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

Good morning, and welcome to another session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach and I cover the apparel and accessories brands here at Goldman. I am very pleased to introduce our next session with Boot Barn Holdings, Inc. Here with me today is Jim Conroy, President and CEO; and Jim Watkins, CFO. Welcome, Jim and Jim.

Thank you so much.

Jim Conroy, would you like to kick it off with a few opening remarks.

Sure. Happy to. It's a pleasure to be here. Thanks for everybody, for attending. A quick overview of the Boot Barn concept for those that may not be familiar. We operate in an enormous retail market that we often say is hidden in plain sight, certainly not visible from Battery Park in New York. It's roughly a $40 billion total addressable market. We are, by far, the industry leader. Most of our competitors are small amount and pop. So it's a very large industry, and it's extremely fragmented. Quickly kicking through our 4 strategies that have been in place now for over a decade, the first one is build new stores. We've gone from 86 stores to 365 stores in the last 10 years. And even now, we're in the early innings of our growth. So we think we can get to over 900 stores across the country. Our new store Pay back is extremely compelling at less than 18 months. Our second initiative is building out our omnichannel. We often call it omnichannel as opposed to e-commerce because e-commerce for us is only about 10% of sales. And what's almost more important is the integration between the 2 channels and what we really leverage is the fact that we have a national chain of retail stores to help support our digital channel. Our third initiative is same-store sales growth. When we think about same-store sales, when I first got to the business, our average unit volume was $1.7 million, and it went to $2.7 million. Now it's $4.5-ish million, so we've been able to grow same-store sales for a decade pretty consistently with a very, very nice inflection, 2 years ago, where our average store went up 57%. And then our fourth initiative is our exclusive brand business. 10 years ago, our exclusive brands were 2% of sales. Now they're almost 40% of sales. We have 10 different brands, they're all growing in their own right. And the nice thing about the exclusive brands is they give us some competitive differentiation and, of course, they're margin accretive. So when you put all of that together, we're sitting here with 365 stores with the ability to get to 900 or 1,000 and we have the ability to continue to grow comps and exclusive brands. We have multiple levers of ongoing sales and margin drivers.

That's a great introduction. Perhaps we could kick it off with a conversation on current trends and what's happening in the macro outlook today. How would you characterize the health of the Boot Barn customer today? And are you seeing any new trends or shifts emerging as you navigate the fall and back-to-school season?

Sure, sure. I think the Boot Barn customer, the single thing that we worry most about is unemployment in blue-collar industry and there's a lot of dialogue around how unemployment is increasing slightly perhaps. But today, for most of our big industries, the Boot Barn customer is pretty solid. In terms of more specifically around back-to-school, the summer period of pretty low sales period for us. We don't have a big back-to-school business. What we're looking forward to as we get into holiday or we get into our rodeo season, which is February and March of next year, which is where more of the volume comes from.

And as you think about that business, how important are certain trends or items like weather, concerts, gas prices, other factors that drive volatility. I know there's been a little bit of comp volatility in your business the last couple of quarters. Curious if you can elaborate on that.

I think when you look week to week or month to month, we will see swings when a big country music artists comes in or when we cycle a big country music artist last year. Or if we have inclement weather that tends to be good for business, very hot weather tends to be bad for business, we think that kind of self-corrects over a period of time, which is why we generally don't focus all that much on it. And as we look at our most recent quarter in terms of trends, we called out that our ladies boots and ladies apparel business had declined a bit. But when we think about that business over the last few years, it had grown over 100% in sales on a comp basis 2 years ago. And to give a little bit of that back, we actually didn't think that was a decline in the trend, just maybe a little bit of a give back of very outsized growth.

Talk to us a little bit more about that ladies business, but maybe for Boot Barn in total, how do you think about assorting between fashion and function? And where are you seeing that growth over the medium and long term?

Sure. The vast majority of our business is functional in nature. If we were to simplify the company into 3 buckets, the first one is our work customer. That's steel toe work boots, flame-resistant jackets, car hard product, those types of items. And all of that business is functional. The second big chunk is men's western boots and apparel. And while some people believe that, that is something that is discretionary for most of our core customers, they're wearing denim and cowboy boots and cowboy hats because they're working outside, they're working with horses, they're working in agriculture. They're working in the oil industry. And while we call by product western, they view it as part of their sort of work uniform, if you will. And that leaves the last 1/3 of our business, which is to Brooke's question, the ladies business. Ladies boots plus apparel is about 20% of total sales. About half of that 20%, I would put with the first 2 categories are very highly functional. We have plenty of female customers that work outside, ride horses, work with horses and need products that they will wear through and our best-selling ladies cowboy boots are brown, distressed leather performance old boots. And what remains is this bit of fashion that does tend to ebb and flow over time. I would say we were in a fashion cycle and a tailwind over the last couple of years and now facing a little bit of a headwind from that perspective from a trend perspective.

