All right. So good morning, everyone. My name is Max Rakhlenko, and I'm the Hard Lines analyst here at TD Cowen. So first, a quick shameless plug, but with II season upon us, we would truly appreciate a five-star vote in the Hard Lines category. But with that out of the way, I am truly pleased to be joined this morning by the Boot Barn team. We've got CEO Jim Conroy, as well as-
Good morning
... CFO Jim Watkins. We have a buy rating on Boot shares and view the company as an industry leader in the western and work industry with a compelling opportunity to compound earnings on strong new unit growth, comps, as well as margin expansion. With that, let's get started.
All right, thanks for having us.
Of course. So first, let's dive into your business update this morning. You're running 1.4% through the first nine weeks, accelerating from about flattish the first six. So can you just walk us through what you're seeing? What do you think is driving the inflection, and how much do you think is macro versus some of your own initiatives?
Sure, happy to. We're, we're quite pleased, of course, with the business. It's an extension of the narrative that came off of the Q4 earnings call, where we've seen broad-based sequential improvement from time period to time period across all regions of the country, across both stores and online, and across every single major merchandise department. So it's just been a really, really good news story. If you look at the business from Q4 to Q1, that, that narrative has just continued as we've gone from May to June. It's gotten even a little bit better, so it's just really, building some positive momentum. In terms of what's driving the inflection point, I think there's maybe two different pieces to it. We, of course, are doing things all the time to try to drive the business.
We've leaned into a little bit more call-to-action kind of marketing, no more promotions, no change to our promotional posture, but a little bit more of trying to drive more traffic either to the stores or to the site. We've made some tweaks to the hierarchy, or the architecture of our merchandise assortments. We had perhaps abandoned a little bit of the, in terms of good, better, best, the good price points-
Yeah
... so we've kind of filled those in. So I do want to give a little bit of credit to the team that's been executing well, but the other half of it, I think we're benefiting from a little bit of a tailwind of the sector.
Yeah.
You know, denim is, you know, in an upswing right now. I think western and country is in an upswing. Country music is certainly enjoying a moment, so all of that put together has just continued to help push the business kind of sequentially positive.
Yeah. No, that's great, and then I guess when we think about the rest of the quarter, obviously, the business has momentum, but the trends do get tougher in June. So just curious how you're thinking about the near-term setup for the rest of the quarter, and then as you exit Q1?
Sure. Yeah, on a one-year basis, June was our toughest month. On a two-year basis, May was our toughest month, so I think we feel pretty confident that we'll roll right past June. The first week in June was very strong. That was our fiscal first week of June ended on Saturday, and that was a very solid week. I'm not too worried about the year-over-year comparison. I think the momentum that started a few months ago and the broad-based nature of it.
Yeah
... I think bodes well for the near-term future.
You guys always do a nice job around Father's Day as well, so that'll be, that'll be a big weekend.
It will be a big weekend.
So I just want to dive into two categories. First, on women's, there's been significant volatility over the past couple of years, so just curious, if we think about, you know, 1Q run rate, where you're running now, I guess, where are you versus 2019? Does it feel like the business is now becoming more stable, and we've sort of gotten past the volatility, and we can see a little bit more of normalized growth, or how do you think about the women's business here?
So you're right. It has been volatile and I sometimes always have to remember and remind folks that for a year, our ladies' business comped up essentially 100%, like, truly comp, and then was down. But I think embedded in your question is ladies as a percentage of total business is still actually slightly higher than-
Mm-hmm
... it has been historically. I do think the business is settling in a little bit. It's become a little bit more predictable now and a little bit more volatile across all merchandise categories.
Yeah.
And, if you think about how our company has grown over the last three or four years, we had this sort of pretty pronounced inflection point in fiscal 2022, where we had a 53.7% same store sales growth, and the question, appropriately so, was, "Are you gonna give all that back?" While we did have a negative 6-ish year, it does look like we'll hold on to all of those gains, or, at least that looking at the data-
Yeah
... that we're seeing now, it looks like we're gonna kind of just grow from here, and I think ladies is gonna be a nice part of that. Ladies boots, actually, this is a small thing, but psychologically a nice morale booster. Ladies boots actually just turned slightly positive-
Positive
... which is cool.
That's great, and then the other piece I want to look at is, the work business. So that business is typically pretty stable. It's typically runs positive as well. So just curious, what do you think is driving some of the pressure? Are you seeing anything across categories where oil might be underperforming or outperforming or just, you know, when you dive within that business, sort of what do you think is going on, and, just what are you able to discern about maybe the macro versus what's going on with your own business?
