Boot Barn Holdings, Inc. (NYSE:BOOT) Q3 2024 Earnings Call Transcript

Boot Barn Holdings, Inc. (NYSE:BOOT) Q3 2024 Earnings Call Transcript January 31, 2024

Boot Barn Holdings, Inc. beats earnings expectations. Reported EPS is $1.81, expectations were $1.8. BOOT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the Boot Barn Holdings Third Quarter 2024 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, Senior 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 2024 earnings results. With me on today’s call are Jim Conroy, President and Chief Executive 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’s 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 statements. 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 2024 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 will review our third quarter fiscal 2024 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. We are pleased with our third quarter results, which marks the highest sales volume in Boot Barn’s history. During the quarter, total sales grew by 1.1% driven by the 49 new stores added over the last 12 months. It’s worth noting that except for three COVID-impacted quarters, we have grown sales on a year-over-year basis every quarter since we went public nearly 10 years ago.

The incremental revenue from new stores was partially offset by a 9.7% decline in same-store sales. To put this performance in perspective, our third quarter sales are up 83% from pre-pandemic levels with our same-store sales up almost 50% on a four-year stack basis over that same period. Additionally, we achieved 300 basis points of merchandise margin expansion during the quarter, comprised of 250 basis points of freight improvement and 50 basis points of product margin expansion. The growth in product margin was driven by more than 300 basis points increase in exclusive brand penetration, a reduced level of promotional activity, and buying economies of scale. The strength in sales and gross margin combined with solid expense control drove a 30 basis point increase in operating margin and earnings per diluted share of $1.81 during the quarter, up from $1.74 a year ago, and more than double our earnings per share in the same quarter pre-pandemic.

We believe this demonstrates the ability of the Boot Barn model to utilize multiple levers to drive earnings growth and the team’s ability to execute at a high level. As we approach the last two months of fiscal 2024 and prepare for 2025, we will maintain our focus on executing against our four strategic initiatives. I’d like to spend a few minutes providing an update on each of them beginning with expanding our store base. With 382 stores today, we’re the largest player in the Western and work wear industry. In the quarter, we added 11 new stores as we expand our footprint across the country. As a reminder, we typically underwrite the investment in a new store expecting revenue of approximately $2 million with a two to three-year payback. The performance of the most recent 100 new stores has been considerably better than this model with new store revenue projected to generate more than $3 million on average or 50% higher than the typical investment thesis with an accelerated payback of approximately 18 months.

And if we view this on a shorter timeline, the most recent 45 stores that have been opened one full calendar year, opening before December 2022, have generated approximately $3.3 million of annual revenue on average over the last 12 months. We believe that the combination of 15% new store openings, a 60% return on capital, and the opportunity to more than double our units is one of the strongest, most compelling growth stories in the retail industry. Moving to our second initiative, driving same-store sales growth. Our third quarter same-store sales declined 9.7% within the guidance range we outlined in November. The decline was driven by lower transactions, partially offset by higher AUR and transaction size. The more functional categories such as men’s Western boots and apparel and work boots, while still negative mid-single-digit on a comp basis, outperformed the more discretionary ladies Western departments.

Geographically, the West and North regions were slightly better than chain average and the South and East were slightly worse than chain average. As I reflect on our execution in the quarter, I’m very proud of the entire cross functional team. The merchandising team managed inventory levels extremely well, improving product margin and constraining growth in clearance merchandise despite a nearly double-digit decline in same-store sales. The stores team also performed quite well as evidenced by earning the highest customer service scores for any holiday quarter in the history of Boot Barn. They also supported our omnichannel business by fulfilling more than 45% of our total e-commerce orders over the holiday period. Before moving on to the next strategic initiative, I do want to provide a bit of historical perspective to our recent same-store sales results.

I think it is helpful to remember that our average store volume increased by more than 50% beginning in March of 2021, and has remained at elevated levels for nearly three full years now. On a year-to-date basis, our retail store and same-store sales have declined by approximately 6%, cycling plus 2% for the full year of fiscal ’23 and plus 57% a year prior to that. Going forward, while same-store sales may continue to be negative for the near future, we believe it is unlikely that we will forfeit a significant portion of the higher average store sales volume. Similarly, when we look at our customer count metrics, we reached the same conclusion. The elevated level of average store volume that began a few years ago was a result of a nearly 50% growth in new customers in a comp store and most of those customers became repeat purchasers.

