Q2 2022 Boot Barn Holdings Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Boot Barn Holdings, Inc. Second quarter 2022 earnings call. As a reminder, this call is being recorded I would now like to turn the conference over to your host Mr. Jim Watkins Senior Vice President of Finance and Investor Relations. Mr. Watkins. Please go ahead.
Thank you.
Good afternoon, everyone. Thank you for joining us today to discuss boot barns second quarter fiscal 2022 earnings results.
With me on today's call are Jim Conroy, President and Chief Executive Officer, and Greg Hackman, Chief operating Officer, and Chief Financial Officer.
Copy of today's press release is available on the Investor Relations section of Dupont's website and keep on Dot com.
Certainly after we end this call a recording of the 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 coupons judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting <unk> business.
Accordingly, you should not place undue reliance on these forward looking statements.
For a more thorough discussion of the risks and uncertainties associated with the 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 second quarter fiscal 2022 earnings release as well as our filings with the SEC referenced in that disclaimer.
We do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.
I'll now turn the call over to Jim Conroy Boot barns, President and Chief Executive Officer, Jim.
Thank you Jim and good afternoon. Thank you everyone for joining us.
On today's call I'll review, our second quarter fiscal 'twenty two results how.
Each of our key strategic initiatives and provide an update on current business.
Following my remarks, Greg will review, our financial performance in more detail and then we will open the call up for questions.
Consistent with our last earnings call and given the impact Covid had on our performance in fiscal 'twenty. One we believe that a comparison of our second quarter results to the same period two years ago provides the most helpful view into our performance.
Our business remains extremely strong during the second quarter, we saw broad based growth online and in stores.
Total sales growth on a two year basis was 67% with retail stores up 69% and ecommerce up 57%.
I think it is important to begin with some additional color into the underlying strength of the business.
First a significant portion of the sales increase can be attributed to the addition of new customers added to the boot barn brand with only a small portion of the increase attributable to increased retail prices.
Second we've achieved this growth while dealing with a challenging supply chain, where some of our vendors are not shifting us in full.
Third the growth is extremely broad based with nearly every department in the company experiencing strong double digit growth.
And finally, the consistency of the business has been remarkable with 32 consecutive weeks of more than 55% growth in sales on a two year basis with.
With every one of the 13 weeks in Q2, 60% or better.
I must express my appreciation to the entire organization across each functional area and every store team that is contributing to this tremendous sales growth the.
The entire team continues to demonstrate an ability to execute successfully during this exponential surge in the business.
In combination with strong topline performance merchandise margin during the quarter was very healthy increasing 320 basis points over the same period two years ago, driven primarily by better full price selling and growth in exclusive brand penetration.
This increase in margin is even more notable as it includes some modest margin deterioration from freight expense.
The strength in sales both in stores and online helped drive earnings of $1 25 per diluted share compared to 26 cents in the same period two years ago.
When adjusting for the tax benefit in both years, we grew our earnings per diluted share more than 400% to $1 22 compared to 24 cents in the same period two years ago.
While this year is somewhat of a unique period of growth. It is worth noting that we continue to outperform our 20% annual earnings algorithm. When you look at the past several years of E. P. S.
Digging deeper into the drivers of our performance I would now like to provide an update on each of our four initiatives beginning with driving same store sales growth.
During the second quarter, we saw consistently strong sales growth across our storage business continuing the momentum that began building in the fourth quarter last year and accelerated during the first quarter.
Total sales in our retail stores during the second quarter grew 69% when compared to the same period two years ago.
Geographically, we again saw broad based double digit growth across every district and region. All regions were extremely strong with the two year same store sales growth in the west outperforming the rest of the chain.
Texas, while still growing by double digits was below the chain average.
From a merchandize perspective on a two year basis, we saw broad based double digit growth across almost all major merchandise categories. We saw particular.
<unk> strength in the growth of ladies western boots and apparel.
To expand on this point slightly we do believe we are experiencing and perhaps we have helped create a western fashion trend that is adding to the growth of the business.
That said if you exclude the ladies' Western business from total company sales the balance of the business, which has very little fashion influence would still have grown by approximately 60%.
The men's western business was also very strong with outsized growth in boots apparel and hatch.
Work boots, and non F. Our work apparel grew strong double digits, albeit less than the chain average.
Once again flame resistant work apparel remained the only category that declined when compared to the same period two years ago.
Well as far as a small percentage of our business. It is indicative that sales in the oil markets have not yet returned to the levels. They were at two years ago.
From a marketing perspective, I'm very pleased with the work. The team continues to produce they have successfully elevated the aesthetic of boot barn and greatly expanded the brand's reach their ability to develop and communicate world class branding to each customer segment that ties back to an annual overarching campaign has.
Proven to attract new shoppers, both in store and online.
There appears to be a growing presence of western inspired fashion and more mainstream channels I would attribute a portion of background swell to the work that the boot barn marketing team has been doing to redefine our brand over the past few years and communicate that message to a broader audience.
From an operational perspective, our store associates and field leadership team have been working extremely hard to meet the needs of our customers. The team continues to rise to meet every challenge, including the surge in sales a significant flow of inventory.
Spanned it omnichannel requirements a difficult hiring environment.
And of course, the ongoing issues associated with the pandemic.
They had us off to the sales associates and store leadership teams that are on the front lines, taking care of customers and representing the boot barn brand so professionally everyday.
Moving to our second initiative strengthening our Omnichannel leadership.
E Commerce sales in the second quarter grew 57% compared with the same period two years ago.
While we are extremely pleased with the top line growth and sales we are even more encouraged by the outsized growth in earnings we had seen in the ecommerce channel.
