Q2 2023 Boot Barn Holdings Inc Earnings Call
Okay.
Good day, everyone and welcome to the Boot Barn Holdings, Inc. Second quarter 'twenty 'twenty three earnings calls.
As a reminder, this call is being recorded.
Now I'd like to turn the conference over to your host Mr. Mark Dental wish widespread evident all financial planning.
Please go ahead itself.
Thank you good afternoon, everyone. Thank you for joining us today to discuss boot barns second 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 a.
A 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 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 the 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 the forward looking statements to be made during this conference call and webcast. We refer you to the disclaimer regarding 40 <unk> forward looking statements that is included in our second quarter fiscal 2023 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 this call I'll review, our second quarter of fiscal 'twenty three 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 very pleased with our second quarter results, which reflect.
Growth on top of the market share gains we've achieved over the past few years.
During the quarter with total net sales grew 12, 4% on top of 69, 5% growth in the prior year period with strong sales from both existing stores and new stores opened over the past 12 months.
On a three year basis total sales grew 88% compared to the second quarter of fiscal 'twenty 'twenty.
We believe that driving additional growth this year on top of such strong growth over the last several years demonstrates that the market share gains we've achieved will be sustainable.
During the second quarter consolidated same store sales grew two 3% comprised of an increase in retail stores same store sales growth of three 9%, partially offset by an e-commerce sales declined 7%.
On a full year basis consolidated same store sales grew 56% compared to the second quarter of fiscal 'twenty 'twenty.
We also continued our new unit expansion this year by opening at least 10, new stores for a fourth straight quarter.
In addition to solid top line performance its merchandise margin expanded 50 basis points, primarily as a result of quote and exclusive brand penetration and better full price selling.
Once again, we expect to maintain our full price selling philosophy and do not anticipate a material change in promotions or markdowns going forward.
The combination of topline growth and ongoing strength in merchandise margin, resulting in EBIT margin rate of 12, 6% our.
Our earnings per diluted share in the second quarter was $1 six or 13 cents better than the high end of our guidance range.
We believe our consistent success in sales growth reflects the execution of our four strategic initiatives and showcases the future potential of the brand.
Now spend some time highlighting our recent progress on each initiative.
Beginning with driving same store sales growth.
We are quite pleased that we've been able to build on top of the outsized same store sales growth last year for the quarter. Our same store sales grew two 3% as we cycled a remarkable 61, 7% increase in the prior year period.
Retail store comp was driven by a 4% increase in transaction size due to an 8% increase in average unit retail price with average transactions per store approximately flat versus last year.
We believe the fact that we continue to grow on top of last year's level is a testament to the strength of the brand and the durability of the step function increase in sales that we've experienced.
During the second quarter, our strongest growth categories, where men's western apparel men's and ladies' denim work apparel and work boots and cowboy hats.
Sales of men's western boots, and Lady non denim apparel declined on a comp store basis over the prior year period and sales of ladies boots were almost flat.
While the performance of ladies boots, and apparel is lagging on a one year basis. It is important to call out the bulk categories cycled a comp growth of more than 100% in the same quarter last year.
From a geographic standpoint, we had strong results in our east and north regions solid growth in our South region and a decline in our west region, which is perennially our strongest region.
To put this in perspective, while our west region was negative for this most recent quarter that region has outperformed the chain average on a three year comp basis.
From a marketing perspective, our creative team continues to modernize and build the brand across multiple forms of media as we add new segments and nature of our legacy customers.
Combination of World class creative talent customer messaging any strategic mix of acquisition and retention oriented programs has enabled us to continue to grow our customer base across the country.
We believe that the strength of the brand continues to build as evidenced by the strong sales performance of new stores in brand new markets on the East coast.
From an operational perspective, we are extremely proud of the field organization across the country over the past two years, our average store unit sales volume has grown by more than 50%.
Our field organization has demonstrated the ability to handle this increased sales level.
Augment the in store staffing model and to manage the additional inventory needed to fuel this growth in.
In addition, they have taken on several new omni channel initiatives and implemented new in store technology solutions further enhancing the store experience.
As we approach the holiday season, we feel good about our current staffing and overall preparedness.
<unk> has already begun hiring seasonal store partners for the holiday sales surge and the application flow from new candidates is quite healthy.
I want to commend the entire field team as they continue to provide excellent customer service, all while managing sales growth supply chain challenges and multiple omnichannel initiatives.
Moving to our second initiative strengthening our Omnichannel leadership.
We continue to build our omni channel capabilities and integrate our two selling channels as.
As we evaluate the broader retail landscape, we are increasingly confident that our long standing strategy of leveraging the combination of our store and digital businesses is proving to be a successful model to profitably fulfill customer demand.
For example, we continue to use our ecommerce business to prospect for new customers, and then convert them to store or omnichannel customers.
Conversely, our stores are extremely instrumental in the growth of our ecommerce business as they have some involvement in more than two thirds of our digital sales.
Over the past year, we've expanded our ability to fulfill our ecommerce demand from our stores, adding this capability has given us multiple advantages, including the ability to dramatically increase the exclusive brand penetration of our e-commerce sales as well as the ability to move through store clearance inventory more efficiently and.
At a higher markup by making all inventory available to all shoppers regardless of channel or location.
For the most recent quarter our ecommerce sales.
Our E Commerce same store sales declined 7%.
There are two primary drivers of the decline in E. Commerce sales first the majority of the erosion in online sales during the quarter is attributable to a sharp decline in sales on Amazon marketplace.
This business is relatively small making up approximately 10% of our online sales or 1% of total sales.
Additionally, given the third party nature of the Amazon relationship. This portion of our business is less strategically important and less profitable than our traditional e-commerce sites.
The second factor relates back to our e-commerce business last year.
Last year, we made considerable gains because we had a strong online inventory position, while many competitors and branded sites were low in stock.
Now as competitors are back in stock we have given back some of the gains we made over the past year.
From a longer term perspective, we are quite pleased with the multi year growth you have seen in sales with our ecommerce business up 55% on a three year basis and continued multi year growth in online profitability.
Now to our third strategic initiative exclusive brands.
