Q2 2021 Boot Barn Holdings Inc Earnings Call
All over to Jim Conway coupons, President and Chief Executive Officer, Jim.
Thank you Jim and good afternoon. Thank you everyone for joining us on today's call I will review, our second quarter results update you on our current performance.
And walk through each of our four strategic initiatives.
Following my remarks, Greg will review, our financial performance in more detail and then we will open the call up for questions.
Before we begin I would like to acknowledge the entire boot barn organization for their continued hard work and execution as we navigate through the current macro environment.
The team has adapted quickly to the ever changing nature of the pandemic and has done a tremendous job serving our customers, while focusing intensely on maintaining a safe shopping environment.
I continue to be humbled by the culture of the company and Im grateful to be part of this wonderful organization.
We are very pleased with our second quarter results, which exceeded our expectations beginning with our topline net sales were down 1.4% from a year ago with same store sales decreasing 5.1%.
Given the environment and the many pressures on the business our ability to nearly maintain our sales volume year over year was quite an accomplishment.
By channel same store sales in our retail stores declined 9.1% and E Commerce same store sales increased 17.6%.
Following a slow start to the quarter due to an increase in KOVA cases in several of our key states sales.
Same store sales growth improved sequentially each month of the quarter and has continued to increase during October.
Consolidated same store sales declined 9.8% in July 8.9% in August before turning positive in September increasing 1.3%.
The acceleration and consolidated same store sales was driven by sequential improvement in our retail stores.
As we mentioned on our last quarter's call, we have seen a correlation between consumer sentiment.
Around cobot, 19, and retail store sales.
From a margin perspective, our second quarter merchandise margin was strong in both stores and online we have maintained our full price selling philosophy with minimal markdowns and promotions, resulting in growth in product margin, which helped to partially offset de leverage of buying and occupancy costs.
Higher freight expense and margin headwinds due to channel mix.
Once again, the merchandising team has done a great job of navigating through the many challenges in the retail environment and has us well positioned from an inventory standpoint without incurring margin pressure due to product markdowns.
The strong full price selling combined with our recent cost reduction efforts resulted in second quarter net income of $5.8 million or 20 cents per diluted share.
This was better than our expectations and compares to $7.7 million or 26 cents per diluted share in the prior year period, which included a two cents per share benefit due to income tax accounting for share based compensation.
Given the challenging macroeconomic environment, we are particularly encouraged by our bottom line performance in the quarter.
I'd like to now provide an update on current business. We saw continued improvement during fiscal October as same store sales in our retail stores were flat to last year and our online sales remains very strong.
While work boots continue to be our strongest performing category. We are also encouraged to see more broad based growth across other categories with momentum building in denim pants and western boots, all of which are now comping positive quarter to date.
I would now like to provide an update on each of our four strategic initiatives beginning with to driving same store sales growth.
During the quarter, we saw a significant sequential improvement in the retail stores business improving from a same store sales decline of 15% in July to slightly negative comps in September and further improving to flat comps in the month of October.
While we experienced several headwinds related to COVID-19 that impacted sales transactions during the quarter, our underlying business remains solid.
Low oil prices impact unemployment in some of our markets, most notably in west, Texas, while coated related restrictions have slowed travel and some of our markets that benefit from tourism.
Additionally, events, such as videos and concerts have been cancelled across the country.
These events typically provide a catalyst for our customers to get into our stores and purchased boots and apparel and preparation for attending the event.
Despite these coated related challenges, we were able to improve our retail store same store sales from a decline of 27% in the first quarter.
Two a decline of 9% in the second quarter ending the month of September with essentially flat store comps.
The improvement in the business showcases the strength of the boot barn model and our customers affinity for our in store shopping experience.
From a merchandise perspective work boots continue to be our strongest performing category sales.
Sales of non flame resistant work apparel were up in the quarter as our core customer purchase functional product for their work needs.
In contrast demand for our Fr work apparel business was soft due to high unemployment for our customers working in the oil and gas industries, which pressured same store sales of some of our stores in Texas.
And other oil dependent markets.
In addition sales of both mens and ladies western boots, and apparel declined during the quarter.
From a marketing perspective.
Upon the onset of cold in the spring, we adjusted our media mix by placing more emphasis on digital and paper click advertising, while pulling back on direct mail and radio spots.
Now with the business returning to a more normalized composition with stores returning to a penetration of more than 80%.
We have reverted back to our more traditional marketing program, which includes radio television and direct mail. In addition to the digital marketing that we have had in place.
From a customer segmentation segmentation perspective in addition to marketing spots targeted at our work with customers. We are refocusing on our core western and passion segments, especially during the holiday and gift giving season.
We've also recently expanded into a new segment called just the country. This.
This new segment extends our customer reach to those who don't live a core western lifestyle, but fit into a rugged outdoor adventure enthusiast and recreational category.
Recognizing opportunities to expand our product offering to those living in an increasingly more outdoor lifestyle and in line with our just country segmentation our.
Our merchandising team has broadened our assortment of hiking boots, outerwear and outdoor footwear and apparel.
Inventory in these expanded product categories has started to build.
Respect this offering to our new customers to the brand and expand our share of wallet with existing customers.
From an operational perspective, essentially all of our stores are open today with normal hours of operation.
We continue to promote a safe shopping environment use of face coverings plexiglas partitions at the registers and social distancing.
We've also made terrific progress in recruiting and hiring much of the seasonal staff that we will need for the holiday building business.
As we look forward to our holiday quarter, we feel great about how we are positioned from a merchandising staffing and marketing standpoint to handle the holiday surge and to react to whatever challenges are presented by the external environment.
Moving to our second initiative strengthening our omni channel leadership.
During the second quarter E Commerce same store sales increased 17.6% and our continued focus on ecommerce profitability drove a more than 100% increase in operating income.
Our increase in sales was driven by both new and existing customers.
We are focused on stepping up our efforts to add more new customers and optimize conversion across each of our online platforms.
Majority of the online growth we saw during the quarter was driven by 42% increase in sales on boot barn dot com with a healthy year over year increase in both traffic and conversion.
Sales of coupon Dot com now make up more than 50% of our E Commerce business.