We believe that many omnichannel initiatives, we have put in place over the last few years have contributed significantly to the profitability improvement in our online business.
We've improved merchandize margin by becoming less promotional particularly on chapter shufflers and by continuing to increase the penetration of exclusive brands online.
We've also managed to limit outbound freight expense in a very difficult shipping environment by leveraging our store network across the country.
And finally, the team continues to become more efficient with our marketing and pay per click spend.
The combination of these changes has improved the profit contribution of this channel meaningfully over the last few years.
While COVID-19 served as a catalyst for us to further develop our omnichannel ability. We recently had been focusing more specifically on our capability to fulfill online orders from our store inventory.
This new offering has resulted in a multitude of benefits, including faster and less expensive order fulfillment.
An increase of exclusive brand penetration online and the ability to sell through the relatively small amount of clearance merchandise that we carry at a higher markup.
This was a project that required careful coordination across merchandising store operations and e-commerce with tremendous facilitation by our technology group and once again demonstrates the team's ability to execute successfully and to outpace our competition.
Now to our third strategic initiative exclusive brands are since a brand from performance continued its momentum from the first quarter with growth of 750 basis points compared to the same period two years ago amounting to 28.8% of met sales in the second quarter.
Our portfolio of exclusive brands for sure and consistent performance over time, and we're very pleased with the ongoing customer receptivity we are seeing.
We have seen significant growth in every one of our major exclusive brands with three of them now being included in our top five brands.
Not only has the product development team been able to continue to produce highly desirable merchandise, but the team has done a great job in bulk fulfilling the increased product need and controlling inflationary pressures.
The team's execution on these two points has enabled us to continue to grow our penetration of exclusive brands with only modest increases in retail prices to cover additional freight costs.
Finally, our fourth initiative expanding our store base during the second quarter, we opened three new stores and closed one bringing our total store count to 278 stores across 36 states.
We continue to believe we can expand our footprint across the U S and have been extremely happy with recent new store performance.
These stores, both in new and existing markets have been performing above our expectation and are on track to payback well ahead of our targeted three year period.
Our pipeline for new store openings is very strong and we expect to open a total of 27 stores in the current fiscal year.
Including the 11 stores in the third quarter and 10 in the fourth quarter.
We are particularly excited to continue to expand the geographic reach of the brand with approximately half of the upcoming new store openings in new markets.
Further looking at the strength of the future pipeline. We believe we are well positioned to grow new units by at least 10% annually going forward.
Okay.
Yeah.
Now I would like to touch on our readiness for the upcoming holiday period, while we are facing a multitude of challenges I feel that the company is well positioned for the upcoming seasonal build in sales.
From a supply chain perspective, we are encouraged that our merchants have been able to increase our inventories at 34% compared to last year or 9% on a comparable store basis, and I would like to thank them for their relentless effort in securing merchandize.
Their accomplishment is particularly remarkable given the more than 60% sales growth during the past seven months.
For context, when business began to strengthen last summer we commenced placing purchase orders to ensure that we would be in stock with the necessary products to meet customer demand.
This early and aggressive action has allowed us to stay in stock during this period of record sales growth.
This coupled with some terrific operational execution in our distribution center has us well positioned from an inventory standpoint, as we head into the holiday shopping season.
The other area of intense focus has been securing seasonal hiring for our stores and distribution centers.
While the labor market has been extremely tight I am pleased to share that we have made considerable early progress in building our holiday staffing.
At this point, we have fulfilled approximately 80% of our total store staffing needs for the holidays, which is an improvement versus our preparation last year at this time in the season.
Turning to current business.
Our third quarter is off to a strong start with total consolidated sales growth on a two year basis through the first four weeks of our third quarter, increasing 67% with a continuation of strong expansion in merchandise margin. Once again, the sales growth has been extremely consistent and broad based across both merchandise categories and <unk>.
Please.
Finally, as we have announced in our press release, we have promoted Jim Watkins to Chief Financial Officer effective Monday November one.
We brought Jim to boot barn to assist with our IPO more than seven years ago and his role has since expanded to include Investor relations and external reporting.
He will now add accounting and financial planning to his responsibilities.
This new structure has been contemplated for some time as part of our organizational succession planning.
Jim will continue to work closely with Greg to ensure an orderly transition of the finance function.
I look forward to working even more closely with Jim as he steps into this new leadership role.
Greg will continue as executive Vice President and Chief operating Officer.
Greg will continue to be my partner in roaming overall company and this change will enable him to spend more time on the sales support functions to help ensure we can continue to scale the business to a multibillion dollar national retailer.
I would like to recognize both Jim and Greg for their ongoing partnership and look forward to continuing to work with them as we grow the boot barn brand and geographic footprint.
I'd like to now turn the call over to Greg.
Thank you Jim good afternoon, everyone compared with two year ago period, net sales increased 67% to $313 million driven by a consolidated same store sales increase of 54%.
Retail store same store sales were up 53% and E. Commerce same store sales were up 57% forces two years ago.
The increase in net sales was primarily a result of the increase in same store sales and the incremental sales from new stores opened over the past 24 months.
Gross profit increased 99% to $118 million or 37, 8% of sales compared to gross profit of $51 million or 31, 7% of sales in the two year ago period.
The 610 basis point increase in gross profit rate resulted from a 320 basis point increase in merchandise margin rate and 290 basis points of leverage in buying and occupancy.
Our merchandize margin rate increase was primarily a result of better full price selling and growth in exclusive brand penetration.
Operating expense for the quarter was $68 million or 21, 8% of sales compared to $46 $4 million or 24, 8% of sales in the two year ago period.
Operating expense increased primarily as a result of higher store payroll and overhead in addition to an increase in incentive based compensation.
