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

Thanks. It's Matt Boss, department stores and specialty softlines at JPMorgan. Today, I'm happy to introduce the management team from Boot Barn, President and CEO, Jim Conroy. Boot Barn is the nation's largest lifestyle retailer of western and workwear at 266 stores in 36 states. Boot Barn maintains only a mid-single-digit percentage market share today in a $20 billion industry. Fresh off its holiday print, Boot Barn sees ample growth runway with plans to double their store count and stated annual growth algorithm of low to mid-single-digit same-store sales, 10% plus unit growth, which translates to at least 20% annual earnings growth. With that, I'll turn it over to Boot Barn's CEO, Jim Conroy.

Very good. Thanks so much, Matt. Really, a pleasure to be here today and hear what we think is a pretty exciting story and some really phenomenal results for our most recent holiday quarter. If we kind of dive right in for what happened during our third quarter, so this is our quarter that ended at the end of December. We were joking earlier. I think I could spend 25 minutes just going through the numbers on this particular page. If we look at 3 years of growth, top line growth in total sales or even in same-store sales growth, just really pleased with the performance of the whole team and the entire field organization. So if we zero in on that 4.6% comp, just to give a little bit of color commentary and a little bit of context on that number, first, that 4.6% was up against 6.7% last year and 9.2% the prior year. So 3 consecutive years of really solid same-store sales growth in both channels. So I think one of the really unique things about Boot Barn is 3 consecutive years of same-store sales growth in the stores. And just to really kind of add an exclamation point to this particular quarter, that 4.6% growth had a number of headwinds to it, right? So I think everybody is faced with the headwinds associated with COVID. Unfortunately, for us, the biggest impact is it has essentially canceled all concerts and rodeos, which were always a catalyst for more sales in our stores. Second, we continued to see pressure in our oil markets. Our West Texas business is still under a significant pressure, although it seems to be hitting a bottom and perhaps on its way to recover. The other thing that's embedded in that number is some top line downward pressure on sheplers.com. The sheplers.com business has been completely repositioned and rebranded and repriced. And while that has significantly impacted top line growth, it's been EBIT-accretive. So it's been helping our profitability. And then finally, one of the things that we were doing during the entire quarter was really chasing inventory. So 9 or 10 months ago, on the onset of COVID, we essentially, out of an abundance of caution, really slowed down our inbound inventory, and we, as we wrapped up the quarter, were still roughly minus 10% on a same-store sales basis from an inventory perspective. So despite COVID, oil pressure, sheplers.com, chasing into inventory, we were still able to deliver a 4.6% comp. If we peel off the e-commerce business, the e-commerce business was really driven forward by a very strong bootbarn.com, right, plus 36.6%. I must tell you, though, when we look at the business internally, we see a plus 1.9% store comp and a plus 80% e-commerce comp. In such a variable cost business when we were able to grow EBIT for e-commerce by 80%, that's essentially how we view the business and manage the business. The other thing we're able to do at the exact same time was continue to grow our merchandise margin rate. So in the quarter, we had 150 bps of merchandise margin improvement. That's on top of 50 bps the prior year, 120 bps 2 years ago. And again, just really thrilled with that result. Typically, we see a nice tailwind in merchandise margin from exclusive brands. In this particular quarter, given some of the inbound supply chain challenges, our exclusive brands didn't grow in penetration quite as much as they had in the past. So there's just a very mild tailwind from exclusive brand penetration, 8 or 10 bps out of the 150 bps. So what that should tell the investor is we continue to have the ability to drive same-store sales growth in a very difficult external environment, and we don't need to run massive sales or promotions to drive top line. And then finally, when you put it all together, we were able to achieve $1 of earnings, up from last year of $0.85 of earnings and, again, in the middle of a very difficult and challenging macro environment. So really just tremendously pleased with the quarter, incredibly proud of the team here at our store support center and, more than anything, the 5,000 people in the field that made this happen and took care of customers every day. If we now kind of zoom back out quite a bit and just bring everybody through more of a macro view of Boot Barn and share a little bit about the Boot Barn story and then tick through each of our 4 strategic initiatives. And just as a reminder for everybody, our 4 strategic initiatives remain incredibly constant. We update the tactics under each one of them each year, but part of the success of Boot Barn is just relentless execution against each of these 4 initiatives. And then finally, we'll just conclude with some remarks relative to the investment thesis. Starting with the Boot Barn story. I think once again, we want to remind the world and, certainly, the financial community that our core customer is a very, very large segment of the U.S. population. They're vibrant, they're in stores, and the lifestyle of our customer is one that drives pickup trucks, listens to country music on the radio in their truck, they attend rodeos and NASCAR events, and they wear boots, hats, blue jeans, workwear, virtually every day of their life. While I think there's tremendous potential for us to continue to grow the business, top line and bottom line, we also always want to try to help highlight the downside risk. And one of the things that really helps mitigate our downside risk is the diversification within Boot Barn. So if you think of the -- just the right-hand side of the screen for a second, we sell both western and work product. So at the onset of COVID, our Western business really got hurt quite a bit, but