Boot Barn Holdings, Inc. Q4 FY2023 Earnings Call

Good day everyone and welcome to the Boot Barn Holdings' Fourth Quarter 2023 Earnings Call. As a reminder, this call is being recorded. Now, I'd 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 fourth quarter and 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 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 fourth quarter and 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 and good afternoon. Thank you everyone for joining us. On this call, I'll review our fiscal 2023 and fourth quarter 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. Fiscal 2023 was a solid year for Boot Barn as we achieved record sales, opened 45 new stores, and continued to expand product margin. I am proud of the entire Boot Barn team for driving these results and for holding on to the outsized gains from the prior year. Fiscal 2023 total sales grew 11.4% on top of 67% growth in the prior year, driven primarily by strong sales from new stores opened over the past 12 months. Consolidated same-store sales were flat to the prior year, which was comprised of 1.8% retail store same-store sales growth and a 10% decline online. The stores comp is notable as we cycled a 57% comp growth in the stores last year. Similarly, while our online business declined, that business is cycling two very strong years of 39% and 24% comp growth in fiscal 2022 and fiscal 2021, respectively. Given the extraordinary revenue increase last year, we are quite pleased with these results. In addition to the sales performance, we were able to grow our product margin for the year by 30 basis points, primarily through growth in our exclusive brand penetration. This margin expansion was offset by 100 basis points of freight headwinds, resulting in a net 70 basis point reduction in merchandise margin. To put our sales and margin results in perspective, over the past five years, Boot Barn revenue has more than doubled, adding nearly $1 billion in sales and merchandise margin has expanded approximately 500 basis points. Turning to our fourth quarter results, total sales continued to show solid growth, driven by sales from new stores. However, same-store sales declined 5.5% on a consolidated basis as we cycled same-store sales growth in the prior two years of 33% and 27%. From a margin perspective, we saw product margin expansion of 30 basis points in the quarter. It is a testament to the strength of the Boot Barn brand, where we can continue to expand our selling margin despite a decline in same-store sales. While our full year results fell short of our original expectations, overall, I am pleased that we've been able to continue to grow the business on top of a record-setting year. I will now spend some time highlighting the recent progress we have made across each of our four strategic initiatives. Let's begin with expanding our store base. Our growth engine continues to significantly outperform our expectations. While we've historically targeted 10% new store openings, we were able to accelerate the growth to 15% for fiscal 2023. We believe the 45 stores opened in the past 12 months will continue to generate average unit volumes of $3.5 million and pay back in less than 18 months. In the fourth quarter, we opened 12 new stores, which was our sixth consecutive quarter of double-digit new unit openings. These recent openings include our first stores in the states of New York and Maryland, further expanding our presence into untapped markets. We continue to be encouraged both by the new store performance in new markets and the lack of significant cannibalization as new stores are added to existing markets. The new store performance, along with a strong new store pipeline, further bolsters our confidence in the ability to expand to 900 more stores across the United States over the next several years. Moving to our second initiative, driving same-store sales growth. Fourth quarter consolidated same-store sales declined 5.5% with retail store same-store sales declining 3.3%, and e-commerce comp sales declining 18.4%. From a merchandise department perspective, the more functional product lines performed better than the more discretionary categories. These include men's western boots and men's apparel, which performed better than the chain average, while men's work boots and work apparel were in line with the chain average. Ladies boots and ladies apparel declined 11% and 13%, respectively, as both departments cycled a two-year stack of over 80%. From a marketing perspective, the brand continues to resonate across the country. The recent customer research we conducted was able to confirm that our outsized sales gains were due in part to the influx of many new customers, both from Western and work competitors and from retailers outside our industry. As we look forward, we will continue to prospect for new customers through broadcast media channels, while nurturing our legacy customer base with tailored print and direct mail communication. We are pleased with the continued expansion we have seen in our customer base with 22% year-over-year growth in our B Rewarded loyalty members, ending the year at 7.1 million active members. Drilling down into our comp stores business from a geographic standpoint, we saw a slight decline in our East and North regions. The West and South regions both experienced a mid-single-digit decline. As we look at our store KPIs, a decline in transactions per store during the quarter was partially offset by growth in average transaction amount. Our January stores business was positive on a same-store sales basis, which then turned negative in February and more negative in March. While topline performance in the stores was softer than we expected it to be at the outset of the quarter, we are relatively pleased with this result as we're recycling a two-year stack comp of approximately 60%. From an operational perspective, the field organization continues to deliver exceptional customer experience. With all the omnichannel offerings we currently have in place, our stores team has been tasked with balancing many operational responsibilities in addition to delivering high-quality customer service. The team has not only risen to this challenge, but has also managed to sustain our elevated sales per store. I do want to express my appreciation to the entire field team for their execution and their ability to adapt to the changing needs of the business. Moving to our third initiative, strengthening our omnichannel leadership. In the fourth quarter, our e-commerce same-store sales declined 18.4%, in line with the performance we saw in this channel during the third fiscal quarter. We believe these declines are a result of competitors having a stronger in-stock position compared to last year and expect this softness will be transitory. For the past few years, we have successfully rolled out several omnichannel capabilities, including ship-to-store, ship-from-store, cross-channel returns and buy online pick up in store. Doing so has enabled us to increase the customer service options online, while simultaneously expanding the breadth of the in-store assortment. Today, approximately two-thirds of our online sales are touched in some way by the stores. We believe that leveraging our nationwide store presence will create a seamless integration of our two selling channels and provide us with a sustainable competitive advantage in our industry. In addition to the omnichannel capabilities that have been created, we are continuing to make progress in a number of areas. First, we continue to see strong growth in exclusive brand penetration online as we access the broader assortment that resides in all the stores across the country. With the incremental margin provided by our exclusive brands, we expect to further increase the profitability of our online sales in the coming years. Second, during fiscal 2023, we rolled out a Boot Barn mobile app. This app creates a more convenient shopping experience for our customers, offers a mobile-friendly option for purchasing, and serves as an additional tool to drive in-store traffic. It enables our online customers to shop their local store, learn about events and concerts in their market, and stream country music directly from the app. Our digital team did an incredible job with the development and we are very pleased with the final product. Lastly, I am quite excited about a new project underway called Bandit. That utilizes artificial intelligence and machine learning to enhance the customer shopping experience. All Boot Barn stores are already equipped with touchscreen devices that guide customers through their purchase decisions by narrowing the assortment based on a series of filters and preferences. Our digital team has added to this capability tremendously. First, they have integrated machine learning to develop a recommendation engine based on market basket analysis. Second, they have created a fully integrated connection with ChatGPT to provide a customer with a conversational interactive experience. For example, if a customer is shopping for a pair of women's western boots, they will now be able to ask Bandit for a recommended outfit that would pair well with their selection to wear to a country music concert and that recommendation will be rendered with a conversational tone and qualitative reasons why these items would look good together. Additionally, we have harnessed the same capability in the handheld devices utilized by our store associates when they are assisting customers. This new technology will empower our team greatly by providing them with a deep level of product expertise and an ability to pair items together, regardless of how much product knowledge they have or experience they have working at Boot Barn. While there has certainly been a tremendous amount of recent discussion around the use of AI, we are thrilled to be on the cutting-edge, having already rolled out both customer-facing and employee-facing applications to all of our stores. I'm looking forward to the potential this new offering has to enhance the customer experience and drive incremental sales. I do want to express my gratitude to the digital team, specifically to Justin Hamlin for developing this incredible tool and enabling us to be first to market within our industry in integrating AI into the customer experience. Now, to our fourth strategic initiative, exclusive brands. During the fourth quarter, exclusive brand penetration increased 770 basis points to 37.3%. For the full year, our exclusive brands were 34% of sales and surpassed $550 million. For context, exclusive brand sales have increased more than 10 percentage points in penetration over the last two years. Consistent with prior quarters, three of the top five selling brands were Cody James, Herd & Vibe, and Idle Wind. Our exclusive brands not only provide us with competitive differentiation, but they are also financially accretive to the business by approximately 1,000 basis points of margin. Turning to current business. We are halfway through our first fiscal quarter and quarter-to-date same-store sales declined 5.8% compared to approximately 13.4% growth in the comparable prior year period. The consolidated 5.8% decline is driven by a 15.2% decrease in e-commerce sales and 4.3% decline in retail store same-store sales. Given that we are up against the toughest compares in the year ago period, it is encouraging to see a sequential improvement from March into our first quarter signaling a healthier tone in the business. I'd like to now turn the call over to Jim Watkins.

