Good morning, and welcome to another session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel and accessories brands here at Goldman. I am very pleased to introduce our next session with Boot Barn Holdings, Inc. Here with me today is Jim Conroy, President and CEO, and Jim Watkins, CFO. Welcome, Jim and Jim.
Thank you.
Thank you so much. Jim Conroy, would you like to kick it off with a few opening remarks?
Sure, happy to. It's a pleasure to be here. Thanks for everybody for attending. Quick overview of the Boot Barn concept for those that may not be familiar. We operate in an enormous retail market that we often say is hidden in plain sight, certainly not visible from Battery Park in New York. It's roughly a $40 billion total addressable market. We are by far the industry leader. Most of our competitors are small mom and pops, so it's a very large industry, and it's extremely fragmented. Quickly ticking through our four strategies that have been in place now for over a decade. The first one is build new stores. We've gone from 86 stores to 365 stores in the last 10 years, and even now, we're in the early innings of our growth.
So we think we can get to over 900 stores across the country. Our new store payback is extremely compelling at less than 18 months. Our second initiative is building out our omni-channel. We often call it omni-channel as opposed to e-commerce, because e-commerce for us is only about 10% of sales, and what's almost more important is the integration between the two channels. And what we really leverage is the fact that we have a national chain of retail stores to help support our digital channel. Our third initiative is same-store sales growth. When we think about same-store sales, when I first got to the business, our average unit volume was $1.7 million, then it went to $2.7 million. Now it's $4.5 million-ish.
So we've been able to grow same-store sales for a decade, pretty consistently, with a very, very nice inflection point two years ago, where our average store went up 57%. And then our fourth initiative is our exclusive brand business. 10 years ago, our exclusive brands were 2% of sales. Now they're almost 40% of sales. We have 10 different brands. They're all growing in their own right. And the nice thing about the exclusive brands is they give us some competitive differentiation, and of course, their margin accretive. So when you put all of that together, we're sitting here with 365 stores, with the ability to get to 900 or 1,000, we have the ability to continue to grow comps and exclusive brands. So we have multiple levers of ongoing sales and margin drivers.
That's great. That's a great introduction. Perhaps we could kick it off with a conversation on current trends and what's happening in the macro outlook today. How would you characterize the health of the Boot Barn customer today? And are you seeing any new trends or shifts emerging as you navigate the fall and back-to-school season?
Sure, sure. I think the Boot Barn customer, the single thing that we worry most about is unemployment in blue-collar industries. There's a lot of dialogue around how unemployment is increasing slightly, perhaps, but today, for most of our big industries, our, the Boot Barn customer is pretty solid. In terms of more specifically around back to school, the summer period is a pretty low sales period for us. We don't have a big back-to-school business. What we're looking forward to is that we get into holiday or we get into our rodeo season, which is February, March of next year, which is where more of the volume comes from.
As you think about that business, how important are certain trends or items like weather, concerts, gas prices, other factors that drive volatility? I know there's been a little bit of comp volatility in your business the last couple of quarters. Curious if you can elaborate on that.
I think when you look week to week or month to month, we will see swings when a big country music artist comes in, or when we cycle a big country music artist last year. Or if we have inclement weather, that tends to be good for business. Very hot weather tends to be bad for business. We think that kind of self-corrects over a period of time, which is why we generally don't focus all that much on it. And as we look in at our most recent quarter in terms of trends, we called out that our ladies' boots and ladies' apparel business had declined a bit. But when we think about that business over the last few years, it had grown over 100% in sales on a comp basis two years ago.
To give a little bit of that back, we actually didn't think that was a decline in the trend, just maybe a little bit of a giveback, a very outsized growth.
Talk to us a little bit more about that ladies' business, but maybe for Boot Barn in total, how do you think about assorting between fashion and function? And where are you seeing that growth over the medium and long term?
