Boot Barn Holdings, Inc.

Good day, everyone, and welcome to the Boot Barn Holdings third quarter 2024 earnings call. As a reminder, this call is being recorded. Now, I'd like to turn the conference over to your host, Mr. Mark Dadovish, Senior Vice President of Financial Planning. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's third quarter fiscal 2024 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer, and Jim Watkins, Chief Financial Officer. A copy of today's press release, along with a supplemental financial presentation, is available on the Investor Relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days on the Investor Relations section of the company's website. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Boot Barn's judgment and analysis only as of today, and actual results may differ materially from current expectations 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 during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter fiscal 2024 earnings release, as well as our filings 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 will now turn the call over to Jim Conroy, DuPont's President and Chief Executive Officer.

Jim? Thank you, Mark, and good afternoon. Thank you, everyone, for joining us. On this call, I will review our third quarter fiscal 24 results, discuss the progress we have made across each of our four strategic initiatives, and provide an update on current business. Following my remarks, Jim Watkins will review our financial performance in more detail, and then we will open the call up for questions. We are pleased with our third quarter results, which marks the highest sales volume in Boot Barn's history. During the quarter, total sales grew by 1.1%, driven by the 49 new stores added over the last 12 months. It is worth noting that except for three COVID-impacted quarters, we have grown sales by on a year-over-year basis every quarter since we went public nearly 10 years ago. The incremental revenue from new stores was partially offset by a 9.7% decline in same-store sales. To put this performance in perspective, our third-quarter sales are up 83% from pre-pandemic levels, with our same-store sales up almost 50% on a four-year stack basis over that same period. Additionally, we achieved 300 basis points of merchandise margin expansion during the quarter, comprised of 250 basis points of freight improvement and 50 basis points of product margin expansion. The growth in product margin was driven by more than 300 basis points increase in exclusive brand penetration, a reduced level of promotional activity, and buying economies of scale. The strength in sales and gross margin, combined with solid expense control, drove a 30 basis point increase in operating margin and earnings per diluted share of $1.81 during the quarter, up from $1.74 a year ago, and more than double our earnings per share in the same quarter pre-pandemic. We believe this demonstrates the ability of the Boot Barn model to utilize multiple levers to drive earnings growth and the team's ability to execute at a high level. As we approach the last two months of fiscal 2024 and prepare for 2025, we will maintain our focus on executing against our four strategic initiatives. I would like to spend a few minutes providing an update on each of them, beginning with expanding our store base. With 382 stores today, we are the largest player in the Western and workwear industry. In the quarter, we added 11 new stores as we expand our footprint across the country. As a reminder, we typically underwrite the investment in a new store, expecting revenue of approximately $2 million with a two- to three-year payback. The performance of the most recent 100 new stores has been considerably better than this model, with new store revenue projected to generate more than $3 million on average, or 50% higher than the typical investment thesis, with an accelerated payback of approximately 18 months. And if we view this on a shorter timeline, the most recent 45 stores that have been open one full calendar year, opening before December 2022, have generated approximately $3.3 million of annual revenue on average over the last 12 months. We believe that the combination of 15% new store openings, a 60% return on capital, and and the opportunity to more than double our units is one of the strongest, most compelling growth stories in the retail industry. Moving to our second initiative, driving same-store sales growth. Our third quarter same-store sales declined 9.7% within the guidance range we outlined in November. The decline was driven by lower transactions partially offset by higher AUR and transaction size. The more functional categories, such as men's western boots and apparel and work boots, while still negative mid-single digit on a comp basis, outperformed the more discretionary ladies' western departments. Geographically, the west and north regions were slightly better than chain average, and the south and east were slightly worse than chain average. As I reflect on our execution in the quarter, I am very proud of the entire cross-functional team. The merchandising team managed inventory levels extremely well, improving product margin and constraining growth in clearance merchandise, despite a nearly double-digit decline in same-store sales. The stores team also performed quite well, as evidenced by earning the highest customer service scores for any holiday quarter in the history of Boot Barn. They also supported our omnichannel business by fulfilling more than 45% of our total e-commerce orders over the holiday period. Before moving on to the next strategic initiative, I do want to provide a bit of historical perspective to our recent SAM store sales results. I think it is helpful to remember that our average store volume increased by more than 50% beginning in March of 2021 and has remained at elevated levels for nearly three full years now. On a year-to-date basis, our retail store SAM store sales have declined by approximately 6%. cycling plus 2% for the full year of fiscal 23 and plus 57% the year prior to that. Going forward, while same-store sales may continue to be negative for the near future, we believe it is unlikely that we will forfeit a significant portion of the higher average store sales volume. Similarly, when we look at our customer count metrics, we reach the same conclusions. The elevated level of average store volume that began a few years ago was a result of a nearly 50% growth in new customers in a comp store, and most of those customers became repeat purchasers. These two statistics give us confidence and our belief that we will likely maintain most of the elevated sales in an average store going forward. Moving to our third initiative, strengthening our omnichannel leadership. In the third quarter, our e-commerce sales declined 11.5%. Our online channel has felt pressure due to less efficient online marketing spend, partly caused by an increase in digital spend by a handful of vendors and competitors. To add some more color, our bootbarn.com business comped down low single digits in the quarter, and approximately three-fourths of the decline was due to the erosion of paid demand. Our other two sites, Schepler's and Country Outfitters, are more dependent on paid traffic, so the erosion of paid demand has a significant impact on them. Our objective continues to be to maximize profitability for our online business so we will remain disciplined with our digital spend so as not to erode earnings and our desire to grow top-line sales. Operationally, we have improved our ability to fulfill demand from nearly all of our store and warehouse locations across the country. This enabled us to commit to a pre-Christmas delivery later in the season than ever before.