During the quarter, our exclusive brand penetration grew to 32, 3% more than 350 basis points higher than the prior year period.
Compared to three years ago, our exclusive brand penetration has grown over 10 percentage points, which is a testament to the quality product and compelling design created by the team.
We continue to be encouraged by the performance of the newly added brands and are optimistic in their future growth prospects. Additionally, three of our more well established exclusive brands were among the top five selling brands for the quarter on a consolidated basis.
Our exclusive brands, creating strategic point of differentiation for us and we believe provide an ongoing opportunity for us to build our merchandize margin.
For the full fiscal year, we expect to grow exclusive brand penetration to 31, 8% and approximately 350 basis point increase over fiscal 'twenty two.
Finally, our fourth initiative expanding our store base.
Our new store development capability continues to build the business on a national scale.
During the second quarter, we opened 10, new stores, including expansion into New Jersey, and Delaware, bringing our total count to 321 stores across 40 states.
New stores opening in both existing and new markets continue to perform in line with our $3 5 million dollar first year sales expectations, which results in a payback on our investment much faster than our historical 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, Connecticut, and Maryland.
Yes.
Turning to current business through the first four weeks of our third fiscal quarter total net sales have grown approximately 8% over the prior year period, driven by continued sales growth from the new stores. We have opened over the last 12 months.
Our preliminary consolidated same store sales through the same period or down one 3% compared to the prior year period.
Driven by a 17, 6% decrease in e-commerce sales, partially offset by retail store same store sales growth of one 7%.
We have seen further softness in our ecommerce sales, which we believe is a result of many of our online competitors and third party vendors returning to in stock position on their sites and on Amazon marketplace.
On a three year basis store and E. Commerce same store sales are up more than 48% in October .
We are pleased to see the growth in retail store same store sales, particularly given the very strong sales we saw in the prior year periods.
I'd like to now turn the call over to Jim Watkins.
Thank you Jim.
In the second quarter net sales increased 12% to $352 million.
Sales growth was driven by sales from new stores added during the past 12 months and a two 3% increase in consolidated same store sales.
Saw an increase in average unit retail prices driven in part by inflation.
Gross profit increased 9% to $129 million or <unk> 36, 7% of sales compared to gross profit of $118 million or 37, 8% of sales in the prior year period.
The 110 basis point decrease in gross profit rate resulted from a 150 basis points of deleverage in buying occupancy and distribution center costs, partially offset by a 50 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.
Included in our merchandize margin expansion or 10 basis points of freight expense leverage.
This improvement in freight expense was better than the 100 basis points of deleverage we had anticipated for the quarter as we continued to experience elevated container costs, along with some inventory storage fees, which were capitalized at a higher rate than what we experienced a year ago.
We expect to see elevated freight expense in the third and fourth quarters as we sell through the inventory burdened with the peak freight charges.
Fortunately, we are now regularly booking containers at spot rates, 50% lower than recent peaks and have eliminated most offsite storage fees with the opening of our new distribution center in Kansas City, Missouri.
Given these encouraging trends, we anticipate reverting back to normalized freight expense as we move into next fiscal year.
Selling general and administrative expenses for the quarter were $85 million or 24, 2% of sales compared to $68 million or 21, 8% of sales in the prior year period.
As expected SG&A expense as a percent of net sales increased primarily as a result of higher marketing expenses other store related expenses and higher store payroll.
Income from operations was $44 million or 12, 6% of sales in the quarter compared to $50 million or 16% of sales in the prior year period.
Net income was $32 million or $1 six per diluted share compared to $38 million or $1 25 per diluted share in the prior year period.
Turning to the balance sheet.
On a consolidated basis inventory increased 83% over the prior year period to $641 million.
This increase was primarily driven by additional inventory in our distribution centers in order to support new store openings and our exclusive brand growth, which continues to exceed expectations.
Average comp store inventory increased approximately 39% over the prior year in order to support the sustained increase in average unit sales volumes.
When evaluating our in store inventory against our updated sales projections, we have approximately 23 weeks of forward supply, which is in line with our historical average.
The final portion of the increase in total inventory can be attributed to new stores. Both the 43, 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 is doing a great job of maintaining our in stock position as a house of brands and we continue to believe that the composition of our inventory is healthy.
We finished the quarter with $20 million in cash on hand, and $147 million draw.
Drawing on our $250 million revolving line of credit.
Turning to our outlook for fiscal 'twenty three.
We have updated our guidance for the fiscal year and now expect total sales to be between $1 six five and $1 67 billion representing.
Representing growth of 10.9 to 12, 2% over the prior year.
We expect same store sales to be in the range of approximately minus 1% to growth of a half a percent.
With a retail same store sales increase of 2% to 3% and E. Commerce same store sales decline of 11% to 13%.
We expect gross profit to be between 617 and $625 million or approximately 37, 4% of scale.
Gross profit includes an estimated 100 basis point headwind from freight expense.
Our income from operations is expected to be between 235 and $243 million or 14, two to 14, 6% of sales.
We expect net income for fiscal 'twenty, three to be between 173.3 and $179 $3 million.
We expect earnings per diluted share to be between $5 70 and $5.90.
We also expect our interest expense to be $4 $6 million in capital expenditures to be between 80 and $87 million.
We remain on track to open 40, new stores during the year, including the 22 stores, we have opened year to date.
Please refer to the supplemental financial presentation, we released today for further information on our revised fiscal 'twenty three guidance.
Yeah.
As we look to the third quarter, we expect total sales total sales to be between 502 and $514 million.
We expect the same store sales decline of 3% to 5% with retail store same store sales of approximately minus 2% to flat.
And E Commerce same store sales declines of 17% to 21%.
We expect gross profit to be between 184 and $189 million or approximately 36, 8% of sales.
Gross profit includes an estimated 200 basis point headwind from freight expense.
Our income from operations is expected to be between $71 million to $76 million or 14, 1% to 14, 8% of sales.
We expect earnings per diluted share to be between $1 71, and $1 83.
There are two primary drivers of the change in our full year guidance first we expect the softness of our September and October ecommerce sales to continue for the balance of the year.