Thank you, Jim. In the fourth quarter, net sales increased 11% to $426 million. As Jim mentioned, our sales performance benefited from new stores opened over the past 12 months and the sales contribution from the 53rd week, partially offset by a same-store sales decline of 5.5%. Gross profit increased 5% to $156 million or 36.6% of sales compared to gross profit of $149 million or 38.8% of sales in the prior year period. The 220 basis point decrease in gross profit rate resulted from a 120 basis point decline in merchandise margin rate and 100 basis points of deleverage in buying, occupancy and distribution center costs. The decline in merchandise margin rate was driven by a 140 basis point headwind from higher freight expense, partially offset by 30 basis points of product margin expansion resulting from growth in exclusive brand penetration. Lower than expected freight expense was the primary driver of the beat to guidance on the merchandise margin line. As sales slowed during the quarter, we sold fewer high freight inventory items through the P&L compared to our expectations, resulting in lower freight expense. Looking forward, we expect freight expense to be a benefit to fiscal year 2024 merchandise margin of approximately 100 basis points, recapturing the 100 basis point headwind from fiscal 2023. Selling, general, and administrative expenses for the quarter were $93 million or 21.9% of sales compared to $86 million or 22.6% of sales in the prior year period. We leveraged SG&A expense primarily as a result of lower incentive-based compensation, marketing expenses, and leverage from the 14th week. Income from operations was $63 million or 14.7% of sales in the quarter compared to $62 million or 16.3% of sales in the prior year period. Net income was $46 million or $1.53 per diluted share compared to $45 million or $1.47 per diluted share in the prior year period and $0.82 per diluted share two years ago. Turning to the balance sheet. On a consolidated basis, inventory increased 24% over the prior year period to $589 million. This increase was primarily driven by new store inventory, exclusive brand growth and inflationary increases from our vendors. Average comp store inventory increased approximately 8% over the prior year period. On a three-year stack basis, our retail store same-store sales growth of 56% has outpaced our three-year stack average comp store inventory growth of 35%. We continue to be pleased with the content and quantity of our current inventory levels. We finished the quarter with $18 million in cash and $66 million drawn on our $250 million revolving line of credit. Turning to our outlook for fiscal 2024. The supplemental financial presentation we released today lays out the low and high end of our guidance ranges for both the full year and first quarter. I will then be speaking to the high end of the range for both periods in my following remarks. For the year, we expect total sales at the high end of our guidance range to be $1.7 billion, representing growth of 4% over fiscal 2023, which, as a reminder, was a 53-week year. We expect same-store sales to decline 4.5% with a retail store same-store sales decline of 5.2% and e-commerce same-store sales growth of 1%. We expect gross profit to be $630 million or approximately 36.5% of sales. Gross profit reflects an estimated 150 basis point increase in merchandise margin, which includes a 100 basis point improvement from freight expense. We expect to grow exclusive brand penetration by 400 basis points. We also anticipate 180 basis points of deleverage in buying, occupancy and distribution center costs. This deleverage is primarily the result of negative same-store sales, higher occupancy from new stores, and the cost of the new Kansas City distribution center. I'd like to provide you with some color around leverage points. On a go-forward basis, we expect to leverage buying occupancy and distribution center costs with a 4% consolidated same-store sales growth. However, as a result of the cost of our new Kansas City distribution center, the annualization of the step-up in new unit growth from 10% to 15%, store remodels in fiscal 2024 and the benefit of the 53rd week in fiscal 2023, the same-store sales required to leverage buying, occupancy, and distribution center costs in the current fiscal year is expected to be 14%. When adjusting for these transitory items, we expect to return to a more normalized leverage point of 4% in fiscal 2025. Our leverage point in fiscal 2024 on SG&A is a consolidated 2.5% comp. Our income from operations is expected to be $209.9 million or 12.2% of sales. We expect net income for fiscal 2024 to be $153 million and earnings per diluted share to be $5. We also expect our interest expense to be $4.3 million and capital expenditures to be $95 million. For the year, we expect our effective tax rate to be 25.6%. We plan to grow new units by 15%, adding 52 new stores during the year. We anticipate opening 13 new stores during each quarter of the year. As we look to the first quarter, we expect total sales at the high end of our guidance range to be $364 million. We expect the same-store sales decline of 7% with retail store same-store sales declining 6% and e-commerce same-store sales declining 15%. We expect the gross profit to be $131.1 million or approximately 36% of sales. Gross profit reflects an estimated 80 basis point increase in merchandise margin, which assumes flat freight expense year-over-year. We anticipate 250 basis points of deleverage in buying, occupancy and distribution center costs, primarily resulting from negative same-store sales, higher occupancy from new stores and the cost of the new Kansas City distribution center. Our income from operations is expected to be $36.2 million or 9.9% of sales. We expect earnings per diluted share to be $0.85. Now, I'd like to turn the call back to Jim for some closing remarks.

