Good day, everyone. And welcome to the Boot Barn Holdings, Inc. Second Quarter 2023 Earnings Call. As a reminder, this call is being recorded. Now, I would like to turn the conference over to your host, Mr. Mark Dedovesh, 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 Second Quarter Fiscal 2023 Earnings Results. With me on today's call are Jim Conroy, President and Chief Executive Officer; Greg Hackman, Executive Vice President and Chief Operating Officer; and Jim Watkins, Chief Financial Officer. A copy of today's press release, along with the 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 second quarter fiscal 2023 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, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Mark. Good afternoon. Thank you, everyone, for joining us. On this call, I'll review our second quarter fiscal 2023 results, discuss the continued progress we've made across each of our 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 very pleased with our second quarter results which reflect continued growth on top of the market share gain we've achieved over the past few years. During the quarter, total net sales grew 12.4% on top of 69.5% growth in the prior year period. The strong sales were from both existing stores and new stores opened over the past 12 months. On a three-year basis, total sales grew 88% compared to the second quarter of fiscal 2020. We believe that driving additional growth this year on top of such strong growth over the last several years demonstrates that the market share gain we've achieved will be sustainable. During the second quarter, consolidated same store sales grew 2.3%, comprised of an increase in retail store same store sales growth of 3.9%, partially offset by an e-commerce sales decline of 7%. On a three-year basis, consolidated same store sales grew 56% compared to the second quarter of fiscal 2020. We also continued our new unit expansion this year by opening at least 10 new stores for a fourth straight quarter. In addition to solid top-line performance, merchandise margin expanded 50 basis points primarily as a result of growth in exclusive brand penetration and better full-price selling. Once again, we expect to maintain our full-price selling philosophy and do not anticipate a material change in promotions or markdowns going forward. The combination of top-line growth and ongoing strength in merchandise margin resulted in an EBIT margin rate of 12.6%. Our earnings per diluted share in the second quarter was $1.06, or $0.13 better than the high end of our guidance range. We believe our consistent success in sales growth reflects the execution of our four strategic initiatives and showcases the future potential of the brand. I will now spend some time highlighting our recent progress on each initiative. Let's begin with thriving same store sales growth. We are quite pleased that we've been able to build on last year's same store sales growth. For the quarter, our same store sales grew 2.3% as we cycled a remarkable 61.7% increase in the prior year period. Our retail store comp was driven by a 4% increase in transaction size due to an 8% increase in average unit retail price, with average transactions per store approximately flat versus last year. We believe that the fact that we continue to grow on top of last year's level is a testament to the strength of the brand and the durability of the step function increase in sales that we've experienced. During the second quarter, our strongest growth categories were Men's Western apparel, Men's and Ladies' Denim, Work Apparel, Work Boots, and Cowboy Hats. Sales of men's western boots and Ladies' non-denim apparel declined on a comp store basis over the prior year period, and sales of Ladies' Boots were almost flat. While the performance of Ladies' Boots and apparel is lagging on a one-year basis, it is important to call out that both categories cycled a comp growth of more than 100% in the same quarter last year. From a geographic standpoint, we had strong results in our east and north regions, solid growth in our south region, and a decline in our west region, which is perennially our strongest region. To put this in perspective, while our west region was negative for this most recent quarter, that region has outperformed the chain average on a three-year comp basis. From a marketing perspective, our creative team continues to modernize and build the brand across multiple forms of media as we add new segments and nurture our legacy customers. The combination of world-class creative, tailored customer messaging, and a strategic mix of acquisition and retention-oriented programs has enabled us to continue to grow our customer base across the country. We believe that the strength of the brand continues to build, as evidenced by the strong sales performance of new stores in brand new markets on the east coast. From an operational perspective, we are extremely proud of the field organization across the country. Over the past two years, our average store unit sales volume has grown by more than 50%. Our field organization has demonstrated the ability to handle this increased sales level to augment the in-store staffing model and manage the additional inventory needed to fuel this growth. In addition, they have taken on several new omnichannel initiatives and implemented new in-store technology solutions, further enhancing the store experience. As we approach the holiday season, we feel good about our current staffing and overall preparedness. The team has already begun hiring seasonal store partners for the holiday sales surge, and the application flow from new candidates is quite healthy. I want to commend the entire field team as they continue to provide excellent customer service, all while managing sales growth, supply chain challenges, and multiple omnichannel initiatives.

