Q4 2022 Boot Barn Holdings Inc Earnings Call
Good day, everyone and welcome to the boot barn, Holdings' fourth quarter fiscal year 2022 earnings calls.
As a reminder, this call is been recorded.
Now I'd like to turn the conference over to your host.
Mr Mok Needlefish, Vice President financial planning. Please go ahead Sir.
Thank you good afternoon, everyone. Thank you for joining us today to discuss boot barns fourth quarter and fiscal 2022 earnings results with me on today's call are Jim Conroy, President and Chief Executive Officer, Greg Heckman, Executive Vice President and Chief operating Officer, and Jim <unk> Chief Financial Officer.
Copy of today's press release, along with a supplemental financial presentation is available on the Investor Relations section of boot barns website at boot barn Dot com. Shortly 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 boot barns judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting boot barns 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 forward looking statements to be made during this conference call and webcast. We refer you to the disappointment regarding forward looking statements that is included in our fourth quarter and 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 will now turn the call over to Jim Conroy Boot barns, President and Chief Executive Officer, Jim.
Thank you Mark and good afternoon. Thank you everyone for joining us on today's call.
Paul I'll review, our fourth quarter and fiscal 2022 results discuss the continued progress we have made across each of our strategic initiatives and provide an update on current business.
In addition, I'll be sharing the results of a recent study we have completed that has led us to update our estimate of the size of our total addressable market and to establish a new long term store count potential.
Following my remarks, Jim Watkins Who'll review, our financial performance in more detail and then we will open the call up for questions.
On this call we will return to our typical cadence of discussing our financial results on a one year rather than two year basis.
They still 22 was a record setting year for boot barn with results exceeding our expectations across the board.
Consolidated same store sales increased a staggering, 54% cycling a positive 3% comp in the prior year.
This consolidated same store sales growth was comprised of an increase in retail store same store sales, a 57% and e-commerce sales a 39%.
Our sales growth throughout the year with consistently strong driving our business far beyond the $1 billion Mark for the first time to $1.5 billion we met.
Notably all 52 weeks of fiscal 'twenty two grew in excess of 55% on a two year basis, demonstrating the consistency of our performance.
Merchandise margin increased 270 basis points compared to the prior year fuelled primarily by greater full price selling and growth in our exclusive brand penetration.
The combination of top line strength merchandize margin growth and expense leverage led to a more than tripling of our earnings per share to $6.33 and then EBIT margin rate of 17, 4%.
I would like to take a brief moment to congratulate the entire boot barn team for achieving one of the best if not the best years I've seen in my entire retail career.
Thank you all for your dedication resilience and hard work.
Looking at our fourth quarter performance consolidated same store sales grew 33% on top of 27% same store sales growth in the prior year period, which benefited from two rounds of stimulus payments.
Our consolidated same store sales growth was comprised of an increase in ecommerce sales of 50% and retail store same store sales growth of 31%.
Consistent with our third quarter the growth in same store sales was driven primarily by an increase in transactions.
Additionally, a substantial portion of the increase in transaction growth came from new customers, which underscores the success of our strategy to expand our addressable market, which I will address later in my remarks.
In addition to strong topline performance EBIT margin expanded 360 basis points to 16, 3% during the fourth quarter.
Driving earnings per diluted share of $1 47.
On a tax adjusted basis, excluding the benefit from stock compensation in the prior year period.
Earnings per share grew 96% compared to 75 cents in the prior year period.
We believe the underlying strength of the business as a result of relentless execution across each of our four strategic initiatives I will now spend some time highlighting the progress we continue to make across each initiative.
Let's begin with driving same store sales growth.
We saw broad based growth across the business in the fourth quarter with every major merchandise categories, showing double digit growth over the prior year period.
From a geographic perspective every region also increased strong double digits as.
As we anticipated the sow modestly outperformed the other regions, primarily as a result of a full rodeo season. This year in Texas going up against a COVID-19 impacted season last year.
From a merchandise perspective, ladies apparel and boot camp.
Oh boy hats ball caps and belts were our strongest performing categories. Additionally, we saw healthy growth in men's western apparel and boots.
Apparel and accessories.
Work boots and work apparel will also double digit positive with both flame resistant and non flame resistant apparel showing nice growth over the prior year period.
The merchants in combination with our planning supply chain and logistics teams overcame industry wide supply chain challenges and did a fantastic job of broadening our merchandise assortment as well as securing enough inventory to fuel the outsized demand.
We believe that the team's aggressive buying decisions helped drive a strong in fact position gave us a competitive advantage and drove solid growth across the entire business.
From a marketing perspective, we continue to balance our investment in both traditional marketing programs and digital advertising or marketing strategy has enabled us to elevate the aesthetic of the brand and extend our customer base beyond our traditional western customer.
We are pleased with our ability to continue to build our customer base and we're encouraged to see that their retention rates and spending patterns are very similar to our legacy customers.
We believe that our efforts to transform and extend the boot barn brand has greatly expanded the market in which we operate we are further pleased to report that our push to attract a new customer segment has not negatively impacted our legacy customers, who continue to shop, even more frequently than they have in the past.
From an operational perspective, the entire field team was able to handle the elevated sales volume, while providing excellent service to our customers.
The stores organization managed a heavy flow of merchandize and let a much larger base of employees. While also supporting the opening of 20 new stores across the country.
As we emerged from the holiday season, we believe that the strength in the sales trend would continue.
Accordingly, we work to convert a substantial portion of our seasonal employees to full time associates, which positioned us well for the balance of the fourth quarter.
This has enabled us to circumvent many of the ongoing staffing challenges other retailers are facing and provided additional competitive advantage.
Moving to our second initiative strengthening our Omnichannel leadership.
Yeah.
Alright.
E Commerce channel had a fantastic fourth quarter with sales growing 50% and EBIT, increasing 70% over the prior year period.
Our ongoing focus on driving exclusive brand penetration coupled with a more efficient use of our digital marketing spend continues to result in improved the profitability of our ecommerce business despite industry wide freight cost headwinds.
From an Omnichannel perspective, we continue to build a more seamless experience for our in store customer.
Over the last several years, we've upgraded the digital experience in the store with the addition of multiple Omnichannel services that have been very well received.
