Earnings Call: Q2 2021

Oct 28, 2020

Good day, everyone, and welcome to the Boot Barn Holdings Second Quarter Fiscal Year twenty twenty one Earnings Call. As a reminder, this call is being recorded. Now I'd like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations. Please go ahead, sir. Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's second quarter fiscal twenty twenty one earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer and Greg Hackman, Chief Operating Officer and Chief Financial Officer. A copy of today's press release 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 thirty 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 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 second quarter fiscal twenty twenty one 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? Thank you, Jim, and good afternoon. Thank you, everyone, for joining us. On today's call, I will review our second quarter results, update you on our current performance and walk through each of our four strategic initiatives. Following my remarks, Greg will review our financial performance in more detail and then we will open the call up for questions. Before we begin, I would like to acknowledge the entire Boot Barn organization for their continued hard work and execution as we navigate through the current macro environment. The team has adapted quickly to the ever changing nature of the pandemic and has done a tremendous job serving our customers while focusing intensely on maintaining a safe shopping environment. I continue to be humbled by the culture of the company and I'm grateful to be a part of this wonderful organization. We are very pleased with our second quarter results, which exceeded our expectations. Beginning with our top line, net sales were down 1.4% from a year ago, with same store sales decreasing 5.1%. Given the environment and the many pressures on the business, our ability to nearly maintain our sales volume year over year was quite an accomplishment. By channel, same store sales in our retail stores declined 9.1% and e commerce same store sales increased 17.6%. Following a slow start to the quarter due to an increase in COVID cases in several of our key states, same store sales growth improved sequentially each month of the quarter and has continued to increase during October. Consolidated same store sales declined 9.8% in July, '8 point '9 percent in August, before turning positive in September, increasing 1.3%. The acceleration in consolidated same store sales was driven by sequential improvement in our retail stores. As we mentioned on our last quarter's call, we have seen a correlation between consumer sentiment around COVID-nineteen and retail store sales. From a margin perspective, our second quarter merchandise margin was strong in both stores and online. We have maintained our full price selling philosophy with minimal markdowns and promotions, resulting in growth in product margin, which helped to partially offset deleverage of buying and occupancy costs, higher freight expense and margin headwinds due to channel mix. Once again, the merchandising team has done a great job of navigating through the many challenges in the retail environment and has us well positioned from an inventory standpoint without incurring margin pressure due to product markdowns. The strong full price selling combined with our recent cost reduction efforts resulted in second quarter net income of $5,800,000 or $0.20 per diluted share. This was better than our expectations and compares to $7,700,000 or $0.26 per diluted share in the prior year period, which included a $02 per share benefit due to income tax accounting for share based compensation. Given the challenging macroeconomic environment, we are particularly encouraged by our bottom line performance in the quarter. I'd like to now provide an update on current business. We saw continued improvement during fiscal October as same store sales in our retail stores were flat to last year and our online sales remained very strong. While work boots continue to be our strongest performing category, we're also encouraged to see more broad based growth across other categories with momentum building in denim, hats and western boots, all of which are now comping positive quarter to date. I would now like to provide an update on each of our four strategic initiatives, beginning with driving same store sales growth. During the quarter, we saw significant sequential improvement in the retail stores business, improving from a same store sales decline of 15% in July to slightly negative comps in September and further improving to flat comps in the month of October. While we experienced several headwinds related to COVID-nineteen that impacted sales transactions during the quarter, our underlying business remains solid. Low oil prices impacted employment in some of our markets, most notably in West Texas, while COVID related restrictions have slowed travel in some of our markets that benefit from tourism. Additionally, events such as rodeos and concerts have been canceled across the country. These events typically provide a catalyst for our customers to get into our stores and purchase boots and apparel in preparation for attending the event. Despite these COVID related challenges, we were able to improve our retail store same store sales from a decline of 27% in the first quarter to a decline of 9% in the second quarter, ending the month of September with essentially flat store comps. The improvement in the business showcases the strength of the Boot Barn model and our customers' affinity for our in store shopping experience. From a merchandise perspective, work boots continued to be our strongest performing category. Sales of non flame resistant work apparel were up in the quarter as our core customer purchased functional product for their work needs. In contrast, demand for our FR work apparel business was soft due to high unemployment for our customers working in the oil and gas industries, which pressured same store sales at some of our stores in Texas and other oil dependent markets. In addition, sales of both men's and ladies' western boots and apparel declined during the quarter. From a marketing perspective, upon the onset of COVID in the spring, we adjusted our media mix by placing more emphasis on digital and pay per click advertising while pulling back on direct mail and radio spots. Now with the business returning to a more normalized composition with stores returning to a penetration of more than 80%, we have reverted back to our more traditional marketing program, which includes radio, television and direct mail in addition to the digital marketing that we have had in place. From a customer segmentation perspective, in addition to marketing stocks targeted at our work customers, we are refocusing on our core Western and fashion segments, especially during the holiday and gift giving season. We've also recently expanded into a new segment called Just Country. This new segment extends our customer reach to those who don't live a core Western lifestyle, but fit into a rugged, outdoor, adventure enthusiast and recreational category. Recognizing opportunities to expand our product offering to those living in an increasingly more outdoor lifestyle and in line with our Just Country segmentation, our merchandising team has broadened our assortment of hiking boots, outerwear and outdoor footwear and apparel. Inventory in these expanded product categories has started to build. We expect this offering to drive new customers to the brand and expand our share of wallet with existing customers. From an operational perspective, essentially all of our stores are open today with normal hours of operation. We continue to promote a safe shopping environment with the use of face coverings, plexiglass partitions at the registers, and social distancing. We've also made terrific progress in recruiting and hiring much of the seasonal