Q1 2023 Boot Barn Holdings Inc Earnings Call
Good day, everyone and welcome to the boot barn Holdings' first quarter fiscal year 'twenty 'twenty three earnings call. As a reminder, this call is being recorded now I would like to turn the conference over to your host Mark to Dovish, Vice President of Investor Relations and financial planning. Please go ahead Sir.
Thank you good afternoon, everyone. Thank you for joining us today to discuss boot barns first quarter fiscal 2023 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 Watkins 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 <unk> Dot com shortly.
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.
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 barn space.
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 first quarter fiscal 'twenty 'twenty three earnings release as well as our filings with the SEC referenced in that disclaimer.
Do not undertake any obligation to update or alter any forward looking statements, whether as a result of new information future events or otherwise.
Now I'll 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.
On this call I'll review, our first quarter fiscal 'twenty results discuss the continued progress we have made across each of our strategic initiatives and provide an update on current business.
Following my remarks, Jim Watkins Who'll review, our financial performance in more detail and then we will open the call up for questions.
We are extremely pleased with our start to fiscal 'twenty, three and the strength of our first quarter results.
During the quarter total net sales grew nearly 20% over the prior year period with strong sales from both existing stores and new stores opened over the past 12 months.
Consolidated same store sales grew 10% comprised of an increase in retail store same store sales growth of 10% and ecommerce sales growth of 9%.
Consistent with prior quarters the growth in same store sales was driven primarily by an increase in transactions with a large portion coming from new customers.
We also continued our new unit expansion by opening 11, new stores for a third straight quarter.
In addition to strong topline performance, we once again saw merchandise margin expansion as a result of further growth in our exclusive brand penetration and strong full price selling which more than offset freight headwinds versus the prior year period.
The team's ability to drive topline growth and navigate fleet and supply chain challenges resulted in an EBIT margin rate of 14, 3%.
150 basis points above our guidance of 12, 8%.
Our earnings per diluted share in the first quarter was $1 29, and when adjusting for the tax benefit from share based compensation, our EPS was $1 26, or 12 cents better than guidance.
On a tax adjusted basis, we were able to achieve flat earnings per share when compared to the prior year period, which benefited from outsized growth in revenue and significant expense leverage.
We believe our sustained success and sales growth reflects the execution of our four strategic initiatives and showcases the future potential of the brand.
I will now spend some time highlighting our recent progress on each initiative.
Let's begin with driving same store sales growth.
First off I want to congratulate the entire team for achieving double digit comp sales on top of a 17, 9% same store sales growth in the prior year period over.
Over the last few years boot barn sales have reached record levels and to be able to grow on top of our new days by double digits is a testament to the level of execution across the organization.
During the first quarter, we saw broad based growth across most major merchandize categories, ladies apparel and boots work apparel cowboy hats ball caps and belts were our strongest performing categories.
Additionally, we saw healthy growth in men's western apparel kids' apparel and accessories.
Sales of flame resistant apparel exceeded the chain average while sales of mens western boots were a headwind during the quarter with negative comps versus the prior year period.
From a geographic standpoint, we saw strength in our north and west regions. The Southern region, which includes Texas lagged the chain average, but also posted positive comp sales growth.
From a marketing perspective, we continue to balance the priorities of attracting new customers. While also remaining relevant to our legacy western customer.
The strategy to expand the brand into new customer segments has proven successful and we continue to be encouraged by the growth of our active database.
We're also pleased that new customers are shopping with similar frequency to our core customers.
From an operational perspective, our stores were sufficiently staff to service the strong consumer demand, we feel very good about our staffing levels and the ability to hire associates in such a strong labor market.
I want to commend the entire field team as they continue to provide excellent customer service all while managing sales group merchandise flow and multiple omni channel initiatives.
Moving to our second initiative strengthening our Omnichannel leadership.
Our ecommerce channel had a solid first quarter with comp sales growing 9% over the prior year period as our digital business has had multiple years of outsized growth coming out of Covid. We are pleased with the ongoing growth.
Additionally, we continue to expand the merchandize margin rate in our ecommerce business driven in part by the increased penetration of our exclusive brands since the implementation of in store fulfillment last summer.
We are very pleased with the success of in store fulfillment and all of our Omnichannel initiatives as they haven't improved the consumer experience increased the percentage of omnichannel customers and help drive profitability in our online business.
Now to our third strategic initiative exclusive brands.
During the first quarter, our exclusive brand penetration grew to 31, 7% approximately 540 basis points higher than the prior year period. We are extremely pleased with the ongoing growth of our exclusive brands, which have grown approximately 10 percentage points in the last two years.
Once again three of our exclusive brands were among the top five selling brands in the quarter.
Additionally, the initial feedback on the for new brands, we launched at the end of last year has been strong and we are very pleased with the initial adoption by consumers.
I would like to commend our exclusive brand team for designing innovative and compelling product expanding our brand portfolio and successfully managing a complicated supply chain environment. It's been remarkable to see the incredible growth in this portion of our business over the last several years for perspective.
Our exclusive brand business has grown from $5 million in annual revenue 10 years ago to over $400 million last year.
Finally, our fourth initiative expanding our store base during the first quarter, we opened 11, new stores, bringing our total count to 311 stores across 38 states.