For example, the implementation of our endless aisle or what capability has enabled us to enhance the in store shopping experience and to convert potentially lost store sales and making all of our inventory chain wide available to every customer in every store.
During the fourth quarter, our stores team and I T team partnered well to rollout multifunctional handheld devices across the chain and enable omnichannel selling services, while also streamlining the operational aspects of the store.
On our last earnings call, we highlighted our ability to sell in store inventory to our online customers.
Now e-commerce orders can be filled by either our distribution center or any one of our stores.
This has had a positive impact on the business from a few different perspectives.
First as we carry more exclusive brand product in stores versus online we've been able to drive incremental exclusive brand penetration online by broadening the inventory selection available to that customer set.
Second we were able to mitigate markdown risk at the individual store level by enabling all in store inventory can be viewed by our online customers as well.
Lastly, by making all our store inventory accessible.
We believe we can service online customers more quickly and more efficiently at the product ordered often resides in each store that is geographically closer to the consumer.
Amazingly when factoring in all of our Omnichannel capabilities.
Separately, two thirds of total ecommerce orders involving store associate whether that be via in store fulfillment ship to store with vocus or same day delivery.
We believe our focus on integrated Omnichannel experience that leverages, a nearly national footprint of stores has set us apart and gives us another competitive advantage.
Yeah.
Now to our third strategic initiative exclusive brands.
During the fourth quarter, we grew exclusive brand penetration to 29, 6% and approximately 540 basis point increase over the prior year period.
We continue to be very pleased with the growth and reception of our exclusive brands, notably.
Notably three of our exclusive brands were among the top five selling brands in the fourth quarter.
For the full fiscal year, we grew exclusive brand penetration to 28.3% and approximately 470 basis point increase over fiscal 'twenty one.
Our current portfolio now consists of 10 brands, including the addition of our four new brands in the fourth quarter.
We're quite pleased with the customer receptivity of our exclusive brands and the ability to provide our customers with unique merchandise further as many of our branded vendor partners have faced significant supply chain challenges, we were able to rely on our own brands to ensure a strong in stock position and outperform our competition.
Titian.
Finally, our fourth initiative expanding our store base.
In the fourth quarter, we opened 11 stores, bringing our total store count to 300 stores at the end of the fiscal year.
We also opened our first store in Delaware during the fourth quarter, bringing our national footprint to a 38 states.
We continue to be very pleased with the performance of our new stores new stores opened in both existing and new markets are consistently outperforming their pro forma sales and their expected payback period.
Not only are we seeing any stores far outpace our original sales pro forma.
But we are also seeing a synergistic growth in our e-commerce business in those markets as well.
We are excited about our new store openings in fiscal 'twenty three with expansion into the state of New York, New Jersey, West, Virginia, and Maryland.
Remarkably every store in the chain is profitable from a four wall contribution perspective.
Gives us further confidence to continue our aggressive growth.
At this point I would like to share some exciting new information related to the market opportunity for the boot barn brand and store concept across the country.
As we have been communicating over the past few years, we've been looking at expanding our customer reach to a more casual customer in addition to the core western customer.
We've now had time to substantiate our intuitive feeling with a robust data driven third party analysis.
This work, which is summarized on pages nine and 10 of our supplemental financial presentation has further validated our recent strategy of extending our customer reach as a mechanism to drive outsized sales growth and has confirmed that the market is substantially larger than we had estimated when we last did this work on.
10 years ago.
Not only has the original western and work market expanded by 25% in these 10 years.
But we have now added $15 billion of new market opportunity as a result of incorporating this more casual outdoor segment that we have defined as a country lifestyle customer.
As a result of this external evaluation, we now believe that our total addressable market has doubled from $20 billion to $40 billion.
When you couple this analysis with the success of our new stores, both in building out new markets and adding to existing markets. We now feel confident that our U S store count can successfully reached 900 stores over time.
This is quite exciting news for us and we look forward to sharing more details with you in the future.
Yeah.
Turning to current business. We are now approximately halfway through our first fiscal quarter and are very pleased with the continued growth of the business.
While there was some concern that would be it would be difficult to wrap the strength of last year's business. Our consolidated same store sales growth through the first six weeks of fiscal 'twenty three is approximately 12% with both the stores and e-commerce channels posting store comps strong.
Comps.
Once again sales are being driven by strength in transactions with minimal help from inflation and no change in our promotional posture.
We are now six weeks into the quarter and feel great about the strength of the current trend further bolstered by the sequential improvement we have seen in may right.
<unk> to an already very strong April business.
I'd like to now turn the call over to Jim Watkins.
Thank you Jim.
As a reminder, I will be discussing our financial results with comparisons to our prior year period.
In the fourth quarter net sales increased 48% to $383 million.
Sales growth was driven by a 33% increase in consolidated same store sales and sales from new stores added during the past 12 months.
Gross profit increased 61% to $149 million or 38, 8% of sales compared to gross profit of $92 million or 35, 7% of sales in the prior year period.
The 310 basis point increase in gross profit rate resulted from a 190 basis points of leverage in buying and occupancy costs and a 120 basis point increase in merchandise margin rate.
The merchandise margin rate increase was primarily a result of better full price selling and growth in exclusive brand penetration, partially offset by a 60 basis point headwind from higher freight expense.
Operating expense for the quarter was $86 million or 22, 6% of sales compared to $60 million or 23% of sales in the prior year period.
Operating expense increased primarily as a result of higher store payroll.
Sure overhead costs and marketing expense.
Operating expenses as a percentage of sales decreased by 40 basis points.
Primarily as a result of expense leverage on higher sales.
We're pleased with the expense leverage we saw in the quarter as we cycled our fourth quarter business last year.
When we saw a sharp acceleration in sales volume toward the end of the quarter, which drove outsized operating expense leverage.
It is encouraging that we could anniversary that nuance and offset other inflationary expense pressures to drive leverage.
Income from operations was $62 million or 16, 3% of sales in the quarter, expanding 360 basis points compared to $33 million or 12, 7% of sales in the prior year period.
Net income was $45 million or $1 47 per diluted share compared to $25 million or <unk> 82 cents per diluted share in the prior year period.
