Earnings Call Transcript - BOOT Q4 2024

Operator, Operator

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

Mark Dedovesh, Senior Vice President of Financial Planning

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's Fourth Quarter and Fiscal 2024 Earnings Results. With me on today's call are Jim Conroy, President and Chief Executive Officer, and Jim Watkins, Chief Financial Officer. The copy of today's press release, along with a supplemental financial presentation, is available on the Investor Relations section of Boot Barn's website. 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 several 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 forward-looking statements to be made during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements included in our fourth quarter and fiscal 2024 earnings release, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Jim Conroy, President and CEO

Thank you, Mark, and good afternoon. Thank you everyone for joining us. On this call, I will review our fourth quarter fiscal 2024 results, discuss the progress we have made across each of our four strategic initiatives, and provide an update on current business. Following my remarks, Jim Watkins will review our financial performance in more detail, and then we will open the call up for questions. We are pleased with fiscal 2024 results, as we grew revenue to record levels, opened 55 new stores, which exceeded our original plan, and expanded exclusive brands by 370 basis points. Our full year fiscal 2024 revenue grew to approximately $1.7 billion, which is nearly 100% growth over pre-pandemic levels just four years ago. When excluding the 53rd week of fiscal 2023, total revenue grew 2% year-over-year, with growth driven by the new stores added over the last 12 months, which offset a mid-single digit same store sales decline. Full year merchandise margin grew 160 basis points comprised of 120 basis points of freight improvement and 40 basis points of product margin expansion. The growth in product margin was driven by another healthy increase in exclusive brand penetration and buying economies of scale. For the year, we achieved earnings per diluted share of $4.80, which, while down from last year, is nearly triple our pre-pandemic earnings from four years ago. Turning to our fourth quarter results, same store sales declined 5.9% on a consolidated basis, slightly better than the high-end of our guidance range and meaningfully better than our third quarter performance. We also saw sequential improvement from February to March driven by better comp growth in our retail stores. From a margin perspective, fourth quarter merchandise margin expanded 160 basis points driven by freight improvements and supply chain efficiencies, which offset slight pressure from a 20 basis point decline in exclusive brands penetration, which we anticipated and called out on our last earnings call. Overall, I'm pleased with the company's ability to hold on to the market share gains we achieved over the past few years in addition to introducing the Boot Barn brand to new markets. I believe the company's foundation is solid, and we have multiple growth levers that have proven their effectiveness, and I'm confident in the runway for future growth. We have seen some exciting recent trends in the performance of the business, which I will summarize at the end of my remarks. But I do want to start with our traditional review of our four strategic initiatives. Let's begin with expanding our store base. I would like to take a moment to recognize and celebrate the team as they opened 55 stores in fiscal 2024, which is more than one store per week on average. Over the past 12 years, the company has transformed from a regional retailer with 86 stores in eight states to a true national lifestyle brand with 400 stores across 45 states. This accelerated growth is a testament to the careful coordination across nearly every function in the company, from locating and building the stores to creating a compelling product assortment, staffing the stores, and attracting a loyal set of customers in each of our new markets. In addition to opening a high number of stores each year, we also are opening stores with much higher first year sales volumes than our historical average. The store portfolio is extremely healthy, and we see no signs of slowing momentum as new stores are generating a 60% cash on cash return on capital in their first year. As we look at the roadmap for the future, we continue to believe that we have the opportunity to open at least 500 more stores in the United States alone and plan to maintain our recent pace of adding 15% new units annually. Moving to our second initiative, driving same store sales growth. Fourth quarter same store sales declined 5.9% driven by fewer transactions, partially offset by a modest increase in average unit retail and larger transaction size. From a merchandise category