These two statistics give us confidence and our belief that we will likely maintain most of the elevated sales and an average store going forward. Moving to our third initiative, strengthening our omnichannel leadership. In the third quarter, our e-commerce sales declined 11.5%. Our online channel has felt pressure due to less efficient online marketing spend, partly caused by an increase in digital spend by a handful of vendors and competitors. To add some more color, our Bootbarn.com business comped down low-single-digits in the quarter and approximately three-fourth of the decline was due to the erosion of paid demand. Our other two sites, Sheplers and Country Outfitters, are more dependent on paid traffic, so the erosion of paid demand has a significant impact on them.

Our objective continues to be to maximize profitability for our online business, so we will remain disciplined with our digital spend so as not to erode earnings and our desire to grow the top-line sales. Operationally, we have improved our ability to fulfill demand from nearly all of our store and warehouse locations across the country. This enabled us to commit to a pre-Christmas delivery later in the season than ever before. Now to our fourth strategic initiative, exclusive brands. Exclusive brands penetration increased 310 basis points in the quarter to 37.3% I’m pleased with this result, particularly as we were able to achieve healthy growth in penetration despite softness in our Ladies’ business, which over indexes to exclusive brands.

In the quarter, we did launch a brand extension in approximately 50 stores, called Cody James Black, which targets a higher-end customer for men’s cowboy boots and cowboy hats. While this will be a relatively small contributor to the overall exclusive brand business, we do feel great about the initial results and are in the process of extending the new assortment to 200 stores. Looking back over the last three years, we’ve expanded Exclusive Brands’ penetration 1,400 basis points, far exceeding our historical goal of 250 basis points per year. This growth is a testament to the team’s ability to develop world-class brands and compelling merchandise assortments. Turning to current business. Through the first four weeks of our fiscal fourth quarter, our preliminary consolidated same-store sales have declined 8.1% compared to the prior year period.

On the surface, this is only a modest sequential improvement in our sales trend. However, we did see significant disruption in the business in the second and third week of the month due to a winter weather pattern that forced store closures, reduced operating hours, and presented significant travel challenges for customers. When we evaluate the business by region, the same-store sales trend in the South and West regions, which were less impacted by the weather, has improved sequentially from the prior quarter by more than 5 points of comp. Conversely, the North and East regions, which were impacted by the weather, have deteriorated sequentially from the third quarter by approximately 4 points of comp. While significant variability in weekly comp sales persists, we believe the underlying tone of the business has improved compared to the holiday quarter.

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

Jim Watkins: Thank you, Jim. In the third quarter, net sales increased 1.1% to $520 million. Our sales performance benefited from new stores opened during the past 12 months, partially offset by same-store sales decline of 9.7% comprised of a decrease in retail store same-store sales of 9.4% and a decrease in e-commerce same-store sales of 11.5%. Gross profit increased 6% to $199 million or 38.3% of sales compared to gross profit of $188 million or 36.5% of sales in the prior year period. The 180 basis point increase in gross profit rate resulted from a 300 basis point increase in merchandise margin rate, partially offset by 120 basis points of deleverage in buying, occupancy, and distribution center costs. The increase in merchandise margin rate was driven by a 250 basis point improvement in freight expense as a percentage of sales and 50 basis points of product margin expansion.

Selling, general, and administrative expenses for the quarter were $124 million or 23.8% of sales, compared to $115 million or 22.4% of sales in the prior year period. The increase in SG&A expenses compared to the prior year period was primarily a result of higher overhead costs and store payroll associated with operating an additional 49 stores when compared to the prior year period. Income from operations was $75 million or 14.4% of sales in the quarter, compared to $72 million or 14.1% of sales in the prior year period. Net income was $56 million or $1.81 per diluted share compared to $53 million or $1.74 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory decreased 5% over the prior year period to $563 million and decreased 1% on a same-store basis.