staff that we will need for the holiday build and business. As we look forward to our holiday quarter, we feel great about how we are positioned from a merchandising, staffing and marketing standpoint to handle the holiday surge and to react to whatever challenges are presented by the external environment. Moving to our second initiative, strengthening our omnichannel leadership. During the second quarter, e commerce same store sales increased 17.6%, and our continued focus on e commerce profitability drove a more than 100% increase in operating income. Our increase in sales was driven by both new and existing customers. We are focused on stepping up our efforts to add more new customers and optimize conversion across each of platforms. The majority of the online growth we saw during the quarter was driven by a 42% increase in sales on bootbarn.com with a healthy year over year increase in both traffic and conversion. Sales at bootpoint.com now make up more than 50% of our e commerce business. While e commerce sales in the rest of our online business were down low single digits year over year, we have seen significant improvement in e commerce profitability, partly as a result of the rebranding of the sheplers.com site and the associated changes we made in our promotional posture to reflect a more full price selling model. The ongoing changes we have made and are focused on increasing e commerce profitability have not only greatly improved our bottom line, but have continued to narrow the margin differential between the stores and online channel. We are making improvements to our omnichannel capabilities, and with the enhanced capabilities will enhance will enable us to continue to meet our customer shopping needs during these unusual times. We now offer a variety of omnichannel options, including our endless aisle whip tablets, brain finder tool, buy online pickup in store, and curbside pickup. We are pleased with the success we have seen in recent weeks with our buy online pickup in store sales as some of our customers have adjusted their shopping habits. We recently added additional capabilities to our e commerce business, including fulfillment of e commerce orders from our stores and same day delivery from our stores. We believe these enhancements provide us with additional competitive advantage, including same day delivery of holiday gifts purchased on our sites, which will extend our online shopping season several days longer than traditional direct to consumer players. Additionally, in the coming weeks, we plan to launch virtual clienteling, which will allow our customers to shop from home while video conferencing with an in store expert stylist as their virtual shopper. While still in the early days, we are encouraged by the performance across each of these platforms and expect them to provide incremental sales and enhanced customer satisfaction, especially as we head into the holiday shopping season. From an e commerce fulfillment perspective, the upgraded automation and enhanced warehouse management system added to our distribution center over the last few years has reduced picking times and shortened the time from order to delivery. These changes, along with expanded capacity at the fulfillment center that has recently been added, have us well prepared to fulfill essentially any type of online demand during the busy holiday season. Now to our third strategic initiative, exclusive brands. During the second quarter, exclusive brand penetration grew to 24.9%, an increase of more than three fifty basis points compared to the prior year period. This growth is a testament to the high quality product offering and the overall brand receptivity we have seen with our customers. As a reminder, our exclusive brands are created and nurtured as true brands and not as inexpensive alternatives to third party brands. This focus on brand development has positioned Cody James and Cheyenne as our number two and number four top selling brands in the store. We believe our exclusive brands in combination with the assortment we offer from third party vendor partners will continue to drive traffic to our stores and our e commerce sites and further develop loyalty from our customers. We expect to see continued growth in our exclusive brand penetration in the range of 200 to 300 basis points during the current fiscal year. Finally, our fourth initiative, expanding our store base. We opened one new store during the second quarter and an additional store in October, bringing our total store count to two sixty six stores. We plan to open in both new and existing markets and continue to target a total of 15 new store openings in fiscal twenty twenty one, including the seven stores opened year to date. We are very encouraged by the performance of the newly opened stores, particularly those in new markets. This strong performance, despite the challenging macro environment, underscores the strength of the business model and further validates the significant opportunity for us to continue to open new stores with attractive returns going forward. While we have intentionally slowed new unit growth this fiscal year as a result of COVID-nineteen, we remain confident in our long term ability to expand our store base by 10% or more each year in a more normalized external environment. I'd like to now turn the call over to Greg Hackman. Thank you, Jim. Good afternoon, everyone. In the second quarter, net sales decreased 1.4% to $184,500,000 The decrease in net sales was driven by a 5.1% decline in same store sales, with same store sales in our retail stores declining 9.1% and Determa's same store sales increasing 17.6%. The decrease in retail store sales was primarily the result of decreased traffic in our stores that resulted from customers staying at home in response to the COVID-nineteen crisis. Gross profit decreased 6.5% to $55,500,000 or 30.1% of sales compared to gross profit of $59,300,000 or 31.7% of sales in the prior year period. The 160 basis point decrease in gross profit rate resulted from a 110 basis point increase in buying and occupancy costs and a 50 basis point decline in merchandise margin rate. The deleverage in buying and occupancy costs was primarily a result of lower sales due to the COVID-nineteen crisis. Merchandise margin declined 50 basis points, of which 30 basis points is a result of higher e commerce penetration and the balance of results of higher freight, partially offset by better product margins. Operating expense for the quarter was $45,400,000 or 24.6 percent of sales compared to $46,400,000 or 24.8% of sales in the prior year period. Operating expense increased primarily as a result of lower marketing and pay per click expense. Income from operations was $10,000,000 or 5.4% of sales in the quarter compared to $12,900,000 or 6.9% of sales in the prior year period. Income tax expense was $2,000,000 in the quarter compared to $1,900,000 in the prior year period, resulting in an effective income tax rate of 25.6% in the second quarter. Net income was $5,800,000 or $0.20 per diluted share compared to net income of $7,700,000 or $0.26 per diluted share in the prior year period. Turning to the balance sheet. Inventory decreased approximately 14% compared with the last year, both on a comp store basis and on a total company basis. The decrease in total company inventory was primarily driven by the reduction in comp store inventory and a decrease in inventory at our Fontana distribution Center, partially offset by growth in inventory for new stores added in the last twelve months. We continue to be pleased with the team's ability to manage inventory levels during the current environment. As of 09/26/2020, we had a total of $179,300,000 of debt outstanding, including a $111,000,000 term loan and $68,000,000 outstanding on our $165,000,000 revolving line of credit. During the second quarter, we reduced our line of credit borrowings by approximately $62,000,000 resulting