Q2 2020 Earnings Call
Good day, everyone and welcome to the boot Barn Holdings Inc. second quarter 2020 earnings call.
As a reminder, this call is being recorded now I'd like to turn the conference over to your host Mr., Jim Hawkins Vice President Investor Relations. Please go ahead Sir.
Thank you.
Afternoon, everyone. Thank you for joining us today to discuss boot barn second quarter fiscal 2020 earnings results.
With me on todays call our Gen Conroy, President and Chief Executive Officer, and Greg Hackman, Chief Financial Officer.
A copy of today's press release is available on the Investor Relations section. Thank you best website, a beep on dot com.
Shortly after we end this call a recording of the call will be available for replay for 30 days on the Investor Relations section of the company's website.
I would like to remind you that certain statements. We will make in this presentation are forward looking statements. These forward looking statements reflect the best judgment and analysis only as of today, an actual results may differ materially current expectations based on the number of factors affecting the banks business [laughter]. Accordingly, you should not place undue reliance on these forward looking statements.
For more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made during this conference call webcast. We refer you to the disclaimer regarding forward looking statements that is included in our second quarter fiscal 2020 earnings release as well as our filings with the FCC referenced in that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, where there was a result of new information future events or otherwise.
Well now turn the call over to Jim Conway, Dupont, <unk>, President and Chief Executive Officer, Jim.
Thank you Jim and good afternoon, Thank you for joining us.
Today's call I will discuss the highlights of our second quarter results and provide an update on easier about four strategic initiatives.
Following that Greg will review our financial performance in more details and then we'll open the call up for questions. We're very pleased with our second quarter results, which reflect continued broad based strength across the business.
Consolidated same store sales increased 7.8% on top of an 11.3% increase a year ago.
Same store sales and our physical locations increased 8.0% well ecommerce sales accelerated sequentially with topline growth of 7.0%.
The combination of strong full price selling a significant increase in exclusive brand penetration and loved ones in that's DNA fuel 170 basis points of EBIT margin expansion and earnings per share of 26 cents.
On a normalized tax basis, our EPS grew by 100% versus the second quarter of last year.
The team continues to execute well against each of our fourth strategic growth initiatives, resulting in another very strong quarter.
I'd now like to review the second quarter highlights for each initiative beginning with its driving same store sales group.
The second quarter represents our 10th consecutive quarter of positive store comps, which reflects the strength of our model coupled with fantastic execution by the entire team.
We were particularly pleased today, we can drive such a solid topline results.
By eliminating our anniversary sale that has been a part of our business for more than 20 years and cycling the launch of idling to buy Miranda Lambert last September .
Consistent with the past several quarters.
Solid gains in virtually all geographies and major product categories.
Continued to see nice growth in our Texas business as it was slightly below the chain average well cycling in extremely strong second quarter last year.
Boy merchandising perspective.
Continued strength in all major product categories with the biggest growth coming from work apparel work boots hats, and ladies western apparel.
For the third consecutive quarter or ladies western boots business was positive.
Our merchant team continues to drive growth in these categories by delivering compelling product assortment.
Enhancing our in store merchandising.
Devoting more selling space to growing categories.
Most notably we have continued to expand humana floor space I mean inventory investment in both what's boots and work apparel.
Fueled the growth in those businesses.
[noise] for makes two operations perspective, we have seen continued benefit from the streamlining of certainly administrative tasks and our stores, giving our field team the opportunity to focus more of their time I'm driving improved sales results through enhanced service and selling initiatives.
We've also made two important upgrades to our in store Pos systems.
First we now have the ability to accept additional payment options in store, including Apple pay.
Secondly, we've upgraded the Pos registers and more than 100 legacy stores.
These new registers greatly accelerate the customer look up and checkout process and should help increase transaction speed very busy holiday selling period.
Which could further drive comp store sales growth.
Our marketing efforts continue to be rooted in the customer segmentation work that we've been doing over the past two years.
Accordingly, we are in a constant process of refining our media mix and not only connect with our current customer.
Catalogs email and social media.
But also to expand our customer reach with television and radio.
[noise] disappoint.
This approach has been an important greedy and and our ability to grow our customer base and it came to driving same store sales growth.
Moving to our second initiative strengthening our omni channel leadership.
Our focus over the past 18 months has been on improving the EBIT contribution of our ecommerce business and reducing our promotional activity cutting back on paper click advertising.
Moving low margin skews from our online assortment.
As we've now lapped many of these efforts we've seen a nice pick up in topline trends.
Second quarter ecommerce sales growth accelerated to 7%.
Boot barn, dotcom growing double digits, and our ecommerce operating margin outpacing our sales growth.
Well Sheplers dot com remains negative a significant portion of the sales erosion for that brand can be attributed to a loss of paid traffic, which we have planfully reduced in an effort to maximize profitability.
We remain focused on growing the profit contribution of ecommerce channel are driving topline growth, but we've been appropriate return on AD spend for online marketing dollar.
Recently, we have been expanding our customer service option for online business. We now offer an installment payment option on all three E. Commerce sites. This option has been well received by many online customers and will provide additional flexibility during the upcoming holiday season.
We have also meaningfully upgraded our buy online pick up in store or BOPUS initiative across the chain.
Historically, if you bring back on customer the byproduct online it used to have that item shipped from our DC to a local store for pickup.
Hey, what's our newly launched brokers capability.
Our customers online orders can now be fulfilled by the inventory in any of our stores across the country, allowing customer pick up within a couple of hours.
This functionality was launched successfully this month.
In that only drive increased online sales.
I will also drive additional store traffic this holiday season.