One of the questions that we're asking most companies at our conference today is one on share of wallet and the outlook for driving higher spend in the core categories that you operate in relative to other areas where the consumer could be spending those dollars such as entertainment or going out. As you look into next year, what's the one most important factor for driving growth in your core categories in your view?

I would give you 2 answers, I suppose. One is we continue to believe that there is a new customer acquisition strategy as we've gone from a pure western customer and expanded around that circle, if you will, to a more country casual lifestyle outdoor customer and while that has provided some growth over the last couple of years, we think we're just getting started in inviting that customer into the Boot Barn brand. I'd say the second piece maybe more tactically is we're really now trying to build the basket for each consumer that comes through the doors. So we are tracking and have been doing this for a while, but really focusing even more attention on. When someone buys a pair of boots, are they always buying boot care. When someone buys a pair of jeans, are they always buying a belt and how can we link up boot purchases with apparel purchases, so we can make the most of the customer traffic that we see in the stores.

Let's round out this discussion on the consumer before we move on to some of your strategic growth initiatives. One of the questions we're asking all companies at our conference today is how they view the consumer backdrop into next year. Do you see the consumer facing more headwinds or fewer headwinds compared to 2023? And how are you thinking about the potential impact from trade up or trade down among your core customer income demographics?

It's a very difficult question, and everybody, of course, is trying to forecast that our view is that the consumer has had a lot of pressure in this year in the most recent 12 months that some of that will abate, right? So our belief that we'll be in a disinflationary period for the next year or so, that might free up dollars to spend on goods or on services. We don't believe unemployment is going to spike meaningfully. So I think there'll always be some macro noise and some macro pressure, but I don't think it will be any worse next year than this year. In fact, I think it will probably improve slightly. What was the second part of your question?

Trade-up, trade down?

The trade-up trade down part of our equation has been -- has bucked conventional wisdom a little bit. Some of our best-selling categories are higher price points. And I know that flies in the face of what a lot of other folks are calling out. One example of that is men's exotic skin cowboy boots is the most expensive item in the store, and it's probably one of our highest growth businesses. We haven't seen a significant trade down in price point. Our AUR continues to be growing year-over-year. So we're cognizant of the fact that we want to make sure we have an alienated, a moderate price customer over the last couple of years as our retail prices have gone up. So we're ensuring that we're building in the bottom part of the assortment. But we haven't been able to point to a data-supported trend where customers have traded down.

That's great. Let's dive into your strategic growth drivers. The first pillar you mentioned was the new store fleet expansion, which has been something that you've been doing for quite some time. What gives you confidence in your ability to continue to grow the fleet at the current mid-teens rate? And then maybe we can bring you into the conversation as well. Can you elaborate a little bit more on the financial aspects of that, whether that's new store productivity, operating profit, payback periods, et cetera?

Sure. I think I can take both parts of that, if that's okay. When we first went public 9 years ago, we had a new store target of Pay back in just under 3 years, sales of $1.7 million for those new stores. And we were able to deliver on that over the last several years. Coming out of the pandemic, we saw those new store sales increased to $4 million, and we're paying back in just over a year. And as the sales of our the average unit volumes of the rest of our chain also increased in the plus 57% comp that Jim talked about earlier. And then over the last couple of years, that's continuing to be well above $3 million and paying back in just under 1.5 years. And so I think the track record that we've seen has really encouraged us. We did a study a couple, I guess, it's been almost 2 years ago now, where we revisited our new store potential and increased that to 900 stores, and that was based off of a couple of factors, one being the way we've been able to expand into new markets and how well those stores have done into new markets and as we've filled in existing markets, including some of our most mature markets in California and Texas and seen relatively little cannibalization in those markets has given us confidence that we can continue to grow new units to the 900 store and do it at a nice economic -- with a nice return on the capital, a very nice return.

Are there any constraints or factors in your ability to source real estate in the current market, particularly for your most desirable markets in the most desirable locations or any other constraining factors on how fast you can grow the fleet?

