Boot Barn Holdings, Inc. (NYSE:BOOT) Q3 2023 Earnings Call Transcript

Boot Barn Holdings, Inc. (NYSE:BOOT) Q3 2023 Earnings Call Transcript January 25, 2023

Operator: Good day, everyone, and welcome to the Boot Barn Holdings Third Quarter 2023 Earnings Call. As a reminder, this call is being recorded. Now I’d like to turn the conference over to your host, Mr. Mark Dedovesh, Vice President of Financial Planning. Please go ahead, sir.

Mark Dedovesh: Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn’s third quarter fiscal 2023 earnings results. With me on today’s call are Jim Conroy, President and Chief Executive Officer; Greg Hackman, Executive Vice President and Chief Operating Officer; and Jim Watkins, Chief Financial Officer. A copy of today’s press release along with a supplemental financial presentation is available on the Investor Relations section of Boot Barn website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days on the Investor Relations section of the company’s website. I would like to remind you that certain statements we will make in this presentation are forward looking.

These forward-looking statements reflect Boot Barn’s 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’s business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third 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 Barn’s President and Chief Executive Officer. Jim?

Jim Conroy: Thank you, Mark, and good afternoon. Thank you, everyone, for joining us. On this call, I’ll review our third quarter fiscal ’23 results, discuss the progress we have made across each of our four strategic initiatives and provide an update on current business. Following my remarks, Jim Watkins will review our financial performance in more detail, and then we will open the call up for questions. I’m extremely proud of the entire Boot Barn team for their tremendous execution in the third quarter as we delivered total sales at the high end of our guidance. Total net sales grew 5.9% on top of 60.7% growth in the prior year period, driven primarily by strong sales from new stores opened over the past 12 months. On a three year basis, total sales have grown compared to the third quarter of fiscal 2020, just prior to the start of the pandemic.

We are very encouraged that this three year growth has been driven primarily by an increase in the number of transactions as we have added a significant number of new customers to the brand while legacy shoppers seem to be purchasing more frequently. From a margin perspective, during the third quarter, merchandise margin declined 190 basis points, driven by a 180 basis point headwind from higher freight expense. We maintained our full price selling posture in what we believe was a highly promotional holiday season across retail. As a result, we were able to achieve a merchandise margin rate nearly in line with last year’s record-setting performance after normalizing for the transitory freight headwinds. Once again, this demonstrates the strength of the Boot Barn brand and our ability to drive the business forward without resorting to unnecessary sales or promotions.

I will now spend some time highlighting the recent progress we have made across each of our four strategic initiatives. Let’s begin with expanding our store base. We continue to be pleased by our ability to grow new units each year. While historically, we targeted 10% new unit growth with each store generating approximately $1.7 million annually, we have recently been overdelivering on both metrics. We expect to open approximately 43 stores in the current fiscal year or more than 14% growth. Even more encouraging is our new store model is now $3.5 million and more than double our original target. At this level of sales, our new stores are paying back in just over one year with nearly 100% cash-on-cash returns. The pipeline for new store openings remains strong as we continue to broaden our retail footprint across the United States.

During the third quarter, we opened 12 new stores, including our first store opening in the state of Connecticut, further expanding our Northeast presence. The success of our new stores in new and existing markets, coupled with less sales cannibalization than we originally anticipated, gives us further confidence in our ability to expand to more than 900 stores of the country or nearly triple our current store count. Moving to our second initiative, driving same-store sales growth. We are pleased with our same-store sales performance in the third quarter with consolidated same-store sales down 3.6% while cycling 54.2% same-store sales growth in the prior year period. We are particularly encouraged by the performance of our retail store sales, which declined a modest 0.8% while cycling a 55.7% growth in the year ago period.

During the third quarter, our strongest growth categories were work apparel and men’s Western apparel. While sales of men’s and ladies western boots, ladies apparel and has declined, it is important to note that each of these businesses was up against incredibly strong double-digit or triple-digit growth in the prior year period. From a geographic standpoint, we saw growth in our East and North regions, a slight decline in our South region and a mid-single-digit decline in our West region, which is perennially our strongest region. Given the outsized growth we saw in all regions of more than 50% in our prior year period, we are again pleased with the performance across the country. From a marketing perspective, the team continues to expand our customer reach by modernizing the brand and carefully tailoring our communication to each customer segment.