... I don't think there's anything specific to call out there. I would like to see some more strength there. It is the most functional business, the point that you're making, and it's unusual for it to not be, particularly on the work boot side-
Yeah
- to not be leading the charge. But it's... Work boots now is just about flat, and I think it'll turn positive relatively soon.
Great. All right, so let's switch gears a little bit, talk a bit more big picture, but so your new store volumes remain really strong at around $3 million, which you've now maintained for many quarters. I guess, does that give you more confidence that that $3 million will be sustainable? And then if we start to see building costs go down, do you think that this really strong IRRs could actually see a little bit of a lift if we get, you know, some help on the denominator?
Yes, it does give us a lot more confidence. We've opened above $3 million in fiscal 2022, 2023, 2024, and then we've guided again $3 million for new stores-
Yep
... in this current year. So every year that goes by and we're doing those elevated volumes, it does give us confidence. To the extent that we see building costs come down, then that would help our IRR for sure.
And then just given how well the new stores have done over the past couple of years, how does that shape your confidence in achieving that target? Because it is a question that we get asked pretty often.
Yeah, it again, it's increasing our confidence as we move into new markets, and again, you go back five or six years, and we hadn't been in a lot of the markets that we're in now and that we've recently-
Yeah
... we've gone into, and the fact that the stores we're opening in new markets are behaving very similar to the stores in the more mature markets or existing markets, it is very encouraging. So it's... And a couple of years ago, we did raise our new store target, you know, because of those reasons.
Yeah.
So as we continue to see success there, it emboldens us for sure.
Yeah, and on the new store growth, you know, roughly 60 this year, you're looking to grow at about a 15% rate. Just curious, given the law of large numbers-
Mm-hmm
... do you think that that's a rate that you'll be able to maintain? And then do you think that the organization can just, you know, handle this sort of a blistering pace from an organizational level?
We're more confident now than we were a couple of years ago at our ability to handle that pace. A few things that we've been able to do operationally as we've opened those new stores is we've been able to hire talent from outside the organization, where if you went back five or six years, we were-
It was all inside.
... we were doing more relocating people and developing, you know, people to have them move into different stores. It's still a great opportunity for our store partners and our store managers to advance in their careers and become district managers and develop and move into new stores. That same thing is allowing us to attract talent because people know they can come to Boot Barn. There's a great culture, and there's an opportunity for them to grow with the company as we continue to open stores and expand across the country. So I think if we were asking a district manager to open one or two, or in some instances, three or four stores a year as we add districts-
Mm-hmm
... we're not really asking them to open any more than that. It's actually probably fewer stores than that as we expand the number even though we're increasing the total number-
Yeah
... of the stores we're opening, we're not asking them for more than what they've already given us.
Got it, and then just switching gears, since the start of the pandemic, you've grown your comps a bit over 40%. So curious, if you could just talk about how much of that was transactions versus basket, and then within transactions, just what's the latest update on new shoppers versus existing shopper growth?
Sure, I think the number was actually higher than 40-something% because we were 53.7%, then flat-
Right
... then -6.7, and I think we guided -1 something now. So, but still, it's, we're happy about that. In terms of what's driving it, it's very much customer-driven, new customers and traffic-driven. The basket piece of it has been a de minimis portion of it. So if you think about just the health of the brand, we're getting more footsteps in the stores, more traffic to the site. If you went back a couple of years when we did have that one very outsized year of same store sales growth, the commentary then was roughly half of it was brand-new customers finding-
Right
... Boot Barn, and the other half of it was our current customer base either shopping more frequently or buying more on each visit. As we go forward, and, in the presentation that we loaded up, and disclosed this morning, you'll see a very nice growth in customer count, where-
Mm
... we've added 1 million customers a year for the last couple of years now. Our loyalty program continues to be a very vibrant part of the strategy, and it certainly seems that the category that we play in right now is just getting more and more consumer attention-
Yeah
... which is great.
I guess on that shopper piece, how do you really focus on balancing winning new shoppers while still maintaining that core Boot Barn shopper that's, you know, really been coming to you guys for many years?
