Q3 2020 Earnings Call
Good day everyone.
And welcome to the boot Barn Holdings, Inc. third 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 Watkins Vice President Investor Relations. Please go ahead Sir.
Thank you.
Good afternoon, everyone. Thank you for joining us today to discuss the bonds third quarter fiscal 2020 earnings results.
With me on today's call or 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 of Dupont website at Dupont Dot com.
Shortly after we end this call every quarterly call will be available as a 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 Lcs only as of today and actual results may differ materially from current expectations based on a number of factors affecting be biased because.
Accordingly, you should not place undue reliance on these forward looking statements.
For more thorough discussion of the risks and uncertainties associated with forward looking statements to be made during this conference call and webcast. We refer you to the disclaimer regarding forward looking statements that is included in our third quarter fiscal 2020 earnings release as wasn't filings with the FCC Rochester not disclaimer.
Not undertake any obligation to update or alter any forward looking statements, whether as a result, a new information future events or otherwise.
I will now turn the call over to Genconn, like Vice President and Chief Executive Officer, Jeff.
Thank you Jim Good afternoon, Thank you for joining us [noise].
Today's call I will discuss the highlights of our third quarter results.
Provide an update on each of our fourth strategic initiatives.
Following that Greg will review, our financial performance in more detail and then we'll open the call up for questions.
We're very pleased with our third quarter results would reflect broad based strength across the business.
Sounds good same store sales increased 6.7%.
For the 9.2% increase a year ago.
The combination of continued full price selling.
A significant increase in exclusive brand penetration and leveraging SGN, a fueled 80 basis points of EBIT margin expansion and earnings per share of 85 cents.
On a normalized tax basis or E. P. S grew by 23% to 81 cents versus the third 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 third quarter highlights for each initiative, beginning with driving same store sales growth.
[noise] during the third quarter consolidated same store sales grew 6.7% well show growth of 5.7% in our stores the growth in brick and mortar marks our 11th consecutive quarter a positive store comps.
We're very pleased with the healthy retail same store sales growth, we saw during the holiday quarter on top of 8.6% growth in the prior year period.
Ecommerce sales accelerated in third quarter, 211%, while continuing to contribute strong profitability.
Consistent with the past several quarters, our same store sales results were fueled by growth across virtually all geographies and major product categories, Texas performed in line with the chain average.
Well my marketing perspective, we continue to evolve our customer segmentation work.
Over the past two years, we are focused on refining our marketing immediate mix to target three distinct customer categories Western work and fashion.
Looking ahead and into fiscal 2021, we believe there's an opportunity to not only further expand into an adjacent customer segment, which we have to find that's country.
But also to further refine our methodology to become even more relevant could each of our customers.
We believe that targeting this expanded consumer segment will enable us to continue to grow our customer database and drive additional traffic to bolt our stores and E Commerce site.
From a merchandising perspective, we saw continued strength in all major product categories with the most notable growth coming from ladies western apparel hats, and mens western apparel.
Beach and work apparel performed inline with the chain average.
Ladies western boots were positive for the fourth consecutive quarter.
I'm very proud of our merchandising team continues to drive growth across the business, our refining our assortment expanding our offering and enhancing our in store merchandising.
Our stores team performed extremely well during the busy holiday shopping period.
We're able to higher appropriate levels, a seasonal associates in a competitive job market, enabling us to service our customers during the peak holiday period.
Our rollout of new Pos hardware and in store digital tools went very smoothly further enhancing the in store experience.
Finally, we have seen nice progress in our omni channel initiatives were significant use of our Boris or buy online returning store functionality.
We believe this will provide us with competitive advantage versus pure play digital competitors and enable us to convert online returns into additional sales in the stores.
Moving to our second initiative strengthening our omni channel leadership.
Over the past several quarters, we have discussed our efforts to improve the EBIT contribution of our ecommerce business by reducing promotions cutting back on EBIT eroding paper click advertising and removing low margin skews from our online assortment.
As we began to cycle. These efforts ecommerce business has returned to double digit comps.
Third quarter E commerce sales growth accelerated to 11%.
Boot barn, dot com growing 31% and the remainder of the online business down mid single digits, driven primarily by a reduction in paper click spend.
Our E Commerce operating profit grew significantly more than our topline growth demonstrating the effectiveness of our EBIT growth initiatives.
We're in the process of repositioning the Sheplers brand online in an effort to rebuild that business, while that site will continue to be value price offering. The goal is to upgrade the creative looking beyond the site and continued to become less reliant on paid traffic.
Ultimately, we are focusing on building the lifetime value of the core sheplers customer.
This will be an ongoing effort over the upcoming fiscal year and we believe it will have a long term benefit.
We continue to work on initiatives that will enhance the digital experience inside our stores such as our range finder touch screens.
These in store digital hubs allow our customers the ability to quickly find boots in the store that fit their specific needs.
These portals help our customers quickly narrowed their focus in the most relevant items, which increased the conversion of our in store shoppers.
It also helps the store associates acquire product expertise that will allow them to better meet the needs of our customers.
Our endless aisle of products available online, where our with portal. It's also driven off of the range finder touch screen.
This same technology provides 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 a third strategic initiative exclusive brands.
During the third quarter exclusive brand penetration exceeded 22% of total sales an increase of more than 600 basis points compared to the prior year period.
This record growth exclusive brands is being fueled by extremely strong growth in each of our five major brands.
Our could you James in Cheyenne brands or the number two and number four brands in our stores based on sales volume.
Exclusive product lines with country music celebrities Miranda Lambert and Brad Paisley continue to grow and we believe our introducing new customers to boot barn.
Our new work brands.
Hawks and create a James work I've also seen very strong growth acceptance.
We've been able to achieve success in some of the higher volume boot and apparel categories, which has resulted in an inflection point independent tracing during gets called 2020.
It was encouraging to see consumer receptivity in categories that we expected to be more difficult to build such as the work business and men's denim.