While ecommerce sales in the rest of our online business were down low single digits year over year, we have seen significant improvement in ecommerce profitability, partly as a result of the rebranding of the Sheplers Dot com site and the associated changes we made in our promotional posture to reflect a more full price selling model.
The ongoing changes we have made and are focused on increasing ecommerce profitability has not only greatly improved our bottom line, but have continued to narrow the margin differential between the stores and online channels.
We are making improvements to our omni channel capabilities and believe the enhanced capabilities will enhance will enable us to continue to meet our customer shopping needs. During these unusual time.
We now offer a variety of omnichannel options, including our endless aisle with tablets.
Range finder tool buy online pickup in store and curbside pickup.
We are pleased with the success, we have seen in recent weeks with our buy online pickup in store sales as some of our customers have adjusted their shopping habits.
We recently added additional capabilities to our ecommerce business, including fulfillment of ecommerce orders from our stores and same day delivery from our stores.
We believe these enhancements provide us with additional competitive advantage, including same day delivery of holiday gifts purchased on our sites, which will extend our online shopping season, several days longer than traditional direct to consumer players.
Additionally, in the coming weeks, we plan to launch virtual Clienteling, which will allow our customers to shop from home while video conferencing with an in store expert stylist as their virtual shopper.
While still in the early days, we are encouraged by the performance across each of these platforms and expect them to provide incremental sales and enhanced customer satisfaction, especially as we head into the holiday shopping season.
From an ecommerce fulfillment perspective, the upgraded automation and enhance warehouse management system added to our distribution center over the last few years has reduced picking times and shortening the time from order to delivery.
These changes along with expanded capacity at the fulfillment center that has recently been added have us well prepared to fulfill essentially any type of online demand during the busy holiday season.
Auto afford strategic initiative exclusive brands.
During the second quarter exclusive brand penetration grew to 24.9% an increase of more than 350 basis points compared to the prior year period.
This growth is a testament to the high quality product offering and the overall brand receptivity, we have seen with our customers.
As a reminder, our exclusive brands are created and nurtured as two brands and not as inexpensive alternatives to third party brands.
This focus on brand development has positioned Coty Jane can Cheyenne as our number two and number four top selling brands in the store.
We believe our exclusive brands in combination with the assortment we offer from third party vendor partners will continue to drive traffic to our stores and our E commerce sites.
And further develop loyalty from our customers, we expect to see continued growth in our exclusive brand penetration in the range of 200 to 300 basis points during the current fiscal year.
Finally, our fourth initiative expanding our store base.
We opened one new store during the second quarter and an additional store in October, bringing our total store count to 266 stores.
We plan to open in both new and existing markets and continue to target a total of 15, new store openings in fiscal 2021.
Including the seven stores openings year to date.
We are very encouraged by the performance of the newly opened stores, particularly those in new markets.
This strong performance despite the challenging macro environment underscores the strength of the business model and further validates the significant opportunity for us to continue to open new stores with attractive returns going forward.
While we have intentionally slowed down new unit growth. This fiscal year as a result of COVID-19, we remain confident in our long term ability to expand our store base by 10% or more each year in a more normalized external environment.
I'd like to now turn the call over to Greg Hackman.
Thank you chairman good afternoon, everyone.
In the second quarter net sales decreased 1.4% to $104.5 million.
The decrease in net sales was driven by 5.1% decline in same store sales with same store sales in our retail stores declared a 9.1%.
Apparently are same store sales to increase to 17.6%.
The decrease in retail store sales was primarily primarily as a result of decreased traffic in our stores that.
That resulted from customers staying at home in response to the cobot notes in credits.
Yes.
Gross profit decreased 6.5% to $55.5 million or 30.1% of sales compared to gross profit of $53 million or 31.7% of sales in the prior year period.
In 160 basis point decrease in gross profit rate resulted from a 110 basis point increase for the buying and occupancy costs, but at 50 basis point decline in merchandise margin rate.
That the leverage in buying and occupancy costs was primarily a result of lower sales due to the Kobe through the crisis.
Merchandise margin declined 50 basis points of which 30 basis points as a result of higher income numbers penetration for that.
Now as a result of higher freight partially offset by better product margins.
Operating expenses for the quarter was $45.4 million or 24.6% of sales compared to $46.4 million or 24.8% of sales in the prior year period.
Operating expenses increased primarily as a result of lower marketing and pay per click sense.
Income from operations was $10 million or 5.4% of sales in the quarter compared to $12.9 million or 6.9% of sales in the prior year period.
Income tax expense was $2 million in the quarter compared to $1.9 million in the prior year period, resulting.
Resulting in an effective income tax rate was 25.6% in the second quarter.
Net income was $5.8 million or 20 cents per diluted share compared to net income of $7.7 million or 26 cents per diluted share in the prior year period.
Turning to the balance sheet.
Inventory decreased approximately 14% compared to last year, both on a comp store basis and on a total company basis.
The decrease in total company inventory was primarily driven by a reduction in comp store inventory and a decrease in inventory at our Taylor distribution Center portion.
Partially offset by growth in inventory for new stores added in the last 12 months.
We continue to be pleased with the team's ability to manage inventory levels during the current environment.
As of September 26, 2020, we had a total of $179.3 million of debt outstanding, including a $111 million term loan from $68 million outstanding on our $165 million revolving line of credit.
During the second quarter, we reduced our line of credit borrowings by approximately $62 million, resulting in $97 million of remaining availability.
We had $35.7 million in cash on hand at deliver quarter and our net debt leverage ratio at the end of the quarter was 1.7.
Given the continued lack of visibility into the business as a result of COVID-19. The company has not providing third quarter guidance at this time.
Now I'd like to turn the call back to Jim for some closing remarks.
Thank you Greg.
Although the current environment remains challenging.
We are pleased with our second quarter results and are optimistic about maintaining our positive momentum through the holiday season and back half of the year.
We continue to believe in the strength of the boot barn model and look forward to the opportunities that lie ahead.
Once again I would like to thank the organization for their hard work and commitment to taking care of our customers and executing on our initiatives through a difficult backdrop.
Now I would like to open the call up to take your questions Stacy. Thanks.