Thank you, Jim. We are pleased with our fiscal 2023 results and believe we are well positioned to continue our growth. During fiscal 2023, we accelerated new store openings with the 45 new stores across the country, grew product margin for the seventh consecutive year and expanded the penetration of exclusive brands by a record 570 basis points. With new stores continuing to well exceed our financial targets and our growing store footprint, providing even greater integration with our digital channel, we are confident the business is on course to deliver profitable market share gains and increased shareholder value. I'm very proud of the entire team across the country, I want to thank you all for your continued hard work and execution. I also would like to take a brief moment to publicly express my gratitude to Greg Hackman, who will be retiring this summer. Greg has had a significant impact on the growth of the company and on the personal development of executives. Thank you, Greg, for all that you have done for Boot Barn, for your team and for me personally. Now, I would like to open the call to take your questions. Shamali?

Thank you. And at this time, we will be conducting a question-and-answer session. Operator Instructions: (instructions for participants were provided). Our first question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks. So maybe, Jim, as we think about FY 2024 comps, and I think, guided down 5.5% at the midpoint. Two questions. So, can you speak to trends that you're seeing today across your existing legacy customers versus new customers that you've acquired, just the general trend across both? And then as we think about the guide in terms of the first quarter of 2024 relative to the back half, if you could just help us bottoms-up build same-store sales as the year progresses 1Q relative to assumptions baked into the back half? I think that would really help.

Sure, I'll take the first piece of it. It's hard to split out the comp between new and legacy customers. I wouldn't read much into a slightly negative comp after we cycled last year's 53.7%; even if we give a little bit of that back, it's not like there's this massive exodus of customers from our database. In fact, we called out ongoing growth in our customer count. And if we look at our stores specifically, our stores were up 57% last year and still positive in fiscal 2023. So, I think what might be happening—if you think about what many other companies are calling out with some softness in March and April—it may just be sort of the natural downdraft that we're seeing in retail. And while some very marquee companies have called out softer business in the spring, companies that we have a great deal of respect for, they weren't even cycling the numbers that we were cycling. So, the fact that we're down just slightly when the rest of the world of retail seems to be down just like them and our LOI compares are sort of higher than everybody else, we honestly are not worried about sort of a slow decline for the next several years. I think this could just be a small—for a transitory amount of time.

And Matt, I'll take the second part. In guiding the year, we used the last few months of sales volume and projected the sales for the balance of the year using the historical weekly sales penetration. And so as that flows out through the year, the second quarter stores are going to—the comp is going to look similar to the first quarter comp with e-commerce improving to run flat in that second quarter. As we get to Q3 and Q4, the stores get better, but they're still projected to be down in that mid-single-digit range, better than what we'll see in Q1 and Q2, but still not positive, and e-commerce improves to a plus mid-single-digit.

Great. And then maybe just a follow-up. As we think about the profitability side, could you just speak or elaborate to promotional behavior that you're seeing today within your own business? Or what you're seeing in the larger Western wear industry? Or just what gives you confidence in the 150 basis points of merchandise margin expansion in FY 2024 despite the—it sounds like a little bit of a softer demand backdrop?

Sure, I would say that the Western industry's promotional tenor is similar to pre-pandemic times, with a relatively modest amount of sales and promotions across the industry, perhaps more promotional than two years ago when sales were strong across the industry. But nothing really out of the question or out of the ordinary. And maybe the follow-up point to that is, regardless of what the rest of the industry does, we never really chase a promotion or a sale or a reduction in prices from any of our competitors. We think the Boot Barn proposition goes far beyond a short-term reduction in price. And when we look at the health of our inventory, we see no reason to make any significant reductions to move through product. So, we're going to continue with our full-price selling philosophy. We're going to continue to drive exclusive brands. We get a nice tailwind for this year. So, we're looking forward to, I guess, an eighth consecutive year of margin expansion.

And Matt, just to add on to that, the 150 basis points of merchandise margin expansion does include the 100 basis points of freight tailwind for the year. So, it is 50 basis points of product margin that we're guiding to, and with exclusive brand penetration growth of 400 basis points for the year, that's driving a lot of that product margin expansion.

Great. Best of luck.

Our next question comes from the line of Steven Zaccone with Citi. Please proceed with your question.