Sure. The vast majority of our business is functional in nature. If we were to simplify the company into three buckets, the first one is our work customer. That's steel-toe work boots, flame-resistant jackets, Carhartt product, those types of items, and all of that business is functional. The second big chunk is men's western boots and apparel. And while some people believe that that is something that is discretionary, for most of our core customers, they're wearing denim and cowboy boots and cowboy hats because they're working outside, they're working with horses, they're working in agriculture, they're working in the oil industry. And while we call that product western, they view it as part of their sort of work uniform, if you will. And that leaves the last third of our business, which is, to Brooke's question, the ladies business.
Ladies boots plus apparel is about 20% of total sales. About half of that 20%, I would put with the first two categories of very highly functional. We have plenty of female customers that work outside, ride horses, work with horses, and need product that they will wear through, and our best-selling ladies cowboy boots are brown, distressed leather performance sole boots. And what remains is this bit of fashion that does tend to ebb and flow over time. I would say we were in a fashion cycle in a tailwind over the last couple of years, and now facing a little bit of a headwind from that perspective, from a trend perspective.
One of the questions that we're asking most companies at our conference today is one on share of wallet and the outlook for driving higher spend in the core categories that you operate in, relative to other areas where the consumer could be spending those dollars, such as entertainment or going out. As you look into next year, what's the one most important factor for driving growth in your core categories, in your view?
I would give you two answers, I suppose. One is we continue to believe that there is a new customer acquisition strategy as we've gone from a pure Western customer and expanded around that circle, if you will, to a more country, casual, lifestyle, outdoor customer. And while that has provided some growth over the last couple of years, we think we're just getting started in inviting that customer into the Boot Barn brand. I'd say the second piece, maybe more tactically, is we're really now trying to build the basket for each consumer that comes through the doors. So we are tracking, and have been doing this for a while, but really focusing even more attention on when someone buys a pair of boots, are they always buying boot care? When someone buys a pair of jeans, are they always buying a belt?
How can we link up boot purchases with apparel purchases, so we can make the most of the customer traffic that we see in the stores?
Let's round out this discussion on the consumer before we move on to some of your strategic growth initiatives. One of the questions we're asking all companies at our conference today is how they view the consumer backdrop into next year. Do you see the consumer facing more headwinds or fewer headwinds compared to 2023? And how are you thinking about the potential impact from trade up or trade down among your core customer income demographics?
It's a very difficult question, and everybody, of course, is trying to forecast that. Our view is that the consumer has had a lot of pressure in this year, in the most recent 12 months, that some of that will abate, right? So our belief is that we'll be in a disinflationary period for the next year or so, that might free up dollars to spend on goods or on services. We don't believe unemployment is going to spike meaningfully. So I think there'll always be some macro noise and some macro pressure, but I don't think it'll be any worse next year than this year. In fact, I think it'll probably improve slightly. What was your second part of your question?
Trade up, trade down.
The trade up, trade down part of our equation has been has bucked conventional wisdom a little bit. Some of our best-selling categories are our higher price points, and I know that flies in the face of what a lot of other folks are calling out. One example of that is men's exotic skin cowboy boots is the most expensive item in the store, and it's probably one of our highest growth businesses. We haven't seen a significant trade down in price point. Our AUR continues to be growing year-over-year. So we're cognizant of the fact that we want to make sure we haven't alienated a moderate-priced customer over the last couple of years as our retail prices have gone up.
So we're ensuring that we're building in that bottom part of the assortment, but we haven't been able to point to a data-supported trend where customers have traded down.
That's great. Thank you. Let's dive into your strategic growth drivers. The first pillar you mentioned was the new store fleet expansion, which has been something that you've been doing for quite some time. What gives you confidence in your ability to continue to grow the store fleet at the current mid-teens rate? And then maybe we can bring you into the conversation as well. Can you elaborate a little bit more on the financial aspects of that, whether that's new store productivity, operating profit, payback periods, et cetera?
Sure. I think I can take both, both parts of that, if that's, that's okay.
I don't need to be here, do I?