New stores opened in both existing and new markets continue to perform in line with our $3 5 million dollar sales expectations with results and a payback on our investment much faster than our stated three year goal.
We are confident in our ability to continue this momentum and are excited about our new store pipeline for the year with planned store openings in new markets, including New York, New Jersey and Maryland.
Turning to current business through the first four weeks of our second fiscal quarter. Our consolidated same store sales are slightly positive compared to the prior year period.
While we have seen a deceleration in discretionary purchases are more functional businesses remain strong.
It is encouraging that we've been able to grow on top of the tremendous growth in the business in fiscal 'twenty two as a reminder, the step function change in sales growth at boot barn has been delivering began in the first quarter last year, while there has been a concern that this trajectory.
Sorry, while there has been a concern that this growth was.
It was transitory and we would revert back to pre pandemic average store sales.
It appears that this new level of revenue and store a UV is sustainable going forward.
I'd like to now turn the call over to Jim Watch.
Thank you Jim.
In the first quarter net sales increased 19% to $366 million.
Sales growth was driven by a 10% increase in consolidated same store sales and sales from new stores added during the past 12 months.
Gross profit increased 18% to $138 million or 37, 7% of sales compared to gross profit of $116 million or 38% of sales in the prior year period.
The 30 basis point decrease in gross profit rate resulted from 70 basis points of deleverage in buying occupancy and distribution center costs.
Partially offset by a 40 basis point increase in merchandise margin rate.
The merchandise margin rate increase was primarily a result of growth in exclusive brand penetration and better full price selling partially offset by a 70 basis point headwind from higher freight expense.
Selling general and administrative expenses for the quarter were $85 million or 23, 3% of sales compared to $63 million or 25% of sales in the prior year period.
As expected SG&A expense Deleveraged, primarily as a result of higher store labor and marketing expense as we normalize our cost structure compared to the first quarter of fiscal 'twenty two.
Income from operations was $52 million or 14, 3% of sales in the quarter, decreasing 320 basis points compared to $54 million or 17, 5% of sales in the prior year period.
Net income was $39 million or $1 29 per diluted share compared to $41 million or $1 35 per diluted share in the prior year period.
Excluding the tax benefits, primarily resulting from share based compensation and each year net income per diluted share was $1 26 in both periods.
Turning to the balance sheet.
On a consolidated basis inventory increased 80% over the prior year period to $534 million.
This increase was primarily driven by a 50% increase in average comp store inventory in order to support the increase in average unit sales volume.
When evaluating our in store inventory against our updated sales projections, we have approximately 24 weeks of forward supply.
Which is in line with the inventory levels required to turn twice a year consistent with our historical average.
Additionally, we've added inventory to our distribution centers in order to support our exclusive brand growth, which continues to exceed our expectations.
The final portion of the increase in total inventory can be attributed to new stores. Both the 36, new stores opened over the past 12 months as well as the inventory needed to stock the pipeline of stores that will open over the next couple of quarters.
The team has done a tremendous job of securing the merchandize needless to fuel our growth and we continue to feel that the composition and the freshness of our inventory is healthy.
We finished the quarter with $75 million drawn on our revolving line of credit and $16 million in cash on hand.
Earlier this month, we amended our revolving credit facility. This amendment increased our capacity on the line of credit by $70 million from $180 million to $250 million and extended the maturity date by three additional years to 2027.
Turning to our outlook for fiscal 'twenty three.
In light of recent macroeconomic uncertainty coupled with a deceleration in our business, we have updated our guidance for the year.
For the fiscal year, we now expect total sales to be between 1.68.
And $1.70 billion reps.
Representing growth of 12, 9% to 14, 2% over the prior year.
We expect same store sales to be in the range of approximately flat to positive, 2% and earnings per diluted share to be between $6 and $6 20.
Our income from operations is expected to be between $247 million and $255 million or 14, 7% to 15.0% of sales.
We expect net income for fiscal 'twenty, three to be between $182 $7 million and $188 $6 million.
We also expect our interest expense to be $4 million and capital expenditures to be between $80 million and $87 million.
For the balance of the year, we expect our effective tax rate to be 25, 22%.
We are on track to open 40, new stores during the year, including the 13 stores, we've already opened year to date.
Please refer to pages 13, and 14 of the supplemental financial presentation, but we will be releasing shortly for further information on our revised fiscal 'twenty three guidance.
As we look to the second quarter, we expect total sales to be between $339 million and $346 million and same store sales of approximately flat.
We expect earnings per diluted share to be between 87 and 93.
Now I'd like to turn the call back to Jim for some closing remarks.
Thank you Jim.
We're very pleased with our strong start to fiscal 'twenty 'twenty free we are confident in our ability to execute on our four strategic initiatives and drive growth this year and over the long term.
I would also like to extend my gratitude to the thousands of associates in our stores distribution centers call centers and the Irvine office for their hard work and dedication.
Now I would like to open the call to take your questions Kevin.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up a handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Matthew boss from Jpmorgan. Your line is now live.
Great. Thanks, So Jim maybe to kick off on July same store sales.
Could you help maybe speak to drivers interview of the sequential moderation relative to June and if we broke it down how the composition breaks down between basket size purchase frequency or did you see any notable differences in performance by region.
Sure so.