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Our first question comes from Matthew Boss with JP Morgan. Please go ahead.
Great Thanks, and congrats on the business momentum.
Thank you thanks.
So maybe first on your positive 2% comp in October what performance are you seeing and maybe some of your core markets, such as California relative to Texas or oil and gas markets and Jim given the topline stabilization is there any impediment to returning to 10% new unit growth as early as.
Next year.
Okay second question on from a regional perspective, the way we think of that.
The field organization as we split into three different regions, the West region, which includes California and a few other states has performed the best.
The South region, which includes Texas has been under the most pressure.
Largely due to some more oil markets in west, Texas, and some softness in overall, Texas.
And then the North region includes essentially the rest of the country and thats been somewhat somewhere in between those two bye.
But I think as we see the business progressing month after month after month history, Thats emerging that's pretty encouraging.
Yes, we do.
Three or four months ago, we were selling work boots and some work apparel.
And then.
Sort of one by one each department and started to sequentially improve and then turned positive et cetera. So we've seen a nice steady improvement team.
Men's cowboy boots in ladies cowboy boots, a nice steady improvement in men's work apparel, a nice steady improvement in ladies apparel and many of those departments or are now positive not all of them, but many of them are have turned positive which is great to see a broader based growth.
Then just being single threaded through sort of the work business.
The second part of your question was around.
New store development and.
While this may seem like a paradox in a height of a pandemic wing Ling stores are curtailing hours and people are shifting to online.
The truth the tier two bond issues, we are probably even more emboldened than weve ever felt about opening up new stores.
Just a couple of reasons for that one we.
We have opened a brand new stores in new markets that Didnt really even know the boot barn brand.
Right in the middle of the pandemic and they are exceeding our expectations will payback.
Leasing totality that group of stores will pay back faster than the three year benchmark that we hold for ourselves and this is again opening up in that kind of worst of environments and new stores are doing great.
The second reason is as we continue to open stores in existing markets. We are realizing that our store density aside.
Assumptions actually may have been too conservative and we probably can open even more stores in existing markets than we had originally five.
So you put all that together I think returning to 10% once we get back to somewhat of a normal environment and not sure when that will happen.
I think we'll absolutely be able to return to 10% and I think we'll absolutely be able to at least double our store count and we're continuing to look for more and more opportunities to grow the coupon brand across the country.
Great and then maybe just a follow up for for Greg on gross margin, what's the best way to think about merchandise margin in the third quarter, maybe relative to the 50 basis point contraction in the second quarter and just as maybe as a reminder for the back half of the year.
Theres any puts and takes but what does the comp that you think you need to leverage buying and occupancy cost in the back half of the year within the gross margin.
Yes.
We havent given guidance at all really on on those kinds of things. This year, having said that I think the leverage points weve given in the past.
Probably hold true today, there's nothing.
Abnormal about this year other than pressure on the top line of course that fit that.
What is going on so I think.
If you revert back to what was said in the past that's probably a pretty good guide Asia.
As you think about the merchandise margin in Q3, I mean of the 50 point 50 basis points decline in merchandise margin 30 basis points of that was related to growing ecommerce penetration year over year.
And.
The the E com penetration I think at the end of October was 16%, which is probably more in line with what we would see.
In October of last year. For example, so I don't know that we'll have the same if I don't know the composition of sales in Q3, but.
To the extent that E com penetration grows by a percentage point that costs us about 15 bips of pressure on the merchandise margin line.
So in Q2, we had.
Two points of increase penetration year over year, and that was 30 basis points of headwind for us.
The.
The other piece of this was.
We had expansion in what I'll call product margin.
The sale of that product that said our store, but we had some headwinds related to freight and you may have seen that from some other retailers.
So there's a little bit of freight pressure out there but.
Backups in the West Coast Port setting and so we're having to do some things differently to get product in.
I don't expect that to be a significant headwind in Q3, but that that affected us a little bit in Q2, but it really comes down to what the composition of our sales will be in Q3 in terms of how you think about merchandise margin.
Thanks, Great color and congrats again.
Thanks very much in Q.
Our next question comes from Max for Clinker with Cowen and Company Company. Please go ahead.
Hey, guys. Thanks, a lot and congrats on a nice quarter. So on the E. Com comps can you maybe share how much of that came from new shoppers and then can you talk about how those baskets saw look similar or different from your typical shoppers and then we have one more.
Sure well there is two different stories online right that the boot barn dot com business.
And.
Very strong topline very strong bottom line.
Performance and that is a combination on the top line.
Healthy traffic and healthy improvement in conversion.
On the Sheplers site, we we're we've completely rebranded that site, we've taken away the sales and promotional aspects of it.
And we're really pleased that traffic has continued to improve.
But given the fact that the price points are a little higher and it's not nearly as promotional.
And really trying to underscore the legacy of this western under your old Western brand called Sheplers. The conversion has come down.
So Adam and Thats not entirely unexpected given that fact that we changed the promotional posture, we put all that together our ecommerce profitability is up over 100% versus last year. So we we essentially viewed that as a comp growth of 100%.
In E com, despite the fact that it's.
A combination of of sales and margin.
And in terms of your specific question of new customers versus.
Existing customers about if we just think about boot barn about a third of the increased traffic.
And.
We have a little bit more than that is new customers.
And the others are either existing customers shopping more frequently or stores customers shifting over.
You had one other question before you had your additional question that you were going to ask which was around how does the basket differ Adam.
Yes, there's that huge differences I mean roots are penetrated a little bit higher in boot barn, dotcom denim is penetrated a little bit higher in Sheplers dot com.
The average basket.
Online is a little bit higher add about $30 higher than the basket in the stores, so roughly $130 $135 versus $105 in the store something like guidance.
But other than that the composition of the business as you look at all of the different.
Channels and the different brands.
It is sort of in line with each other and there are some nuances that yes.
The merchants would see but by and large we're selling boots in denim and hats and.
Work apparel.
Understood and with some of the various supply chain risks in mind for the holiday season.
How are you thinking about maybe moving some of those sales shifting them from December earlier into the quarter.
We'd just love to hear about that.
There's been a lot of discussion about how to ship sales earlier and I do think that is something that retailers try each and every year.