our work business, a, enabled us to remain open because we were deemed an essential retailer; and b, continued to grow, helping to really mitigate the downside erosion due to COVID. And then if we go through the charts on the left-hand side, we sell both apparel and boots. So when flame-resistant work apparel is comping down, that erosion can be picked up by other parts of the business like work boots. We sell to men, women and kids. We're a store for the whole family. When we first went public, part of the reason that we were comping up so strongly was ladies fashion boots. That business then softened and was supported by work boots. And then finally, in terms of channel mix, we have 2 vibrant, growing and profitable channels between stores and e-commerce. The other thing that really manages our downside risk is the nature of the product. So we don't have merchandise that has high fashion risk. We sell everyday product to customers that tend to work in them, whether it's on the western side or the work side. They buy a pair of boots. Eight months later, they've worn out that pair of boots. They come back and they buy another pair. Similar story for denim or Carhartt jackets, and they come back to us to replenish the product that they have had. So we have very, very little markdown exposure. If you go back to the beginning of COVID, once again, we had entered that period with high inventory levels. We were almost plus 10% on a same-store basis from an inventory perspective. COVID hit and really put pressure on our top line. And despite those 2 countervailing forces, we still didn't really have a major margin hit or a major markdown. We have very little sales and promotions in the business, and in fact, we continue to take away or reduce the duration of our sales and promotions with each passing season and each passing year. If you look at the business over the last 8 or so years, it's really been a tremendous top line growth story, right? So we've grown almost $100 million in revenue every year for the last 7 or 8 years. And if you look all the way to the right, our TTM revenue is almost at our last year, our fiscal '20 revenue, which is pretty astonishing given the environment that we're in. And we're in the middle or maybe 2 weeks into our fourth quarter. So as we continue to actualize the quarter that we're in, which is off to a very, very strong start, and we start to cycle the very difficult business at the end of March last year, there was a pretty good chance that that $823 million will catch up to the $846 million from the full year prior, which, again, in this environment, just makes me incredibly proud of the entire team. And not only have we been able to grow top line, but when we look at EBIT over the same period of time, our profitability has grown almost exactly in lockstep with our sales. So while our sales have grown 20%, our EBIT has grown 19%. I would remind everybody that on the left-hand side of that chart on the bottom of the page, our e-commerce penetration was roughly 3%, now it's 23%, and yet, we've still been able to grow EBIT in line with sales, which I think is a very, very unique feature of Boot Barn relative to most other retail companies out there. Looking once again just at the third quarter, top line grew 6.5% and when we look at the flow-through to operating income growing at 19%, which we're extremely pleased with, that represented about a 37% flow-through on the incremental sales, again, a number of that I'm just thrilled with, partly merchandise margin, partly expense control, but the flow-through at that rate was something that we're really, really pleased with. From an EPS standpoint, first, the GAAP numbers, but maybe more appropriate and comparable, the tax adjusted numbers went from $0.81 to $0.99, grew 22%, slightly more than 22% in the quarter. So really pleased with that increase in EPS. $0.81 was our last year. It's pretty close to where consensus was. So as we look at the quarter, we did really significantly better than last year and felt good about the beat relative to consensus estimates. Going through each of the 4 different initiatives, starting with same-store sales growth. As typical, we'll start with our segmentation strategy. Our customer segmentation is really the underpinning of everything that we do. So 10 or 12 years ago, we were just a western retailer. Then we added work product, work boots, Carhartt jackets, et cetera. A few years ago, we added a more fashionable element on the ladies' side called Wonderwest. And most recently, we've started to expand into a more casual customer that we've called Country or segmented it as Just Country. And this is really just an expansion from our core western customer. So this particular customer perhaps doesn't go to rodeos and doesn't always wear a cowboy hat and may not work on a ranch, but they may, in fact, wear boots and blue jeans and go hunting or hiking or fishing. And that segment of the population is even bigger than the segment we've been targeting for the last 10 years and continuing to get growth. And as we continue to penetrate this country segment, we think that this will give us even more runway to continue to expand our top line and continue to drive market share. So a little bit of a view into the Just Country customer base. Again, unlikely you'll see rodeos, you'll see bull riding or you'll see horses or cattle. You will see sort of more of an outdoor recreational, hiking, camping, hunting, lifestyle. And, of course, this segment is very prevalent across most of the United States. And it's a segment that we're just scratching the surface on, and it happens to coincide really nicely with some of the macro trends that are happening relative to COVID with more and more people getting outside, more and more people hiking and camping, et cetera. We have 2 short videos I'd like to show, and they have a couple of different objectives. The first one is to show the distinction between how we are positioned relative to the Western customer, and the second is how we're positioned relative to this Country customer. So I'll play both of them, and I'll kind of recap at the end. This first one is our holiday spot. It's really leaning Western. It ran on a national basis on television in many of our local markets and had some really, really great feedback. [Presentation]