Great. Good afternoon. Thanks for taking my question. I wanted to follow-up on Matt's question about same-store sales. What have you seen from a category performance thus far in the first quarter? And can you talk about your expectations from a category perspective for the year? And then just also, how do we think about ticket versus transaction performance within the guidance range?

Sure. On the second part, I guess we don't really outline our guidance in traffic versus ticket, but we expect to see continued pressure, probably low single-digit in traffic or average transactions per store with a higher ticket for most of the year. At some point, we'll cycle the increases that we had or the inflationary price increases we took last year. In terms of category by category, some of the businesses that are less discretionary, more staple-type products continue to do better. Men's western apparel has seen a slight sequential improvement from the fourth quarter into the first quarter; men's western boots are roughly flat for the first quarter-to-date. The businesses that are down in any significant way continue to be more discretionary purchases, at least in general. So, ladies boots and ladies apparel continue to be softer. Ladies apparel is down, call it, 12 points or so. Ladies western boots are high single-digit declines. I always feel obligated to remind the call that the ladies business is up against just enormous growth numbers in both boots and apparel. If I look at Q4, ladies apparel, just as an example, in Q4, it was up against an 83% growth last year and a 43% growth the prior year. So, if we wind up giving 10 or 15 points of that back, internally within the four walls of the company, we won't get fussed over that. We just grew at 40% and then 80% on top of that. So, giving a little bit back is almost expected. And when we put it all together, if we end up with a modest decline in same-store sales, coming off the years in the most recent couple of years, I think we should feel pretty good about that.

Just to follow-up on that comment. What gives you confidence that it's not fashion risk to the business, right? Like some of the discretionary categories are slowing now. Do you think that potentially fashion is working against you, whereas last year, maybe a couple of years, it worked for you?

Well, actually, I would say it is fashion working against us. We have seen some really upsized growth in the ladies business. Now, being mindful of the fact that we're overly generalizing and there's a tremendous amount of our ladies categories that are basic product for women who ride horses, et cetera. But there is sort of a layer on top of that that we believe was helping us from a fashion sense in the last couple of years. If you go back several quarters, we said it was probably an 8% help. We haven't quantified it, but that 8% help has probably turned against us. I would point you to page 12 in the supplemental deck that points to how small the fashion component is within our assortment and how it's diluted down or really dominated by the more functional product. The second thing I feel obligated to call out is, historically, there's been a lot of dialogue around our outsized growth being driven by fashion or television shows or something. And one of the things we tried to do this quarter is to validate whether that's true or not. So, there's not a tremendous amount of publicly available data, but there are companies that sell product that we sell. And if there was this massive fashion trend or macro cycle based on a television show, you'd see everybody seeing that same growth. And again, if you go back to that same document I just pointed you to on page 10, you'll see that the growth we experienced just far outpaces anything that anybody else has seen in the industry, which I think speaks mostly to the execution of the people at Boot Barn, not some sort of artificial transitory piece of fashion.

Okay. Thanks for the detail. I'll cede the floor.

Our next question is from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hey, thanks. Good afternoon everyone. I wanted to look at the recent store growth that you have. So you've accelerated up to kind of mid-teens unit growth this past year and expect that to continue. The stores are coming out pretty strong out of the gate, but historically, your new stores have comped double digit in year two. What are you expecting from a maturation angle from this most recent batch of openings the last 12 to 18 months?

Yes, you're right. The stores have gotten out of the gate extremely quickly. The first year performance has been a little bit more in line with the chain comp. So, when we're comping slightly positive last year, they were comping slightly positive. We haven't seen a great waterfall for those recent openings. I do think there's been a lot of other macro things moving around. So, we'll see what happens as we continue to open up stores over the next couple of years. But we continue to be very enthusiastic about the new store openings and the pipeline that we have. We're on pace now for opening up a store a week, so that will be about 100 stores over the next two years and add, call it, $350 million worth of revenue and the flow through along with that. So, we're excited about the growth prospects going forward.

Okay, great. And then just looking back at the falloff in comp trend that happened in March and particularly at retail. I guess there's been a debate that I've had with investors in recent weeks around the weather impact and all of the rain out West. Do you think that actually impacted demand, either positively or negatively at all in the last two months?

Well, as you know, we tend not to use weather very often as a reason or rationale for much of anything. So, I think over periods of time, of course, it normalizes. I do think if your question is specifically around California, the challenge that we're seeing in California was we have gone from drought to torrential downpours. And we often talk about it as the impact it will have on a particular customer. But in the extremes that we've seen, the impact that it's having is on the farming industry. So, during the drought, we had a more difficult agricultural market in the Central Valley, for example, which is one of our strongholds of stores. And then as the rain started to come, we thought that would help that market. It's unclear what that will be going forward because they've had so much rain that we've seen farmland now flooded. So, those businesses—we have two specific districts in California that are being impacted and they're down, call it, 15% or so, and they're very high-volume districts. But we'll get through that, whether that's in two months or six months will be on the other side of the weather. And those businesses, as you know well, Peter, have been perennial strongholds and just real great growth drivers for us for five or more years coming into this period, and the team will pick up from that once the weather passes, and we're pretty certain we'll start to see growth there again.

Okay, very good. Thank you very much.

Our next question comes from the line of Max Rakhlenko with TD Cowen. Please proceed with your question.

Hey, thanks a lot guys. So, first, can you speak to your new customer counts on a same-store basis compared to where you were pre-pandemic? Are your new shoppers behaving similar or showing any differences versus the legacy shoppers? And then just your confidence in being able to hold on to them when the Western cycle does inevitably slow?

Max, can you repeat the first part of your first question, it cut out on us?

Sorry about that. Just your customer accounts on a same-store basis because you typically speak to it overall, and obviously, you've grown a lot of stores. So, just curious what they look like on a same-store basis.

