average price per piece): a 3.9% increase in average knit shirt price points ($0.40), a 9.0% increase in average accessory price points ($0.36), an increase in average price points for certain other merchandise categories ($0.20), and a shift in the merchandise mix ($0.30); which were partially offset by a 1.8% decrease in average denim price points (-$0.33). These changes are primarily a reflection of merchandise shifts in terms of brands and product styles, fabrics, details, and finishes.

Gross profit after buying, distribution, and occupancy costs increased from $400.7 million in fiscal 2020 to $653.0 million in fiscal 2021. As a percentage of net sales, gross profit was 50.4% in fiscal 2021 compared to 44.5% in fiscal 2020. The gross margin increase was the result of leveraged occupancy, buying, and distribution expenses (5.05%, as a percentage of net sales) and an improvement in merchandise margins (0.85%, as a percentage of net sales). Merchandise shrinkage was 0.3% of net sales for fiscal 2021 compared to 0.4% of net sales for fiscal 2020.

Selling expenses increased from $191.2 million in fiscal 2020 to $266.4 million in fiscal 2021. As a percentage of net sales, selling expenses decreased from 21.2% in fiscal 2020 to 20.6% in fiscal 2021.

General and administrative expenses increased from $41.5 million in fiscal 2020 to $51.1 million in fiscal 2021. As a percentage of net sales, general and administrative expenses decreased from 4.6% in fiscal 2020 to 3.9% in fiscal 2021.

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In total, selling, general, and administrative expenses were 24.5% of net sales for fiscal 2021 compared to 25.8% of net sales for fiscal 2020. The decrease was the result of a decrease in store labor-related expenses (1.15%, as a percentage of net sales) and sales leverage across several other expense categories (1.30%, as a percentage of net sales), which were partially offset by an increase in expense related to incentive compensation accruals (1.15%, as a percentage of net sales).

As a result of the above changes, the Company’s income from operations increased from $168.0 million for fiscal 2020 to $335.5 million for fiscal 2021. Income from operations was 25.9% as a percentage of net sales in fiscal 2021 compared to 18.7% as a percentage of net sales in fiscal 2020.

Other income was $2.3 million in fiscal 2021 compared to $2.9 million in fiscal 2020. The Company’s other income is derived primarily from investment income related to the Company’s cash and investments.

Income tax expense as a percentage of pre-tax income was 24.6% in fiscal 2021 and 23.9% in fiscal 2020, bringing net income to $254.8 million in fiscal 2021 versus $130.1 million in fiscal 2020.

Fiscal 2020 Compared to Fiscal 2019

A discussion of fiscal 2019 and year-over-year comparisons between fiscal 2020 and fiscal 2019 can be found in PART II, ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021, filed with the United States Securities and Exchange Commission on March 31, 2021.

LIQUIDITY AND CAPITAL RESOURCES

As of January 29, 2022, the Company had working capital of $142.7 million, including $254.0 million of cash and cash equivalents and $12.9 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 fiscal 2021, 2020, and 2019 the Company's cash flow from operations was $311.8 million, $227.4 million, and $130.7 million, respectively. Changes in operating cash flow between each of the three years is primarily a function of changes in net income, along with changes in inventory and accounts payable based on the timing and amount of merchandise purchased in each respective period. Operating cash flow is also impacted by the timing of certain other payments, including rent and income taxes. The Company's growth in operating cash flow for fiscal 2021 compared to both fiscal 2020 and fiscal 2019 is attributable to the strong increase in both net sales and net income for the year.

During fiscal 2021, 2020, and 2019, the Company invested $18.3 million, $5.5 million, and $6.4 million, respectively, in new store construction, store renovation, and store technology upgrades. The Company spent $0.8 million, $2.2 million, and $0.9 million in fiscal 2021, 2020, and 2019, respectively, in capital expenditures for the corporate offices and distribution facility.

During fiscal 2022, the Company anticipates opening 5 new stores and completing approximately 15-20 store remodels and/or relocations. Management estimates that total capital expenditures during fiscal 2022 will be approximately $22.0 to $27.0 million, which includes primarily planned store projects and technology investments. The Company believes that existing cash and cash equivalents, investments, and cash flow from operations will be sufficient to fund current and long-term anticipated capital expenditures and working capital requirements for the next several years. The Company has had a consistent record of generating positive cash flow each year and, as of January 29, 2022, had total cash and investments of $286.2 million, including $19.4 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 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.

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The Company has available an unsecured line of credit of $25.0 million with Wells Fargo Bank, N.A. for operating needs and letters of credit. The line of credit agreement has an expiration date of July 31, 2023 and provides that $10.0 million of the $25.0 million line is available for letters of credit. Borrowings under the line of credit provide for interest to be paid at a rate based on SOFR. The Company has, from time to time, borrowed against these lines of credit. There were no borrowings during fiscal 2021, 2020, and 2019. The Company had no bank borrowings as of January 29, 2022 and was in compliance with the terms and conditions of the line of credit agreement.

