Boot Barn Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 2 Jun 2017

[Operator:]

Greetings and welcome to the Boot Barn Holding's Fourth Quarter Fiscal Year 2017 Earnings Conference Call. As a reminder this conference is being recorded. Now I'd like to turn the conference over to your host Mr. Jim Watkins, Vice President, Investor Relations and External Reporting for Boot Barn. Mr. Watkins, you may begin.

[Jim Watkins:]

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Boot Barn's fourth quarter and fiscal 2017 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Financial Officer. A copy of today’s press release is available on the Investor Relations section of Boot Barn's Web site at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's Web site. I would like to remind you that certain statements we will make in this presentation are forward-looking statements and these forward-looking statements reflect Boot Barn's judgment and analysis only as of today and actual results may differ materially from current expectation, based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter fiscal 2017 earnings release, as well as our fillings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. I'll now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

[James Conroy:]

Thank you, Jim and good afternoon. Thanks everyone for joining us. On today’s call I will be providing a review of our results, followed by a discussion around the key growth initiatives of our business. Following that, Greg will review our financial performance in more detail and provide our outlook for fiscal 2018. Finally, we will open the call up for your questions. Fiscal 2017 was a challenging year as the impact from low commodities prices in some of our key markets coupled with a general softness in the overall retail environment, pressured sales and earnings growth. While we were able to achieve slightly positive same-store sales growth for the year, our results fell short of our initial expectations. That said, we are pleased with the progress we made in strengthening our position of the leading western and work retailer in the U.S through investments in our digital channel, improvements in merchandising and our in-store environment, and new store openings that continue to deliver attractive financial returns. We're confident that these investments will set a foundation for sales and earnings growth over the long-term. Let's move on to our fiscal fourth quarter. Total sales increased 9% driven by an extra week of sales as fiscal 2017 was a 53-week year and contributions from the 12 stores opened since the beginning of fiscal 2017. This growth was partially offset by a 0.9% decline in same-store sales. While comps in our physical stores declined to low-single digits, we did see a modest sequential improvement in this trend versus the third quarter. This improvement was largely the result of sales in stores outside of markets impacted by oil and other commodities. During the fourth quarter, our commodity impacted states continued to face headwinds. Same-store sales at stores in Texas declined mid-single digits in line with incoming trend. North Dakota, Wyoming, and Colorado also declined mid single digits, which was a sequential improvement from the high-single-digit decline in the third quarter. Turning our attention to e-commerce. Over the past several months, we've been working to complete our new e-commerce platform. As a reminder, this new platform consists of a new frontend site and upgraded order management system and common back-end fulfillment operations. We expect this platform will enable us to achieve expense efficiencies and improved inventory productivity by consolidating operations of all of our e-commerce businesses as well as our in-store web platform. In February, we migrated the Sheplers.com business onto the new platform. While this transition is complete operationally, we have seen an unexpected decline in sales in Sheplers.com since the migration. This decline in Sheplers.com resulted in a deceleration of our total e-commerce sales to positive mid-single digits during the fourth quarter and negative mid-single digits during April and May, the first two months of our fiscal 2018 first quarter. We had identified the metrics that are underperforming and have a team comprised of both internal executives and outside parties focused on rectifying the issues. While we're clearly disappointed that sales have been negatively impacted post conversion, we believe that the new platform will benefit us long-term and we will continue to work hard to improve the site performance and return Sheplers.com to positive sales growth. Now turning our attention to merchandise margin. We saw a healthy improvement in margin rate for the quarter, particularly considering a difficult start we had in January due to outsized selling of clearance merchandise. Despite softer than expected top line sales, we did not see erosion in selling price and have not shouldered additional promotions. Although we saw improvement in our merchandise margin, the combination of slightly negative consolidated same-store sales and some unanticipated operating expenses resulted in fourth quarter earnings per share well below our most recent guidance. I'd now like to spend a few minutes discussing some of the exciting things underway that support each of our four growth initiatives. As a reminder, they are

[Gregory Hackman:]