Thank you, Jim. In the second quarter, net sales increased 12% to $352 million. Sales growth was driven by sales from new stores added during the past 12 months and a 2.3% increase in consolidated same store sales, which saw an increase in average unit retail prices driven in part by inflation. Gross profit increased 9% to $129 million, or 36.7% of sales compared to gross profit of $118 million, or 37.8% of sales in the prior year period. The 110-basis point decrease in gross profit rate resulted from a 150-basis-point deleverage in buying, occupancy, and distribution center costs, partially offset by a 50-basis-point increase in merchandise margin rate. The merchandise margin rate increase was primarily a result of growth in exclusive brand penetration and better full-price selling. Included in our merchandise margin expansion were 10 basis points of freight expense leverage. This improvement in freight expense was better than the 100 basis points of deleverage we anticipated for the quarter as we continue to experience elevated container costs along with some inventory storage fees, which were capitalized at a higher rate than what we experienced a year ago. We expect to see elevated freight expense in the third and fourth quarters as we sell through the inventory burdened with these peak freight charges. Fortunately, we are now regularly booking containers at spot rates 50% lower than recent peaks and have eliminated most off-site storage fees with the opening of our new distribution center in Kansas City, Missouri. Given these encouraging trends, we anticipate reverting back to normalized freight expense as we move into the next fiscal year, Selling, general and administrative expenses for the quarter were $85 million, or 24.2% of sales compared to $68 million, or 21.8% of sales in the prior year period. As expected, SG&A expense as a percentage of net sales increased primarily as a result of higher marketing expenses, other store-related expenses, and higher store payroll. Income from operations was $44 million, or 12.6% of sales in the quarter compared to $50 million, or 16% of sales in the prior year period. Net income was $32 million, or $1.06 per diluted share compared to $38 million, or $1.25 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory increased 83% over the prior year period to $641 million. This increase was primarily driven by additional inventory in our distribution centers in order to support new store openings and our exclusive brand growth, which continues to exceed expectations. Average comp store inventory increased approximately 39% over the prior year in order to support the sustained increase in average unit sales volume. When evaluating our in-store inventory against our updated sales projection, we have approximately 23 weeks of forward supply, which is in line with our historical average. The final portion of the increase in total inventory can be attributed to new stores, both the 43 new stores opened over the past 12 months as well as the inventory needed to stock the pipeline of stores that will open over the next couple of quarters. The team is doing a great job maintaining our in-stock position as a house of brands, and we continue to believe that the composition of our inventory is healthy. We finished the quarter with $20 million in cash on hand and $147 million drawn on our $250 million revolving line of credit. Turning to our outlook for fiscal '23. We have updated our guidance for the fiscal year and now expect total sales to be between $1.65 billion and $1.67 billion, representing growth of 10.9% to 12.2% over the prior year. We expect same store sales to be in the range of approximately minus 1% to growth of 0.5%, with retail same store sales increasing of 2% to 3%, and e-commerce same store sales decline of 11% to 13%. We expect gross profit to be between $617 million and $625 million or approximately 37.4% of sales. Gross profit includes an estimated 100-basis-point headwind from freight expense. Our income from operations is expected to be between $235 million and $243 million or 14.2% to 14.6% of sales. We expect net income for fiscal '23 to be between $173.3 million and $179.3 million. We expect earnings per diluted share to be between $5.70 and $5.90. We also expect our interest expense to be $4.6 million and capital expenditures to be between $80 million and $87 million. We remain on track to open 40 new stores during the year, including the 22 stores we have opened year-to-date. As we look to the third quarter, we expect total sales to be between $502 million and $514 million. We expect the same store sales decline of 3% to 5%, with retail store same store sales of approximately minus 2% to flat and e-commerce same store sales declining 17% to 21%. We expect gross profit to be between $184 million and $189 million, or approximately 36.8% of sales. Gross profit includes an estimated 200-basis-point headwind from freight expense. Our income from operations is expected to be between $71 million and $76 million or 14.1% to 14.8% of sales. We expect earnings per diluted share to be between $1.71 and $1.83. There are two primary drivers of the change in our full-year guidance. First, we expect the softness of our September and October e-commerce sales to continue for the balance of the year. We believe that this softness is the result of many of our online competitors and third-party vendors returning to an in-stock position on their sites and on Amazon Marketplace. Second, construction and permitting delays in many of our new stores have resulted in planned new store opening dates being pushed back from their original plan. These delays in store opening dates are expected to result in a reduction in sales from these stores in the back half of our fiscal year. Despite these delays, we remain on track to open 40 new stores this year, with approximately nine stores opening in the third quarter and 10 stores opening in the fourth quarter. In addition to the above and while not impacting our full-year guidance, the timing of the freight expense within the year has been difficult to predict. On our last call, we expected the freight expense to more negatively impact our earnings during the first half of the year than what was actualized. We now anticipate additional freight headwinds in the back half of the year, particularly in the third quarter, as we sell through the inventory burdened with peak freight charges. Third quarter freight expense is expected to be a 200-basis point headwind and fourth quarter freight expense to be 90 basis points higher than in the prior year period.