Operator.
Operating expense as a percentage of sales decreased by 300 basis points, primarily as a result of expense leverage on higher sales.
Income from operations was $50 million or 16% of sales in the quarter compared to $13 million or six 9% of sales in the two year ago period.
Net income was $37 $9 million or $1 25 per diluted share compared to seven $7 million or 26 cents per diluted share in the two year ago period.
Excluding the three cent tax benefit in the current year and two cent tax benefit in the two year ago period net income per diluted share in the current year was $1 22, compared with 24 cents and the two year ago period.
Our second quarter typically looks like the first quarter in terms of sales volume in Q2, we increased store staffing as we saw the consistency of the business and invested in additional marketing to match. The sales calls we were.
Very pleased to see the sales growth from the first quarter. We believe sales were helped by the increase in labor hours to help provide better customer service, while increases in marketing help drive traffic.
We also saw increases in freight expense, but were able to offset them with extremely strong product margins.
Turning to the balance sheet.
On a consolidated basis inventory increased 34% over the prior year period to $350 million.
This increase was primarily driven by inventory held at both our Fontana in Wichita distribution centers in.
A 9% increase in same store inventory.
And inventory for new stores added in the past 12 months as a reminder, our inventory turns approximately twice a year.
The vast majority of our inventories on a replenishment model and is not subject to a high high level of fashion risk.
Approximately half of what we sell is manufactured in China.
25% in Mexico, 10% in the U S and 5% from Vietnam.
As of September 25, 2021, we had a total of $50 million of debt outstanding on our term loan with zero drawn on our $180 million line of credit.
During the second quarter, we expanded our revolving line of credit from 165 million to $180 million, we have $39 $5 million of cash on hand at the end of the quarter.
While our sales growth has been very consistent for the past seven months, we will not be providing guidance for the third quarter.
The holiday period is typically the most difficult to guide given the modest shift to e-commerce, and the gift, giving nature of the business.
That said, we remain optimistic about the business and we reiterate our previously provided select full year of fiscal 2022 guidance, which includes growing units at 10% and increasing exclusive brand penetration 350 basis points when compared to the prior year.
We now expect capital expenditures to be in the range of $36 million to $39 million and our effective tax rate for the year to be 25, 4%.
Finally, I would also like to congratulate Jim Watkins on his promotion to CFO.
I've had the pleasure of working closely with Jim for the past seven years and he has been a tremendous asset within the finance organization.
As Jim noted I will be focusing more of my time on my responsibilities as CFO and I look forward to working closely with Jim to ensure an orderly transition of the finance function.
Now I'd like to turn the call back to Jim for some closing remarks.
Thanks, Greg.
We're pleased with the ongoing strength, we've seen in the business through the first half of our fiscal year <unk>.
Our long standing strategies, we have in place continue to drive sales give us a competitive advantage and have enabled us to both broaden and strengthen our customer base.
This has been a year of tremendous execution by the team and the results are bearing that out and look forward to continuing the momentum through the back half of the year.
Now I would like to open the call to take your questions.
Molly.
Sure and at this time, we 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 queue.
You May press star two if you'd like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before Christmas turkeys.
One moment, please while we poll for questions.
And our first question is from Matthew boss with J P. Morgan. Please proceed with your question.
Great Thanks, and congrats on another exceptional quarter.
Thanks, Matt and stuff.
So Jim with <unk> to date, holding the high Sixty's trend relative to two years ago.
Stimulus largely behind us reopening of events still on the horizon.
What do you attribute the consistent strength of the business.
This expansion of the total addressable market and the larger basket or increased purchase frequency I guess the question is and maybe is it all of the above and how best do you attribute this continued outsized strength that you're seeing.
Yeah.
Sure Great question, we always want to acknowledge that.
There are some external factor at play.
Our business has been exceptionally strong but in fairness other retailers are posting.
Pretty good growth as well I think we our outsized growth and I think the incremental piece of our growth is mostly the increase in customer count.
I think we're executing across the board on a number of things.
Our conversion in the stores is good our basket is up a bit.
But the vast majority of the 67% growth versus two years ago as a result of increased customer count.
And I think the good news is it really does appear that this is a.
Step function change up.
If you go back two earnings calls we thought maybe it was the March stimulus to your point that's in the rearview mirror now.
In our first quarter call without maybe it was Jeff.
Adjusted result of pent up demand.
It candidly now after 32 consecutive week of this business, it's hard to say that it's transitory.
And the growth has been so broad based that it's just it's kind of exhilarating to be honest.
So as we look forward I think we're extremely well positioned for the holiday.
I think we'll be well positioned as we turn the calendar into our fourth quarter, we will cycle, a very strong January and a very strong end of March.
But by and large the rest of the the rest of the time period that we're up against for the balance of the five months of the year.
It's slightly positive numbers other than those two searches.
And maybe a follow up on the bottom line.
Is there a best way to think about a sustainable margin for this business over time or.
I believe you've cited low to mid teens operating margin as a potential target in the past. So maybe another way to ask it is other than maybe the fixed cost outsized leverage that you've seen tied to the top line is there any margin gains that you believe you need to give back or anything that's more transitory on that front that you would cite.
Matt It's Greg the only things I would point to would be we continue to want to invest in store labor to make sure. We're servicing the customer properly we did a nice job we increased our.
I'll say it differently, if I think about Q1, where we had 17.5% EBIT breakeven and Q2 is a 16% EBIT rate the rate came down 150 basis points 90 of that basis points was in the stores organization between payroll and variable costs et cetera.
And we spent a little bit more on marketing, but just coming back to your answer. Your question I do think that that that low to mid teens is a reasonable place for us to land again, ending this quarter at 16 and investing some in and some SG&A places again labor maybe.