Thank you, Jim. Good afternoon, everyone. I will begin by reviewing our fourth quarter results and then comment on our outlook for the first quarter and full-year of fiscal 2018. In my discussion, I will be commenting on both actual and adjusted results, excluding one-time costs to facilitate comparability. Please reference today's press release for all definitions and for a reconciliation of GAAP numbers to these non-GAAP adjusted numbers. In the fourth quarter, net sales increased 9% to $163 million. As Jim mentioned, our sales performance benefited from the sales contributions from the 14th week. The new stores opened and the new stores Boot Barn opened over the past 12 months partially offset by a same store sales decline of 0.9%. Gross profit increased 12.4% to $49.3 million or 30.3% of net sales compared to adjusted gross profit of $43.9 million or 29.4% of net sales in the prior year period. The 90 basis point increase in adjusted gross profit rate resulted from 30 basis points of merchandise margin improvement and an improvement in shrink of 50 basis points as we anniversaried the large shrink expense in the prior year. We also saw 10 basis points of occupancy leverage from the 14-week quarter. The 30 basis point increase in merchandise margin rate resulted from an increase in private brand penetration and volume purchases from our third-party vendors. We are pleased to have been able to maintain our pricing during February and March, which offset increased clearance penetration during the month of January. As Jim mentioned, we continue to drive merchandise margin improvement in fiscal 2018 by increasing our private brand penetration and volume purchases from our third-party vendors. Adjusted operating expense for the quarter was $40.1 million or 24.6% of net sales compared to adjusted operating expense of $36.2 million or 24.2% of net sales in the prior year period. Adjusted operating expense in the fourth quarter excludes $1.2 million of non-cash store impairment charges, primarily associated with two former Sheplers stores. One that is relocating due to the closing of an adjoining mall and the other one a Sheplers stores opened just prior to our acquisition, which has not achieved the financial performance anticipated. In the prior year period, adjusted operating expenses exclude the impact of acquisition related integration costs and the loss on disposal of assets. Adjusted operating expense in the fourth quarter was higher than we projected as a result of unanticipated store expenses, store repairs and maintenance, and outside services primarily related to transition -- transitioning and operating the newly acquired Country Outfitters e-commerce site. Our adjusted income from operations was $9.2 million in the fourth quarter of fiscal 2017 compared to $7.7 million of adjusted income from operations in the prior year period. Interest expense in the fourth quarter was $3.9 million compared to $3.6 million in the prior year period. Adjusted net income for the quarter was $3.3 million or $0.12 per diluted share compared to adjusted net income of $0.09 per diluted share in the prior year period and compared to our guidance of $0.17 to $0.20. Our earnings shortfall is attributed to a sales shortfall in our physical stores, unanticipated operating expenses, and a decline in Sheplers.com sales. GAAP earnings per share for the quarter were $0.10 in fiscal 2017 compared to $0.04 in the fourth quarter of fiscal 2016. Turning to the balance sheet. I’m pleased with our efforts to diligently manage our inventory which on an average store basis was down approximately 5% compared to last year. On a consolidated basis, inventory rose 7% to $189 million compared to a year-ago. This increase was primarily driven by an increase in our warehouse inventory used to support our private brand initiatives and our merchandise purchased at volume discounts as well as the increase related to inventory for our new stores opened over the past 12 months. Turning to capital expenditures. Our fiscal 2017 capital expenditures totaled $19 million. As of April 1, 2017, we had $226 million of debt outstanding, including $33 million drawn on our $125 million revolving credit facility. We had $8 million of cash and cash equivalents and our net debt leverage ratio was 3.7x. Last week we opportunistically took advantage of the favorable credit markets and amended our revolving credit facility, extending maturity of the credit facility two additional years to may 2022 and increasing the capacity of the credit line $10 million to $135 million. Additionally, we amended the financial covenant of our term loan increasing the total net leverage ratio maximum requirements for the next six quarters. These amended terms afford us the opportunity to pay down $10 million of our term loan and increase our interest expense without losing borrowing capacity on the line of credit. We believe these amendments provide us additional operating flexibility in our use of cash over the next few years. Now I'd like to turn to our outlook for fiscal 2018. We expect same-store sales to be flat to slightly positive. For modeling purposes, I want to point out that Country Outfitters sales will not be included in our same-store sales base until April 2018 consistent with how we treat new stores. Country Outfitters sales are expected to be approximately $10 million in fiscal 2018. We expect earnings per diluted share in the range of $0.52 to $0.57 per share based on an estimated weighted average diluted share count of 27.1 million shares for the full fiscal year. This represents income from operations of $37.8 million to $40 million. We expect net income for fiscal 2018 to be between $14 million and $15.4 million. Our fiscal 2017 adjusted earnings per share results of $0.55 include a $0.03 of earnings generated from the 53rd week of business. We estimate that our fiscal 2018 earnings at the high-end of the guidance range of $0.57 will represent 10% earnings growth over fiscal 2017 earnings per share of $0.52 when adjusted for the $0.03 of earnings from the 53rd week. We expect capital expenditures to be in the range of $15 million to $17 million with the majority related to investments in stores and in the [indiscernible]. We plan to open 12 new stores during the year with all but one of them expected to open in the second half of the fiscal year. We expect our tax rate to be approximately 39% and interest expense to be approximately $15 million. Based on our earnings per share projections of $0.52 to $0.57, we expect to generate free cash flow of $14 million to $16 million. As we look to the first quarter of fiscal 2018, we expect same-store sales to be flat over the prior year period. We expect our first quarter earnings per diluted share to be breakeven. Included in our guidance is $500,000 of one-time marketing expenses related to the re-launch of the Country Outfitters site that begin this week. Now I'd like to turn the call back to Jim for some closing remarks.