Having said that while we believe that exclusive brands will continue to show solid growth in fiscal 2021, the rate of change will likely normalize back to approximately 300 basis points a penetration.
Finally, our fourth initiative and expanding our store base.
During the third quarter, we opened three new stores, bringing our total count to 251 stores across 33 states at the ended the quarter.
We continue to believe in our ability to expand our store base to 500 stores across the country in both new and existing states.
Our expansion will be driven by a combination of organic growth and tuck in acquisitions, they targeted pay back three years or shorter.
We are on track to reach our new store openings goal this year, including our first stores in the states like Pennsylvania, and Ohio in the coming weeks.
Certainly our attention to current business.
Consolidated same store sales quarter to date continue to grow and are approximately plus 5% through the first five weeks of the quarter.
We've seen growth in both channels, while cycling strong performance in the fourth quarter of each of the past two years.
The growth continues to be broad based across most merchandise departments with some softening of the perennial strong worksite the business.
We believe that this top line dynamic in the work businesses transitory and as a result of outsized growth in that category last year.
Which was driven by Rainier and colder weather and many of our key markets in January 29 team.
Similarly, Texas was positive this January boat, but below the store average as it lapped an 18% comp last year.
Merchandise margin has continued to build as we have maintained our full price selling philosophy and exclusive brands continues to expand penetration.
As we look forward to the balance of the are you putting rodeo season in Texas, we feel good about how we're positioned or the remaining mindset fiscal 2020.
Now I'd like to turn the call over to Greg Hackman.
Thank you Jim good afternoon, everyone.
In the third quarter net sales increased 11.8% to $284 million.
Sales growth was driven by 6.7% increase in same store sales and sales from stores added over the past 12 months [noise].
Gross profit increased 13.3% to $97 million or 34.2% of sales compared to gross profit of $85.7 million or 33.7% of sales in the prior year period.
The increase in gross profit rate resulted from my 50 basis point increase in merchandise margin rate, primarily driven by growth an exclusive brand penetration.
Operating expense for the quarter was $62.1 million for 21.9% sales compared to $56.4 million or 22.2% of sales in the prior year period.
The increase in operating expenses, primarily a result of additional costs to support higher sales and expenses for both you want acquired stores.
Operating expenses as a percentage of sales decreased by 30 basis points as a result of expense leverage on higher sales.
Income from operations was $35 million or 12.3% of sales in the quarter compared to $29.3 million were 11.5 personal sales in the prior year period.
Representing approximately 80 basis points of improvements in operating margin.
Income tax expense was $7 million in the quarter based on an effective income tax rate of 22.1%.
We expect our tax rate for the fourth quarter to be approximately 25.2% themselves.
Net income was $24.8 million worth 85 cents per diluted share compared to $19 million or 66 cents per diluted share in the prior year period.
Net income per diluted share in the current your period includes a four cents per share benefit due to income tax accounting for short share based compensation.
Excluding this tax benefit net income per diluted share in their current year period were 23% to 81 cents compared to 66 cents in the prior year period.
Turning to the balance sheet inventory increased approximately 9.4% on a comp store basis compared to last year.
On a consolidated basis inventory rose, 22% $275 million compared to New York, though.
This increase was primarily driven by an increase in the inventory at our Santana distribution center to support the growth of exclusive brands.
GAAP store inventory.
Inventory for new and acquired stores added in the last 12 months and inventory for the stores and expect to open during the fourth quarter.
As of.
As of December 28, 2019, we had a total of $154 million of debt outstanding including $45 million drawn on our 165 million dollar revolving credit facility.
We had $45 million of cash on hand, and our net debt leverage ratio at the end of a third quarter was 1.1 times.
Turning to our outlook for fiscal Twentytwenty, we've updated our guidance and now expect same store sales to increase approximately 7% and earnings per share to be in a range of $1.81 to $1.83 cents per share based on a estimated weighted average diluted share count of 29.3 million shares for the full fiscal year.
This compares to our previous guidance of $1.67 to $1.75 cents per share.
Our income from operations is now expected to be between 81.7 million and $82.3 million and we now expect net income for fiscal 2020 to be approximately 53.1 million to $53.5 million.
Interest expense is expected to be approximately $13.3 million.
As we look to the fourth quarter, we expect same store sales to increase approximately 5% with total sales between 212 million and $214 million and net income per diluted share to be in the range of 36 to 38 cents per share.
Now I'd like to turn the call back to Jim for some closing remarks.
Thanks, Greg I.
Our third quarter results reflect continued focus on our key strategic initiatives importantly, we're converting our topline success into significant bottom line improvement thanks to enhance merchandise margin and operating expense leverage.
Hi level of execution across the organization has us well positioned to deliver a strong finished the fiscal 2020.
[laughter] and carry our momentum into next year.
I want to thank the entire boot barn team for their continued hard work and dedication to growing boot barn brand and delivering these strong results.
Now I would like to open up the call to take your questions.
Sure.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question comes from line of Matthew Boss with Jpmorgan. Please proceed with your question.
Thanks, and congrats on another nice quarter.
Thanks, Matt.
So on the margin front, what's the expectation for gross margin in Nash DNA embedded within the Fourq you forecast any help with the puts and takes near term I think would be helpful.
Okay.
Matt its Greg we expect exclusive brands to grow about five percentage points in Q4, and that's on top of.
Four points of growth last year in Q4, so as we think about merchandise margin yeah, we're thinking about.
About 50 basis points or so of merchandise margin expansion.
We do have offsets to that we expect higher shrink this year.
And we also expect to continue to see slightly higher econ outbound freight, which we also commented about in Q3 and finally, we have some deleveraging from higher buying cost for that product design and development team.
So merchandise margin might expand slightly better it won't be that 50 basis points that results from a exclusive brand penetration.
And then on the S.G. and eight line.