Our first quarter total sales growth was 19 or second quarter or at least in July . It was plus 10 from a comp standpoint that our first quarter went from plus 10.
We're sort of slightly positive most of the Delta in same store sales growth is transactions based so.
Our transactions for July were down about one a little over 1%.
And in the first quarter, they were up about 7% or something like that.
So most of the deceleration has been.
Due to a falloff in transactions we.
Made up a little bit of background.
With our basket size getting slightly bigger in the second quarter quarter to date versus the first quarter, which got us Besides the positive.
Growth in the stores in terms of the the regional differences.
Yeah.
The way I would think about it is the the west had a very strong first quarter.
And has gone slightly negative in the second quarter.
The the complication there is the west is up against incredibly strong numbers. So.
As we look at the business and we try to look at what's going on in our west business.
We still actually feel quite strong on a two year basis last year, it was up 60% or 59% or something like that so to give two points of that back.
Isn't so bad on a on a kind of a three year comp basis.
The other business that turned negative in the second quarter was our south business, that's slightly negative and.
And our two other regions, both the north and the east are are doing well and there there are positive in the second quarter.
So that's kind of the composition of what's changed between Q1 and Q2 in terms of.
Transactions versus basket and by region.
Other cutback, which wasn't your question, but the other way to look at it is.
We continue to try to remind investors that most of our.
Business still is functional in nature. So when we look at many of our functional categories work boots work apparel.
Men's western apparel hats, all of those businesses in July were pretty solid.
So the falloff and perhaps expected lately given what everybody is talking about in terms of discretionary purchases has been a slowdown in ladies apparel ladies boots.
So that's that's kind of where the business has decelerated from a merchandise category perspective.
That's that's helpful. And then maybe just a follow up Jim on gross margin. So how best to think about second quarter and back half drivers as now you walked through some of the categories and in components on the top line and maybe if we're thinking about merchandise margin are incorporating some of what you're seeing in <unk>.
Terms of sales by category versus freight and occupancy just how best to think about gross margin in the second quarter in the back half of the year.
Yeah, Matt the one thing I would say to the group as we did post a supplemental presentation on our site that we're having some technical difficulties with the S. E T and then and then posting it on our site. So if that's not up now it will be up shortly and we've got some more detail there.
You've got access to it great at slide 14, I referred to.
Well, we've updated the fiscal 'twenty three financial guidance.
As far as the margin drivers.
Yeah, we would expect to generate 80 basis points of product margin.
And that's going to be driven by 300, and so again this is for the full year.
Keith So the balance of the year will be a little bit less than the 80 basis points.
And that's going to be driven by more full price selling similar to what we've seen in this last quarter in the previous quarters as well as.
Product margin improvement will be you know rhonda.
You know what we've got in there 80 basis points for the full year.
Offsetting that we've updated our guidance to be 100 basis points of freight headwind for the full year.
So what we found this last quarter was 70 basis points, we expect that the freight expenses will continue to be elevated and so that's what we've got baked in for the last half of the year as far as the occupancy deleverage and SG&A expense.
When we outlined our guidance.
At the beginning of the year, we were pretty granular on what we had guided there as the top line has come down.
Guiding the different parts like we did before but as the top line comes down we'll expect the deleverage around SG&A and our buying and occupancy to continue to be you know probably a little bit worse than what it was before.
That's helpful Best of luck.
Thank you.
Thanks, Matt Thank.
Thank you. Our next question is coming from Stephens a cone from Citi. Your line is now live.
Great. Good afternoon, everybody. Thanks for taking my question I wanted to focus specific on specifically on inventory positioning it sounds like you're pretty comfortable but Jim curious you can elaborate a little bit more hard because it looks it looks a little high you know I guess the question I have too is if the sales trends were to just now.
All right from here what are the levers that you could call it to appropriately manage inventories.
Steven it's Greg in and I'm going to take this question.
Question, given I have direct line of sight over merchandize planning and the inland and toys.
You know as Jim mentioned, we do feel really good about our inventory position I understand the point of your question.
But if we look at the increase to 80% increase it's really broken into three parts.
Jim spoke to the first part which is the comp store inventory build and I'll go into in a bedroom with up there.
The second piece is we've built up inventory in our Fontana distribution center that supports exclusive brands and container buys and then the third piece of it is directly related to new stores added over the last 12 months. So if we take that first chunk that they eat the growth in our.
Inventory per store.
That's about 45% of the 80% increase right so almost half and the average inventory per store is up 50% over the prior year and as you May remember we were chasing inventory last year as our business continued to do very well.
If you were to look at our inventory growth over the three year period eating a pre COVID-19 Q1 compared to this quarter, our inventories up 47%, but our sales in that time frame or up 61%. So we've actually sped the turn of debt.
And then in the supplemental deck. If you have it available on page five we kind of show historic weeks of supply forward weeks of supply.
And where we're positioned well given our new guidance, we have about 24 weeks of supply and that compose I'll say favorably to.
Q1 O three years ago in Q1 of two years ago, it's a little bit more inventory than last year, but again, we had a very strong sales trend and we were light on inventory.
The second piece is Fontana, that's about 30% of the growth and.
In March of last year, we signed an amendment to our D. C. At least there where we doubled the space. We went from 200000 square feet to 400000 square feet.