Net income per diluted share in the prior year period and includes an approximately seven cents per share benefit primarily due to income tax accounting for share based compensation.
Excluding the tax benefit in the prior year period net income per diluted share in the current year period was $1 47.
Compared to 75 cents in the prior year period.
Turning to the balance sheet.
On a consolidated basis inventory increased 72% over the prior year period.
Two $474 million.
This increase was primarily driven by a 36% increase in same store inventory.
Growth in inventory held at our Fontana distribution center and inventory for new stores added in the last 12 months.
We finished the quarter with $29 million drawn on our 180 million dollar revolving line of credit.
We also had $21 million in cash on hand at the end of the quarter.
Turning to our outlook for fiscal 'twenty three.
For the year, we expect same store sales to grow four 8% and earnings per diluted share of $6 41.
As a reminder, fiscal 'twenty three is a 53 week year.
We expect to generate approximately $34 million.
Sales and earn a practical or approximately <unk> 19 per diluted share in the 50 <unk> week, which is included in our provided guidance.
Yeah.
We expect total sales to be $1 74 billion.
Dollars, we expect gross profit to be $652 million or 37, 5% of sales.
We expect operating expenses to be $386 million or 22, 2% of sales.
Our income from operations is expected to be $266 million or 15, 3% of sales.
We expect net income for fiscal 'twenty three to be $197 million.
We also expect our interest expense to be $3 million in capital expenditures to be $87 million.
The increased investment in capital expenditures in fiscal 'twenty, three when compared to fiscal 'twenty three 'twenty two.
Is the result of opening new stores.
Remodeling or relocating existing stores and opening a third distribution center.
This new Midwest distribution Center will primarily support our exclusive brand initiative and a portion of our ecommerce business.
For the full year, we expect our effective tax rate to be 25, 2%.
Additionally for fiscal 'twenty, three we expect to accelerate our new unit growth and opened 40, new stores with targeted opening spread consistently throughout the year.
Included in our guidance is an assumption that these stores will generate sales of $3 $5 million per store in their first 12 months of operations.
Please refer to pages six through eight of the supplemental financial presentation released we released today for further information on our fiscal 'twenty three guide.
As we look to the first quarter, we expect total sales to be $367 million driven by a same store sales increase of 10%.
Our income from operations is expected to be $47 million or 12, 8% of sales, which is expected to result in net income per diluted share of $1 14.
Now I would like to turn the call back to Jim for some closing remarks.
Thank you Jim.
Fiscal 'twenty two was an incredible year for boot barn, we continued to build on each of our strategic initiatives further strengthening the brand and expanding our customer reach.
I would like to take one more opportunity to express my heartfelt gratitude to the entire boot barn team in the field.
Distribution centers and store support center.
Each and every one of you have stepped up to every challenge and as a team you've just delivered one truly spectacular year.
I look forward to what fiscal 'twenty, three brain and what we will be able to accomplish together.
Now I would like to open the call to take your questions Jacob.
Thank you.
We will now begin the question and answer session.
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And then too.
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Momentarily.
Joe.
Ladies and gentlemen, Hey, Chris you to limit your question to one foot participant and one portfolio.
The first question comes from Matthew Boss with JP Morgan.
No.
Yeah.
Thanks, and congrats on a great quarter.
Thanks Matthew.
So Jim we've talked about consistency I think for the past four quarters, but to me if you're too.
12% wants you to date comp now points to sequential acceleration, if we look at it honest researches or relative to the fourth quarter.
Could you speak to the drivers of this acceleration on what you're seeing as we think about maybe the doubling of the Tam you sided that oil and gas market trends or event reopening opportunities that you're seeing today.
Sure.
Hey.
If you were to pull apart the business on a three year basis.
Q3 into Q4 got better Q4 into Q1 is also better once again and amazingly may is better than April .
In terms of what's driving that I mean first I'd like to start with.
Many people thought and including some of us occasionally around the table internally that we weren't going to be able to cycle. The business that really took a step function change up.
Essentially a year ago right mid March of last year.
So we're thrilled to be able to report that we've been able to grow on top of that.
I would attribute it to sort of be the proverbial flywheel right.
We extended our reach to more customers, we've broadened our assortment.
We've contemporize the brand to make it more accessible to people better.
Outside our core western customer.
And as we've done each part of that coupled with sort of a lot of operational execution pieces right. So we've been aggressive in securing inventory we've managed our supply chain extremely well, we've been able to hire in the stores and retain people extremely well.
And when you put all that together, it's a combination of maybe a little bit of a tailwind from some macro pieces.
It honestly and we say this with great humility.
And my hats off to the team that's executing but a good portion of it is just sort of very strong execution across some.
So the basic tenants of retail.
And then maybe a follow up on on the bottom line. So Jim that the IPL I think you cited low to mid single digit same store sales, 10% unit growth was at 20% plus EPS EPS growth story, so on an underlying basis now moving forward.
I guess has anything changed with topline flow through in the model or has the algorithm lost any drivers as you can.
Scaled the business.
Sure so.
You're right and that has been our long term algorithm.
Yeah, we are and you have led us to this in the past while we.
Tried to guide investors to a 20% EPS growth since we've been public we've been growing even more than that right. We've grown almost double that or more than double by 40 something percent EPS growth since at the time of our IPO.
So this upcoming year given that we've had such a step function performance in fiscal 'twenty, two we're certainly not promising.
Either 20, or 40% EPS growth for the next fiscal year fiscal 'twenty three.
From that point forward, though I think the long term algorithm should be viewed as are our ongoing view into EPS growth.
I would imagine its going to once again prove conservative.
If you think about what we've been able to do over the last few years and how we're positioned today.
We're likely to grow faster than 10% new units, so I'd, probably say, 13% new units.
We often anchor back to.
250, or 300 basis points of exclusive brand penetration.
But we've over performed that.
The historical algorithm is low to mid single digit comps and we've been plus 11 for 11 years. So if you look at the the three factors that when taken together drive a 20% EPS growth.
I think there's.
A decent likelihood that going forward, we'll be able to achieve that or or overachieve. It again and so.
Right now we're going to focus on delivering a strong fiscal 'twenty three and then I guess on a on the call a year from today, well well give you a better answer for the go forward algorithm.