We have.
Sort of a similar promotional cadence to last year as you know we don't have massive.
Sales or or.
Massive promotions planned anytime during the year, including during the holiday period.
Weve adjusted our marketing a little bit to be a little earlier.
But in terms of.
Yes price points and breaking price et cetera.
We have no intention of doing that this year and just like last year, we have overemphasized marketing spend prior to Thanksgiving, a little bit differently than last year.
And I think the last thing that we've done to try to.
Mitigate the add either.
Either people shopping later people running out of time to shop online is to develop every flavor of omnichannel capability that you can imagine to to make it easy for a customer to shop with us in any manner that they want.
Yes, that's that's our current strategy in a I know some other retailers are.
Probably going to be out early with fab.
More promotional pricing and.
Just not strategy that we think would work for us.
Got it thanks, a lot and congratulations again.
Thanks Ben.
Our next question comes from Jeanine Fisher with Jefferies. Please go ahead.
Hi, Thanks for taking my question I have a question on the E Commerce channel. So naturally this unit silent on that month over month and address our performance that Hasnt trends do you have any sense of what you would consider kind of a normalized rate of growth there understanding that there's add a divergence in performance between Brian Dot com and the other banners and also.
I wanted to ask about profitability of E. Com I think youve noted that either profitability has been improving and maybe give us some perspective on where the gap and profitability versus stores and then maybe how much more revenue, thanks, Eric and potentially bridging that gap. Thank you.
So I'll take the second part of your question Jeanine, which is all with all the margin profile as E com versus stores.
Our stores continue to outperform the E com channel, but as Jim mentioned, we doubled our our earnings in the E Comm channel on off on oil.
You know a reasonable comp performance of plus 18 in the quarter.
So we continue to make progress the places where the most significant place that that E. Com is disadvantaged on as the freight piece right and Jim talked a lot about some of the initiatives we've made to be able to fulfill a ecommerce order from the store and that will help that freightliner that disadvantage.
On the freight loan, but thats the most significant piece that slate going into our stores is relatively inexpensive and unsettling terabytes to a customer in New York Citys more expensive on a rate basis.
Beyond that there is a little bit of disadvantage in the ecommerce channel as it relates to exclusive brands penetration as you know in solar as a customer can see and feel and recognize the quality of our exclusive brands and thats harder to do online.
So that the stores business has a heavier penetration or for a bigger penetration of exclusive brands, which of course helps the profitability profile.
Those are probably the two biggest things that make it difficult to overcome our catch up to the stores all margin rate.
I can cover the first question to answer and I get it and you had asked about.
White, how we would expect the business to look going forward from an E commerce perspective and.
And while that falls, a little bit into quote unquote guidance.
We haven't provided that we can give you a sense for I think what were thinking which is boot barn continues to be.
Solid grower.
The 42% topline growth in the quarter, which was quite nice.
I would imagine we'll continue to have solid double digits, maybe 42 will be.
High watermark.
And I think our business will be solid double digit on boot barn.
The rest of the online businesses will be probably slight drags on our comp.
Mike It was in this quarter and it it is something that we tried to.
Overly amplify on the call because we if we weren't focused on rebranding sheplers and we weren't focused on really improving the margin profile of our ecommerce business.
We probably pretty easily could have added plus 30 or 40 comp on E com and driven our consolidated same store sales higher but it would have been EBIT eroding.
So.
Yes, I would just kind of remind everybody that it's a very strategic and conscious decision were making to focus on the bottom line performance of our ecommerce business. Despite the fact that it's it's slowing or at least.
The restraining topline growth Itzhak, it's absolutely been an EBIT enhancing.
Tactic that we've taken.
Great. Thank you.
[music].
Thanks Neely.
Next question is from Jonathan Komp with Baird. Please go ahead.
Yes, great. Thank you, Jim I want to back up and ask about the category performance and our.
Good to hear your thoughts on what's driving the non work businesses. The rebound like they have add maybe a broader question understanding you're not guiding but with most of the categories trending well and positive employee.
Any thoughts on it yes, there is.
Chance that comps might be back to more of a sustainably positive.
Dr is going forward here.
Sure So I think.
I think it's sort of followed a natural storyline rate from sure needs based.
To the next business that got turned on to positive was something like men's denim rate somewhat and that on the western side somewhat need phase by.
But not perhaps as much as work boots.
And then we started to see and a an improving trend in mens western boots, which.
It's just about flat now and which is great and its.
Some would need based.
Site oftentimes discretionary spend.
And so I I can see how it's playing out as customers are now starting to just shop for more traditional clothing.
Clothing, and apparel and boots and for them or their family I think the other thing, perhaps getting a little credit to the merchant team in the stores team.
Is what we have pretty quickly made some adjustment trade so.
To give you a few examples.
The.
The trends in the business now have tended to be more casual so rather than button down woven shirts, they're buying more T shirts and.
They are buying things that they might just where.
And.
Sort of more casual for examples what we believe some of our lease up work through.
Sales without a safety tail have been sell.
Selling because people are using them for four weekend heights and things of that nature.
We've also added some pieces to be assortment right. So we've.
We have adjusted to what we're seeing out there we've expanded a hiking boot assortment in not all of our stores, but a good number of our stores.
And we're trying to.
Kind of manufacturers some sales.
Where we see the consumer taking us and then the last thing I give some credit to the storage part embedded in the comp performance is a nice increase in our units per transaction.
Part of that admittedly is selling face masks and hand, sanitizer, but even if you strip that out yes, we've really had that the stores focusing on adding a pair of socks, adding food care or boot trees to be purchases.
And our our units per transaction of helped as well. So I think when you put all that together, while it's it's still a battle to gain.
Positive same store sales, particularly in the stores.
We are starting to see some really nice momentum across multiple departments.
And it's encouraging.
Yeah, that's great and maybe one more question looking forward to the holiday can you just remind us how some of that mix changes play out for your business across channels and across categories in the store and then the.
The initiatives you talked about adding so the same day delivery and the virtual all client following.
Just any thoughts on potential contribution there from a sales perspective, and what are the economics look like for both.
Those new lines of business.