Thank you, Jim. We are pleased with the performance of the business in the second quarter and look forward to a strong finish to the year. I do want to take a minute to express my gratitude to the entire Boot Barn team. The past three years have been impacted by a global pandemic, massive supply chain challenges, and now a looming recession. Despite these obstacles, we are on pace to grow our annual sales by nearly 100%, to add considerably to our merchandise margin, and to more than triple our earnings in that same three-year time period. We've added more than 50% to our average store sales, and that new level of sales has proven to be sustainable. You should all be proud of these incredible achievements. Finally, as I look forward, the opportunity for us to triple our store count provides considerable future sales growth and clear growth opportunities for you and your team. Now I would like to open the call to take your questions. Ryan?

Our first question comes from Matthew Boss from JPMorgan.

Great. Thanks and congrats on a nice quarter. So Jim, could you elaborate on business in October? What's driven the moderation relative to the second quarter, maybe by category? And help us to bridge the back half comps now implied down mid-single digits for the back half of the year relative to negative low single digits, which I think was implied in the prior forecast.

Sure. I'm happy to provide a summary of the changes between Q2 and October, along with some additional insights. First, it's important to note that our total sales in October have increased by 80% over a three-year period. This is slightly lower than the 88% growth we saw in Q2. I want to emphasize this, particularly for those who are new to the company, because even though it indicates a sequential slowdown, it's hard to feel disappointed with such significant growth. Looking at the quarter, it was indeed outstanding, with total sales up 88% year-over-year and earnings up 300% over three years. In terms of specific changes by category, the most notable impact came from our Ladies' Boots and Ladies' Apparel segments. Within Boot Barn, there are around 20 main merchandise categories, with some seeing slight increases and others slight decreases. However, the major changes occurred between Q1 and Q2, and Q2 and Q3, primarily in Ladies' Boots and Apparel. Ladies' Boots performed exceptionally well in Q1, were flat in Q2, and dropped 9% in Q3, or in October. Ladies' Apparel declined by about 8% in October. It's crucial to consider that these categories are comparing against strong performances last year—Ladies' Apparel saw an increase of 100% and Ladies' Boots a 76% increase. Another factor influencing our overall same-store sales is the decline in our e-commerce business, which can be attributed to a few issues. One is a decrease in sales on Amazon Marketplace, and another is the increase in competition as more sellers are offering similar products. Last year, we had an advantage due to our inventory levels while competitors struggled with supply chain issues.