perspective, we are seeing some encouraging trends in the business with broad-based sequential improvement across virtually every major product department from our third quarter to our fourth quarter. Our B Rewarded customer database grew 18% year-over-year, reaching 8.4 million total active customers. This growth represents more than a million customers being added to the program each year for the past three years. We continue to harness the power of this information to assist with planning our media spending, customizing our customer communications, and tailoring our merchandise assortments by store based on local demographics. From a geographic standpoint, each of the four regions showed sequential improvement in the quarter versus Q3. The west, north, and south regions were in line with chain average, and the East was slightly below the chain average. Our stores team continues to execute well as evidenced by another solid year-over-year improvement in customer service scores in the fourth quarter. I do want to explicitly thank the entire field team for their efforts and hard work in driving sales, opening new store locations, and supporting our omnichannel initiatives by fulfilling online orders. Moving to our third initiative, strengthening our omnichannel leadership. In the fourth quarter, our e-commerce sales declined 7.6%, better than the high end of our guidance range. Our branded site of bootbarn.com, which was approximately 75% of our online sales in Q4, comped down low single digits in the quarter. The digital team continues to make progress on our development of artificial intelligence. As mentioned on a prior call, we already have a working model of generative AI embedded in our in-store platform that helps both customers and sales associates build full outfits, which has been slowly gaining traction. We are in the process now of taking the learnings from that platform and will be adding new AI-enabled functionality to our bootbarn.com site over the next few months. Additionally, we are in the beginning stages of using AI to help create more detailed product descriptions and landing pages to further support our organic search results. We expect the immediate benefits of this additional AI functionality to be minor but believe we will have an early advantage in what we expect will become an increasingly complicated online channel in the near future. Now to our fourth strategic initiative, exclusive brands and margin expansion. During the fourth quarter, exclusive brands penetration decreased 20 basis points to 37.1%, which is in line with the expectations outlined on our last earnings call. For the full year, exclusive brands penetration increased 370 basis points to 37.7%, which is an increase of more than 1,400 basis points over the last three years, far exceeding our stated goal of 250 basis points per year. We believe we have additional opportunities to expand exclusive brand penetration, to augment the product assortments from our third-party national brands, which continue to build our merchandise margin. Additionally, we have been able to grow our markup on merchandise from third-party vendors and expect to see continued tailwind to merchandise margin as that higher markup product works through our inventory. Consistent with recent years, we expect merchandise margin to continue to build through a combination of exclusive brand penetration, buying economies of scale, and ongoing supply chain efficiencies. I would like to commend the merchandising and exclusive brands' organizations for continuing to develop compelling assortments with appropriate regional variation to drive the business forward. Turning to current business and some of the positive trends I noted earlier, through the first six weeks of Q1, quarter-to-date, same store sales are flat and May's business has turned comp positive. It is great to see the momentum in the business and the sequential improvement from Q4. To summarize, we have seen broad-based sequential improvement across virtually all major merchandise departments, both stores and e-commerce channels, and in all four regional geographies. This trajectory began as we progressed from our third quarter into the fourth quarter, then improved in April and again into May, where we have seen positive same store sales in both channels on a month-to-date basis. While we are pleased to see the inflection in this business, we are careful to note that we are commenting on a relatively short recent trend and are about to cycle the most difficult year-ago trend in the month of June. Additionally, the macro environment continues to be somewhat uncertain, and our core customer is still facing persistent inflationary pressure. Accordingly, we have incorporated these considerations into our guidance and plan to manage the business cautiously until we feel this trend will endure or continue to improve. I'd like to now turn the call over to Jim.