We weren't really in a position to grow inventory and that additional 200000 square feet. During the first quarter last year again, as we were trying to get inventory into the stores. So that's that's a piece of the growth and then finally, 18% of the 80% growth is because of the 36 new.
Stores that we added over the past 12 months.
So Jim kind of cowboy kind of I did write that.
Most of what we sell is functional and basic in nature or 70% of what we sell is on replenishment. That's what we disclosed in our 10-K, a few months ago. So you.
We feel like there's not significant markdown risk here as.
As we look at sales we are you know.
Continue to be cautious and and push receipts, where appropriate, but but we feel really good about our inventory content and quantity.
Okay I appreciate all the detail there and just to follow up on matts questioning around quarter to date, you know how much of the drought and are in the South Lake, Texas, I guess, a little bit in California is an impact I guess, we're trying to assess is.
The consumer slowing down because maybe gas prices are high and they're feeling it a bit but their hours or is it something that they just you know you've seen drought here and it's probably impacting some of your farm and ranch customers.
I think there is a combination of things that might be impacting demand.
Drought inflationary pressure concerns about the economy all those things.
You know for us.
Where we're candidly quite pleased that we continue to grow on top of the base that we built last year rate had we gotten into this current fiscal year and we were plus two the whole year, we would've been thrilled we.
We had a very strong first quarter as we cycled that quote from last year.
But that doesn't make us disappointed in the second quarter growth, if I'm honest and what where we're at.
Happy that we're holding onto the business that we have.
You know really put together over the last couple of years and I.
Margin plots of customers right.
Coming out of Covid, we were able to add for the business seems to be sticky.
Will we get some.
Tailwind in the future potentially re.
July was particularly hot there's been a drought, it's a small month for us etcetera.
We've got some things that might help drive business for the balance of the year, but even though.
Flat to low single digit comp for the balance of the year, we'd be pretty happy with.
Great. Thanks for the detail guys.
Yeah.
Thank you next question is coming from Max Brooklyn call from Cowen and company. Your line is now live.
Thanks, a lot guys. So first can you maybe elaborate a little bit more on hiring a new shoppers have behaved compared to your core shoppers are they starting to slow maybe similarly to the core or are there any diversion says I think you noted that most of the Delta in July as a transaction based and leaning towards discretionary.
A little bit, which is where I would guess that those new shoppers are probably over indexed a little bit more so any commentary there would be helpful.
Sure. It's a very good question.
And probably a good hypothesis, we have we have better data on our first quarter in our first quarter.
The customers, both new and legacy were behaving similarly, and in the second quarter.
It's hard for us to do that kind of analysis.
And on a kind of weekly or monthly basis.
If you are.
If you're hypothesizing that the new stores are coming into more fashionable categories and now they're there potentially.
Potentially shopping less I guess, that's a fair.
Yes, but we don't we can't really prove or disprove that if I'm honest.
So as we as we get more information over the balance of this quarter, we'll be able to opine on it.
But that said I mean I think.
When you look at how much the business has grown over the last two years, even if we.
We're getting slightly less frequent shopping from a sliver of our new customer base.
We're pretty pleased to be able to hold on to the other 99% of the of the business that's been growing over over the last 24 months or so.
Yes.
Got it that's very helpful. And then can you discuss what you're seeing in the competitive environment.
Your primary peers, maintaining our pricing discipline and then what about just secondary and tertiary obviously the promo environment is picking up so just curious there and then is that having any impact on how you're thinking about your own pricing structure over the next several quarters.
Sure.
On the second piece, where I, we're a full price selling retailer where.
We feel like we have a very strong handle on our inventory position.
We'll have our.
Typical.
Promotional periods in our typical matter.
Of course, our business markdowns for the balance of the year, but we don't expect to change our promotional posture.
It all to be honest in terms of the competitive set.
We compete against.
Two or three groups of of retailers out there.
The number one cause.
Imperative Sag is hundreds of single store operators, the mom and pop industry and.
Some of those folks may become more promotional suddenly hold price.
We honestly will not change our promotional stance regardless of what they do is they are just not we don't trade customers with them very much we typically take share.
And maintain sort of a stickiness with those customers and we wouldn't chase any any.
Single store, operator from a sales and promotion standpoint, we have one other chain of <unk>.
Your western stores based in Texas.
Called the cabin there's categories operates very similar to what we operate the way we operate which is mostly full priced selling occasional modest promotions and tend to be extremely rational.
And then the last big competitor, we have is sort of a group of farm and ranch players led I guess by tractor supply.
And you know they continue to hold a E D. L P strategy.
And frankly continue to raise their prices right I mean, that's one of the things they called out on their call was that.
Sales growth they've gotten thanks to inflation.
So I don't really expect to see a promotional environment within our industry.
And nor do we believe that as mass market retailers and mall based retailers and big boxes, if they become more promotional I candidly. We just don't think that's kind of an impact on who shops with us and our core customer.
Great. Thanks, a lot that's helpful best of luck.
Okay. Thanks, Max Thank you.
Next question is coming from Peter Keith from Piper Sandler Your line is now live.
Hi, Thanks for taking my question guys.
Just looking at the the revision to the EBIT margin guidance for the year is it just purely a function of just taking a reduced sales outlook or are there any other puts and takes with regard to gross margin or expenses.
Yeah that is the main driver of Peter.