Look forward to it great work and best of luck.
Thanks, Matt.
Okay.
Thank you.
The next question comes from Maxim Group.
Cool with Cowen and.
Please go ahead.
Great. Thanks, a lot and congrats on a really strong quarter, so with another quarter under your belt, how would you assess your ability to track and the new shoppers that you've gained over the past 12 to 18 months. How confident are you that the shoppers will remain from shoppers and then if there was a reason why you would potentially lose what do you think that that could be.
Sure. So we've had enough time now to see.
More than 12 months of behavior from some of the new shoppers that have been attracted to the boot barn brand.
And while of course, we can't completely predict the future what we can say looking back over the last 12 or 16 months is that those customers are shopping with us.
With the same frequency, that's our legacy customers of their shopping roughly twice a year on average their basket is roughly in line with our legacy customer.
At a little over $110 per trip.
And in terms of how we could potentially lose them going forward.
Look I think there is there is a host of ways that they could they could lead the boot barn brand that could be bid away by a competitor or there could be an online threat with a company that is competing on price and we may be less of a focus on profitability.
And but there's also a more bullish viewpoint, which is we're just getting started in this new customer segment there'll be word of mouth expansion within its new customer segment will start to gain.
Not only more customers, but a bigger share of their wallet going forward and so on and so forth. So we we announced this initiative too.
He brought in the sort of definition of boot barn.
Yeah.
Kind of concurrent unfortunately, with the outset of Covid in the beginning of calendar 2020.
And we've had a couple of years of learning and we're encouraged by those results, but we're still in the early innings of expanding that customer base learning more and more what makes them tick and what types of product to bring in the store and how to reach them from a marketing perspective et cetera, So I actually view it from the perspective.
Dave.
This is a great new market opportunity that we're just beginning to tap into.
Like our core customer, there's not a whole host of really strong competition.
Typically being serviced by mom and pop operators and you know we're going to.
Do what we normally do which is just methodically.
Continue to expand within that part of this new customer base.
Got it that's very helpful and then with a doubling of the Tam how does that impact your outlook for what your own brands can do and contribute is there an opportunity to potentially leaning more heavily especially given all the success that they've had over the past year plus just any other new verticals that you have.
Looking to get into you know are they all covered by exclusive brands now or are there additional opportunities down the road.
Best regards.
So.
I would I would separate the expanded Tam a little bit from the potential opportunity for exclusive brands and not too to nitpick. The words at all it was a fair question.
We're very excited about the opportunity to announce a larger market size that we can go. After we know we can open successful new stores, we've been doing that for years and really have been able to achieve that in the most recent year. So a big part of our future growth as they continue to open 40, or 45 or 50 stores a year.
Going forward.
And if you do that for a.
A few years four years or so that could be another $1 billion themselves on the exclusive brand piece.
We are we feel reasonably well covered if we look at our 10 different brands.
We could easily position them on sort of a brand map in terms of customer segment western versus work versus country male versus female boots versus apparel et cetera, and I think we feel reasonably well covered there might be opportunities for some additional brands going forward.
And I guess I would just end with when we look at the new brands that have been added.
Along with the brands that we have up and running for a few years now.
We're really pleased with their performance.
We are calling out 300 basis points of additional <unk>.
Exclusive brand expansion in this fiscal year.
Essentially what we called out last year.
But last year, we over perform big quite a bit and I think there's probably opportunity for us to overachieve that exclusive brand penetration this year as well.
All of that said.
We will still be roughly one third of our business will be exclusive brands and the other two thirds of our business will be.
Two our third party branded partners, who are extraordinarily important as we continue to grow our business.
And many of them have really stepped up to help us fuel the outsized sales trend that we've been experiencing over the last year plus so.
Yeah.
A great deal of gratitude goes out to those at many of those vendor partners as well.
Yeah.
Okay.
Jacob.
Yeah.
Thank you.
The next question comes from Steven exactly with Citi. Please go ahead.
Great. Good afternoon, guys. Thanks for taking my question Congrats on a strong corner I wanted to ask on the margin side of the business. So maybe Jim could you could you talk a bit more about the outlook for growth versus SG&A within the first quarter EBIT margin guidance and then for the full year could you just elaborate a little bit more on the gross margin outlook.
I saw on the slides it looks like Oh.
130 basis points of freight deleverage, let me just talk about that in a bit more detail that'd be helpful. Thank you.
Sure.
I'm sorry.
<unk>.
Steve for the year for the first quarter, just talking about the EBIT rate and I'll just walk through the P&L.
The bottom, but as a reminder, last year, we got a significant amount of Av.
Leverage or EBIT at 17, 5% during the quarter as our sales accelerated this year, we've developed our expense budget contemplating more modest sales increase in the first quarter and so we expect that the EBIT rate to normalize a bit and as you see in the guide that we've got there at 12, 8% EBIT.
Yes, so the first of those the I'm afraid, it's what we've seen with freight as it's been elevated during the last couple of quarters and from an accounting standpoint, we capitalize those freight charges and amortize them over a six month period. So based on what we're we've been seeing we're expecting 200 basis points of headwind in freight during the first quarter.
Which is above our 130 basis point guide for the full year as far as freight headwind goes.
So that'll that'll create a little bit of pressure.
And.
As we can.
Set on our last call, we significantly increased wages for in the fall for our employees and our distribution center in these wages. In addition to some occupancy deleverage from the timing of new stores.
That will result in some buying and occupancy deleverage in the first quarter.
From an SG&A standpoint.
As we've talked about we expect to see deleverage in store labor and marketing as we normalize in <unk>.
Our labor and marketing.
In line with our sales plan for the quarter, there and then finally.
From us from our stores and our corporate overhead standpoint, there's a little bit of pressure there is things such as health insurance and supplies and consumables and the maintenance charges.
Pressure in Q1.
As far as the fiscal year goes I would refer you to slide eight.
Well, we've got the components.
Listed out there.
Pointed to the right side, if you look at the gross profit.
Yeah, our merchandise margin is comprised of our product margin as well as freight and that all rolled into our merchandise margin. So we've broken that out and expect to see 50 basis points of product margin expansion, which will be led by better full price selling and exclusive brand penetration of a 300 basis points.
Improvement there.