That's a great question. So our strategy for the last few years has been to transform Boot Barn to expand the aperture for our target core customer, and by doing so, we've welcomed plenty of other new segments into the brand. So we've gone from a Western-focused, very narrowly defined brand to be more inclusive of a outdoor lifestyle, a country casual lifestyle, people that are wearing Western-inspired fashion, even though they may not be riding horses, or working in agriculture, or working on a ranch. And we're very careful to always recognize that our core customer is that pure Western ranching, agricultural, blue-collar customer. So all of our marketing is very customized to each of those different segments.
Our store design tries to find a balance, to try to keep each of our different customers that walk in, feel like they are in a, in a environment that's suitable to them. So it's something that's very, very top of mind. As we, as we shift the assortment a little bit, we still need to ensure that we have very hardcore core Western product, as we add layers of other merchandise to it.
Yeah.
It's, I would say, it's an ongoing dialogue in the office, and something we're very careful to not alienate our core customer, as we try to expand the aperture to new customers.
Within that, on the advertising piece, how are you thinking about top-of-funnel versus sort of middle and really a call to action with the top-of-funnel? Seemingly, you guys have massive opportunity still to continue to grow your presence, especially as you enter many new markets.
Sure. Well, we're continuing to try to build the brand nationally. Part of that is simply by opening up more stores, so we get... As the footprint grows, we get more word of mouth and more presence in different markets. We're becoming more vocal in national media types, so country music radio is a big one, a little bit more national television placement. We've become a little bit more active in social media, of course, and all of... you put all of that together, we are seeing a very nice influx of top-of-funnel-
Mm
... new customers coming into the business. And then in terms of trying to generate traffic, we find that we—I think we've found a nice balance between continuing to build the brand of Boot Barn and continuing to invite more people to experiment with the company, and to walk into a store, and go to the site, and at the same time, trying to light a fire of demand-
Yeah
... and, you know, talking about product. So it's kind of two ends of the spectrum there, I suppose.
Sure. And then, so with comps inflecting positive now, if we go back to the historical algo, the company was low- to mid-single-digit comps growth. So just curious, how do you think about the key drivers and whether the key drivers today are evolving from what they were previously, sort of basket versus transactions?
I think they're very similar. As we look forward and look at increasing transactions, we've seen transactions, you know, turn positive, which has been a nice driver of the comp that we're seeing now. And as we move forward, that. We expect that to continue to be a driver. Not sure if your question was to walk down the P&L and talk through that-
No, no, no.
... or more just top-line drivers?
Top-line drivers.
I think that's what we're thinking.
Yeah. Okay, great, that's, that's helpful. So your exclusive brand mix in 2024 reached 37.6%. Just curious, what's the latest thinking around where it can go over the longer term? And then will it become more challenging to continue to grow at that 200-300 basis point pace, which you've outlined before, and whether your strategy is gonna need to evolve in order to achieve that, whether it's continued new brand introductions, or extensions, or square footage growth? But just curious how you think about where it can go over time, and then just the pace.
Sure. I think we're heading towards 50% over the next four or five years. I see no reason to slow that down. We have about 10 brands right now. I don't envision us launching any new brands-
Yeah
... in the near future, but each of our brands has an ability to continue to kind of grow around its starting point. So our largest exclusive brand, as an example, is a brand called Cody James. So Cody James is men's Western, and it was boots, and jeans, and shirts, and hats, and we've expanded that with a sub-brand, if you will, or a brand extension called Cody James Black.
Mm.
And Cody James Black is a little more elevated boots, different styling, like Chelsea boots, like this boot, for example. And Cody James Black is a perfect example, because Cody James Black started in 70 stores, now it's in 100 stores and will likely get either chain-wide or pretty close to chain-wide. So in terms of getting that increased penetration, in that particular example, all we need to do is extend the store count for a brand that's already started to see some nice traction.
Yep.
And then each of the other brands has a roadmap for some growth in penetration. We think there's some more opportunity to grow our exclusive brands on the work side of the business. Work tends to be the hardest to penetrate.
Yep.
So both work boots and work apparel penetrate around 20-ish%, and the company's at almost 40, so we think there's tremendous opportunity there as well. In terms of the level of difficulty, I think it's pretty standard fare. To grow 2.5-ish points a year over the next few years should be doable. This year will be a little bit of a reset year, because we're coming off of a couple of years where we outpaced that 2-ish%-3-ish% growth for the last few years. So we're maybe gonna plateau for a little bit, and then kind of pick back up.
