It'll wake me up, that's for sure. All right, well, good morning, everyone. Thanks for joining us. So my name is Peter Keith, the Senior Research Analyst with Hardlines and Leisure. Welcome to the Piper Sandler Growth Frontiers Conference. Very happy to have Boot Barn with us today, which, for a conference based in Nashville, I think they're a perfect company to be presenting today. So thanks for coming, Boot Barn team.
Thanks for having us.
As many of you know, they are the definitive 800-pound gorilla in the Western and workwear space. Just for quick introductions here, we have CFO Jim Watkins; CEO Jim Conroy; and then VP of Finance and Investor Relations, Mark Dedovich is up front. So thanks for coming, welcome.
Thank you, Peter.
Thank you.
So, let's just kick off. I know a lot of people are curious on the state of the consumer. You guys serve a little bit different consumer than most retailers, more blue collar, more middle of the country. How do you feel about the health of your customer and the spending capabilities right now?
Sure. We feel pretty good. To your point, our core customer buys product from us fundamentally for functional, basic use. And what would impact their spending generally is sort of macro changes in employment in some of the blue-collar industries. And I think there's plenty of macro pressures out there, but most of the blue-collar industries that we service are reasonably strong right now. So I think we feel decently, decently about the, the overall health of our customer.
Okay, good. So one of my favorite topics with Boot Barn is this really strong growth you saw in COVID. And, I like to just tell, tell people, I don't know why people all of a sudden would have bought a lot of boots during COVID, so I think there's more to it than just COVID demand. And you guys have talked about widening the appeal and widening the aperture of the brand, is how you put it, Jim.
Mm-hmm.
I love that phrase. So talk about some of the things that you guys undertook, even going into COVID, and have continued to leverage to bring in more new customers.
Sure, sure. Well, we in the year or two leading up to COVID, we had started to expand our segmentation, our consumer segmentation, to go from a brand that was heavily focused on a very traditional Western customer. So our core customer rides horses, works on a ranch, knows rodeo athletes, and while we thought that market was quite large, the goal was to expand beyond that market, open the aperture, to borrow Peter's terminology. And we went and looked at sort of a more country lifestyle customer. So it's more casual clothing with perhaps some Western leaning. And we were heading down this path of prospecting for those consumers, expanding the assortment, changing the branding, changing our marketing mix to invite customers that aren't hardcore Western customers to become Boot Barn customers.
Just as that strategy was beginning to take hold, the pandemic hit, and in an unfortunate stroke of luck, I suppose, it helped propel our strategy. The reason it did that was, we took a position that we were an essential retailer because we were selling Western work clothing and steel-toe boots, and flame-resistant product for workers on oil rigs, et cetera. Most of our stores remained open throughout COVID, where most of the stores in the industry, and certainly most stores within retail, were closed down for a period of time.
So if we had this strategy of we were trying to broaden our customer base, and then many retailers in the retail marketplace closed down for a few months, our quote, unquote, "customer acquisition cost" became almost zero because anyone that needed a shirt or a pair of jeans, whether they were going to ride a horse or not, found our doors open. Typically, when a customer comes into a Boot Barn, they're presented with a proposition that is more, compelling than they otherwise would have thought. They generally think, before they walk through the front door, that it is purely for cowboys, and then when they get into the store, they realize that, "Well, look, there's a lot of product here for me or for me and my family," and then they become shoppers at Boot Barn.
So as we exited the pandemic, we realized we had captured a tremendous number of customers, both from within the industry, but even more from other retail, more mainstream retailers out there that weren't mom-and-pop Western retailers. And now it's a couple of years later, and it looks like those customers have remained sticky to Boot Barn and loyal to Boot Barn.
Right. Okay, yep. And so it's a very big addressable market. So you framed it up a little over a year ago at about $40 billion. Maybe could you break down what amount you think is more Western, what amount is more work, and then just unpack how you arrived at that $40 billion? Because it's a quirky industry with not a lot of data.
Right.
I'd like to hear more about that.
Sure. We had originally done a TAM study when we were going public, and we hired an external consulting company to help do a fair amount of analytics to come up with the number. And at the time, as Peter would undoubtedly remember, it was a $20 billion industry. We went public in October of 2014. About eight years later, we said, we've expanded the meaning of the definition of the Boot Barn brand, so now how big is the marketplace? And when you look at boots plus apparel, and you go through our segments, Western, this newly added country lifestyle plus hardcore work boots and work apparel, so that's kind of like six boxes, you get to a $40 billion TAM.