[James Conroy:]

Thanks, Greg. We are encouraged by our recent positive trend and we continue to be confident in our ability to execute on our four strategic growth initiatives to drive profitable growth and increased shareholder value over the long-term. Now I'd like to open the call up to your questions. Darren?

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matthew Boss of JPMorgan. Please proceed with your question.

[Annie Samuel:]

Hi, guys. This is Annie on for Matt.

[James Conroy:]

Hi, Annie.

[Annie Samuel:]

Could you provide some color on cadence within the quarter what you’re seeing in 1Q today? And then help us with the drivers to bridge to flater same-store sales in 1Q and then flat to up slightly for the full-year?

[James Conroy:]

Sure. In the -- within the fourth quarter and we had said this on our last call, we were -- had pretty solid same-store sales coming out of January. I think like a lot of other retailers, we got caught up in the decline in sales in February given tax refunds and we recovered a portion of that, but I don’t think all of that in March. So we had kind of a roller coaster fourth quarter as we went month to month to month between January and in February, and then into March. As we got into April and May, our business in the stores certainly has improved and the stores business has actually turned positive, which is very encouraging particularly given that we had a nice solid merchandise margin rate in the stores as well. Unfortunately what's weighing us down now paradoxically is since we’ve converted over to the new Sheplers site, we’ve seen -- first a deceleration in our e-commerce business and then a decline in this quarter, so we have to address that clearly. So when you think about the totality of the business, I’d see a bit more strength in stores, a portion of that is the oil patch. I see a solid merchandise margin rate, which is encouraging and I see what I hope to be a short-term issue with our e-commerce business since the transition to our new platform.

[Annie Samuel:]

Great. Thanks so much. And then, could you touch on productivity and returns that you’re seeing from some of your more recent classes of new stores. Maybe versus some of the metrics historically to give us some perspective? Thanks.

[Gregory Hackman:]

Yes, Annie this is Greg. The stores that we opened last year in fiscal '17 have been better than our three-year payback -- modestly better than our three-year payback model and that's roughly in line with the stores we've opened over the past three years or so when we started to ramp up new stores. So I'd call them in line with that -- less than three-year payback.

[Annie Samuel:]

Great. Thanks very much, guys.

[James Conroy:]

Thank you.

[Operator:]

Our next question comes from Peter Keith of Piper Jaffray. Please proceed with your question.

[Peter Keith:]

Hi, thanks. Good afternoon. I was hoping you could just give us maybe some more color around the new platform for Sheplers. It looks like the Web site, it has a different feel and look to it. Is it a shopping experience that’s not resonating? Is it a technical issue? I guess, not really quite sure of what the issue is? And then when you talk about addressing it, what steps are being taken to address specifically?