We finished the quarter with $107 million in cash and zero drawn on our $250 million revolving line of credit. I would now like to provide an update on our fourth quarter guidance, which is outlined in our supplemental financial presentation. As the presentation lays out the low and high end of our guidance range, I will only speak to the high end of the range in my following remarks. As we look to the fourth quarter, we expect total sales to be $386 million. We expect a same-store sales decline of 6.3% with retail store same-store sales declining 5.5% and e-commerce same-store sales declining 13%. We expect to open 15 new stores with all openings scheduled for the second half of the quarter. As a reminder, this year’s fourth quarter includes 13 weeks of sales compared to 14 weeks of sales in the fourth quarter last year.

We expect fourth-quarter gross profit to be $136 million or approximately 35.2% of sales. Gross profit reflects an estimated 160 basis point increase in merchandise margin rate, including a 140 basis point improvement in freight expense year-over-year and a 20 basis point improvement in product margin. Included in the product margin growth, we expect fourth quarter exclusive brand penetration to be flat to down 100 basis points when compared to last year. As a reminder, exclusive brand penetration grew 770 basis points in the fourth quarter last year. The driver of the slowdown besides wrapping remarkable growth the past few years is primarily due to the softer ladies business, which penetrates at a higher rate of exclusive brand sales. We anticipate 310 basis points of deleverage in buying, occupancy, and distribution center costs as we cycle a 15-week quarter in the fourth quarter last year — 14-week quarter in the fourth quarter last year.

Our income from operations is expected to be $38 million or 9.8% of sales. We expect earnings per diluted share to be $0.92. As a result of our year-to-date performance and our updated estimates for the rest of the year, we are updating our full-year guidance. For the full fiscal year, we now expect total sales to be $1.66 billion, representing growth of 0.4% over fiscal ’23, which as a reminder was a 53-week year. This compares to our previous guidance of $1.70 billion. We expect same-store sales to decline 6.3% with retail store same-store sales decline of 5.5% and e-commerce same-store sales decline of 11.7%. This update compares to our previous guidance of a consolidated same-store sales decline of 5%. We now expect gross profit to be $611 million or approximately 36.7% of sales.

Gross profit reflects an estimated 170 basis point increase in merchandise margin, including a 130 basis point improvement from freight expense and a 40 basis point improvement from product margin. We anticipate 180 basis points of deleverage in buying, occupancy, and distribution center costs. We now project 370 basis points of growth in exclusive brand penetration for the full year, bringing our total penetration to 37.7%. Our income from operations is expected to be $198 million or 11.9% of sales. We expect net income for fiscal ’24 to be $146 million and earnings per diluted share to be $4.75. I’d now like to talk about our fiscal year 2025 that begins on March 31. While it is premature to fully outline our guidance for next year, we thought it would be helpful to share our thoughts on select components of the P&L as we get ready to begin our annual budget planning process.

During fiscal year 2025, we again plan to open 15% new units and these new stores are expected to generate at least $3 million of sales during the first 12 months of business. We expect to achieve approximately 25 basis points of product margin expansion through exclusive brand penetration growth and better economies of scale with our vendor partners. Additionally, we expect to see a reduction in our overall supply chain costs that will benefit our merchandise margin beyond the 25 basis points of product margin expansion I just mentioned. These improvements are part of our larger efforts to manage expenses and drive efficiency in the business. As we look to SG&A expenses, we’ve outgrown our corporate office building in Irvine, California, which we first moved into in 2016.

We signed a lease for a building nearby and we’ll move during the third or fourth quarter of fiscal ’25. The increased lease costs and associated depreciation will put some pressure on the SG&A line. We will provide more detailed financial projections on our May earnings call. Now, I would like to turn the call back to Jim for some closing remarks.

Jim Conroy: Thank you, Jim. We are pleased with our ability to execute during the third quarter where we were able to grow sales and earnings despite a negative same-store sales results. Further, it is encouraging to see that there has been only modest decline in our average store sales volumes since the outsized increase that began in March of ’21. I’m very proud of the team across the country. I want to thank you all for your dedication to Boot Barn. Now, I’d like to open the call to take your questions. Camilla?