Jim Watkins, Chief Financial Officer

Thank you, Jim. In the fourth quarter, net sales decreased 8.7% to $388 million. As a reminder, the fourth quarter of fiscal 2023 was a 14-week quarter. The decrease in net sales was the result of the decrease in consolidated same-store sales, partially offset by the incremental sales from new stores open during the past 12 months. The 5.9% decrease in same-store sales is comprised of a decrease in retail store same-store sales of 5.7% and a decrease in e-commerce same-store sales of 7.6%. Gross profit decreased 11% to $139 million, or 35.9% of sales compared to gross profit of $156 million, or 36.6% of sales in the prior year period. The 70 basis point decrease in gross profit rate was comprised of 230 basis points of deleverage and buying, occupancy, and distribution center costs, partially offset by a 160 basis point increase in merchandise margin rate. The deleverage and buying, occupancy, and distribution center costs was driven primarily by the higher occupancy costs of new stores, the impact of the 14th week in the fourth quarter of fiscal 2023, and the depreciation expense related to the opening of our new Kansas City Distribution Center. The increase in merchandise margin rate was driven by a 160 basis point improvement in freight expense and supply chain efficiencies. Selling, general and administrative expenses for the quarter were $101 million or 26.1% of sales compared to $93 million or 21.9% of sales in the prior year period. Selling, general and administrative expenses as a percentage of net sales increased by 420 basis points primarily as a result of higher marketing expenses, normalized incentive-based compensation when compared to the prior year reversal of incentive-based compensation, a $2 million partial impairment of the Sheplers' trademark, higher store labor, and the impact of a 13-week quarter compared to a 14-week quarter in the prior year. Income from operations was $38 million or 9.8% of sales in the quarter, compared to $63 million or 14.7% of sales in the prior year period. Net income was $29 million or $0.96 per diluted share compared to $46 million or $1.53 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory increased 2% over the prior year period to $599 million and increased approximately 1% on the same store basis. We finished the quarter with $76 million in cash and zero drawn on our $250 million revolving line of credit. Turning to our outlook for fiscal 2025. 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 only 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 $1.8 billion, representing growth of 8% over fiscal 2024. We expect same-store sales to decline 1.6%, with a retail store same-store sales decline of 2% and e-commerce same-store sales growth of 2%. We expect gross profit to be $664 million or approximately 36.9% of sales. Gross profit reflects an estimated 110 basis point increase in merchandise margin. We expect to grow exclusive brand penetration by 110 basis points. And we anticipate 110 basis points of deleverage in buying, occupancy, and distribution center costs and 70 basis points of deleverage in SG&A. Regarding leverage points for fiscal 2025, we expect to leverage buying occupancy and distribution center costs with a 6% comp. We expect to leverage SG&A with a 2% comp and expect to leverage EBIT at 3.5% consolidated same store sales growth. Our income from operations is expected to be $201 million or 11.2% of sales. We expect net income for fiscal 2025 to be $149 million and earnings per diluted share to be $4.85. We expect our capital expenditures to be $120 million and for the year, we expect our effective tax rate to be 26.2%. We plan to grow new units by 15%, adding 60 new stores during the year. We anticipate opening roughly 25 stores in the first half of the year and 35 stores in the second half of the year. As we look to the first quarter, we expect total sales at the high end of our guidance range to be $407 million. We expect the same-store sales decline of 2.5%, with retail store same-store sales declining 3% and e-commerce same-store sales increasing 2%. We expect gross profit to be $146 million, or approximately 36% of sales. Gross profit reflects an estimated 70 basis point increase in merchandise margin and we anticipate 170 basis points of deleverage in buying, occupancy, and distribution center costs, primarily resulting from higher occupancy from new stores and negative same store sales. Our income from operations is expected to be $41 million or 10.1% of sales. We expect earnings per diluted share to be $1.

Jim Conroy, President and CEO

Thank you, Jim. As we embark on fiscal 2025, I do want to reflect on the performance of the business versus pre-pandemic levels. In that four-year period, store count has grown by 141 stores. Comp sales have increased by more than 50% on a stacked basis. Total revenue has grown by nearly 100%. Merchandise margin has expanded by 450 basis points, and earnings per share has nearly tripled from $1.64 to $4.80. This performance is a result of the incredible teamwork and superb execution by the entire Boot Barn team, operating in a challenging retail environment. I want to explicitly recognize this performance and express my tremendous gratitude to each and every one of the partners across the Boot Barn organization for your commitment and hard work. I also want to thank our shareholders for their engagement with the company, belief in our growth strategy, and support of the management team. Now I would like to open the call to take your questions. Julie?

Operator, Operator

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Your first question comes from Matthew Boss from JPMorgan Canada. Please go ahead.

Matthew Boss, Analyst

Great, thanks. So Jim, maybe if you could elaborate on drivers of the same store sales acceleration in April and May, if it was possible to break down performance across categories, maybe notably your core replenishment business relative to the inflection in ladies, and then just how you're assessing the potential sustainability of current momentum over the balance of the year relative to the macro backdrop that it seems that you've embedded.