We do have some pressure from higher store labor costs, higher health insurance and higher stock based compensation. So.
Yesterday, we expect to be roughly flat or maybe you know plus or minus 10 basis points that kind of thing.
Okay, Great and then just follow up can you speak to your comp can you just outline your comfort with the quantity and quality of your current inventory maybe you could just for provide a breakdown of the 22% dollar bill to exit exiting the quarter.
Sure and about 9% or it's about a third of the 22%.
Is the increase in the comp store inventory.
And yeah, we've we feel pretty good about that right. When we started the third quarter that same metric was up 15% and we've gotten that down to nine four.
The second component news and inventory that's in new stores really being staged for the upcoming opening up new stores about a dozen stores over the next couple of months.
That's about another third of that 22% increase and then the final piece is simply back stock for the exclusive brand product that is now in the stores and I think everybody or most of the folks that follow as closely recognize that most of the product from our.
Third party vendors are we plan to set up their distribution center.
But for exclusive brands, we need to replenish that from our own distribution center. So that's the final third debate.
In terms of the quality of it the aging is inline with last year.
The quality and scalability of it we feel pretty good about so I think we're in a pretty good position from a inventory standpoint.
That's great color best of luck.
Thanks Pat.
Your next question comes from the line of Oliver Chen with Cowen and company. Please proceed with your question.
Although.
All of our you on the line.
Our following question comes from line of Peter Keith with Piper Sandler. Please proceed with your question.
Hey, good afternoon, guys, Greg maybe a follow up question just on the SGT outlook. It sounds like the rate will be flat year on year on a on a copy of five you're calling out what sounds like maybe some some headwinds around the store labor add a and health insurance.
38, I guess change year to tap into last couple of months, that's causing those items to start run rating at a higher level that that could continue forward for a little bit.
Yes.
Great question, Peter we haven't really completed 2021.
Planning process to understand that we have seen some wage pressure and specifically in Q4, the volumes a little bit less that we weren't able or don't expect to be able to leverage that as much.
Higher insurance, all more self insured on insurance and we had a larger claim that again, we view as a transitory items. So I don't expect these things to be in the in the run rate go forward, having said that you know it's early days of the 2021 planning process.
When we talk about leverage points as you know Peter we typically talk about them on the full year and.
And so this quarter. So you know we're not getting the leverage we'd like on a plus five you did see some nice leverage earlier this year.
So some of it is also timing of expenses et cetera.
Okay make sense and one quick follow up on the on the guidance as to reconcile the full year versus the quarterly the full year guidance include the like that for sent a tax benefit with the fiscal Q3.
Yes, that's correct Peter we always should give a you know a full your update based on GAAP EPS and then we always try to anchor everybody into how much benefit we've received from the stock based compensation.
Okay, Great and then that pivoting to more strategic question, Ron Sheplers for Jim.
It is the as that business gotten better modality, we're into January and and even through the holiday season, when they look at that that paper click dynamic.
That happened in fiscal Q3, <unk> and what was it that didnt get more competitive out there that that caused you guys. It kind of pull back on some of the customer acquisition costs, just trying to the frame up how long the sheplers business could remain pressured.
Well the ecommerce business in total had been sort of mid single digits high single digits, and then double digit comps that was.
Pretty much ollie's.
Driven by boot barn done boot barn, dot coms outsized growth.
And sheplers that time being a bit of a drag the if I want it looked like sheplers back com by itself.
Q2 in Q3 were in line Q4 is probably pretty much in like Q3. So it's that's not a new dynamic where the consolidated ecommerce business is has been strengthening topline and very much strengthening bottom line.
But it's always been in favor of boot barn Dot com and that's that's quite a right for us right Dupont that comment the omni channel brand.
It's the greater lifetime value customer.
It's a customer that can really participate in Boris in BOPUS.
And the Sheplers business that the business that we're leaving behind and we can measure.
The savings in paper click spend.
And the loss.
Sales in paper Clark.
And essentially shoot the role wise that would have it would have taken to get that business and it would have been keep eroding so.
We said it never really blink on a sheplers dot com business sales decline if it's.
Predominantly driven by.
The lack of paper click traffic, because we know we're making more money.
Because the realize is just unprofitable and then we get to the ended the quarter.
When we close all the books financially we've seen a really really nice pickup.
In year over year EBIT dollar contribution from the ecommerce business and an operating margin leverage.
And E commerce business, so that going forward.
We are trying to get to the point where.
Sheplers can be more reliant on free traffic and less reliant on paid traffic.
Emulating more the boot barn sort of composition of customers.
So right now we're in the process of testing a new creative looking feel for Sheplers dotcom.
If you were to type injectors that caution there that.
One third chance approximately that you'd get the new creative into two third chance they'd get the old creator.
And we feel pretty good about their early stages of the new look and feel.
And we'll continue to expand that two more and more traffic as we get comfortable with the results but I.
I think your question why has that changed sequentially in the quick answer that it hasn't.
Okay, that's great feedback and appreciate it guys. Good luck.
Thank you thank you Peter.
Your next question comes from line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi, Jim Grech. Thank you very much regarding the work business. Your your comments were helpful. What are your thoughts about the nature of the comparisons ahead and approximately and whats the magnitude of a percentage of total.
That's work I would also love.
More thoughts on on the opportunity in the country segment and what that means in terms of a customer.
Targeting relative to product targeting and how big that opportunity is and timing.
Sure.
So in the first piece on me and the work business.
Yeah, let me put they the entire sort of business in context in terms of department and classifications. So we think about most of the big departments between Q3 in Q4, many of them actually improve so.
Western boots, mens and ladies both improved sequentially.
Peril.
Mens western apparel, ladies western apparel improved sequentially accessories improved sequentially. So the underlying tone of the business was pretty good.
It's not very good.
The work boots business, while still positive.
Decelerated sequentially and the work apparel business decelerated, a lot and actually turned negative in the beginning of fourth quarter.