We believe that this softness is the result of many of our online competitors and third party vendors returning to an impact because they said on their sites and on the Amazon marketplace.
Second construction and permitting delays in many of our new stores has resulted.
And planned new store opening dates being pushed back from their original plan.
These delays and store opening dates are expected to result in a reduction in sales from new stores in the back half of our fiscal year.
These delays we remain on track to open 40, new stores. This year with approximately nine stores opening in the third quarter and 10 stores opening in the fourth quarter.
On our last call.
We expected freight expense to more negatively impact our earnings during the first half of the year than what was actualized. We now anticipate additional freight headwind in the back half of the year, particularly in the third quarter as we sell through the inventory burdened with peak freight charges.
Third quarter freight expense is expected to be a 200 basis point headwind headwind in fourth quarter freight expense to be 90 basis points higher than in the prior year period.
Now I'd like to turn the call back to Jim for some closing remarks.
Thank you Jim we are pleased with the performance of the business in the second quarter and look forward to a strong finish to the year.
I do want to take a minute to express my gratitude to the entire boot barn team. The past three years have been impacted by a global pandemic massive supply chain challenges and now a looming recession.
Despite these obstacles we are on pace to grow our annual sales by nearly 100%.
To add considerably to our merchandize margin and tend to more than triple our earnings in that same three year time period.
We've added more than 50% to our average store sales in that new level of sales has proven to be sustainable.
You should all be proud of these incredible achievements finally, as I look forward the opportunity for us to Triple our store count provides considerable future sales growth and career growth opportunities for you and your team.
Now I would like to open the call to take your questions Ryan.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line isn't the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing desktop piece.
We will wait for a moment, while the question queue assembles.
Yeah.
Our first question comes from the line of Matthew Boss from J P. Morgan. Please go ahead.
Great Thanks, and congrats on a nice quarter.
Thanks, Matt.
So Jim could you elaborate on business in October what's driven the moderation relative to the second quarter, maybe by category and how best to bridge to back half comps now implied down mid single digits for the back half of the year relative to negative low single digits, which I think was implied in the prior forecasts.
Yes.
Sure happy to give you a sort of the sequential change between.
Q2 in October .
And we'll give you some color commentary I do want to put it into context first though.
Our October business on a three year basis is plus 80% growth in total sales.
Okay.
That is slightly less than our Q2 business, which was plus 88%.
And I do kind of wine, particularly those that are new to the story to let that sink in for a second because while we can view that as a sequential deceleration it's hard for me to to really get there.
That upset over a plus 83 year growth.
And I think when we look at the quarter.
It was just a phenomenal quarter and are up.
88% in total sales on a three year basis and up 300% in earnings on a three year basis.
But back to your specific question around what changed sequentially from a category perspective.
The biggest thing that changed sequentially.
Really relate to our ladies boots in ladies apparel businesses. So that there is.
20, or so major merchandise classifications within boot barn.
Some are up a little bit some are down a little bit et cetera, but the biggest changes between frankly between Q1 and Q2.
And then Q2 and Q3 was ladies boots and apparel.
So ladies boots.
It was very strong in Q1 flat in Q2 and down nine in Q3 or at least in October ladies apparel was down about 8% in October .
I I'd say once again that we have to kind of reflect back on what they're up against those businesses from a comparison standpoint are up against.
100% in the case of ladies apparel last year.
And 76% in the case of ladies boots last year.
So from a merchandise classification standpoint, that's probably the biggest single change the other change that affects our consolidated same store sales is the deceleration or decline in our ecommerce business, which.
He has a few different pieces to it one of it is the softness on Amazon marketplace and the other is just a lot more people selling the same product that we had sort of a leg up on them last year, because we were flushed with inventory and they were struggling a bit more with their supply chain.
And Matt I would just add to that and looking at the back half of the year and the the comp assumptions on slide 17.
We're speaking here to the high end of the range, but you can see that.
Yeah. The E Commerce same store sales did have guided at one 5% at the high end of the range now at minus 11 for the full year.
And the store has actually increased a little bit from 2% at the high end of the range to 3% and so we're continuing to see nice strength in our in our stores year to date, we're at a plus six 1%.
Of October we continue to see growth there plus one 7% and so we've guided the back half of the year in stores to minus two to flat. So there's some conservatism in there in the stores and I would also note that.
November and December of last year were our strongest month of the quarter and so we.
We wanted to be mindful that as we were planning our.
The rest of Q3 based off of kind of current business and considering last year in the regular flow of sales volumes within a quarter.
Our third quarter.
Okay. That's great and then maybe just as a follow up relative to your guidance for operating margins to finish the year and in the mid teens.
Are there any material margin drivers from here that you believe the model is over earned if we looked at the past two years to consider or maybe if it's easier to walk through the other way what would be the sustainable drivers of a higher margin profile relative to pre pandemic that you would call out.
But I think the.
From a merchandise margin standpoint, you know the product margin has been very sustainable and if you look back over the last several years our product margin has increased.
I don't know what the number is 24 quarters in a row with the exception of two quarters and the and the pandemic I believe is the number and so we've continued to guide product margins strong.
Our exclusive brand penetration is.
Giving us a nice lift there from a from a product margin standpoint, but a couple of things as we look to the back half of this year.
We were slow to as we received cost increases on inventory.
A year ago, we were slow to raise our retail prices on those and so as we get into the third quarter are contained in the third quarter and the fourth quarter.
We're going to get our margin and sustained margin benefit from having those price increases that we've put in over the last several months again initially we were thinking that these.
Cost increases we're going to be more transitory is it looked like they weren't we were slow to react and in raising those prices. So again I think those are sustainable as we see it.
The product cross cost decreased from a from our vendors and that's something we can react to but I think the product margin latest sustainable.
And then just just going down the.
You know the freight headwinds will be transitory I mean, it looks like as we get through the end of this year that those will go away.
That's our expectation that the one thing that there is a little bit new in our in our P&L from a.
Buying occupancy and distribution costs.
Standpoint is our new distribution center in Kansas City, So that that will create a little bit of pressure on buying and occupancy as you look.
And some of the deleverage we see in Q3 and Q4.
And Matt It's Greg I would just add that we have.