Additionally, we have the team focused on delivering a truly innovative digital experience inside our stores.
This holiday season every store will feature our range finder touch screens, which will act as a digital hub and will provide all customers and certainly our new customers the ability to quickly find exactly right for them or the right gift for their loved ones.
The goal is to further increase the conversion rate of our in store shoppers and to provide additional product information and expertise.
Just becomes increasingly important as we had seasonal sales associates, leading into the holiday season.
Finally, the same technology will be put will provide the stores with a very efficient platform can manage all omni channel transactions as it integrates seamlessly with online purchases online returns and our customer loyalty program.
Now to our third strategic initiatives exclusive brands.
During the second quarter exclusive brand penetration exceeded 21% of total sales an increase of nearly 600 basis points compared to the prior year period.
Our product design team continues to evolve and expand each of our exclusive brands as we strive to deliver the best product in the industry for each category of merchandise.
Well koby James in Cheyenne have broadened their reach and continue to grow into new categories.
We have cycled the launch of idle wind fueled by Miranda Lambert and are very excited about the ongoing growth with that brand and the marketing partnership that we have built which we believe it introduced new customers to groupon.
The assortment in Moonshine spirit, Brad Paisley is gaining traction and additional markets across the country and we continue to benefit from the association with Brad.
From my perspective, hogs and quota James work continue to build momentum in bulk foods and apparel.
And finally, our assortment of flame resistant we're fr merchandise he's just deliver into stores now and we are encouraged by the early sell through we are seeing.
Notably given the sharp acceleration of our exclusive brand business.
Coupled with an expansion in our initial markup structure due to our purchasing power.
Our exclusive brands merchandise will over deliver our planned margin contribution to the business. Despite the impact of new tariffs on the China source goods.
Finally, our fourth initiative expanding our store base.
We believe that the combination of building new stores and acquiring stores local operators will allow us to develop a national footprint and double our current store count over the next several years.
To this end we added eight stores to our fleet during the second quarter with new store openings in Oregon, Indiana, California, Texas and Oklahoma.
Plus the acquisition NGL clothing, a large volume store in des Moines, Iowa.
We now operate 248 stores in 33 stage and we remain on pace to at 25 stores during the current fiscal year.
Importantly, the new stores, we opened or acquired during the past seven years have on average paid back faster than our targeted three year payback.
Turning our attention to current business business. During the month of October has accelerated from our second quarter sales trend with our promotional stance consistent year over year.
Our consolidated same store sales growth quarter to date is 10%.
At the store channel slightly outperforming e-commerce .
Once again, we're seeing growth across virtually all product categories and consistency across all regions, including Texas, which has accelerated in the third quarter and it's just slightly below the chain average.
More importantly, as we look forward to holiday, we feel great about how we're positioned it during this important time of year.
We've carefully planned or media mix have secured the appropriate levels of inventory to fuel additional growth.
And our ahead of schedule and hiring.
Proximately 1400 seasonal associates that we will need to handle the holiday business.
Hello to build in the business.
And now I'd like to turn the call over to Greg Hackman.
Thank you Jim good afternoon, everyone.
And the second quarter net sales increased 11.3% to $187 million sales growth was driven by a 7.8% increase in same store sales and sales from stores added over the past 12 months.
Gross profit increased 16.5% to $59.3 million or 31.7% of sales compared to gross profit of $50.9 million for 30.3% of sales in the prior year period.
140 basis point, increasing gross possibly resulted from a 200 basis points increase in merchandise margin, partially offset by 60 basis points of increased buying and occupancy costs.
Merchandise margin rates increased as a result of better full price selling and growth an exclusive brand penetration.
The de leverage and buying and occupancy was largely a result of increased costs associated with the acceleration of our exclusive brand growth.
We have invested in head count in the product design and development team.
Have ramped up our DC labor to handle the increase in receipts and shipments.
Operating expense for the quarter was $46.4 million or 24.8% of sales compared to $42.2 million or 25.1% of sales in the prior year period.
The increase in operating expenses, primarily result of additional costs to support higher sales and expenses for both new and acquired stores.
Operating expenses as a percent of sales decreased by 30 basis points as a result of expense leverage on higher sales.
Income from operations was $12.9 million or 6.9% of sales in the quarter compared to $8.7 million or 5.2% of sales in the prior year period.
Representing a 170 basis point improvement in operating margin.
Income tax expense was $1.9 million in the quarter based on an effective income tax rate of 20.2%.
We expect the tax rate for the balance of the yield to be 25.2 person.
Net income was $7.7 million or 26 cents per diluted share compared to $4.5 million or 16 cents per diluted share in the prior year period.
Net income in the current year and in the prior year includes two cents and four cents per share of tax benefit respectively from the exercise of stock options.
Excluding this tax benefit net income per diluted share in the current year period going 100% 24 cents compared to 12 cents.
Our year period.
Turning to the balance sheet.
Inventory increased approximately 15% on a comp store basis compared to last year.
Maximally half of this increase supporting investment in our work business.
On a consolidated basis inventory was 31% to $302 million compared to the year ago.
This increase was primarily driven by increasing the inventory at Santana distribution center to support the growth of exclusive brands.
Comp store inventory and inventory for new and acquired stores added in the last 12 months.
Yes.
As of September 28, 2019, we had a total of $194 million of debt outstanding.
Including $85 million drawn on our $165 million revolving credit facility.
We had $13 million of cash on hand, and our net debt leverage ratio at the and the second quarter was less than 1.9.
At this point I'd like to provide you with an update on tariffs.
After the first quarter call. It was announced a products on list for a would be assessed a 15% to effective September 1st and items on list for be effective December 15th.