Yeah. No, that's, that's helpful. And then, so just switching over to margins, your occupancy comp leverage point this year is gonna be 6%, which is a bit higher than what it's been historically. I guess, can you just walk through why is that, and then what do you and whether you think that this could be the new, normalized leverage point, or if you think that it could go down over time? And then, if it is the new, higher point, how should we think about that in the context of whether, you know, you could reach that bar doing a +6 comp, or could you de-leverage but then offset it with product margin expansion?
Yeah, I think the focus this year is really on leveraging the fixed costs at the EBIT line. It needs a 3.5% comp-
Yep
Right? And it was, it's a one-year number as we get to the occupancy, the 6% hurdle that you mentioned. It really is this year's number, and the driver behind that is us increasing from 10% to 15% new units openings a couple of years ago-
Yeah
... and carrying that through, and so we've got more of the new stores averaging in at, you know, below mature store volumes at this point.
Yeah.
And so it creates a little bit of pressure in the near term. I think that's something that normalizes out and comes back down over the next couple of years. And the nice thing is we've got some nice merchandise margin drivers that are offsetting that, and we've guided our gross margin, you know, for the year at the high end of the range to be flat with last year. And if there's some upside to the sales trend, then there's some leverage-
Some margin
... that we'll get just at the pure gross margin line that will be helpful.
Yeah, so you touched on this a little bit, but so one of the big merchandise margin drivers this year will be gaining supply chain efficiencies. Can you just provide some more color on what you're doing and whether that's something that could be a longer-term tailwind, or whether it's more of a one-time catch-up?
We think this is something that'll be with us going forward. The current year, we talked about 110 basis points of merchandise margin expansion, about two-thirds of that coming from the supply chain efficiencies. And that's really the team talking with vendors, renegotiating rates on shipping rates and delivery costs, eliminating some of the storage fees that we had offsite before. The opening of the Kansas City Distribution Center has given us some opportunities to find efficiencies, and then we've retooled some of the ways... the way that we have handled packaging in both of our distribution centers and filling boxes more and different things-
Yeah
...that are driving the costs down, and it's really the team going out there hustling and swapping out vendors in some instances to try to get lower rates. And so that's something that this year is gonna be a nice tailwind that'll stay with us into the future years. There may be some upside as we get into fiscal 2026 to increase those savings beyond what we've done already-
Yeah
... but we'll talk about that in-
Sure
... nine months or so.
I think one of the most compelling parts of the boot story is just the very low promotions. I think you guys are really one of the only few retailers out there that's been able to maintain this stance over many, many years. Just curious, you know, how much more room is there? How are you thinking about promotions versus full brand, full price selling, and just where do you see opportunities ahead?
We often think we've run out of room to continue to reduce promotions, but there seems to always be something left, so a promotion around a particular rodeo or, items that we might put on sale to drive traffic for a holiday. What we have found, and it was a little bit of a contrarian thought when we first went down this path, but what we have found is, when we do put part of the business on sale, we certainly can create a short-term spike in demand, but it tends to just pull demand forward from a future time period. And if you think about the category of product that we sell, most of it is functional in nature.
So if we run a sale on work boots, you might come in and buy a pair of work boots, but you're unlikely to buy two or three pairs of work boots. It's not a multi-unit kind of purchase. So, we'll continue to find a little bit more opportunity there. We're better and better at managing through clearance. Clearance is a very small piece of our business, but we now have the ability to move store clearance through our online channel, which seems like a small thing, but if you imagine a store that has broken sizing for a particular item that's already been marked down, and you're waiting for that customer in that size to find that item in that store, now we can kind of bring it to the entire online channel. And, we've-
Yeah
... that has been a way for us to move through clearance at a net margin that otherwise would be-
Mm
... lower if we just waited for somebody to come to the store. So that's another place, I think, where we can continue to squeeze a little bit more merchandise margin dollars. And then the last piece, I guess not really specific to your question, is we continue to benefit from buying economies, or we, our company is twice as big as it was a few years ago. We're twice as important to our customer or to our vendors, rather, and most of our big vendors have recognized that, and, and-
Yeah
... we start with a higher markup just because we're buying better.
Great, that's, that's helpful. And then just on SG&A, any large-scale opportunities, to drive efficiencies, especially by leveraging AI and other technology over time?
Yeah, there are similar to what we talked about earlier on the supply chain efficiencies. We're also tackling the SG&A costs as well, and so we've recently ramped up our procurement team, and our head of procurement's doing a fantastic job of getting things going there. Again, renegotiating contracts with vendors, you know, we've got global purchasing organizations that are helping us.