And then 130 basis points of freight headwinds will get us to.
So an 80 basis points.
Deterioration in our merchandise margin for the year.
And then also included in the gross profit is the 40 basis points of occupancy deleverage and that's really related to the timing of the new stores.
Last year again in the back half.
Weighted in opening the stores last year, and then we'll have a more evenly split.
You know, maybe 10, a quarter new store openings for the current year.
And then as we go down into the SG&A similar to what I've talked about previously for Q1 as we normalize the store labor in the in the marketing of this.
This year and have that plan more in line with our sales plan.
Got to see 90 basis points of deleverage there.
Yeah.
Great. That's very helpful. Thanks for that detail I had a follow up on Matt's question earlier, just thinking about the longer term operating margin path for the company because I think the slides referenced you know fiscal 'twenty three this 15% level as the new baseline for the best has stepped down from where you were last year, but explainable I guess as you think.
[noise] about going forward beyond 'twenty three is there opportunity for that margin to continue to expand do you think there's potential to get back to the 17% level your sac.
Absolutely absolutely we expect that to continue to build off of this year and what that looks like as we move into fiscal 'twenty. Four it is hard to say at this point, but we can say that at some point to the freight headwinds of 130 basis points will start to dissipate and what's the return in our favor.
As well as getting continued expense leverage from SG&A line and then as we.
Continue to open these new stores and we get the additional benefit of occupancy leverage going forward and just general expense leverage we continue to expect to see some some EBIT growth and again getting back to where we were this last year in <unk> and beyond hopefully.
Very helpful. Thanks, guys.
Thanks, Steve Thank you.
Thank you.
Next question comes from Peter Keith with Piper Sandler.
Hey, Thanks, everyone great results.
Just looking forward and maybe looking back first you guys have long said that you're a functional use retailer with about 70% of your sales on functioning used products. So that's really limited gross margin volatility and any markdown risk and pre study results.
As you've moved now, but the Tam to this increase in this country lifestyle segment, and maybe Theres, a little bit of a western trend going on right. Now do you think the business steps down from a functional use percentage and if so would that perhaps increase some of the the mark down volatility.
It's a it's a great question, Peter I guess, the candid answer is yes, but slightly.
Ray and I would I would bring everybody back to when we launched Idaho wind.
By Miranda Lambert, a few years ago and she met brand continued to perform well and Theyre just fabulous partners for us.
When we launched that in the fall of 2018.
We move straight into a pretty strong fashion sensibility.
With that particular brand.
And despite launching that and then growing it and then hitting the pandemic, we still have really never had.
Any significant markdown callout, despite being more penetrated in fashion on the Lady side with idle wind and having to work through.
COVID-19, I think the worst we had was we.
As Covid was emerging in our first quarter of fiscal 'twenty one.
Yeah, we had 20 or 30 basis points in merchandise margin erosion, but and that's that's kind of like the worst of all worlds the perfect storm if you will.
As we come back to your question more specifically, yes, we're going after your customers that don't all need the product for purely functional use.
However, much of the product that Phil basics oriented rated denim woven shirts T shirts.
Still cowboy boots or or or footwear of some sort.
And maybe they're not wearing them to work on a farm or a ranch or to work on a construction site or an oil and gas industry, but it's still fairly basic and functional in nature and we're not we're not betting on the next fashion cycle or fashion.
Season or whatever.
So.
Again in the spirit of full transparency, it's slightly less functional than it was when we were first introduced to you back when we were going public but.
But I don't think we're sticking our neck out and taking undue risk.
With the with the expansion into these other customer segments.
Okay great.
And then certainly the 900 store target is impressive to sit here and still trip of your store base from where you stand today.
The new markets being half of that upside opportunity.
Could you talk a little bit more about where you see big new market opportunity you talked about the northeast for a long time is that is that one that you think is really starting to open up for you or are there other geographies that that are becoming a bigger opportunity.
Peter its Greg.
Current year as we think about the 40 stores will open about a fourth of those in the West region, primarily California.
Open about a fourth of them in the South region, which is primarily Texas and then we will open about a fourth in the northeast So New York, New Jersey, Connecticut.
And roughly a fourth and what I would describe as the mid Atlantic States.
Pennsylvania, Maryland, Virginia.
And we've been opening stores in that area for the last couple of years, we've got six stores in Pennsylvania, Florida, and Virginia, and three in Ohio, So I'd say about half will be existing markets, where we continue to fill out, California, and Texas and in the fourth would be.
Again on the eastern Seaboard.
Okay very helpful. Thanks, so much guys.
Yeah.
Thank you.
The next question comes from Jonathan.
Got that.
Right.
Yeah. Thank you hi, good afternoon, I wanted to follow up on the on the sales outlook I know you've guided with quite a bit of precision so they might as well ask when you look at.
First you know sort of the first quarter here beyond beyond the first six weeks it looks like you're embedding.
Single digit same store sales, even though amaze running above that.
Now more like 3% to 4% for the balance of the year. So can you maybe just comment more on what's feeding into that guidance and how how do you think about the economic sensitivity of your business mix today since it's.
Shifted pretty meaningfully the last few years.
Yeah, John so for the sales outlook.
We pinpointed a guidance.
That was more of a precise number than what we used to do what we wanted to do this year given some of the nuance of the level setting of the business and with the to give you all the pieces and components and really what it was is our best estimate and how we're looking at the business, how we're planning the inventory and the the labor.
And this and the sales for the year and in the earnings and you know, we'll provide you updates on that as we as we carry on through through the year.
As far as the the way we were that we're thinking about the business Q1, and Q2, we have more visibility into it and so we've planned sales.
To be more.
Front half.
Weighted as far as sales and so yes, you're right.
Tracking at a plus 12, we've guided plus 10, which would put the back half of the quarter at 8% or so and then the rest of the year, we will come in below that like in Q2, we're planning it to be strong in Q3 and four.
Also positive, but maybe not as strong I think as far as modeling the quarters, what I would do is.
Really look at how we modeled our how we came in last year sales as a percent of the year by quarter and that's how we're thinking about the business and then factoring in.
Q4 with <unk>.
Normally elevated above Q1 and Q2.