Are getting really nice leverage on the new average sales volume per store compared to the pre COVID-19 period. So any of the fixed cost whether it's the occupancy line or in SG&A. There's the fixed cost embedded in that help us have sustainable or structural improvement in operating margin.
Yeah.
That's a great point, thanks, great color.
Thanks, Matt.
Thank you.
Our next question comes from the line of Steven <unk> from Citi. Please go ahead.
Great. Good afternoon, everyone. Thanks for taking my question I wanted to focus on the E. Com commentary could you elaborate a little bit more on what you're seeing from the E. Com channel peers are you seeing more promotional activity online and you're not willing to participate in and do you see this as a few quarters trend that kind of a give back of sales and then things should normalize.
Yeah.
So I agree with the last part of your sentence that I don't think this is sort of a structural problem going forward. We've had some nice growth over the last few years.
We had some advantages last year, because we were.
We were lucky or slightly more successful in managing our supply chain and getting product available to sell and making that the product that was available in the stores.
Online really further help that so.
I'd say, we outperformed the last couple of years from a pricing standpoint.
Most of our product online has a floor price.
I met price.
No.
Very rarely does a competitor go below that prices are forbidden to do so and well thanks repercussions.
Really not a pricing thing.
The the way to buy the business is to over spend on marketing pulp paper click or a social marketing.
Yeah. There are countless examples of direct to consumer companies that do that but not really in our industry and in our industry, where we're selling third party branded goods.
Some of the other big competitors are also selling those same grades on their site with one direct competitor a formidable.
Competitor in Texas called Scavengers, they haven't their website. It's fine. It's all the same product at the same price that we do and if a if someone loads their site versus hours they'll they'll get the cells just as quickly as we will the other people. We compete against of course is our vendors themselves right and one of the reasons why our exclusive brands.
So strategically important to us is that some of our vendors continue to build understandably their direct to consumer business online.
And you know that piece of the business could easily go to wrangler, dotcom or Justin dotcom or area of Dot com before it would come to us. So do I think I do think this is somewhat transitory there'll be a new normal level.
Over the next couple of quarters, and we want to build that business based on the strength of our brand the lifestyle nature of boot barn.
And not go out and overspend on paper click to two by the sale and drive our profitability down and we spent the last few years doing exactly the opposite and really improving the profitability of that channel and we have no intentions of reverting.
That's helpful. James Thank you.
Second question I had was for Greg because I asked it last quarter and I just wanted to follow up on inventory you know it seems like it's still elevated but I guess, you're pretty comfortable with the positioning you kind of cited some reasons, but just as you think about it today relative to three months ago do you still feel pretty comfortable with it and any areas of concern or pockets of.
The elevated <unk>.
Product.
Yeah, Great question Steve.
I continue to feel really good about the quantity and quality of our inventory there's been no change in and you know how I view the inventory from three months ago, we're highly functional business, what we've may be a little bit heavy in inventory it would be in work boots.
Those performance or rubber soled boots, and those have very very little fashion risk or markdown risk and we'll work through those as the business continues to to come to us.
Great. Thanks for the detail best of luck in the back half.
Thank you.
Question comes from the line of Peter Keith from Piper Sandler. Please go ahead.
Hey, good afternoon, everyone nice results today.
I wanted to ask a question do you have about 88% growth over the last three years I think we still get a lot of concerns that boot barns over earning and you certainly have compounded up the last three years at a much faster rate than you did pre COVID-19. So maybe just reiterate why you guys think this.
The sales that you've gained here in the last three years is as structural and something that you can hang on to going forward.
Sure I'm I'm actually very happy that you asked that question because I'd rather address it on the on the.
Public call head on that.
The single biggest factor that drives the profitability of this company is our stores channel. It's been our focus for the last several years, even when it wasn't involved to build stores. We were building stores that are sort of bucking conventional wisdom and.
Continuing to focus on our brick and mortar strategy that now seems to be the one that many people are gravitating towards.
In March of 'twenty, one we saw a step function change in our average unit store volume.
We used to run at roughly $2.7 million per average store.
19 months ago on a run rate basis anyway that volume went up to $4 2 million.
And we've actually included a graph.
In our supplemental.
Presentation to try to give investors a sense for what is that $4 $2 million look like and how sustainable is it and the answer is it's now been.
19th straight months of right around $4 $2 million.
You take that coupled with the guide for the balance of the year. We believe it will continue to be roughly $4 $2 million through the end of this upcoming March.
Could that number go to four three it could go down a number go to forefront one it could.
Could that number overnight go back to 2.7 I find that hard to believe that there is nothing that's happened in our business that would have driven a I think it's a 56% increase in our average store sales that is transitory I just don't understand.
How that number if you go way back down to 2.7, so it does seem to be a little bit.
If not well understood certainly not appreciated.
But we believe will remain at these elevated levels of.
Average store volume hopefully ecommerce will work itself out and get back to a growing business over the next few quarters.
And as you well know we will continue to open 40, or 45 or 50 stores a year.
If you do that for enough years, its another billion dollars in sales and you know.
Every single store in the company makes money. So we'll continue to press the accelerator on new store growth.
Yeah.
Okay. That's helpful maybe.
Maybe just even with some share gains that you've seen.
Over the last couple of years I know in the past you've talked about yeah keep competitors would be like the mom and pop stores catheters in the farm and ranch chain do you think you're pulling in customers that may have historically shopped and other channels, maybe just thinking like some of your your denim are maybe that's a walmart customer or even some of your kind of fast fashion.
Our customers with the just country launch.
So yes, we do.
I think some of the share gains we've gotten are from within the industry I would probably point more towards mom and pops than against cabin crews.
I think their business play continues to be pretty strong.
I think we also are getting it from just more traditional retail channels I mean, our assortment, we the bull's eye of our customer is still a.
Western Cowboy customer they were in cowboy boots, and jeans, and cowboy hats, and Peter you know that customer and I appreciate that customer very well.
But we've also really try to expand the aperture of the product that we sell to capture sort of one circle, one concentric circle of customers around that target.