I think our penetration in pure Western is decent, but we have plenty of room to grow. But our penetration in sort of this more outdoor country lifestyle is just getting started. So if we look at our future growth, in addition to adding new stores, that's embarrassing. In addition to adding new stores, we think we're just beginning to penetrate this sort of country lifestyle customer base, with relationships with NFL athletes, Major League Baseball pitchers, NASCAR, and looking to bring customers into the fold that may wear boots from time to time, often wear jeans, probably wear a baseball hat rather than a cowboy hat, but there's a whole, you know, giant population out there that we can tap into.
Okay, great. Well, that—so maybe that's a great pivot to some of the marketing strategies. You guys have built up a great brand with that core customer. You've talked about you sponsor a lot of rodeos, but what are some newer strategies you've gone after? Just mentioned maybe some celebrities or athletes, influencers.
Sure.
How has that marketing strategy evolved in recent years?
It's evolved quite a bit, and if you went back five or six years ago, the first thing that we did in order to become a slightly more mainstream brand, is we elevated the creative aesthetic of the brand tremendously. So the brand became much more aspirational. We essentially wiped out all price and promotion and sale orientation, so the vast majority of what we sell today is at full price. We're almost never discounting to the customer. And then, if you think about the marketing channels and the marketing mix, coming back to Peter's question, more specifically, we do have multiple segments, right? So we can hit a Western, our legacy customer in many ways, but we can and do sponsor essentially every rodeo across the country, and certainly the bigger ones.
We have a very strong loyalty program, so we can send them specific messaging, whether that's email or we still do a lot of print catalogs, direct mail pieces. And then as we go through the other consumer segments, we believe we can reach the work customer mostly through radio. They are out on job sites. They're traveling from job site to job site. So while radio isn't the latest, newest media type, it's a very cost-effective way for us to get awareness with a blue-collar worker, so when they do need a pair of new work boots, the Boot Barn brand is top of mind. So then you go a little further into more of our sort of newer segments, sort of a fashion segment or a country lifestyle segment, and we've done a whole host of marketing outreach.
Part of it is the new sponsorships or relationships, I should say, with athletes. We have a very vibrant influencer program, more on the female fashion side. So we had just a few weeks ago, we had a giant fashion show here in Nashville, and we had a huge number, 50 or 60, influencers within the industry, country music artists, emerging country music artists, that then, of course, post and bring, you know, the spirit and the excitement of that fashion show to all of their followers. So the... I think part of the success of our marketing outreach is, we look at each consumer segment completely differently and use a very different marketing mix to prospect and then nurture customers across those different segments.
Okay, great. Well, let's get a question to Jim Conroy here. So, wanted to talk about this total store opportunity and then the four-wall metrics. So you've put out a target, a year and a half ago, of 900 total stores, grow about 15% a year, which is impressive. But also, you've talked about how year one productivity of a store has basically doubled now, from the IPO. So just update us on where these metrics are today in terms of revenue, cost to build, cash-on-cash return.
Yeah. So, you're right. When we first went public nine years ago, the new store opportunity showed, you know, we had modeled new stores opening at $1.7 million in sales in year one. You know, that's now, you know, roughly doubled as we open new stores at twice that. The capital that it takes to open a new store between inventory and building out the store is $1.4 million. We get a cash-on-cash return of roughly 75%, paying back in, you know, roughly a year and a half. And so it's a very attractive model. This year, we've guided to grow new units 15%. We're adding 52 new stores.
And so with such an attractive payback, we're gonna open as many stores as we can. And we think, you know, we've gone from 10% new unit growth target when we first went public to 15%, and it's something that we're planning for the foreseeable future to continue at that 15% new units.
Okay, great. So, if you look at the U.S., there's a decent amount of white space in infill markets. But the Northeast, we've talked about this since the IPO, is just this huge white space market. You're now starting to open stores in the Northeast. How is that going for you so far? Have you had to make tweaks to the assortment in order to better position yourself with Northeast consumers?