Sure so on the mix and.
In our third quarter on our holiday quarter.
If we just think of work vessel versus western.
Work days decreased slightly as a percent of the total business.
In western becomes a little bit more give us a little bit more gift, giving them a work business.
And im not exactly sure how that will play out rate and the the work boots business is very strong. The fr work apparel is very weak. So it could almost offset maybe not quite but the mix might be a slight headwind to same store sales.
Although I think we have some other things that are that are maybe pushing and from a tailwind perspective.
In terms of the new capabilities that we're building.
Right now they are a very small portion of our business.
We rebuilt the now because it's.
It can be additional sales it can be margin accretive versus a regular ecommerce business ecommerce allocate to product thats already in the store and customers going to pick it up we can save the freight piece that Greg spoke about earlier.
And the other.
Pretty significant reason that we really wanted to have every possible omnichannel capability.
Built out that we could play in that in the downside scenario where.
Total bid surges tremendously in and.
Local or state governments cake.
Significant action with curtailing store traffic or store hours, we wanted to have sort of every hedge possible.
Again that path and to help bolster the business if we didnt have to shut.
Shutdown in a market or we did have to retail store hours.
Or curtail the number of people in in store during the holiday period.
So we feel we have the ability to and you can buy from the local store and have it shipped directly to your house will deliver Durafit Your house that day by delivery service.
And you have the ability to order.
Gift for somebody across the country and have it delivered to them from the store local to them.
And all those capabilities came together extreme extremely quickly and and hats off to the E com and the team for getting them up and running and working with with.
Very very little speed bumps in the process.
Yeah, that's great. Good luck sky gearing up for holiday. Thank you.
Thank you.
Next question comes from Paula ways with Citigroup. Please go ahead.
Hey, Thanks, guys. That's all trying to assess the you mentioned how your store comps and October I was curious if you could talk about if you're actually seeing traffic turn positive or if that's being driven more by you are you BP overall transaction size.
When I'm curious if you could talk a little bit more about marketing I think you said you'd be pulled back a little bit you're going to start to come back to normal where there any time timing shifts as well that impacted your second quarter, just how how maybe we should be thinking about marketing expense in country Kim. Thanks.
So I'll start with the marketing spend we did save a little bit of marketing in Q2 on a year over year basis, and we call that out as one of the contributors.
And we do expect to see a little higher marketing spend this year in Q3 than we did in Q2, it's not millions of dollars, but we do expect just to invest a little bit in the businesses as well as trying to play offense, a little bit given lead the sales trajectory and Alan.
Improvement in our.
From August into September and September into October sales were quite a bit of offsets were open to our normal hours.
Jim talked about the fact that we are doing a good job of hiring our seasonals.
So we're investing in the business and prepare to play a little bit of offsets. So we're also investing in marketing in Q3, which is a little bit higher than last year.
In terms of your question Paul around.
Total lose business.
We are encouraged that the business on a consolidated basis has sequentially improved a little bit this.
The stores business is roughly flat.
Traffic or at least in in our world average transactions per store as a proxy for traffic is down slightly ATP is up slightly so that has offset to become roughly a flat comp.
One of the other encouraging things and.
With no intent to try to get.
People to overly energized we are cycling.
A pretty strong October last year, we were on our call last year. We said, we had a plus 10 comp in the month of October.
So to be able to.
Post the plus two on a plus 10 in this environment, we feel we feel pretty good about them.
Got it. Thank you and just one follow up on inventory it seems very well controlled from a from an inventory perspective.
Are you too light anywhere maybe talk about.
Categories that maybe.
Maybe running a little bit lower than than you would then you would like how you did mention some support glaze curious if there's a difference in terms of the inventory change year over year in your private label versus your branded goods. Thanks.
Yes, so Paul we.
We did see a 14% reduction in average store inventory and we were not targeting a to b minus 14, we thought we'd be we'd have a little more inventory than that.
But our sales have improved in September and and so we did see also see a little bit of receipt disruption.
And you've heard about that Im sure Theres backups in the in the West coast ports that are delaying a little bit of our exclusive brand products and some of our vendors reacted in the middle of Covidien cut back on their commitments as well so were a little lighter than we had targeted but.
But I don't think were exposed at any meaningful categories.
And we have lots of sub substitution opportunity. So if we were light in and get them ladies denim in certain brands. We've got plenty of other denim in the store. So the major categories are covered by substitution opportunities.
So we think we're fine as a reminder.
We turned about two times a year and if you were to look at last year's transcript you'd see that our average inventory per store was up about 15%.
From the prior year. So when you put those things all together, we feel pretty good about our inventory position at this point.
Gotcha. Thank you guys. Good luck.
Thanks, Paul.
Next question, Peter Keith with Piper Sandler. Please go ahead.
Hi, Thanks, a lot.
Nice to see the improvement in the business guide.
Maybe to follow up on the.
Inventory question. So one dynamic we've heard about the industry, that's somewhat unique as the drop ship to store model right vendor to store.
That would impact you guys that would impact sort of everyone in the industry and with all the delays in essence that acts that that might cause some out of stocks for the holiday season is there anything you're thinking about or or planning around in advance.
Yes, it is and the U.S. news and where we're managing it like everybody else's managing it.
And we have done some things to help mitigate it so weve.
Tried to accelerate inventory receipt earlier in the holiday season than we normally would now in fairness, we're also being yes.
Yes, there is a there is a countervailing force there were some receipts were just coming in late from overseas.
So we are trying to build the inventory in the stores.
A couple of weeks early so we're a little Lee.
Well still be fine.
We've taken a couple of vendors that would do exactly what you're describing.
And rather than be at Behr behest will we brought some of those.
Brands into our own distribution center, and we're distributing ourselves.
Perhaps still beholden to you'd be asked but at least we can control and we ship it.
And we aim it is something we're watching and we've.
You asked the stores to ensure a very quick put away of product that is is brought in.
We've we've augmented to replenishment models to bring in a little bit more safety stock. So we've done a number of things.
One of the things that does help us relative to the vast majority of retailers is Greg called this out we have the luxury of being able to carry 26 weeks of supply or something like that.
Yes, we don't have we have no markdown risk so.
