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spk04: If you're looking for 200 basis points of freight drag in Q3, remind me what that was in Q2.
spk01: It was 10 basis points of a tailwind, actually, Jeremy. So call it flat. We don't really have it.
spk04: Okay. And then in terms of just – I want to come back to inventory for a second. It's clearly a hot topic. Okay. And if inventories are up about 110 percentage points versus three years ago, sales is up 88% in Q2. It's up about 80% versus three years ago here. As we start Q3, it looks like you have probably about $100 million of inventory left. above where the desired level would be. You're not going to be promotional. You feel pretty comfortable. But in terms of thinking about this, about your buying of inventory and your order rates, it's probably, I think you might acknowledge that it's a little higher than you'd like it to be. You have a couple of categories where You feel like it might be a little, whether it's work boots or other items, possibly ladies' fashion where it might be a little higher. Have you taken action to reduce future orders on a go-forward basis? Because I think, frankly, it's probably the inventory levels are what make people the most anxious about where the company's positioned today. Yeah.
spk05: Yeah, Jeremy, it's Greg. So a couple things to think about. When you cite the three-year-ago analysis, you know our distribution model very well, that most of our inventory is fulfilled by the vendor directly shipping to our store after we sell the product. As we continue to increase exclusive brand penetration, we need to own that inventory immediately, right? It needs to be made in a factory environment. We need to take possession of it and put it in our distribution centers. So over those three years, we've grown EB, call it 10 points, 9 or 10 points, on a base of call it 20. So we've had significant increase in the amount of inventory that we need to own to support EB. So that's one factor that you need to consider. As it relates to taking action, Jim kind of mentioned this a few minutes ago, which is The categories where the merchandise has a go bad date by or whatever, that's ladies apparel and denim, fashion denim, not replenishment denim, and ladies boots. And so we've taken some action over the past six weeks to move through some of that inventory that we thought we needed to. So We're not holding off on taking action where we need to. We frankly feel great about the inventory levels in those two categories. And again, where we think we're a little bit high is work boots and men's western boots that have a rubber sole, so very functional in nature. So again, I continue to feel good about the level of inventory and the health of that inventory.
spk04: So just as a follow-up then, extrapolating to thinking about the next few quarters here as things probably normalize a little bit, you've got 100 basis points of drag projected in your FY23 guidance for gross margins. Is it pretty fair to assume that you think as you look forward to the following year that there's no reason why you wouldn't be in the 36% to 38% range again on gross margins?
spk05: We haven't, I mean, I'm looking at Jim Watkins. We haven't put guidance out there, but I think that's fair to think that way. I think that's right, Jeremy. All right.
spk03: Thanks, guys. Best wishes. No problem. I want to just circle back to the earlier point and add to Greg's answer. When COVID first emerged and, you know, store sales fell 50%, 60% or something, you would have thought, we sort of pressure tested a model where you have 200 inventory for your sales growth, and we had literally one quarter of a very modest decline in merchandise margin, less than a point. Other than that, for five, six years in a row now, we've never called out a margin problem. So I recognize that this question continues to come up. We continue to play with a lot of inventory. That inventory has helped really drive incredibly strong sales growth. So the bet has been paying off, and I don't expect us to come out anytime soon with any material margin erosion based on markdowns.
spk02: We can move to the next question.
spk00: Thank you. Our next question comes from the line of Mitch Kometz from Seaport Research. Please go ahead.
spk08: Yeah, excuse me. Thanks for taking my questions. First off, I was just hoping you could reconcile the comp guidance a little bit for Q2. I'm sorry, for Q3. So quarter to date, you're running minus 1.3, and for the quarter, you're saying minus 3 to minus 5. I guess first off, I'm curious, within that minus 1.3, is there some sequential deterioration in that number that you're kind of extrapolating going forward over the balance of the quarter? Or, you know, is the difference between the quarter to date and the quarter guide more like a function of a tougher compare over the balance of the quarter? Can you just address that, please?