And part of that is the jest country initiatives. So it's more of a casual outdoor lifestyle. They maybe not they may not be a rodeo fan, but they probably do enjoy hiking camping being outside et cetera, we have a small piece of our business that are a little bit more fashion and wonder west.
And the share gains there could've come from any number of traditional retailers to your point denim is a great example, we now sell denim that could've been otherwise bought it or any number of traditional <unk>.
<unk> based specialty stores.
Our forfeiting share just given mall traffic trends.
So I think it's coming from a lot of places I wouldn't think it's necessarily coming from Walmart.
I certainly doubt people in bentonville or worried about their share of lost too.
But I don't think I am.
Actually I think we share a number of customers, but I think the price point of our goods in their goods or just going after a different piece of the wallet.
Okay very good thanks, so much.
Thank you.
Yes.
Thank you our next.
Next question comes from the line of Max Raj Lingo from Cowen and company. Please go ahead.
Hey, guys.
Thanks, a lot for taking my question, so maybe just staying on <unk>.
Pretty similar topic, but.
Any differences in shopping behavior last quarter as well as.
In the October to date, just between year core shoppers and then those gained during the pandemic and then maybe just as a follow up there are you able to bucket. The shoppers that you gained in Q, you know say western Peter So the ones that you're taking share from the moms and pops versus more of that country or fashion shopper.
As to sort of who is buying why that's all.
Tagged back to our loyalty program be rewarded program. So we can parse out how the different types of customers are behaving. The quick answer is we've we've retained our customers or we continue to see.
Customer count growth.
Coming back to a prior question, if we had gotten a whole bunch of new customers that drove average store sales up.
And you would then worried that average store sales would come back down you'd see the customer count decline, we haven't seen that we've seen customer accounts continue to appreciate not at the same high.
High level acceleration that we've seen in the most recent year or so, but we're not seeing a deterioration in customer count.
I would say.
Yeah, probably shopping slightly less frequently bulk bulk groups or the traditional and the new customers.
You could sort of just deduce that if customer count is up in transactions are flattish.
They clearly must be shopping slightly less frequently.
The other thing that we mentioned that if you went back to.
Prior calls.
We always tried to be very honest about the additional tailwind we got from <unk>.
Ladies boots in ladies apparel over the last several quarters in fact, we spiked out what impact it had on our comp.
For several quarters and we were.
These are rough numbers, but we were plus 68 or something and we said that without the ladies businesses. We would have been plus 60 or something you got notes are estimated numbers, but I'm pretty close.
And I think that and we said there was a small bit of a fashion trend in those businesses that was probably adding to.
We're creating.
Really outsized gains for a few quarters in those two departments.
And here, we are now, giving some of that back on balance we're still really happy with our ladies business was up over 100% and now he's giving back five or 10 points of that but on a on a two year basis, you would take that all day long.
You all might prefer it to be 50% a year for two years in a row, but we.
We can't wave a magic wand to make that happen.
Got it that's very helpful. And then what is your confidence in the ability to drive greater full price selling and product margins. In this current promotional environment and then you walked us through your inventory positions, but how would you assess the risk that you potentially would need to step up.
Promos, especially.
You know a holiday in the next couple of quarters remained very promotional.
Cross just the broader retail landscape. Thanks a lot.
Sure.
I'll take the first piece anyway from a from a pricing promotional standpoint competitive ways, we have no desire or intention of changing the way. We go to market. We have invested in the boot barn brand and the experience associated with that and.
I suppose there could be mom and pop competitors out there that have overbuy and are running sales.
Just aren't going to respond to a single store operator doing something to work themselves out of an inventory position.
Our number one direct competitive cabin dues.
We're very consistent we have a lot of respect for that company. They tend to operate very similarly to the way, we operate which is mostly full price selling occasionally some modest sale to drive some excitement in the store, but rarely get to the point, where they are highly promotional or in a massively overbuilt.
Bought position, where they're clearing product at a deep discount.
So I don't think and then when you look outside the industry.
There's been a lot of chatter around well.
Other channels of retail will be more promotional.
There'll be a higher level of sales and markdowns going into holiday that may in fact be true.
It's really not going to change the way we operate our business I, just don't think someone's going to go buy a.
A discounted payer of athletic shoes, rather than a full pack price pair of cowboy boots, So we're going to keep our.
Our pricing very consistent at a minimum with where it was two years ago last year, we had a little bit of artificial help because we were sales were incredibly strong and we were chasing that product.
This year it feels very much like our business was prior to last year with very modest.
Very modest.
Promotional activity.
We were fortunate to be an industry with rational competitors, both department Ranch channel and our direct competitor in cabinets.
And I think he mostly covered.
I guess I would just add that you know with the inventories.
Jim said it perfectly we don't need to.
Be more promotional to sell more inventory to raise cash or hope you have a healthy balance sheet, we're headed into our holiday quarter will raise plenty of cash to.
You know to pay down the line of credit and so Greg mentioned you know if there is an area where we're a little heavy on inventory. It may be worked with it if we have to hold onto that for a couple more months.
We will do that rather than get promotional that's right. Yeah. We remain very disciplined on the businesses, where we could get into trouble. Ladies apparel is the biggest one both denim and non denim ladies boots is another yeah. We we've cleared some ladies boots in the most recent quarter or it's in our numbers already.
Yeah. So we are pretty diligent about keeping those businesses that do have more of a fashion cycle.
Certainly than the work categories and typically more than the men's western category. So we watch those businesses very closely and they turn faster.
And we feel that we're pretty clean and both of those categories.
Got it that's super helpful. Best of luck speak soon.
Thank you.
Thank you. Our next question comes from the line of Corey Yano from Jefferies. Please go ahead.
Yeah.
Hi, good afternoon, and thanks for taking my question and congrats on the strong results.
Appreciate that.
So one thing that's I think clear is that exclusive brands continue to grow and they've been really well received by your customers I think the exclusive brand penetration is up something like 350 basis points.
This quarter year over year. So can you talk a little bit about some initiatives. There I know you just launched a bunch of new exclusive brands. How those are trending and then what's the opportunity you see ahead for this segment of your business specifically is to drive more sustainable profitability ahead.