Top line revenue.
Southern post some painful, but I would say that the product margin expansion that we had originally guided.
It would be 50 basis points, what we're seeing is strength in Q1 and even into July and when it comes to product margin.
About 100 basis points of product margin expansion.
They are being impacted by freight and so we've raised that.
The 80 basis points of expansion for the year the freight headwinds that we had initially called out as being 130 basis points for the year, we've lowered that to 100 basis points again, so it's still quite a headwind we're still seeing elevated freight cost, but yeah. We are seeing the cost of containers come down we're seeing them.
You know the highest come come down or coming down off of the highs and so we're encouraged that while we'll still see a freight headwind the rest of the year the 100 basis points.
Fourth quarter, it seems more reasonable and then hopefully you know has.
As spot rates continue to come down and yeah at some point the fuel surcharges, but we've seen an increase at some point those will reverse you know whether that's that's next year or beyond but there'll be some.
Good news coming our way at some point in the future probably next fiscal year.
We're encouraged by what we followed last quarter or so so 100 basis point that those are the two drivers that we called out and then.
And we didn't provide updated guidance around buying and occupancy deleverage in opex deleverage. So we had previously guided to a 40 basis points to 90 basis points of deleverage respectively in the category and.
The July one will be a little bit worse in both of those those are in that.
Got it.
The drivers to get to that updated guidance on that Opex I'm, sorry for me right.
Okay helpful.
And then Hmm just maybe more of a near term question, there's everyone's trying to understand what's going on with the consumer and the competitive set so ah interesting that youre seeing this continued positive trends in the north and the east is anything to read into the geographic disparity. It's top of mind for me and maybe it's a little less competitive in those segments.
Versus our south and west, but I'd love to hear if you have any thoughts.
You know it's hard to create.
Cogent narrative, if I'm honest when we look at sort of the pockets of strength and pockets of relative weakness.
For example, we've had strength in west, Texas from a drilling perspective.
Well, we've had weakness in Houston from a refining standpoint, so it's.
Again, it's hard to find a bunch of dots that lineup.
Texas is definitely more competitive we have a very strong competitor down there in cabin theirs.
But in the West we yeah, we've grown up here we've been here for 40 years, we're the strongest player out here I think by a lot.
So I can't really.
Place.
Sort of a slowdown in the west on competitive pressures.
Candidly I think the worst is partly due to some of the.
Core egg markets in California experiencing.
Experiencing drought and inflation on their raw materials et cetera.
Plus just going up against.
Monster numbers for multiple years in a row.
So our our West region. If you were to parse through the last several years of.
Earnings calls.
Almost always led with growth in the west and for them to finally have a pretty modest slowdown on top of a J.
Gigantic growth last year, it's kind of hard to blame it on anything other than you know that business.
Can you, possibly grow to the to the sky and with some of the pressures that they're facing now.
Perhaps transitory, yeah, they'll probably get back to growth over the next couple of months or quarters, knowing that team.
So that's that's kind of how we view it and Youre right in there in the north and in the east perhaps theirs.
Less organized competition, it's more mom and Pops.
But we've seen some really nice growth in those two regions.
Okay, Alright sounds good thanks, so much.
Thanks, Peter Thank you Peter. Thank you next question is coming from Jonathan Komp from Baird. Your line is now live.
Yeah, Hi, Thank you good afternoon.
Wanted to just ask a question on the implied back half outlook I think the comps guidance, there's something like flat to down low single digits in the back half. So maybe could you just talk through the factors you've considered you know in formulating that guidance and then maybe a bigger picture just what your thoughts are in terms of how the business would react.
Today in a recessionary scenario.
Sure.
So really.
Really what we did John on the back half of the year as we.
We looked at the current trend in July and.
We're up 6% from the same store sales.
Endpoint and so on the on the back half.
And we said okay. If we were to hold that trend and be flat for the rest of your that fed seemed like our best estimate as to where the business goes I mean, we saw really nice growth in Q1, with the plus 10% comp of 19% total sales growth.
Yeah.
There's a scenario, where we reaccelerate on as well as hold where we are or maybe it deteriorates a little bit from here, but I think based off of just four four or five weeks of business.
Guiding at reducing that guidance to be more in that flat range or flat to minus two for the balance of the year.
Total sales growth of around 11% to 13%.
Like the prudent thing to do given the backdrop.
And then you had the question on the Recessionary what was your question on the recession, John I apologize yeah, what we'd love to hear just your broader perspective on how the business would react in a recessionary scenario or if you have any views on how your core customer would hold up just maybe thoughts there.
Sure Yeah look when we've had come down from the economy, including when we had.
You know the big clients in the oil patch several years ago.
And our core customer still.
Needs our product there there still.
Wearing through work boots and in denim and jackets.
Many of our western customers work in that product as well and there they use our merchandize for.
Real functional purpose and certainly if there was a.
Massive change in employment.
Maybe we'd see some florida in those categories, but most of our business isn't really discretionary in nature, so even when.
We had that turned down in the price of a barrel of oil in 2015 and 2016.
First our annual comp, but we got to was flat.
So I think it speaks to sort of the resiliency of the model.
And the diversification of our market base now are in our consumer and stores further helps us to offset weakness in one area with strength in another so.
