All right. Thanks, everyone, for joining us this afternoon. Next, I am pleased to host the Boot Barn team. This afternoon, we're joined by CEO John Hazen, as well as CFO Jim Watkins. We have a buy rating on shares and a $185 price target. Also, investors with the Excel poll recently haven't been kicked off. We would appreciate a five-star vote for TD Cowen if you found our work helpful to your investment process over the past year. With that, John and Jim, thanks so much.
Hey, Max. Good to see you.
Glad you guys made it.
Thanks, Max.
First and foremost, congrats on nice acceleration. Our results seem to be going quite well. Business is gaining a lot of momentum. I know we just spoke after earnings, but any updates on sort of what's driving the acceleration? What are you guys seeing in the business?
Yeah, it's been really encouraging. It's been broad-based across all major merchandise categories, all geographies. When we look at it by customer, we looked at the customer intra-quarter to see if there had been any change in frequency, any change in basket size, and it is very, very consistent. The customer across Western, work, just country that had been shopping with us is shopping with us at the exact same rate. It's just broad-based customer growth and transaction growth, which is nice.
Do you think it's more of weather breaking, more across the country, or sort of what do you think is potentially driving that?
You know, we've always been kind of a mid-single-digit comping business, and we're a little bit better than that now. I don't think it's weather breaking. I think I've been in 40+ stores in the last six months. The stores just look incredibly well merchandised. We're not seeing that same macro growth from other public companies in the Western space. I think I've got to give credit to the team on the merchandising side and the store operations side that it's the execution more so than anything macro that's driving it.
It's really all transaction-driven, I would imagine.
Absolutely. Yeah, it's all transaction-driven right now. We looked to see if there was any pull forward, anyone worried about tariffs, any increase in basket size, and we just didn't see anything to that effect.
Interesting. That is great. Obviously, implies underlying momentum. Also, congratulations. You were recently promoted to CEO. What has been the biggest learning for you in the past, sort of what, six, seven months now since you were first appointed as interim CEO? You have been with the company for a long time, but obviously, it is a very different seat. Sort of what have been the biggest learnings? As you get more comfortable in the seat, where is your focus going to lie?
Yeah, I think the biggest surprise to me was in the last six months, again, I've been in so many stores, and to see our partners and how much they live the lifestyle, the passion they have for the brand and for the brands that we carry was surprising. I had been in many stores over the years, but not to that level over that short period of time. The partners' excitement around myself coming in as CEO, despite my digital background, they were excited to hear that we are going to continue to be a stores-first organization. It was great to hear. Yeah, it was spending time in the field and meeting with the team, hearing about product. I have a passion for product, and that was probably the biggest change from what I was doing as Chief Digital Officer.
Yeah. You touched on some of the things on the call, but where can we see pivots on the strategy side?
Yeah. We have our four strategic initiatives that are going to continue to stay in place: same-store sales growth, new stores, margin and exclusive brands, and omnichannel. Those will not change. Slight adjustments under the cover of those four initiatives. For myself, the biggest one is, one of the biggest ones is going to be focusing on our exclusive brands, our biggest exclusive brands. Prior to Boot Barn, I spent much of my career, or my entire career really, working for brands and not for a retailer. I am always focused on brands and how we can do a better job storytelling around those brands.
We're going to be launching separate websites for some of our exclusive brands, campaigns around those brands, not to drive e-commerce sales, but really to have a place or an avenue to tell the stories of Hawks and Cody James and Cheyenne and some of our other exclusive brands. Yeah. The second big one for me is around sourcing. We have grown our exclusive brands to 38.6% last fiscal year. We're guiding an additional 100 basis points of growth this fiscal year. The team has done just an incredible job. This is almost an $800 million business at retail in exclusive brands, and we've done it with a very, very tiny team. It's almost astounding how well they've done. We're going to focus on building up that sourcing team.
We've recently hired a new head of sourcing that's come with 15 years' experience at Eddie Bauer, joined the team a few weeks back. We're going to look at the margin architecture of exclusive brands now as the growth will continue, but at a slower pace than some of the larger increases we've had over the last several years.
Right, right. And we'll get into EBs in a little bit. Jim, I wanted to bring you in. Obviously, really nice acceleration over the past handful of weeks, really the entire all year we've seen it for the most part. Yet you kept the Q1 guide intact. Just curious, now, how are you thinking about sort of balancing the acceleration the business has continued to see thus far in the quarter versus sort of the shape of the year and how things could play out?
