Boot Barn Holdings, Inc. (BOOT) Earnings Call Transcript & Summary

Right. I think we can get started with the next presentation. I'm Matt Boss, department stores and specialty retail analyst at JPMorgan. Today, I have the privilege of introducing Boot Barn, and President and CEO, Jim Conroy. Boot Barn's the nation's largest lifestyle retailer of Western and workwear with only a mid-single-digit percentage market share today in a $20 billion growing industry, 250 stores in 33 states with plans to double their store count. Company is currently on track for its third straight year exceeding its both top and bottom line algorithm which is 3% to 5% same-store sales, double-digit square footage growth and 20% earnings growth. With that, I'll turn it over to the man behind the cowboy hat, Jim Conroy.

Very good. Thanks, Matt. Good afternoon, everybody. I want to start with this image because for the folks in New York, and I'm a New Yorker, so I can poke fun of you. You guys will never take us seriously until we get to Manhattan. So this is our first attempt to come to New York. I don't think we'll be putting a store there anytime soon. But we did do a photoshoot there. We know there's a market there and there's a naked cowboy 2 blocks away from this guy. So someday, we will get stores there. But we figure we'd bring a little bit of Boot Barn to Manhattan just to give you a taste. As we go through, we're going to start with our third quarter results. We're thrilled with our most recent quarter. Our holiday and Christmas business was extremely strong. And when you look at it in a run of the last 3 years, we comped on top of comp on top of comp. We had same-store sales growth, both in the stores and in e-commerce. We've done that 3 years in a row now. And we did that without promoting our way to top line growth. So when you look at our merchandise margin, we've had really nice accretion in merchandise margin 3 years running now. This year, to break down that 50 basis points, we started with 80 bps of improved product margin, offset a little bit by freight and duties coming, bringing product into the store -- into the states and shipping out to e-commerce customers. But we ended with 50 bps of merchandise margin. Pretty sure we're actually a little bit less promotional than last year and we had a really nice increase in our exclusive brand penetration. And then when you look at EPS growth, our EPS grew to $0.85. If I were to normalize that for you, it's $0.81 with some artificial help from a tax benefit. But it's a really solid quarter. That $0.81 compares to $0.77 that we guided to. Another quarter of broad-based strength across virtually every geography. Broad-based strength across virtually every merchandise classification. So when we look at all the departments within the business, essentially, all of them were positive. In this particular quarter, we saw some really nice growth in ladies apparel, Western apparel, in cowboy hats, in men's Western apparel. About every single category across the board was strong. One really nice thing is ladies Western boots was in line with company average, which is a change for us. Ladies Western boots have been comp eroding for a while. So we feel great about the quarter we just delivered from the top line to bottom line. And you think about the operating margin, we grew our operating margin by 80 bps in the quarter. We're a pretty consistent group. We're going to go through a very similar agenda. I have my team here from the last couple of years, my partner-in-crime, Greg Hackman, our CFO; and Jim Watkins and Megan [ Kotze ] from Investor Relations. I'm going to do a quick overview of the Boot Barn story and then just recount our 4 strategic initiatives, which are the same 4 strategic initiatives we had last year and the same 4 strategic initiatives we had when we went public. But just starting with big picture. What makes Boot Barn different? We are a true lifestyle brand. We target a customer that is seeking authenticity for their lifestyle. We've had very nice growth in store count, in same-store sales, in brick-and-mortar stores and in our online businesses. We also have multiple levers for ongoing growth in earnings, right? So we can grow more stores, continue to get expense leverage, continue to build our private brand penetration and get more merchandise margin. And we're continuing to get more and more SG&A leverage as we grow the top line. But if I were talking sort of at home to my kids and say, "What makes us different?" Well, we have an extremely loyal customer base. We've grown same-store sales in retail stores based on more transactions. Those transactions are based on additional customers becoming familiar with the Boot Barn brand. We're not driving more sales. In fact, we're pulling back on sales. And we just recently increased our private brand penetration by 640 basis points during the holiday quarter. So when I think about changing the assortment, unwinding sales, driving top line growth based on transactions, it's retail nirvana for us. To give you a view of the Western industry, you have to start from Midtown Manhattan. This is where my first office was when I started my career. I looked across the