And and that's kind of the first time, we've had any department any major department turned negative items.
It doesn't really fosse's internally, if I'm honest, we're up against sort of monster numbers in the fourth quarter of last year in the work business. So work apparel as an example in the fourth quarter last year was a plus 35%.
Work boots, and waste plus 20 something percent.
In terms of what happens for the balance of this particular quarter and then as we get into Q1 in Q2.
Well into the quarter two things happen one is the year over year compare gets a little bit easier.
And the percentage of the business goes down a bit as we evolve through out this quarter, because we're getting to Texas rodeo season, the western side of the business and becomes a larger percent penetration so.
Give your rough numbers I think the work apparel penetration.
We'll go from almost 9% to about 7.5% throughout the quarter as we get as we enter the radio season and the Western business, then picks up and that's just what the apparel.
On the country piece of your question.
Part of what's been driving our comps for.
10, 11 quarters, now and what's been driving our stores comps specifically.
As an increase in transaction.
And as a big part of the increase in transactions is more customers literally on a comp store basis, we can track how many customers.
Our being added to the database. So a couple of years ago, we expanded from work in western to be work western in fashion.
Now, we're saying well we can further refined.
Western.
And and have split it between sort of a core western customer that will potential live on a ranch a rider horse and work outside into cowboy hat.
Versus somebody who might be wearing a ball cap, but also awareness.
Kelway boots and might be going to a country music concert. So the goal there is too.
Sort of tweak and expand the marketing a little bit from a creative standpoint, and a change the media mix a little bit to get customers in that one concentric circle outside of they quote western customer its not dissimilar to what we did on the Lady side with.
Adding this fashion segment and here, we actually think we'll be able to continue to grow new customers into the boot barn brand and frankly this country segment, if you will.
Probably has more growth potential in it then even fashion days, because I think it's a very big part of that kind of U.S. customer base.
So that's the strategy there and the underlying goal is to get more customers into the database into our be rewarded loyalty program and to drive foot traffic into the stores.
So hopefully that and Jim.
Regarding country and that opportunity does that interplay with.
The development of your internal private brands or will that be third party brands.
How that takes place on the product side and.
Final question, Greg merchandise margins have been impressive.
I was curious about the the years ahead with merchandise margin opportunity and also how that intersects with the apparel trends you're seeing in if you feel comfortable that you can work through apparel. Despite.
The performance being.
Up against the tough compare like how how are you feeling with the cleanliness of the inventories on their work apparel side.
So and the first piece on the exclusive brand side.
Youre right, we do math, our exclusive brands shoot a customer segments to a degree and we already have two brands that arguably our going after a quote unquote country customer and that's moonshine spirit by Brad Paisley and idle and fueled by Miranda Lambert I think over.
Over time will likely.
Add a brand probably on the men side that is more specifically tailored to the country customer.
That is night in the next yeah, six or 12 months, though but that we will kinda you're looking for new brand opportunities going forward, but at the moment, we're going to continue to run with.
Cody James in Cheyenne.
Moonshine spirit in Idaho, wind and that to some degree does map to western in country already.
And then over its Greg on the merchandise margin expansion you know I do think that over the coming years. The primary driver will have that will be the exclusive brand penetration growth and that will continue to get no 1000 basis points or perhaps more out of each point of penetration growth so that will be.
The primary driver, but I do think we have the opportunity to continue to.
I'll say optimize our mark downs in our promotions to to get more full price selling out of the business.
And as it relates to clothing I mean, we've had some really nice margin expansion in ladies western apparel for example.
And again I expect that we'll continue to do those things very well relative to the work apparel business. We don't have you know a lot of markdown exposure in that category.
The product that we sell the most of or perhaps the best of his card product and if you followed carhartt a lot of their product has been in the line for many years and we're really isn't any markdown risk associated with buying.
Heavy outerwear for example, and carrying it over to the next year, we don't Mark that down just to get rid of it.
So I think we'll continue to see a healthy merchandise margin expansion for the coming years.
Thank you best regards.
Hi, Thanks Oliver.
Your next question comes from mine of Janine Stichter with Jefferies. Please proceed with your question.
Good afternoon.
Talk a little bit more about your omni channel initiatives. Thank you mentioned by online return and start being particularly successful. So any color you can give there may be on attach rates, you're saying when someone comes in a store how much they're buying other items and then also maybe an update on what you're seeing with buy online pick up.
Thank you lot shockingly recently, thank you.
Sure.
On Boris Byline return in store, it's been a.
A big of a pleasant surprise, if I'm honest and we I think one records, saying that.
About two thirds of our boot barn dot com returns come back into the stores.
And that's a.
Composite average of states, where we have lots of stores like California, and Texas in States, where we have no stores like New York in Pennsylvania.
Look at States, where we have store is the numbers, even and pretty much.
A lot higher than 65 or 68% that we've quoted for Boris in general so.
That is the opportunity for the stores to get more customer traffic.
To turn them into and get them back into a terribly to repair genes that's in the store.
Terms of the conversion of how many of those folks by what we do need to and are working on a way to measure that more precisely I can tell you anecdotally that we'd say, 40% to 40% of the customers that come into return product by something but we haven't been able to measure that specifically.
Simply because our online system and our stories system.
Well developed a big separately, the two different software vendors and we haven't fully integrated them from a.
From a in store return and then purchase standpoint, but stay tuned, but we'll we'll get that done next.
A few quarters I hope.
In terms of Bopis BOPUS has been a a pretty small piece of our business.
We had turned it on getting part of the quarter. We had some networking problems. We actually had to go dark for a little bit it'll be back up and running I think that will be a nice addition to our omni channel capability, but I think it'll be relatively minor.
Okay, Great and then just one more on gross margin I think you mentioned some de leverage on design team cost.
Ladies should think about her relationship between the growth in private brands and the expense you might see in gross margin do you need to extend the design team to support that great. Thank you.