Take a break, Jim. When we first went public nine years ago, we had a new store target of payback in just under three years, the sales of $1.7 million for those new stores. And, you know, we were able to deliver on that over the last several years. You know, coming out of the pandemic, you know, we saw those new store sales increase to $4 million, and we're paying back in just over a year. And as the sales of our the average unit volumes of the rest of our chain also increased in the +57% comp that Jim talked about earlier.
And then over the last, you know, couple of years, that's continued to be well above $3 million and paying back in, in, you know, just under a year and a half. And so I think the track record that we've seen has really encouraged us. We did a study a couple... I guess it's been almost two years ago now, where we revisited our new store potential and increased that to 900 stores, and that was based off of a couple of factors. You know, one being-...
The way we've been able to expand into new markets and how well those stores have done in the new markets, and as we've filled in existing markets, including some of our most mature markets in California and Texas, and seeing relatively little cannibalization in those markets, it's given us confidence that we can continue to grow new units to the 900 store, and do it at a nice economic... You know, with a nice return on capital. Very nice return.
Are there any constraints or factors in your ability to source real estate in the current market, particularly for your most desirable markets and the most desirable locations, or any other constraining factors on how fast you can grow the fleet?
Yeah. So we, again, we've initially set out to grow new units 10% every year. Most recently, in the last year and a half or so, we've increased that to 15%. We feel very confident about the 15% new units this year, 52 store openings. You know, as we look into next year, I mean, there is talk about, you know, rising interest rates and what that does for real estate availability, or at least the cost of that available real estate. And then also, you know, we have seen some competition from other high-growth retailers who are looking for similar space. So we'll evaluate that. Do we think that that will be, you know, less than 10%? No.
We think it'll continue to be above, well above 10%, probably closer to 15%, if not 15%, as we look to next year. But as we guide next year in, you know, five or six months, we'll give you a better answer on that.
You've also experimented with some larger-sized stores, the last couple of years. What additional opportunity do you see in new or alternative formats?
Yeah. So we have grown our new store target to be, you know, from 10,000, roughly 10 or 11 thousand, to 12,000-14,000 sq ft. We've seen really nice success as we've increased the store size. We haven't done a whole lot to change, you know, the assortment, but we have added to that assortment. We've created a new store prototype that you'll see with every one of our new stores that we roll out now. As far as our desire or our need to expand into a different concept, you know, whether that would be a work only, or a Western only, or, you know, something different than the norm from what we've been doing, you know, we've just had such nice success. We have a nice...
A lot of white space to grow to that 900 stores, that the need to vary too much from that is not really there. And so we may, we do have the flexibility to increase our square footage of the size of the box that we take over, whether that's, you know, up 10% or 20%, or down 10% or 20%, depending on what's available in the real estate market. But varying outside of the model that's proven to work so well for us is not something we need to do.
What about cannibalization as you continue to fill in certain markets? Are you seeing any emerging signs that the rate of cannibalization may be changing relative to your historical model?
Not really. We, when we go to real estate committee and approve the deals and underwrite them off the sales volume, you know, there are markets where we know we'll have some cannibalization on the existing stores. But it's nothing more than what we had anticipated when we opened the stores. And again, we increased our, you know, our total target for stores from 500 to 900 stores, largely in part to, you know, the lack of cannibalization that we're seeing.
Comps this year have been under a little bit more pressure. If you do continue to see a lower rate of comp relative to-
Mm-hmm
... your long-term aspirations, how does that impact your view of the pace or the timing of store rollouts?
I think it doesn't really impact us too much. You know, the—as I mentioned earlier, you know, the stores are paying back in, you know, roughly a year and a half. We set out at the IPO to open... to have a payback of three years. If, you know, the sales were to come down, and we opened those stores even at, you know, $3 million or $2.5 million, they're still paying back in, in less than three years or, and probably closer to two years. That's a great return on our capital, even with negative comps.