Earlier, Jim outlined our ability to offset these tariffs as it relates to our exclusive brands.
For branded products many of our larger vendors have been successful with getting a cost concessions from their Chinese partners.
Two of our top five vendors have informed us that they are continuing to evaluate the situation.
But that there will not be a price increase until February 1st 2020 at the earliest.
As such we believe that the impact of tariffs for the current fiscal year will be not negligible and this contemplated in our updated fiscal 2020 guidance.
Further as we begin the fiscal 2021 planning process, we do not intend to change our long term earnings algorithm.
Turning to our outlook for fiscal 2020.
We've updated our guidance and now expect same store sales to increase approximately 6.5% and earnings per share to be in a range of a $1.67 to $1.70 size.
Well sure based on estimated weighted average diluted share count was 29.3 million shares.
This compares to our previous guidance of $1.57 to $1.65 per share.
When excluding stock compensation tax benefits the midpoint of this updated guidance represents more than 35 cents.
I'm, sorry, more than 35% earnings per share growth over the last year.
Our income from operations is now expected to be between 78 and $81 million.
We now expect net income from Cisco for fiscal 2020 to be approximately 49 million to $51.3 million interest expense is expected to be approximately $13.6 million.
As we look to the third quarter, we expect same store sales to increase approximately 5%.
With total sales between 275 and $280 million and net income per diluted share to be in the range of 73 to 77 cents per share.
Now I'd like to turn the call back to Jim for some closing remarks.
Thanks, Greg we're extremely pleased with our second quarter results and the positive momentum has continued into the current quarter as we approach to holiday shopping season.
Wrapping up and it's worth noting that today marks that five year anniversary of our IPO I want to recognize the efforts of the entire boot barn team at numbers more than 4000 associates nationwide.
We have created a truly unique lifestyle brand with the physical store presence in 33 states.
And the ability to double our store count I for one I'm looking forward to the next five years.
Now I'd like to open up the call to take your questions Doug.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad a confirmation Tom indicate your line is in a question in queue. You May press star to if you'd like to remove your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star.
First question comes from the line of Matthew Boss with Jpmorgan. Please proceed with your question.
Thanks, Congrats on the quarter guys and the continued momentum.
Thanks, Matt.
I guess there Jim.
Maybe to take a step back at the time at the IPO I think I remember, you're citing a 20 billion dollar western and work where market I think the growth rates at the time were low to mid single digits annually I guess, so higher level any update to your view of the industry growth rates and maybe as it relates to your business. What do you believe is driving the increase.
Topline consistency that you're now seeing across regions, particularly the outsized strength that you're seeing and some of your more mature markets.
Sure on the first piece.
Theres been a lot of debate as to whether we're facing a headwind or tailwind I think the overall industry is still order of magnitude about $20 billion.
We're approaching a billions there were so less than 5%. So there's plenty of growth opportunity for us ahead of us.
In terms of the underlying growth rate I think if I looked at the whole industry and this is anecdotal it's a very difficult industry to get real secondary research on.
I'd say, there's probably 2% underlying growth.
Everything above that I think we can attribute to some of the things that we have working from an initiative standpoint within the company.
I think you characterize it right in terms of the consistency of growth more visibility.
A lot of consistency across regions, I think four or five quarters, where we'd say that essentially every part of the country has been growing and while.
On any given day, you can read good news or bad news in the oil patch or good news or bad news in farming.
Or in any other industry that we might serve.
I think the diversification of the company today.
250 stores approximately 250 stores in 33 states, if we do face a headwind in one part of the country, it's likely to be offset by a tailwind in another part of the country and.
Kevin you put all that together coupled with the way the team has been executing.
We feel great about that the consistency of the growth.
The growth continues to be with fewer promotion and sale periods.
And we're getting nice growth in both channels and I think when you put all that together it puts us into a pretty unique position.
That's great and maybe just a follow up near term comps quarter to date running up 10%.
Looking back last year, you actually have easier comparisons on tap in November December relative to what you just faced in October I guess, maybe anything other than conservatism, maybe the six fewer holiday selling days during the calendar just anything to account for the 5% guide versus the 10% you're currently running.
Sure very good question, certainly Conservatives and while we feel great about where we are quarter to date.
You were four weeks in a couple of days into a 13 week quarter or only about 25% of away to the quarter in terms of total sales volume.
Q3 for US is our holiday period.
Not sure what impact if any the later Thanksgiving will have.
On our sales.
I think the other thing that.
May impact same store sales up or down is it. This is a quarter where E. Commerce does index, a little bit higher than it does for the balance of the year and we're not going to chase same store sales.
Bye bye driving paper click traffic in.
If it's EBIT eroding and if the sort of AD spending become irrational well, probably just sit on the sidelining and not go after.
Sales that will hurt our EBIT.
But if you set that aside I think we feel very good about the momentum that we built so far into the quarter.
You are of course accurate and calling out that October was our strongest month of the quarter last year.
And we feel great about how we're positioned from a readiness standpoint from an inventory standpoint for marketing standpoint.
And while the same store sales number could be.
Move up or down by a little bit here or there.
I think our our.
Forecast for EPS is is pretty solid and had some conservatism in it.
Great Congrats again best of luck.
Thanks, Matt Thanks appreciate it.
Our next question comes from the line of Oliver Oliver Chen with Cowen and company. Please proceed with your question.
Oh.
Thanks Crawford has been really impressive what are your thoughts about the next chapter that and it sounds like you've access.
Sure across people in inventory.
Where are you.
I mean, you're seeing.
Initiatives.
And the marketing mix analysis, you've been doing.