Good question, Janine, we've largely seen the cost or we'll see that cost of that build out of the product design and development team.
As we cycle through Q4 so.
Most of that is all contained into this year, we had a step by step function change over the last two years in terms of our staffing for that team and while we may add one or two people.
This was the big we saw the big increases in staffing.
The last two years. So I think this will be largely behind us this year.
Again, we haven't done in the fiscal 21 plans, but that's how we've kind of talked about the growth of that route.
As Weve entered those budget discussions.
Okay, great. Thank you very much.
Do you actually.
Your next question comes from the line of Jonathan Komp with Robert W. Baird and company. Please proceed with your question.
Yeah, Hi, Thank you wanted to ask your question just following up on the work boots and work apparel categories. Maybe first if you wouldn't mind just.
More broadly beyond just the current quarter, maybe current update on how much each of those categories makes up as a percentage of sales and then.
Related to that it doesn't sound like you're seeing weakness in any particular pockets of categories or geography that would make you think it's anything more Alaska and try and I just wanted to maybe follow up and clarify that.
Sure in terms of rough percentages.
I work boots is about 20% of total sales work apparel is seven or 8% of total sales on an annualized basis.
No no major geographical differences I would say a couple of things that we have seen on.
If we look at one of our bigger were businesses non fr related non oil patch related I is California and.
I think in the last.
Four or five years, we've been public we either never talked about whether or talked about it ones.
And.
Last year in January we had almost five inches of rain in California in Southern California. This year in January we had less than half an inch so when we and we as you well know John were based in southern California. When it rains out here, we know we're going to have a good day in the stores and there's 50 some odd story.
Kornya.
That is a very big difference for our work customer and a huge difference for work apparel customer who is working you know heater all day or in some cases, all night outside in the rain and the proper gear is sort of incredibly important today.
So yeah, we missed that business in California.
Sure, it's somewhat lesser extent in Texas. It was much colder last year than it was this year and we saw that similar.
Kind of slowed down in the work apparel business.
I do think both of those won't will be behind us pretty soon.
Yeah, we'll get some inclement weather coming up and we'll get some some boost in sales, but this is it's a winter time kind of rainy season.
Dynamic and we're just unfortunately had the.
They unfortunate scenario, where we had.
Less inclement weather than we had last year.
Okay. That's very helpful. Thank you and then.
Maybe just one broader question not not asking specifically, but if I looked at the last three years here you have outperformed the targets on the comps and turn a lot of bottom line earnings growth and as.
As you look forward is there any thought to you if comps were to come back within your long term, 3% to 5% range is there anything that would impact you from delivering on your model going forward or how to just frame up bigger picture since it Ben.
So far above that targets in the last few years.
John It's Greg I can't think of anything that would were given the way of kind of that long term algorithm holding true.
With a copy of our plus four or thereabouts.
Again, we haven't developed our 2021 plan. So it's hard for me to speak with any specificity, but there's nothing structural that has come off that that.
Causes us concern in terms of that kind of 20% EPS growth.
Okay. Thank you very much.
Thank you thanks, Jim.
[noise]. Your next question comes from line of Paul Let was with Citi. Please proceed with your question.
Hey, Thanks, guys.
You know we've been talking branch about exclusive brand penetration as a driver of merch margin I'm curious this quarter if lower promotional cadence also contributed to margin expansion are you at a point now as we think about just looking forward the lower promotions can really be a dry.
However on that merge margin line.
In the third quarter exclusive brands is the bigger driver the promotional posture in the full price selling was a small driver.
In fourth quarter or are you know, we're still kind of full price selling there's not.
A lot of.
Store why you know country.
Broad based sales that we have left in our DNA.
There's a few times a year during where do you a season, where we get a little bit promotional.
But most of the big sales are are.
Kind of out of our system, we still look for opportunities to shorten the clearance event or make it.
Less.
Pronounced with shallower discounts.
But going forward I think most of the margin expansion will be the growth and exclusive brands.
And perhaps.
Larger.
And ongoing discounts from vendors as we continue to grow and buy more product from them.
We're always looking for ways to make our vendors more efficient and hope that they'll pass those savings along to us.
Got it and then can you talk about the average transaction size in stores versus online and how that's changed over the past several years.
Sure the and in store transaction is just on average is just over $100 and its two units.
And as I, often say with the management team X wallets average is not necessarily typical because it boots are in the transaction, sometimes it's one item much more expensive.
Or if it's just apparel it could be several items that could be less than $100. So.
The store transaction is just over $100 and it's about two units the online transaction.
Skews more heavily to boots.
Accordingly, the basket size is a bit bigger than mystore transaction.
But paradoxically the units per transaction or lower just over one.
In terms of how that's changed overtime overtime, the dynamic hasn't really changed all that much has been there's been no small ebbs and flows here or there, but we haven't seen a wholesale change in how our customer has shop online versus in store over the last 345 years.
Gotcha, and then how about the private brand penetration online versus in store.
So the store penetration is higher.
And there's probably a couple of reasons for that one is.
The store assortment is a little bit narrower than the online assortment with your online assortment. It has.
The longer tail, the ability to order directly from vendors et cetera.
And the second is we have the ability to really bring the features and functions of our exclusive brands to life in the store.
More so than we have online.
So.
You bet that.
Composite penetration number.
Of 22% is higher in the stores and you know double digits or just about 10 in on our online business.
Got it. Thank you good luck.
Thanks, Paul.
Your next question comes from line of Mitch Kummetz with pivotal research. Please proceed with your question.
Yes, thanks to my question.
On the other work business I'm, just trying to do the math it sounds like.
For the first five weeks of this month that maybe 30% of your businesses were somewhere in there.
And it's maybe running barely positive when you sort of the two pieces up can you say what the what the.