Again, we've guided the year, you know, after a +57 and a +2 in the stores, and this year we're at the high end of our range of -3 to -5 in the stores, is still really generating a lot of cash for the company and allowing us to invest more into the new stores and get that nice payback. So...
That's great. Thanks. Let's move to the second pillar of your strategic growth plan, which is to drive same-store sales growth. Can you talk a little bit about the new customers that you have recently acquired to the brand and how they may have differed from your prior customer demographic? What are you seeing in terms of retention rates, loyalty program engagement, and how does that loyal customer differ in terms of traffic, ticket, basket size, or conversion relative to your new customer?
Sure. Great question. Giving a little bit of a history lesson, we originally embarked on a plan to open the aperture to bring in new customers a few years ago, when we were a little bit more single-threaded through a western customer, our Texas business. There was a lot of talk around how connected we would be to the oil industry. So in a response to that, and with the opportunity for us to just grow the size of the prize or the size of the market, we said, "Let's diversify our customer base." The first thing we did is we started opening up stores in many more states across the country and got some geographic diversification. Then we said: All right, can we diversify away from a pure western or work and western customer and-
... a little bit of a fashion customer, a little bit of a country lifestyle customer, and over the last few years, that's what we've been focusing on. So when we look at the big step up in our average unit volume, it's mostly due to new customers. That then begs the question that Brooke is bringing to the forefront is, well, how do they behave differently? Fortunately, the new customers that we've added to the fold shop with roughly the same frequency as our legacy customers, and for us, that's not that often. It's two or three times a year. They're also spending roughly the same amount per trip, so a little bit over $120 per trip. So we'll continue to focus on how those trends change over time.
But what we're quite encouraged by is the influx of new customers over the last couple of years, have now proven to be loyal and sticky to us, and we haven't lost them back to the places where they used to shop. The share that we took partly came from within the industry and partly came from more mainstream retailers. So as we came through COVID, we kept our stores open. Most of retail, unfortunately, had to close, and that gave Boot Barn this opportunity to bring on more customers with a pretty low customer acquisition cost. And any customer that needed a pair of pants or a shirt or footwear, we were open, a lot of other people were closed.
While that was a very unfortunate reason for it to happen, as we look back upon those events, we've now gotten a customer database that has grown almost 20% every year, and those customers seem to be loyal to Boot Barn now.
Can you elaborate on how that bridges to your current outlook for same-store sales? What assumptions are embedded in your outlook this year for same-store sales growth, particularly given some of the recent inflection in comps that you saw this summer and the easing comparisons that you see in the back half of the year?
Yeah, so when we guided the year at the beginning of the year, we took those sales volumes and we looked at historical sales curve of the business for the balance of the year, and we projected that through the rest of the year. So, that's what's embedded in the back half of the year. We didn't change that when we reported, you know, our Q1 earnings whatever that was, five weeks ago. For the second quarter, we've guided August in the stores down four, September down four, and that was based off of the July sales trends that we saw.
So on that first quarter call, we, we did talk about business being a little bit choppy, and, and we think that's reflected nicely in, in our guidance, and we didn't change that back half guide. And so that may be a little bit conservative for the second half of the year, but feel good about where we've got that same-store sales guide.
That's super helpful. Thank you. Emerging exclusive brands for the Boot Barn business has been a big growth initiative for your business the last two years. Where do you think, how do you think about the opportunity for incremental penetration going forward on your target of three points per year? What are the most important drivers of that penetration? Is it pricing? Is it mix? Is it category expansion? And is there scope for these brands to be even more margin accretive than they are now?
Sure. So a few things embedded in that question that we'll try to tick through. We were... You're 100% right, that we've called out 2.5%-3% of ongoing penetration growth each year. And for the last couple of years and this year, we'll exceed that, right? So we'll grow 5%, 3 consecutive years or more, and that really has bolstered the profitability of the store and our, our merchandise margin rate, et cetera. I think that will probably then start to moderate going forward to 2.5%-3% of penetration. In terms of where that growth will come from, we have 10 different brands, and it's a bit of a portfolio, if you will, with some more mature brands, Cody James or Shyenne or Idyllwind, and then newer brands that are just getting started, that we're nurturing.