in $97,000,000 of remaining availability. We had $35,700,000 in cash on hand at the end of the quarter, and our net debt leverage ratio at the end of the quarter was 1.7. Given the continued lack of visibility into the business as a result of COVID-nineteen, the company is not providing third quarter guidance at this time. Now I'd like to turn the call back to Jim for some closing remarks. Thank you, Greg. Although the current environment remains challenging, we are pleased with our second quarter results and are optimistic about maintaining our positive momentum through the holiday season and back half of the year. We continue to believe in the strength of the Boot Barn model and look forward to the opportunities that lie ahead. Once again, I would like to thank the organization for their hard work and commitment to taking care of our customers and executing on our initiatives through a difficult backdrop. Now I would like to open the call up to take your questions. Stacy? Thank you. We will now be conducting a question and answer session. Our first question comes from Matthew Boss with JPMorgan. Please go ahead. Great, thanks and congrats on the business momentum. Thank you. Thanks. So maybe first on your positive 2% comp in October, what performance are you seeing in maybe some of your core markets such as California relative to Texas or oil and gas market? And Jim, given the top line stabilization, is there any impediment to returning to 10% new unit growth as early as next year? Okay, so good question. From a regional perspective, the way we think of the field organization is we split into three different regions. The West Region, which includes California and a few other states, has performed the best. The South Region, includes Texas, has been under the most pressure, largely due to some of the oil markets in West Texas and some softness in overall Texas. And then the North Region includes essentially the rest of the country, and that's been somewhat somewhere in between those two. But I think as we see the business progressing month after month after month, the story that's emerging that's pretty encouraging is we three or four months ago, we were selling work boots and some work apparel. And then sort of one by one, each department started to sequentially improve and then turn positive, etcetera. So we've seen a nice steady improvement in men's cowboy boots, in ladies cowboy boots, a nice steady improvement in men's work apparel, a nice steady improvement in ladies apparel. And many of those departments are now positive. Not all of them, but many of them current positive, which is great to see a broader base growth than just being single threaded through sort of the work business. The second part of your question was around new store development. And while this might seem like a paradox in the height of a pandemic when when stores are curtailing hours and people are shifting to online, The truth here at Boot Barn is we are probably even more emboldened than we've ever felt about opening up new stores. There's a couple of reasons for that. One, we have opened brand new stores in new markets that didn't really even know the Boot Barn brand right in the middle of the pandemic. And they are exceeding our expectations. We'll pay back, at least in totality, the group of stores. We'll pay back faster than the three year benchmark that we hold for ourselves. And, you know, this is, again, opening up in the kind of worst of environments, and these stores are doing great. The second reason is as we continue to open stores in existing markets, we're realizing that our store density assumptions actually may have been too conservative. And we probably can open even more stores existing markets than we had originally thought. So you put all of that together, I think returning to 10% once we get back to somewhat of a normal environment, and I'm not sure when that will happen, I think we'll absolutely be able to return to 10%. I think we'll absolutely be able to at least double our store count. And we're continuing to look for more and more opportunities to grow the Boot Barn brand across the country. Great. And then maybe just a follow-up for Greg. On gross margin, what's the best way to think about merchandise margin in the third quarter maybe relative to the 50 basis point contraction in the second quarter? And just as maybe as a reminder for the back half of the year, if there's any puts and takes, but what is the comp that you think you need to leverage buying an occupancy cost in the back half of the year within the gross margin? Yes. We haven't given guidance at all really on those kinds of things this year. Having said that, I think the leverage points we've given in the past are probably hold true today. There's nothing abnormal about this year other than pressure from the top line, of course, that is going on. So I think if you revert back to what we said in the past, that's probably a pretty good guide. As you think about the merchandise margin in Q3, I mean, of the 50 basis points decline in merchandise margin, 30 basis points of that was related to growing the e commerce penetration year over year. And the e com penetration, I think, at the October was 16%, which is probably more in line with what we would see in October, for example. So I don't know that we'll have the same I don't know the composition of sales in Q3. But to the extent that e com penetration grows by a percentage point, that costs us about 15 bps of pressure on the merchandise margin line. So in Q2, we had two points of increased penetration year over year, and that was 30 basis points of headwind for us. The other piece of this was we had expansion in what I'll call product margin, the sale of the product that's in our store. But we had some headwinds related to freight. And you may have seen that from some other retailers. So there's a little bit of freight pressure out there. It's backups in the West Coast ports. And so we're having to do some things differently to get product in. I don't expect that to be a significant headwind in Q3, but that affected us a little bit in Q2. But it really comes down to what the composition of our sales will be in Q3 in terms of how you think about merchandise margin. Thanks. Great color and congrats again. Thanks very much. Thank you. Our next question comes from Max Verclenko with Cowen and Company. Please go ahead. Hey, guys. Thanks a lot and congrats on a nice quarter. So on the ecom comps, can you maybe share how much of that came from new shoppers? And then can you talk about how those baskets look similar or different from your typical shoppers? And then we have one more. Sure. Well, there's two different stories online, right? The bootbarn.com business, very strong top line, very strong bottom line performance. And that is a combination on the top line of healthy traffic and healthy improvement in conversion. On the Sheplers side, we're we're we've completely rebranded that site. We've taken away the sales and promotional aspects of it, and we're we're really pleased that traffic has continued to improve. But given the fact that the price points are a little higher and it's not nearly as promotional, and it's really trying to underscore the legacy of this Western, one hundred year old Western brand called Sheplers, the conversion has come down. So, and that's not entirely unexpected. But given that fact that we've changed the promotional posture, you put all of that together, our e commerce profitability is up over 100% versus last year. So we essentially view that as a comp growth of 100% in e com despite the fact that it's a combination of sales and margin. In terms of your specific question of new customers versus existing customers, about if we just think about Boot Barn, about a third of the increased traffic, maybe a little bit more than that, is new customers. And the others are either existing customers shopping more frequently or stores