And Matt, I would just add to that in looking at the back half of the year and the comp assumptions on slide 17. We're speaking here to the high end of the range, but you can see that the e-commerce same store sales we guided at 1.5% at the high end of the range, are now at minus 11% for the full year, and stores actually increased a little bit from 2% at the high end of the range to 3%. And so we're continuing to see nice strength in our stores. Year-to-date, we're at plus 6.1% same store sales growth in our stores. In the month of October, we continue to see growth there at plus 1.7%. And so we've guided the back half of the year in stores to minus two to flat. So there's some conservatism in there in the stores. I would also note that November and December last year were our strongest month of the quarter. And so we want to be mindful of that as we were planning the rest of Q3 based on current business and considering last year and the regular flow of sales volumes within a quarter in our third quarter.

Okay. That's great. And then maybe just as a follow-up, relative to your guidance for operating margins to finish the year in the mid-teens, are there any material margin drivers from here that you believe the model has over earned if we looked at the past two years to consider? Or maybe if it's easier to walk through the other way, what would be the sustainable drivers of a higher-margin profile relative to pre-pandemic that you would call out?

From the perspective of merchandise margins, our product margin has been quite stable. Over the past several years, we have seen our product margin increase for 24 consecutive quarters, except for two quarters during the pandemic. We remain positive about our product margins. Our exclusive brand penetration is contributing positively to this margin. However, as we look at the second half of this year, we were initially slow to raise our retail prices in response to inventory cost increases we experienced a year ago. As we progress through the third quarter and into the fourth quarter, we expect to see sustained margin benefits from the price increases we have implemented in recent months. Initially, we thought these cost increases would be temporary, but it turns out they were not. Nevertheless, we managed to adjust by raising prices, which we believe will remain sustainable as our vendors' product costs decrease. That’s something we can adapt to, and I feel confident that our product margin rate is maintainable. Additionally, the freight challenges we have faced should be temporary; we anticipate they will subside by the end of the year. One new factor impacting our buying, occupancy, and distribution costs is our new distribution center in Kansas City, which will introduce some pressure on these costs as we experience some deleveraging in Q3 and Q4.

And Matt, it's Greg. I would just add that we are getting really nice leverage on the new average sales volume per store compared to the pre-COVID period. So any of the fixed cost, whether it's the occupancy line or in SG&A, the fixed cost embedded in that help us have sustainable or structural improvement in operating margin.

Great. Good afternoon, everyone. Thanks for taking my question. I wanted to focus on the e-com commentary. Could you elaborate a little bit more on what you're seeing from the e-com channel peers? Are you seeing more promotional activity online that you're not willing to participate in? And do you see this as a few quarters' trend of kind of a give back of sales and then things should normalize?

I agree with your observation. I don’t view this as a structural issue moving forward. We’ve experienced strong growth over the past few years, and last year we had some advantages due to better supply chain management, which allowed us to make products available both in-store and online. This contributed to our strong performance over the last couple of years. In terms of pricing, most of our online products have a floor price, so competitors rarely sell below that level due to strict policies against it. It’s not primarily about pricing; the way to grow in this business is to invest heavily in marketing such as pay-per-click or social media advertising. While many direct-to-consumer companies do that, it's not common in our sector since we deal with third-party branded goods. We have a strong competitor in Texas named Cavender's that sells the same products at similar prices. If a customer compares our site to theirs, they’ll get sales just as quickly. Additionally, we face competition from our own vendors who are enhancing their direct-to-consumer presence. It's vital for us to foster our exclusive brands because vendors might direct customers to their own websites before considering us. I believe this situation is temporary, and we will reach a new normal over the next few quarters. We want to grow our business based on our brand strength and the lifestyle aspect of Boot Barn rather than overspend on pay-per-click campaigns that could harm our profitability. We’ve focused on improving profitability in that area for the last few years and have no plans to change that approach.

That's helpful, Jim. Thank you. The second question I had was for Greg because I asked it last quarter. And I just wanted to follow up on inventory. It seems like still elevated, but I guess you're pretty comfortable with the positioning. You kind of cited some reasons. But just as you think about it today relative to three months ago, do you still feel pretty comfortable with it? Any areas of concern or pockets of elevated product?

Yes. Great question, Steve. No, I continue to feel really good about the quantity and quality of our inventory. There's been no change in how I view the inventory from three months ago. We're a highly functional business. Where we may be a little bit heavy in inventory would be in Work Boots and Men's Performance or Rubber Sole Boots, and those have very, very little fashion risk or markdown risk. We'll work through those as the business continues to come to us.