So hopefully, that played well over the airwaves. The video presentations on Zoom never cease to amaze me. But in any regard, that is really Western-leaning, horses running through snow. It's got a Christmas or holiday theme to it. But notably, you'll recognize there's no mention of product, of price, of a big sale. It is really just bringing the Boot Barn brand to life in an aspirational way. The second video leans more towards the Country customer. And similarly, no mention of product, price or promotion, but a very different creative spin. [Presentation]

So again, that should give you a sense for the 2 different esthetics between Western and Country, and we feel really good about the Just Country initiative. In all honesty and spirit of full disclosure, we started that prior to seeing the macro trends associated with COVID, the outdoor, hiking, camping, trends, the fact that you can't buy a bicycle anywhere. But as those trends started to play out, we certainly were well positioned, and we were able to double down and to hold together a lot of merchandise that speaks to this customer, augment it with some new brands and some new products and really bring to life a kind of a new and vibrant part of the Boot Barn story. If we look at same-store sales over a 10-year period, we're really pleased with the performance of the business, real consistent growth. Over that period of time, we've grown the business on average 10% comps. And if you think about a decade or 40 consecutive quarters prior to COVID, only in 3 quarters were we negative. So I think people will always ask, and that's fine, well, can you continue to do it? And our record right now is 37 and 3 for the last 40 quarters prior to COVID. And while COVID had us take a step back for a couple of quarters, we're now back to positive same-store sales. And soon, we have the opportunity to cycle some really difficult numbers in the LY comparison. Bottom part of this page gives you a view of that. So if we looked at our fiscal 2020 results, we were high single-digit comps until COVID hit, and then like a number of other retailers, of course, the rug got pulled out from underneath us. So our Q4 results, that negative 4.7% happened entirely since -- in the last 2 or 3 weeks of March as the quarter was ending, unfortunately. So we would have had another really, really solid year. Even with that in the number, we still were able to produce a 5% comp for the full year fiscal 2020. To give you a little bit more color commentary on what's going on behind the numbers, and a couple of things that make us feel really good about it. One, in the beginning of COVID, and as we started to recover, we called out the strength in the west, and we called out the strength in work boots. In the most recent quarter, we see much more broad-based strength, which makes us feel great, particularly on the category side. So with the exception of men's cowboy boots and flame-resistant work apparel, which is 2% or 3% of our total sales, every other department was either slightly positive or positive, and that really makes us feel great about a much broader recovery. And again, that's without any concerts -- essentially any concerts or rodeos. The other thing I'm sure you will all ask is, well, how does it look sequentially? What happened between October and November and November and December? And what -- how is January doing? Well, happy to answer that now. So we've had 6 consecutive months of sequential same-store sales improvement. So November was better than October, December was better than November. I think there's been some reports that some retailers had a softer December than November. That wasn't the case for us, fortunately. And then we talk about current business. Our January business is off to a strong start. We put that in the earnings release. We will spend the next 3 days trying to define that for you. So I'm going to do the best I can right now. It's off to a very strong start. It is, in fact, double-digit comps. We don't want to provide a specific number partly because we think some of the strength is due to stimulus checks being available to our core customer. And we also don't want to worry then about, well, are we going to sequentially decelerate from a really strong double digit and only finish it plus 9% for the quarter? But more than anything, it's -- I think you should feel very comfortable that the business is off to a very strong start in the fourth quarter. It's very early days. It's 2 weeks and 1 day's worth of sales. January is a small month, but it certainly looks like the business has some underlying strength in it. And again, in the spirit of full disclosure and with some humility, a portion of that undoubtedly is due to stimulus checks, in our opinion. From an omnichannel standpoint, really, really great performance from both the stores team and the e-commerce teams at Boot Barn. We were able to put in just a number of capabilities that we hadn't had prior to COVID and had some really nice success stories. First, I would say, though, that we view the omnichannel relationship perhaps a little differently than a lot of other retailers. For us, while we want to have a great e-commerce business, and we want to continue to develop our omnichannel capabilities, the first objective for our digital business is to help continue to drive customers to our stores. And that might seem like a paradox to many people who are continuing to chase e-commerce sales, but we believe, a, we make more money in the stores; b, we're more competitive in the stores. We control the last mile. We can guide the customers to what we want them to buy and really provide them better service. So that digital channel comes to life in the store through a rangefinder, which helps customers find exactly the right boot or pair of jeans that's right for them in the store they're standing in. And if they can't find it, they can access WHIP, and the WHIP is We Have It Promise, we'll send it to you, we'll send it to the store anything that you need that's available in our e-commerce channel or on a direct ship basis from our vendors. That said, this quarter, and as we went through the holiday period, we were able to really either refine some of our capabilities or add new capabilities. So buy online, pick up in store, curbside pickup. We now have the ability to do same-day delivery, so we're able to extend our digital selling beyond the UPS cutoff. We can -- you can provide somebody a same-day gift. We have a tremendous amount of customers that when they are returning bootbarn.com product, they come back to the store. So again, we really wanted to create a virtuous cycle between our stores channel and our digital channel. And the tail of the tape is about 19% of our bootbarn.com orders for the quarter were picked up in the store. It's even