Boot Barn Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 27 Jul 2016

[James Conroy:]

Thank you, Greg. We are working certainly hard to offset some of the pressures in our business and I am encouraged that we’re able to achieve a slightly positive same-store sales results in the first quarter. Having said that, we remain in a challenging retail environment, which makes forecasting difficult. During this uncertain time, we continue to manage our expenses and inventory levels carefully. By remaining focused on building new stores, growing same-store sales, improving our merchandise margin and enhancing our omni-channel capability. Now I would like to open up the call to take your question. Operator?

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have Randal Konik of Jefferies. Please go ahead. Mr. Konik, your line begin sir. We’ll go ahead and try to proceed to the next one and again Mr. Konik. [Operator Instructions] The next question we have comes from Matthew Boss of JP Morgan. Again there is Matthew Boss of JP Morgan. Mr. Boss?

[Matthew Boss:]

Yes. I’m here.

[Operator:]

All right. Thank you, sir. You may proceed.

[Matthew Boss:]

Okay. Jim just piggy backing on your comments related to business being hard to predict. What’s your comp expectation for oil and gas regions in the second quarter as well as the second half of the year? Just first as what you saw in July?

[James Conroy:]

We’re projecting those states to get a little bit better, but they will be negative for the balance of the year.

[Matthew Boss:]

Okay. And then have you seen any stabilization on the promotional front. I know some of your peers have shifted their mix to lower ticket items. Are you seeing any trade down within categories both in the oil and gas regions as well as some of the other areas of the countries that are not that haven't been impacted by the Oil & Gas?

[James Conroy:]

Yes, to some degree. So particularly in the commodity impacted markets, couple of examples, we're seeing no difficulty in the high end boot business particularly exotic boots. So historically the stereotypical oil worker who was flushed with cash would buy not only what they need to go work in the oil fields, but they also buy themselves a $400 to $600 pair of exotic boots. That business has experienced pretty significant downward pressure. I think the other thing that we've seen is a little bit of a trade down in terms of particularly on the work apparel side, in terms of good, better, best from some of the higher price points, which are on a relative basis in the work where business work where power lines down to more moderately priced apparel line. For us though it's all still essentially at full price and that full price model hasn't changed. So, while we're trading some business down in terms of AUR our promotional posture hasn't really changed at all.

[Matthew Boss:]

Got it. And then just last question. As we think about store growth, any changes that relates to the long term 500 stores target and what would you need to see to consider reaccelerating growth back to the 10% and I guess more so does the balance sheet or the leverage that you have today play a role or is it solely based on top line stabilization?

[James Conroy:]

So on the first side of your question I think the opportunity for 500 stores is as alive and healthy as it was in October of 2014 when we became public. In terms of slow roll out plan, we had a long term goal of 10% units if you look at a multiyear period we're way ahead of that goal. We did slow it this year just in an attempt to be prudent to see if we could -- until we saw top line sale stabilization. So, as soon as we see a couple of quarters that are positive even in the low single-digits and get through Christmas I think we'll feel a lot better about kind of reaccelerating the slow growth. But I think we're trying to in a very kind of uncertain retail environment in general we're just trying to be may be overly cautious.

[Operator:]

Next we have Jonathan Komp of Robert W Baird. Hello Mr. Komp. [Operator Instructions] We will proceed to the next question that comes from Ben Braid [ph] also of Robert W Baird

[Jonathan Komp:]

Yeah, hi it's John Komp from Baird. First question, if I could just ask may be on the sales cadence throughout the quarter that you saw. Any color month-to-month will be helpful.

[James Conroy:]

It's relatively consistent month-to-month and nothing drastically different from throughout the quarter.

[Jonathan Komp:]

Got it. Okay. And if I can may be clarify, Jim your comments about some of the oil and gas impacted market. I think you mentioned expecting some signs of the stabilization, but not seeing improvements yet. Does that mean that the trend is stabilized at lower levels or maybe more specifically can you comment on the two year trends that you are seeing in those markets?

[James Conroy:]

Sure, the most optimistic view would have been, while we’re lapping negative numbers in the last year period. So therefore in terms of two year that will comp positively. We've certainly not seen that, the more pessimistic view would be the negatives sales trends of and we had put this points before as double digit sales trends that are negative particularly in Colorado and North Dakota and Wyoming, that they would stay, that being magnitude negative. They've abated a little bit, they’ve gotten a tiny bit better than that, but not a lot and they’re certainly not as yet flat.