I'm not sure I have that number specifically at hand. I guess what we could point you to is new stores grew 15%. And of course, the customer count in new stores on average would be less than a legacy store. Our B Rewarded customer count grew 22%. So, we've seen more customers just mathematically on an average store basis at bare minimum on the delta between those two different numbers. On the second piece, yes. I think—again, there's been a lot of conversation around all the help that fashion trends have given us. The businesses that we would consider fashionable right now are undoubtedly headwinds to our comp and were in the fourth quarter for sure. So, I'm not sure there's a big shift that will be seen. And candidly, I come back to the comments I made earlier: a lot of the other companies in our space didn't see the growth that we saw that you would have expected if it was a Western wear trend across retail. Again, I would point you to page 10, where our growth considerably outpaced the only four companies we can get data on from a public company standpoint, and these are great companies, extremely well run, great partners to us, but we certainly were able to outpace whatever underlying fashion cycle there was. But that fashion cycle, there may have been, is no longer here. We're certainly up against these outsized growth rates, particularly in ladies apparel, which has a portion of that that is fashion.

Got it, okay. And then what do you attribute the acceleration in exclusive brand mix in 4Q? And then it looks like that you raised your exclusive brand penetration growth for 2024 for the first time in a while. So, is there anything that you're seeing differently? Are the shoppers maybe behaving a little bit differently? Thanks a lot.

I think our new brands continue to build momentum. Historically, we had six exclusive brands, then we launched several new exclusive brands in the last 18 months or so. When we launch a new brand, it starts off small to medium sized and then continues to get more traction and is added into more categories. So, that part of the business will continue to grow. We expect it to grow again this year. It has exceeded all of our expectations that we had five years ago and two years ago and last year. Customers are really responding to them. And they're great complements to the third-party brands that we have out there. Most of our big national brands continue to see growth with us, and the exclusive brands are, in general, taking share from secondary or tertiary or non-strategic brands out there. So, we're excited to see that part of the business continue to grow. You can only buy that product at Boot Barn. It's financially accretive, of course. So, we'll continue to build that business and work it into the assortment to a point where we ultimately say, yes, we've hit a ceiling in a particular category and then we'll slow down, but I don't see that happening for a few years.

Sorry. Just on that last point, does the ceiling change at all? Or is it sort of similar as what you thought a year or two years or three years ago?

I think the ceiling has continued to increase. Ten years ago, we thought maybe we could get to 20% and still maintain a compelling assortment and a house of brands commitment to our customers, and then we marched right through 20%. During COVID, supply chain disruptions gave us an unplanned experiment where we had access to exclusive brands and less access to third-party brands, which resulted in a very nice increase in our exclusive brand penetration while sales were growing dramatically. When we put those two facts together, we said we can double the business in three years and grow exclusive brands. We certainly don't see them as a detriment to topline growth. If I really had to answer that question, I'd go category by category because some departments are dominated by a brand or two and others have much less national brand strength where the ceiling would be higher. As a company, our ceiling would be a composite number rolling up all those departments.

Got it. Very helpful. Thanks a lot guys and best regards.

Our next question comes from the line of Jonathan Komp with Baird. Please proceed with your question.

Yes, hi. Good afternoon. I wanted to just ask a broader question. The whole increase in unit volumes that you've seen in the past few years. It looks like you're embedding about $4.4 million mature store unit volumes for the year ahead. Just any change in your confidence in holding that level? And then as you think about the build for this year based on the weekly sales trends, any perspective you can provide? Does that give enough room if unemployment starts to tick up or how have you factored in any sort of macro sensitivity?

So, for the folks on the call, Jon is alluding to a slide in the supplemental presentation, page 11, which is similar—slightly different but similar to a slide that we've used in the past. That says, look, we've had a step-up in the average sales per store and it's now been 24 months. While we're down slightly from a comp basis that $4.6 million has gone to approximately $4.4 million, which triangulates to roughly a negative five comp. We expect that business to stay in the $4.4 million-ish range going forward, which is reflected in the same-store sales guide that's out there. Could it be better than that? Possibly. I think we are trying to keep an eye on what's happening from a macro standpoint: some of the softness in the discretionary categories, some of the things that the mega cap retailers are calling out who have insight into a much broader portion of the population. So, we're trying to be a little conservative. If you look at our guide, our guide is more conservative than our current quarter and I think that's the gap.

Yes, thank you. That's helpful. And then maybe question just on the margin profile. It looks like you're rebasing this year around 12% operating margin, give or take. Any perspective you can share just quantifying how much additional expense that includes from the step-up in unit growth and the distribution center? And then as we think out to 2025 and beyond, is it realistic to think you get back to your long-term earnings algorithm after the reset this year?

Jon, just walking you through some of the move-out: the occupancy deleverage and the negative same-store sales guide for the year is worth around 60 basis points. The acceleration of getting us from ramping up new store growth from 10% to 15% is a step-up that costs about 50 basis points on that occupancy deleverage. The Kansas City distribution center is about 35 basis points of that deleverage. Once we get that up to full run rate, we're expecting to see some relief from freight expenses as we're shipping from the center of the country now. So, again, as we get to fiscal 2025, that will be full run rate in helping us. We've got some remodels that we're doing to get some of our stores brand right—approximately 30 to 35 stores—and so that's in there; that's a step-up from last year that's costing us about 20 basis points. And then there's lapping of the 53rd week which is about 15 basis points. So, I think just from a margin perspective, those are some of the things that are dragging this year. As we turn to the following year, whether we get back to the algorithm—assuming the topline recovers and gets back to the growth that we've outlined of low to mid-single-digit same-store sales growth—the expectation would be to continue at 15% new unit growth into the future. That's a little bit more of a drag on occupancy initially until we can get that full run rate, but there's no reason to think we wouldn't get back to that algorithm.