... Sure. We're really pleased with the expansion into the Northeast. As a former New Yorker, I had a bit of a dubious eye as we started opening up stores in Pennsylvania, Ohio, Virginia, and now upstate New York. Two things have happened: number one, those stores are exceeding their Real Estate Committee pro forma, the budget that we set out for them to achieve the payback threshold that we're looking for. And two, those stores are also behaving very familiarly to us. We originally had expected that we would have to pretty massively contort either the store size or the assortment to skew it more work versus Western, perhaps. We haven't seen that.
So when we open up a store in Albany, New York, it's still selling cowboy boots and cowboy hats in the same proportion as a store would be in Denver. And the other part of your question maybe is a little more nuanced. The assortment changes a bit, but if you, unless you're sort of a merchant in the industry, you would walk in, and the store would feel very similar to a brand-new store in almost any part of the country. The differences are a little bit more, you know, maybe there's the toe profile of the boot or the type of work boot that we carry in one part of the country versus a different part of the country based on the industries that we serve.
But the good news, therefore, is we can continue to grow at a pretty rapid pace and continue to open brand-new stores in largely untapped markets, and they're paying back in 18 months. They sell very much a similar assortment as the rest of the country, and our downside risk has proven to be pretty mitigated because essentially, every single store in the company is EBIT contributing. So even a bad store, a bad location, or a mistake that we make in opening up a store, tends to just lead us to a slower payback, not a EBIT-draining location.
Okay, great. Let's see, we're-- Jim Conroy, a question-
Watkins.
Well, it's two Jims. Sorry.
I'm the short one. He's the good looking.
Yeah, Watkins, yeah. Gross margin, it's an important topic for you guys. How should we think about the various puts and takes? You've got some, you know, you've got rented occupancy in your COGS, you've got freight coming down, private label. Kind of walk us through the, how those dynamics are, expected to play out for the rest of the year.
Yeah. So for the... You know, one of the things that we called out last year was the freight headwinds of 100 basis points last year.
Okay.
And so we've guided this full year to get the 100 basis points of freight back in as tailwinds this year. And so first half of the year, that being roughly flat with where we were last year, and us picking that back up in the second half of the year. And so that'll be, you know, 100 basis points impacting our merchandise margin. You know, we've guided the year at 160 basis points of merchandise margin improvement, and so the other 60 basis points coming from, you know, product margin driven by exclusive brand penetration growth. You know, 500 basis points of exclusive brand penetration growth, that gets us 1,000 basis points, you know, better markup than what we see with our third-party vendors.
And so, you know, from the merchandise margin perspective, a nice growth there. We'll again, speaking to the high end of our guidance range for the year, so gross margin growing 10 basis points on the year. So the offset to that being the deleverage that we're planning on seeing from the, you know, lower sales, the negative same-store sales guide for the year. We also opened a new Kansas City distribution center. Our growth has, you know, required us to get more distribution capacity, and so we've opened that up. So there's some costs related to the rent and the depreciation and getting that, the labor there, getting that up to speed. And so that's now up and running.
We're seeing, you know, some nice output there, and I think as we get through the end of this fiscal year, we'll be, you know, fully operational and starting to see some of the efficiencies there. But in the meantime, that's going to be a little bit of a headwind on the buying and occupancy and distribution center costs. So those are kind of the puts and takes as we get through this year-
Okay.
with gross margin.
Okay. What about pricing? How much pricing do you think you've taken so far? Has pricing stabilized, or are you still seeing some supplier-led price increases coming through?
Yeah. So over the last couple of years, we have seen those inflationary prices come through from our vendors. We've passed those along to our customers, maintaining our merchandise margin, you know, as we've passed those through. We have seen those prices come down, those increases come down, and in many instances, we're seeing some price decreases from our vendors. And so I feel like we're through the heavy inflationary price increases from those vendors, and we're getting back into, you know, kind of a normal range of prices, and again, you know, some nice decreases in some instances.
Okay. All right, then private label. So, we'll go back to Jim Conroy. So this, 500 basis points penetration within the guidance is even a little bit better than that, your first fiscal quarter. So it's kind of been accelerating here, as of late. So maybe, but what, what are the drivers with this acceleration, and what's kind of a normal type of, private label mix increase do you think we should see going forward?
Sure. Great question. Originally, we had called out 250-300 basis points a year, and we were on that trajectory for several years. One of the things that happened coming out of COVID is the supply chain in the industry tightened up quite a bit, and the one piece of the supply chain that was working better than most of the third-party brands was our own brands. So as we emerged from COVID, our sales for the year two years ago comped up 54%, I think, and we were struggling to chase into all that business, and the single vendor that we could rely on the most was our internal brand.