Because of of Texas, Rodeos, and then out of the 50 <unk> week in there you're going to get a higher sales dollar volume in Q4. So that's how we're thinking about the sales cadence for the year.
And any thoughts on sort of the economic sensitivity of your business today.
Yeah.
What do you mean by that meaning as macro pressures in the U S or inflation that type of sensitivity to those types of things, yeah, certainly and I'd be curious if you see more risk of tailwind or headwinds I know certainly market participants are worried about headwinds for me and in the future. So just curious how you think.
<unk>.
Some of those factors for your business.
Sure Fair question and I think a lot of people are worried about.
The impact of inflation on customer spending you know will we see them moving slipping into a recession et cetera et cetera.
Frankly, we're probably facing into some of that right now I mean, there is.
Some portion of our customer base coming back to a prior question there.
Really relies on boot barn.
For functional product.
Most of our work boot and work apparel business of course much of our men's western.
Product is functional in nature as well a good portion of our ladies western whose functional so that customer is it tends to be pretty solid.
But with that said, our our median household income for our customer group is about $75000 and if there is inflationary pressure about other retailers are facing we're probably facing it now as well.
The challenge that we always try to accept is how do we grow despite those pressures and.
As as they unfold in front of us throughout this year, we will have to continue to innovate and find ways to.
Get additional growth.
But right now we're feeling very strong momentum early on in this fiscal year.
Coming off of just a kind of a once in a lifetime year and you know we're going to continue to try to reach out and get more customers extend the brand reach.
Expand the share of wallet with each of those customers and I think the outlook for us continuing to have sales growth sales growth going forward is still pretty strong.
Yeah, that's really helpful and I'm done a great job of that so far and maybe one other question just on the operating margin, Tom asking maybe differently than what's brought up.
And some of the earlier questions, but I know in the past you've talked about directionally more of a.
12% to 14% operating margin.
Aspiration and now you are above that and talking about it at that new guideposts.
As expected to stay above that so could you maybe just.
Our view, especially on the merchandise margin some of the structural changes and what you see as a sustainable.
Based on what you've driven so far and any other factors that are giving you confidence to be above that sort of 14% mark on the operating margin.
Yeah, Yeah. So so the as far as the merchandise margin rate goes that we tried to break out something a little differently this quarter or this year that we've done in the past, which is putting the product margin out there and that was really to illustrate that we've seen really nice expansion.
Expansion in the product margin side of things and that's really been driven by our exclusive brand penetration growth and that's something that we're not expecting to to give back as well as the full price selling or reducing promotions.
It has been it's been something that we've chipped away at over the past several years and then more recently the in store fulfillment that we've talked about it a little bit more of last quarter.
Where.
The the online shopper is able to have full visibility of what's available in our in our stores and so what we saw online is with more exclusive brand product available to our online shoppers.
That penetration has gone from you know rough numbers, 10% to 20%, which has really helped our online margin and looking forward.
We see that also as an opportunity with the in store fulfillment to.
Use that the eyeballs of the online customer if you will to two.
<unk> moved some of the clearance items, where we may have a broken size in one store will.
Rather than put that rather have have a deeper markdown in the store, we can sell that hopefully a little bit earlier and early reads on this have shown that we are able to set up with the.
Lower markdown and so I think from a merchandize margin standpoint, we're excited about the opportunities we have as we look forward and continue to grow our exclusive brand business and find ways to.
Increased product margin.
Baer.
Okay. That's great I appreciate all the color. Thanks again.
Thanks, John .
Thank you.
The next question comes from Corey.
With Jefferies. Please go ahead.
Hi, Thanks for taking my questions.
As it relates to the new 900 long term store target and 13% New unit growth what some segments of the business have you invested in to be able to sustainably support this opportunity and level of startup that.
Yeah.
Sure. If you are speaking to the organization from a functional standpoint.
<unk>.
Certainly invested in our real estate and construction Department and we've added.
Another deal maker on the East coast, we bolstered our construction group a bit we have more construction project managers. We've also done some things within the store ops or field organization to really.
Professionalize, our new store opening new associate training.
Programs and processes, if you will hit.
Historically, we were.
We would borrow people from one part of the country and send them to a different part of the country to open up stores.
We will always have a little bit of that in our DNA, but now we're trying to.
Isolate some folks that are are more heavily focused on new store openings and training and I can tell you we'd be really happy with our ability to.
Two.
Bring people from one part of the country to another to add people from outside the organization and get them up to speed on the Groupon culture, and our way of operating the business.
The last thing, we did structurally which I think will also help sort of simplify the problem so to speak.
Is it we used to run with three different regions and for years now we have spoken to you all about the north region, the South region and the West region.
And you.
You might ask the obvious question of whereas the east region well, we just recently promoted a woman named Kim the tornado to our East region director.
She has been one of our most solid district managers.
She lives in the east already she understands that market already and she'll be taking over that.
Quote unquote.
Fourth of the business it'll be slightly less in fourth of the revenue for a while.
So with the additional region.
Comes some additional HR support additional loss prevention support et cetera. So there's a mini team that goes along with that.
That said, we feel we feel great about our ability to bring on new stores, we feel great about the pipeline for new stores. We've opened 10 or 11 stores every quarter now for the last few quarters. If you include this one we're on are on track for that.
So one of the.
Quote unquote easiest parts of our strategy for growth is due to just continue to roll out a store concept that.
It seems to be working extremely well.
And has proven now to be well received in many parts of the country, including those that arent geographically western so.
It's exciting and so that I think is perhaps the best way to answer your question.
That's great.
And then if I recall correctly, you've recently introduced four new exclusive brands are there any early reads that you can share with us today with regard to how those are ramping.
Sure sure, we're very pleased with with each of them, So brothers and sons, Cleveland, well flu ranch, where and ranked 45 Oh.
Our four new brands.
Two of them are.
Targeting sort of the country lifestyle customer.
That's clear on Wolf and brothers and signs on the ladies on the menu side respectively.
And then the other two are different facets of the western customer one that we're really excited about is ranked 45 ranked 45 is a.
Core western customer by a bit more younger more modern feeling modern fitting than some of our historical product going after that same customer.
So all four of those brands are in the process of ramping if you walk into our stores now you'd see merchandize assortments and tables presenting that those goods sort of first and foremost in the store.
