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

Yes, it should be very similar to what we had in the first half of the year.

Okay. One of the other ways you guys stand out, at least to me, is the way you talk about freight management and expense management around freight. You spoke earlier about how you've renegotiated your contracts, you've actually found room for tailwinds in freight, whereas everybody else seems to be reporting pretty serious headwinds. How much of that was driven by scale specifically? And does that open the door to any other opportunities for savings with other partners as it pertains to finished goods, tech, advertising, anywhere else you can leverage scale?

Yes, all of those things. Anywhere we can, we're revisiting contracts, working with suppliers and vendors to get better rates as we grow and we've doubled our sales over the last 5 years or so, we have more purchasing power, and that's enabled us to get better discounts. And we've gone back to whether that's a third-party vendor who's selling product to us or boots to us or in the situation we're talking about freight, it's going back to the logistics partners internationally and domestically and renegotiating those rates where we can. And so getting better discounts is really a part of what we're going after right now. And for this year, it's been very beneficial to us. We renegotiated some contracts a little less than a year ago, and we're seeing the benefit of that now where we've got some discounts that year-over-year are allowing us to offset some of the wild fuel increases that we've seen more recently. And so anywhere we can, we're looking for opportunities to use the scale and the size that we've grown to, to get better rates.

Okay. That sort of feeds into the question about comp leverage points and how that informs margin, things like that. I guess how do you balance the pursuit of new door growth with the resulting occupancy deleverage? Obviously, the new store growth is very productive, but I'm curious about that dynamic. And then are there opportunities to offset costs elsewhere in the margin structure or to expand the margin elsewhere that could help address the magnitude of deleverage? And how would you characterize the dynamism or whether or not -- how static or variable they are at the 12% to 15% expansion from a store growth standpoint?

Yes. So we really -- every store in the chain is 4-wall EBITDA positive. And so as we open -- we've opened roughly 100 stores over the last 12 months. And so that's a really nice model for us to generate some additional profit dollars as we've got those stores open. If you look at our leverage points and the profitability, we -- this year, if you exclude the tariff refund benefit for a second, we leverage -- we expect to leverage our operating margin at a 3% comp, and we've guided the year at the high end of the range at a 4% comp. So expecting to see some nice EBIT margin expansion of roughly 30% at the high end -- sorry, 30 basis points at the high end of our range, excluding tariffs. And so yes, there is some deleverage related to opening that many new stores. And when a store is opening at 75% productivity of what a mature store does, and that just creates some pressure on that line. But if we look back at the last 6 years, we've grown our merchandise margin rate more than 600 basis points or 100 basis points a year. This year, we've guided that at 60 basis points. And so that helps us offset almost all of that buying and occupancy deleverage. And then at the operating expense line, at a 1.5% or 2% comp being able to leverage those expenses is something that allows us to get that EBIT margin expansion. So it doesn't really play into the equation when we're looking at new store sites and the number of stores we're going to open, it's really looking at that -- those individual stores and what does that add to the portfolio of stores and how does that help us grow profit as a company, not necessarily concerned about the occupancy rate for those new stores because we know that over time, those will fix themselves as they grow and mature.

Right. To new stores, I think you've spoken before about how new stores have been performing better over time. I guess what exactly is driving that? Is it a matter of assortment? Is it layout? Is it anything that can be retroactively applied to the legacy fleet over time?

Yes, it's a great question. If you look back to the IPO, we've grown the volume probably almost double what a new store used to do coming out of the gate versus what it does today. And I think there's a variety of things that goes into that. I mean the brand is stronger. The store operations team has learned quite a bit, and they do a phenomenal job, the merchandising, all the things that the marketing has been elevated. And so all of that helps the new store opening. But then really, the site selection is also very key to that. We've had some minor shift, I guess, in the sites that we select over the years, we're more into a power center with other stronger tenants. If you went back 10 or 15 years, we're opening up the side of the freeway on an easy access for the work customer going to and from the store. And so I think being a little bit more in that mainstream center has been very helpful to us. And so finding the right site has been something that's key to that strategy.

Okay. Perhaps this is related, but you've also mentioned that the new stores operate with, I think the language was controlled costs, more controlled costs. I'm curious about how those efficiencies have been realized. And similarly, how retroactively could that be adopted?