Yes. So again, we initially set out to grow new units 10% every year, most recently in the last 1.5 years or so, we've increased that to 15%. We feel very confident about the 15% new units this year. 52 store openings. As we look into next year, I mean, there is talk about rising interest rates and what that does for real estate availability or at least the cost of that available real estate. And then also, we have seen some competition from other high-growth retailers who are looking for similar space. So we'll evaluate that. Do we think that, that will be less than 10%? No. We think it will be continue to be above -- well above 10%, probably closer to 15%, if not 15% as we look to next year. But as we guide next year in 5 or 6 months, we'll give you a better answer on that.

You've also experimented with some larger-sized stores the last couple of years. What additional opportunity do you see in new or alternative formats?

Yes. So we have grown our new store target to be from 10,000 -- roughly 10,000 or 11,000 to 12,000 to 14,000 square feet. We've seen really nice successes. We've increased the store size. We haven't done a whole lot to change the assortment, but we have added to that assortment. We've created a new store prototype that you'll see with everyone of our new stores that we roll out now. As far as our desire or our need to expand into a different concept, whether that would be a work-only or western-only or something different than the norm from what we've been doing, we've just had such a nice success. We have a nice -- a lot of white space to grow to that 900 stores, the need to vary too much from that is not really there. So we may -- we do have the flexibility to increase our square footage of the size of the box that we take over, whether that's up 10% or 20% or down 10% or 20%, depending on what's available in the real estate market but varying outside of the model that's proven to work so well for us is not something we need to do.

And what about cannibalization if you continue to fill in certain markets? Are you seeing any emerging signs that the rate of cannibalization may be changing relative to your historical model?

Not really. We -- when we go to real estate committee and approve the deals and underwrite them off the sales volume, there are markets where we know we'll have some cannibalization on existing stores but it's nothing more than what we had anticipated when we opened the stores. And again, we increased our total target for stores from 500 to 900 stores largely in part to the lack of cannibalization that we're seeing.

Comps this year have been under a little bit more pressure. If you do continue to see a lower rate of comp relative to your long-term aspirations, how does that impact your view of the pace or the timing of store rollout?

I think it doesn't really impact us too much. As I mentioned earlier, the stores are paying back in roughly 1.5 years. We set out at the IPO to open -- to have a payback of 3 years. If the sales were to come down and we opened those stores even at $3 million or $2.5 million are still paying back in less than 3 years and probably closer to 2 years. That's a great return on our capital, even with negative comps. Again, we've guided the year after a plus 57% and a plus 2% in the stores. And this year, we're the high end of our range of minus 3.5% in the stores is still really generating a lot of cash for the company and allowing us to invest more into the new stores and get that nice payback.

That's great. Let's move to the second pillar of your strategic growth plan, which is to drive same-store sales growth. Can you talk a little bit about the new customers that you have recently acquired to the brand and how they may have differed from your prior customer demographic. What are you seeing in terms of retention rate, loyalty program engagement and how does that loyal customer differ in terms of traffic ticket basket size or conversion relative to your new customer?

Sure. Great question. Giving a little bit of a history lesson. We originally embarked on a plan to open the aperture to bring in new customers a few years ago when we were a little bit more single threaded through a Western customer, our Texas business, there's a lot of talk around how connected we would be to the oil industry. So in response to that and with the opportunity for us to just grow the size of the prize or the size of the market, we said, let's diversify our customer base. The first thing we did is we started opening up stores in many more states across the country and got some geographic diversification. Then we said, all right, can we diversify away from a pure western or work and western customer and add a little bit of a fashion customer, a little bit of a country lifestyle customer. And over the last few years, that's what we've been focusing on. So when we look at the big step-up in our average unit volume, it's mostly due to new customers that then begs the question that Brooke is bringing to the forefront is, well, how do they behave differently. Fortunately, the new customers that we've added to the fold, shop with roughly the same frequency as our legacy customers. And for us, that's not that often. It's 2 or 3 times a year. They're also spending roughly the same amount per trip, so a little bit over $120 per trip. So we'll continue to focus on how those trends change over time. But what we're quite encouraged by is the influx of new customers over the last couple of years have now proven to be loyal and sticky to us. And we haven't lost them back to the places where they used to shop. The share that we took partly came from within the industry and partly came from more mainstream retailers. So as we came through COVID, we kept our stores open. Most of retail, unfortunately, had to close. And that gave Boot Barn this opportunity to bring on more customers with a pretty low customer acquisition cost and any customer that needed a pair pants or shirt or footwear, we were open and a lot of other people were closed. And while that was a very unfortunate reason for it to happen, as we look back upon those events, we've now gotten a customer database that has grown almost 20% every year, and those customers seem to be loyal to Boot Barn.

Can you elaborate on how that bridges to your current outlook for same-store sales? What assumptions are embedded in your outlook this year for same-store sales growth, particularly given some of the recent inflection in comp that you saw this summer and the easing comparisons that you see in the back half of the year?