Impact of that is on overall comp the 5% did you guys are reporting for the five weeks. It means that a couple hundred basis points or somewhere in that range.
Yep Yep that your math is I think pretty close I mean, it's.
Just under.
30% of the total business and it's probably pulled our comp down by two point yep. Okay. Alright. Thanks and is there any is there any I'm on the inventory side are there any issues in terms of some excess because of that and it sounds like it's kind of weather related.
Are you guys you have any access there because because of the softness in those categories, particularly in those markets.
No not really I mean, it's most of the work boots business and most of the work apparel business is.
Kind of in the assortment for several quarters, if not year round and.
Yeah, we've been we tend to clear goods that don't sell as as we see them underperforming.
So I don't we don't expect a major margin erosion from the.
Slightly slower business in work.
The other thing that happens is as we get into the first quarter in the second quarter. The compares become a little bit more manageable when they were in January and this quarter. So I think.
Yeah, what where we're not terribly worried about it we wish we yeah, it would rain, a little bit and get a little bit colder.
Some of our core markets, but we'll get pass this and you know the western part of the business will begin to accelerate as a percent of the business.
And yeah, I think with the if you look at our comp and normalize it for a point or to have hurt on work, we're still pretty happy with where we're at right now and I think it's.
Yeah, well, probably just continue to.
Increase as we get.
Further into the quarter and get close to the radio season, and then on Sheplers. You guys are obviously transitioning that business I'm getting away from pay per click is there any way you could speak to the impact that that's had on CCOP and margin I mean, it's obviously dragging down because given that it was negative.
For the third quarter, I would I would guess what our year over year basis.
Transition there is margin accretive but is there any way you can again sort of isolate the impact that sheplers had on on Q3 CCOP and margin.
So I think it in a specific number for the comp piece and it's a little bit.
Less than 50% of our E commerce business, which on a full year basis is 17% of sales so call. It seven or 8% of total business ended down mid single digits. I guess, you can get to a cop erosion, there or the retail world investors and analysts are fixed.
Traded for good reason on same store sales increase we kind of look at our E commerce business on a.
Year over year EBIT growth almost the same store EBIT contribution or EBIT growth.
Perspective.
And while.
We'd love to be putting up plus 12 comps consolidated just we're driving on profitable same store sales on E. Commerce. We are we are laser focused on EBIT profitability and.
Again, you have the Sheplers dot com business, while topline is down the bottom line for ecommerce is significantly and add.
Well again, while that that impacts the headline number in the consolidated comp member.
It's really been working for us from a S fab.
And EBIT and profitability standpoint.
Got it alright, thanks, guys. Good luck.
I think it [noise].
[noise]. Your next question comes from line of Tom Nicotine patch with Wells Fargo. Please proceed with your question.
Hey, guys. Thanks for taking my question quick follow up on the gross margins I think Greg when you're given the puts and takes.
In Q4, you mentioned something about a a little bit of us shrink headwind could you sort of give a little color around.
Around that and maybe the magnitude of.
How much that should affect the a the Q4 gross margin.
Sure. So the they shrink accrual this year is higher than last year as a result of the what we would describe as the interim inventory that was held in the September October timeframe. This year, so that rate was higher.
And what we wound up with at year end last year, we're in the process of completing our physical inventories in the stores and cycle counts in the distribution center and so it's too early to tell if have any favorability in the shrink rate this year, but last year we.
Called out that shrink was a benefit we didnt quantify it on the call last year, but when we did our Q4 call. We said, we had strengthened regular and and full price selling exclusive brands that have benefit from shrink we typically don't call out things that are.
10 basis points. So I think you could assume the track was probably 20 or 30 basis points of help last year.
And again were occurring at a slightly higher.
Got it okay.
So I think.
Talk a little bit about a yeah don't work apparel business slowing down a little bit and.
Yeah, there's a.
How big a supplier in the spaces you I'll talk about.
Supplying trends there.
Many going on from a macro perspective.
In the oil patch the southwestern U.S. that maybe.
Yeah, causing a little bit of disruption.
<unk>.
I don't think sending their oil.
Pointing that it's still very strong.
The we had some really nice growth in each of the last two years in many of these markets are we have some strong compares.
We haven't seen at sort of massive layoffs or or any real disruption in employment in oil patch.
And ironically, when we look at our work apparel business.
It doesn't split out perfectly like this but.
Work apparel splitting that flame resistant work apparel and sort of regular or non flame resistant work apparel and the part of the business that's actually under more pressure.
The non fr or the non oil patch work apparel piece, so I really can't dependent on anything that's due with oil I think part of it is cycling. Some really you know eight consecutive quarters of really really strong growth in work boots work apparel almost double digits in both of those departments.
And you know that they whether that we called out which has been real I mean, we again, we live out here in southern California, and we can recall last year's business I'm being helped to some degree by weather and it's just been sunnier and much hotter here.
And at the five inches of rain that we got last year in January we just didn't see this year and we saw some similar dynamics.
More on the temperature in Dallas and Houston, So I.
I think the work boot business will be a a solid grower even in this quarter I think the work apparel business. We're gonna have to try to make up for some lost ground and as we get into Q1 in Q2, the comparisons become much easier. So I think we'll.
We'll be able to roll through that the really nice thing, though is we have often spoken about the diversified business model and you're seeing it here right. We've got one of our bigger departments work apparel comping negatively.
And yet we're still at a plus five were guiding a plus five and thats being buoyed by a bunch of other businesses that are picking up the slack. So the the underlying diversification of our our product classifications as one of the underpinnings of the strategy and it's playing out perfectly.
All right. That's a that's helpful. Thanks, guys.
Thanks, Doug.
Your next question comes from line of John Morris with D.A. Davidson. Please proceed with your question.
Thanks, My congratulations on a great quarter guys.
Kind of surprised you didn't get the question, so far but I've got the China sourcing question.
So what are you hearing from your partners, maybe remind us a little bit about <unk>.