Yes. So yes, we're controlling the cost. We've been negotiating, again, back with vendors, but fixture vendors and with the general contractors that we're putting out multiple bids and trying to keep the cost down there. About 1.5 years ago, we started implementing some efficiencies on the building management system and making sure that we're being efficient on the utility costs. And so there's some upfront costs that we put in the store that pays back in 3 years or less and is good for the environment. So that's been helpful on the cost side of things. Retroactively, we are going in and implementing that in some of the stores. And back to your earlier question, we do a number of relocations of stores every year. And so as leases expire or get close to expiration, we're looking at opportunities where maybe the market has shifted within a certain area. And if we can be in a better location, we can see a pretty nice comp lift in those stores. Particularly, we're looking to relocate stores that are already outperforming the chain average. And if we can get those into an even better market or part of the market, then that's been a nice win for us. We're also focused on the fleet and making sure that we've got all the necessary repairs and the uplifts and whether that's paint and boot fixtures and flooring in a lot of stores or it's a bigger remodel. We want to make sure we've got the right balance there. So there's some opportunity that we have to either lift the comp or at least keep the stores brand right as we're building the brand across the country.

Got it. Okay. Maybe turning back to some of the category specifics. In the women's business, which we touched on slightly, I'm wondering what differs between today's environment in that category? And maybe how is it different than fiscal 2024 when you guys are up against many years of building comp in the ladies Western boot segment?

Yes. The women's Western boots, the place where we are a little bit softer is in the leather bottom boots. So these are boots that have a leather -- not the shaft of the boot, but the actual sole of the boot is leather versus, if you imagine a rubber-soled boot. And that's where we're seeing the challenge. So it's more on a traditional western silhouette, a boot that is handcrafted in Mexico. And that's, in some ways, we can react quicker and get down to our factories in Mexico from an exclusive brand standpoint and ramp up production and try different styles. So that's kind of where we're -- the merchandising team is kind of hustling and working to improve the women's Western boot business.

Got it. Pivoting to work boots. I think this is kind of a pet project of yours, right? I guess can you dive into what the company has done specifically to get -- to generate, I mean, 5 consecutive quarters, at least of growth in the work boots category. Where do you envision that category going into as part of the total business over the long term? I guess, maybe the data center thing plays into this.

Sure. It absolutely does. At our last count, there were 2,100 data centers being built in some fashion right now domestically. So it will be somewhat of a tailwind to the work business. We did 3 things to reinvigorate the work business. We changed the way we merchandise boots. They were merchandised by style, not by size, and this was a heavy lift, but we remerchandised every single store. And so if you're a size 9, you walk in and you see all the size 9s that are lace-up or all the size 9s that are pull-on by safety toe, non-safety toe, which made it easier for the customer, and we kind of scratched our heads and wondered why we hadn't done it sooner. But the secondary effect of that was the store partners became so much more comfortable selling work boots and being in the work boot aisles. The way that work boots used to be merchandised, if they didn't have the style the customer was looking for and they normally come in and say, I want another pair of these is typically what would happen with work boots. They would have to then know something about the next style over and the style after that and be able to speak to it. And it's intimidating. I have been in stores and have done it. Now they can take the customer and go, I'm sorry, we don't have that particular style, but here are all the other size 9s, which one of these appeals to you? That conversation gets so much easier. So we're thrilled with that piece of it. We brought in new brands and new styles from third parties that are performing incredibly well in work. We've built up the sales team on Workforce, and we continue to see that B2B business grow. And then we have been leaning more towards country, and I'm thrilled that we did it, but we were focused on that country lifestyle customer for a few years and the fashion customer before that. So from a marketing standpoint, we've now pivoted to some true blue-collar kind of trades marketing. When I think about the Boot Barn customer and kind of the legacy of Boot Barn and how the customer views us, I want them to be proud of the work they're doing and the life that they are building. And so much of our advertising revolves around the pride in being a tradesman and working in anywhere in the trades, whether it be in energy or data centers or traditional construction.