Even if we were a little bit delayed in getting some product in we do have to get through the holiday season, and replenish as we get into January.
Okay. That's good there.
On a totally different topic I wanted to ask about just country segment that certainly interesting and.
Feels like something different than what you guys have done is done in the past where almost bolting on that potential new customer opportunity. So that Jim could you just flush that out a little bit more for us we think there'll be a lot of overlap with the existing customer base or think that their majority of sales will be new customers or anywhere to have frame up like the tam or over you would.
Ultimately as a percent of sales over time.
So it's a great question.
It is.
It is another step in the process. If you really follow the long boot barn for for eight or 10 years. We were western only then we added work then we added wonder West which is this sort of very contemporary fashion segment and now we've said all right, let's look at the customers in one.
Big concentric circle around our core western customer.
And this person was loosen genes, but where's T shirts.
Woven shirts sweaters based.
Baseball hats, and not cowboy hat.
And you're right the.
The addressable market, there is quite a bit larger than the addressable market.
For sort of the pure western lifestyle customer.
In terms of where we think the sales will come I think a portion of it will be.
Coming back to that share of wallet concept with our existing customers. If you walk into our stores now.
Or even over the last few quarters, particularly on the ladies side ladies apparel.
Weve expanded quite a bit.
Around a core western customer and has brought in some more casual fashion and I think the assortment. There is built quite nicely I think more recently the mens side has done the same.
And.
Part of the share of wallet with our current customers. We're also changing how we go after new customers and from a media mix standpoint from the.
Patients in channels that we market online from some of the AD words that we buy on pay per click.
How do we prospect for new customers that tends to take longer of course.
And tends to be a little bit more expensive to get that new customer, but I think we can do it and if you were to look at our.
Same store sales growth for the last.
Two years, almost every single quarter at least prior to quoted.
At really healthy contributor to our same store sales growth.
It was an increase in customer count on a comp store basis and.
Frankly, this is an extension of that strategy.
And.
Ironically were somewhat fortuitous that we're bringing this more casual assortment to the stores at a time when the customer has started to move in that direction anyway. So it's there's.
Theres.
We're pretty we're pretty pleased with the progress so far and guidance really encouraged by the outlook because I think it fits well with where the customer is and.
I can't say that we planned that nine.
Nine months ago, when we started this fight.
And once in a while you get lucky.
Yeah, it's a remarkably well timed with the step up in outdoor activities. So look forward to seeing how that progresses. Thanks so much.
Thanks Peter.
Next question comes from Rick Nelson with Stephens. Please go ahead.
[laughter] current Clark our current term up our current reset arms restart that 10%.
So our growth.
If you come through the current quarter compared with positive comps.
Got October momentum.
Her pain, who use that corn Q current quarter.
You got to commit to that tempers hunk stronger our current clinical 20 peer.
And I think it's more related to the macro it's actually more related to the pandemic really I mean, it what we are.
We're in a very solid position right now as Greg mentioned, we're about to go through holiday that just bolsters our capital structure, even more site, we pulled back simply because we were preserving capital.
And didn't think that new store openings during a pandemic H could be tone deaf and b.
They may not work as it turns out once we were able to get some of these stores opened we realize that there wasn't market.
There was a customer ready to shop, there and even in some of these new markets. There they are performing quite well so.
I don't I don't think we necessarily need a plus 10 store comp to be the.
Confident that opening up new stores as a good investment.
And I think we need.
Any kind of normal in the world over the next few months to once we get to January February to Reengage for growth on new stores.
In terms of timeline.
Well, we can we can move pretty quickly.
It's a it's a five or six month process from finding a location to getting a store belt.
So we probably have to hustle, a little bit, but I think we could get 10% new stores in our upcoming.
At school year.
Particularly if we see the macro environment stabilized and we have a very solid new head of real estate.
Started nine months ago and he's he has already.
And some some great locations. So I think we can get there pretty quickly and including next year.
Thanks for that color also.
Correct.
Little bit term could be uncovered tramp.
Maybe sequential recovery.
They occur out small one.
I would say no.
ER co recover it Eric new hires.
So related work.
Tom.
Terms.
Your customer's home sales.
Channel.
Stores from become.
So I.
I would say the encouraging thing without without going into very specific detail. The encouraging thing is.
Over the last year and.
Nine weeks, which would include our fiscal September.
In our fiscal October.
Yes.
Seven of them were positive so it hasn't been it hasn't been sort of one great week mass being a bunch of lousy weeks and they've been pretty consistent.
And.
And one was flat so most of them were pretty were pretty solid.
As we got into October there's been very little difference across two weeks and then frankly once the weather broke that help our business little bit more it's been very very short amount of time since that happened by the cooler weather in many parts of the country and.
And has been a nice uptick.
At least in.
The last part.
October going into November.
Okay. Thanks.
Hi, grabs here have been squeezed current mix.
Yes I.
I guess the way from workwear toward report has slowed categories.
How do you plan on our add on a go forward basis.
No do you pick those trends are.
Correct.
So on that on a go forward basis, and what we got I think the appropriate amount of inventory on what you described is a more fashionable pieces of the business the western side of the business.
And the world business can can grow very.
Very quickly.
Without.
Without requiring big new inventory commitments, we simply just replenish faster so.
We we sort of have a natural.
Ability to feed the.
Certainly the work boot business most of the work apparel business.
And just by spinning the inventory.
Slightly faster because we we just replenish it and.
Yes, the only business that we're going to we need to I guess two pieces of it that we need to look further out is part the ladies' apparel, particularly non denim.
And we have to make some decisions around exclusive brands with longer lead time commitment.
But even a good portion of that is basic in nature. So we'll.
We'll buy with the ability to fuel a growing business and if we fall slightly short of that growing business. We will do what we just did over the last nine months in.
Lead down the inventory slowly without having to.
Kind of feel it in the margin money.
Hi, good.
Thanks, a lot.
Good luck.
Thank you.
Our next question comes from Mitch Kummetz with.
Pivotal research. Please go ahead.
Hi, guys. Thanks for taking my questions.
Follow up on Rick's question about covert.
Corporate spikes in the upper Midwest of late I know you guys don't have a lot of stores up there.