Hey, good afternoon, everyone. Nice results today. I wanted to ask a question, Jim, about the 88% growth over the last three years. I think we still get a lot of concerns that Boot Barn is over-earning. You certainly have compounded up the last three years at a much faster rate than you did pre-COVID. So maybe just reiterate why you guys think the sales that you've gained here in the last three years is structural and something that you can hang on to going forward?

I'm glad you asked that question because I want to address it directly. The primary factor driving our company's profitability is our stores channel, which has been our focus for several years. Despite not initially planning to build stores, we continued to open them, challenging conventional wisdom and sticking to a brick-and-mortar strategy that others are now adopting. In March 2021, we saw a significant increase in our average unit store volume, rising from approximately $2.7 million to $4.2 million. We have provided a graph in our supplemental presentation to help investors visualize this $4.2 million and assess its sustainability. This figure has been consistent for 19 months, and given our guidance for the remainder of the year, we expect it to remain around $4.2 million through the end of March. While there's a possibility for slight fluctuations—either up to $4.3 million or down to $4.1 million—I believe it’s unlikely to drop back to $2.7 million. There hasn't been anything in our business that suggests this 56% increase in average store sales is temporary. I don't see how it can revert all the way back to $2.7 million. This seems not well understood or appreciated, but we expect to maintain these higher levels of average store volume. We're hopeful that e-commerce will rebound and contribute to growth in the next couple of quarters. As you know, we plan to continue opening 40 to 50 stores each year, which could add another $1 billion in sales over time, with every store being profitable. Therefore, we will keep focusing on expanding our store growth.

Okay. That's helpful. Maybe just even with some share gains that you've seen over the last couple of years. I know in the past, you've talked about key competitors would be like the mom-and-pop stores, Cavender's, and the Farm and Ranch chain. Do you think you're pulling in customers that may have historically shopped in other channels, maybe just thinking like some of your denim, maybe that's a Walmart customer or even some of your kind of fast fashion customers with the Just Country launch?

We have indeed seen some share gains, primarily from within the industry. I would highlight mom-and-pop shops rather than Cavender's, as their business remains robust. We're also capturing customers from more traditional retail channels. Our primary customer profile is still the Western cowboy, who typically purchases cowboy boots, jeans, and cowboy hats. However, we've worked to broaden our product offerings to appeal to a wider audience. This includes our Just Country initiative, which targets a casual outdoor lifestyle. While these customers might not be rodeo enthusiasts, they likely enjoy activities like hiking and camping. Additionally, we have a small segment of our business, Wonderwest, that leans more toward fashion. The share gains in this area could come from various traditional retailers. Denim is a prime example; we now offer denim that would have previously been available at many specialty stores in malls, which are losing market share. Overall, our gains are coming from various sources, and I don't believe they are originating from Walmart. I doubt Walmart is concerned about losing share, though we do share some customers, our pricing strategies cater to different market segments.

Hey, guys. Thanks a lot for taking my question. So maybe just staying on a pretty similar topic, but any differences in shopping behavior last quarter as well as in October to date, just between your core shoppers and then those gained during the pandemic? And then maybe just as a follow-up there, are you able to bucket the shoppers that you gained into, say, Western Peter, so the ones that you're taking share from the moms-and-pops versus more of that country or fashion shopper.

We have very good insights into who is buying and why, linked to our loyalty program, Be Rewarded. This allows us to analyze the behavior of different customer segments. The short answer is that we've retained our customers, and we are still experiencing customer growth. In response to a previous question, even if we had attracted a lot of new customers that increased average store sales, we would expect a decline in customer counts afterward. However, we haven't observed that trend. Customer counts continue to grow, although not at the high acceleration rate we saw in the past year. It appears that customers are shopping slightly less frequently, as customer counts are up while transaction numbers remain flat. Additionally, in prior calls, we noted the positive impact from Ladies' Boots and Ladies' Apparel over several quarters. Roughly speaking, our comp sales were up 68%, and we estimated that without these ladies' segments, it would have been around 60%. There was indeed some fashion trend contributing to significant gains in these categories for a few quarters. Currently, we are seeing some reduction in that growth. Overall, we remain very pleased with our ladies' business, although it experienced a decline from over 100% growth to giving back 5 or 10 points. Still, on a two-year basis, that performance is quite strong.