Yeah. The guide at the high end of the range for the first quarter is a 6% same-store sales growth. As we're nine weeks in and sitting on a + 10%, that is beginning to look conservative for the first quarter. We haven't updated that guidance, but we like the really strong start to the quarter, obviously. As we look to the rest of the year, we also have an updated guidance for the balance of the year, particularly the second half of the year where we've got that guided at the high end of the range at a flat comp. That's really focused on the macro environment and what would have been probably a + 3% comp guidance for the back half of the year we brought down. There's a little bit of art and science to how we got to the flat comp.
A lot of that is really focused on the impact we think that some pricing increases will have on the consumer, not just at Boot Barn and price increases we have, but just generally the consumer's wallet being stretched a little bit further as they see price increases in other aspects of their lives. I think we feel confident about the flat comp for the back half of the year, and we're holding that. That's still the guide. It's always great when you start the first two months of any year with a + 10% comp.
It's much more about macro than micro in the second half of the year.
Yes.
With that, I just want to talk about how you're thinking about elasticity. The brand historically has really stood for function, very little fashion risk. Just how do you think about the elasticity? I'm sure you've done a lot of analysis over the years. Which categories do you think are more versus less elastic as you think about the second half?
Yeah, it's a great question. Our merchants are constantly looking at pricing within their categories and their areas of ownership and playing with pricing and trying to always maximize margin, but also give our customers a good value. We do sell a very functional product. It's a replenishment product in most cases, and our customers need that to go to work every day. We want to give them a good value proposition. As far as the elasticity goes, we're going to try to hold pricing as much as we can, particularly around our exclusive brands, and work with our third-party vendor parties to try to keep the pricing as low as we can there also. Where we have price increases, we're going to raise prices around the third-party product.
We expect to see a decent amount of elasticity, but it's going to be an interesting test for us. We normally have price increases in the low single-digit range every year, and that seems to be par with inflation and just what we see generally. The customers tend to be okay with that as we raise prices mid-single digits on many of the product. We expect to see some of that demand drop a little bit, as we talked about earlier.
Yeah. Maybe let's just stay on tariffs. Obviously, we spoke a few weeks ago, but there's been several updates since then. Just curious, what have conversations with your vendors been like? Obviously, now China at 30%, it's at 145. Has there been much progress? Is the mid-single-digit price increase on your national brand still the right number to think about, or potentially could it be a little bit lower?
I think it's still going to be mid-single digits from most of our vendors. What they did is they took the tariffs and looked at what they could absorb, what the factories could absorb, and what they could pass on. They really spread that out across their entire product line. Maybe it comes down a little bit. We have not seen that yet. I expect it to still be a mid-single-digit price increase for most of our third-party vendors. What comes in conjunction with that, or in tandem with that, rather, is that they raise the MSRPs and their MAP pricing or their Minimum Advertised Pricing policy. All of the retail industry, the Western retail industry, will increase their price at that same cadence. We won't be uniquely disadvantaged as you think about that elasticity equation, at least with third-party vendors.
We will all be selling that next boot or that next shirt or that next jacket all at that same price, given the MAP policies of the industry, which overall are a good thing. It keeps the industry fairly rational and not a race to the bottom in terms of promotions and prices.
When we think about your scale and your digital prowess, it really should give you an opportunity to pick up some outsized market share during this period. Where do you think that we could see it? Because pricing, to your point, it's mostly MAP pricing, so everyone's going up the same amount. Is it better sourcing? Is it having more product? Where could we see your scale really play to your advantage?
I think it's a couple of places. One, we tend to lean in and be a little more opportunistic when there's a situation that causes most to be a little more cautionary, think COVID and the 54% comp we had during those post-COVID times. We have looked at inventory and made sure that we have the right inventory levels going into the holiday season, and perhaps the mom-and-pops or some others may not have reacted as quickly or have been as opportunistic to be positioned for holiday. The second piece is with our exclusive brands. We are going to hold pricing lower for longer on exclusive brands.
Tying that back to elasticity again, there's an opportunity for us to perhaps gain penetration growth above the 100 basis points we've guided for fiscal 2026 and have exclusive brands grow given the quality and the build of our exclusive brands is not that of a house brand or a private label. It's as good as our third-party vendors.