Dividend payments - During fiscal 2021, the Company paid total cash dividends of $347.8 million as follows: $0.33 per share in each of the first three quarters, $0.35 per share in the fourth quarter, and a special cash dividend of $5.65 per share in the fourth quarter. During fiscal 2020, the Company's Board of Directors suspended the Company's quarterly cash dividends during the first two quarters of the fiscal year as a result of the global COVID-19 pandemic. During the last two quarters of the fiscal year, the Company paid total cash dividends of $128.5 million as follows: $0.30 per share in both the third and fourth quarters and also a special cash dividend of $2.00 per share in the fourth quarter. During fiscal 2019, the Company paid total cash dividends of $112.9 million as follows: $0.25 per share in each of the first three quarters, $0.30 per share in the fourth quarter, and a special cash dividend of $1.25 per share in the fourth quarter.

Stock repurchase plan - The Company did not repurchase any shares of its common stock during fiscal 2021. During fiscal 2020, the Company repurchased 25,000 shares of its common stock at an average price of $14.83 per share. During fiscal 2019, the Company repurchased 4,552 shares of its common stock at an average price of $14.92 per share. As of January 29, 2022, 410,655 shares remained available under the Company's current 1,000,000 share repurchase plan that was approved by the Board of Directors on November 20, 2008.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon The Buckle, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the financial statement date, and the reported amounts of sales and expenses during the reporting period. The Company regularly evaluates its estimates, including those related to inventory, investments, incentive bonuses, and income taxes. Management bases its estimates on past experience and on various other factors that are thought to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes that the estimates and judgments used in preparing these consolidated financial statements were the most appropriate at that time. Presented below are those critical accounting policies that management believes require subjective and/or complex judgments that could potentially affect reported results of operations.

1.Revenue Recognition. Retail store sales are recorded, net of expected returns, upon the purchase of merchandise by customers. Online sales are recorded, net of expected returns, when the merchandise is tendered for delivery to the common carrier. Shipping fees charged to customers are included in revenue and shipping costs are included in selling expenses. The Company recognizes revenue from sales made under its layaway program upon delivery of the merchandise to the customer. Revenue is not recorded when gift cards and gift certificates are sold, but rather when a card or certificate is redeemed for merchandise. A current liability for unredeemed gift cards and certificates is recorded at the time the card or certificate is purchased. The liability recorded for unredeemed gift certificates and gift cards was $16.5 million and $14.3 million as of January 29, 2022 and January 30, 2021, respectively. Gift card and gift certificate breakage is recognized as revenue in proportion to the redemption pattern of customers by applying an estimated breakage rate. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. Sales tax collected from customers is excluded from revenue and is included as part of "accrued store operating expenses" on the Company's consolidated balance sheets.

The Company establishes a liability for estimated merchandise returns, based upon the historical average sales return percentage, that is recognized at the transaction value. The Company also recognizes a return asset and a corresponding adjustment to cost of sales for the Company's right to recover returned merchandise, which is measured at the estimated carrying value, less any expected recovery costs. Customer returns could potentially exceed the historical average, thus reducing future net sales results and potentially reducing future net earnings. The accrued liability for reserve for sales returns was $3.0 million as of January 29, 2022 and $2.6 million as of January 30, 2021.

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The Company's Buckle Rewards program allows participating guests to earn points for every qualifying purchase, which (after achievement of certain point thresholds) are redeemable as a discount off a future purchase. Reported revenue is net of both current period reward redemptions and accruals for estimated future rewards earned under the Buckle Rewards program. A liability has been recorded for future rewards based on the Company's estimate of how many earned points will turn into rewards and ultimately be redeemed prior to expiration. As of January 29, 2022 and January 30, 2021, $10.6 million and $10.2 million was included in "accrued store operating expenses" as a liability for estimated future rewards.

Through partnership with Comenity Bank, the Company offers a private label credit card ("PLCC"). Prior to October 2020, Customers with a PLCC were enrolled in our B-Rewards incentive program and earned points for every qualifying purchase on their card. At the end of each rewards period, customers who exceeded a minimum point threshold received a reward to be redeemed on a future purchase. The B-Rewards program also provided other discount and promotional opportunities to cardholders on a routine basis. Reported revenue was net of both current period reward redemptions, current period discounts and promotions, and accruals for estimated future rewards earned under the B-Rewards program. A liability was recorded for future rewards based on the Company's estimate of how many earned points would turn into rewards and ultimately be redeemed prior to expiration, which was included in "gift certificates redeemable" on the Company's consolidated balance sheets. In October 2020, the Company merged the B-Rewards program and the Buckle Rewards program enabling participating guests to earn additional points for qualifying purchases on their PLCC card under the newly enhanced Buckle Rewards program.