customers shifting over. You had one other question before you had your additional question that you were gonna ask, which was around how does the basket differ. There's not huge differences. I mean, boots are penetrated a little bit higher on bootbarn.com. Denim is penetrated a little bit higher on sheplers.com. The average basket online is a little bit higher, about $30 higher than the basket in the stores. So roughly $130 or $135 versus $105 in the store, something like that. But other than that, the composition of the business, as you look at all of the different channels and the different brands, is is sort of in line with each other. I mean, there's some nuances that, you know, the merchants would see. But by and large, we're selling, you know, boots and denim, hats and work apparel. Understood. And with some of the various supply chain risks in mind for the holiday season, how are you thinking about maybe moving some of those sales, shifting them from December earlier into the quarter? I would just love to hear about that. There's been a lot of discussion about how to shift sales earlier, and and I do think that is something that retailers try each and every year. You know, we have sort of a similar promotional cadence to last year. As you know, we don't have massive sales or massive promotions planned anytime during the year, including during the holiday period. We've adjusted our marketing a little bit to be a little earlier. But in terms of price points and breaking price, etcetera, we have no intention of doing that this year. Just like last year, we have overemphasized marketing spend prior to Thanksgiving a little bit differently than last year. And I think the the last thing that we've done to try to mitigate either people shopping late or people running out of time to shop online is to develop every flavor of omnichannel capability that you can imagine to make it easy for a customer to shop with us in any manner that they want. So that's our current strategy. And I know some other retailers are probably going to be out early with more promotional pricing and just not a strategy that we think would work for us. Got it. Thanks a lot and congratulations, Tim. Thanks, next question comes from Jeanine Stitcher with Jefferies. Please go ahead. Hi, thanks for taking my question. I have another question on the e commerce channel. So naturally, we've seen it slow a little bit month over month as the store performance has improved. Do you have any sense of what you would consider kind of a normalized rate of growth there, understanding that there's a divergence in performance between bootbarn.com and the other banners? And then also just wanted to ask about profitability at ecom. I think you've noted that the profitability has been improving. Maybe give us some perspective on where the gap in profitability versus stores stands and maybe how much more room you think there is in potentially bridging that gap? Thank you. So I'll take the second part of your question, Janine, which is on the margin profile of ecom versus stores. Our stores continue to outperform the ecom channel. But as Jim mentioned, we doubled our earnings in the ecom channel on a reasonable comp performance of plus 18% in the quarter. So we continue to make progress. The places where the most significant place that ecom is disadvantaged on is the freight piece, right? And Jim talked a lot about some of the initiatives we've made to be able to fulfill an e commerce order from the store, and that will help that freight line or that disadvantage on the freight line. But that's the most significant piece, that freight going to our stores is relatively inexpensive and sending a pair of boots to a customer in New York City is more expensive on a rate basis. Beyond that, there's a little bit of disadvantage in the e commerce channel as it relates to exclusive brand penetration. As you know, in stores, the customer can see and feel and recognize the quality of our exclusive brands. And that's harder to do online. So the stores business has a heavier penetration or a bigger penetration of exclusive brands, which, of course, helps the profitability profile. Those are probably the two biggest things that make it difficult to overcome or catch up to the stores margin rate. I can cover the first question or Yes, that's fine. I got it. Yes, you had asked about what how we would expect the business to look going forward from an e commerce perspective. And while that falls a little bit into guidance, which we haven't provided, we can give you a sense for, I think, what we're thinking, which is Boot Barn continues to be a solid grower. The 42% top line growth in the quarter was quite nice. I would imagine we'll continue to have solid double digits, maybe 42% will be a high watermark. But I think our business will be solid double digits on Boot Barn. The rest of the online businesses will be probably, you know, slight drags on our comp, like it was in this quarter. And, you know, it it is something that we try to overly amplify on the call because we if we weren't focused on rebranding Scheffler's and we weren't focused on really improving the margin profile of our e commerce business, we probably pretty easily could have had a plus 30 or 40 comp on ecom and driven our consolidated same store sales higher, but it would have been EBIT eroding. So, you know, I would just kind of remind everybody that it's a very strategic and conscious decision we're making to focus on the bottom line performance of our e commerce business. Despite the fact that it's slowing or at least restraining top line growth, it's absolutely been an EBIT enhancing tactic that we've taken. Great. Thank you. It's helpful perspective. Thanks, Philippe. Next question is from Jonathan Komp with Baird. Please go ahead. Yes. Great. Thank you. Jim, I want to back up and ask about the category performance and wanted to hear your thoughts on what's driving the non work businesses to rebound like they have. And maybe a broader question, understanding you're not guiding, but with most of the categories trending well and positively, Any thoughts on if there's a chance that comps might be back to more of a sustainably positive trajectory going forward here? Sure. So I think it sort of followed a a natural storyline, right, from pure needs based to the the next business that got turned on to positive was something like men's denim. Right? Somewhat on the Western side. Somewhat needs based, but not perhaps as much as work boots. And then we started to see a an improving trend in men's western boots, which is just about flat now, which is great. And it's, you know, some need based, but oftentimes discretionary spend. And I I can see how it's playing out as customers are now starting to just shop for more traditional clothing and apparel and boots, for them or their family. I think the other thing, perhaps giving a little credit to the merchant team and the stores team, is we have pretty quickly made some adjustments. Right? So to give you a few examples, the the trends in the business now have tended to be more casual. So rather than button down woven shirts, they're buying more t shirts and, you know, they're buying things that they might just wear sort of more casually. For example, so we believe some of our lace up work boot sales without a safety toe have been selling because people are using them for weekend hikes and and things of that nature. We've also added some pieces to the assortment. Right? So we've we have adjusted to what we're seeing out there. We've expanded a hiking boot assortment in not all of our stores, but a good number of our stores. And we're we're trying to, you know, kinda manufacture some sales where we see the consumer taking us. And then the last thing, I give some credit to the stores, you know, embedded in the comp performance is a nice increase in our units per transaction. Part of that admittedly is selling face masks and and hand