If I could just add to the commentary around the algorithm, I think we often use the algorithm term as an abbreviation for our same-store sales growth. The original algorithm assumed 10% new unit growth with new stores doing $1.7 million; we're at 15% unit growth with new stores doing roughly double that. It assumed exclusive brands would grow 250 basis points a year. Over the last two years, they've grown 500 basis points a year. We really wildly exceeded the algorithm. If you look at EPS, three years ago we were at about $2; this year we're guiding to $5. The algorithm at 20% EPS growth would be a slowdown relative to what we've achieved. So, getting back to the algorithm would be a slowdown if you look at a multiple year period other than the most recent year's comp. I do want to make sure everybody doesn't lose sight of the multiple levers we have to grow this business and how we're overachieving on all of them other than comps for the last few quarters.

That's really helpful. And I guess what I'm asking is, do you see a multiyear earnings reset after the strength you've delivered? Or is there any reason that you can't get back to nice growth with 2024 being the new base here?

Jim Watkins doesn't feel obligated to give a 2025 guide as we just have everyone digesting the 2024 guide. I think if we look to next year, the two things we have high confidence in are we'll open 52 stores or maybe slightly more because we'll try to keep 15% growth, and we expect to continue to see exclusive brands build. The same-store sales piece is a bit more uncertain; we've had incredible growth over the last couple of years and we've given some back. My intuition tells me we'll be back to low to mid-single-digits for fiscal 2025, but we'll have a lot more clarity in 12 months when we're putting out that guide. If you're thinking about where the risk is, we do have about 100 stores upcoming in the next 24 months that will generate roughly $350 million of sales and significant EBIT regardless of what the comp is. The new store engine is really building momentum. Despite guiding to a negative comp, we're still seeing total sales growth and we're still assuming we'll get to a $5 EPS number. So, we feel pretty good about our positioning right now.

That's really helpful. Thanks for walking through all of that. Best of luck.

Our next question comes from the line of Janine Stichter with BTIG. Please proceed with your question.

Hi everyone. I want to ask about the e-commerce business. It seems like it's a bit weaker for longer than we would have expected. So, just wanted to understand if there's anything you might change there in terms of the strategy—is it still a case of prioritizing the stores business and prioritizing profitability of e-commerce? Or could anything potentially change there in the strategy with maybe the advertising dollars? And then along those lines, just wanted to get your confidence in it turning flat in Q2.

So, no change. Similar to how we don't chase promotions in our retail stores, we don't think spending more marketing online is going to be EBIT accretive. We certainly could spend more and grow topline and have it be EBITDA eroding, but we tend to focus on the profitability of the business and on growing earnings and not a short-term boost to the e-commerce channel. In terms of the cycling of negative numbers, we've been consistent that it would be in the second quarter fiscal 2024 where we would see that business turn positive. So, we haven't been surprised. If we've been surprised at all, the one thing we don't split out often is the difference between bootbarn.com and sheplers.com. The bootbarn.com business is already back to flag and is being dragged down by sheplers.com, which, while that might be disappointing when investors look at a negative e-commerce, that business isn't our marquee brand. It's not strategic to us other than it gives us the ability to be price competitive if we ever had to be. We are going to continue to operate that business as we have been. I think our degree of confidence that it will turn positive by mid- to late-second quarter is still pretty good. We continue to focus that part of the organization on building out capabilities for customers across channels. They've done some incredible work: the amount of shipments that are now shipped from our stores versus a couple of years ago is incredible—about a third of our e-commerce business is now being shipped from stores—which gives us the ability to put the best product in all of our stores and funnel markdowns through the e-commerce channel if needed. I can't say enough about how well the digital team has been doing, and I certainly don't want to spend unprofitable advertising dollars to boost the sales line.

Okay, perfect. And then a follow-up on the freight. I know you said 100 basis points for this year. Over the last few years, you've lost over 200 basis points from freight headwinds. Should we expect that you get some of that in fiscal 2025? Or is there a sense that you're not getting it all back? How are you thinking about recovery?

It's a great question, Janine. I think it's really going to come down to where freight rates stabilize. We're seeing container costs back to pre-COVID levels. In six to 12 months we'll have a better idea; we do expect to get some of that back in fiscal 2025. For fiscal 2024, we feel comfortable guiding a 100 basis point recovery for what we gave back last year, and then we'll see how the macro settles.

Great, thanks very much and best of luck.

Our next question comes from the line of Jason Haas with Bank of America. Please proceed with your question.

Hey, good afternoon and thanks for taking my questions. I was curious if you could talk about how new stores are performing in your newer markets, particularly in the Northeast. I know there's maybe some concern that the concept wouldn't resonate with customers in the Northeast. So, maybe you could tell us how those stores have been performing lately?

Sure. They're outperforming our new store model for sure. Historically, we thought a new store could do $1.7 million or $2 million, and we've updated that to $3.5 million. That $3.5 million has proven to be true in legacy markets like Texas and California as well as markets like Pennsylvania, Virginia, Maryland, New York, and New Jersey. While it may seem counterintuitive to some, we are seeing new stores in that part of the country selling Western product in equal proportion to the rest of the country. So, it's not like we open up a store on Long Island and it's selling all jeans and work boots; it's selling cowboy boots and cowboy hats and is on par with the new store model. In summary, we're quite pleased with new store openings in our new markets. While there's some concern about downside risk of opening new stores, we have 352 stores today and either zero or one or two lose money. So, the downside risk is pretty low for us. We're going to continue to expand the footprint across the country. That will continue to give us more economies of scale, continue to build the brand and has a high degree of certainty that we'll get between $3 million and $4 million of additional revenue for every new unit that we open.

That's great. Thank you. And then as a follow-up, I was looking at the 2.5% leverage point for SG&A in fiscal 2024. Is that a good leverage point to think about for fiscal 2025 and beyond? Or is it less than that because there's more investments in fiscal 2024?