Sure Great question, Yes, we've added new brands and so we used to have six now we have 10.
New brands are all off to a good start we're pleased with the sell throughs you've had some runaway winners and some other things we had to clear out but on balance the launches of each of the four brands, where we're quite pleased with.
What tends to happen is we start a new brand.
On a certain number of different categories.
And we see what's working we respond there and then we sort of expand on the successes.
And then maybe go into it's sort of related categories. So we might launch a brand and then later on add outerwear to it or and hats to it.
So that's how when the.
Every once in a while it was a few years ago now where we added a couple of brands and then in the last year, we had before brands that gives us some growth but in each of those brands.
<unk> to expand into related categories.
We continue to believe we can increase our exclusive brands by three points or 300 basis points a year.
There'll be a point, where we may want to slow that I don't think we're that close to that point yet yeah. We do have some very strong third party brands and great vendor partners out there.
We want to continue to grow with they've helped us grow this business to where we are today and I think our customer is expecting a house of brands kind of experience with a boot barn. So I wouldn't expect exclusive brands to get north of 50% and even if it were to hit 50% that's.
Five years six years away from now so that's.
That's the way, we're thinking about it and we have a great team up there we continue to invest in that team. We are a relatively new leader, who has taken that group to new heights, and we're pretty excited and energized about whats going on in exclusive brands.
Got it very helpful. Thank you and then I just wanted to follow up with there was I think a new partnership that boot barns established with a business called pack size that should it looks like really helped on the automation side of the supply chain, which I think should also probably.
He helped to underpin more sustainable profitability ahead and drive efficiencies.
In the supply chain, so could you talk a little bit more about that the opportunity that lies ahead there.
Cory it's Greg Thanks for noticing that yes, we love that partnership.
But being able to reduce waste in the shipping if you will of the goods to the to the customer it's a great opportunity for our branding as well.
And we think it's right as we work towards our ESG efforts to to use that.
That versus the bags that we've used historically so.
It it probably has a push financially or maybe just a slight cost but in general it's it's the right thing for us to do.
Yeah.
Got it very helpful. Thank you very much and best of luck.
Thank you very much.
Okay.
Thank you our next.
Our next question comes from the line of Sam Poser from Williams trading. Please go ahead.
Thank you for taking my question gentlemen.
So.
I'm going to go into the ecommerce business and of course I want to touch on inventory.
You talk about the ecommerce business being impacted by.
Better in stocks by your competitors. So the question I have is how many people how many consumers did you add to your files or your loyalty program through e-commerce over.
Over the last couple of years.
I don't have that number.
The number at my Fingertips I would tell you that when we look at our ecommerce business.
Particularly on boot barn.
Still getting a fair amount of traffic I mean, our traffic has been relatively.
Relatively strong I think what's happening is conversion of Vancouver, there than shopping elsewhere or they're they're not shopping with some of the stimulus money that they had shaft with in the past so from a boot barn dotcom standpoint, we actually feel pretty good about that the strength of the <unk>.
Right and the traffic of the site under your ear basis.
Yeah.
Less so about our performance in Amazon marketplace, right Amazon marketplace, we called out is significantly down.
If amazon themselves carry the product and have it in stock they're going to win the buy box no matter, what we do which is going to be the same price because it's not protected.
And there they are more in stock than they were last year.
The paradox for us not to take us down a complete tangent, but the paradox for us is.
Given that we have been.
Really pushing a brick and mortar strategy.
Weakness in e-commerce channel across retail.
To some degree has just.
C.
Quote unquote digital native customers are now becoming less digital native and opening up stores. You know we've had a 10 year head start in building a chain across the country.
We feel great about what we've been able to do two.
Create a national brand of stores that can support our digital channel and I think that will be sort of our strength going forward.
But I guess the question is what can you.
What can you better do to engage and get that customer to open up his or her pocketbook when there I'm not talking about promotions necessarily but how can you maybe pull more people with more purpose coming to the site.
To overcome.
To anchor them in as for boot barn, because of the strength of <unk> brand to become the place to go and I have a whole another group of questions but.
No. That's fair prices continue we continue to reinforce that we are the authority.
Centric brand online so they should feel a great deal of trust in buying from boot barn, we've added and really made more friction less the ability.
To earn be rewarded points, our b rewarded program has always been extremely strong in the stores.
But less well developed online so we're continuing to try to make that a bigger piece of the puzzle there and thats one bed.
Tactically going forward should help exactly what you're describing and I'd say the third piece is leveraging the.
Localized nature of our store base to get product to customers in a more timely fashion or to offer same day delivery.
Would be sort of a third thing we would we would try to do it.
You know beyond that you know, it's we're selling commodity boots in many cases that are again at the same price across different sites.
And we the way to win is to present the brand as the leading brand in the industry.
Cool and.
Oh, how big what percent of the quarter is October .
I was 25%.
And then there's what like December is like 45%, but a fair number.
Probably yes sort of 50 50.
50, okay.
So.
With the <unk>.
With the with the women's business that is struggling right now.
I was traveling a lot saw.
A lot of both junior.
Junior fashion brands too.
Brands like saline, having western boots in there.
Okay.
When you could have more people are there you'll be that met all of a sudden you might see this women's business sort of re emerge as a you know an event business versus you know.
You know versus what.
Youre lapping last year from last year.
Okay.
I suppose that's possible and of course, we would love to see that happen.
When we look at it as a percentage of our business, though you know ladies boots used to be call it eight or 9% of our business and now it's 11% of our business. So while the year over year comparison might be suffering a bit it's silly a.
A big of a portion of our business than it has been historically.
But it could have a a.
Reinvigoration as we get into a more gift, giving part of the season for sure.
And the season quite literally then change and we get into holiday and approaching.
Approaching new year's and more party business et cetera, we do sell a bit of product there.
Caters to that customer as well so we will see hopefully your your instinct is right there.
Does that pick up are you can you use the e-commerce business to draw people in stores.
Better I mean, so it's like how are you lapping that by months or was like November and December just huge last year and that's why you're guiding.
The corner, but where you are.
So e-commerce last year on a year over year basis.
October and November were roughly in line in December was weaker.