sanitizer. But even if you strip that out, you know, we've really had the stores focusing on adding a pair of socks, adding boot care or boot trees to boot purchases. And our units per transaction have helped as well. So I think when you put all that together, while it's still a battle to gain positive same store sales, particularly in the stores, we are starting to see some really nice momentum across multiple departments, and it's encouraging. Yes, that's great. So maybe one more question. Looking forward to the holiday, can you just remind us how some of the mix changes play out for your business across channel and across categories in the store? And then the initiatives you talked about adding, so the same day delivery and the virtual clienteling, Just any thoughts on potential contribution there from a sales perspective? And what are the economics look like for those new lines of business? Sure. So on the mix, in our third quarter, in our holiday quarter, if we just think of work versus Western, work does decrease slightly as a percent of the total business. And Western becomes a little bit more because it's a little bit more gift giving than the work business. And we're not exactly sure how that will play out. Right? You know, the the work boots business is very strong. The FR work apparel is very weak. So it it could almost offset, maybe quite, but the the mix might be a slight headwind to same store sales. Although, I think we have some other things that are that are maybe pushing from a tailwind perspective. In terms of the new capabilities that were built, right now, they are a very small portion of our business. We we built them out because, you know, it's it can be additional sales. It can be margin accretive versus a regular ecommerce business ecommerce sale. If it's a product that's already in the store and the customer is going to pick it up, we can save the freight piece that Greg spoke about earlier. And the other pretty significant reason that we really wanted to have every possible omnichannel capability, built out that we could was in the in the downside scenario where COVID surges tremendously and and local or state governments take significant action with curtailing store traffic or store hours, we wanted to have sort of every hedge possible, against that and to to help bolster the business. If we did have to shut down in a market or we did have to curtail store hours or curtail the number of people in a store during the holiday period. So we built the ability that you can buy from a local store and have it shipped directly to your house or delivered directly to your house that day by delivery service. You have the ability to order a gift for somebody across the country and have it delivered to them from the store local to them. And all those capabilities came together extremely quickly. Hats off to the ecom and the IT team for getting them up and running and working with very, very little speed bumps in the process. Yes, that's great. Good luck gearing up for holiday. Thank you. Thank you. Next question comes from Paul Leuiz with Citigroup. Please go ahead. Hey, thanks guys. Sorry if I missed this, but you mentioned your store comps in October. I was curious if you could talk about if you have actually seen traffic turn positive or if that's being driven more by AUR, UPT overall transaction size. And then curious if you could talk a little bit more about marketing. I think you said you pulled back a little bit. You're going to start going back to normal. Were there any timing shifts as well that impacted your second quarter? Just how maybe we should be thinking about marketing expense in 3Q? Thanks. So I'll start with the marketing spend. We did save a little bit of marketing in Q2 on a year over year basis, and we called that out as one of the contributors. And we do expect to see a little higher marketing spend this year in Q3 than we did in Q2. It's not millions of dollars, but we do expect just to invest a little bit in the business as we're trying to play offense a little bit, given the sales trajectory and improvement from August into September and then September into October. So we're playing a bit of offense. We're open our normal hours. Jim talked about the fact that we're doing a good job of hiring our seasonals. So we're investing in the business and prepared to play a little bit of offense. So we're also investing in marketing in Q3, which is a little bit higher than last year. In terms of your question, Paul, around October's business, we are encouraged that the business on a consolidated basis has sequentially improved a little bit. The stores business is roughly flat. Traffic or at least in our world, average transactions per store as a proxy for traffic is down slightly. ADT is up slightly. So that has offset to become roughly a flat comp. One of the other encouraging things, and with no intent to try to get people too overly energized, we are cycling a pretty strong October. We were on our call last year, we said we had a plus 10 comp in the month of October. So to be able to post a plus two on a plus 10 in this environment, we feel pretty good about that. Got it. Thank you. And just one follow-up. On inventory, it seems very well controlled from an inventory perspective. Are you too light anywhere? Maybe talk about categories that may be running a little bit lower you would like? You did mention some port delays. Curious if there's a difference in terms of the inventory change year over year in your private label versus your branded goods? Thanks. Yes. So Paul, we did see a 14% reduction in average store inventory, and we were not targeting to be minus 14%. We thought we'd be we'd have a little more inventory than that. But our sales have improved in September. And so we did see also see a little bit of receipt disruption. And you've heard about that, I'm sure. There's backups in West Coast ports that are delaying a little bit of our exclusive brand product. And some of our vendors reacted in the middle of COVID and cut back on their commitments as well. So we're a little wider than we had targeted. But I don't think we're exposed in any meaningful categories. And we have lots of substitution opportunities. So if we were light in denim, ladies denim in a certain brand, we've got plenty of other denim in the store. So the major categories are covered by substitution opportunities. So we think we're fine. As a reminder, we turn about two times a year. And if you were to look at last year's transcript, you'd see that our average inventory per store was up about 15% from the prior year. So when you put those things all together, we feel pretty good about our inventory position at this point. Got you. Thank you, guys. Good luck. Thanks, Paul. Thanks, Paul. Next question, Peter Keith with Piper Sandler. Please go ahead. Hey, thanks a lot. Nice to see the improvement in the business guide. Maybe to follow-up on the inventory question. So one dynamic we've heard about the industry that's somewhat unique is the drop ship to store model, right, the vendor to store. It wouldn't impact you guys, but it would impact sort of everyone in the industry. And with all the delays with UPS and FedEx that might cause some out of stocks for the holiday season. Is that anything you're thinking about or planning around in advance? Yes, it is. And, you know, the UPS news, you know, we're we're managing it like everybody else is managing it. We have done some things to help mitigate it. So we've tried to accelerate inventory receipts earlier in the holiday season than we normally would. Now in fairness, we're also being there's countervailing force there where some receipts were just coming in late from overseas. So we are trying to build the inventory in the stores a couple of weeks early. So if we're a little late, we'll still be fine. We've taken a couple of vendors that would do exactly what you're describing And rather than be at their behalf, we