Marketing.
We should be able to do that and and we've got a freight headwind right now that we view as transitory, but its real in Q1 freight was 40% or 40 bps higher than the two year ago period. In Q2 was 90 basis points higher so that will come back to us at some point.
That's great color, Congrats again and best of luck guys.
Thank you I've met.
And our next question is from Stephens column with Citigroup. Please proceed with your question.
Great. Thanks for taking my question and congrats to Greg and Jim on the on the appointments well deserved.
I wanted to focus a little bit more on the new customer strength, you've seen I guess, Jim could you expand if there's a specific area of the business you've seen that customer come to I guess like when you look at them wherever they are shopping before and you know now that you've seen this growth in the customer count like how are you focused on retaining these customers.
Sure very good question I would go all the way back to.
April 2020.
The first.
Decision met we took was to stay open and be there for our customer as an essential retailer.
And we were able to do that because we carry a fair amount of work boots and flame resistant work apparel for the oil industry et cetera.
And.
That decision enabled us to not only take care of our current customers.
Keep the stores teams in place.
Store managers et cetera.
But candidly most of our competition.
His mom and pop western only retailers.
So those guys for the most part closed down during the beginning of the pandemic and we were able to take care of met all of our customers, but certainly picked up share from those players as competitors.
I'd say the second thing is <unk>.
We have continually for the last three or four years.
Expressed our desire to expand the brand reach.
And it could be as simple as looking at some of our marketing materials from five years ago versus today.
Five years ago, we were.
Squarely focused on a.
Rancher western customer.
And.
Each successive year, we've expanded the aperture a bit to be more inclusive.
The adjust country initiative was part of that.
And that came at a perfect time when.
Customers from all sorts of retail channels.
And some mainstream retailers.
We're looking to drive more casually and we had what we would call casual western product, but hit a pretty broad swath of the U S population.
I'd say the next piece of it is we really aggressively secured product. We went from playing defense to playing offense almost overnight in August of 2020.
And.
Long term purchase orders secured our exclusive brands et cetera, and that just enabled us to take care of.
Kind of any customer that walk through the store so.
Circling back to the specific of your question I think we've taken share from the industry. I think we've added customers that are more casual western customers.
I think we probably get into some mainstream retailers because we were available and present from a marketing standpoint and had product on the shelves and then finally and I do want to ensure that everybody recognizes this is a small piece, we're seeing a bit of a fashion trend in.
Ladies western boots, and ladies western apparel.
We called that out a couple of quarters ago as a whisper and now it's turning into more of a war.
But it's you know I think you couple all of those things together.
Most of the things I've. Just described we would contend are here to stay and we don't we don't really expect to be for fitting those customers back to the retailers, where they had shocked previously.
Great. That's very helpful. Then just shifting to merchandise margin on a two year basis. The second quarter was stronger than what you saw in the first quarter. So I guess I'm just how should we think about the back half of the year from merchandise margin perspective. Thanks.
Steve a question it's Greg.
Did see a little bit of expansion in merchandise margin to your point it was about 100 basis points higher than Q1.
<unk>.
I'd say, a small piece of that was we put some price changes into effect in Q1, those price changes quote held and they helped the business in the merchandise margin rate.
And we've got a bigger benefit of that in Q2.
<unk>.
So how do you think about it for the back half I mean, we continue to try to be less promotional and certainly in today's environment, where people are struggling to get product. We don't see any reason to meaningfully discount.
Even in the holiday period, where we're fighting for share of wallet we're gonna.
Be less promotional than we were in the prior year.
So you know I would expect us to continue to make inroads on.
Expanding merchandise margin the caveat here is freight expense right. We just.
That's a headwind for everybody frankly, I'm happy to have the headwind because it means we're getting the merchandise.
But we saw a 50 basis point increase from Q1 to Q2 and and I don't know if that grows by another 50 points in Q3 or not I don't have a lot of visibility into that but.
That'll be the one thing that will hurt markup or margin rate a little bit so not trying to be too vague you know, we're not giving specific guidance, but I do feel good about the growth from Q1 to Q2 and will continue us again, Ted to be paring back on promotions.
Great. Thanks for the detail best of luck over holiday guys.
Alright, thank you.
And our next question is from Max.
Clinical with Cowen and company. Please proceed with your question.
Great. Thanks, a lot and congrats on a nice quarter and congrats to Jim on the promotion. So the first question is on the exclusive brand side curious if the way that the last several quarters have played out as the impact of your long term outlook for the opportunity.
It makes sense to accelerate growth.
And then your ability to control the supply chain and also the really nice customer receptivity.
Great question, Max I think it probably has just accelerated our growth and emboldened us a little bit.
We still believe that we will continue to be a house of brands, we have tremendously strong relationships with our vendor partners.
And yeah, our exclusive brands will continue to grow I'm sure, but we don't envision a world where exclusive brands become 75% of our of our business and we still want to offer the customer an assortment of brands, both ours and third party brands.
But one of the things that that happened and it was a good market test and that one we intended to do but some of the brands had difficulty securing product we're shipping product.
And some of them also we're passing through.
<unk> expenses are freight charges that were.
More than what our exclusive brands was experiencing so.
When you take those two factors less availability of the national brands and a relatively higher price point, given the fact that they're passing along the freight expense to us.
And you couple that with our exclusive brands group they were able to secure the product.
And frankly did a better job of managing the freight expense. It made our exclusive brands more available and perhaps more price competitive and to your point the customer receptivity has been extremely extremely strong.
So I don't think we intend to grow it grow a part of our business by more than our kind of typical three points a year.
Once we get to a normalized.