Some categories are still trickling in so we're still waiting for some some denim and some of those brands and for some of the boot assortment to be expanded by the early reads are pretty positive.
That's great. Thank you very much.
Thanks Kurt.
Thank you.
Our next question comes from Sam Zell.
William screening. Please go ahead.
Thank you. Thanks for taking my questions I've got a couple good afternoon gentlemen.
One are.
The where did this year change your sourcing.
<unk> had 50% of your goods being made in China, and I think it was 35% of the goods they've made in the Western Hemisphere and then the rest is other places what does that look like what does it look like last year and what's it going to look like this year.
It was roughly in line for all three years, so China tends to be half of our business Euro.
Youre right about 35% that split between Mexico, and the U S and a few other smaller countries.
But right now that's our plan is to.
Continue to use many of the vendors that we've been sourcing from both third party and exclusive brands and the split will remain roughly in line.
And as it does that mirror your.
Exclusive brand business, especially in western footwear.
I know in the work footwear the pure work, it's you've got a lot out of China, but.
Yeah, So our exclusive brands and our branded vendor partners are pretty similar in terms of where we source from.
And then.
Yes.
Western footwear, the leather soled western boots are made primarily in Mexico.
Gotcha. Thank you and then within everything Youre doing.
Do you have any M&A or are you considering any M&A beyond rolling up a few other smaller western players do you have any other M&A.
On the horizon or are you looking are you potentially looking at or anything.
Yeah right now we have so much opportunity just to continue the growth in our store base organically that that's our primary focus.
We've made acquisitions in the past of course, if something were to present itself. We would take a look at it but it would have to be relatively compelling for us and given how much success, we've been having just opening up new stores.
Got you thanks, very much continued success.
Makes sense.
Thank you.
The next question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead Sir.
Thanks, and congrats on the outside outstanding performance.
And thank you for the increased transparency and additional details I wanted to focus on the unit development and just clarify first in terms of the 13% unit growth is.
Is that something where you're thinking this is several years, 4% to 13%.
And then part two of that question is you know we've seen a number of companies running into permitting and construction issues.
Given this is not a level of a unit development you guys have been at in quite some time.
Can you provide some you know some additional thoughts on.
Yeah confidence of getting to those figures not just in 'twenty three but on a on a go forward basis.
Sure.
So I think for the time being we should assume 13% as our go forward number.
Well, well calibrated again, a year from now, but it would be unlikely unless we saw something that was negatively impacting us pretty dramatically that we would then step backwards to 10%.
In terms of our ability to.
Literally get the stores open and constructive and permitted.
I think we face many of the outflows of the other companies that you're calling out are facing.
Bye have been at a.
11 store one right now for a couple of quarters I think in our third quarter. We opened 11 stores in our fourth quarter, we opened 11 stores.
In this quarter, we are on pace to open 10 stores and.
So that's a Q1 number and then we as we look forward into Q2, right. So not so far forward our Q2.
Pipeline is is quite strong and probably if everything goes reasonably well will be more than 11 stores.
We have had some challenges here and there, but nothing that has slowed our pace in any significant way.
And candidly at least from our experience.
Some of those issues are still.
Kind of holdovers from things relative to Covid. So.
I think a year from now I'd like to thank anyway that some of the challenges that people have been facing.
You know my might dissipate a bit because we're getting further and further to the tail end I hope. Unfortunately, this will remain true to the talent of Covid in and at least that piece of the challenge.
But you're calling out will go away.
Great I'll leave it at that congrats thank you.
Okay. Thank you.
Yeah.
Thank you.
The next question comes from Jay sole.
UBS. Please go ahead.
Great. Thank you so much all my questions about the share count guidance for this year it looks like the share count at the end of the quarter was $30 for your guidance to 37. It seems like you might generate 120 550 million of free cash have you considered buybacks looks like you're going to buy back 5% of the shares at the current stock price what are your thoughts about that.
Thank you.
Yes, Jay.
It is something that we've looked at and it's something that.
As an option what we've really.
Focused on is building our inventory building new stores and we've got a great payback on our on our new store.
Rollout and so we're it's a pretty much guaranteed payback on our new stores, we've seen others who have.
We opportunistically bought back shares in an.
I wanted to see the stock price.
The volatile after doing that I think for us or our use of cash is better spent right now in growing the business and building new stores and tackling some of that white space that we have available I would say that that again looking at the share count that as something that you know maybe a year from now that we look out a little more.
Seriously, but for the near term, it's not something that.
We've got the appetite for right now.
Okay, and then maybe I know theres been a lot of questions about this 900 store target, but Jim if you could just talk about.
What were some of the parameters that you put around this independent study because you know tractor supply has about 2000 stores. You know why are we 900 why not more than that because if you get the hand them. After you guys do you have on the slide deck I think it's slide 16.
You know Theres a lot of states that don't have.
A lot of density like you do in East, Texas and California.
You know what what would be the reason to not say hey, you know that.
1500, 1700 stores could be the ultimate.
Is that opportunity.
Well, there's a couple of things I'm kind of smiling because a few years ago, nobody thought we could ever opened 300 stores or 500 stores.
Now, we're ready to get the 900 that it seems conservative which is do.
To some degree.
A nice compliment I think the way we looked at the study.
And whenever you do an estimate like that there is.
Theres ranges of different assumptions right and you can relax.
Assumption, one or assumption to our assumption three or multiple more assumptions simultaneously.
So the universe of potential outcomes is actually quite broad.
So we when we got the results of that study we had to apply some judgment and saying you know what.
Where do we think why do we think it's a reasonable target for the mid term and Thats really at the 900.
We certainly have the possibility once we get closer to that end.
Clearly, we're several years away from getting.
Bumping our head against the 900 stores ceilings.
Bye.
Based on what we see in the development around the country based on what we see with new stores opening in some of these newer states.
Seeing if there's any cannibalization there is some likelihood that will take that 900 up again, but just again in the spirit of complete transparency, that's four years away or something right now where we.
We got.
400 more stores to open before we start thinking about what our next new store target is.
All of that said I appreciate your your sort of bullishness and and the comparison to.
Tractor supply yeah. They we have a world of respect for those guys.