[James Conroy:]

On the first part of your question, the new site is I’d say modestly different than the old site in terms of look and feel and aesthetics. Yes, the Sheplers site was never intended to be a branding, pretty [ph] sort of aesthetically pleasing site, but instead a mega site that carries everything, is easy to search and competes on selection and price against the biggest e-commerce competitors, Zappos, Amazon etcetera. So while I think we've upgraded the aesthetics a little bit, we actually haven't changed the shopping experience all that much. In fact, what one small piece of good news and what’s otherwise been a pretty disappointing transition of that platform is conversion on a desktop platform has actually increased. We're getting hurt on the transition to the new platform is really in two fundamental areas. The first is our traffic has fallen off from an organic search perspective. Now, we expected a minor blip in SEO traffic as we converted from one platform to another even though we built all the links and the redirects from the old platform to the new platform, so we expected a couple of weak pickup, but it's been more protracted and deeper than we had anticipated, so the organic search problem has lowered traffic to the site both on desktop and on mobile. The second problem that we had and these issues are linked, which I will come back to in a second. The second problem that we’ve had is the conversion on our mobile site, on our mobile device, it's a responsive design site. So it's the same-site, but when a user is on the site on their mobile phone, conversion has declined, and we believe that the primary reason for that is the mobile site is slower, unfortunately that it was before the transition. So when a customer is on the mobile site and the experience is slower, they just exit, they just leave and either go to another site or they get distracted to some other activity, and we’ve seen the conversion on our mobile site getting worse, because of the speed we believe. And the way these two issues are linked is as your site is slower and you have a higher abandon rate, you then get penalized in organic search. So it's been a difficult 8 or 10 weeks as we're trying to solve this. What we’re doing to rectify it is a couple of things. We’ve got our internal team working on the organic search. They’ve reached out to two separate groups from an advisory or consulting perspective on organic search to see if there's something that were just flat out missing in terms of how we are tracking customers to the site through organic. And then in terms of speed of site, there is a couple of things we're doing there as well, the first thing we’re trying to do is make the code literally more efficient, so lighten the code base on the mobile site. We're looking into something now where the caching on the cell -- on the mobile site wasn't working properly. We think there's something there, I don't think that's going to be the silver bullet, but that was something that was slowing the site down and hurting conversion. So -- and we’ve got a couple of people looking at that as well. So it's kind of an all hands on deck to try to get this part of the business back to growth mode, because big picture, if we can get that platform for Sheplers to be working, it really enables us to do a lot more things. And the encouraging piece, if there is an encouraging piece here is Country Outfitters is on the exact same platform and its working extremely well. And that part of the business is at least meeting our expectations, if not doing a little better than that. So we’re going to continue to try to rectify what we’ve got with Sheplers and that the long-term plan is exactly, which is to bring all brands to the new platform with the same inventory, with same folks working on it, because I think there is a number of things that we can do to improve our efficiency within e-commerce as well as to really combine the stores and our e-commerce channels in the much better kind of omni-channel way.

[Peter Keith:]

Okay. That’s very good detail. I appreciate that. And then, maybe I will stay on that same topic. So when you looking at the guidance how long are you estimating that Sheplers is a drag. And secondarily when you think about the same-store sales guidance what is the impact the Sheplers.com today for Q1 or full-year?

[Gregory Hackman:]

So, Sheplers.com represents somewhere in the low teens of our overall business and in Q1 we certainly are expecting to see the trend continue. We don’t think that we’re going to be able to fix this in the next two weeks. I think as Jim outlined part of the stuff is self-fulfilling. So if your speed is down, then Google penalizes you in the search and all that kind of stuff, so it takes time to restore that high ranking that we typically get. So I’d say in the first half of the year we think that it will be roughly flattish for us and then we will start to see improvements, I will say, in the second half. So holiday and thereafter, but we are certainly not expecting it to hockey stick in the next couple of weeks or month.

[Peter Keith:]

Okay, thanks. And then, I guess one bright spot of the quarter is the merchandise margin expanding. You had a couple of quarters for some declines, some of the issue has been the mix of e-com as a headwind. Is that issue resolved or is it just a function of e-com now running below stores, that's maybe remove that headwind for the time being and that could return as Sheplers bounces back in hopefully the coming quarters?