Playing field, but it certainly has.
Kind of accelerated a couple of years into one based on the dynamic the dynamics I just described.
Got it that's very helpful and can you just discuss the competitive landscape just anecdotally our European to able to work through some of their own supply chain issues or are they are having a lot of difficulties are putting products on the shelves and is this like some easy wins as your competitors probably aren't feeling.
Yet more than you guys are and then just as a follow up does this just simple then you'll have a little bit more ahead of holiday or how do you think god that that could play out.
Thank you and best regards.
Sure. So the first question.
On competitors.
If you if you accept the fact that our single biggest competitor.
As a mom and pop typically with one location.
Presumably they have zero exclusive brands. So they are completely at the mercy of.
National brands and the National brands that they are they are working hard also to manage their business and to grow their business, but some of them got caught up in Vietnam more than we did some of them had distribution center supply chain bottlenecks et cetera.
So if you walk into a mom and pop western retail store across the country.
They're not going to be any better than you know kind of our worst national brands, where if you walk into a boot barn store the holes that may have otherwise been there been filled by our own brands. So it certainly plays out that we will take it.
Candidly another step forward versus.
The overall western industry.
We do have one regional chain in our business that you know well I know called calendars.
They have some exclusive brands not nearly to the levels that we have.
They probably got a little bit more priority from the national vendors, but we probably also took a step forward versus them.
And once again I said it consistently they are a very good company and very good operators, so I wouldn't count them out.
On the <unk>.
Looking forward from a holiday standpoint.
Theres certainly a bullish thesis here and not signaling that the visits are going to get better than 67%. I mean, we would love to have any kind of really strong double digit growth for the balance of this quarter.
But.
The thing that really has emboldened us ethane carrier a few things one our competitive positioning against the mom and Pops. The point you've made the second is and this keen recently right. This.
Pig in the Python of inventory starting to arrive in the stores on the last call. We were flat on a comp store basis.
This call, we're saying a plus nine and in total we're plus 34 from an inventory perspective.
And when you're trying to feed a sales trend that is plus 67.
To some degree air quotes finally, we have the product to support the outsized growth.
I would.
Just wrap up with the last piece, which is the combination of our HR function in recruiting function alongside our store operations and field function.
They have done a masterful job of staffing our stores and we feel.
Very good.
And frankly relative to what we are hearing within the industry and outside it with other retailers I think we feel extremely good about our position in terms of staffing up for the holiday period.
One unique advantage that we have is our business is so strong now that we're giving a lot of hours already right. So we may pay market or candidly slightly below market in some places, but we can get the people that are looking for work a fair amount of hours much earlier than the retailers.
I don't see a surge now for three or four more weeks.
So again, there is definitely a a.
A positive sentiment in a bullish thesis that could play out.
That said, we are four weeks and two days into a very long.
High volume quarter, and there's like you know a lot of business left to be had.
Got it that's very helpful. Congrats guys.
And tax.
And our next question is from Jimmy.
The Institute with Jefferies. Please proceed with your question.
Hi, everyone and congrats on all the momentum and I wanted to dig into the comments on unlimited outbound freight.
Style network can you talk about what penetration.
Currently and then maybe I'm wondering what kind of attachment rates, you're seeing if you can quantify that when someone comes in to pick up in auto do you think that that's also contributing to that conversion. Thank you.
Sure.
I just need to expand the question slightly when we talk about fulfilling orders from our stores focus is a piece of it.
But we're also shipping product from our stores cute directly to the customer they are acting as a mini.
E Commerce fulfillment center and candidly that second piece is much bigger than bolt base. So focus is low single digits in store fulfillment are shipping from the store is 20 plus percent of the.
Outbound E Commerce orders.
At least that don't have to come from our fulfillment center.
So it's it is considerable.
It gives us the ability to.
A few things that happened right we can.
We've seen an immediate uptick in our exclusive brand penetration online because we have.
More ample inventory of exclusive brands in the stores. We're also able to work through some of our clearance product. We don't have a lot of it but we can use this to work through some of our clearance product.
And we were pretty excited about what the future might hold for this of.
Do we bring.
Broader and more exciting higher price point product into the stores that otherwise might not turn fast enough to make the cut.
If we can put it on the shelf and if it turns to slowly use our ecommerce channel to work through it. So that there is some really strategic benefits of <unk>.
Doing this and doing it so well.
You also asked a question around the attachment rate.
This might be too much information, but we've we see a cash we're in two different things I always see attachment rate on focus.
We also have customers that come in to the store to byproduct that was shipped to the store from our D. C on their online order and in both cases, we're seeing a healthy attachment rate maybe one in four one in five customers are are picking up another I'd.
The exciting thing about that is.
We are.
While while I love both of our channels equally we're exposing a lot of our e-commerce and digital customers to the store and we just always feel better when they are in the store. We're more competitive we can take we can give them world class customer service.
That customer tends to be more loyal.
So we like the fact that we can get.
Our digital customers, who are experienced sort of both channels.
So I think I've covered both of your questions, maybe and perhaps at a very long winded way no. That's great and then I just want to clarify on me and the inbound freight I think you said 90 basis points in Q2 versus two years ago was that purely related to the exclusive brands and have you observed any of the incremental freight from your third party brands.
I would characterize it is it's largely exclusive brands, there's probably some element of container purchases and other things, while we see we absorb that inbound freight typically though inbound freight where the merchandise goes to the vendors distribute.
<unk> centre in the U S and then it shifts to our store that tends to wind up in cost of goods as opposed to freight, but we do make some container buys where we we take on that freight expense and have some inbound impact.
Great. Thanks, so much and best of luck.
Thanks Janeen Thanksgiving.