Indiana.
Michigan, Wisconsin, but I'm just curious if you've seen any change in the pace of business traffic comp store comp and some of those markets as covered rates have gone up again.
Yes, Mitch it's Greg we haven't really seen a meaningful change in the trajectory of north regions business and Thats. The described so.
I haven't seen that.
Yes.
We hope not to see it but.
Were certainly prepared us at best.
I would add to that as quickly we.
Our our our core customer has an affinity to two.
Shop in the store.
And perhaps doesnt have quite as much concern and shopping in our store because where the stores are relatively largest not tons of customers in a small space and we're not typically in mall. So so they can kind of drive over.
Come in to a pretty socially distanced environment and continue to shop, so what white puts us more expenses when there's.
There's regulations say.
Curtail our ability to operate in some lines.
Got it.
And then.
Greg well.
Obviously October you're Comping October was pretty similar to September a little bit of an improvement.
As Greg mentioned, you did a 10 comp and auto.
It's over last year, so to your stock on October plus 12 could you remind us what September was last year or what's the to your stock on September sales.
So it was plus eight or nine plus eight okay got it. Okay. I was just wondering if there were some big big improvement sequentially on a two year stack it doesn't sound like it a little bit but not not usually many for their last last question just on the improving western trend that you're seeing.
Being.
As there are you know it is there are some macro behind that I mean is that is that you think how's that.
Particularly in kind of some of the over your western and southern market. This cover this dive down a little bit some of those.
Consumer confidence has gone up or maybe disposable incomes go up is there some underlying backer issue I wouldn't imagine that it's really a fashion thing for you guys, but I'm wondering if there's something else that you're seeing that is leading to the uptick in your western business.
I think from my.
Hypotheses standpoint, I think it's the word you used was confidence revenue consumer confidence there.
Our people are just more comfortable.
Shopping in this in this crazy environment that we have.
And many of the macro factors that would drive our business, particularly concerts in radios et cetera are still essentially all cancel data we haven't gotten any help there that's still a headwind I.
I just think people are are.
Either desensitized or a slightly more comfortable that if they do.
Take the appropriate cautions they'll.
Likely or hopefully be safe and therefore, they are out and about and buying more than just what they absolutely need to get work.
Got it okay. Thanks, guys.
Okay.
Next question, Jeremy Hamblin with Craig Hallum. Please go ahead.
Thanks, and I'll add my congratulations on the momentum.
I had two questions I wanted to ask about first is just in the change in getting back to your more normalized operating hours.
I think in most of your markets you're back to kind of night after night yeah.
And I think that mostly started in second half.
Berke can you just give me a sense of a.
The factors going and getting back to those more normalized towers.
As we look to this.
December quarter here.
In terms of thinking about your SGN, a expenses having reduced hours like.
Over the last.
Four or five months.
What does this imply in terms of best DNA.
December quarter should we assume that it's going to be up on a year over year basis in absolute dollar terms.
Or are there changes that you've made.
This year that.
Our permanent in nature.
Great question I'll take the second piece of that question.
So first it's Greg and Tom.
I think as we look at the SDMA in Q3, we're not providing guidance on the top line unless it's impossible to guide on SGN, a what I did say earlier in the call is we are playing a bit of awesome sight, we're going to invest in more marketing we're investing in the seasonal hires.
So we're doing some solace that that would suggest to you that that.
We're playing off once and if the sales don't Tom which.
I I believe we do believe that those sales will come but.
If they didn't come we're not going to be able to leverage our expenses as opposed to Q2 wells. We were still playing a bit of defense will reduce hours et cetera. So.
So I can't tell you how to model that other than to say that we're not trying to leverage the SG in a rate in Q3.
Got it and then the other question is just.
Justin in looking at some of the competition out there and I think you indicated that you feel better about your competitive positioning.
Forward.
Can you give us a sense of.
How kind of your your market.
We will continue to be quite fragmented, how your mom and pop.
Competition is performing if they've gotten a little bit more promotional.
And then related to this.
Are you seeing maybe.
Maybe some increased M&A opportunities some tuck in deals and when what would be the earlier.
Given the environment we're in today.
That are looking at opportunities.
Okay.
So on the first piece.
I think it's safe to say that the mom and the traditional mom and pop.
Retailer in our industry, which is the the majority of the industries that.
That group is our biggest competitor.
Has has unfortunately, if I'm honest struggled through this because they just didnt have.
Necessarily the capital structure of the wherewithal to continue to fight through it. So we have seen weakness we've had some inbound calls we've seen some guys got a business where the markets that we're in.
So.
That does present us with an opportunity of course competitively.
There is a in all fairness they hit counterbalance that accessories other channels that have strengthened.
Quick trip consolidation going to the farm and ranch channel selling a little bit more of our products. So it's when.
It may be they offset in the current environment I think going forward.
We will likely benefit because I think the mom and pop group.
We'll be.
Weekend or or.
Whittled that down a bit permanently.
And I think our customer will come back to get a broader assortment of the product that we sell rather then consolidate their trips elsewhere.
Where they just can get sort of the most basic stuff.
From an M&A standpoint.
I think there will be some opportunities.
That said there there.
There isn't really any meaning full.
Chains last other than one big one in Texas that is unlikely to be an acquisition candidate.
So that gets us to use the word tuck ins to the guidance of one store maybe two stores.
And we'll we'll look at them just as we hope as we decide to enter a market as they build versus buy and is there some advantage in and moving more quickly by buying one of those guys and getting their customer base et cetera, or should we just opened a store.
Today.
Fits our model better and frankly, it's a bit easier to open a brand new store and so I don't think that going to.
The massive.
Impact on our store count or the economics or whatever we if I were modeling then I'll just model that has a new store.
Got it alright, good luck guys. Thanks for taking the question.
HM.
Next question comes from top metric with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking my question.
So I wanted to follow up on.
The questions earlier about E commerce sales.
I know it's pretty.
Pretty impressive.
Improvements in profitability in the channel and I know its a.
A few quarters now that you've sort of had the.
Trading sales for our profitability.
Situation with Yelp with Sheplers and.
You kind of feel like.