Considerably weaker than November on a year over year basis.
So we might benefit a bit from.
Cycling.
A weaker December .
But we'll see.
And some of that but some of that was a calendar shift in black Friday and different things between between the months.
Between November December I think.
We're guiding Sam.
The E Commerce business that we're seeing in October we're playing that out through the third and fourth quarter. So that's that's kind of the way we're looking at it.
Thank you very much and good luck.
Thank you Kevin.
Thank you.
Our next question comes from the line of Jeremy Hamblin from Craig Hallum Capital Group. Please go ahead.
Thanks, and congrats on a sustained path so.
So first.
Thank you included I, just don't have it in my notes I.
Wanted to confirm if you're looking for 200 basis points of freight drag in Q3.
Remind me what that was in Q2.
It was it was a 10 basis points of a tailwind actually Jeremy.
So call it Scott.
Abbott.
Okay.
And then in terms of just I want to come back to inventory for a second clearly a hot topic.
And it is.
Right.
Toys.
Are you now about 110.
Percentage points versus three years ago sales is up.
You know, 88% in Q2, its up about 80%.
Versus three years ago here.
As we start Q3, it looks like you have probably about $100 million of inventory.
Above where the desired level would be if you're not going to be promotional you feel pretty comfortable.
In terms of thinking about this about.
Your.
Your you're buying of inventory in your order rates.
It's probably I think you would might acknowledge it's a little higher than you'd like it to be you have a couple of categories where.
You feel like it might be a little you know, whether it's work boots or other items, possibly lady fashion, where it might be a little higher.
Have you taken action to reduce.
Future orders on a go forward basis, because we think you know frankly thats probably the inventory levels are what make people. The most anxious about where the company is positioned for that.
Yeah, Jeremy it's Greg.
A couple of things to think about would you cite the three year ago analysis, you know our distribution model very well that most of our inventory is fulfilled by the vendor directly shipping to our store after we sell the product.
As we continue to increase exclusive brand penetration, we need to own that inventory immediately right. It needs to be made in a factory we needed to take possession of it and put it in our distribution centers. So over those three years, we've grown E. B call. It 10 points nine or 10 points on a base of <unk>.
Call. It 'twenty. So we've had significant increase and the amount of inventory that we need to own to support E. B.
So that's one factor that you need to consider.
As it relates to taking action generally kind of already mentioned this a few minutes ago, which is.
[laughter] go bad date by or whatever that's ladies apparel and denim.
Fashion that I met replenishment denim and ladies boots, and so we've taken some action over the past six weeks to move through some of that inventory that we felt we needed to so we're not holding off on on taking action, where we need to we frankly feel great about the inventory levels in those two categories.
And again, where we think we're a little bit high is work boots and men's western boots that have a rubber soles. So very functional in nature. So again I I continue to feel good about the level of inventory and the health of that inventory.
So just as a follow up then extrapolate into thinking about the next few quarters here as things probably normalize a little bit.
You've got a 100 basis points of drag projected in your your FY 'twenty three guidance for gross margins.
Is it pretty fair to assume that you think you know as you look forward to the following year that there's you know there's no reason why you wouldn't be in the 36% to 38% range again on gross margins.
We haven't I mean, I'm looking at Jim what we haven't put guidance out there, but I think that's fair to think that way I think that's right Jamie.
Alright, Thanks, guys best wishes.
I wanted to just circle back to the earlier point and Ed to Greg's answer when Covid first emerged in.
Store sales fell.
50, 60% or something.
You would have thought I believe sort of pressure tested a model where you have too much inventory for your sales growth that we had.
Literally one quarter.
Of a very modest decline in merchandize margin less than a point.
Other than that for.
Five six years in a row now we have we've never called out a margin.
Problems. So I recognize that this question could you use come up we continue to play with a lot of inventory.
Tories helped really drive incredibly strong sales growth so.
The bank has been paying off.
And I don't expect us to come out anytime soon.
A any material.
Margin erosion based on markdowns.
But we can move to the next question.
Okay.
Thank you <unk>.
Question comes from the line of Mitch who met.
From Seaport Research. Please go ahead.
Oh excuse me thanks for taking my questions.
First off I was just hoping you could reconcile the comp guidance a little bit for Q2, so for I'm, sorry for Q3, so quarter to date, you're running minus one three and four the quarter Youre seeing a minus three to minus five I guess first off I'm curious within that minus one three is there some sequential deterioration in that number that you're kind of extrapolating.
Going forward over the balance of the quarter or you know is the difference between the quarter to date in the quarter guide more like a function of a tougher compare over the balance of the quarter could you just address that please.
Yeah no.
You're talking about whether within October the four weeks of October there anything sequentially.
What it is niches.
Yeah.
If you break it into two pieces the ecommerce piece, we're continuing to extrapolate the e-commerce sales that we've seen in October for the balance of the year and minus high teens I think they were minus 17 for October and extrapolating that out for the rest of the year and as it comes to the stores.
The stores are seeing nice growth with the with the plus.
Plus one.
One seven in the month of October and we're guiding Q3, and Q4 minus two to flat and so there is some.
Yeah, we do have tougher comps in November December .
But really there's some conservatism that we've got planned into that guide there.
Okay, and then just a real quick follow up and I might be splitting hairs here, but you're saying you're extrapolating the height the minus high teens on e-commerce over the balance of the quarter does ecommerce became a bigger.
Zero penetration over the balance of the quarter versus October or is that part of why you would see a more difficult comp in November and December than October .
Yeah, well the more difficult comp was really talking about the store sales I guess, but the e-commerce as a percent of sales for the for the third quarter is about 14%. So it's higher than an average quarter and it's going to be about 12% a year.
Okay for October it is a lower portion of the quarter then November December .
Okay, and then I guess just the second question, just maybe a little bit of a housekeeping Jim Watkins you mentioned that one of the changes in the guidance on the topline with some construction permitting delays is there any any way to quantify that impact on the guide and correct me if I'm wrong I think there's still opening the same number of stores for the year. It's just that some of these stores are maybe.
Coming online later.
Yeah, No that's right and.
From a sales standpoint.
Yeah. It is.