Look we're not completely a resilient two or immune to a downturn in the economy, but yeah for for <unk>.
For the most part our customers turning to us for functional product and not for discretionary are fashionable purchases.
Yeah, that's really helpful. And then just one follow up Jim I know you mentioned no plans to change your promotional stance.
I thought you mentioned, maybe some other drivers that you could pursue hard during the year. So any other color on specific drivers you have in mind outside of Youre using promotions to drive traffic.
Yeah I think.
Our marketing team is doing a fantastic job and continues to elevate the brand and we have.
You know entered into some some really nice sponsorships and some.
Extended the brand reach into some areas that we haven't been in before whether that's a major league baseball or NASCAR and so that's a nice driver from a from a sales standpoint, I think from a from a margin standpoint.
Yeah, we talked on the last call when asked about markdowns and whether we'd see more markdowns and and we continue to believe that that will have exclusive brand penetration growth will have better full price selling and we expect to have some markdowns in some areas. If we need to clear out some seasonal goods than what we'll be doing that.
But again for the most part.
Product is basic and core and it's it's you know if we have too many work boots. We can we can use those again next year and work our way through that inventory. So we don't expect markdowns to be significant and if and to the extent that we need to do those markdowns. When we talked about also on the last call was with the in store fulfillment.
That went live last summer, we have the ability to.
And.
Don't take product that's in one store may be broken sizes, you can put that on our website and get to that.
The views of the online customer and.
Increasing that that merchandise margin and that's why it's reflected in the guidance that we haven't around product margin for the balance of the year.
Okay, great. Thank you very much.
Thanks, Tom Thanks, Jim.
Thank you next question is coming from Cory Garlow from Jefferies. Your line is now live.
Hi, good afternoon, and thanks for taking my question.
My first question I wanted to ask dealt with inflation just curious is the higher.
Dealing with that are you, taking price and passing it through to the customer or do you have certain initiatives in place, where you're looking to mitigate some of the higher costs that you're witnessing and and then also if you could just talk a little bit about trends that you're currently seeing in western men's western boots.
So Cory I'm on the inflation piece.
We have seen some modest inflation, then on product costs and input costs and similar to what others are seeing in our merchants and our exclusive brand king the I've been hustling and working with our vendor partners and manufacturers to <unk>.
And using our growing economies of scale to two.
You offset some of these inflationary pressures, we've talked a little bit about the freight pressures that we're seeing and you know that's a temporary headwind that eventually will will dissipate, but our approach as you stated has been consistent which is to pass those price increases onto the customers, while maintaining the same merchandise margin rate.
That's.
<unk> been working for us so far and we'll continue to do that approach and use that approach, but yes, we are seeing some of that inflation coming through our product cost and.
We're going to maintain that margin rate.
I'm going to add to that and then I'll come back to that.
Mens western boots piece of it.
Yeah, the credit to the to the merchants, who have actually been managing cost inflation so well.
That it's for US it's been a relatively small piece of our assortment, that's gone up and price relatively small amount.
It sounds like that that we're not getting sort of the artificial comp driver that you'd get from.
From raising prices more.
On the men's western boots business it's.
About it's a pretty big business for us is about 13% of sales.
We've.
It splits into.
Performance sole boots, and leather soled boots are not may not mean, a lot to everybody listening, but the performance sole boots are more functional in nature.
And candidly we've had some difficulty trying to get some of that product in stock and it's now coming back online. So we're hopeful that that business seeing some life going forward now that we're in a better inventory position with the performance sold side of the business, which is the bigger part of the biz.
Yes.
But that's how I guess I would characterize the men's western boots business, notably the men's western apparel business.
Was strong in Q1 and almost equally strong in Q2, so we're still getting that customer in the door.
And perhaps theyre, just waiting a little bit longer on a higher.
AUR product like a cowboy boot versus a pair of opinions or a shirt and so we'll see stay tuned.
Got it and then have you seen any sort of.
Interesting dynamics, where people are trading down from different brands, because maybe they're a little bit more strapped for cash are.
If you will.
And you've seen obviously seen the transactions decline in July , but just curious if you're starting to see any sort of.
Interesting changes I pricing tier within the brands that you do carry.
Honestly, we're not really seeing that using an example on the men's western boots for example.
And in the first quarter.
Our.
Mens western boots business was slightly down, but the most expensive category of boots that we sell.
Men's western exotic skin boots was actually up so.
While the.
The natural or conventional wisdom would be people are trading down et cetera, we actually haven't seen that.
One possible explanation of that.
And on a relative basis, we are seeing our higher income customers performing better than our lower income customers. So maybe that's why we're not seeing a trade down because our are slightly more affluent customers are still shopping.
You know kind of more frequent way then.
Then are less affluent customers, but we have looked for that trade down.
We honestly haven't seen it yet.
Anticipated that call we recognize that other companies are calling that out we haven't seen that here, though.
Great very.
Very helpful. Thank you very much and best of luck.
Thank you.
Thank you. Our next question is coming from Dylan Carden from William Blair. Your line is now live.
Thanks, a lot just two quick ones here. If you could just give me a sense or a sense of where marketing costs are in regards to historic ranges and maybe you know when you might start lapping.
Some of that headwind and similarly.
The on the merch margin side, when you lap the most significant kind of increase in freight costs.