A lot of the rate changes that we saw and improvement on the supply chain came from technology and leveraging some technology with a newer vendor to help us analyze the costs that we're spending shipping packages across the country, and that's resulted in us going back to the vendor, renegotiating rates, and coming back in with a really nice improvement to our margin from that. And so it's that kind of mentality and that the team is taking across all fronts, and we expect that to generate some nice savings in SG&A over the next couple of years, but the groundwork is being laid there.
And to the extent that, you know, AI can help us in that process, I think we're still early stages there, but we're doing some nice things with AI across the organization. But again, it's pretty early stages.
Yeah. So if we were to bring the margin discussion home, you're at about 9.5%, four quarters pre-pandemic. High end of your guide this year is, I believe, 11.2%. So just curious, you know, over time, where do you think it can go? I know in the past, you've said 14%-15% may be feasible, so just curious the latest thinking there.
Yeah, you're right. We were marching towards that 10%. That was the near-term goal, to get EBIT margin of 10%, which is very respectable in the retail world. We had a little setback with COVID. We were able to get that up to 17% for the one year where we were where sales took off. I think the mid-range target, five or six years from now, we can get back to 15% is, and that'll just be slow and steady growth over the next coming years.
Yeah.
We talked about 12%-14% of kind of being a sweet spot for us, and I think, again, if we can see some comps inflect positive.
Yeah
... then there's some benefit there ahead of us.
So nice square footage growth, comps turning positive, margin expansion. Think that brings us to your capital allocation priorities. Obviously, you've got inventory and working capital as well as CapEx needs, but at the same time, the business is going to be growing. Pretty healthy cash flow here, so just curious how you're thinking about potential capital returns down the road.
Sure. We love getting questions about the cash generation that the business is generating. We've paid off our debt over the last couple of years. To your point, we are able to continue to generate cash despite growing new units 15% and some of our capital needs. We've taken a pretty conservative approach on building a little bit of a cash balance. We expect that to continue. We don't have a share buyback plan in place. We don't have a dividend plan at this point. Keeping some extra money on hand for different strategic opportunities is something that we prioritize a little bit more over those other things. I would say we do favor a share buyback over a dividend, but there again, there's no immediate plans to put something like that in place.
Yeah. Got it. So just a few more minutes, but I wanted to switch gears a little bit and talk about the competitive environment, because on one hand, as you've said many times, you really compete mostly against mom and pops. You've got one bigger sort of regional competitor, but on the other hand, given the strength in the industry, we've seen a lot of more general retailers, whether it's department stores, soft lines, they've all sort of entered the category in different ways. So just how are you thinking about, you know, more closer end competition versus broader competition and the impact it's having on the business?
Sure. Well, it's exciting that, you know, we're in a hot category and other people are trying to sort of take a piece of it. I think we're extremely well-positioned, though, right? We are, we are the only national company that is extremely well-known for this type of product. Western and country music is ascending. Denim is a very strong business, and that is clearly one of our core categories. I think our, our sort of positioning from a western boots standpoint is very, very strong, and while we certainly will start to see more competition sort of edging in on the margins, I think if somebody really wants a broad assortment in western boots or denim and edging a little bit into western-inspired fashion, we are extremely well set up for that.
Yeah.
So if imitation is the sincerest form of flattery... I guess we feel quite flattered.
Great, and then maybe just a last question, but how are you thinking about the TAM? You've outlined it in the past, but the industry, I think, has grown quite nicely since then. So where do you think is it now, and just the, the risk that it might come back down and sort of the implications?
So the addressable market, I think, is still huge, right? We've triangulated it a few different times at $40 billion. We've looked at store counts of north of 1,000 stores. You could reason by analogy and look at a cousin company, one that we have a world of respect for, like Tractor Supply, that has 2,000-plus stores. So today, we're at 407 or 408 stores, and I think as we proceed to grow at 15%, we'll head towards 900 stores. I'm pretty confident that once we get closer to that, which is still several years away, we'll find room for more growth-
Yeah
... on top of that.
Great. Any last closing remarks?
No, it's, thanks for having us. It's certainly great to be able to walk through a very positive update and to kind of continue this broad-based sequential improvement that we started a few months ago, and if you were to draw a line through the most recent data points, it seems to be continuing to go up in a positive direction. So thank you-
Great
... and thanks, everyone.
Thanks a lot.
... for joining us today.