Or how far along are you in sort of rebasing of the.
The sheplers business sort of retraining that customer to not look for promos et cetera like I.
At what point does that.
Web site become a grower.
Grower again.
Compared to the topline.
We need the changes between call. It April and July so that the aesthetic changed around April and then pricing change over a series of weak in July. So you once we wrap those too.
Im frames will be back we'll have a more normalized L y comparisons so.
I guess if I'm just.
Through that it's probably July of next year, where we get that where we have a comparison that we should be able to grow from.
So I don't know if that helps.
Yeah, that's that's helpful.
And Keith can you just kind of like remind us like what sort.
Sort of the core differences are between both the boot barn customer the sheplers customer that the country outfit or customer.
Sure.
Well the boot barn customer is a sort of.
Slightly younger than the Sheplers customer, it's more balanced between male and female their sheplers customer is a.
A little bit older and a little bit more male and.
Just given the way that brand is growing up.
More heavily focused on denim.
Dan do barn so.
Barn, when they first launched the boot barn Cytori boots. Only then apparel was added and end just given that legacy Groupon dot com business use more heavily kids boots than.
The Sheplers business guidance.
Country Outfitters continues you're very nice job going after a sort of more fashionable.
Female younger customer.
Bye.
In all candor is just much smaller than the other two big brands.
Got it Thats helpful. Thanks, guys and the vessel at this holiday season.
Okay. Thanks, Tom.
Next question comes from Sam Poser with tough to quantify please go ahead.
Well. Thank you for taking my question and.
The time, I will say great job on the inventory.
I have a question of does that sort of create a new base for the second quarter and they now use somebody else asked you know do you have enough, but I guess the question is is this a good new base to work from and then increasing your annual turn over the long term.
Yes, Craig.
Sales in answering one of the questions I commented that we had targeted not quite a 14% reduction. So I would tell you it's not the new baseline we have.
Expected to have more inventory than we had.
We've been managing inventory closely and trying to control receipts and normal supply chain got.
Started to be avenues, and disruptive we started to write some orders to bring in more of the replenishment product that carries no markdown risk, which I think we've proven we don't incur.
So we tried to bring in more inventory in Q4.
Express some delays so I would say, it's not the new base our slot last years level, but it's not the new base this year.
Well I have a few more questions, but just follow up on that what was the target.
Yes.
Yes, we're not going to disclose that form.
Okay on the just country.
A new initiative.
What brands.
If we go to your website should we be looking for that's part of that.
Sure well I'll give you one of the examples we talked about earlier was weve added.
A nice selection of hiking boots too.
The stores and as many of them are pharma online as well, but brands like merrell or Keane hiking boots.
And then.
On the.
On the apparel side, just a number of different brands that might be a little bit less western in nature.
We're certainly focusing.
Pretty intently on.
On the food side.
And there are also.
Leases, where we have a traditional western brand that has a broader assortment that we just bought more deeply into their assortment.
Thank you and then.
Two more holiday E com versus.
Versus the stores you know given to covert it everything do foresee that there could be some capacity, even though your stores are big and they're off mall could you see capacity constrained and leading to more giftgiving via E Commerce, and having the third quarter E Commerce sales.
Tick up from.
The growth rate from Q2 to Q3, despite the fact that you have all your stores open now.
So we.
We can.
Almost guarantee that.
Q3 E com as are the same.
Will be the highest of the of the quarters for US. It is every year and what you are asking I think is it can be even more outsized than typical.
And it's very it's very hard to say and certainly if there is if there is another major problem with Colgate in a surge in a shutdown it will spike right back up become a spec rate backup just like it did in the first quarter.
But if it's business as usual it will be maybe a little bit more than it was last year, we'll see some business is growing pretty nicely, but when.
When you throw a fee income.
Any kind of store comp in there even if it's flat and you have.
New stores coming into the mix and it tempers the shift for us.
Maybe more so than a lot of other places.
In terms of.
Store capacity, if you're asking about storage capacity or E commerce capacity to take care of customers. No I was really talking about stores I mean like for instance, you're still probably having to keep social distancing requirements in the stores and so on so when you get into your highest traffic time of year.
That also could have more people move over to E commerce more so than let's say in the second quarter. When you are not seeing the traffic in stores that you normally would see during holiday yeah.
Yes, and I think that's true and it's.
It's true in.
A handful of days, it's a concern inherent handful rated black Friday or.
Saturday before Christmas.
Adam.
Even when we get busier during holiday just the way the model works is you.
You'd you'd see.
15 customers 20 customers in the store, you're not going to see two hunger customers in the store. It's just not it's just not sort of the way our our our store model works.
But you're right to call it out and it's it's the reason we have been.
So intent on saying look we can deliver to your house. We you can pick it up in store, we can pick it up at the curve and I fully recognize we're not the only retailer doing that but we are really trying to give them every opportunity to shop with us in whatever manner. They feel best doing so.
Thanks, and then lastly, you talked to the E comm business due to shipping a lot of shipping rate and the mix.
Your margins are far less than the stores, but have you considered.
You know trying to.
You know entice people with a small promotion to build the basket size of that something that could ship along for free I mean for instance, like a face mask or some aged goods that they say, okay. We'll give you 20 off but it increased the ticket enough.
And you don't pay the.
This.
It does not as much weight to the box. So you actually get your shipping costs as a rate goes down have you have you thought of ways to do that to sort of try to increase the average ticket even though it is already higher than the stores, but to try to push it higher maybe through a little bit of promotion, but that was more than offset by the freight savings.
Good.
Or more merchandise as well yes.
Sam its Greg and our head of ecommerce gentlemen, long John Hanson has been bringing our ecommerce for 15 years and he's a big test and learn guy and so he's been doing that kind of testing to.
We'll see if that moves the needle. It also you can be sure that we're looking for opportunities to respond.
Thank you very much and.
I have a successful holiday sales.
Thanks, Tony.
I would like to turn the floor over to Jim Collins for closing comments.
Very good thank everyone for joining the call today, we look forward to speaking with you on our third quarter third quarter earnings call take care.
This concludes today's teleconference. You may disconnect your lines at this time I would say.
Thank you for your participation.
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