Okay. Pivoting to denim, you mentioned a little bit about the fashion versus work. I know that denim is one of these nebulous categories where it's used both at work and it's used also as fashion. But as Boot Barn becomes more of a denim destination, I guess, how quickly can the business respond to the fashion winds, I guess, given that like silhouette preferences and cuts and things like that shift. There's probably -- I mean, I assume a geographic kind of preference. So it seems like quite like a complicated checkerboard that shifts around.

It can be. To break down our denim business or our apparel business, men's apparel is roughly 20% of our business. Women's apparel is roughly 10% of our business. Within women's apparel, half of that is denim. So roughly 5% of our overall business is denim. If we looked at that denim, we have had some new styles come in that are a wide leg trouser, a riding jean, but in a wide leg silhouette, but it's 1 or 2 styles. If we looked at that 5% of our business on the women's denim side, 90% of it is traditional boot cut jeans. And denim is having a moment in mainstream. I was doing my own channel checks a few months ago, and it's kind of a sea of sameness of everyone selling -- everyone from Walmart to Target to all the typical teen denim retailers selling that wide leg denim. It was kind of everywhere. But we are rooted in Western lifestyle and Western culture, and most of what we sell is still boot cut. So we'll get some freshness in there, to be sure. And we've got some great new silhouettes, but it's a tiny, tiny piece of our business.

Okay. I guess keeping with the theme of the fashion versus the replenishment-based shopper, I guess to the degree you can disaggregate between the 2, how would you characterize the replenishment cycle for a work boot or a work product versus the purchase frequency of a lifestyle customer?

Sure. The purchase frequency is similar. We say that we know that our customer shops roughly 2 times a year. That work customer, again, because I've seen it personally, it's usually a typical tradesman he comes in and he throws the boots on a counter and says I want another pair of these. So theirs is very much the same product in many cases, over and over again. When it comes to Western or country lifestyle, the denim is very much replenishment in the Western side of things. Folks keep buying the same styles over and over again from all the traditional Western denim retailers. And then I think that second purchase on the Western side is we've really become a little bit more of a lifestyle retailer, a little bit more of a one-stop where that customer can come in there and they can get a sweater, a pair of jeans, outerwear, boots, belts, hats, accessories, pick a category. And so it's twice a year for both the work side and more of the Western or lifestyle side just for very different reasons.

Okay. It sounds like you're alluding to the idea that the basket has expanded, the number of items per purchase has expanded. I heard you guys speak a little bit about the trade-up that you guys try to do in store. If you could expand on how exactly that's been disseminated across the stores and then how productive that's been?

Yes. The -- we're on with the field every week and every week, the field is focused and talking about units per transaction. So it's absolutely a focus of the field. It depends on the product. If we're looking at boots, the easiest add-ons are a matching belt or boot care. It's kind of a no-brainer. We have our own Boot Barn branded boot care that we retail. When it comes to jeans, you try to add a top. So we look at what is typically in a basket. We look at the basket composition from a transaction standpoint, and then we use that. We're going to be in Denver with all of our store managers next week, close to 600 store managers. And UPT is one of the classes that's being taught, and they'll kind of go through all the different -- if someone is buying this, they're typically also adding this, and it depends on what that first item is, right? So we coach the stores and the teams on how to drive that UPT up.

Okay. We have a little bit of time left. I think maybe we can get one question squeezed in. We haven't talked about exclusive brands may as well now. I guess if you could speak very quickly to the work you've done to grow that business, how you think about the balance between third party and your own and why 50% penetration is still the right?

Yes. We've seen incredible exclusive brand growth over the last several years. We're sitting just north of 40% at this point. The only reason we've guided it flat for the remainder of the year is the success we're having with work boots and the third-party work boots. If not for work boots, we would be continuing to grow exclusive brands. So the rest of the exclusive brand business is doing -- is performing quite nicely. We're a house of brands. We're a retailer. We have to have the brands that the customer wants. And we've created real brands with our exclusive brands. Cody James or Shyanne or Idyllwind can stand next to all the other brands in Western, and we're incredibly proud of them. But we have to acknowledge that we don't want to be only Boot Barn exclusive brands. And so 50%, I think, is the right balance. North of 50% makes me uncomfortable, but I'm fully confident we can get to that 50%, and that's where we're headed.

Fantastic. I don't think we have time for another question. We're not to run the clock either. I think that's enough for now. Thank you guys very much appreciated.

Thank you.

Thank you.