Yeah. Just maybe switching to EBs for a second here, but the 100 basis points was lower than what we've seen historically. To your point, you're not increasing price. Therefore, there should be an advantage there. Sort of what drove that 100 basis point initial guide? It feels like you probably can overshoot that here in the near term.
In the end, we're going to let the consumer decide or the customer decide. We had had several years of outsized exclusive brand growth, some of that driven by leaning in or being opportunistic in terms of inventory buys when everybody else was pulling back post-COVID during all the supply chain dislocations that were happening. It felt like a time we believe, I believe, that we can still get to 50% exclusive brand penetration over the next five to six years. It's not entirely linear every year. It's 100 basis points- 200 basis points. It tends to go in little kind of minor step function increases. It seemed like this year, 100 basis points given last year's performance seemed like a reasonable goal for the year.
Again, there may be opportunity with holding price lower for longer on EB, but I don't think it's doing the math. It's not 200 basis points a year every year for the next five years.
Yeah. As we think about the incrementality on the EB side from here, is it more about continuing to increase the mix, or is it really about gaining better product margins on that side?
I think we'll continue to, again, march towards that 50% EB penetration as long as the customer decides that they like the product and we love the product and we love the brands, and we're going to lean into the storytelling of those brands. There is an opportunity on the margin architecture. We've spent so many years growing the volume and growing the size of our exclusive brands that now we're going to take a moment to look back at the margin and the sourcing strategy and try and optimize that architecture for the margin. I think it's a mix of both, but I think more of the opportunity will come from margin over the next several years versus penetration, although the penetration we expect to continue to grow.
Really, the exclusive brand sits under our merchandise margin growth category, right, or one of the four pillars that John alluded to. Whether it's growing the penetration or actually growing the margin rate within that category, they both serve the same purpose. We're kind of entering into phase II a little bit of the program. Right. That makes sense. Just going back to the price increase on the national brands, when do you intend to begin to take prices? Is it going to be sort of all at once or over a period of time? How are you thinking about being able to do that in the least disruptive way?
Yeah, there's only several windows as we think about holiday coming up on us. It's closer, and retail is always closer than you think. We are going to take the price increases on third-party brands over the month of July. That's the optimal time to do it. It's one of the slower months of the year. That's when the price increases come into effect and the MAP policies come into effect. We really, we have to do it during that timeframe. As we look at exclusive brands, we've got two other windows in August and October where we'll decide whether, looking at the penetration of EB post-increases of third-party vendors, we'll decide when and if we take those price increases during those windows.
Got it. Okay. Let's switch gears maybe a little bit. At an industry level, where do you think we are as far as the Western trend is? Every time it feels peakish, there's something that suggests we're actually potentially still on the ascent. I'm sure you've gotten this question often, but where do you think we are now? You know.
If we go back all the way to the IPO 10+ years ago, 10 and a half years ago, we've been on average a mid-single digit comp business. There have been many different things over those years that people would coin a trend or a moment for Western. Maybe there's lots of small moments in there, but I don't think it's a Western trend. I think we have a nice business that comps in the mid-single digits, and that's what we continue to do. Again, given some of the fluidity of tariffs and the consumer macro sentiment for the back half of the year, we've guided the back half flat this year. Otherwise, we would have guided a + 6 and then a + 3 for the Q2 and + 3 for the back half of the year.
I think the last 10 years are a testament that it's not a trend, and we're in a business where we can be a mid-single digit comp grower.
Even if the industry were to slow, you have a history of still being able to put up at least a low to mid-single digit comp.
Correct.
How do you go ahead?
One other point would be that if you look at some of those other public companies, they are not necessarily seeing the same performance we are. I think it is, again, a credit to the entire Boot Barn team on our performance versus the macro in the industry itself.
Yeah. Part of that is you guys have spent a lot of money cumulatively over the years on advertising. Obviously, you're now taking a fresh look at it. How are you approaching advertising and specifically top of funnel and building awareness as it does feel to be quite the large opportunity? Are you changing any of the strategies as you look ahead?
Yeah, our marketing budget has always been roughly 3% of sales. If you kind of rewind the tape 10 years and look at our marketing budget, it has gone from $7 million or $8 million or $9 million- $60+ million at this point. We feel great about our content creation. Our marketing team is incredibly talented, and they have gotten to a level where we have enough creative to do everything we need to do. As sales grow by $200 million between comp stores and new store growth and add another $6 million to the coffers from a marketing standpoint, those dollars are going to be spent against distribution. Really, every incremental dollar at this point on a go-forward basis is going to be spent against the distribution of that marketing content. Boot Barn was the first retailer I had worked at.