When maybe the higher penetration rates lower promotion cadence can kind of offset that more fully.
Thanks.
Yeah, So don on the on the marketing cost.
Marketing costs were lower as a percentage of sales than what we've guided for the full year. So again as a reminder, we tend to target a 3% of sales spend in marketing.
A year ago in Q1, and Q2 as sales accelerated the planned marketing expenses.
We are a lower percent of the increase sales right. So in Q1 and Q2 were up again.
That timeframe, where the you know we had the.
The lower spend in marketing as a rate of sales and so that headwind should get a little bit better in Q3 and Q4 and.
And then as far as freight from the from the prior year standpoint, the freight was pretty.
Consistent last year headwinds I think if you look back at container costs and some of the things that we had it did.
Kind of peaking and.
Really I guess about six months ago, if I look at the freight headwinds going back Q4 was 60 basis points Q3 was 60 basis points Q2 was 10 basis points. In Q1 was 10 basis points right. So we saw in the third quarter. The freight really getting elevated so I think as we move into the back half of this year.
We'll see that I guess, the compare ease a little bit again.
There's a little bit of accounting nuance with how it takes six months.
For the free the higher freight charges to work its way through the P&L, It's freight expense and so that's really why we've got the guide out there at a 100 basis points of headwind for the rest of this year and that we would expect that next year is when we might start seeing some relief as it comes.
As to the freight headwinds.
Thanks, a lot.
Our next question is coming from Sam Poser from Williams trading your line is now live.
Hi, Thanks for taking my questions good afternoon.
Can you can we can I said the gross margin question straightforward.
How should we think about the total gross margin for the year. I mean are we or are we looking at like mid 37% range is that a good number as it should improve in the back half.
Or is that too high.
I think that that's a pretty good number.
Sam I think yeah the 37th.
I think that's great.
And then.
I I might've missed it but the euro.
Your sales and your work category how were they in the quarter.
And in the first quarter, both work boots and work apparel grew and grew nicely our work apparel business. It.
It was a solid double digit growth in the first quarter.
In this part of the year work apparel was only about 5% of ourselves so.
That was a help to overall comp, but it's just not that big a business work boots were also high single digit positive comps in the first quarter as we got into the second quarter. Both businesses are still solidly positive they both slowed a little bit, but what we really saw sequentially between Q1.
Going into July as ladies boots in ladies apparel decelerated massively now they've started with a very strong trend, but they they lost them double digit.
Pieces of their trend if you have a they came down almost 20 points in comp.
Ladies western boots in the second quarter, it's still slightly positive.
Ladies western apparel is slightly negative, but they were strongly positive in Q1.
And I guess my question a follow up to that is what can what can you do through your expanding omni channel operations in your loyalty program and so on.
Without getting promotional.
Sure.
Encourage that woman.
Are the customers that have slowed down to come back.
You know given what's going on or are we dealing with potentially you know six week blip in back to school starts in gas prices come down.
I mean, you're guiding it sounds like just to what's happening now and not assuming that there's going to be much improvement except for maybe some falloff of some freight costs that'll help the gross margin.
Right.
No that's very fair.
Yes.
I think our guide right now and I think every management team is trying to out guess.
A number of different highly impactful macroeconomic factors all at the same time and try to give wall Street not.
Nine months view into their business that said, we had an extremely strong last year, we had an extremely strong first quarter and we had four weeks of less strong business, which [laughter].
If you really wanted to look at it with a microscope at slightly better in the latter part of July versus the first part of July so.
I think part of it is we're extrapolating current business and we're also looking at.
All the macro factors and trying to be conservative what with what our outlook is.
And part of the thinking ways even in this scenario.
Our business still holds up pretty pretty strongly our earnings holds up pretty strongly I mean, it certainly seems that.
The market is expecting much worse right at least looking at our multiple.
But even with this conservative guide.
Yeah Grill.
Generate $6 to $6.20 worth of earnings on a year.
Which.
Over the last few years, and it's a nice growth rate going back for three or four years. So.
That's the way we're thinking about it it is not intended to be overly pessimistic, but it is looking at a very short time period.
And candidly, a very small or low volume month themselves and in trying to project, what's going to happen for the balance of the year.
Thanks, very much and I appreciate them.
Yeah.
Okay. Thanks, Tim. Thank you. Our next question is coming from Jeremy Hamblin from Craig Hallum. Your line is now live.
Thanks.
I wanted to follow up on exclusive brand penetration and just in terms of thinking about price points for that you had another quarter of extraordinary.
You know penetration or growth in share of mix in that you know closing in on 32%.
Do you see that as a you know one how do you view those brands price points are versus some of your other kind of high.
Sales mix brands like an area or so forth and then secondly, I wanted to get a sense for you you've launched a whole bunch for new exclusive.
Exclusive brands this year and to get a sense of how those brands are tracking versus you know some of the incredible success you've had with <unk>.
It'll wind or you know Cheyenne Cody, James Hawkes et cetera.
Over the years.
Sure.
On the second piece, they're tracking well there they're tracking.
In line with expectations or slightly better than theirs for a different trajectories. There. So theyre not all exactly the same but we feel very good about their additions to the business.
And we.
We expect them to build over time.
We have somewhat of a balanced approach, we want to bring out those brands with a.
Somewhat of a splash, but we also.