And where we tend to see growth is, we'll start a new brand relatively narrowly, find what's working, what's resonating with the customer, and then we'll expand into broader sizes or adjacent categories, and that's how we tend to see the growth going forward. From a pricing standpoint, our exclusive brands tend to be very much on par with national branded, branded partners. So we don't try to undercut. We, we're not trying to be the value price alternative to the real product, and by doing so, we, we really commit to putting the highest quality product on the shelf. So the last part of your question was around the 1,000 basis points of margin accretion. There's certainly a scenario where we could grow that beyond that, beyond the 1,000, and perhaps that will happen over the next couple of years. But our highest priority is to...
We do want to maintain that buffer, that 1,000 points, but we really want the product to continue to be the best available product, so we don't end up in a situation where we're putting out, quote-unquote, "inexpensive knockoffs of the real thing." And particularly as we nurture these new brands, we want that product to be best in class. So that first trial by a new customer is one that is compelling for them and is attractive for them, so they continue to come back. And then over time, we'll do some of the things that we will be able to do as a more mature retailer, where we can pre-position denim across multiple categories and look at purchasing leather and skins for our boots earlier up in the supply chain.
Right now, we're focused on demand creation, the best product that we can make, that does give us 10 points of margin appreciation.
On pricing, one of the questions we're asking every company at our conference this year is how they're thinking about that into next year. Do you think that you have scope to raise pricing, maintain pricing, or do you think you need to lower pricing next year, given some of the inflationary pressures that are easing in the industry?
I would say—You can add. Like, I would say we're sort of in a steady state mode right now, we'll so maintain of those three choices. Honestly, I think that if there's any trend or any movement in our retail prices, we'll probably look for opportunities to reduce in certain areas if the input costs have come down. Input costs could be raw materials, or the biggest one over the last couple of years, of course, has been freight. And as those start to show any disinflation, A, to be competitive, and B, to just provide the most value we can to a consumer, we'll probably bring some prices down. I don't expect that to be meaningful enough that it, it bubbles up to our consolidated financial statements. I don't think that'll be something we'll be calling out as a big change in our business.
As you think about inventory, where do you think the industry-wide levels of inventory are for your category in aggregate, and how does that compare to your inventory outlook for the rest of the year?
Yeah, we feel really good about our inventory and the weeks of supply that we have in our stores. I would say, you know, the supply chain disruption we've seen over the last couple of years seems to have moderated, where we... You know, other retailers and us for a short period of time didn't have enough inventory. We were able to get in stock. We were able to get in stock probably quicker than a lot of our competitors. And then what we've seen happen is the suppliers have kind of gotten the stock and maybe overstocked in some instances. And so I would say we're in a better place than some of our suppliers who may be, you know, oversupplied on inventory.
What's nice for us is that we do have, you know, shorter lead times on getting that inventory, and it allows us to operate a little more efficiently and have a little more left open to buy as we head into the more near term, compared to what we've had the last couple of years. So we feel really good about it.
You talked about supply chain, and you've guided for some improvement in freight and supply chain costs into the back half of the year. Can you quantify that freight benefit that you expect to realize? And then help us understand how much of that supply chain and freight benefit is still on the table into next year.
Sure. Last year, we called out 100 basis points of headwind in our freight expense. This year, we expect to get all of that back, Q1 and Q2 being, you know, flat year-over-year in freight, and all that benefit coming in Q3 and Q4 of this year. You know, it kind of depends a little bit on where freight costs go from here. They seem to be, you know, staying, you know, pretty low as we head into the fall months here, and so there could be a little bit of benefit in the next year, but right now, I'm not planning on a benefit into next year, maybe a slight benefit. We'll have more on that in the next couple of months.
On SG&A leverage, where do you see the pressures abating, and where's the biggest opportunity for additional leverage?