Jim Conroy, President and CEO

Thank you for the question, Matt. Regarding the categories, the performance has been remarkable. Every department, from work boots to ladies' apparel, has shown consistent positive progress. We observed this trend building from Q3 into Q4, then into April and May. The overall improvement is impressive and spans all categories. For instance, ladies’ Western boots improved 15 points from Q3 to the current quarter. Work boots increased by 5 points, work apparel by 11 points, and men's Western boots by 9 points. This pattern extends across the entire schedule I have in front of me. When considering other aspects of the business, we've noticed these improvements in both sales channels, including e-commerce and physical stores, as well as in every region of the country. This reflects a rise in the number of transactions, rather than just higher average unit retail or larger purchases. Essentially, we're seeing healthier transactions on average per store. There isn't a significant gap between fashion and non-fashion categories. The ladies' segment has shown a slight edge over men's, though it also had more room to grow. On the topic of sustainability, we've shared a guide that we believe is somewhat conservative, but there’s no indication that trends will reverse. After Mother's Day, which is typically slow for us, we saw positive sales growth in May. Looking ahead to Father's Day, a more significant holiday for us, we anticipate a strong performance, especially since the business composition will shift from a slight focus on ladies to a greater focus on men's. June is expected to be a far stronger month than May, suggesting potential for increased sales in the near future. Jim mentioned some caution for our third quarter due to the election and a shorter holiday season, so we’ll see how that unfolds. Overall, all current indicators within the business suggest a positive shift in performance.

Matthew Boss, Analyst

Great. And then maybe just a follow-up on the bottom line. If you could just help break down your EBIT margin forecast between puts and takes on the flattish gross margin guide relative to the deleverage on SG&A embedded in the forecast.

Jim Watkins, Chief Financial Officer

Sure. So yeah, as you pointed out, we're planning the year with 110 basis points of merch margin expansion, Matt, and with a similar or the exact same amount of deleverage and buying occupancy and distribution center costs. And so, as we look at what's driving the merchandise margin growth for the year about two-thirds of that expansion will be supply chain efficiencies and the other third will be improvements from exclusive brand penetration and better pricing from vendors due to economies of scale, including things like bulk purchases and better discounts from vendors. The deleverage is really just coming from the negative same store sales guide that we have on the buying occupancy and distribution center costs. And then as you look at the SG&A with 70 basis points of deleverage there, it's really just the deleverage that we're seeing from the negative same-store sales guide. You know included in there we have a little bit of pressure from health insurance and some other inflationary cost increases. And then as we called out on the last call, we've got the new corporate headquarters that's worth about 30 basis points in the current year or about $6 million higher than last year. And just a reminder on that facility, as we get into fiscal 2026, the run rate incremental cost of that is more like $4.8 million more or less.

Matthew Boss, Analyst

Congrats on the improvement. Best of luck.

Jim Conroy, President and CEO

Thank you, Matt.

Operator, Operator

Your next question comes from Peter Keith from Piper Sandler. Please go ahead.

Alexia Morgan, Analyst

Hi. This is Alexia Morgan on for Peter Keith. Thanks for taking our question. One question that we're getting a lot from investors is whether you might be experiencing a lift from the Beyoncé album. Are you able to give any detail around the possible impact you're seeing there if you're getting a lift from that at all? And then my second question would just be how, and you touched on this a little bit, how you might think about sequencing comps throughout the year and what are the drivers to eventually get to positive.

Jim Conroy, President and CEO

On the first question regarding Beyoncé, we anticipated this inquiry because we previously addressed similar situations with Yellowstone and Taylor Swift. We appreciate Beyoncé and her choice to wear hats, as well as her inclination towards Western styles. She has been engaging with this aesthetic for five years, and with her new album, she seems to resonate with a newer audience in country music. However, it's unclear to us that her influence is significantly affecting our business. If the improvement we noticed was solely attributable to women's fashion cowboy boots or western apparel, I would have a different perspective. Yet, we've observed a broad-based improvement over the past few months, dating back to the third quarter, making it imprudent to link it specifically to Beyoncé. We conducted a customer survey, and while many were aware of her album release, only about 3% mentioned it would positively affect their buying behavior. Some responses hinted at disbelief that Beyoncé could impact our business. We have been in this market for a long time, but perhaps she will draw in new customers to Boot Barn, which could help generate some additional sales. Ultimately, her influence seems to be a minor aspect relative to our regular customer base.