Hudson River and I didn't know what was beyond it other than Hollywood and L.A. was out there someplace. But you really get quite a different perspective. This is the perspective in Midtown Manhattan. It's urban living. People don't drive to stores, they take Ubers or subways or taxi cabs. You see Amazon everywhere, it's 99% of retail headlines, it's 5% of retail sales. But that's the perspective that we all have when we live in an urban center. Then you look at Boot Barn and you say, "Well, this must be your customer, right?" They haven't shopped online yet. They haven't gotten to Amazon yet, because they don't have running water, they don't have electricity. They haven't gotten Internet connectivity. That's not our customer. This is our customer. Our biggest markets are Houston, Dallas, Denver, Phoenix, San Antonio, Nashville, Southern California. These are urban or suburban markets where customers do shop in stores, they do come to Boot Barn and they walk out with product. It is very much a store's preferred purchase. And when they go online, they know our brand. They know we're the authentic lifestyle brand for this particular category, and they go right to bootbarn.com. From a demographic standpoint, they do absolutely drive pickup trucks. This is the fifth or sixth year in a row I'll stand in front of you and say the top 3 vehicles in the U.S. are pickup trucks, they're not Teslas, BMWs or Mercedes. They listen to country music. They go to more than 1,000 rodeos around the U.S. every year. So on March 3 in Houston will be the first day of a 20-day rodeo in Houston. For 20 days, 100,000 people will go to the rodeo everyday. That's 2 million people going through the gates at the arena in Houston. This is a real lifestyle. And these folks wear boots, hats, workwear, blue jeans every day. If I think of one word that really differentiates Boot Barn, is we're diversified. We sell boots and apparel. We're a store for the whole family. So we have men's and ladies. We're in stores and online. We have category diversification in that we have work and Western products. And when you think about the merchandise that we sell, I had a guy, just as I was walking in say, "I own boots. I just had to buy a pair of boots for a gala event at The Met in New York. And I'll never need another pair of boots. How do you guys stay in business?" Well, that's not our core category or core customer at all. Our core customer buys very basic everyday merchandise. Jeans and boots, work or Western. They tend to work outside. They tend to wear through the product. And when they need another pair, they come back to Boot Barn because we have a fair price and we have the product in their size. The vast majority of our sales are done at full price. Our full-price percentage of sales continues to grow. And we have very, very limited fashion risk as we really almost never bet on the latest new fashion trend. Our best-selling boots are brown, distressed leather boots. When you think of this company over a 7- or a 8-year period. When I first looked at the business, we were 86 stores in 8 states. We were about $200 million. And over the next 7 or 8 years, we've grown to $850 million. That's a 20% top line growth. I mean that's a digital-native growth rate, right? That is as good as any company out there. And if we were a digital-native brand, you'd be multiplying our revenue number by some giant multiple and we'd be spending crazy amounts of money on marketing and cutting our price and driving top line growth, and you guys would be so thrilled to hear all that. Unfortunately, we make money. Now it's -- news isn't that bad. Our EBIT growth has been consistent for the last 7 or 8 years. And probably the coolest thing about this chart, our EBIT has grown by 20% also. And our EBIT has stayed in lockstep with our revenue growth despite the fact that e-com has gone from 4% of sales to 17% of sales. So a lot of retailers are talking about the margin erosion of a shifting channel. Well, we've been able to keep our EBIT rate intact and we're approaching a 10% operating margin. And we'll likely get there next year despite the fact that our e-commerce business is growing strongly. Going through the 4 strategic initiatives, starting with same-store sales growth. So the underpinning for our same-store sales is our customer segmentation. Years ago, we were Western-only. Then we split out a work customer. More recently, we've split out a more fashionable female customer called Wonderwest. And each of those 3 segments are communicated with in different ways. So all of our marketing aligns with those segments. We merchandise our stores along those segments. And I want to give you a sense for how they're different from each other. So the first TV spot I'll show you is a Western, very core Western-focused commercial. [Presentation]