The percent of your good.
Did you broken it down before between private label. Another wise that are sourced out of China, and whether or not you're hearing about any potential disruption or are you concerned or any contingency plans you might be making if there is any kind of a potential delay given the CRADA virus.
Yeah, John it's Greg and about 40% of our product comes from China via a third party branded vendor and about 10% of our product originates through our exclusive brands via China.
It's obviously, a very dynamic situation that's changing.
Seemingly daily.
And what we've heard from some vendors is that they think that given the Chinese new year vacation or holiday was extended by or a week or two weeks that they expect their deliveries to be delayed by a week or two weeks.
That's about the extent of what we've heard.
In terms of our exclusive brands, we have about a million and a half dollars' worth of receipts that are due to arrive before you know between now and before April 1st and so we don't see any meaningful risk to the topline as a result to that.
We've talked about the fact that you know our inventory levels or are in good shape or both in our stores and also in our distribution center and you know as opposed to some other retailers. It you may follow our churn is a bit slower so I think that.
Advantages S a bit in this situation as well so at this point I wouldn't say, we're you know.
Really concerned about it but obviously we're watching it closely.
Yeah and I.
I assume none of those factories and <unk> on probably more in Guangdong, just checking to see where some of those locations.
Yeah, I think that's right at least from.
Finished goods perspective, Oh, we don't have that exposure as you've described.
I'm not sure where the raw materials originated so there could be a little bit of exposure, but we haven't heard again any alarm bells going off.
Right and and then finally, Jim New markets I guess kind of most recent ones that you've been tracking in updating us on North Carolina, Virginia.
I don't think you've opened anything in Pennsylvania, Ohio, yet, but wondering how the stores are performing still consistent with what you've talked about before in terms of the ramp.
And so the stores in the new markets are still performing very well.
The ramp is a little bit harder because in some cases like Virginia. There were two stores. There now did you beach originally now Roanoke.
Roanoke is new news for you guys roadmap is.
Exceeding its plan quite handily, so we feel great about that but we haven't cycled a full year. So we don't have a ramp.
I think if you're thinking of modeling a the first year comp of a plus 10 second year comp of seven and a half in a third year comparable plus five is.
The way we tend to ask you guys to model and.
Over the past few years, we've done a little bit better than that but that's what we are that's how we kind of.
Try to guide the modeling of year, one stores going coming into the comp base in year two.
And then in terms of Pennsylvania, Ohio, You're right you don't have any stores. There yet next 90 days, we should have stores in both states and we feel if you feel great about the locations that we found in some of those are under construction right now.
Great Good luck for radio season.
[laughter], thanks very much on.
Your next question comes from line of Sam Poser with Susquehanna. Please proceed with your question.
Good afternoon. Thank you for taking my questions. I guess one question I have is the just the gross margin question can you tell I mean <unk>.
<unk> was the gross margin up.
And your.
On the branded product or was the entire did.
What was that down on the branded product for the quarter.
Sam It's Greg and I don't I don't look at the reporting that way I'm I'm not sure even exist.
Probably does but I haven't seen it my suspicion is that it was up on both products both exclusive brands and the branded product because as Jim mentioned that at the actually our conference we expanded about 80 basis points so that.
Likely included branded product as well as our exclusive brand penetration grows.
Okay, and then secondly, EM was sheplers since you don't have any stores I mean, what <unk> how are you going to let people know.
To go to the Sheplers website.
From a from a marketing perspective, I understand you're going to clean up decided make it look better make it easier. So once they get their you should do pretty good, but but given you're not going to do the paper click how how couldn't do you know what are you gonna do to drive people to the site.
You know boot barn makes sense you got all the boot barn stores. They see that they go let me check out the website, but that you don't have the sheplers stores anymore, which makes that.
Little complicated.
Right now it's your question. So it's a how do you convert to free traffic. It's a couple things if we continue to tweak our assay show.
So again and.
Free search traffic we've.
Really been expanding our email capture on Sheplers and trying to build a database there that replicates.
Gary what we've done on the boot barn side.
And then finally this that particular customer while we are.
Modernizing the look and feel of the say that particular customer is searching for the lowest price available for the vote. It's a price driven customer so and they tend to tighten sheplers because of the the fact that kemper's there's always.
Essentially always the lowest price on any given I.
And we have contemplated doing a little bit of traditional marketing. So should we do some sponsorships for sheplers.
In rodeos or should we do some radio advertising that specifically for Sheplers.
And we might do some of that we couldn't afford to do television I don't think any digital natives brand could afford to do TV, but we can do some of the other traditional marketing and perhaps gained some customers that way.
Thank you and then and then and then lastly, you know in your <unk> in the big in the Big Sheplers stores of its in the skied or or or outside the <unk>.
Outside of various cities.
You know that you're using it looks like about 60% of the real estate poor presentation within those stores have you.
Considered multiuse <unk>, you know tribute to make the entire space.
More productive to use to reconfigure so you could.
You know do something else with that with the empty space it sort of cut off generally about two thirds way back in the store just eyeballing it looks like.
Yeah, Yeah. So it's a very good question just had the benefit of everybody on the call.
There are.
Some store set in specifically you could share employers.
Were built very oversize before we ever acquire them and New York 2030 years old.
And originally they were built to be almost a western version or department store.
And Sheplers first before we acquired then shrunk the store a little bit by putting up walls and closing off portions of the building and then when we acquired the business in July of 2015, we get the exact same thing and guide to a more normalized and kind of.
Pad within the store.
We thought we could best merchandise the goods within assays. So there's there are seven stores that have.
Free space that potentially could be sub leased we have looked at back a little bit it's.
And it's a good bye.
Hasn't been so easy if I'm honest I mean, it's we're giving them the remnant space behind the wall, it's hard to get the parking and but if that if that opportunity presents itself. We would take somebody up on a it hasn't been a huge priority consistent with seven stores, but it is a it is a good question.