And our next question is from Jonathan Komp with Baird. Please proceed with your question.
Yes. Thank you can I can I ask more of a near term question, but trying to get away from some of the comparisons year over year, but when I look at the third quarter typically sales have been.
50% or more higher than the second quarter and you've typically had a peak operating margin significantly so.
Any factors to call out that would make us think differently.
On a sequential or a seasonal basis here.
John.
And as I think about the business in Q3, we're very pleased with how October.
It's a lot like Q2 for example.
I don't see really any reason that November woods would be much different than that the trick to me is.
What happens in in December gift, giving shifting e-commerce all of those things, but directionally from my perspective, there is.
Wouldn't think of it much different other than.
That's a really big month December to grow 67%.
So Jim I don't know if you've got other thoughts, but I agree with that and then the operating margin piece.
Yeah, No operating margin will be should be better of course, given even a higher sales volume.
Yeah, that's really helpful. And then maybe a big picture when you think into fiscal 'twenty three.
Are you planning the business to give back you know earnings or EPS or how should we think about.
Holding onto what Youre gaining this here.
John.
We're not guiding Q3 I can't.
No I can't guide next year, but but I think Jim touched on it in his prepared remarks that we're extremely happy that for seven straight months, our business has been incredibly consistent so and then he talked about the fact that if you strip out fashion, we dropped eight points or something from a plus 68 to a plus 60 right. So there.
There may be a little bit of macro tailwind that we lose I would also say there are some things that probably are in our favor like where do those in concert. So I don't you know I'm Gonna I should probably turn this over to Jim Watkins, but I won't do that for him on his first call.
<unk>.
I don't think we would plan or expect to see any significant.
Step back on the business, we will obviously learned a lot more as Jim said in January and March as we go up against the stimulus and candidly rack those numbers.
Yeah excellent and one more just quick one on the exclusive brands it looks like to us.
There are set to maybe.
Developer launch a bunch of new brands is there anything youre willing to talk about there.
Sure happy to provide a little bit of color.
I think two different things have happened one we.
We have more explicitly overlaid some new brands back to our customer segmentation. So we have a couple of brands that will come out that are going.
For more of this casual western or were calling.
Country customer.
That's the bigger change that the second change is we have.
Refined some of the tried and true brands Cody James and Cheyenne.
And we've we've.
Created.
Another.
Sort of Western Ranch, where brand and it will be difficult to walk everybody through telefonica, what they look like the next time, we're together.
With the the benefit of visuals, we can kind of shine.
Shine some light on this.
It's it's exciting what we've got you know some some new players Mac are inclusive brands, hopefully taking us to even a whole another level and that group continues to deliver and the expansion of the brand portfolio I think it should.
At a minimum maintain our growth and certainly all the way back to an earlier question they might accelerated a little bit from our typical three points a year.
And are those let's call it <unk> to your fiscal 'twenty three initiatives.
Yeah.
I'd say fiscal 'twenty three in fairness some of that product will hit the store before the end of this fiscal year, but it's not going to be a meaningful amount of business until we get into sort of Q1 of fiscal 'twenty three.
Okay, great. Thanks again.
Thank you appreciate it Jim.
And our next question is from Sam Poser with Williams trading. Please proceed with your question.
Thanks, guys.
Taking my question and Jim Congratulations on the new gig.
I just have a list so I'm just going to go through it then we can deal with them what are the top five brands what percent of your product is coming.
It's coming from the.
Not from Asia more from the Americas.
<unk>.
What is your loyalty member percent and how is that growing.
Sheckler is now a tailwind.
And.
What percent of digital sales are the stores involved.
You were you were right and signaling that you have a list Sam.
And so let me see if I can tick through these.
Top five brand.
We do disclose this in the 10-K.
Internally our top.
Three exclusive brands are totally James Cheyenne and Idaho wind.
Our two national branded partners that are also in the top five number one our number one branded area.
And the other one is wrangler, so that that rounds out the top five brands.
In terms of sourcing.
And G.
Thiago fees of sourcing.
These are broad brush strokes.
Roughly half of our product comes from China, roughly 25% of our product comes from Mexico. The balance of the 25% is rest of world.
With a small portion 10 ish percent from the Americas.
Yeah Urs tank.
Yeah.
We.
As it turns out we were fortunate.
That we have a very small exposure in certain of our exclusive brands with very small exposure to Vietnam.
And the most of our vendors have a small exposure to Vietnam.
Did have a couple that that had some difficulty there with the with the unfortunate pandemic breakout there.
In terms of terms.
In terms of loyalty.
We typically say that the vast majority of our sales go through our rewards program call. It two thirds of our sales we can connect to a customer.
That customer would have a be rewarded number we typically get some combination of.
E Mail.
Phone number home address.
And those customers as you would expect our you know our better customers. They they shop across both channels more than a typical customer their average basket is higher the frequency is higher et cetera, et cetera, so that loyalty and our ability to understand.
All of their RF M and now their analytics.
And to speak to them in the language that they want to hear from us in.
Cause meaningful rate so and.
To tie it back to.
Our desire to expand our customer reach.
We then had to be super careful to leverage our loyalty customer our customer database, but we werent spending.
Hardcore work mailers or E mails to a.
Younger female fashion, western customer or vice versa rights of the segmentation and the CRM work hand in hand, which is why the the loyalty is so important to us.
Is jetblue is a tailwind shippers is positive, but it's not quite as positive as the rest of the company.
So [laughter].
The quote unquote drag on the 67%, but we're certainly not worried about that.
Let me rephrase that one if I may.
Is it a tailwind and that it's no longer going to be margin dilutive.
Are you cleared through the promote lapping the promotional okay. Great question. Great question. It is it is no longer margin dilutive.