higher in December. It was about 22% in December. So that was essentially free traffic to the store. It enabled us to really mitigate the UPS challenges, shipping to a commercial address, avoiding the UPS surcharge. So we don't have a freight burden that will call out that would be impacting our margin rates. And finally, we had about 2/3 of the bootbarn.com returns come back to the store. Again, more traffic to the store where we can convert that return into a sale. Spend one more minute on omnichannel. We talk extensively about looking at our e-commerce business from the bottom line up. And what that means is we want to continue to drive exclusive brands that have a higher-margin rate. We actually spent less on pay-per-click this year than we did last year. We inventoried more goods in our Wichita fulfillment center than we did last year. So we were able to really pull back on the amount of drop ship directly from vendors that have an associated charge with it. So all those things really enabled us to drive some nice, healthy top line growth from an e-commerce perspective. But that 80% EBIT growth is really a combination of sales, cost containment, lack of drop ship, a higher ROAS on our pay-per-click and a number of other things. So really terrific results, and again, a fantastic performance from the e-commerce team. From an exclusive brand perspective, our exclusive brands continue to grow and be vibrant and strong, and we're incredibly pleased with them. If you went all the way back to our conference call in May, that was our fourth quarter call, one of the things we said was our supply chain for exclusive brands is the longest and requires the earliest payment. So in the spirit of playing defense, in the spirit of cash preservation, we essentially shut off that supply chain and came out and said, look, we expect exclusive brands to be flat year-over-year between fiscal '21 and fiscal '20. Fortunately, in the first, second and now in the third quarter, we've actually seen some really nice growth in exclusive brands. It was higher than the 80 bps in the first quarter and in the second quarter. And I would tell you that the 80 bps we're really pleased with in the third quarter. And the only reason it wasn't 2 or 3 points of growth was purely inventory scarcity and the lack of our ability to get the supply chain flowing at kind of full run rate. We expect over time that we'll be able to get the exclusive brand business back up and running and having the supply chain keep pace with sales. So I would expect that going forward, we'll be right back to our 2 to 3 points of penetration growth on a year-over-year basis going forward. When we think about all the brands in the store, we are definitely a house of brands. We have some tremendous vendor partners. We are developing our exclusive brands to give us some competitive advantage, but at the end of the day, we really do rely on our vendor partners and may have some extremely strong brands. And that's -- when we array the store and merchandise the store, all the brands sit together. If you were to walk into a store, you wouldn't necessarily see what brands are ours versus third-party brands. They tend to be priced at the same levels with the same or better quality, et cetera. When we look at our top 5 brands, Ariat continues to be our #1 vendor partner, just a truly terrific company. And when you look at the balance of the 5, 2 of those brands are Cody James and Shyanne, right? And those brands are 10 or 12 years old. And they are now, if you're known by the company that you keep, they are now on the same list as Wrangler and Justin. Both of those brands are over 100 years old. So we've really done a tremendous job of developing true brands in Cody James and in Shyanne and in Idyllwind and in Moonshine Spirit and some of the other brands that are out there, so much so that they are now, in some cases, as big as companies that have been around for a century. And then finally, one of the things that I think is never fully understood about Boot Barn is we are a white space, double-digit store growing company. And the store -- the customer really prefers the in-store experience. So if we look at the percentage of our business that's retail store, brick-and-mortar versus e-comm, it continues to be 80-plus percent store. And certainly, that came down a bit in the height of COVID in the beginning of our fiscal '21 in the first quarter. But as soon as the business started to recover, when we look at a year-over-year comparison, the shift to e-comm from stores has been pretty modest relative to a lot of other companies that are seeing a much more pronounced shift. There's a couple of reasons for that. One, I think our customer truly enjoys coming to the store. They only shop from the store maybe 3 or 4 or 5 times a year. So the value of shopping online to them doesn't save them all that many trips. They really want to touch and feel and try on the product. We demonstrate and have the authority in the store of a lifestyle brand, et cetera. And then finally, we're growing new stores. So as we continue to comp positive in brick-and-mortar and add new units, we may not see any shifts to online. That said, we've also worked extremely hard in trying to improve the profitability and the EBIT rate of our online business. So even if we do see that shift, it's unlikely that we will see any significant erosion in EBIT based on the shift to an online customer. Why do we continue to open stores? It's, frankly, pretty simple arithmetic. Our stores pay back in 3 years or better. It's a 30% cash-on-cash return in the first year. We've been opening up stores in new markets and continuing to see some really, really nice returns. So if we look at a 10-year view, while we call out that we want to grow units 10%, we've added about 15% units over the last 10 years. Admittedly, some of those are new stores, some of those are small tuck-in acquisitions, and some of these stores were larger acquisitions of 20 or 30 stores. But we've been able to grow from 86 stores that were almost all West of the Rocky Mountains to now 260-plus stores in 36 states around the country and have seen some really nice success even in new markets. So if you look at the map, when I first looked at the business, again, 86 stores in 8 states, almost all of them were West of the Rocky Mountains. Then we started to go a little bit towards the East and Southeast. Five years ago, we were talking about our development in the Southeast, and people were asking, well, can you put stores in Tennessee and Kentucky and Georgia and the Carolinas? And now in fact, one of those divisions is the best division that we have in one of those districts. So we've been able to continue -- 10 seconds. Thanks for the heads-up. So we do -- okay. So we do think we -- 15 minutes to go?