Got it. That's very helpful. And then what is your confidence in the ability to drive greater full-price selling in product margins in this current promotional environment? And then you walked us through your inventory positions, but how would you assess the risk that you potentially would need to step up promos, especially if holiday in the next couple of quarters remain very promotional across just the broader retail landscape? Thanks a lot.

Sure. I'll address the first part. From a pricing perspective, we have no plans to alter our market strategy. We've invested in the Boot Barn brand and the associated customer experience. There may be smaller competitors who have overstocked and are holding sales, but we won't react to that. Our main competitor, Cavender's, operates consistently with a focus on full-price sales, occasionally offering modest promotions to create excitement, but rarely resorting to deep discounts to clear excess inventory. Though there is talk of increased promotions in other retail sectors during the holiday season, it will not affect our business strategy. I don't believe customers will choose discounted athletic shoes over full-price cowboy boots. We'll maintain our pricing strategy, at least at the levels from two years ago. Last year saw a boost due to strong sales and high demand for quality products. This year resembles our previous business model with limited promotional activities. We're fortunate to be in a market with rational competitors, both in the farm and ranch sector and with our direct competitor, Cavender's.

I believe you mostly addressed it. Max, I would just add that regarding the inventories, Jim explained it well; we don't need to promote more in order to sell inventory and raise cash. Our balance sheet is healthy, and we are approaching the holiday quarter. We will generate enough cash to pay down the line of credit. As Greg mentioned, if there is a situation where we have excess inventory, that may be addressed. If we need to hold on to that inventory for a little longer, we will do so rather than resorting to promotions.

That's right. We remain very disciplined on the businesses where we could get into trouble. Ladies' Apparel is the biggest one, both denim and non-denim. Ladies' Boots is another. We've cleared some Ladies' Boots in the most recent quarter. It's in our numbers already. So we are pretty diligent about keeping those businesses that do have more of a fashion cycle certainly than the Work categories and typically more than the Men's Western category. So we watch those businesses very closely, and they turn faster. We feel that we're pretty clean in both of those categories.

Hi. Good afternoon and thanks for taking my question. And congrats on the strong results. So one thing that's, I think, clear is that exclusive brands continue to grow, and they've been really well received by your customers. I think the exclusive brand penetration is up something like 350 basis points this quarter year-over-year. So can you talk a little bit about some initiatives there? I know you just launched a bunch of new exclusive brands. How those are trending? And then what the opportunity you see ahead for this segment of your business specifically, is to drive more sustainable profitability ahead?

Sure. That's a great question. Yes, we've added new brands, increasing from six to ten. The new brands are performing well, and we're happy with the sell-through. We've seen some standout successes along with a few other items. Overall, we're satisfied with the launches of the four new brands. Typically, we introduce a new brand across several categories. After assessing what works, we expand on those successes and potentially branch into related categories. For instance, we might start a brand and later introduce outerwear or hats. A few years back, we added a couple of brands, and last year, we added four. This contributes to our growth, and each of those brands tends to expand into related categories. We maintain the belief that we can increase our exclusive brands by around three points or 300 basis points annually. There might come a time when we decide to slow this down, but I don't think we're close to that yet. We have strong third-party brands and excellent vendor partners that we want to continue growing with, as they have significantly contributed to our current success. Customers are looking for a variety of brands within Boot Barn. I don't expect our exclusive brands to exceed 50% market share, and even if that were to happen, it would take five to six years. That's our current perspective. We have a fantastic team in place, and we're committed to investing in that team. There's a relatively new leader who has driven that group to new levels, and we're quite excited about the developments in exclusive brands.

Corey, it's Greg. Thanks for noticing that. Yes, we love that partnership with Packsize, being able to reduce waste in the shipping, if you will, of the goods to the customer. It's a great opportunity for branding as well. We think it's right as we work toward our ESG efforts to use that versus the bags that we've used historically. So it probably is a push financially or maybe just a slight cost. But in general, it's the right thing for us to do.