And we'll see that maybe that's an opportunity for us.
Thanks, very much and good luck.
Thanks, Dan.
<unk>.
Your next question comes from mine of Rick Nelson with Stephens, Inc. Please proceed with your question.
Hey, guys. An example around for Rick Great quarter, I'm, just I'm the country customer segmentation again it sounds like this is purely a marketing effort for the near term, but just to be clear are you introducing any new products or categories. This to the stores at this point in conjunction with that segmentation effort and are you currently you absorbing any incremental.
Costs associated with this new segmentation.
So very good question and on the cost side, not really al I'll give you a couple of small examples.
If we wanted to extend.
A particular department like ball caps and country customer tends to where a ball cap. It typically has a western brand on it.
But it's not a cowboy hat and that business has been growing for us quite nicely. So we need some fixturing in the stores football caps, but this is a.
Almost inconsequential spend.
And when you look at the product assortment, we are trying to isolate merchandise that is.
A I'll give you. An example on the men's apparel side, a menus woven long sleeve shirt for a western customer has longer sleeves and longer cows, because there are literally riding on horse potentially with a rope in their hand, and moving cattle or other animals around.
Iran.
If it's a country customers that particular guy he's probably wearing that [noise].
His long sleeve.
Buttoned down woven shirt and talks doesn't need expanded sleeve lane store or arms for anything that he's doing and it's more of a fashion.
And then a kind of functional western peas.
So the distinction to sort of a naked eye might be minor to the merchants.
And to that product designers and frankly to people buying the product are pretty important. So you think it say a logical.
Hi, Jason customer one concentric circle outside of our core customer.
I have some of the product in there already and we just think we can expand it a little bit and continuing bye.
Do you customers to explore the boot barn brand that may not.
Live and work on Iran. Our rider horse, but have some affinity to the lifestyle right. So like that and that example that you just gave that second product that you described was that in the store before or is that something that some new in was recently brought in.
In most cases, some subset of the existing already so we already have some product selling and some successes and we're seeing opportunities.
To expand that the ball cap is a perfect example, bulk has used to be very small absorbing a store.
As we saw sell thrilling selling pickup we expanded breadth and depth and that's become a bigger business.
Moonshine Spirit as an example, that's been in store for five years now has more styles of denim and more washes and its expanding a little bit. So it's it's taking something that we had this season success already and making it a little bit broader.
That makes a lot of that's appreciate it good luck guys.
Thank you.
Your next question comes from mine of Jeremy Ham Hamblin with Craig Hallum. Please proceed with your question.
Thanks, guys. Congrats on another strong quarter and why that fair question on on real estate plans here moving forward 2019 saw pretty significant uptick in a store closures and planned store closures here and in 2020 companies like Pier one.
Entry some attractive real estate. So I wanted to ask first what you're seeing on the cost side of things with so many a potential opportunities on the market.
And to whether or not it changes at all your growth algorithm that 10% unit growth.
Actual opportunity.
Let's say if you if you saw some really good site to potentially develop and convert.
Would you be more aggressive in looking at that.
Thank you.
The costs are.
Maybe slightly better because there's some more availability to your point.
What we've really been doing though is getting what we believe better.
Sites for the same occupancy cost.
And we've seen in the new store sales to be Onyx right. I mean, we ask people to model a new store a $1.7 million on average we do better than that I think part that is attributed to the fact.
That we're getting better real estate sort of at the same kind of seeing dollar.
In terms of.
The 10% a unit growth going forward.
Yeah, we feel pretty good about that number.
Where we are in.
Position of strength now and are you Greg talked about our leverage ratio is.
Almost a one now just over one we have and really tried and true processing opening stores. So we and to your point there are people that unfortunately are closing their stores and making real estate.
Available in some cases in the right size and shape that we need.
Having said that for the time be we're going to stick to the 10% unit growth with potential for upside going forward, but we're not calling that out right. Now is that it is something we've explored even contemplated but we're going to stick to the 10% for the time being.
Great and then a follow up question here on your online business and Sheplers, you mentioned that you're earning more from the Sheplers business, even though there's a slight down tick here and sales.
From that fight could you give us a little more color in terms of magnitude.
That's.
We lets say 9% of business.
<unk> percent of business.
Can you give us a sense for maybe the dollar improvement.
The magnitude of improvement.
With that improve profitability on my thanks, and that's it for me.
Sure it's hard because we don't split the brands online because they share so many of the costs.
But I would tell you that the the business that we're giving up is.
Would undoubtedly be unprofitable for example, as we looked at paper click advertising.
Around Black Friday in cyber Monday.
We saw a other brands in other brands in our space and digital native brands bidding on a two to one return on AD spend so they were spending $100 to get a $200 sale.
And that was just a business that we walked away from.
So it's it's hard to to quantify the specific bottom line impact of Sheplers.
We did say in the prepared remarks that.
In total E com EBIT contribution.
It's a very nicely year over year.
And Oh, yes, that's partly driven by.
My sales growth and boot barn, dot com exclusive brand penetration improving merchandise margin.
The paper click piece, becoming much more efficient spend.
Better distribution center efficiency, Alan Johnson fixed cost leverage on fixed costs. So it's kind of top to bottom a success story for how to run a profitable ecommerce business.
And you know given the fact that from a consolidated standpoint were measured on earnings any P.S.
We really need our our E commerce business to be profitable and highly profitable. So we've made some really nice progress there.
And we feel good about the future for for both brands going forward I think Sheplers, we'll just continue evolve.
And hopefully we'll be able to get more free traffic and maintain a brand that is about a century old now so.
Its got its own positioning in the marketplace and we'll continue to look to places to get some more growth.
Great. Thanks, guys. Good luck.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Jim Conroy for closing remarks.
Well. Thank you everyone for joining the call today, we look forward to speaking with you on our fourth quarter earnings call take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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