Or a little risk mitigated in how much dollars, we commit to them.
And we get to see a couple of quarters of selling and then we push on what's working and we pull back on what's not working and then we will have the ability to accelerate more going forward. If I were to think of the most recent two exclusive brand launches probably the better one to look at that's more analogous is when we launched Hawks.
Workwear and it got it got out of the gate relatively quickly and then expanded nicely to the point where it's.
A pretty decent penetration in the businesses that it operates in Idaho wind was sort of a runaway home run from the very beginning the product line with fantastic our partner with Miranda Lambert was just a great.
Partnership marketing push et cetera. So it's a that's kind of an unfair Lee are artificially high bar to hold ourselves to but the Hawks launch.
<unk> is more appropriate in and the four new brands feel like they're all following that trend line to a large extent.
In terms of.
Our exclusive brands relative to the portfolio of other brands.
While while some companies are looking to bring out more value oriented product to N.
In anticipation of a weakening economy or in in response to actual inflation today, we continue to.
Stick to our strategy that are exclusive brands should be high.
High quality best in breed.
Boots or apparel that should be very.
Very much in line with the best brands in the space.
Hum.
Most of the other vendor.
Vendors that we do business with area. It's a great example of an area has helped us build our business there and extremely strong partner.
No. They they will continue to get growth with us going forward.
Typically what happens is when we bring in our exclusive brands a more tertiary brand get excluded or diminished to make room for one of our new brands.
But we always want to make sure that we have.
A nice variety and assortment of different brands and different products, both within our own exclusive brand portfolio.
As well as the national brands out there.
Yeah.
Okay. So our interpretation is.
The price points you.
You know kind of holding firm on price points and you don't feel like your exclusive brands are you know slightly lower price points in some of the other national brands and you could maybe potentially benefit from a margin perspective, if there was a trade down quite trade down.
Correct right I mean, well yeah, it's they're in line with the National brands. So.
It would be it would be disingenuous for us to say, our customer center trade down or exclusive brands didn't help our margin rate because they if they're really not trading down in place if they if they trade over so to speak yeah retail places equal we of course make more margin and as we build our inventory.
That part of our business.
To the extent that we wind up with future markdowns, which again I think we've.
Tried to.
Really make people few people feel comfortable that we don't we're not too worried about ongoing future markdowns, but even if we have been we're starting with much higher margin rate R&M exclusive brands. So we have a bit of a hedge on the downside anyway, but it's.
We're really not pricing them lower.
To take care of a customer that's trading down.
We have we have been able to keep the price from increasing.
In many cases, so by default, we may wind up slightly lower than some third party brands, but that's more because in some cases, we've had to raise prices for third party brands.
Got it.
And just clarifying one point to it and thinking about the you know the guidance change.
Is it kind of a fair rule of thumb here. So you guided down about $50 million here at the midpoint.
And that equated to about 40 basis points to your EBIT margin is that a pretty fair rule of thumb, you know kind of going both ways. If sales ended up a little better than you were thinking you might.
Get let's say by $50 million, you're going to get that 40 basis points back or you know cotton Conversely.
Conversely, if it's you know a little softer by another $50 million and 40 basis point, that's about kind of the you know the incremental margin rates so to speak every $50 million.
Yeah, I think within a narrow range that that's okay. I think you can look at what our guidance was and how we got to where we re guided and kind of see what that would look like on the outside.
Thank you.
Again, I think between the range we provided for the current guidance and then you have the metrics in the margin.
Had out there before you can kind of build a model on the on the downside scenario, if that's what you're looking to do better.
And at some point that that range.
Kind of falls apart, if you get too high or too low off of what we've provided you.
Got it well thanks for taking the questions and best wishes.
Thanks, Jeremy Thanks, Jeremy.
The next question is coming from John Lawrence from Benchmark. Your line is now live.
Oh, Yeah, good afternoon guys.
And would you talk a little bit about just construction cost inflation anything that's surprising you as you move forward with these contract delays et cetera permitting.
To maybe alter the cuckoo afraid at all.
Sure Juan.
Separating the question on the cost side.
Certainly there's been some inflation, but it's kind of baked into our model in and speaking to our capital assumption is baked into a payback model and all of our stores are.
Are performing so well our new stores are performing so well that even if our capital expenditures have gone up slightly there.
The payback has been so strong that it just gets.
Sort of overwhelmed by our by the sales at the stores are generating.
In terms of timing.
I would say we feel very good about the phasing of stores by quarter, you were kind of holding ourselves to the standard of opening 10 stores each quarter.
<unk>.
Slipped a little bit with in each quarter and in fact ourselves were slightly off in the quarter, even in the first quarter. Because we were they opened a little bit later in the quarter than we had initially anticipated.
I view that as noise and but it is things like you talked about it we can't get an electric bus we can't get it permitted we can't whatever I think our real estate and construction team has done just a phenomenal job of hustling through.
With jobs across the country, two to minimize or mitigate the the delays in that area.
And then I would just add John that we've we've modeled that into our updated guidance.
Little bit of slippage in construction timing just to make sure that we're being.
Cognizant of that.
Great. Thanks, guys appreciate it good luck.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Very good. Thank you everyone for joining the call today, we look forward to speaking with you all on our second quarter earnings call take care.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.