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss: Great. Thanks. So, maybe first question, Jim, near term, could you elaborate on the regional improvement that you cited in January sales relative to November, December outside of weather, maybe at a category level? And then just to follow-up on your — on the total company average unit volume, so multi-year you’ve seen average unit volumes moved from, I think it was $2.6 million pre-pandemic to a peak of a bit over $4 million, and I think we’re just under $4 million today. I guess, what do you see as this sustainable AUV for the company going forward and what supports the structural improvement?

Jim Conroy: Sure. On the first one, your first question was around sales by week in January, and actually it was sales by week in January by category, essentially what happened was, weeks one and four had temperate weather; weeks two and three, we had the winter storm that went across most of the country. The two regions for us, the West, which is Arizona and California and Nevada and a couple of others, and then South, which is Texas and a few other states, didn’t feel the weather quite as much as the other two regions, so their business actually improved by about 5 points sequentially from the holiday quarter. The other two regions, we had just — and as you know, Matt, we almost never call out weather, in this case, we had stores closing early or not opening at all, and we had a lot of customers that just couldn’t get out and drive to stores, so those two regions, our North region and our East region, their business decelerated by 4 points of comp from the third quarter.

So, we — as I said in my prepared remarks, we believe that the overall tone of the business has improved from the holiday quarter. In terms of your second question around average unit volume, I think your before number is in the ballpark. We used to be $2.6 million. Actually, if you go back just five years or something we were at $2.2 million and then we’ve grown to much more than that. One of the ways to think about it is we looked at a base of stores that were open in Q3 of fiscal ’20 or had been open, we looked at a comp base, if you will, of 234 stores and those stores were at $2.9 million average unit volume. Those same-stores are now at $4.4 million average unit volume. So that $2.9 million went to $4.4 million for that base of stores and I think that’s greater than a 50% increase, right, $1.5 million on $2.9 million, I like doing math live with other people listening.

If we want to think of the whole chain where our average unit volume is going forward, it’s still north of $4 million, and embedded in your question is what’s driven that, the single biggest thing that’s driven that is we’ve added customers tremendously over the last four or five years in total, of course, part of that driven by new stores. But also on a comp store basis, so our customer count on a comp store basis is up approximately 50% also. When you put all those facts together, we look at the business over an extended period of time and see nothing like tremendous growth and on a year-to-date basis, we’re down roughly 6% in our retail stores. When we cycle plus two and a plus 57, we actually feel pretty good about that number.

Matthew Boss: Got it. And then maybe for Jim Watkins, just on flow through in the model, could you elaborate on the magnitude of buying and occupancy and SG&A deleverage in the fourth quarter? And just how best to size up as we think multi-year, the magnitude of the supply chain efficiencies you cited, and how that may impact fixed cost leverage hurdles in the model moving forward?

Jim Watkins: Sure. Yes, as we look to the fourth quarter, you’re right, given that 14-week period, we do have higher deleverage and so if I look to the high end of the guide and again I’d point you to the Slide on Page 20, where we kind of go through the different components of that, that is 310 basis points of buying, occupancy, and DC deleverage during that fourth quarter. And then as we look to SG&A for the same period, the OpEx, it’s 340 basis points. And the one thing I would remind you on, particularly around the SG&A deleverage, it’s a little more outsized and part of that is because of some unique factors that are working against us. Besides the negative same-store sales for the quarter and the 14-week period, you’ll remember, last year in the fourth quarter, when we gave our report on that as our sales turned negative as we got out of January and went into February and they deteriorated a little bit more as we got into March, we pulled back on several expenses such as marketing and then we had reversed incentive-based compensation.

And so those are things that create a little bit more deleverage as we get into the fourth quarter around SG&A. As far as the magnitude of the supply chain improvements that we’re expecting to see as we get into next year, we’ll give you more color on that and how they impact the leverage points, but the way I would model those out right now is around $6 million of an annual run rate in next year. And — again, we’ll give you more color on that as we look beyond, but that should be something that continues with us as we get into the years beyond fiscal ’25.