Hi machine learning and things that are driving the marketing mix and how that's impacting awareness and demand. So several questions. Thank you.
Okay very good.
We fundamentally we have six brands right now there each targeted for a different demographic recycle graphic within the portfolio of brands in the company.
And.
Sure the near term growth will be to expand each of them sort of in place. So.
The most recent example is we launched Hawks apparel.
And now this year, we're coming out with Hawks fr work apparel. So before we launch a net new brand will continue to build out each of the brands that we have each of the six brands and I can walk you through examples for all of them.
The interest of time I'll start you guys that.
At some point in the future will likely look for another niche within the consumer landscape.
Where.
We believe the our third party brands and have left some white space and it's underserved and we'll launch another brand in bulk and go after that.
Part of the market.
Yeah that is even if we.
Conceptualize that brand today were 12 months Stacy metric putting in the stores. So.
For the short term I think we should just stay focused on nurturing and growing the brands that we have out there.
The second part of your question was around Bopis.
I think bulk is a it's a great mechanism for a couple of things one it certainly gives our online customer another option.
And while we could ship it to them in four or five days or in two days.
They could also BYD online drive over to the store within the next couple of hours and habit same day and that is a little bit unique.
With the leader Thanksgiving and later cyber Monday that actually gives us a nice competitive advantage over a lot of pure play digital native brands that are going to run out of time from a shifting standpoint, and the guys that have a healthy and functionally rich buy online.
Pickup in store.
Process like we view I think you benefit even online.
Your question, though we've really around store traffic, what we've seen and we'll we'll be able to measured this in the future. We can't give a real number now, but what we absolutely see is as people coming to pick up the goods that they purchased online some portion of them call. It 2020, 5% of then.
Our leaving with something else if they bought in their store visit so if additional traffic and it's just a great experience from a customer standpoint to blend the two channels together.
The final part of your question.
Was on marketing mix and.
Hi.
I'm laughing because on the train statistician, but I will tell you that I view marketing mix as part art and part science and one of the things that we believe in is that the ARCC part of it and the creative part of it.
Has a fair amount of value and I think where a lot of company needs.
Our chasing media mix that they can improve.
And they leave behind media that we believe is effective even though we can't necessarily pivot.
And so we kind of look at the analytics and we studied them in depth.
And then we add a bit of guide.
And we put a fair amount of emphasis on the upgrade in the creative aesthetic the brand and all that goes together and when we look at the same store sales that we been producing.
Perhaps the same store sales are we've been producing in store.
It's an extremely healthy.
Number because it's driven by transactions and it's driven by customer visits and new customers. So.
We can we can deduce very quickly that the media mix, coupled with a great in store experience coupled with a great assortment.
Is adding new customers to the boot barn brand and that's been what's.
One of the biggest PC, that's driving the underlying comp for the company.
Thank you very.
Questions about digital.
You've been making some really good steps in terms of engaging and the most profitable sales, but how should we model the growth rate and also key thoughts around your your levers for continuing to improve profitability in that channel.
So now that we've lapped many of the efforts from the EBIT initiative and those are ones that you get in 80, 90% of event. The first time and then you lap them again, you can squeeze a little bit more out of each.
You won't were guiding two is a high single digit view of our ecommerce business.
We are often quick to point out that are boot barn dot com brand is solidly double digit growing and is pulled down a bit by sheplers dot com and while sheplers that calm serves a very.
Good strategic purpose for us from a price leader in the industry.
Much of the sales erosion that we see in Sheplers dotcom would be even eroding. So we're just sort of sitting on the sidelines.
Not bidding up.
Not bidding on words that don't pay back with a healthy enough return on ad spend.
And so if you were to if we want to report on our boot barn stores business, plus our boot barn dot com business.
And separate out Sheplers ecommerce comp would be even higher.
Thank you best regards.
Thanks However.
Our next question comes from the line of Peter Keith with Piper Jaffray. Please proceed with your question.
Hi, Thanks for you guys. So maybe just a follow up on the last question. It does seem like E. Com business is re accelerating.
I guess maybe.
Great asking the context of gross margin opportunity. So so private label is.
Sounds good momentum, it's really on the promotional levers.
There are less opportunity now on.
Not pulling back on promotions, which I guess is less gross margin, but but inherently drives more.
Sales growth is that the message today.
Hey, look I think there's always opportunities as we look forward.
To to tweak promotion, so we continue to refining.
Some of the quote unquote clearance events that we do and clearance for us as a very small piece of our business by I'll give you a very tangible example, historically we would go clearance event across the entire chain it'd be very consistent now we are doing a little bit of markdown optimization by store. So.
I will do clearance a bit heavier in some stores that are a little bit heavier and lighter or were knows I am clearance sale and other stores.
All that amounts to 5% of sales so there's not a ton of.
Just to the squeeze there.
As we look into the holiday period, while we continue to really focus on being a full priced.
Retailer and full price seller of boots and apparel.
As we get into Black Friday, and the holiday period of course, we have some offer sue so we're looking at those to see if there's some areas, where we can be a bit less aggressive and recapture some margin.
So we'll see how that unfolds as we go forward.
But then you're right to call out from a.
Exclusive brand perspective.
We started the year thinking maybe three points.
Penetration four points of penetration and now, we're seeing five points or or maybe a bit more than that as exclusive brand penetration.
We're also seeing while we.
Hello.
10 points of margin enhancement or thousand basis points of margin enhancement.
Seeing a bit more than that also so while we're of course watching the tower situation quick very carefully.
A lot of.
Hello wins from a margin rate perspective on exclusive brands that weren't necessarily in thinking from the beginning of the year and not necessarily.