We use a combination of media formats to target our legacy Western and work customers in addition to our more recently added country lifestyle and fashion customers. We believe the content of our marketing not only showcases the Boot Barn brand within the industry but has also garnered the attention of a much broader customer base for mainstream retail. From an operational perspective, I am proud of our field organization across the country for another very successful holiday season. The team has not only risen to the challenge of the higher average store sales volume but has continued to expand the brand’s footprint through new stores, including 12 additional store openings in the third quarter. The store team’s ability to deliver world-class customer service, manage the inventory levels needed to sustain the elevated store sales and allocate store labor hours to the many omnichannel offerings we now have in place is a testament to the dedication of our team and the hardworking nature of all of our store partners.

Moving to our third initiative, strengthening our omnichannel leadership. We continue to focus on our omnichannel capabilities by integrating our stores and digital channels. Approximately 60% of online orders involve a store associate underscores the importance of our brick-and-mortar presence. We’ve always believed that the most successful and profitable way to service an e-commerce customer is by seamlessly integrating the store and digital channel. As an example, we added in-store fulfillment to our omnichannel offering. Now when a customer places an order online, they have access not only to inventory that is in our distribution center, but they also can select merchandise for more than 300 stores across the country. This enabled us to enhance the in-store experience while also providing digital customers with a much broader selection of merchandise.

In-store fulfillment has resulted in shorter delivery times and a pronounced expansion of exclusive brand sales online, which further contributes to the profitability of the business. In the third quarter, our e-commerce sales — same-store sales declined 15.2%, which was in line with our expectations. As we discussed on our prior earnings call, we believe the recent decline in our e-commerce channel is a result of competitors having a stronger in-stock position compared to last year. We believe this trend will continue for the next two quarters until we cycle the softer business that emerged in July last year. It is important to note that this headwind impacts our digital business, but not the strength of our stores business for a couple of reasons.

First, our e-commerce customer has historically been a less loyal customer. Secondly, we are very prudent with our online spending for new customer acquisition. As a result, our pay-per-click spending over the past several years has been pared back to a level that focuses more on bottom line profitability than top line sales growth, which could erode our earnings. Our focus on the long-term health of our e-commerce business has enabled us to grow digital sales by more than 45% over the past three years with an even greater growth in earnings. Now to our fourth strategic initiative, exclusive brands. During the third quarter, our exclusive brand penetration grew to 34.1%, more than 570 basis points of growth over the prior year period. On a trailing 12-month basis, our exclusive brand volume has exceeded $500 million and now makes up 32.2% of sales.

Our exclusive brand team continues to design excellent merchandise on both a price and quality perspective. Consistent with prior quarters, three of the top five selling brands in the third quarter were Cody James, Cheyenne and Idyllwind. We expect to drive continued growth in this area of the business with the 10 brands that currently comprise the portfolio. These brands not only provide us with competitive differentiation, both in stores and online, but they are also accretive to the business by approximately 1,000 basis points of margin. The success of exclusive brands once again exceeded our original expectations. At the beginning of the year, we had anticipated expanding our exclusive brands by 300 basis points. We now are focusing — we now are forecasting exclusive brands to grow to 33.4% of sales or approximately 500 basis points of penetration growth versus last year.

I do want to express my appreciation to the entire exclusive brands team for continuing to provide product innovation and for the outsized growth in our exclusive brands business. We believe that the combination of our exclusive brands, along with the strength of our third-party vendor partners, provides for an exciting and diverse merchandise assortment, both in-store and online. Turning to current business. Through the first four weeks of our fourth fiscal quarter, our preliminary consolidated same-store sales have declined 1.5% compared to the prior year period, driven by a 16% decrease in e-commerce sales partially offset by growth in retail store same-store sales of 1.2%. Please note that our retail store same-store sales growth for this short four week period is artificially suppressed as it incorporates one day of zero sales given that our quarter began on Christmas Day this year.

Importantly, when looking at our January business on an annualized basis, we continued to maintain an average unit sales volume of approximately $4.2 million per store. This elevated store sales volume began in April 2021 and now sustained itself for 22 consecutive months. For reference, our average store sales volume historically had been $2.7 million annually and is now more than 55% higher than that. In an effort to better understand the reasons for this AUV growth and its sustainability, we conducted a survey of approximately 3,000 of our customers, both legacy and new to Boot Barn. Among the many questions that the survey asked, we were particularly curious to learn where the new customers came from, what made them shop Boot Barn and whether they would continue to shop with us going forward.