[Jonathan Komp:]

Okay, and then maybe in terms of the outlook for some of those locations some of the work boot vendors are talking little more positively that their business could actually have further stabilize and then in some cases actually turn positive later in the year again some of the low comparisons and just wanted to maybe reconcile of that with your views of the business if you expect kind of the trends as you look at they work side of the business versus the some of the other categories looking ahead?

[James Conroy:]

Sure. I think there is a possibility that could happen. However and I hope you are right, we are not banking on that though. We've had some decent sales in our work boots category and our work apparels category. But that really hasn’t been especially in the comp, that's been pressuring the comp in the effective markets is the more discretionary spend, people buying less ladies boots, less apparel other than work apparel, the underlying work boots business is up as is the work apparel business is up.

[Jonathan Komp:]

Fair enough, that's helpful. And then last one from me, if I could just ask related to the unit development target for longer-term. I noticed it would like maybe a most recent annual update that the disclose even economics look slightly less favorable for the new stores and I'm wondering if that's just a factor of the class that was open or your expectations for the new unit targets have changed meaningfully in terms of the construction cost or the payback period?

[James Conroy:]

I think it's more of the later. I think it's a -- rather the former, I think it's more of a temporary phenomenon, that most recent class had two things go maybe three things go against them. The first was we were tweaking so model a bit, so the store capital rent was elevated modestly. That's not a brand new store prototype, we’re in just from new fixtureing and in store signage. So we had an escalation of the store capital which has now normalized as we’ve been able to source much of that on a kind of build out basis and gotten back down to a capital requirement that as so much [indiscernible] that we had called out when we had first gone public. The second piece was we had taken a couple of stores and tried a model in certain markets looking for slower performers of $2.5 million to $3 million in some of the Texas new stores. That proved to be a little bit of an aggressive posture for two to three stores. And those couple of stores that’s were positive, EBITDA positive gives you a longer pay back, just to state they’re not meeting their expectation for those two to three stores. And third piece is that most recent class is opened and with much more difficult environment for the whole industry as you can see in the comp or the same-store sales [indiscernible] rate. And when we make all of that out our new store sales volume is still averaging $1.7 million, which is what we had always said it would average, but because the capital requirements had gone up a little bit, of course we had the occupancy in a few, a handful of stores was is a little higher than our model, it flow the payback for the most recent class. We expect as we go forward that the roughly three year payback model will come back to us. And we expect that we can model that as we go forward for the next classes of stores.

[Operator:]

Thank you, sir. And next question we have Peter Keith with Piper Jaffray.

[Peter Keith:]

So I know there is a couple of questions around the oil and gas market, so I want to make sure we were maybe splitting out Texas, which I think you’ve classified as known oil and gas. Last quarter it seemed like you saw some sequential improvement in taxes. Could you give us an update there or is it more of the same or continued sequential improvement?

[James Conroy:]

So now, so there is a clarification Peter, thank you. The taxes business was still slightly negative but it was sequentially better than it was in the fourth quarter and you remember like the fourth quarter with sequentially better than it was in the third quarter. However, with 47 stores in Texas that are still a drag on our overall comp, because their negative, they’re just not quite as negative. The other three states where we call out specifically our North Dakota, Wyoming and Colorado. The negative comp in those states is much more significant than that in Texas. And while that they have slightly improved between the fourth quarter and the first quarter, they’re still pretty significantly down double digit declines.

[Peter Keith:]

Okay. Thanks for the clarification. And then Jim going back the last quarter, I think your commentary was at the sales trends were remarkably volatile for our business that historically been quite existent. Maybe it’s too short a trend, but it sounds like this most recent quarter you saw a little more consistency in the recent month, is that a fair observation?

[James Conroy:]

I think so, a little bit more in the standard deviation if you will, is a little bit tighter. But it’s still, when we look week-to-week, two years ago [indiscernible] will probably remember, we had a positive six to eight week, virtually every week of our license [ph] and now it’s, you have some positive leads and you have some negative leads and they average out, to where we’ve been reporting. I think when we look at the store based from and if we look at the sequential from Q4 into Q1. So it really drove that and we’re pleased with it, but also don’t want to necessarily extrapolate the shape, but drove the improvement between Q4 and Q1 if you think about the components of our business the tailwind from ecommerce between the two quarters was exactly the same between Q4 and Q1. And the Sheplers stores business unfortunately they comped a little bit low in Q1 versus Q4. So the overall sequential improvement in the consolidated comp is thanks to the Boot Barn core store business and that’s a good fact for us again, we continue to manage in an environment where it’s difficult to predict next week and next month sales, but at least looking at those two quarters is just as the kind of the core group on storage business have some improvement on the product line and still at a very healthy margin. In other words, we didn't change our promotional strategy, we didn’t run any crazy sales, so we had some guarded optimism [indiscernible].