Thank you for taking my questions. I would like to discuss the e-commerce business and inventory. You mentioned that your e-commerce operations have been affected by your competitors having better stock levels. My question is about how many consumers you have added to your files or your quality program through e-commerce over the past couple of years.

I don't have that specific number at my fingertips. I would tell you that when we look at our e-commerce business, particularly on Boot Barn, we're still getting a fair amount of traffic. I mean our traffic has been relatively strong. I think what's happening is conversion is down, either they're then shopping elsewhere or they're not shopping with some of the stimulus money that they had shopped within the past. So from a bootbarn.com standpoint, we actually feel pretty good about the strength of the site and the traffic of the site on a year-over-year basis, less so about our performance in Amazon Marketplace, right? Amazon Marketplace, we called out as significantly down. If Amazon themselves carry the product and have it in stock, they're going to win the buy box. No matter what we do, it's just going to be the same price because it's iMAP protected. They are more in stock than they were last year. The paradox for us not to take this down, but the paradox for us is given that we've really been pushing a brick-and-mortar strategy, seeing weakness in e-commerce channel across retail has just reinforced that our long-standing strategy of focusing on the 85-plus percent of our business and of most retail business that go through physical stores was right. So we work for our e-commerce business to return to growth. But if the pendulum is swinging back, and you can see a number of D2C digital native customers are now becoming less digital native and opening up stores, we've had a ten-year head start in building a chain across the country. I feel great about what we've been able to do to create a national brand of stores that can support our digital channel. I think that will be sort of our strength going forward.

So I guess the question is what can you do better to engage customers and encourage them to spend? I'm not necessarily referring to promotions, but how can you attract more purpose-driven visitors to the site to strengthen their connection with Boot Barn and reinforce its reputation as the go-to destination?

That's a good question. We are committed to being the leading and trusted brand online, so customers should feel confident when purchasing from Boot Barn. We have improved the process for earning Be Rewarded points and recognize the need for a more seamless experience in our online program, which has historically thrived in our physical stores. We aim to enhance this aspect significantly. Additionally, we are focusing on utilizing our local stores to ensure quicker delivery to customers, including same-day options. Furthermore, we often sell commodity boots that are priced similarly across various platforms, and to stand out, we need to position our brand as the foremost name in the industry. What percent of the quarter is October? So about 25%? And then what, like December is like 45%? Is that a fair number? So December is about 50, but yes. The women's business is currently facing challenges. During my travels, I noticed a variety of both junior fashion brands and established names like Celine featuring Western boots in their collections. My question is whether this is just a temporary dip. As we approach the crucial fourth quarter holiday season, when more customers are shopping, do you believe the women's business might start to perform better and become more event-driven compared to last year’s performance? I suppose that's possible. And of course, we would love to see that happen. When we look at it as a percentage of our business, though, Ladies' Boots used to be, call it, 8% or 9% of our business, and now it's 11% of our business. So while the year-over-year comparison might be suffering a bit, it's still a bigger portion of our business than it has been historically. But it could have a reinvigoration as we get into a more gift-giving part of the season for sure. And the season quite literally then changes as we get into holiday and approaching New Year's and more party business, et cetera. We do sell a bit of product that caters to that customer as well. So we'll see. Hopefully, your instinct is right there.

Some of that was due to the calendar shift and Black Friday along with other factors affecting the months of November and December. We are forecasting the e-commerce business based on what we observe in October, and we plan to carry that forward into the third and fourth quarters. That’s essentially our perspective on the situation.

Thanks, and congrats on the sustained success. So first, I think you included it. I just don't have it in my notes. I want to confirm if you're looking for 200 basis points of freight drag in Q3. Remind me what that was in Q2.

It was 10 basis points of a tailwind, actually, Jeremy. So call it, we really have it.