I spent my entire career on the brand side, companies like True Religion, Nike, Hurley. We're going to be doing a lot more storytelling with those marketing dollars, more top of funnel around both Boot Barn as a retailer and our exclusive brands, whether it be Hawks or Cody James or Cheyenne, and telling those stories with their own marketing campaigns separate from Boot Barn.
Got it. Maybe switching over to margins, I think something that's still pretty underappreciated is that being a soft lines retailer, you guys do drive essentially a totally full-price business, something that you've been able to do over the entire public history of the company. Where do you think we are today? Because every time it sort of feels peakish, you guys do continue to pull and pull promos, and your full-price selling mix continues to increase. How much room is there to go? What are some of the strategies that you're using? If the environment were to soften a little bit, do you think that on the margin, we could see a little bit more promotions to drive sales? How do you think about that?
Yeah, this business is a very, the rationality or how rational the Western retail business is compared to many others is refreshing. It is not a very promotional business. It traditionally never has been. The competitive set all kind of reacts well to the ebbs and flows of the business. You do not have some of the challenges you have in other retail businesses. Almost all the promotions we have at this point are against our markdowns, which are at really historic lows outside of COVID. We are in a very, very good position in terms of markdown inventory. When you see a Father's ay or a Labor Day or Memorial Day promotion, that is really what we are talking about, is trying to increase the velocity of some of that markdown inventory. I think we are going to continue to be a full-price business.
I think there will always be some level of markdowns we're trying to move through. Yeah, there's always room if there is a softening, but I don't think this business traditionally gets very promotional, even during the most, the holiday timeframe where everyone tends to get very, very aggressive in those promotions. We tend to hold the line both online and in stores, which gives us a lot of latitude.
Yeah.
I think this year may be the year where the lack of a markup is considered a promotion, so.
Right. Right. Fair enough. Jim, you guys have done a really, really nice job over the past couple of years of getting back to trying to leverage your new scale to drive better supply chain and sourcing efficiencies and really work with your vendors to get the margins that you probably have deserved for quite some time. As we think about your supply chain efficiencies, how much room do you think that you've got left despite all the progress that you've been making more recently?
Yeah, I think the team has done a really great job in negotiating with our vendors, and we have great vendor partners. Around the supply chain, particularly the last year, we saw really outsized increase, getting close to 100 basis points of improvement on the supply chain efficiencies. That was renegotiated contracts with some of our freight and shipping providers, as well as some efficiencies in our new Kansas City distribution center. We expect those to continue to be with us and kind of permanent margin improvements. We're not expecting this upcoming year to have, it's really not baked into the margin guide for the year. We'll continue to work with those providers and look for those, but there'll be little wins here and there as we work through that.
I think as we've guided this year, the merchandise margin flat at the high end of the range, and that's close to 100 basis points of improvement in the first half of the year and some absorbing the tariff expense in the second half of the year, putting some pressure and turning that negative in the second half of the year. We think we have the continued margin drivers of exclusive brand penetration growth. Really, the buying economy is a scale, getting more and better volume discounts and vendor discounts as we've been able to grow with our vendors and increase the purchases. They've offered us more discounts, and we've been working with them. I think that stays with us.
John mentioned some of the sourcing efficiencies that we expect to see more longer- term, maybe starting in late fiscal 2027, but really fiscal 2028, as we see what kind of margin benefit we can get on the sourcing side around the exclusive brand. Lots of margin drivers ahead of us we are excited about, and that is on top of more than 600 basis points of merchandise margin expansion over the last six years from that. You talked about the supply chain efficiencies, but also full-price selling improvements as well as exclusive brand penetration growth and among other things.
I think the guide as well, like 100 basis points of merch margin upside in 1H and then down in the second half. Is that right?
Yeah. Yeah.
Then sticking with gross margin, a question that we get often is just the leverage point around buying and occupancy. Obviously, it is quite elevated. How should we think about that line item longer term? It probably does come down maybe on the margin, but it is still going to be probably quite high versus the business becoming a little more mature and potentially not being able to comp above maybe a mid-single. As you think longer- term, merch margin is going to be a good guy, but do you think buying and occupancy probably remains a small pressure point? Or how should we think about that?