Incredible company extremely well run.
<unk> led the path for us from a consumer standpoint, sometimes and certainly from a wall Street perspective.
And if we can approach anything close to their store count you know, there's plenty of opportunity for us to continue to expand our our brand across the country.
Okay got it thank you so much.
Thanks Jay.
Okay.
Thank you.
The next question comes from Mitch.
At the Seaport Research. Please go ahead.
Oh, yeah. Thanks for taking my questions I just have two I wanted to drill down on a couple of things have already been discussed one was on the.
On the product margin I know you guys have historically been a predominantly school price retailer, but do you have a sense as to what your you know your full price per cent is today versus maybe what it was pre COVID-19 and then when I look at the you know the margin bridge for 'twenty three you've got the product margin going up I'm kind of curious what's in.
Better there in terms of full price per sand I don't know if you've got that maybe ticking down a little bit I would think that if anything.
The main driver again would be the exclusive brands, but can you talk a little bit about the full price selling per cent and then I've got a forward.
Sure Great question, we haven't disclosed the full priced selling mix, but we have said, it's the vast majority and compared to pre COVID-19 the amount of full price selling has gone up.
A couple percentage points from come back then.
And so.
That's kind of what I can give you there is as far as the product margin expansion during the quarter or during the year.
Yeah, it's really going to be driven by it but you know me.
More of the full price selling as well as exclusive brand penetration growth of 300 basis points.
It may sound like a conflicted answers. So so the part of your question, where you said you react if there's going to be some give back from a from a clearing standpoint. There there are some products or categories, where we are expecting to have the <unk>.
Margin not not grow like like a dead or maybe there's a little more clearance baked into what we've.
Estimated but we think that's going to be more than offset by a better full price selling another category. So the mix of where we may have some clearance versus last year may be changed a little bit but that.
That product margin expansion does contemplate some more full price selling.
Along with exclusive brand penetration okay.
Appreciate the color and then also two more items on the margin bridge I notice that you're expecting occupancy deleverage in 2013 on a four four.
4.8.
Same store sales increase I'm just curious what is the what's the leverage point now on occupancy and has.
Maybe that's gone up but I guess, it's it's above a five copper are above 40 comp can you talk about that.
Thinking about the right way it is above a four eight for this year I would say it is more of a level set year. We've tried to provide as much color as we could on down the P&L, we didn't give leverage claims but it is.
Well above that that four eight.
Guide as we get into next year and you know me.
See this is a level setting of the business will grow from here will provide you with some with respect to provide January next year with some some leverage point that that will probably look more similar to what we have historically had but for this year.
It's something we're not providing mentioned Greg add yeah, I would just add that if you looked at the phasing of new stores last year, we opened 22, new stores in the back half of last year. So that puts pressure on occupancy rate this year of course.
And then we're opening 13% new units, which is a little bit elevated from the 10% unit algo. So that again put some pressure on occupancy.
That makes sense at the opening through this year, what we're planning on should help without flow next year as we did give you some leverage back.
Okay, alright, thanks again.
Yeah.
Thank you.
The next question comes from John Lawrence with Benchmark. Please go ahead.
Great. Thanks.
Congratulations guys great quarter. Thanks.
Thanks, John I appreciate you calling that out.
Jim would you just I.
No calls wrong warm, but let me just one quick question. If you look if you look at your customer and walk him through the year I can.
Say several years in the business do you think that that is that customer came to you years ago, Dubai work boots or one of the segments. Do you think most of the growth has come from that merger that customer buying that one specific thing like boots or fashion.
Or whatever and then as time has moved on and through the years, you've you've attracted more customers, but then that that historical customer has shopped more of the store and expanded whose basket.
So the quick answer is it's it's both right in very rough numbers.
We have grown nearly 70% in sales over the last two years.
Almost exactly half of that 70% can be attributed to a 35% growth in attracting new customers into the brand.
So therefore balance if there's if there's no real help for us in terms of inflation and basket size, that's been pretty de Minimis.
So the balance is our.
Legacy customer shopping more frequently and undoubtedly.
Expanding their wallet and shopping different parts of the store.
One of the things we said when we first one on the road and when we're going public is.
More than half of our customers shop at that point really had kind of two pieces of the business Western and work, but we saw a lot of crossover between the two businesses.
And so I think your intuition is right that a portion of our growth is just getting more share of wallet from somebody that has been a tried and true customer for us so they might buy.
Cowboy boots, but a carhartt jacket and now they're both a western anywhere customer combined.
So if I were to if I were to take my answer may be up one level in terms of altitude.
We're thrilled with the growth we've been able to.
Achieved because it's we're not promoting the business, we're not running more sales, it's extraordinarily healthy full price selling growth, it's driven both by the attraction of new customers and the increased frequency of current customers.
So.
Again, you're aware where.
Extremely pleased with the most recent year end.
And taking a page out of your book in terms of your question.
It's been it's been a pretty good decade of growth and we've added $1 billion in sales since we went public.
Yeah chip.
And theirs.
And not take it too far but theres no reason that that similar sort of trend could happen over the next three or four years as those new customers find more parts of the store.
Correct No I look we always have to challenge ourselves to find more opportunities for growth.
We are.
As I had mentioned in an answer to a question earlier.
We are thrilled with.
The share and the sales were generating from this country lifestyle customer.
But we're also just getting started right. There's there's plenty of opportunity for us to attract more of those customers into the brand. We started to do some small sponsorships that just as an example, with NASCAR. So that world of of fan base is open to us.
In addition to our tried and true legacy sponsorships with PRC, a PBR sort of a rodeo circuits. So there's there's plenty of opportunity for us to continue to get growth continue to add customers and then to be a bigger part of their day.
Our apparel and footwear spend.
Yeah, I don't know, how big that could be and we've raised our Tam from 20 billion to 40 billion.
Theres another.
Publicly traded footwear company I think for the camera is $1 eight trillion. So we've got some room between our 40 billion in net.
One eight trillion number.
Got it thanks again for your time I'll be in touch thanks.
Thanks, so much.
Okay.
Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Mr. Jim Conroy for any closing remarks.
Thanks, Jacob and thank you everyone for joining the call today, we look forward to speaking with you all on our first quarter earnings call take care.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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