[Peter Keith:]

Okay. That's helpful color and may be one last clarification question for me. So you come into the Sheplers stores. Sounds like they’ll still be under pressure in fiscal Q2 until the promo calendar has lapped in Q3, but because you own the stores in Q2 I’m surprised you wouldn't be lapping that now. Could you help me understand why there is some volatility there?

[James Conroy:]

Sure, we got the business at a little over the last day of the first quarter of the first day of second quarter. And for the month of July into August the former Sheplers team were still buying the products for that business and running the promotions for that business and they were running on their own -- their entire systems, and we weren’t fewer very methodical conversation process of first changing the [indiscernible] systems over to ours and then being able to take control of the assortments, but in an effort to keep their business intact while we went through that conversion for the first three-ish months that they promotional calendar just kind of stayed intact that they had already put together. So that's why we didn't really start them on the Boot Barn promotional calendar and to the stores where we've branded which products does it in September those of the volume of the Sheplers stores business, they didn’t get branded until November.

[Peter Keith:]

Okay. That's very helpful color. Thanks a lot and good luck with the coming quarter.

[Operator:]

Next I believe we'll have Randal Konik of Jefferies.

[Randal Konik:]

Quick question if you think about the deposits part of the business obviously with the slight deposit comp something I should be doing very well. What are the coming characteristics of what areas of the geography are doing well from a geographic standpoint, but also from a product standpoint? That's my first question.

[James Conroy:]

Sure. That’s a good questions, so from a geographic standpoint I think if you circle back to the comments earlier, the core Boot Barn stores have improved a little bit of a sequential improvement in Texas and a modest sequential improvement in the three states that have been a drag. Although again just want to reiterate that fell, a pretty sharp decline in Colorado, North Dakota and Wyoming. From a merchandizing category perspective, it’s so interesting when you looks at the fourth quarter going into the first quarter every single major merchandize department improved sequentially almost in locks step and our read on that was so traffic much have a come up a little bit, because it’s not like one particular category broke out and changed the sales trend. It was literally an incremental improvement based on a consolidated business in every single, maybe virtually every single major merchandize department.

[Randal Konik:]

Got it, and then could you talk about the 40-some odd stores in Texas, could you talk about the variability within the geographic locals of those stores and is there anything to kind of take away from that? Northern or Southern or Eastern or Western Texas, it is very kind of difference at all or no?

[James Conroy:]

It's not an obvious patterns risk and there is probably a couple of good reasons for that, one in East Texas as you know there are a lot of stores that are being converted from Sheplers. So sometimes they’re up and sometimes they’re declining and in the most recent quarter the Sheplers rebranded stores had a difficult growth rate. The other piece of it is last year we actually opened some stores in the Houston market, so if we were too look at the Houston market as a whole that market has comped down, but we've in our view have been taking share because total sales has gone up and in that particular so we cannibalized ourselves a little bit, so I mean we have a very different prices of oil and gas between East Texas and West Texas, paradoxically the West Texas business isn’t quite as bad as you might think it would be.

[Randal Konik:]

Got it, so I guess. Thanks my next question because you said on the comments when you talked to, I believe those Wyoming, Colorado and North Dakota you actually say, I believes that the work business was up but discretionary business was down. When those states were worst was the work business in fact also down in addition to the discussion business, such that the work business is reached an inflection? I'm just curious there.

[Gregory Hackman:]

Beyond the [indiscernible] I'm not sure I can quote that specific number. I think your hypostasis is probably valid, but I don’t know that specific, by department by those three states sequentially.

[Randal Konik:]

Got it, okay and then I guess my last question. When you spoke about the in the press release but also your commentary kind of spokes to a theme of you’re not over -- not in extensive amount of scale [ph] event, it's kind of like listen the Sheplers is what caused the gross margin and the mix there to be down from our total gross margin perspective. So I guess my question is how do you feel about the full price sell through rates in the business are you starting to see those trends sequentially improving all?