Yes.

Okay. So we have somewhere between 10 seconds and 15 minutes left. Sorry, I'll wrap up the last few pages. We do think we can continue to build out the Northeast, our new stores in brand-new markets where the brand isn't well-known or doing extremely well. We're also seeing much less cannibalization in some of our existing markets. So we're putting new stores in Texas and new stores in California, and we're not seeing the business in the existing stores erode all that much. So undoubtedly, Matt will ask if our 10% growth is conservative or if our top side 500 store count number is conservative. And I think they are. I mean this is not exactly the forum or the timing to announce even more stores growth. But based on what we're seeing, we're seeing really great receptivity in the brand-new markets of Pennsylvania, Ohio, Virginia, et cetera. Just wrapping up from an investment thesis standpoint, Matt can walk us all through. And as he mentioned it in his opening remarks, our long-term algorithm is on the screen, right, 10% new unit growth. If you go back a couple of pages, we've been growing at 15%. We call out low to mid-single-digit comps. If you go back several pages, we've been plus 8% for a decade. We call out 25 to 30 bps of margin expansion. We typically anchor that to our exclusive brand penetration. We see much greater than that in the most recent quarter, 150 bps of margin expansion. But if we were just able to do 10% new units low to mid-single digits and merchandise margin of 25 bps, we'd have a 20% growth in EPS. Prior to COVID, we had exceeded all 3 of those factors and were delivering a higher than 20% EPS growth. And we do believe that once we go forward, that 20% will be sort of a baseline number for us as we plan next year. And just finally, wrapping up, what makes Boot Barn unique? We are truly a lifestyle brand. I think sometimes we're kind of grouped in with just specialty retail in general, but we are truly a lifestyle brand. We have an extremely loyal customer. The vast majority of our sales go through our B Rewarded loyalty program. We know who our customers are. They continue to shop with us. We have the ability to continue to grow new units. 10% new units each year going forward is something that we look forward to returning to once we get past COVID. And we have multiple levers for margin enhancement, both merchandise margin and EBIT margin. So we've seen that in the merchandise margin line by eliminating sales, increasing exclusive brands. We've become more efficient with our marketing spend. We've made our e-commerce business more profitable. And that has enabled us to deliver what we think is a really nice quarter, $1 of earnings and has set us up well for the fourth quarter that is just underway and as we enter the beginning of next year or our fiscal 2022. So with that, I would like to thank everybody for joining. I'm sure sitting through Zoom presentations might be arduous, but we appreciate your time and attention. I think at this point, we'll turn back to Matt Boss who will lead us through some Q&A.