[Gregory Hackman:]

Yes, I think the way we’ve described this in the past, Peter, is we could improve margin both in e-com and in stores and still mix down, so to your point to the extent that it's not growing mid-teens and the stores are flattish or slightly negative, that certainly helps. But we did see and we talked about it in the script, we did see nice improvement in our stores margin on a year-over-year basis, specifically in February and March. We commented on the last call that January clearance was deeper and negatively impacted us and in February and March we were able to again maintain our pricing promotion and not only drive top line sales improvement and growth, but also add strong margins.

[Peter Keith:]

Okay. Thank you very much. Good luck.

[James Conroy:]

Thanks, Peter.

[Operator:]

The next question comes from Jonathan Komp of Baird. Please proceed with your question.

[Jonathan Komp:]

Yes, hi. First question maybe first just to clarify Jim or Greg, what are you running in total in terms of a same-store sales quarter to date relative to the flat guidance you gave for the first quarter?

[Gregory Hackman:]

We haven't said, John, but you can probably assume that we are flattish.

[Jonathan Komp:]

Okay. And maybe just a broader comment, if you could, I know Jim you described the fourth quarter as a roller coaster and I'm just curious what you're seeing in the core markets outside of the oil and commodity impacted markets? How the California and other core markets there are performing?

[James Conroy:]

Sure. As we went from the fourth quarter into the first quarter, total stores went from negative to positive. Oil and commodity market stores improved pretty substantially, call it 6 points a comp or something, because we had called out that Texas was mid single-digit negative and is now slightly positive, and we called out the other states is being mid to high single-digit negative and now are flat. So the oil and commodity market has gotten a lot better. Admittedly, we're eight weeks into the quarter, we’ve five to go. The rest of the stores as it was in the fourth quarter to the first quarter also improved just not by nearly as significant quarter magnitude, just a small improvement sequentially. So those things taken together is and make us feel a bit better about the stores business. And as we’ve said in our prepared remarks, no meaningful change in our pricing structure or promotional stands. The amount of advertising and marketing that we are doing on the stores side, so we're hopeful not ready to completely declare victory in the oil and commodities market, but we’re hopeful that this is the beginning of a recovery within the markets that have been a headwind for us for several quarter then.

[Jonathan Komp:]

And when you look at the full-year guide of flat to up slightly for comps? Yes, I understand the Web site issues, but 8 or 12 weeks ago prior to the Web site issue, I think it's we would have given you flat to slightly positive trends in the oil markets, I think you would have been feeling better than flat to slightly positive in terms of the guidance for the year. So, do you think there is a opportunity for upside to that type of number as it get throughout the year, are you being conservative just given the volatility or how should we think about the progression throughout the year?

[James Conroy:]

I think we’re trying to give those as good review into the year as we know. Right now I don't think we've overly -- are trying to be overly conservative, but I think it's a accurate view we can provide. Of course if we get the e-commerce, the Sheplers by the e-commerce business, the back to growth there might be a little bit of upside there, but we’ve got work to do and we’ve been working pretty hard on it for a few weeks now and haven't been able to find the silver bullet to rectify that problem.

[Jonathan Komp:]

So it does seem like you've the initiatives you laid out in terms of a stores and some of the opportunities, have a pretty full pipeline of potential drivers. So do you think any of those are potentially meaningful drivers as you get them in place at the store level or how should we think about that the same-store sales initiative?

[James Conroy:]

I think all -- they all work together. I think some of the bigger ones, we’re really seeing some nice growth in the work side of our business. We're continuing to look for outsized growth on commercial accounts that ties into it. We’re adding new work boot fixtures and expanding the work I had within some of our stores and as we do that, we see a relatively immediate uptick in sales, in those stores. Having said that, what we're talking about 20-years stores that we can do something on the work boot and work apparel side to get additional product and additional space and outsized same-store sales there. Many of the other stores either wouldn’t want more space or already have it. So I think the work piece is going to be compelling. The other piece that I like to think adds to our customer loyalty and to our ability to drive sales to customers by providing and extending credit at our own credit as you probably understand -- is our new store credit card. So we intend to launch that over the next few months. When that launches, albeit [ph] a store branded card, that will tie to the B rewarded loyalty program. Other retailers would say that that’s your best customer of course, and everything about them, their average transaction size is higher, et cetera, et cetera. So, I think while we’ve a lot of things working and a lot of been working in unison, I think the press and the push in to the work business, coupled with the credit card are probably the two biggest that will help drive same-store sales.