[James Conroy:]

So, we feel good about that and yes I think what we're trying to communicate was that in a good store retail environment we’re not going to resort to kind of broad based across the store promotions. With one exception to that which is an annual fair that we do every year in August called Stinky Boot, we did our last year, we’ll do that this year in August. But other than that we usually never put the entire store on sales. We often try to have --promote life style [ph] promotional offers in the store. So either a particular vendor or particular category and a particular vendor will have some promotional activity, but it’s very minor and in terms of our sales contribution 85% plus of Sheplers price selling and the balance of it is clearance and every -- and all the promotions put together. So we intend continue to operate that way, we think that’s the healthier way to run the business and while sales haven’t been as strong as again they have been historically, which is managing our inventory very closely. So we don’t wind up exposed from a margin perspective or clearance.

[Randal Konik:]

So that’s helpful and because you brought up Stinky Boot, I had one more little question. You commented that ladies boots are negative. But you didn’t comment that men’s boots were negative. So I’m assuming they’re positive. Has there been any time before where you see variability in the two genders within the boot category and if so or if not what do you think is going on in the boot category? That’s my final question. Thank you.

[James Conroy:]

Sure. Yes, I think the ladies boots business is big more discretionary. On a ladies side, many of our ladies customers were boots either riding a horse or working with [indiscernible]. Oil is part of the daily wardrobe. This is a portion of our ladies boots business that is more the casual concert cover or the country music customer kind of participants and that piece of business probably has a little bit more variability in the next businesses a bit more stable than that kind of across the board, it just that is kind of always been that way, at least on my time here.

[Operator:]

Next is Mitchel Kummetz from B. Riley.

[Mitchel Kummetz:]

Yes. Thanks for taking my questions. Jim I got on late, because of all the technical difficulties. So trying to piece together things here from the Q&A, but I may ask questions that you’ve already addressed in your prepared remarks. It sounds like you gave a July comp, could you tell me with that was?

[James Conroy:]

Yes. We can give us specific July comp, but we said as we got into this quarter in July business was slightly negative. We gave some context that in the last year of period in Q2, July was our strongest month of the quarter particularly in the [indiscernible] farm business.

[Mitchel Kummetz:]

Got it. Okay. And then sounds like what you said in the Q&A that ecommerce was a tailwind like it was last quarter. Can you break-up ecommerce stores?

[James Conroy:]

We haven’t broken FX specifically, but ecommerce continues to grow quite nicely and the stores business was slightly negative than the ecommerce business but the consolidated comps were positive.

[Mitchel Kummetz:]

Got it. And then also just in terms of kind of July trends. Did Texas continue to show kind of the improvement as you’ve been seen the last couple of quarters or did that not occur?

[James Conroy:]

Actually I don't know if I have the Texas comp on my fingertips.

[Mitchel Kummetz:]

Okay.

[James Conroy:]

I think it's roughly the same as it was in the first quarter.

[Mitchel Kummetz:]

And then it sounds like Sheplers’ comp was a little worse this quarter than last, did you give your breakout between Sheplers comp versus core Boot Barn comp?

[James Conroy:]

We didn’t give it out specifically, what we said was the Sheplers business or the Boot Barn stores business performed better than the Sheplers stores business and which is inverted from the prior quarter. [Indiscernible] high comp there is in the prior quarter in January where we lost other retailers put things on sale and had a clearance sale. The Sheplers business did pretty well in that particular month, kind of speaking to the traditional Sheplers net promotional customer. We didn't have that same highly promotional clearance period as we do for couple of weeks in January in the second quarter and that they may explain a little bit why we didn't have a strong same store sales performing from the Sheplers stores. Having said that the emerging rate improvement in the Sheplers stores business has been so dramatic that we've almost made up the margin dollars in the same stores between last year and this year even on a negative single-digit comp.

[Mitchel Kummetz:]

Okay. And then last one for me. If I recall correctly it was the Oil & Gas market that turned in June of last year, I would imagine that they were negative in July is there any way you can say when were they at their most negative in terms on the drag on comp we kind of start to -- as we continue to cycle through that.

[Gregory Hackman:]

Sure. We haven’t ever called that our specifically, but there were most negative in the third quarter.

[Operator:]

Next we have [indiscernible] of Citi.

[Unidentified Analyst:]

Hey thanks guys. Just curious when we look at the performance of the converted Sheplers stores how wide is the range of performance and can you give us a little color as to the standout may be regionally positive, negative, how much of the cost did you see from one market to another market within the major [indiscernible]?