Great. So a couple of questions that we had come in. Maybe first, Jim, on competition. So you're the #1 player in Western with less than 10% market share. Any changes in the competitive landscape? Are you seeing consolidation of smaller players? I think it's a pretty fragmented industry backdrop, a lot of mom and pops. So how are you taking offense? And what do you see is the market share opportunity?

So you recapped it, I think, extremely well. We do see some mom and pops struggling or calling in for potential acquisitions or just closing down. And frankly, it doesn't make us feel great that COVID has created that problem or exacerbated it, but it does give us an opportunity to continue to build share. And while we compete against very formidable companies like Tractor Supply and Amazon, and we do want to go head-to-head with the best in the world, in order for us to be successful, we really just need to be able to outcompete guys that have 1 store or 2 stores or 5 stores. And we bring the national brand. We invest in that brand on a national basis and at a local level. We build brand-new stores. We bring a full assortment. We charge a fair price. And when you put all those things together, we just are able to continue to outcompete the smaller guy and take share. So I think you're right to call out that we don't really need to do anything that's extreme in any way. We just need to continue to execute the way we've been executing and continue to build market share in a very large industry that we're a very small part of.

Great. And then on unit growth, so could you speak to confidence in your brick-and-mortar fleet? I think you hired a new head of real estate within the past year. I think you formally was at Starbucks. What gives you confidence in the 500 stores? It sounds like you see it as potentially even more than 500 stores. But what gives you confidence in the doubling of the base that may actually now even be conservative?

Sure. I think there's 2 or 3 things. One, our stores continue to comp positive despite the pandemic, right? In our third quarter, we had stores, particularly high volume, small footprint stores in California that had to meter in customers coming in, given capacity constraints. We've had people that are maybe appropriately so concerned about shopping in busy stores, not coming in. And despite all of that, we still see brick-and-mortar comping positive. I think the second thing is, a few years ago, we entered the Southeast. Now we're starting to scratch the surface and penetrate the Northeast with a couple of stores in Pennsylvania and Ohio and Virginia. Central parts of New York and Upstate New York will be right behind that. And we're really, really quite pleased that those stores are going to meet or exceed, i.e., be better than a 3-year payback. And these are markets that haven't grown up with Boot Barn and aren't sort of stereotypically cowboy country. It's not the heart of Texas or the heart of Cheyenne, Wyoming. And then maybe just the third piece of it is, we continue to be pleasantly surprised by the fact that we can further saturate existing markets and not see cannibalization from neighboring stores. And that's just been a really, really great thing to witness. And we'll open up a new store in California. We've had a few open in the last 12 or 18 months. We will track every single day what the drag on the sort of local markets will be. And in almost every case, it's been less than we bought. So I think the level of saturation that we can build to over time will be even higher than we originally had modeled that got us to the 500 stores top side.

And then on that, so it sounded like -- you just walked through a laundry list of reasons why the chain could basically double or more than double. Is there any capacity constraints that you see from a store growth perspective? Meaning, it sounds like you now plan to grow units at more than 10% on an annual basis. But what pace do you feel is comfortable or what pace of store growth going forward do you think is the right pace? I know you were waiting for this one.