Really not at all contemplated in the original earnings algorithm. So it's kind of a nice.
Your added benefit and that's that's really a testament to the product that the merchants and the product design team put out there.
Where were getting very strong sell throughs going up against some really good brands.
Okay.
Okay. That's helpful.
Maybe just a little bit related potentially for Greg on the on the balance sheet.
To that step up in inventory.
And accelerating.
I guess I'm trying to wonder if is there dynamic of buying ahead of tariffs or is this more of a.
Shift to more private label, which inherently cause you to handle more of that.
Victoria upfront and therefore, it might see continued inventory increases like this for a while.
Yes, it's a great question and it's it's more of the latter Peter.
We invested in work that was about 50% of the in store increase was related to the work business, whether its boots are apparel.
Where were we see a strategic opportunity to grow that business significantly. We also last year. After we got out of holiday, we look back at our business and we saw some merchandise categories, frankly, where we thought we missed some business and so we plan for we increased inventory levels in those.
Category, so that we could take advantage of that business this year.
So those are the two big things that are happening in the stores as it relates to the contain a distribution center you're right we bought into.
The exclusive brands as we've grown that business.
Pretty sharply we've we've had to invest more in inventory as you know our.
Our model has been.
We sell something we ship we have the vendor shipped directly to the store now with more exclusive brands, we need to house more of that inventory.
And lastly, there is an element of trying to beat the tariffs that came in it.
It's not the most meaningful number on the page, but it certainly was one of the things that we thought about.
Okay. Thanks, a lot that's good color and congrats on the results.
Thanks, very much Peter.
Our next question comes from the line of Jonathan Komp with Robert W. Baird. Please proceed with your question.
Yes, hi, thank you.
I wanted to start off maybe Jim just curious any color you're willing to provide on kind of inter quarter trends or any.
Noticeable trend that you've seen and then.
Whether or not you have any thoughts on what's driven.
Ration quarter to date and the comps.
Sure intra quarter, Ed I think we.
Kind of called this out on the last call, where we got out of the very strongly in second quarter.
We didnt anniversary, our sale and while that was absolutely the right thing to do firming EBIT and EPS standpoint.
Our same store sales did slow a little bit.
As we went against the sale I still positive, but not quite as strongly positive and then we.
As we got in September we kind of got back to a normal.
Pretty strong comp in both channels stores and E com.
And we were up against a bit of an outsized.
Event in the Miranda Lambert launch last year. So we felt good about that.
As we turn the calendar impact over.
I think some of the things that we haven't store like the new deliveries of inventory.
Outerwear as Greg had called out.
Perhaps coupled with a little bit of change in the weather and fall sort of arrive.
Right around October 1st and that helped us drive some really strong business in.
In the month Thats.
Continued to build so it's we feel great about how well positioned we are right now leading into the holiday season.
But we have 70, 75% of the quarter still ahead of us.
Okay, that's very helpful.
And then maybe a related question, but as you look forward I'm just curious how you're thinking about comparisons for the business and I know you had tough comparisons the whole time, but if I go back two years.
Especially towards the end of your fiscal 2000.
And it early 19, you saw kind of an incremental acceleration so I'm curious if.
You look at all I kind of a two year comparison and that gets tougher going forward.
Or just how you're thinking about.
The comparison.
Piece as you look ahead.
Sure. It's a good question and as retailers, we always are looking back a year back two years et cetera.
We've sort of learned that.
Sometimes that math just doesn't doesn't work anymore. The October is a very good example, if you wanted to look at.
You went back to fiscal 18, and I believe our.
What we had a really nice step up from second quarter to third quarter in fiscal 18.
And our fiscal 18 third quarter was a solid five to with the stores business really strong and E. Commerce was a negative in the quarter deal backup are so if you. If you wanted to do a three year stack, which again I'm not sure. It's it's going to tell us much like you say our stores on a three year stack base.
This new third quarter are incredibly solid.
Fiscal 18 with strong fiscal 19 was strong and fiscal 2000 is off to a great start.
So.
We do do what you're hearing in terms of arithmetic and we drive ourselves grades you sometimes.
I think the way we view the business right now as we have some really nice momentum.
Is now one geography, driving its consistent across the country theres not one product category or some crazy trends driving it it's consistent across product categories and yes, we feel very fortunate position marine where we feel like this momentum has been building.
And hopefully we will continue to build going forward.
And I'm I'm I don't staff at night at all worrying about what my Al why comp was in Q4 and certainly not what my hour.
To prior year or two year ago comp was in Q4.
Okay, great great to hear.
And then maybe just last one Greg I'm curious.
If you could maybe just reconcile the full year guidance increase you obviously.
The earnings range for Q2, a little bit, but if you could maybe just walk through the.
The remaining source of upside on the guidance and then.
As you look out if theres any other call out for like the buyer and occupancy piece this quarter or anything else to be aware of modeling some of the margin. The next couple of quarters.
Sure. So the 10 cents is comprised of seven cents in Q2.
And then three cents, obviously for the back half.
There is about a penny of of.
Decreased interest expense that helps us.
Then we slightly took off our internal Q3.
FSS and that was worth roughly two cents.
In terms of the geography, if you will.
We expect to see exclusive brands in Q3.
Grow between five and six percentage points and that should deliver 50 or 60 basis points of increased.
Merchandise margin.
In terms of the buying and occupancy line will continue to see a little bit of headwinds from the product design and development guys.
So call that maybe 20, Bips, we won't see the DC costs or we don't expect to see the DC costs that we.
We ramped up to handle the additional.
Great and to a ship exclusive brands to the stores et cetera. We also install they pick to light system I'm, sorry put the light system.