Okay. I want to revisit the topic of inventory for a moment. It's clearly a significant issue. Inventory is up about 110 percentage points compared to three years ago, while sales increased by 88% in Q2 and are up about 80% compared to three years ago as we enter Q3. It appears that you have roughly $100 million in inventory above your target level. You’re not planning to go on promotion, and you seem comfortable with that. However, regarding your inventory purchasing and order rates, it's likely that you would admit they are a bit higher than desired. There are a few categories, like work boots and possibly ladies' fashion, where inventory levels might be particularly elevated. Have you made any decisions to decrease future orders moving forward? I think the current inventory levels are likely the primary concern for people regarding the company's position today.

Yes. Jeremy, it's Greg. So a couple of things to think about when you cite the three-year-ago analysis. You know our distribution model very well. 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, 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 where I mentioned this a few minutes ago, which is the categories where the merchandise has a go bad day buyer or whatever, that's Ladies' Apparel and denim, fashion denim, not replenishment denim, and Ladies' Boots. We've taken some action over the past six weeks to move through some of that inventory that we thought we needed to. We're not holding off on taking action where we need to. We frankly feel great about the inventory levels in those two categories. 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. Again, I continue to feel good about the level of inventory and the health of that inventory.

As a follow-up, considering the next few quarters as conditions likely stabilize, your FY23 guidance indicates a 100 basis points impact on gross margins. Can we reasonably assume that you believe you could return to the 36% to 38% range for gross margins in the following year?

We haven't provided guidance, but I think it's reasonable to consider that possibility.

I think that's correct, Jeremy. I want to return to the earlier point and expand on Greg's answer. When COVID first struck and store sales dropped by 50% or 60%, we put a model to the test regarding inventory for sales growth. We experienced just one quarter of a slight decline in merchandise margin, less than a point. Aside from that, for 5 or 6 years straight, we have not identified any margin issues. I understand that this question keeps arising. We still have a significant amount of inventory, which has contributed to very strong sales growth. Our strategy has been effective. I do not anticipate any significant margin erosion due to markdowns in the near future.

Thank you for taking my questions. I would like to clarify the comp guidance for Q3. Currently, you are at minus 1.3% quarter-to-date, and for the quarter, you're projecting a range of minus 3% to minus 5%. I'm interested to know if the minus 1.3% reflects any deterioration that you foresee continuing for the rest of the quarter, or if the difference between the quarter-to-date and the quarterly guidance is primarily due to a tougher comparison for the remaining period. Could you address that, please?

Yes. Regarding October, there isn't any sequential change to mention. Specifically, if we divide it into two parts, for the e-commerce segment, we're projecting the sales we've observed in October will continue at a decline of around 17% for the rest of the year. For physical stores, they experienced a growth of 1.7% in October, and we anticipate a guidance of a decline between 2% and flat for Q3 and Q4. We do face tougher comparisons in November and December, but there is some caution incorporated into our projections.

Okay. And then just a real quick follow-up, and I might be splitting here, but you're saying you're extrapolating the high to the minus high-teens on e-commerce over the balance of the quarter? Does e-commerce become bigger? 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?

Yes. Well, the more difficult comp is really talking about the store sales, I guess. But the e-commerce as 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% for the year. For October, it is a lower portion of the quarter than November, December.

Thanks, everyone. Jim, could you provide some insights on the new stores? You've mentioned this over the past few quarters, specifically regarding the lack of cannibalization in some new markets. Are these trends still holding true as you enter new markets? You brought up Delaware and other locations where these stores are being developed much quicker than anticipated. Could you discuss that briefly? 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 few stores in Delaware, Pennsylvania, and New Jersey. Again, their budget was probably $1.8 million or $2 million, depending on the store, and they are running at $3.5 million or more each. So rather than pay back in three years, we're 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, and the eight stores now do like $40 million. We haven't seen a deterioration of same store sales there. So as we look forward, the downside risk of opening up the 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 will be $1 billion. So people will ask us 100 million questions around what our comp is in October. But I can tell you that the next $1 billion 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. We've sort of proven that we can grow from the 86-store chain that it was when I got here to 321 today and on our way to 900.

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. Please go ahead.

Thank you, everyone. I appreciate you joining the call today. We look forward to speaking with you on our third quarter earnings call. Take care.

The conference of Boot Barn Holdings, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.