And if it is it's minor basis points it used to be significant and I. Appreciate you, calling out that and frankly, giving us a platform to discuss at the E. Commerce team has completely extinguished that might be overstating, it probably but nearly extinguished the promotional stance that <unk> had in the past.
And it's.
Almost in line with boot barn, Dotcom and frankly, there are a couple there are some times when it's every bit as margin accretive as boot barn dotcom, it's much more.
Positive from a margin perspective.
Has been historically.
And then in terms of the percent of our digital sales where the stores are involved.
Okay.
The quick answer is 50%.
It might be slightly too high but admin because.
We have roughly a fourth of our digital sales that are shipped from a store and slightly less than a 45% of our digital sales that are shipped.
Store for pickup.
And call it 45%.
But it is significant and we are lucky in a way that our stores are very capable in.
Recruiting shipping packing product because as you know is that much of our product most of our product goes directly from under two historic So theres a theres a highly capable back room in the store. So when we rolled out these initiatives.
It took literally a few days not months of training and rearranging back rooms et cetera. It was.
It was sort of very.
Very smooth rollout.
And some of these initiatives so they're involved in and when I describe the what piece of our our digital sales growth through our stores. We typically think of it from a newborn dot com perspective. So I think if you counted everything it would be a little bit less than that including kepler's in marketplace.
Amazon et cetera.
Thank you very much continued success.
Thank you.
Yes.
And our next question is from Dylan Carden with William Blair. Please proceed.
Hey, Thanks, a lot just curious to what you attribute the outperformance of recently opened stores, particularly those stores Navy in newer geographies.
I know the overall business is kind of rip roaring, but it seems like these openings or even kind of above and beyond internal expectations.
And then kind of as part of that question, how youre thinking about the assortment and new markets and maybe that's an opportunity to kind of speak to.
The new prototype store that you're trying out there in California.
So on the on the new stores success.
Beautiful things, we opened up.
Some of them.
Right in the height of Colgate emerging and frankly quite nervous when we open them.
Paradoxically, we may have had the advantage that we are opening.
A brand new retail store in a lots of werent available to shop at all but western or otherwise right. So if somebody needed a pair of jeans or.
Sure.
Perhaps a pair of boots, we had a brand new store in their backyard and the local mall in many of the other regional players are just closed again, regardless of whether they were western players or not.
The second thing is we have been finding the pump in terms of bringing the brand to a more national level and we have we want to continue and invest in doing that but we have shifted some of our marketing more too.
More to national radio versus spot market local.
<unk> radio we do more social media than we've done in the past and so our brand is out there and we sponsor an awful lot of events that have national presence.
Even though they might not be in Pennsylvania, or Ohio et cetera, but the finals of the of the rodeo season within Las Vegas, and we're a big sponsor in our name is reasonably well known.
In terms of the assortment there.
Quick answer.
Is.
Our new stores are selling.
By category very much in line with.
Sort of the company average if you will so if I looked at sage.
Sales by merchandise classification for our stores in Pennsylvania, Ohio, Virginia, and a compare that to Colorado and Arizona.
Very similar there there was a hypothesis early on that once we got into the North East. We would have this flip the concept to be two thirds work one third western that turned out to be just not right, we're selling every bit as much.
Cowboy boots men's and ladies' cowboy hats.
As we are in much of the rest of the country.
So these stores are off to an incredibly strong start.
The three year payback.
Will be will be an easy hurdle for them to get over.
And we feel great about.
The upcoming pipeline and one of the things that all of this leads back to is we have a new head of real estate that started ironically and I think February of 2020. So his first.
Order of business was in opening up stores, but it was managing rent expense and landlords in many quickly pivoted to looking for new locations and many of these stores that are opening with one year paybacks are thanks to him.
And that team.
So go ahead Charlie.
Shout out.
Okay and nothing it's still early days on the prototype at this point.
So on the prototype it's funny, we try to avoid the word prototype because we then expect to get 1000 questions on how the new prototype is doing.
[laughter] policies tied to me.
That guy.
The I would say the new store, it's on Capella here in Orange County, California.
It is sort of a logical logical progression of where the brand has been evolving. So if you were to look at our marketing materials, our social media presence.
If you get our mailers and then you walk into some of our stores you'd realize that.
Print media and our digital media has got an elevated more quickly than we were able to elevate the in store experience across 281 stores now I guess.
But the new store brings in some of those elements, it's more of an organic feel.
It's there's much less signage and.
It's just much more open and more comfortable shopping experience.
But from an economic standpoint from a payback standpoint.
It will be every bit as good as you know the three year model or better that particular store is doing extremely well.
So if you really want to know how that one off any pulls one sample sizes doing the answer is it didn't cover off the ball.
That's great I really appreciate it guys. Thank you.
Alright, no problem.
Yeah.
And our next question is from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much Jim I'm interested in just the business being so steady.
For the last three months and six months, specifically, maybe can you tell us a little bit about traffic into the store, presumably traffic is up a lot with a lot of new customers or is that really not the case I mean, you're just seeing really high conversion plus some price and have you seen the traffic chain traffic trend change over the last few months, even as the total sales have been steady.
So great question.
One caveat, but we've been able to answer this in the past and I'll give you a more direct answer in a second we don't have traffic counters in the stores. So we can intuit, what's happening a few other ways how many customers entered the database.
We know if the basket size has grown or not et cetera. So the coming back to giving you a real answer recognizing the fact that we don't have specific traffic counters.
80, plus percent of the growth, we're experiencing is from new customers coming into the brand.
So that's helped a little bit.
We might have higher conversion, we might have more frequency, but the vast majority of the increase in sales is new customers and.