For shipping.
Exclusive brands and that allows us to to pick that merchandise more quickly and get it on a truck out to the stores and it also helps us with labor efficiency, so that won't be a headwind going forward or at least we don't project that to be.
We will see a little bit of a headwind in terms of.
Occupancy costs as we continue to roll up in new stores. So the 50 or 60 basis points of merchandise margin offset by some de leveraging buying and occupancy gives us I think two gross gross margin expansion of 20 to 30 basis points.
Then in Q3, we'd expect to get a little bit of leverage NSG, ne and so I think that will round that math for you and then in terms of Q4, I mean, nothing specific to call out kind of our leverage points on Q4, we didnt update our our sales or earnings for.
Q4 at this point, but that's how I would recommend you model.
Okay very helpful color. Thank you.
Thank you Lisa.
Our next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.
Good to hear that your vendors I really planning on taking price at least not immediately but can you provide just a little bit more color kind of what the plan.
Today's price come next year, and maybe give a little bit of the history that you've seen with some of the capacity that you sell on when you did take price and kind of what you plan B looks like.
Okay, Great right now.
Sure. If we do look at what happened to though with three items, which are small leather goods belts handbags. They initially didnt take price there.
As well and then they did pass on price increases and in those categories, which are smaller businesses for us on the whole we were able to maintain our our markups if you will.
And the sales trend relative.
[laughter] materially stayed the same we didnt see a big drop off in those businesses again, those tend to be smaller purchases and people may be buying.
So match, a boot or handbags matching outfit or something like that but.
We were pleasantly surprised with our ability to to pass along that tariff and even.
Maintain our market bore largely maintained it.
As it relates to lift foray items, which are largely our boots, whether their workloads or there are performance sold boots in both mens and ladies western.
Those boots.
We think we'll have a modest price increase so that could be one or 2% and we think that that customer.
Needs to buy those things those are tend to be pretty functional they're not going to the concert though for.
Either working or shoveling, a stable or writing a horse are working in the fields and so we believe that that that won't the customers not going to change their shopping behavior because of a one or 2% the price increase.
But again as a reminder.
Where most of our exposure is.
As it relates to branded it is in the rubber sole boots, which a lot of people sourced from China and again, we've got we have we know of some vendors that are actively moving out of China whether to the.
Whether to the demand Dominican Republic.
Going to put your this or Kmart Mynamar mynamar.
Or other countries, but again, we have a lot of confidence that we'll be able to pass along a really modest price increase.
Okay, Great and then just on the.
And I said merchandise.
Is that assuming that private brand and by somewhere in the range if I understood.
The thing I would it be more along lines of this.
Hello, how are you thinking about and within the guidance.
Yes, the guidance is exclusive brands going by roughly five to 600 basis points or five or six percentage points of penetration and that translates to that call. It 50, or 60 basis points of merge margin thats in the guidance.
Okay. Thank you.
Thank you joining.
Our next question comes from the line of Paul from Citi Research. Please proceed with your question.
Thank you Tracy filling in for Paul.
I Wonder if you guys can talk a little bit more about the work business.
Any changes in the competitive environment there on how do you think your customer.
Thanks.
Sure.
We haven't really seen much change in the competitive environment.
There's some very formidable players out there that sell this product today tractor supply sell some workwear product.
Perhaps you'd see some decline in the business at Sears.
That sells some that product.
But big picture I think that.
Industry from a competitive standpoint.
Is the same on our biggest competitor for work where across the country.
It's probably a mom and pop and in store.
And the single biggest chain store, I think where we compete against would be tractor supply and they of course, you have very good job.
On a number of fronts.
But by and large and we feel.
And that our work business has been solid now for.
Each quarter is probably in a row, it's been solid in boots ended in apparel.
We're seeing growth in fr and non fr apparel.
We're seeing growth in pull on work boots and lease up work boots. So it's it's a just spend a great business for us which is why weve doubled down on the inventory we've added states in high volume stores.
And we're a little bit space constrained for it to do the business.
And.
We think that will be an ongoing growth engine for us.
Hi.
Your private label business.
On the branded work.
What are you seeing there.
New customer cannibalizing your existing brand.
Any color you have early on there.
It's probably a little bit of both.
Our.
While we are extremely excited about the exclusive brand.
Performance and success and and sell throughs.
We also have very strong branded partners across the entire store and work is no different so.
I've already give you the most.
Illustrative example, I could think of.
Coty James work is probably a customer that's already been shopping us may also by western products that Thats actually are westman brand.
And is probably.
More typically taking share from a secondary or tertiary work brand on the works out of the store.
Pocs was launched bolts boots, and apparel to try to get a new customer into the store a customer that doesn't necessarily have a western aesthetic and I would say that that business, we're certainly targeted to bring new customer and.
Not cannibalize, our our work brands in apparel and footwear.
Got it thanks.
Of course ex Tracy.
Our next question comes from the line of John .
Please proceed with your question.
Hi, Thanks, very much my congratulations to everybody also on a great quarter.
Maybe talk a little bit more about performance in terms of classification.
Jim I think maybe if I missed it at the beginning of the call in your prepared remarks, you talked about women's boots performing.
Tell me, whether or not I got that right and just any more color generally across the board in terms of.
Classification performance that was.
Noteworthy that you would call out of that was surprising.
Sure.
Good growth across every essentially every department in the store.
So we feel great about them.
The big drivers given their size and the growth rate combined our work boots and work apparel.
And also seems a really nice growth in ladies apparel, which is.
Mid to high single digit portion of our business.
Has been demonstrating some really really nice double digit growth from from that perspective.