[Jonathan Komp:]

Okay. And just last one, if I could. Just in terms of the guidance and what’s embedded from a gross margin standpoint? I know that you sound pretty optimistic about the store merchandise margin prospects. A lot of it depends on the relative growth rates across the channel. So I’m just wondering what you baked in when you net that all out in terms of the overall gross margin?

[Gregory Hackman:]

Just to be clear, merch margin or gross profit, because we will have deleverage on the occupancy line.

[Jonathan Komp:]

Yes, I guess, I’m thinking in total. If you want to give any color on the pieces will be great, but at least overall gross margin?

[Gregory Hackman:]

So, we continue to think we will expand our merch margins around numbers 20 basis, 30 basis points similar to what we saw in Q4. And occupancy costs could be 10 basis points of drag based on a slightly positive comp.

[Jonathan Komp:]

Okay. Thanks, guys.

[James Conroy:]

Thank you.

[Gregory Hackman:]

Thank you.

[Operator:]

Our next question comes from Randy Konik of Jefferies. Please proceed with your question.

[Randy Konik:]

Yes, thanks a lot. I just wanted to clarify back to the e-commerce side. So, if major issue, a conversion issue or a traffic issue and what was the -- can you explain what you’re saying about Country Outfitters is on the same platform as Sheplers.com, but they're not having the same problems it sounds like you’re saying. So, again I’m just trying to figure out what is the main issue of people not going there now or this was -- slightly is compromised from a speed perspective to not encourage them to complete a purchase. I just want to reclarify that.

[James Conroy:]

Sure. No problem. They -- its a little bit of both, organic search has been impacted, so that's traffic driving and the speed of the mobile side has hurt conversion on the mobile site. So those are the two bigger factors and then you put those two together particularly as business starts to evolve more and more to mobile away from desktop, it's been a kind of tough combination for us. The example relative to Country Outfitter, Country Outfitter when we acquired then was operating their site on a legacy version of demand wear and we brought it over to this, our new platform, which is demand wear based and that site is actually working quite nicely and the sales and kind of performance of that site is again meeting our expectations, if not exceeding them a bit. So I think we have to continue to work on what we’re seeing on the Sheplers.com side and I think there will be a series of small fixes that if we ultimately can get this back to positive sales, it will be a number of different things.

[Randy Konik:]

And then just on bootbarn.com, you’re on a different platform, is this basically saying you’re not going to switch the platform there for a very long time, and just did you comment on? I didn’t really catch the performance on bootbarn.com during the quarter?

[James Conroy:]

The bootbarn.com continues to perform nicely. It hasn't yet transitioned to the new platform. It has a different starting point than Sheplers does, so bootbarn.com is already on a version of demand wear similar to the Country Outfitters business. So right now our plan would be to proceed with the bootbarn.com transition over to the new platform. We will continue to take a look at that over the next few weeks, but that’s our current thinking.

[Randy Konik:]

Got it. And then, I guess, Greg question on, I believe your guidance on free cash flow was positive $15 million to $16 million. I believe CapEx was $15 million to $17 million. How should we be thinking about multi-year free cash flow generation? I see you kind of improved the financial flexibility and duration of your credit facility, I believe, up to 2022. So just trying to get some color on how you’re thinking about kind of the nuances of leverage, targeted leverage, targeted free cash flow, is that going to be more done through expense management on the actual SG&A line or more on the capital expense side? Just trying to get some color there on how you’re thinking about these items? Thanks.

[Gregory Hackman:]

Yes, sure. So if you think of our CapEx of $15 million to $17 million and the fact that it will still generate somewhere between $14 million and $16 million of free cash flow this year. That means we were generating between $29 million and $33 million pre CapEx tax. And if you think about average store costs is 300 brands, we could build 20 new stores and only spend $6 million of, I will call it the $14 million on the low end. So there is a lot of opportunity for us to continue to use free cash flow to pay down debt, and that's really our objective. Frankly, the reason we pulled back a bit on our new stores both last year and this year is just visibility and also we're investing heavily or more heavily $3 million to $4 million in our Wichita distribution center to make that a more efficient operation and improve profitability. So we still think that we can build 10% units and even doing that we can still drive free cash flow to pay down debt. So that's kind of how we’re thinking about the next couple of years.