I think that is a good number to use going forward. If that changes, we'll update you, but it's in line with where we've been. Expenses are something we're constantly taking a look at and trying to improve on while continuing to invest in the business in areas that provide growth. We'll keep you updated on that.

Great. Thank you.

Our next question comes from the line of Dylan Carden with William Blair. Please proceed with your question.

Thank you. Just kind of getting back to the long-term margin conversation. Another way of asking that question maybe to kind of use numbers you've given, you've doubled the business over, however many years—it's been four or so years—and at which point you've added 500 basis points of merchandise margin, largely through private label penetration. At that point in your history you were kind of a 33%-ish gross margin business. There's a lot of puts and takes between freight and deleverage on occupancy. But just simple math gets you to 38%, 39% gross margin. Is that kind of the structural level of that line item at this point, all else being equal? I know you're guiding to 36.5%. I get the guidance. But behind the hood, is that a reasonable long-term target?

In fiscal 2022, we did get to 38.6% for the year. I think returning to same-store sales growth and leveraging more of the buying and occupancy and distribution center costs and marching back towards that 38% and towards 39% is what we have in our sights and how we're planning the business internally.

Excellent. And then there was sort of an offhand comment on remodels. I think you said 35 remodels in the current year or maybe you did them last year. Is that something that's bigger than historically? I know you're putting more into the boxes to warrant some retrofitting. Is that something going forward to increase, accelerate, drive comp? Any comment on that?

We'll do a certain number of relocations within a market and that will drive some comp sales and typically drives a pretty nice comp tailwind. When we do remodels, we'll often expand the size and if we can get a bigger box out of it, we'll see some growth. A lot of the remodels we're looking at now are stores that have been in the chain for 10 years or longer and need a refresh. There's not necessarily a comp lift that we plan in those stores, but it's something we need to do to get them brand right and looking nice into the future and functioning the way we need them to. We started this in a smaller degree last year; I would expect we'll continue to look at roughly 35 stores as we go into the next couple of years to get those stores right. We've built over 150 stores over the last several years that are in great shape, but the earlier stores need some work. This year we have about $15 million in the budget for remodels.

You kind of answered my next question. So, as far as magnitude, round numbers, 150 stores, 35 a year kind of takes you four years or so to work through those more or less what you're saying?

Maybe a little longer than four years, but yes.

Awesome. All right. Thanks a lot guys.

Our next question comes from the line of Corey Tarlowe with Jefferies. Please proceed with your question.

Hi, good afternoon and thanks for taking my questions. And I don't know if Greg is around there, but congrats to Greg if he's there on his retirement announcement.

Thank you, Corey.

So, I wanted to ask on the distribution center that you built in Kansas City. Could you maybe just remind us, number one, about what your current distribution footprint looks like? And Jim, you mentioned that you're adding around 100 stores or so over the next two years, you added 45 in the last fiscal year. Do you feel like you now have the capacity built out to be able to support the new store growth ahead? And just remind us some of the benefits of this new DC that you built?

So, on the first piece, the current distribution center footprint: we have a fulfillment center in Wichita that takes care primarily of e-commerce and a distribution center in Fontana, California that historically took care of stores. The Fontana DC was approaching capacity as our sales grew faster than plan, so we had a multiyear plan to build the Kansas City distribution center. Kansas City is coming online as originally scheduled, but our sales line outpaced plan. With those two distribution centers—Fontana and Kansas City—that will service our store base: Fontana will service the Western states and Kansas City will service the Eastern states. We should be good from a distribution capacity standpoint for four to five years, assuming 15% new unit growth and low to mid-single-digit comps and continued exclusive brand penetration growth. The next DC would come on in the later part of the decade as we expand further east. The benefits are clear: we needed capacity; Kansas City will be able to do value-added services presently done in stores, which is a more efficient use of labor and lets store associates focus on customer service and sales. With two DCs closer to stores, outbound freight expense will be lower and transit times should improve.

Got it. And then what's the financial impact associated with opening that distribution center? Is most of that in the review at this point? I think there's some impact embedded in the guidance. Can you remind us what that is?

We spent about $20 million on the distribution center throughout last year getting it up and ready. We'll spend another $8 million in this coming year. The full expense of that capital is starting to depreciate through in this fiscal year and into next, and you'll see that in the buying, occupancy and distribution center line. Labor is coming online shortly and will be reflected in gross margin. There are some incremental IT and supply costs in SG&A related to the facility as well.

Okay, great. And then lastly from me on inventory. Sales are projected to be up, comps are projected to be down, but inventory is also up. Could you talk about how you feel about the relative positioning of your inventory at present and how you expect that to trend throughout the rest of the year?

Sure, Corey. Of the 24% increase in inventory, a little more than half is related to new units we've added over the last year—the 15% unit growth and new stores planned. About 30% of the growth is related to inventory in our distribution centers that supports our exclusive brands. As we grow brand penetration, we need to house more of that inventory in the DCs. The balance of the growth is related to comp stores: our comp store cost dollars are up 8% year-over-year and our units are up about 3%; that delta of roughly 5% is the inflationary impact from last year's price increases. If we look at forward weeks of supply based on our guide, we have about 30 weeks of supply, which compares favorably to pre-COVID years when weeks of supply were 36, 34, and 32 in fiscal 2021, 2020 and 2019. We feel very good about the inventory levels and the quality of that inventory. As a reminder, we've grown merchandise margin for many years and have carried similar levels of inventory historically. I don't think anyone should be concerned about the 24% inventory growth.

Great. Thank you so much and best of luck.

Our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Good afternoon. Thanks for taking my question. On the freight impact on gross margin, how much of the inventory that you currently have has that higher freight cost attached to it right now? How long will it take for that freight to roll through the inventory so you can take full benefit of the lower rates?

We turn our inventory about twice a year, so it takes roughly six months to get through. Peak freight costs were coming in last summer and they've been coming down since then. We're mostly through that headwind. We thought we'd get through more of it in Q4, but we have a little bit coming into Q1, and we've guided Q1 freight flat year-over-year. So, we're mostly through the elevated freight and expect more benefit as the year progresses.