Which has been great.
And we're we also believe that oftentimes a female shopper comes into the store buy something for herself and often something for on the mail side of the source. So that is a just good traffic to add too.
The overall traffic for the for the store.
Lastly, we called that was our hats business.
[laughter].
And we've seen continuous very nice growth in hats.
And that includes traditional cowboy hat TSPL.
Felt and straw.
As well as a really nice pick up in baseball tax if you will from it. So let standpoint capital has is still a bigger business still driving more dollar growth, but our bulk up business has been very strong.
The reason, we called out the ladies boots business.
Ladies boots has been.
Comp eroding I guess for a while it's actually been negative for.
Making its up.
Over the last 10 quarters or something like that and more recently over the last three quarters started to turned slightly positive.
And that would be a good thing if we could get it still below company average from a comp standpoint so.
Perhaps it still mathematically comp eroding.
But if that business does.
Bill strain.
And that is one part of the business that has.
A portion of it is cyclical in nature and has a fashion cycle.
That would be a great thing and a great.
Additional tailwind for us or a tailwind that would offset some other headwind that we saw that was the reason we called out the.
No the ladies boots business.
Perhaps you only business that isn't performing our businesses that were shrinking so home and gift business were shrinking a little bit and were shrinking that to make room for.
Higher ticket items like work boots and work apparel so.
Sometimes or an all will take out a a kids apparel.
Section and expand into work apparel.
So if you walk into the store the store wouldn't feel much fuller, but we're trading out a $30 item for an $80 right on and.
Part of the.
Well in the inventory value is literally the you are the product so.
And thats kind of what's going on and.
We are forfeiting some smaller category that are lower dollars per square foot.
And it's mostly home and gift and occasionally its kids apparel.
In favor of higher dollar per square foot higher margin dollars per square foot.
Categories light work apparel and workloads.
Yeah got it and that's great. That's helpful color and my quick follow up for Greg.
On the categories that did not perform.
Albert sorry, the categories in where you were under inventoried are under Index index last year that you're building up this or is that am I reading. This correctly that that's mostly outerwear or what were the other categories you want to.
Being better.
Our position for this Q4.
I was aware was one of them there were a couple on I'd, probably prefer not to elaborate on something that.
But outerwear was certainly a call out.
Yes understood. Okay. Thanks, good luck.
Yes.
Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.
Thank you very much for taking my question I just want to know.
You caught my follow up on my last question.
He said you missed some business and you were ramping up some inventory to make up for at one of those categories.
Being outerwear and your comp to nine to 70 already know that.
My question is.
What didnt work last year, so what could you reduced because I mean.
There has to be puts and takes not everything's incremental here so the side.
The gift category in part and selected Kid businesses.
No.
So even with that great comps something didnt work, even though you missed themselves. So can you give us some color on sort of how you think about the balance from the flow of the inventory.
With the balance.
With that balance how it down.
Of course, yet and what we are Tierpoint, we are sometimes exchanging.
It kids sure for a.
Sure and the AIU Argos up quite a bit.
And that looks to you like a increase in inventory.
And.
But we were we don't have as a goal to reduce our inventory Sam and.
As we've discussed in the past our strategy.
Is to ensure that when someone walks into one of our stores.
We havent products that they want in their size in stock.
And.
It does seem to be working.
Oh I complete I appreciate that but I mean look last year. You ended you ended Q.
Q2, with $230 million, you did 160 million of cost of goods in Q3.
And then this you've got 302, and you're talking about doing $17 million to $20 million more so you're bringing in $70 million more inventory to do you know $20 million more to comp was a little bit higher $25 million $30 million more so a lot of inventory when when they were selling at this time last year.
Oh, yes that is a change in the business model right as before we used to be more branded vendor that we didn't have to carry inventory, except when we put it in our store and now as we've grown our exclusive brands, we wind up housing that on our content distribution Center, and then replenishing it to the store.
Or cells.
Thanks.
How many how many of the.
Branded how much branded product is being reduced to make room for that because you're ready to sell on your.
Private label in the margins are very very good.
But I mean, you have to be again, it's everything should be have to be a trade off I would think.
No there's certainly been some trade offs.
And in marketing businesses, where we have more.
Time, and longevity, where we've gotten some success in our exclusive brands.
We can very easily change the replenishment algorithms.
To start to migrate that that the another vendor whether it's one of our brands are more than likely third party vendor.
To have their inventory come down and have that inventory turn faster.
One of the strategies that we followed for this particular fall was to bring in our exclusive brand work merchandise.
With the hopes that it would sell well and seems to be selling very well.
But to hedge against some underperformance there we didn't change the replenishment models in any meaningful way on our third party brands.
And we'll as we get through the next couple of months.
We will absolutely evaluate a sell throughs, if our brand sell throughs of other brands and where we can have.
The turn pick up to the third party brand.
But I know you're a little newer to the story, but just as a reminder, for you and for the investors listening.
The vast majority of our product is on replenishment. The vast majority of our product is basic in nature and while it.
May turn slower than you would like or slower than others that you cover.
It has most of it has very little if any markdown risk in and the Bulls eye for that discussion.
He is our work apparel and work boot business.
So I think we're actually in agreement, but I think you'll have to see it play out over time and all we need to do.
His cheese replenishment algorithms and rather than have three units of a size color.
In store will have two units of a size color in store, we don't need to mark down or unit, we don't view any significant margin risk in the future, particularly in the work business.
But we're not going to change our replenishment algorithms lower inventory going into the highest selling part of the year.
Thank you and then lastly.
About the women's business are you seeing an emerging.