[James Conroy:]

Sure. The [indiscernible] the variability is pretty high and I think there is a couple of reasons for that I think there are some market that have been converted that just really cater to a more value conscious price promotional customer and those customers have probably flood those stores quickly they don't have in other markets that might be slightly higher income and a little bit less promotional. I think the second piece that's crated some variability is just the competitive dynamics and each of the Sheplers stores operate in different market where we either have more or less aggressive competition from kind of Mom & Pop restaurant retailer and as we've gotten less promotional there has probably been a couple of Mom & Pops that have taken advantage of that. So I think there is some real reasons for that. We've also had a couple of openings in two markets by Cavender's they continue to be a strong competitor to us and very localized places or localized markets. So, I think there is kind of some real reason why there is variability, but the answer to your question, it’s been pretty highly variable from store-to-store and it's kind of tested, our merchants and our merchandize planning teams to bring inventory in and out in a measured way.

[Unidentified Analyst:]

Got you, and then just last one from me, you guys have been pretty flattish on accomplishment that are now changing the promotional model, what would you need to see that would make you adjust your promotional models? Do you think about, what percent of your business should be happening?

[James Conroy:]

I must say, I'm not sure, we would ever get there. I think, once we start to pull the promotional lever in a meaningful way, we probably could drive same store sales for a year, and in the following year, we see us against that same promotion at a lower margin rate, and it has to be a deeper promotion to drive same store sales again, and we have yet again a lower margin rate. So, while we want to amplify the margin, sorry amplify that promotions that we have in this store and try to make them more energizing and more exciting for the customer and looking for more innovative ways to leverage our customer loyalty program and tie our promotions to our most loyal customers. I still don’t think it's going to be promotions at a much higher index, kind of regardless of what is happening on the same store sales line. We've had several examples where same store sales has been soft and margin dollar has gone up, and in different kind of macro positives over the business over the last few years. So, I just don’t think it's a winning down term strategy and we’ll find a long-term gain.

[Operator:]

Last we have Corinna Freedman of BB&T.

[Corinna Freedman:]

I wanted to know if you had an update on some of the new vendor collaborations that you were going to be rolling out of the stores and if there are any other merchandizing initiatives you've got planned for the next few quarters? Thank you.

[James Conroy:]

Sure. Hi, Corinna. Good question. So, we continue to partner well with cohort [ph] on rolling our same stores, there is probably about 100 stores that have a cohort shop and we feel good about that performing. We starting to do a little bit now on the Denim wall with Wrangler and I wouldn’t call this a same store, but it's more trying to take credit for being a Denim authority, and there is perhaps one other vendor that we and are doing context with that, its' very materialize we not roll out in a broader way. So, it's kind of the way we are thinking about the relatively and look for growth in our private brands, our Cheyenne [ph] brand continues to grow quite nicely. It's been leveraged a little bit from our marketing perspective with connection to [Indiscernible], she has been a great face of Cheyenne and has started to really open-up that brand and perhaps Boot Barn to more of a millennial customer and certainly to a country music festival customer. We feel good about that and some of the big broad brush strokes that are happening from vendor partner perspective, we certainly agree that other ongoing relationship with Brad Paisley and the new transparent [ph] line. He continues to be incredibly supportive of our Boot Barn. I mean whether merchandising strategies are similar to thing that we’ve talked about in the past, continuing to try to find growth in work boots certain of the performance work boots brands like Keen and Timberland have perform well for us. Expanding the definition of men’s western boots a bit to include something more casual kind of Rodeo boots, we call them Halfway Rodeo Boots or driver marketing is really I guess the official name. So there is a number of different merchandising initiatives and the team led by [indiscernible] continues to just squeeze every ounce of same-store sales growth we can find across each of the departments, particularly as we are facing into an environment with down retail traffic.

[Corinna Freedman:]

Great. Thanks so much and best of luck.

[Operator:]

[Operator Instructions] At this time, there are presently no further questions. We will go and conclude our question-and-answer session. Again, we will like to thank the management team not only for your time today, but again for your patience through the technical difficulties earlier. And we also thank you all again for your patience and for your attendance today. And I now like to turn the conference back over to the management team for any closing remarks. Gentlemen.

[James Conroy:]

Thank you everyone for joining the call. We appreciate the time. We apologies for the late start, we have the same difficulty I’m sure as you did with getting onto the call. And we look forward to speaking with you again on the second quarter earnings call this fall. Thank you very much.

[Operator:]

And again we’ve been thank you to everyone else again for your time today. For joining the conference call and for the technical difficulties earlier. Thank you for your patience. The conference call now has officially concluded. At this time, you may disconnect your lines. Thank you, take care and have a great day.