[Randy Konik:]

Got it. And my last question is, it seems like we’re coming out of the dark tunnel and into the light with regards to the oil state as well as even the -- and the ex oil [ph] states have sound like they’re continuing to do better. So if you think about -- you give us a nice color on the 1Q comp estimate is impacted by the e-commerce. Do you think as -- we should continue to see nice, I guess, acceleration in the oil impacted states as well as the non-oil impacted states from a stores perspective? And then as it relates to e-com, when you talk to the software vendor or partner for the platform, have they seen this movie [ph] before and if they have, what’s the duration to fix it. Again, you might have covered that, I’m just trying to get a sense of duration of the problem in terms of the fix? Thanks. And that’s all. Thank you.

[James Conroy:]

Okay. So that’s two questions. The first was really around acceleration in stores and commodities etcetera. We're not modeling a incredible growth rate in those states or those markets for this year, while we had a few solid weeks of decent business, again I think it's too early to call that that already going to become a tailwind, so we're planning them roughly, I think we’re playing Texas to be flat to slightly up than the another states to be slightly down. The other states being North Dakota, Colorado, Wyoming. Hopefully that becomes of a tailwind, but we’re not ready to declare that yet for sure. On the second piece, has the vendors involved in the transition seen this move before? I’d say some of the things that we’re seeing have come up before I would say, what we’ve been experiencing has gone on longer and was deeper than they let us -- they had seen before than we expected. So I think it's -- some of it is a little bit familiar, but it's a little bit more of a significant issue than they’ve seen before. In terms of a path to getting things put in the right direction. I can't lay out a timeline for you. I mean, if we knew how to fix it, we would have fixed it already. We're starting to make some small progress in different areas, we believe we will keep you guys apprised of it. Of course, disappointing certainly for the quarter, fourth quarter and first quarter that we are in. Hopefully, it will be a very solid foundation for us longer-term to fulfill all the goals that we had of sort of bringing all sites together in kind of one consolidated operations. So that vision is still impacted at the moment. We just have to get the Sheplers.com business back on track and again the Country Outfitter site working the way it is gives us hope that it's possible to rectify and fix the Sheplers site.

[Randy Konik:]

Understood. Thank you.

[James Conroy:]

Thanks, Randy.

[Gregory Hackman:]

Thank you.

[Operator:]

Our next question comes from Mitch Kummetz of B. Riley. Please proceed with your question.

[Mitch Kummetz:]

Yes, thanks for taking my questions. Let me just start as a follow-up to Randy's question. Jim you were just talking the oil and gas markets. I think you said Texas flat slightly up and the other three states slightly down. So I guess -- I'm guessing sort of net net that gets maybe flattish or down a little for those markets. It sounds like e-com, Greg, I think you said on Sheplers, I think you said flat in the first half and up in the second half, so that would seem in aggregate to be up a little bit. I guess sort of the remaining piece would be bootbarn.com and the non-oil and gas stores. I mean are you expect -- I would expect you would, well not put words in your mouth, but I mean are you expecting those kind of to be up for the year?

[Gregory Hackman:]

The oil and gas?

[Mitch Kummetz:]

No, the -- oil and gas, it sounds like you’re expecting that to be flat -- flattish, maybe down a little bit. Sheplers.com, it sounds like first half, second half combined you’re expecting that to be up a little bit. So I’m just trying to understand the non-oil and gas stores in bootbarn.com. What are you looking for that to do for the year?

[James Conroy:]

Sure. So, the rest of the stores we would expect to be slightly positive and we expect bootbarn.com to continue to be teens positive, but again it's a very small portion of our overall business. It doesn't have a big impact.