brought some of those brands into our own distribution center and we're distributing ourselves, perhaps still beholden to UPS, but at least we can control when we ship it. We it is it is something we're watching. We've we've asked the stores to ensure a very quick put away of product that is brought in. We've augmented the replenishment models to bring in a little bit more safety stock. So we've done a number of things. One of the things that does help us relative to the vast majority of retailers is, and Greg called this out, you know, we we have the luxury of being able to carry twenty six weeks of supply or something like that because we don't we have no markdown risk. So even if we're a little bit delayed in getting some product in, you know, we do have the goods to get through the holiday season and replenish as we get into to January. Okay. That's good to hear. On a totally different topic, I wanted to ask about the Just Country segment. That's certainly interesting and feels like something different than what you guys have done in the past where you're almost bolting on potential new customer opportunity. So Jim, could you just flesh that out a little bit more for us? Do think there'll be a lot of overlap with the existing customer base? Or do you think that the majority of the sales will be new customers? And anywhere to frame up like the TAM or where you would hope it might land as a percent of sales over time? Yes, it's a great question. It is another step in the process. If you really followed the long Boot Barn for for eight or ten years, we were Western only, then we added work, then we added Wonderwest, which was this sort of very contemporary fashion segment. And now we've said, alright. Let's look at the customers in one big concentric circle around our core western customer. And this person wears boots and jeans, but wears T shirts, not woven shirts, wears baseball hats and not cowboy hats. And you're right, the addressable market there is quite a bit larger than the addressable market for sort of the pure Western lifestyle customer. In terms of where we think the sales will come, I think a portion of it will be coming back to that share of wallet concept with our existing customers. If you walk into our stores now or even over the last few quarters, particularly on the ladies' side, ladies apparel, we've expanded quite a bit around a core Western customer and has brought in some more casual fashion. And I think the assortment there is built quite nicely. I think more recently, the men's side has done the same. So part of their share of wallet with our current customers, we're also changing how we go after new customers. And, you know, from a media mix standpoint, from the stations and channels that we market on, from some of the AdWords that we buy on pay per click, how do we prospect for new customers? That tends to take longer, of course, and tends to be a little bit more expensive to get that new customer. But I think we can do it. And if you were to look at our same store sales growth for the last two years, almost every single quarter, at least prior to COVID, a really healthy contributor to our same store sales growth was an increase in customer count on a comp store basis. And frankly, this is an extension of that strategy. And ironically, we're we're somewhat fortuitous that we're bringing this more casual assortment to the stores at a time when the customer has started to move in that direction anyway. So it's there's we're pretty pleased with the progress so far, but really encouraged by the outlook because I think it fits well with where the customer is. I can't say that we planned that, you know, nine months ago when we started this, but, you know, once in a while you get lucky. Yes, it's remarkably well timed with the step up in outdoor activities. So look forward to seeing how that progresses. Thanks so much. Thanks, Peter. Thanks, Peter. Next question comes from Rick Nelson with Stephens. Please go ahead. Thanks a lot. Curious, Jim, about the lead times to restart that 10% store growth. If you come through this fiscal third quarter, December with positive comps, that October momentum is sustained, is that a point you think where you're going to commit to that 10% store growth for fiscal twenty two? I think it's more related to the macro. It's actually more related to the pandemic, really. I mean, we're we're in a very solid position right now, as Greg mentioned. We're about to go through a holiday that just bolsters our capital structure even more. But, you know, we pulled back simply because we were preserving capital and didn't think that new store openings during the pandemic, a, could be tone deaf and b, they may not work. As it turns out, once we were able to get some of these stores open, we realized that there was a market, There was a customer ready to shop there. And even in some of these new markets, they're performing quite well. So I don't think we necessarily need a plus 10 store comp to be confident that opening up new stores is a good investment. I think we need any kind of normal in the world over the next few months to once we get to January, February to reengage for growth on new stores. In terms of timeline, well, we can we can move pretty quickly. You know, it's a it's a five or six month process from finding a location to getting a store built. So we probably have to hustle a little bit, but I think we could get 10% new stores in our upcoming fiscal year, particularly if we see the macro environment stabilize. We have a very solid new head of real estate, started about nine months ago. And he has already found some great locations. So I think we can get there pretty quickly, including next year. Thanks for that color. Also, interested in drilling down a little bit into the October trend, maybe sequential week to week basis, if possible when we've seen this COVID hit new highs recently. What that's done in terms of your customers and sales and channel stores and ecom? So I would say the encouraging thing, without going into very specific detail, the encouraging thing is over the last you know, weeks, which would include our fiscal September and our fiscal October, you know, seven of them were positive. So it hasn't been it hasn't been sort of one great week masking a bunch of lousy weeks, and they've been pretty consistent. And one was flat. You know, most of them were were pretty were pretty solid. As we got into October, there's been very little difference across the weeks. And frankly, once the weather broke, that helped our business a little bit more. It's been very, very short amount of time since that happened. But the cooler weather in many parts of the country has been a nice uptick, at least in the last part of October going into November. Okay. Thanks. And finally, I'd like to ask you, those recent mix shift, I guess, away from workwear towards the more fashionable categories, how you plan that on a go forward basis? Do you think those trends have legs to them? So on a go forward basis, we've got, I think, the appropriate amount of inventory on what you described as the more fashionable pieces of the business, the Western side of the business. And the work business can grow very quickly without requiring big new inventory commitments. We simply just replenish faster. So we sort of have a natural ability to feed certainly the work group business, most of the work apparel business, just by spinning the inventory slightly faster because we just replenish it. The only business that we're going to we need to I guess two pieces of it that we need to look further out is parts of ladies apparel, particularly nondenim. And we have to make some decisions around exclusive brands with longer lead time commitments. But even a good portion of that is basic in nature. So we'll buy with the ability to fuel a growing business. And if we fall slightly short of that growing business, we'll do what we just did over the last nine