2.Inventory. Inventory is valued at the lower of cost or net realizable value. Cost is determined using an average cost method that approximates the first-in, first-out (FIFO) method. Management makes adjustments to inventory and cost of goods sold, based upon estimates, to account for merchandise obsolescence and markdowns that could affect net realizable value, based on assumptions using calculations applied to current inventory levels within each different markdown level. Management also reviews the levels of inventory in each markdown group and the overall aging of the inventory versus the estimated future demand for such product and the current market conditions. Such judgments could vary significantly from actual results, either favorably or unfavorably, due to fluctuations in future economic conditions, industry trends, consumer demand, and the competitive retail environment. Such changes in market conditions could negatively impact the sale of markdown inventory, causing further markdowns or inventory obsolescence, resulting in increased cost of goods sold from write-offs and reducing the Company’s net earnings. The adjustment to inventory for markdowns and/or obsolescence was $5.6 million as of January 29, 2022 and $10.8 million as of January 30, 2021.

3.Income Taxes. The Company records a deferred tax asset and liability for expected future tax consequences resulting from temporary differences between the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing tax planning in assessing the value of its deferred tax assets. If the Company determines that it is more than likely that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Estimating the value of these assets is based upon the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, such value would be increased. Adjustment would be made to increase net income in the period such determination was made.

4.Leases. The Company's lease portfolio is primarily comprised of leases for retail store locations. The Company also leases certain equipment and corporate office space. Store leases for new stores typically have an initial term of 10 years, with options to renew for an additional 1 to 5 years. The exercise of lease renewal options is at the Company's sole discretion and is included in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Certain store lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Lease agreements do not contain any residual value guarantees, material restrictive covenants, or options to purchase the leased property.

The Company records its lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. As the Company's leases do not provide an implicit interest rate, the Company obtains an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The Company has elected to apply the practical expedient to account for lease components (e.g. fixed payments for rent, insurance, and real estate taxes) and non-lease components (e.g. fixed payments for common area maintenance) together as a single component for all underlying asset classes. Additionally, the Company elected as an accounting policy to exclude short-term leases from the recognition requirements.

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Consistent with guidance in the FASB Staff Q&A regarding lease concessions related to the effects of the COVID-19 pandemic, the Company made the election to treat all lease concessions as though the enforceable rights and obligations existed in each contract and, therefore, did not apply the lease modification guidance in ASC 842.

5.Investments. Investments classified as short-term investments include securities with a maturity of greater than three months and less than one year. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity (net of the effect of income taxes), using the specific identification method, until they are sold. Held-to-maturity securities are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses included in earnings, using the specific identification method.

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

As referenced in the table below, the Company has contractual obligations and commercial commitments that may affect the financial condition of the Company. Based on management’s review of the terms and conditions of its contractual obligations and commercial commitments, there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. In addition, the commercial obligations and commitments made by the Company are customary transactions which are similar to those of other comparable retail companies.

The following table identifies the material obligations and commitments as of January 29, 2022:

(a) See Footnote D of the consolidated financial statements.

The Company has available an unsecured line of credit of $25.0 million, which is excluded from the preceding table. The line of credit agreement has an expiration date of July 31, 2023 and provides that $10.0 million of the $25.0 million line of credit is available for letters of credit. Certain merchandise purchase orders require that the Company open letters of credit. When the Company takes possession of the merchandise, it releases payment on the letters of credit. The amounts of outstanding letters of credit reported reflect the open letters of credit on merchandise ordered, but not yet received or funded. The Company believes it has sufficient credit available to open letters of credit for merchandise purchases. There were no bank borrowings during fiscal 2021, 2020, and 2019. The Company had outstanding letters of credit totaling $2.7 million and $1.8 million as of January 29, 2022 and January 30, 2021, respectively. The Company has no other off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

Included in other assets is a note receivable of $1.4 million as of January 29, 2022 and $1.4 million as of January 30, 2021, from a life insurance trust fund controlled by the Company’s Chairman. The note was created over three years, beginning in July 1994, when the Company paid life insurance premiums of $0.2 million each year for the Chairman on a personal policy. The note accrues interest at 5% of the principal balance per year and is to be paid from the life insurance proceeds. The note is secured by a life insurance policy on the Chairman.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements are disclosed in Footnote A of the consolidated financial statements.

FORWARD LOOKING STATEMENTS

Information in this report, other than historical information, may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are made in good faith by the Company pursuant to the safe-harbor provisions of the 1995 Act. In connection with these safe-harbor provisions, this management’s discussion and analysis contains certain forward-looking statements, which reflect management’s current views and estimates of future economic conditions, Company performance, and financial results. The statements are based on many assumptions and factors that could cause future results to differ materially. Such factors include, but are not limited to, changes in product mix, changes in fashion trends, competitive factors, and general economic conditions, economic conditions in the retail apparel industry, as well as other risks and uncertainties inherent in the Company’s business and the retail industry in general. Any changes in these factors could result in significantly different results for the Company. The Company further cautions that the forward-looking information contained herein is not exhaustive or exclusive. The Company does not undertake to update any forward-looking statements, which may be made from time to time by or on behalf of the Company.