spk05: Yeah. No, you're talking about whether within October, the four weeks of October, there's anything sequential? No. Really what it is, Mitch, is – If you break it into two pieces, the e-commerce piece, we're continuing to extrapolate the e-commerce sales that we've seen in October for the balance of the year. And minus high teens, I think we're minus 17 for October and extrapolating that out for the rest of the year. And as it comes to the stores, the stores are seeing nice growth with the plus growth. one seven in the month of October and we're guiding, you know, Q3 and Q4 minus two to flat. And so there is some, we do have tougher comps in November, December, but really there's some conservatism that we've got planned into to that guide there.
spk08: Okay. And then just a real quick followup, and I might be splitting here. So, but you're saying you're extrapolating the height, the minus high teens on e-commerce over the balance of the quarter to Does e-commerce become a bigger, you know, is it a higher penetration over the balance of the quarter versus October? Is that part of why you would see a more difficult comp in November, December than October?
spk05: Yeah, well, the more difficult comp is really talking about the store sales, I guess. But e-commerce is a percent of sales for the third quarter is about 14%. So it's higher than an average quarter, and it's going to be about 12% a year. Okay. For October, it is a lower portion of the quarter than November, December.
spk08: Okay. And then I guess just a second question, just maybe a little bit of a housekeeping. Tim Watkins, you mentioned that one of the changes in the guidance on the top line was some construction permitting delays. Is there any way to quantify that impact on the guide? And correct me if I'm wrong, I think you're still opening the same number of stores for the year. It's just that some of these stores are maybe coming online later. Yeah, no, that's right.
spk01: From a sales standpoint, yeah, it's $6 million for the year. Okay, all right, so not a huge number. All right, okay, thank you. Good luck. Thank you, Mitch. Thanks, Mitch.
spk00: Thank you. Our next question comes from the line of Jay Soul from UBS. Please go ahead.
spk01: Great. Thank you so much. I have just two short questions.
spk07: The first one is, Jim, I think you spoke to this, but sort of maybe just explain it one more time. You're seeing the pressure in the online business, but why is it not impacting the stores? Why has the store trend still been pretty consistent? And then secondly, on the deleverage on buying and occupancy, maybe is it possible to break down that 100 basis points? Is it more of the distribution center cost? Is that the buying and occupancy? And if you can maybe relate what the leverage point is on the comp. I mean, the comp was 4% in the stores and 2.5% overall. What kind of comps do you need going forward to not have deleverage on bargain occupancy and distribution centers?
spk01: Do you want me to go first?
spk03: So on the stores versus e-commerce piece, there's surprisingly small a small amount of overlap between a store customer and an e-commerce customer. It's certainly less than half of our customer base shops both channels. So we have sort of a different set of competitors online than we do in our stores. And our stores customers are just very loyal to us. They're part of our Be Rewarded program. They've shopped with us typically for a long time. And we continue to ensure that the in-store environment and experience is just second to none. So I think our stores business continues to get growth on top of just incredibly strong growth last year and, frankly, for the last decade. But with e-commerce and, you know, everyone has the ability to open up a site and sell a pair of boots online, The brands can sell a pair of boots or a pair of jeans online directly, of course, and they do. Fortunately for our industry, most of the business, most of the market is conducted and transacted inside a store. So while our competitive set is more complicated and it's very easy to change the URL on your browser to buy from somebody else, we have a really, really strong position on the other 85 to 90% of the market, which happens in the stores. You want to take that second part of the question?