On the first question, the survey feedback indicated that we gained new customers throughout the pandemic, not only from within the Western industry, but we captured an even greater number of shoppers from mainstream retail channels. It was also quite encouraging to learn that these new customers were attracted to Boot Barn stores by a combination of our upgraded marketing and our expanded product assortment. Finally, when we ask customers how likely they are to shop at Boot Barn in this calendar year, 96% of them said they are very likely or extremely likely to shop with us again. To summarize, we believe that we have reached a new level of average store sales when we consider both the qualitative feedback from the customer research and the ongoing consistency of the monthly sales volumes.

I’d like to now turn the call over to Jim Watkins.

Jim Watkins: Thank you, Jim. In the third quarter, net sales increased 6% to $515 million. Sales growth was driven by sales from new stores added during the past 12 months, partially offset by the decline in same-store sales. Higher average unit retail prices, driven in part by inflation, further contributed to the increase in net sales. Gross profit decreased 2% to $188 million or 36.5% of sales compared to gross profit of $192 million or 39.4% of sales in the prior year period. The 290 basis point decrease in gross profit rate resulted from a 190 basis point decrease in merchandise margin rate and 100 basis points of deleverage in buying, occupancy and distribution center costs. The decline in merchandise margin rate was driven primarily by a 180 basis point headwind from higher freight expense.

Selling, general and administrative expenses for the quarter were $115 million or 22.4% of sales compared to $99 million or 20.5% of sales in the prior year period. SG&A expense as a percentage of net sales increased primarily as a result of higher store-related expenses and store payroll. Income from operations was $72 million or 14.1% of sales in the quarter compared to $92 million or 19% of sales in the prior year period. Net income was $53 million or $1.74 per diluted share compared to $69 million or $2.27 per diluted share in the prior year period and $1 per diluted share two years ago. Turning to the balance sheet. On a consolidated basis, inventory increased 54% over the prior year period to $592 million. This increase was primarily driven by added inventory in our distribution centers in order to support new store openings and our exclusive brand growth.

Average comp store inventory increased approximately 20% over the prior year period — over the prior year in order to support the elevated level of average unit sales volume per store. On a 3-year stack basis, our retail store same-store sales growth of 57% has outpaced our 3-year stack average comp store inventory growth of 33%. The final portion of the increase in total inventory during the third quarter can be attributed to new stores, both the new stores opened over the past 12 months as well as the inventory for stores that will open over the next couple of quarters. We continue to be pleased with our current inventory levels and that our forward weeks of supply are in line with our historical average. We finished the quarter with $50 million in cash on hand and $59 million drawn on our $250 million revolving line of credit.

Turning to our outlook for fiscal ’23. We have updated our guidance for the fiscal year and now expect total sales to be between $1.67 billion and $1.68 billion, representing growth of 12.2% to 12.9% over the prior year. We expect same-store sales growth of 0.5% to 1% with a retail store same-store sales increase of 2.5% to 3% and e-commerce same-store sales decline of 10.5% to 9.5%. We expect the gross profit to be between $611 million and $615 million or approximately 36.6% of sales. Gross profit includes an estimated 140 basis point decline from freight expense partially offset by 40 basis points of product margin expansion. Our income from operations is expected to be between $228 million and $232 million or 13.7% to 13.8% of sales. We expect net income for fiscal ’23 to be between $167 million and $170 million and earnings per diluted share to be between $5.51 and $5.60.

We also expect our interest expense to be $6 million and capital expenditures to be between $90 million and $95 million. For the balance of the year, we expect our effective tax rate to be 25.1%. We now expect to open 43 new stores during the year, including the 33 stores we have opened through the end of the third quarter. The 10 stores we plan to open in the fourth quarter will be the sixth quarter in a row of opening at least 10 new stores. Please refer to the supplemental financial presentation we released today for further information on our revised fiscal ’23 guidance. As we look to the fourth quarter, we expect total sales to be between $438 million and $448 million. We expect the same-store sales decline of 3% to 1.5%, with retail stores same-store sales of flat to growth of 2% and e-commerce same-store sales declines of 20% to 16%.

We expect the gross profit to be between $156 million and $160 million or approximately 35.7% of sales. Gross profit includes 250 basis points of merchandise margin pressure, including an estimated 290 basis point decline from freight expense partially offset by 40 basis points of product margin expansion. Our income from operations is expected to be between $59 million and $63 million or 13.5% to 14% of sales. We expect earnings per diluted share to be between $1.42 and $1.51. As a reminder, the fourth quarter includes an extra week of business compared to the prior year period, which we estimate will generate approximately $34 million of sales and $0.19 of earnings per share. The primary driver of the revision in our guidance relates to freight expense.