One of the things you may want to note about that spot is there's no mention of product, of specific brands, of promotions, price points. Our marketing has completely evolved to be branding, to get -- cut through to customers that are either already familiar with Boot Barn or they may not be familiar. But we're not going to do that by a 3-day sale on a particular weekend. This has to connect with them at an emotional level. For this year, we've started to evolve our customer segmentation. So rather than just Western, work and fashion, we've started to uncover, and we think there's an opportunity to even expand a segment called Country. So this is a guy that takes off his cowboy hat -- or he doesn't wear a cowboy hat, he wears maybe a ball cap. He may not go to a rodeo, but he'll go listen to Brad Paisley's concert. And the cool thing about this customer group for us is a portion of them already shop Boot Barn, but we think there's more customers for us to go get in that country segment. So when we look at this segment, we're going to steer our marketing that way, develop assortments that are appropriate for this customer and go after them in -- around a very tight concentric circle of core Western, expand this country segment. And we think this is another opportunity for the next year or 2 or 3 years to continue to add new customers to the brand. And I'm sure there are some folks in the room that are saying this is a distinction without a difference, what's the difference between country and Western? The best way I can represent that to you all is through another TV spot. So this spot is much more geared to a noncore Western customer, maybe someone that doesn't go to rodeos and doesn't ride a horse, but certainly would wear boots and a lot of our product, either men's or ladies. This happens to be more focused on ladies. [Presentation]

Another example, pure branding, trying to get cut through, not screaming price or sale or any particular brand. So the combination of the segmentation, the change in our creative aesthetic, a massively upgraded branding, has given us a really nice run of same-store sales growth. So our algorithm is low to mid single-digit growth. We've been substantially higher than that for the last couple or 3 years. And the nice thing is we've seen growth in both channels. In the most recent quarter, we comped up 6.7%. That's 11% online, 5.7% in the stores. And again, fewer promotions, a really nice pickup in exclusive brands. And to work through all the arithmetic from top to bottom, we had 50 basis points of gross margin accretion. We delevered by about 10 basis points, which we have to invest in the product design and development team. So that -- but we saw 40 basis points net of that in the gross margin line and 40 basis points of SG&A leverage. Or we grew bottom line by 80 basis points. Now one of the things you might ask is, well, you were a 7.8% in Q2 and you were a 6.7% in Q3, you guys are much more worried about that than I am. But I can help address it a little bit. One of the things we called out on the October 30 conference call is we were not going to chase EBIT eroding, pay-per-click spend online. And most of our pay-per-click traffic from e-commerce goes to Sheplers. So Sheplers was about a minus 6% comp for the quarter, sheplers.com. And that's okay because we could have bid that sales line up, but it would have cost us more money and it would have been EBIT eroding. Bootbarn.com, that doesn't rely quite as much on pay-per-click, comped up 31%. So I can tell you, I didn't lose 1 second of sleep, of a 7.8% going to a 6.7%, knowing that most of the erosion could be completely explained by not chasing EBIT-eroding pay-per-click sales. Speaking of omnichannel, we have 3 different brands online still. Boot Barn is the sort of long-term investment. It's the brand that connects to the stores, it's where the omnichannel experience is. Country Outfitters is more of a boutique, more focused on ladies' fashion boots and much smaller than the other 2. And Sheplers is our end all, be all. We have everything at the lowest price in the industry. It's highly, highly promotional. One of the things we're doing to become, or try to become less reliant on pay-per-click is how do we now take Sheplers and upgrade the creative look and feel. So if you went to the Sheplers site, its jaw-dropping deals and the promotional sales period is going to end in 2 days just to restart 3 days later. So we're trying to get away from that. And we've experimented with and we'll be rolling out new creative for sheplers.com, and it's already in our DNA. A portion of the traffic for Q3 went to a brand-new look and feel for sheplers.com. And we feel really good that it'll help us get much more long-term growth, a more loyal customer and not just the bargain basement sale customer. We also use our digital team to bring to life the in-store experience. So probably 1/3 of the digital team's time is to try to make the in-store experience more fulfilling. Either it's more interactive through range finder, so I can go over and say, I'm a male customer looking for work boots. I need steel toe, size 12, and it will give me all the boots in the store in my size. The entire goal is to make that store's customer not leave empty handed. If, for some reason, we don't have that product, or we can't really meet that need, they can go to our endless aisle capability, we call that WHIP. We Have It Promise, so that's WHIP. And they can get the product shipped to them or shipped to the store and come and pick it up. We also have finally stitched