[Mitch Kummetz:]

Got it. And then on the gross margin, Greg, I think I heard you say 20 to 30 basis points of merch margin improvement for the year, but an offset by about 10 basis points of occupancy deleverage. I guess I'm not -- I guess I’m surprised you’re not expecting more deleverage on sort of a flat slightly positive comp. Could you kind of give us what were the leverage points are now on comp both for occupancy and then on the SG&A side as well? I know that you kind of gave us last year's breakpoints, but what are they this year?

[Gregory Hackman:]

Yes and the stories flipped a bit this year versus last year and part of that is because the new stores we're opening 12 and they’re more back half weighted, so before when we’ve had that we had 18 new stores or 20 plus new stores in the pipeline and not getting that mix and now with 12 new stores in back half weighted. But the leverage point for occupancy is in that 1.5 to 2 range. And for SG&A, it's actually higher. It's more like 3 or so, 3.5 and that's driven by a couple of things. One of them is the add back of bonus based compensation, or bonus compensation, incentive compensation. The other is we got slightly higher operating costs for Country Outfitters. Their SG&A rate is slightly higher or is higher and part of that is -- was relaunch $500,000. So, anyway there is a couple of factors that are impacting at SG&A leverage point.

[Mitch Kummetz:]

Okay. And then, Jim, I think you said that Country Outfitters was accretive from a cash flow perspective. Could you say whether it was from an earnings standpoint?

[James Conroy:]

We didn’t comment on that Mitch.

[Mitch Kummetz:]

Oh, you didn’t, okay. And then the 12 stores that you guys were opening, can you give us a sense as to these of backfilling existing markets, I'm guessing not in oil and gas related markets, anything in terms of new states?

[Gregory Hackman:]

Yes, mainly we are selling in existing markets, so last year we opened a handful of stores or so in California and we continue to look for those opportunities in California and Arizona, so maybe a new market in Mobile, Alabama, for example. But the Southeast, but largely going to be concentrated in the last filling in those markets.

[Mitch Kummetz:]

Okay. All right. Thanks.

[Gregory Hackman:]

Thank you.

[James Conroy:]

Thanks, Mitch.

[Operator:]

Our next question comes from Tom Nikic of Wells Fargo. Please proceed with your question.

[Tom Nikic:]

Hey, good afternoon guys. I think you touched on this earlier in answer to Randy's question, but about the store growth you kind of grew the store base, mid single digits last year, you’re planning to grow mid single digits this year, but kind of indicated that double-digit unit growth is still kind of the eventual goal. I mean, I’m just kind of thinking like when does maybe the footage growth reaccelerate, if it does, and as far as the big picture longer-term store target, is there any adjustment you're thinking? Are you still kind of thinking of doubling the store base from here or is that kind of more vague now than it was maybe a couple of months ago? Thanks.

[James Conroy:]

Good question, Tom. I think on the -- when we will reaccelerate to 10% or more, I think the answer is the same, maybe in the last couple of calls which is when we feel that the comp store base is growing solidly and consistently, I think we will feel better about kind of [technical difficulty] 5% unit growth up to a 10% or 10% plus unit growth. I continue to believe that we can double our store counts and when we look at the map of the United States, we saw a number of places where we can add density of stores, both on a number of markets that we know have customers that are based on our e-commerce data where we can put stores in where we’ve no stores. So I think the long-term algorithm of 10% unit growth will return at some point. Right now it will be a little prudent in saying, let's be -- let's grow modestly. But again, if we see stability, we will accelerate.

[Tom Nikic:]

Got it. And just a quick question in regards to the debt financing actions that you took. I think you said that you should see a more favorable interest rate on your borrowing. Did you quantify what kind of savings you would see or how we should think about interest expense this year?

[Gregory Hackman:]

Yes, so what we’ve said those, we'd probably use $10 million of revolver capacity to pay down the term loan. And you can look at the 10-K that we will be filing in the next week or so, but the spread between those two is roughly 4 percentage points.

[Tom Nikic:]

All right. Thanks very much.

[Gregory Hackman:]

Thank you.

[James Conroy:]

Thank you, Tom.

[Operator:]

Ladies and gentlemen, we’ve reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Jim Conroy for closing remarks.

[James Conroy:]

Thank you everyone for joining the call today. We look forward to speaking with you on our first quarter earnings call in August. Take care.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.