Yeah. So I think it is. You know, we leverage our SG&A at a positive 2.5% same-store sales growth, and so as we get back to positive comps, you know, it'll be helpful to getting SG&A leverage. We can, you know, lower that a little bit as, you know, some have talked about wages coming down potentially in the next year or two, you know, compared to what we've seen with the inflationary wage pressure over the last several years. If some of that abates, that would be helpful to us in the stores. We've also seen, you know, increases in other input costs, you know, whether that's medical insurance or other insurance and different things.
So if we can get some of that to abate, that would be a nice benefit to our SG&A.
Let's put all these margin drivers together and put a bow on it. Help us frame the normalized margin opportunity of the business and the path to achieving that level. What are the key levers? What levers are in your control, and what are drivers that are just a function of the outside environment?
Sure. So we've guided this year, you know, at the high end of the range, to be an operating margin in the, you know, high 12s. We think we can march back towards a 15% operating margin over the next coming years. The drivers, I would break into maybe three pieces. You know, merchandise margin expansion. You know, we've got a nice opportunity to continue to grow our merchandise margin, whether you know, through exclusive brands. We've grown, you know, merchandise margin around 500 basis points over the last 5 years. Don't expect that to continue, you know, going forward, but we do expect merch margin growth as we move in the next couple of years.
As we return to positive comps, you know, leveraging the buying occupancy and distribution center fixed costs, there's a nice opportunity for us to, you know, to help the bottom line and grow the overall operating margin. And as we just talked about, the SG&A expenses, I think if we can get some relief there, return to positive comps and grow the top line, there's some nice opportunity to get back to that 15% over the next couple of years.
... We've got a couple of minutes left, so let's hit on a few hot topics in retail. First is shrink. We've heard from several retailers this season that it's been an issue. What are you seeing here? And if it is an issue, how are you addressing it?
Sure. We haven't called out shrink. Historically, our shrink has been pretty low in our stores. We're not seeing a pronounced increase in theft, you know, in the stores. It's something that we continue to monitor. You know, we do put security guards in some stores if it's a higher shrink store or a higher theft store. You know, or hiring an employee that we'll put at the front of the store to greet people as they come into the store. It's something we'll continue to monitor, but we haven't seen, you know, a lot of the theft problems that others are seeing, at least not in an elevated manner.
The second hot topic is consumer credit and student loan resumptions. How are you thinking about the impact of these industry trends to your business?
Yeah, we... There has been a lot of talk about the student loans, particularly coming to, you know, as we've looked at the customer, you know, profile of our customer, and they tend to be a little bit older than average, and so, you know, have got those loans, you know, paid off. And we tend to service a blue-collar worker that works extremely hard and needs our product, not necessarily highly burdened with a lot of credit card or student loan debt, I should say. So, that's something that we don't see having a meaningful impact to us as those payments start coming due.
As far as consumer credit goes, you know, our customer tends to pay with debit card and with cash. About half of our transactions are paid for with a debit card. You know, about 20%-25% pays with cash. And so that leaves about 25%-30% credit card. So I think it's lower than what we see at other retailers, but it's something, you know, we'll watch and monitor over the coming months.
Finally, how are you thinking about capital allocation? How do you manage your strategic investment pace versus returning cash to shareholders?
Yeah, so we've got a really nice model that you know, with the new stores we talked about and the return on cash, we're getting to the point where you know, we've got our long-term debt paid off, our line of credit is getting close to zero, and we're gonna start generating some really nice cash flow. For the time being, you know, we're okay maintaining that cash on our balance sheet. It's something we'll look at over the next couple of years, you know, whether that's a share buyback or returning some cash to shareholders. But you know, right now, our focus is on new store growth and being conservative with how we manage our balance sheet, particularly in this environment.
Excellent. Jim, any final closing comments?
No. Thank you very much for having us, and appreciate everybody attending this morning. Thank you.
Thank you, Jim. Thank you, Jim, and thank you for everyone in the audience for tuning in.
Thank you, Brooke.