And then you mentioned that in the fourth quarter you reduced your marketing spend. When you look at the ROI on marketing, particularly for discretionary areas like women's, could you be doing more marketing to get a disproportionate return? Or might evolving marketing rather than cutting it when business gets tough provide better outcomes? In other words, could you drive better results by changing marketing strategy instead of cutting spend?

That's the age-old question around marketing. If spending more were EBIT accretive and we could prove that out, we would certainly spend more. Our marketing budget hovers around 3% of sales a year. We've grown from roughly $200 million to $1.8 billion in 10 years, so marketing is helping us grow at the current budget. I'm not sure doing more would be EBIT enhancing or just spend to get an artificial lift, particularly online. For digital marketing, we tend to spend to the point where the last dollar is close to breakeven on a direct-response basis. Many companies spend past that under the belief lifetime value will be higher, but we focus on profitability. If we get higher return on net spend, we'll spend more; as return falls, we'll ratchet back. We try to have that last dollar be just above breakeven.

Just one last thing. What percent of that 3% marketing spend is directed to e-commerce specifically versus overall brand marketing? I realize you can do brand marketing digitally too, but for the part you treat like direct-response that you expect to be near breakeven versus the e-commerce channel, what percent of total spend is that?

Roughly north of 10% is earmarked for digital-specific marketing. The split between digital and traditional spend varies, and we also believe strongly in some of our traditional media channels which we continue to invest in.

All right. Thanks very much. Appreciate it.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Hi guys. This is Jack Cole on for Jeremy. Thanks for taking our questions. So, the guidance implies about 15% unit growth in FY 2024. Can we assume that given your comments about roughly one opening per week, you'll follow that run rate of about 10 to 13 openings per quarter? And then any color on average construction lead-times would be great?

Sure. They are roughly phased at 13 a quarter. Lead times are similar to other retailers that are adding stores; we manage the pipeline and see occasional delays. We try to have conservatism in lead times. Our real estate and construction teams have been hitting the cadence closely; I feel strongly we'll hit at least 13 stores in the first quarter of this year. We opened two stores today, so if you're phasing it, put them roughly evenly through the year.

Great, that's great color. And then just on inventory—any specific categories where inventory is a bit out of balance? Any category-level color?

The two categories to call out: work boots, which is functional and evergreen—we were a bit heavier there but have no concern as it's staple product—and men's western performance boots or rubber sole boots where we were a bit heavy. We're making good progress on both, and expect those categories to be in line with merchandise plans based on expected sales volumes by the middle of the year.

Great. That's all from me. Thanks for the color guys.

Our next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Great. Thank you so much. Just curious about Bandit. Maybe, Jim, can you talk about what consumers experience when they use Bandit? And then do you have other ideas in mind for how to use AI to enhance the business? Thank you.

So, it just rolled out this week, so we don't have many use cases yet, but it is remarkable. When you ask ChatGPT-style questions for styling advice or why a composite toe differs from a steel toe and it gives a clear explanation in well-written pros, it's very helpful. That's the consumer-facing piece. It's also being used to help store associates drive more sales. It can help customers get real-time counsel and build their basket because they receive styling suggestions. It can also help new store associates ramp faster because they have a knowledge crutch via handheld devices. If we analyze logs of what associates type, we can identify knowledge shortfalls and train accordingly. There are many other use cases we can layer on: improving conversion, driving traffic, empowering sales partners, optimizing assortments. We feel like we're first to market in our industry with an AI-enhanced in-store and employee tool. We're excited about the potential.

Sounds great. Thank you so much.

Our next question comes from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.

Yes, thanks for taking my questions. Jim, on ladies boots and apparel, you referenced the tough multi-year comparisons. When do those get easier? Is that what you're looking for in terms of that business turning and starting to perform more in line with the chain as a whole? And I have a quick follow-up.

I think we have another two quarters before we start to cycle the toughest comparisons in the ladies side. We have a strong team of merchants in ladies boots and apparel; they're bringing in new vendors and expanding assortment while managing inventory closely to avoid overexposure in an up market. We had enormous growth prior, and we may give some of that back. I expect within the next six months we'll see those businesses start to come back around.

Okay. And on California and the weather, you mentioned two districts were most impacted, including the Central Valley, where they're comp down maybe 15% in the quarter. Could you say what the impact was on 4Q comp—was that as much as 100 basis points? And what's factored into the outlook going forward?

We called out two districts representing roughly 10% of our store sales that were down about 15%. That equates to roughly 150 basis points of comp erosion on stores. Those districts have been down for 12 months due to agricultural pressure related to drought and then flooding. As we begin to cycle that in the next quarter, we're modeling them to be less negative than what we've seen in recent months.

Okay. Thanks guys. Good luck.

Our next question comes from the line of John Lawrence with Benchmark Company. Please proceed with your question.

Thanks guys. I know it's running late. I'll be quick here. Jim, would you comment a little bit about the loyalty members—how big is that business now? What's the typical profile of that loyalty member? How much more do they shop with you than the average customer?

Great question. We have about 7.1 million B Rewarded members, up from 5.8 million last year. A little more than two-thirds of our sales dollars flow through the program. We get a lot of actionable metrics: who is buying, frequency, and spend. Their average basket is higher and their shopping frequency is greater than non-members. They're more loyal and likely to shop competitors less frequently. Our stores do a great job introducing customers to the program. It's been a critical asset for Boot Barn for well over a decade, certainly so.

Great. Good luck. Thanks and Greg, thanks for all the help.

You're welcome. Thank you.

We have reached the end of the question-and-answer session. I will now turn the call back over to Jim Conroy for closing remarks.

Well, thank you, everyone, for joining the call today. I'm sorry I went so long. We look forward to speaking with you all on our first quarter call. Take care.

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