months and bleed down the inventory slowly without having to kind of feel it in the margin line. Very good. Thanks a lot and good luck. Thank you. Next question comes from Mitch Kummet with Pivotal Research. Please go ahead. Yes. Thanks for taking my questions. Just want to follow-up on Rick's question about COVID. There have been spikes in the Upper Midwest of late. I know you guys don't have a lot of stores up there, Iowa, Indiana, Michigan, Wisconsin. But I'm just curious if you've seen any change in the pace of business, traffic, comp, store comp in some of those markets as COVID rates have gone up again? Mitch, it's Greg. We haven't really seen a meaningful change in the trajectory of North Region's business, and that's what you described. So we haven't seen that yet. We hope not to see it, but we're certainly prepared if it does. And I'd like to add to that just quickly. Our core customer has an affinity to shop in a store, perhaps doesn't have quite as much concern, shopping in our store because we're the stores are relatively large. There's not tons of customers in a small space, And, you know, we're not typically in malls. So so they can kinda drive over, come in to a pretty, you know, socially distanced environment, and continue to shop with us. So what hurts us more is when there's regulations that curtail our ability to operate in some way. Got it. And then, Greg, well, obviously, October your comp in October was pretty similar to September, a little bit of an improvement. But as Greg mentioned, you did a 10% comp in October last year. So the two year stack on October is plus 12%. Could you remind us what September was last year or what the two year stack on September is? So it was plus eight or nine, plus eight. Okay. Got it. Okay. I was just wondering if there was some big improvement sequentially on a two year stack. It doesn't sound like it a little bit, but not hugely meaningful. And then last question, just on the improving Western trend that you're seeing. Is there some macro behind that? I mean, that you think as particularly in kind of some of the maybe Western and Southern markets as COVID has died down a little bit in some of those. I think consumer confidence has gone up or maybe disposable income has gone up. Is there some underlying macro issue? I wouldn't imagine it's really a fashion thing for you guys, but I wonder if there's something else that you're seeing that's leading to this uptick in your Western business. I think from a hypothesis standpoint, I think the word you used was confidence, right? I mean, confidence people are just more comfortable shopping in this in this crazy environment that we have. Many of the macro factors that would drive our business, particularly concerts and rodeos, etcetera, are still essentially all canceled. Right? So we haven't gotten any help there. That's still a headwind. I just think people are are either desensitized or slightly more comfortable that if they take the appropriate precautions, they'll likely or hopefully be safe and therefore they're out and about and buying more than just what they absolutely need to get to work. Got it. Okay. Thanks, guys. Next question, Jeremy Hamblin with Craig Hallum. Please go ahead. Thanks, and I'll add my congratulations on the momentum. I have two questions I wanted to ask about. First is just in the change in getting back to your more normalized operating hours, I think in most of your markets, you're back to kind of nine a. M. To nine p. M. And I think that mostly started in September. Can you just give me a sense of, a, the factors going into getting back to those more normalized hours And b, as we look to this December here, in terms of thinking about your SG and A expenses, having reduced hours like we've seen over the last four or five months, what does this imply in terms of SG and A in the December? Should we assume that it's going to be up on a year over year basis in absolute dollar terms? Or are there changes that you've made this year that are permanent in nature? Great question. I'll take the second piece of that question. So it's Greg. And I think as we look at the SG and A in Q3, we're not providing guidance on the top line unless it's impossible to guide on SG and A. What I did say earlier in the call is we are playing a bit of offense, right? We're going to invest in more marketing. We're investing in seasonal hires. So we're doing some things that would suggest to you that we're playing offense. And if the sales don't come, which I believe we do believe that the sales will come. But if they didn't come, we're not going to be able to leverage our expenses as opposed to Q2, where we were still playing a bit of defense with the reduced hours, etcetera. I can't tell you how to model that other than to say that we're not trying to leverage the SG and A rate in Q3. Got it. And then the other question is, just in looking at some of the competition out there, I think you indicated that you feel better about your competitive positioning moving forward. Can you give us a sense of how kind of your market still continues to be quite fragmented? How your mom and pop competition is performing if they've gotten a little bit more promotional? And then related to this is are you seeing maybe some increased M and A opportunities, some tuck in deals? And what would be the earliest, given the environment we're in today, that you'd consider looking at opportunities for some tuck in deals? So on the first piece, I think it's safe to say that the mom and the traditional mom and pop retailer in our industry, which is the majority of the industry, that group is our biggest competitor, has unfortunately, if I'm honest, struggled through this because they just didn't have necessarily the capital structure or the wherewithal to to continue to fight through it. So we have seen weakness. We've had some inbound calls. We've seen some guys go out of business or at least markets that we were in. So that does present us with an opportunity, of course, competitively. You know, there is a in all fairness, there's a counterbalance to that because there's other channels that have strengthened with trip consolidation going to the farm and ranch channel, selling a little bit more car products. So it's you know, when maybe they offset in the current environment. I think going forward, we will likely benefit because I think the mom and pop group, will be weakened or or, whittled down a bit permanently. And I think our customer will come back to get a broader assortment of the product that we sell rather than consolidate their trips elsewhere, where they just can get sort of the most basic stuff. From an M and A standpoint, I think there'll be some opportunities. That said, there there there isn't really any meaningful change left other than one big one in Texas that is unlikely to be an acquisition candidate. So that gets us to use the word tuck ins. So the guys that have one store or maybe two stores. And, you know, we'll we'll look at them just as we as we decide to enter a market as they build versus buy, and is there some advantage in in moving more quickly by buying one of those guys and getting their customer base, etcetera? Or should we just open a store that, you know, fits our model better and and frankly, it's a bit easier to open a brand new store? So I don't I don't think that's going to be a massive impact on our store count or the economics or whatever. We if I were modeling them, I would just model them as in the store. Got it. All right. Good luck, guys. Thanks for taking the question. Thanks, Charlie. Next question comes from Tom Nikic with Wells Fargo. Please go ahead. Hey, guys. Thanks for taking my question. So I wanted to follow-up on, you know, some of the questions earlier about e commerce. So I know, you know, there's pretty impressive improvements in profitability in the channel. And I know it's it's been a few quarters now that you've sort of had this, you