Sort of a western fashion trend in women now and you talked about sort of cyclical part of that business. So.
Are you seeing that.
Where are you on that and how are you addressing that and that has a different risk matrix I would assume then.
Okay discuss how you manage that business, let's say different if there was a trend there how you would men's that business differently from the work business.
Sure.
Your instincts are of course exactly right the fastest turning major department in our company is ladies apparel and we do watch that inventory like a hawk because you could wind up with.
Markdown risk there.
Yeah.
We don't believe we have that problem today at all in our turn there continues to be extremely fast on our freshness, there or are the inverse our aging is very healthy.
I and there are some trends right we're seeing.
Hi, wasted flare jeans be a trend we're seeing.
Snakes gain an animal friends via trend.
Yes, theres plenty of things that we want to participate in.
But when you put all of that together. It is a very very very small piece of our business. It's a very small piece of our ladies apparel business what drives our ladies apparel businesses basic teams and basic product.
And basic boots for the most part.
Yes, there is a portion of it that has a little bit of fashion cycle, but more than half of even ladies business.
If we tend apparel is pretty basic in nature.
But you're right that is one place where we are much more.
And close to ensuring we have fast turning fresh product.
You can't sell.
Spring, ladies apparel in the winter and vice versa. So.
We do have to manage that business, a little bit differently, but if I'm looking at a steel toe.
Ground lease up work too and I have 26 weeks of supply or 27 weeks of supply.
Markdown risk has not changed at all.
Thank you very much in and have a good holiday selling.
Thanks, Dan.
Our next question comes from the line of Rick Nelson with Stephens. Please proceed with your question.
Thanks, Good afternoon.
Okay, great quarter.
<unk>.
Ask you to provide color on that.
Market.
Given the shutdown in retail.
Yeah.
In terms of revenue.
Better quality.
250.
Today our.
Thank you at all that long term target of 400 stores.
So on the first part of your question.
Our new store model.
It is pretty consistent for the last few years I would say that.
Perhaps we're getting better real estate for the same dollar.
And we've seen our new stores be a little bit better than our our model new store revenue, so, but as a rate of sales, particularly for new store occupancy or total occupancy rate has been pretty consistent for the last few years.
I mean.
What's the second part of his question.
The second part of your.
Our long term potential 400 stores.
If you could discuss.
Plans for the north the mid Atlantic.
Are we looking there.
Sure.
Minor correction to your number we've called out that we could hit 500 stores.
We feel very good about that number still.
And we've done a fair amount of work over a couple of different studies that will defend.
A doubling of the chain and we've recently started looking more aggressively into the northeast we have some new stores performing well on the East Coast already North Carolina, South Carolina, Virginia.
And as we kind of migrate up that part of the country. We expect that we'll see some of the same.
Paybacks, and three year or better paybacks for those stores.
And just to be Crystal clear most of the time when we enter a new state.
We'll be in more of the rural or at least outskirts of the city centers, So central Pennsylvania Central New York.
There's a lot of industry there there's a lot of agriculture. There there are some oil in some places so that is our core customer work and western and we feel good about the potential there and hope to be delivering some stores in New York, Pennsylvania, Ohio over the next.
Few quarters.
Correct.
Sure.
Hi.
Yeah.
Well.
Impacts your business.
And weve seen cold brain.
Well there.
For the country fires on the West coast.
Curious how that all works and too.
The.
Sure. It's a good question I think in the in the second quarter.
Whether it was either neutral or frankly, probably a little bit of a headwind.
It was a little bit dryer, and a little bit warmer than perhaps it was last year.
As one to the third quarter, we have seen their snow in Denver.
Temperatures have dropped in the south so thats frankly, good for us and that kicked off our fall season, and our outerwear season strongly.
The fires in California, we live here.
We feel like everyday with people that we know.
Extremely unfortunately, it has had virtually zero impact on.
Our business actually strengthened a little bit I mean, it's.
As zero impact on the overall calm.
And.
With any luck, let's keep it that way.
These fires.
Minimized or extinguished.
Okay.
Thanks, Good luck.
Thanks, Rick.
Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, I'll add my congratulations and thanks for making time to take a question I wanted to ask about the dynamic of asked DNA here in the last half of the year.
You're coming off of the private label launch you made a lot of investment in that last year Q3 Q4.
You've also noted that you're going to have.
You were potentially fewer.
Pay per click advertising.
We think about.
Hey, here, especially in Q3.
How is that dynamic kind of play out.
Lapping now.
These SGN.
You made.
A year ago.
Yeah.
A little bit earlier, Jeremy I said that I thought we'd get somewhere around 20 basis points of leverage in SGN A. I mean, while we're pulling back on paper click and we'll requiring.
No and appropriate ROI, yes, there are other places of investment as you grow the business for the plus five comp. So we expect to get leverage on a full year NSG nay of one and a half or 2% and this is in line with that kind of full year look.
As we cycle, so there's puts and takes within the year by quarter.
We had really nice leveraging in Q1, I believe it was 90 basis points or something like that and this quarter, we had some nice.
Average as well are decent leverage but to the extent for example that we trade pay per click advertising for some more print media or or something like that.
We do look at those things a little bit is fungible buckets, and we try to get the best return on whatever dollars we spend.
Okay. Great. So then then just trading buckets.
Really.
No.
But try to get the best return for our.
Our expense investment if you will yeah.
Great I'll keep it at that Geisinger running along thanks for taking the questions. Good luck.
Thank you very much.
There are no further questions in the queue I'd like to turn the call back to management for closing comments.
Very good well. Thank you everyone for joining the call today look forward to speaking with you.
On our third quarter earnings call take care.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.