Our end of year inventory is now projected to be lower than what we expected, and freight charges are declining faster and to lower rates than what we anticipated three months ago. While both these developments are great news, it also means that from an accounting standpoint, we will no longer carry as much capitalized freight on our balance sheet. We now expect that more freight expense will be recorded in the fourth quarter and will be 290 basis points higher than last year. While this freight expense negatively impacts the fourth quarter, it is overall very positive as our current inventory purchases are being burdened with lower freight charges which will benefit merchandise margin more than we expected as we move into next fiscal year.

While we are not yet providing guidance for fiscal year ’24, we would expect freight expense to be a benefit to next year’s merchandise margin of approximately 100 basis points. To summarize our changes in guidance, the high end of the guidance range provided at the end of our second quarter was $5.90 per share, and we’re reducing it by $0.30 to 5.60 per share. The $0.30 reduction is driven by third quarter results that were $0.09 below the high end of our range and freight headwinds in the fourth quarter that are expected to add an additional $0.21 per share of freight expense compared to what we had previously guided. With an improved retail store sales trend, combined with an anticipated 100 basis points of improvement in freight, exclusive brand penetration growth and the continued opening of new stores, we are headed into fiscal ’24 with multiple opportunities to fuel earnings growth.

Now I would like to turn the call back to Jim for some closing remarks.

Jim Conroy: Thank you, Jim. We are very pleased with our third quarter business and believe our runway for future growth is extremely promising. We’ve nearly doubled the size of the business in just three years and achieved store productivity levels that far exceed pre-pandemic levels. As we head into fiscal ’24, we have multiple levers of earnings growth from same-store sales and new store openings to margin accretion from exclusive brands and lower freight charges. I’m very proud of the team across the country and want to thank you all for your dedication to Boot Barn and your strong execution. Now I would like to open the call to take your questions. Doug?

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Q&A Session

Operator: Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss: Great, thanks. So maybe, Jim, on current trends, could you speak to the progression that you’ve seen post-holiday, maybe by category, if you could break down Western versus functional strength. And then just with the continued positive comps at stores, maybe if you can touch on performance that you’re seeing from your newer store builds and just the opportunity that you see – or is there a ceiling on the potential to accelerate unit growth as we think about next year and beyond?

Jim Conroy: Okay sure. On the first part of your question, particular if I focus on stores business, as we turned the calendar into January, we’ve seen some nice sequential acceleration in the business and feel like we’re on pretty solid ground. We had a positive retail store same-store sales growth in January after making up for the first day of Christmas Day, which was obviously zero sales and minus 100%. As we look at it by category, most categories have gotten sequentially better from the third quarter into January where we really love to see some of the very functional, more basic businesses performing positively. So some of the things that have really been strong in Q3 and gotten stronger into January are things like work boots, men’s cowboy boots, work apparel had a nice third quarter.

So we’re really quite pleased that sort of the more staple, basic parts of the business that drive tremendous volumes are improving. We’re also seeing less, decline in some of the businesses that had been under pressure. For example, ladies cowboy boots was up against ridiculously strong numbers last year, as was ladies apparel. And they’ve both gotten sequentially better into January, ladies western apparel actually slightly positive as we got into January. So it’s been a nice progression in categories. We’ve seen a nice progression in some of our softer regional businesses. Our western region has gotten better. We’ve seen a nice sequential progression in the transaction count. So in the third quarter, our transactions were down mid-single digit, and now they’re sequentially getting better than that.

They’re still slightly down. But that’s been nice to see. So it’s a short and low volume month of January, but it certainly looks like things are, at a bare minimum, sustaining, if not improving. From a new store perspective, we continue to just be thrilled with the new store performance, the stores – the number of stores that we’re opening there, immediate volumes, their ability to sell Western product in Eastern parts of the United States, et cetera. So we are well set up to exceed our original 40 stores for this year. Our pipeline is very strong going into next year. We have the good fortune that our new stores are performing at much better than the original algorithm for sure and even better than what we’re modeling them now. And that is in new markets and existing markets.

So maybe harkening back a little bit to what we said at ICR, if we did nothing but continue to open stores for the next six or seven years, we doubled the size of the company even if we didn’t grow comps. So while we’ll continue to try to look for growth in every part of the business, the new store engine is really quite compelling.