know, trading sales for profitability, situation with, you know, with with Sheplers. And do you kind of feel like, or or how far along are you in sort of rebasing the, the Sheplers business, sort of, you know, retraining that customer to to not look for promos, etcetera? Like, you know, at what point does that website become a grower again as a, you know, contributor to the top line? We we made the changes between, call it, April and July. So, you know, the the aesthetic changed around April, and then the pricing changed over a series of weeks in July. So, you know, once we wrap those two time frames, we'll be back. We'll have a more normalized LY comparison. So I guess if I'm I'm if just work through that, it's probably July of next year where we get that where we have a comparison that we should be able to grow from. I don't know if that helps. Yeah. That's helpful. And can you just kind of, like, remind us, like, what sort of the core differences are between, you know, boot you know, the Boot Barn customer, the Sheplers customer, the the country outfitter customer? Well well, the the Boot Barn customer is is sort of slightly younger than the Sheffler's customer. It's more balanced between male and female. The Sheffler's customer is a little bit older, a little bit more male, and just given the way that brand has grown up, more heavily focused on denim, than the Boot Barn. So Boot Barn, when they first launched the Boot Barn site, it was boots only, then apparel was added. And and just given that legacy, BootBarn.com's business used more heavily kitt boots than, the Sheffler's business does. Country Outfitters continues to do a very nice job going after a sort of more fashionable, female, younger customer, but in all candor, it's just much smaller than the other two big brands. Got it. That's helpful. Thanks, guys, and, you know, best of luck this holiday season. Thank you. Thanks, Tom. Next question comes from Sam Poser with Susquehanna. Please go ahead. Thank you for taking my question. And this time, I would say, great job on the inventory. And I have a question, Does that sort of create a new base for the second quarter? And somebody else asked, do you have enough? But I guess the question is, is this a good new base to work from, hence then increasing your annual churn over the long term? Sam, it's Greg. Yes, in answering one of the questions, I commented that we had targeted not quite a 14% reduction. So I would tell you it's not the new baseline. We had expected to have more inventory than we had. We've been managing inventory closely and trying to control receipts. And then as supply chain got started to be the news and disrupted, we started to write some orders to bring in more of the replenishment product that carries no markdown risk, which I think we've proven we don't incur. So we tried to bring in more inventory and we experienced some delays. So I would say it's not the new base. It's not last year's level, but it's not the new base this year. I have a few more questions, but just to follow-up on that. What was the target that you were aiming at? Yes. We're not going to disclose that. On the Just Country, new initiative, what brands, you know, if we go to your website, should we be looking for that's part of that? Sure. Well, I'll give you one of the examples we talked about earlier was we've added, a nice selection of hiking boots to, the stores, and many of them are up online as well. But brands like Merrell or Keen hiking boots. And then, you know, on the on the apparel side, just a a number of different brands that might be a little bit less Western in nature. But, you we're certainly focusing pretty intently on the boot side. There are also places where we have a traditional Western brand that has a broader assortment that we've just bought more deeply into their assortment. Thank you. And then, two more. Holidayecom versus the stores, you know, given COVID and everything, do you foresee that there could be some even though your stores are big and they're off mall, could you see capacity constraints hence leading to more gift giving via e commerce and having the third quarter e commerce sales tick up from the growth rate from Q2 to Q3 despite the fact that you have all your stores open now? So we can almost guarantee that q3ecom as a percent will be the highest of the of the quarters for us. It is every year. And, you know, what you're asking, I think, is it gonna be even more outsized than typical? It's very it's very hard to say. Certainly, there's if there's another major problem with COVID and a surge and a shutdown, it it will spike right back up. E comm will spike right back up just like it did in the first quarter. But if it's business as usual, it will be maybe a little bit more than it was last year because E comm business is growing pretty nicely. But when you throw any kind of store comp in there, if it's flat and you have new stores coming into the mix, it tempers the shift for us maybe more so than a lot of other places. In terms of store capacity, are you asking about store capacity or e commerce capacity to take care of customers? No, I was really talking about stores. I mean, like, instance, you're still probably having to keep social distancing requirements in the stores and so on. So when you get into your highest traffic time of year, that also could have more people move over to e commerce more so than, let's say, in the second quarter you are not seeing the traffic in stores that you normally would see during holiday? Yes. And I think that's true. And it's it you know, it's true in a handful of days. It's a concerning handful. Right? It's Black Friday or it's the Saturday before Christmas. But even when we get busier during holiday, just the the way the model works is you you'd see 15 customers, 20 customers in the store. You're not gonna see 200 customers in the store. It's just not it's just not sort of the way our our our store model works. But you're right to call it out, and it's it's the reason we've been so intent on saying, look. We can deliver it to your house. We you can pick it up in store. We can pick it up at the curb. And and I I fully recognize we're not the only retailer doing that. But, you know, we're we're really trying to give them every opportunity to shop with us in whatever manner they feel best doing so. Thanks. And then lastly, you you tried you know, the ecom business, you know, due to shipping a lot of shipping rate and the mix, your margins are are less than the stores. But, know, have you considered, you know, trying to, you know, you know, entice people with a a small promotion to build the basket size of something they could ship along for free? I mean, for instance, like a face mask or some aged goods that, you know, you say, okay. We'll give you 20 off, but it increased the ticket enough, and you don't pay the, you know, this you know, it doesn't add as much weight to the box, so you actually get your shipping costs as the rate goes down. Have you have you thought of ways to do that to sort of try to increase the average ticket even though it is already higher than the stores, but to try to push it higher maybe through a little bit of promotion, but that would more than be offset by the freight savings. Can you get some more merchandise as well? Yes. Sam, it's Greg. And our head of e commerce, a gentleman named John Hazen, has been doing e commerce for fifteen years, and he's a big test and learn guy. And so he's been doing that kind of testing to see if it moves the needle at all. So you can be sure that we're looking for opportunities to do this stuff. Well, thank you very much, and have a successful holiday season. Thanks, Jim. I would like to turn the floor over to Jim Conroy for closing comments. Very good. Thank you, everyone, for joining the call today. We look forward to speaking with you on our third quarter earnings call. Take care. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.