Right now, the leverage point on buying occupancy and distribution center costs, it's a + 7% comp, right? On a low to mid-single digit same-store sales growth, that's going to be a drag for us as long as we continue to open 15% new units. It probably goes down to a 6% in a couple of years as we cycle kind of the ramp up from a + 10% unit growth to a + 15% unit growth. I think that's with us. It's really, we've opened 200 stores. 200 of our 465 stores or so have opened in the last five years. When you open a new store at 75% volume as a mature store, it really puts some pressure on that occupancy rate.
Unless we stopped opening new stores, I think that pressure is going to be with us, which we're finding those stores are making some nice, generating some nice profit dollars for us. I think really the number to focus on this year is the 3% comp needed to leverage the EBIT rate. With this year's guide, even with a flat merchandise margin, that does put some pressure on gross margin. We've got some really nice leverage. Even at a flat comp, we can get leverage at SG&A this year. As we move forward in the next couple of years, the SG&A leverage point being at roughly a probably a 1.5% comp at a low to mid-single digit same-store sales growth, we're going to get to see some nice benefit to EBIT from SG&A.
On SG&A, you guys have historically done a really nice job of watching expenses, keeping that line quite tight. Do you see any sort of major opportunities around SG&A? I know you guys are doing some things on AI, but ultimately, is it more just about maintaining where you are, potentially finding small pockets here and there? Or are there bigger sort of cost buckets we should monitor in SG&A?
I think we're going to continue doing what we've done. We have a lot of our SG&A expenses is variable, probably about two-thirds of that just in store labor and credit card fees and marketing that John mentioned. Really, how can we leverage the fixed costs? The best thing that we're doing is trying to keep those costs as low as possible while opening this year 65-70 new stores that all generate profit dollars to spread those fixed costs among. I think that's the biggest driver of us leveraging those SG&A costs.
Maybe putting it all together, we've spent several years now talking about 15% EBIT margin is sort of the North Star. Obviously, with tariffs, there's a lot of incremental costs. Do you still think that 15% over some period of time is feasible, or is that just going to be more challenging to achieve?
Yeah. You do not like having a year where you do not make progress on that goal. I think as we look to the next five or six years and marching back to that 15% operating margin target, it is within reach, and there is a path to get there with the drivers that we talked about. At a low to mid-single digit same-store sales growth, once we get out of this year, I think we are right back there driving some EBIT margin expansion each year.
John, on store growth, you're very quickly becoming one of the fastest growers in all of retail, which is quite impressive. How do you balance customers clearly demanding for you to build stores with making sure that you're not stretched too thin, you're able to hire top-notch talent, and that the business overall can support an ever-increasing number of store openings?
Yeah, we have a great team internally to both find the right real estate and then build out that store and get that store open. We have roughly 40 district managers who help us open those stores, and we'll move them around, and each of them will have to open a store or two a year, which is something they can do quite handedly. The focus is always on finding the right real estate. We're going to open the right stores in the right location, and we're not going to open a store for the sake of opening stores. There are always stores that open better, stores that open softer, and we learn from every single one of those store openings.
The internal team, both from the dealmaking side and finding the right real estate, as well as the store operations team all the way down to the store managers, the visual merchandisers, and everybody who helps open that store, have gotten very good at managing the load of opening 60, 70, or 80 stores a year.
Just on the new stores, it seems like their momentum and what they do in year one sales is very similar to what you see in regions that you've been in for many, many years. Is that a surprise to you? Did you expect stores in sort of the Northeast and, say, the Mid-Atlantic to do quite as well as your core regions?
It's not a surprise any longer, but if we rewind the tape five or six years, when we first started opening stores in places like Pennsylvania, we really thought we were going to see more of a work customer. We thought lace-up work boots, less Western, less cowboy hats, less traditional exotic boots, not what we would sell in Texas or Arizona or California. That simply hasn't been the case. Those stores index as Western as our typical West Coast stores or Arizona stores. In some cases, given the lack of mom-and-pop or specialty competition, index even more Western in some cases. It was surprising several years back, but we've gotten used to it as we open more and more Northeast or East Coast stores.
Awesome. That's great. It's all the time that we've got. Thanks a lot, gentlemen, for joining me. This was great.
Thank you.