together, buy online, return in-store. So if you buy something at bootbarn.com, you can bring it back to the store. And about 2/3 of bootbarn.com's returns came back to a Boot Barn store, which is just additional traffic, an additional ability to turn that return around and turn it back into a sale, which we didn't have in the last couple of years. Looking at exclusive brands. The exclusive brand initiative, the exclusive brand story is a complete home run. Historically, we had 2 brands. Men's Western, Ladies' Western really going after our core Western cowboy "customer". In an effort to expand around that core customer, we recently launched 2 brands: Brad Paisley's Moonshine Spirit; and Idyllwind by Miranda Lambert, to get -- to really leverage their fan base, right? And to get customers that, again, may not be riding horses, but do wear boots and do go to concerts. Both of those brands are doing well. The partnership with both of those artists is phenomenal, and we expect them to be in our business for time to come. And while the product is doing great, the introduction of new customers is probably even better. From a work perspective, we've launched 2 new brands: Cody James Work; and Hawx Work. Both of those brands are in the store, have plenty of growth opportunity in front of them. And when you look at the sales penetration of exclusive brands over a period of time, 8 years or so, we used to be 2.6% penetrated. Now we're more than 20%. And while that's a significant amount of growth, when you put it in dollars, given the fact that the company has grown so much, this little $5 million internal vendor to ourselves is now $175 million, pushing $200 million and has grown 35x in the last 8 years. So we couldn't be more thrilled with adding exclusive brands to complement our third-party brands. So these are the logos and icons of the brands that have helped us build our company. And our 2 big exclusive brands, Cody James and Shyanne, are now 2 of the top 5 brands in the store. Cody James is pushing $100 million in revenue. Shyanne is going to push $50 million in revenue. These are businesses that were unbelievably small just 5 years ago. From a store count perspective, we continue to believe that we can double our store count. We have about 250 stores now. We've road mapped about 500 stores. Our stores are a 3-year payback, it's a 30% cash-on-cash return in the first year. So it's highly accretive to earnings for us to continue to grow. And when we look at the map, I see 2 different things. We look at the map, which isn't that -- that's all right, I'll catch up to you. Okay. When we look at the map -- okay. When we look at the map -- guys, I'm going to do this free style from here forward. When we look at the map, we have the ability to continue to grow the business in states where we don't have stores yet, right? So we have 2 new stores in Virginia. We feel great about those new stores and the new stores in North Carolina and Indiana, continuing to meet that 3-year payback. But we do believe that we can continue to grow up into Pennsylvania and Ohio. And we'll continue to add new stores in these new markets until we get to 500 stores. So the opportunity for ongoing growth is tremendous for us. If we were to circle back and look at sort of the drivers over the last few years in our earnings model, while we've called out low to mid-single-digit comps and accretion in exclusive brands and new stores will get us to 20% EPS growth, we've outpaced that, right? So we were 5.2% a couple of years ago, 10% comps last year. If you piece together our guide, you'd get to a 6.5% for this year. You can't really -- that doesn't imply what our Q4 number will be. So we'll update our guidance going forward. And that number, that 6.5%, will go higher. Our store count continues to grow. Our exclusive brands over the last couple of years have gone from 14% to 22%. And our operating margin is approaching 10%. So when you put all of that together, while we promised 20% EPS growth. We're delivering 47% EPS growth, right? So if you -- for the valuation folks in the room, if you want to do a peg on the 47%, you'd only be getting [ 201 ]. If you kind of look forward and say, "Okay. Now what are you going to do?" Well, we still believe there's tremendous opportunity for us going forward. We can expand the country assortment to really go after that customer. We think there's multiple categories of growth in the store. We continue to improve the profitability of our e-commerce channel. We've stitched together all the capabilities of omnichannel, our exclusive brands and the new brands continue to build share. We continue to get more competitive differentiation and more margin. And finally, we can open up stores in new states that are Eastern states with essentially the same model that we have in the rest of the country, right? So when we enter Virginia and North Carolina, and when we enter Ohio and Pennsylvania, it's not a new concept. It skews heavily Western still. And we still believe that those stores will continue to open payback in 3 years as we double our store count over the next few years. So that's the Boot Barn story. I appreciate your time and attention. Thank you.