Six six ish million dollars for the.
For the year.
Okay, alright, so not a huge number all right. Okay. Thank you good luck.
Thanks Mitch.
Okay.
Thank you. Our next question comes from the line of Jay sole from UBS. Please go ahead.
Great. Thank you so much.
I have just two short questions. The first one is Jim I think you spoke to this but sort of.
Maybe just explain one more time youre seeing the pressure in the online business, but why why is it not impacting us towards why is the store trends still been pretty consistent.
And then secondly on the deleverage on buying and occupancy maybe is it possible to break down that 100 basis points is it more of the distribution center costs is that the buying and occupancy and if you could maybe relate what the what the leverage point is on the comp the comp was 4% in the stores and two 5% overall, what you know what kind of comp do you need going forward to not.
Have deleverage on buying occupancy and distribution centers.
Normally the first so I met on the service versus E Commerce piece.
There is surprisingly small.
<unk> amount of overlap between our store customer in an e-commerce customer or certainly less than half of our customer base shops. Both channels. So we haven't sort of a different set of competitors.
Online than we do in our stores.
And our service customers, just very loyal to us.
Okay.
They are part of our B rewarded program, they've shopped with us typically for a long time and we continue to.
Ensure that the in store environment and experience is second to none so I think our storage business continues to get growth on top of just.
Incredibly strong growth.
Last year, and frankly for the last decade.
But with ecommerce and.
Everyone has the ability to open up a site and sell a pair of boots.
And the brands can sell a pair of boots or a pair of jeans online directly of course and they do.
Fortunately for our industry.
Most of the business most of the market is conducted.
And transacted inside our stores so.
While our competitive set is more complicated and it's very easy to change the UL in your browser to buy from somebody else. Yeah. We have a really really strong position on the other 85% to 90% of the market, which happens in the stores.
You want to take that thanks for the question yeah. So so on the <unk>.
100 basis points of occupancy deleverage on the full year Jade.
Really I'd like to maybe three things.
The first being the.
New store opening this year being 40 versus 28 last year.
Some pressure on that on.
That line item.
Yeah.
The second is related to costs.
Costumes from the DC labor, we talked last year about it.
Increased wages a year ago.
Fall.
Heading into holiday that we increased pay rates. So so the first half of this year were epic.
Incurring those higher costs compared to a period, where we didn't have those costs.
And then the third thing that just went live a Kansas City.
Distribution center, we're now paying rent on that and we're ramping up the operating cost there. So for the back half of the year, that's something that will put some pressure when compared to the prior year.
Oh, a leverage point for buying and occupancy we didn't we didn't guide that this year. When we started the year and we had put out.
Four 8% same store sales growth, we had planned about 40 basis points of buying and occupancy deleverage.
And so you can kind of use that to anchor into what it would have been this year again.
Started the year, we looked at this as more of a reset year and don't provide those leverage points as we get to next year.
Now is that we would provide that going forward.
Okay. Thank you so much.
Okay.
Thank you. Our next question comes from the line of John Lawrence from Benchmark. Please go ahead.
Alright, Thanks, guys I appreciate your time.
<unk>.
Jim would you comment a little bit you talked about at our last couple of quarters, but your comments about the new stores I mean anything that Oh I know you went through it.
You know the the lack of sort of cannibalization in some of the new markets.
Are those trends just continuing when you go to a new market and you mentioned, Delaware and some of those that are.
Do these stores are coming out of the ground just from a much faster than you saw can you just talk about that briefly please.
Yes, I'd love to.
The story is exactly the same and it is as good a story as you could imagine we continue to open up stores.
In all parts of the country. So we've just opened up a brand new store in California.
Its budget was probably $2 million, it's probably going to do six we've opened up a store.
A few stores in Delaware, Pennsylvania, and New Jersey, now again their budget was probably one eight or $2 million, depending on the store and they are running at three and a half or more million dollars. Each so rather than payback in three years are paying back and call. It 18 months.
We haven't seen any material cannibalization as we've opened up and added to different markets Phoenix, Arizona is a perfect example, we used to have four stores. There now we have eight stores was forced to refuse to do $10 million to eight stores now do like $40 million.
And we haven't seen a deterioration of same store sales there so as we look forward.
Now the downside risk of opening up a store is quite low we have 321 stores in every single one of them is EBIT positive at the moment.
So we'll continue to open up stores, we'll open the next 303.
Three and a half million dollars each that'll be $1 billion. So people will ask US 100 million questions around what our comp is in October but I can tell you that the next $1 billion of cells is sort of right in front of us. If we can just continue to execute on our new store openings.
I appreciate the question because it sort of puts the focus on where it should be which is this is a.
New unit growth retailer and we've sort of proven that we can grow from.
The 86 store chain that it was when I got here to 321 today and on our way to 900.
So just not not to belabor the point, but we're working at that and that tremendous store growth.
And part of them.
Part of the reason you selected those sites is because of the E Commerce business correct.
It's one factor of many factors if I'm honest.
I think.
And we do use it.
We use.
Multiple inputs, though in a giant retail model.
Your population.
Employment levels income levels, like graphic information et cetera, et cetera et cetera.
But could it happen pretty.
Could've, just simply be part of that is that.
You switched a customer maybe from a little bit of a direct customer to a store customer and some of those markets.
It's a fair hypothesis fight, but we have seen is when we put a store in a new market. The E Commerce business goes up and not down the other thing I would tell you is.
One store, we just happened to look at consider that one store in Delaware, we will do more than the entire ecommerce business in Delaware.
The notion that e-commerce can can.
Impact.
Retail store locations or you can trade customers, we've talked about all the time.
Just don't buy into it and the data that at least I have access to wood wood dismiss it as a hypothesis.
Great. Thanks, Thanks for the time and congrats on the results.
So much.
Ryan I think that was the last question.
Ladies and gentlemen, we have reached the end of the question answer session I would like to turn the conference to Mr. Jim Conroy for closing comments.
Thank you everyone. I appreciate you joining the call today, we look forward to speaking with you on our third quarter earnings call take care.
Thank you the conference of Boot Barn Holdings, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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Okay.
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Yeah.