spk05: Yeah, so on the 100 basis points of occupancy due leverage on the full year, Jay, really I'd look to maybe three things. The first being the new store opening this year being 40 versus 28 last year puts some pressure on that line item. The second is related to, you know, costs from the D.C. labor. We talked last year about increased wages a year ago in fall, heading into holiday, that we increased pay rates. So the first half of this year, we're incurring those higher costs compared to a period where we didn't have those costs. And then the third, the thing that just went live, our Kansas City – distribution center, you know, we're now paying rent on that and we're ramping up the operating costs there. So for the back half of the year, that's something that will put some pressure when compared to the prior year. As far as leverage points for buying and occupancy, we didn't guide that this year. When we started the year and we had put out a 4.8% Zim store sales growth, we had planned about 40 basis points of buying and occupancy deleverage. And Yeah, so you can kind of use that to anchor into what it would have been this year. Again, at the start of the year, we looked at this as more of a reset year and didn't provide those leverage points. If we get to next year, my thinking now is that we would provide that going forward.
spk02: Okay, thank you so much. Thanks, Jim. Thanks, Jim.
spk00: Thank you. Our next question comes from the line of John Lawrence from Benchmark. Please go ahead.
spk06: All right, thanks, guys. I appreciate your time. Jim, would you comment a little bit? You talked about it last couple of quarters, but your comments about the new stores. I mean, anything that – I know you went through it, you know, the lack of sort of cannibalization and some of the new markets. Are those trends just continuing when you go to a new market? You mentioned Delaware and some of those that – These stores are coming out of the ground just much faster than you thought. Can you just talk about that briefly, please?
spk03: Yes, I'd love to. The story is exactly the same, and it is as good a story as you could imagine. We continue to open up stores in all parts of the country. So we just opened up a brand-new store in California. Its budget was probably $2 million. It's probably going to do $6 million. We've opened up a store – A few stores in Delaware, Pennsylvania, New Jersey now, again, their budget was probably $1.8 or $2 million, depending on the store, and they are running at $3.5 or more million dollars each. So rather than pay back in three years or paying back in, call it 18 months, we haven't seen... Any material cannibalization, as we've opened up and added to different markets, Phoenix, Arizona is a perfect example. We used to have four stores there, and now we have eight stores. Those four stores used to do $10 million. The eight stores now do like $40 million. And we haven't seen a deterioration of same-store sales there. So as we look forward, the downside risk of opening up a store is quite low. We have 321 stores, and every single one of them is EBIT positive at the moment. So we'll continue to open up stores. We'll open the next 300 stores. They'll do $3.5 million each. That'll be a billion dollars. So people will ask us 100 million questions around what our comp is in October, but I can tell you the next billion dollars of sales is sort of right in front of us if we can just continue to execute on our new store openings. So I appreciate the question because it sort of puts the focus on where it should be, which is this is a new unit growth retailer, and we've sort of proven that we can grow from the 86-door chain that it was when I got here to 321 today and on our way to 900.
spk06: So just not to belabor the point, but looking at that and that tremendous store growth and part of it, Part of the reason you selected those sites is because of the e-commerce business, correct?
spk03: It's one factor of many factors, if I'm honest. And we do use it. We use multiple inputs, though, in a giant retail model, population, employment levels, income levels, like graphic information, et cetera, et cetera, et cetera.
spk06: But could it just simply be part of that is that you switch that customer maybe from a little bit of a direct customer to a store customer in some of those markets?
spk03: It's a fair hypothesis, but what we have seen is when we put a store in a new market, the e-commerce business goes up and not down. The other thing I would tell you is One store, we just happened to look at this earlier, one store in Delaware will do more than the entire e-commerce business in Delaware. So the notion that e-commerce can impact retail store locations or you can trade customers, which we talk about all the time, I just don't buy into it. And the data that at least I have access to would dismiss it as a hypothesis.
spk06: Great. Thanks for the time. Congrats on the results.
spk01: Thank you so much. Ryan, I think that was the last question.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the conference to Mr. Jim Conroy for closing comments. Thank you, everyone.
spk03: I appreciate you joining the call today. We look forward to speaking with you on our third quarter earnings call.
spk01: Take care.
spk00: Thank you. The conference of Boot Barn Holdings Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.
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