Of course, we want that experience to be great. We want it to be you want those customers to be air quotes.
Sticky customers.
And that's one of the reasons why we feel great about the fact that where you have an in stock position that I think is better than most of our most of our competition.
Got it and then maybe one more from me Jim you did mentioned radios a moment ago.
Just where are we in the toll and the reopening phase I mean, all of the group.
Big events are they all happening.
You know, we totally lapped all of that stuff from last year are there any COVID-19 costs that were in the.
The SG&A last year that are not in there. This year do you feel like really everything is sort of back to normal from a reopening standpoint at this point.
I can take the second part of that question first that the Covid expense. While we had some was was de Minimis and we never really spike it out when it was happening quite that much and we've been talking about our P&L on a two year basis anyway. So that we're going to have COVID-19 and the two of them are whole period.
In terms of events, they they've ramped up and I wouldn't say, they're egg problem with 90% now.
So we're getting the quote unquote benefit from that now.
With that said, we still haven't had.
Some of the bigger events throw.
The year in our numbers.
For two years ago. So I'll give you two of the bigger examples.
Finals of the rodeo season in Las Vegas in December getting happen last year, I guess it did but it was much smaller and was moved out of Vegas and it was just a much different deal.
The second one even.
Even bigger in.
The rodeo season in Texas during February and March.
Essentially didn't happen this year.
There are some exceptions to that but the biggest one Houston didn't happen at all.
The others were much more minimized so as we look forward I would say we have.
The the benefit and you know it might be.
Tailwind of course, Mike May have some headwinds also but we will have some tailwind from these events from now.
Through December which is the finals through the first quarter, which is Texas rodeo and even into the spring, where we had stagecoach and some of the music festivals that didn't happen this year. So.
We're trying not to assign to greater value of that and get people too.
Too far ahead of their skis, but it's that's all in the future for us.
Got it Okay, and then maybe one more just because inflation is such a big topic, you talked about some of the freight and shipping.
But as far as just cost inflation next year, when you're replacing orders for inventory.
What are you hearing from vendors in terms of how much costs are going to go up across the board for that.
The national brands, and the categories like boots and things like that.
We've seen quite a varied response from vendors.
Some have.
Passed along every dollar of increase that Theyre seeing others have shared it with us.
Our exclusive brands candidly has done probably the best job of managing inflationary pressures on on raw materials and freight.
So with all of that said you know we came to.
Hassle long cost increases with our markup so.
It really won't impact our margin right. So the next question is will it impact negatively sales velocity.
Well, if it made us uniquely less competitive it might.
Don't think it does make us uniquely less competitive as I think most of the industry passes along price increase.
And frankly, I think customers come to boot barn for the overall experience.
The boot has gone up by $5 as long as it's in stock and we have authoritative customer service taking care of them, we're still going to get the sale.
Sample size, we've got some price change or price increases in the first quarter, we pass those along with the markup as you've described and we haven't seen a real.
Change in the demand, but for maybe a two week period right after the price change.
Got it okay. Thank you so much.
Okay No problem. Thank you thanks for joining the call.
And our next question is from Jeremy Hamblin with Craig Hallum Capital Group. Please proceed with your question.
Thank you and I'll add my congratulations.
The exceptional performance.
Wanted to ask about your your clearance sales and.
The impressive expansion of your gross margins in your merch margin.
Can you give us a sense of.
How much your sales that are on clearance has changed versus last year and versus two years ago is it a 800 basis point change in the total sales that are on clearance.
Can you give us a sense of how much of that.
It has changed both versus last year, and then versus two years ago.
If I look at Germany, It's Greg if I look at.
Compared to last year, and I don't have the two year information handy in front of me.
But the level of clearances is half or maybe even a little bit more than it was.
Last year, having said that clearance and markdown inventories are relatively small portion of our overall business historically and so it's you know let's see.
Even more it's even lower this year, but that's not driving that the the margin improvement, it's more driven by being a bit less promotional more exclusive brands selling.
And while we want to continue to sell to.
Manage our clearance down.
But that's not the main driver of what's going on here.
Okay and then.
Following up on the exclusive brands.
How well you've handled supply chain issues out there.
It sounds like your relative value perception of your exclusive brands has improved significantly in your customer's eyes and maybe that's part of why you're you're taking some share.
How do you think about.
Heading into next year, where you do have a lot of national brands that have taken some.
Some meaningful price increases in some cases.
Is this something where you would see the momentum in these brands.
Your customers responding really well and you maybe don't take much price.
Simply because you have that much momentum or how you're thinking about price for your exclusive brands moving forward.
It's a very good question and touching on some of the more strategic pieces of the business how should we.
Should we hold Pat on our exclusive brand pricing.
We tend to kind of.
Treat all all of the brands the same and if we see an increase in price and in our own owned brand or a third party brand.
Would typically.
Change the the retail price to accommodate that.
One of the things that will be.
Important to see is.
In some cases, our vendors have passed along a transitory freight charge and so you know we're going to expect that to go away and maybe that name those prices come back down.
From an exclusive brand standpoint, I think we will keep them.
Yeah in lock step with their mark up expectations and if the cost to make increases will have you know pass those through to the retail of the of the product itself.
That has been less of an issue instance of brands in our in our.
Our national brands.
So again hats off to that really exclusive brand team and the sourcing folks that are working on that.
Hi, Thanks for taking the questions and best wishes for an awesome holiday season.
We appreciate the journey.
Alright, well. Thank you everyone for joining the call today, and we look forward to speaking with you on our third quarter earnings call take care. Thank you.
And this concludes today's conference and you may disconnect your lines at this time thank.
Thank you for your participation.
[music].