That enabled us to get our product out there, get our new boots and our new brands on people's feet, our new jeans sort of started to really take hold. And for two years in a row, and this will be the third year in a row, we'll grow more than 500 basis points of penetration in exclusive brands. So in a three year period, we'll go from 25-ish% of the company to almost 40% of the company being our own brands. I do think coming out of this year, and we'll, we'll have plenty of time to guide for our fiscal 2025 year, but I think we'll come back to a more normalized growth rate in exclusive brands, back to 2 or 3 points. We don't want to outpace the customer.
We always want to make sure we have a wide variety in our brands and our assortment. We want to always be having our national branded partners find growth with us and always be bringing in other outside third-party brands. So we don't want to push exclusive brands too far, too fast. But it has been a runaway success story for the last three years, where we've grown sales substantially and grown exclusive brands and have added more than 100 basis points a year for four or five years now to our merchandise margin, our product margin. So it's been a great experience for the last few years.
Yeah. Are there parts of the assortment in the store that have higher private label penetration and others that might be a little more brand-oriented, where it's a little bit more challenging?
There are. It's a very good question. If you think of sort of a continuum of consumers, kind of back to our segmentation strategy, the ladies businesses are the most highly penetrated in exclusive brands, and at least the anecdotal notion is they look for a product that they think looks good and/or is functional and are a little bit less brand specific. On the far other side of the spectrum, and I recognize that this is a stereotype, but the hardcore work blue-collar worker wants Carhartt jackets and Timberland work boots, and so that part of our business is less penetrated. We have seen growth in exclusive brand penetration across all of the segments. They just all have different starting points. So we think work boots is a perfect example.
We think work boots is about 20% of our total business, and the penetration is much lower in work boots than the rest of the business from exclusive brand standpoint. So that's just great opportunity for us to continue to nurture and build that consumer, and still remain important to the third-party brands, but we should be able to build up. We have two brands in that space, Hawx and Cody James Work, and we think there's a lot of opportunity for them to continue to grow.
Okay, great. So one topic, Jim, we and I have talked about for years is commercial sales. I mean, your retail sales with consumers has just been so strong, and maybe there's no reason to grow a commercial sales effort, but give me an update on what you're doing there, 'cause that always just seemed like a really nice opportunity long term.
Sure, sure. Well, we have a great sales team out across the country. It's roughly a dozen people that interact on a sort of B2B basis, and they create a somewhat contractual relationship with builders or oil rigs and will outfit an entire crew. And typically, the company then would pay either most or all of their needs of their workers. The neat thing about that part of the business is that's sort of the most stable, right? That becomes sort of an annuity, and it's sort of a baseline business for a store, particularly on the work side. The other thing that's begins to happen there is, we put stores in new markets. You don't immediately have commercial accounts.
So some of the success we've seen in the Northeast with our brand new stores is prior to them adding and building up their sort of local accounts. So one of the priority areas for us as we enter new markets is we gotta get the store open. We wanna take care of the first customers that walk through the door, but then we want to start to build relationships with the local community and sort of the, the bigger companies in that market where we can outfit 50 or 100 people at once rather than every individual that happens to walk through the store.
Okay, great. So one last question, and management team structure. So for your, our good friend, Greg Hackman, retired in, I think it was May.
Mm-hmm.
He was COO. So you do not have a COO right now. How are you thinking about the structure of the team over the next 12-24 months? Is that something you'd like to fill in?
Sure, sure. I'm happy to address that. So, Greg did a lot of great things for the company. One of the things he did was really develop the team underneath him. So our current thinking is to just take his functional areas and distribute them to the folks like Jim Watkins took on some, our head of stores took on some, I took on some. And we feel really good about our current structure. We have no immediate term desire to add another chief operating officer, and frankly, that's largely thanks to the work that Greg did to sort of develop all these functional areas to the point where, as he retired, we didn't need to replace him.
As you know, we tend to run a very lean organization, so if to the extent that we can save a headcount, particularly a more expensive headcount, we'll look for those opportunities.
Okay, great. Well, we are out of time, so we'll wrap it up there. So, Jim, Jim, and Mark, thanks so much for joining us today.
Thanks very much.
It's always a pleasure.
Yeah, very good.
Thank you.