I just want to make sure the attribution for that is to Matt Boss on greater than 10%, Matthew, Jim Conroy, President, and CEO of Boot Barn. I do think we -- there are very few constraints, if I'm honest. We do have a great new real estate deal maker. He's off to a fantastic start. He started essentially right before COVID and first started playing defense and now is playing offense and has been bringing forward some really, really terrific deals. So we think there's some real great upside there. Then when you think about the other potential constraints, we have the buying team in place. We don't really have a traditional sort of distribution network that other retailers would rely on. Most of our product, not all of it, but most of our product is shipped to our stores directly from our vendors. So while we might be leaving a little bit of efficiency on the table, that model scales perfectly. So if we have 200 stores or 500 stores, Wrangler can ship to every one of those locations directly, and we don't have to build another distribution center. So the balance of the constraints that could potentially come up would be our POS system, which we think is fine. The field team are always looking for new talent, but we've been able to scale that. So we've continued to try to keep at 10% even when things -- prior to COVID-19, just to make sure we don't get over our skis, but there'll be a time when we probably can accelerate faster than that once COVID is behind us, and there really is no structural constraints to us whatsoever.

And then from a same-store sales perspective, you said it during the presentation, 6 straight months of sequential comp improvement. I think the math was November, December, up mid-single digits, and then you said double digits in January. Are you seeing improvement in all markets, all categories? What do you think is happening from an underlying business perspective?

So it's a very good question. I'm glad you asked it. The easiest way to respond is, we have 3 regions, right? So we have 200 -- call it, 270 stores, slightly less than that. And let's assume there's 90 stores in each region. The West [indiscernible], which is dominated by California, but not entirely California, has been strong, continues to be strong. It did see sequential improvement between the second and third quarter. The North region also saw a sequential improvement and was almost flat and, frankly, has one particular store that's a drag because it's downtown Nashville. And without that store, probably, it would have been very, very close to flat, but also saw a very nice sequential improvement from the second quarter to the third quarter. And that leaves the Southern region. The Southern region is where many of the investors and analysts ask about Texas. That's where Texas resides. And while the Texas business in the Southern region continues to be a negative comping business, the sequential improvement between the second quarter and the third quarter for the Southern business was more sequential improvement than either of the other 2 regions. So we're certainly not out of the woods as we look at West Texas and the oil pressure there or some of the softness we might see in a market like Houston, but it does seem like we might be the beginning of the bottom or maybe even of a rebound. Rig counts starting to improve, the price of oil has improved from $40 to $50 over the last several months. So we're hopeful that going forward, we'll eliminate the headwind of COVID, concerts and rodeos will come back on, the oil pressures and the pressure in the oil markets would subside, and we'll cycle easier numbers. So there's some real wind in our sail going forward.

It sounds like it. and then last question, just from a margin perspective. So on gross margin, what's your comfort with inventory exiting the holiday? And how best to think about continued drivers of merchandise margin going forward? And then just on the expense front, any change to the historical leverage point in terms of flow-through in the model?

So on the first point, we feel great about the inventory, right? I mean in a convoluted way, right, we had a little bit less inventory than we wanted and sales exceeded our expectations. So we're exiting the quarter extremely fresh. We haven't announced our inventory balance, but I think you should expect to see roughly a 10% reduction in our comp store inventory when we come out with our quarterly results or somewhere in that neighborhood. And again, it's fresh. Our aging is in a really great place. We see very limited concerns from a markdown standpoint, and we see some really nice positives going forward. Exclusive brands will reengage. We think that 80 bps in the most recent quarter was an anomaly. And maybe not in the fourth quarter, but certainly going forward, we'll see 2 or 3 points of penetration. That will give us some tailwind. We continue to be pleasantly surprised that we can eliminate sales and promotional periods and drive higher-margin rates. And then finally, the work that the e-commerce team has done across both brands, bootbarn.com and Sheplers, but really on the Sheplers' side, we have another 6 months to go before we start to cycle the change in promotion on Sheplers. So that's another sort of tailwind to margin, both merchandise margin and EBIT margin. On the leverage points, I think the leverage point is consistent with where they've always been pretty much...

Nothing structurally has changed.

So I phoned a friend, and Greg is saying nothing structural has changed from the -- our typical leverage points. I think that's 1 to 2 points on the SG&A and 3 to 4 on occupancy. Is that right?

Yes.

Perfect. I think that's a great place to leave at. It sounds like a tremendous amount of momentum and a laundry list of initiatives. Thanks for all the time. And I think that's all we have in the question queue.

All right. Very good. Thank you very much, Matt. We appreciate it.