Yes. So we really -- when we guided the year at the beginning of the year, we looked at the most recent sales volume, February, March and April, and we took those sales volumes and we looked at historical sales curve of the business for the balance of the year, and we projected that through the rest of the year. And so that's what's embedded in the back half of the year. We didn't change that when we reported our Q1 earnings that was 5 weeks ago. And for the second quarter, we've guided August in the stores down 4, September down 4, and that was based off of the July sales trends that we saw. So on that first quarter call, we did talk about business being a little bit choppy, and we think that's reflected nicely in our guidance. We didn't change that back half guide, and so that may be a little bit conservative for the second half of the year, but feel good about where we've got that same-store sales guidance.

That's super helpful. Emerging exclusive brands for the Boot Barn business has been a big growth initiative for your business the last few years. Where do you think -- how do you think about the opportunity for incremental penetration going forward on your target of 3 points per year. What are the most important drivers of that penetration? Is it pricing? Is it mix? Is it category expansion? And is there a scope for these brands to be even more margin accretive than they are now?

Sure. So a few things embedded in that question that we'll try to tick through. We were -- you're 100% right that we called out 2.5% or 3% of ongoing penetration growth each year. And for the last couple of years and this year, we'll exceed that, right? So we'll grow 5%, 3 consecutive years or more. And that really has bolstered the profitability of the store and our merchandise margin rate, et cetera. I think that will probably then start to moderate going forward to 2.5% or 3% of penetration. In terms of where that growth will come from, we have 10 different brands and it's a bit of a portfolio, if you will, with some more mature brands, Cody James or Cheyenne or Idyllwind and then newer brands that are just getting started that we're nurturing. And where we tend to see growth is we'll start a new brand relatively narrowly, find what's working, what's resonating with the customer, and then we'll expand into broader sizes or adjacent categories. And that's how we tend to see the growth going forward. We from a pricing standpoint, our exclusive brands tend to be very much on par with national branded partners. So we don't try to undercut, we're not trying to be the value price alternative to the real product. And by doing so, we really commit to putting the highest quality product on the shelf. So the last part of your question was around the 1,000 basis points of margin accretion. There's certainly a scenario where we could grow that beyond that -- beyond the 1,000 and perhaps that will happen over the next couple of years. But our highest priority is to -- we do want to maintain that buffer, that 1,000 points, but we really want the product to continue to be the best available product. So we don't end up in a situation where we're putting out "inexpensive knockoffs" with the real thing. And particularly as we nurture these new brands, we want that product to be best-in-class so that first trial by a new customer is one that is compelling for them and is attractive for them, so they continue to come back. And then over time, we'll do some of the things that we will be able to do as a more mature retailer, where we can preposition denim across multiple categories and look at purchasing leather and skins for our boots earlier up in the supply chain. But right now, we're focused on demand creation, the best product that we can make. That does give us 10 points of margin accretion.

On pricing, one of the questions we're asking every company at our conference this year is how they're thinking about that into next year. Do you think that you have scope to raise pricing, maintain pricing? Or do you think you need to lower pricing next year, given some of the inflationary pressures that you are seeing in the industry?

I would say -- you can add -- like I would say we're sort of in a steady-state mode right now and we'll maintain of those 3 choices. Honestly, I think if there's any trend or any movement in our retail prices, we'll probably look for opportunities to reduce in certain areas if the input costs have come down. Input costs could be raw materials, are the biggest one over the last couple of years, of course, has been [ free ]. And as those start to show any disinflation, a, to be competitive and b, to just provide the most value we can to a consumer, we'll probably bring some prices down. I don't expect that to be meaningful enough that it bubbles up to our consolidated financial statements. I don't think that will be something we'll be calling out as a big change in our business.

And as you think about inventory, where do you think the industry-wide levels of industry -- of inventory are for your category in aggregate? And how does that compare to your inventory outlook for the rest of the year?

We feel really good about our inventory and the weeks of supply that we have in our stores. I would say the supply chain disruption we've seen over the last couple of years seems to have moderated. We're -- where other retailers and us for a short period of time didn't have enough inventory, we were able to get in stock. We're really getting stock probably quicker than a lot of our competitors and then what we've seen happen is the suppliers have kind of gotten the stock and maybe overstocked in some instances. And so I would say we're in a better place than some of our suppliers who may be oversupplied on inventory. What's nice for us is that we do have shorter lead times on getting that inventory and allows us to operate a little more efficiently, have a little more left open to buy as we head into more near term compared to what we've had the last couple of years. So we feel really good about it.

You talked about supply chain, and you've guided for some improvement in freight and supply chain costs into the back half of the year. Can you quantify that freight benefit that you expect to realize? And then help us understand how much of that supply chain and freight benefit is still on the table into next year.

Sure. Last year, we called out 100 basis points of headwind in freight expense. This year, we expect to get all of that back, Q1 and Q2 being flat year-over-year in freight and all that benefit coming in Q3 and Q4 of this year. It kind of depends a little bit on where freight costs go from here as they seem to be staying pretty low as we head into the fall months here. And so there could be a little bit of benefit in the next year. But right now, I'm not planning on benefit. Into next year, maybe a slight benefit. We'll have more on that in the next couple of months.

And on SG&A leverage, where do you see the pressures abating? And where is the biggest opportunity for additional leverage?

Yes. So I think as we leverage our SG&A at a positive 2.5% same-store sales growth. And so as we get back to positive comps, it will be helpful to getting SG&A leverage. We can lower that a little bit as some have talked about wages coming down potentially in the next year or 2 compared to what we've seen with the inflationary wage pressure over the last several years. If some of that abate, that would be helpful to us in the stores. We've also seen increases in other input costs whether that's medical insurance or other insurance and different things. So if we can get some of that to abate, that would be a nice benefit to our SG&A.

Let's put all these margin drivers together and put a bow on it. Help us frame the normalized margin opportunity of the business and the path to achieving that level. What are the key levers? What levers are in your control? And what are the drivers that are just a function of the outside environment.

Sure. So we've guided this year at the high end of the range to be an operating margin in the high 12%. We think we can march back towards a 15% operating margin over the next coming years. The drivers, I would break into maybe 3 pieces: merchandise, margin, expansion. We've got a nice opportunity to continue to grow our merchandise margin through exclusive brands, we've grown merchandise margin of around 500 basis points over the last 5 years. I don't expect that to continue going forward, but we do expect merch margin growth as we move in the next couple of years. As we return to positive comps, leveraging the buying occupancy and distribution center fixed costs, there's a nice opportunity for us to help the bottom line and grow the overall operating margin. And as we just talked about in the SG&A expenses, I think if we can get some relief there, you return to positive comps and grow the top line, there's some nice opportunity to get back to that 15% over the next couple of years.

We've got a couple of minutes left. So let's hit on a few hot topics in retail. First is shrink. We've heard from several retailers this season that it's been an issue. What are you seeing here? And if it is an issue, how are you addressing it?

Sure. We haven't called out shrink. Historically, our shrink has been pretty low in our stores. We're not seeing a pronounced increase in theft in the stores. It's something that we continue to monitor. We do put security guards in some stores, if it's a higher shrink store or a higher theft store, or hiring an employee that we put at the front of the store and to greet people as they come into the store. It's something we'll continue to monitor, but we haven't seen a lot of the theft problems that others are seeing, at least in not in an elevated manner.

The second hot topic is consumer credit and student loan resumptions. How are you thinking about the impact of these industry trends to your business?

Yes. There has been a lot of talk about the student loans, particularly coming due as we've looked at the customer profile of our customer, and they tend to be a little bit older than average. And so it's got those loans paid off and we tend to service the blue-collar workers that works extremely hard and needs our product, not necessarily highly burdened with a lot of credit card or student loan debt, I should say. So that's something that we don't see having a meaningful impact to us as those payments are coming due. And then as far as consumer credit goes, our customer tends to pay with debit card and with cash, about half of our transactions are paid for with the debit card, about 20% to 25% paid with cash. And so that leaves about 25% or 30% credit card. So I think it's lower than what we see at other -- what you'd see at other retailers, but it's something we'll watch and monitor over the coming months.

And then finally, how are you thinking about capital allocation? How do you manage your strategic investment pace versus returning cash to shareholders?

Yes. So we've got a really nice model with the new stores we talked about and the return on cash, we're getting to the point where we've got our long-term debt paid off. Our line of credit is getting close to 0, and we're going to start generating some really nice cash flow for the time being. We're okay maintaining that cash on our balance sheet. It's something we'll look at over the next couple of years, whether that's a share buyback or returning some cash to shareholders. But right now, our focus is on new store growth and being conservative with how we manage our balance sheet, particularly in this environment.

Excellent. Jim, any final closing comments?

No. Thank you very much for having us, and appreciate everybody attending this morning. Thank you.

Thank you, Jim. Thank you, Jim, and thank you for everyone in the audience for tuning in.

Thank you, Brooke.