Jim Watkins, Chief Financial Officer

And just to give you a little bit of cadence of the year and how we're looking at same store sales, again just backing up, the way we've provided the guide is similar to what we've done the last two years. We've taken the last few months of sales and projected the sales for the balance of the year, using the historical seasonality of the business. And then one of the things that was a little bit different this year, what we did in the guide is, is we reduced the sales from what the output was for the second half of the year to account for distraction around the upcoming Presidential Election, a shorter holiday shopping period between Thanksgiving and Christmas, and some of the continued macro uncertainty. As we look at how the guidance lays out for the year, we expect the second quarter same store sales to look similar to what we've guided for the first quarter. As we get into the third quarter, we expect store comps to be slightly better than the second quarter and then strengthen to be slightly positive comps in the fourth quarter.

Alexia Morgan, Analyst

Great, thank you.

Jim Conroy, President and CEO

You're welcome.

Operator, Operator

Your next question comes from Steven Zaccone from Citi. Please go ahead.

Steven Zaccone, Analyst

Great, thanks very much for taking my question. I wanted to follow up on Matt Boss' question. If you think about where you're running now quarter-to-date, and then as you think about the guidance for the year, where are the potential areas of conservatism? Is it somewhat of the ladies business doing better now that maybe that could moderate over the next couple of quarters? Because it seems like the overall business is seeing a pretty broad-based improvement. So just help us understand why there’s so much conservatism in the year.

Jim Watkins, Chief Financial Officer

I would say as we look at the next month and a half, if you look at June, that was our toughest comp on a one-year comp basis to lap. And so as we're looking square at that, we've embedded kind of a softening of our current comp just because we're going up against tougher numbers. If you look at the two-year stack, May and June, we're comping a two-year stack that's the toughest of the year. And so it's really early in the year for us to declare victory. So we have embedded some conservatism there. I would say that, as I just mentioned a minute ago, Steven, putting some reduction or some conservatism in the second half of the year, particularly in the third quarter when we do have some more macro events or some calendar shifts that are a little bit harder to plan through, that's probably where I would say we have the most conservatism in the guide.

Steven Zaccone, Analyst

Okay, that's helpful. And then you gave some comments around the leverage points for this year with buying occupancy SG&A and then overall EBIT margin. Do you see those as the run rate going forward beyond fiscal 2025 as the right level to leverage?

Jim Watkins, Chief Financial Officer

I believe that for now, we are seeing EBIT leverage at around 3.5%, which is the key rate to focus on. The SG&A leverage is expected to stay at about 2%, which has been consistent, although it was slightly higher last year. I anticipate it might decrease a bit more. Regarding the costs associated with buying, occupancy, and distribution centers, as we open new stores, their occupancy rates tend to be higher due to lower sales volumes compared to more established stores. This presents a challenge for achieving leverage at a 6% comparable sales increase. However, the positive aspect is the growth in merchandise margin we have experienced, with an increase of 650 basis points over the last six years, and a further projection of 110 basis points for this year. This growth is helping to maintain strong margins and provides a solid leverage point for a company expanding its units by 15%.

Steven Zaccone, Analyst

Great. Thanks for all the detail.

Jim Conroy, President and CEO

Thank you.

Operator, Operator

Your next question comes from Max Rakhlenko from TD Cowen. Please go ahead.

Max Rakhlenko, Analyst

Great. Thanks a lot guys. So first, can you remind us how you're thinking about the new store comp waterfall? And then if historically, the chain was able to comp at a high single-digit rate, what do you think the normalized go forward rate could be for the business?

Jim Conroy, President and CEO

On the new store waterfall, it will be interesting to see what happens now with the business starting to inflect positively. What we had seen in the most recent couple of years is new stores when they turned comp, their one-year comp was sort of in-line with the rest of the business. I see no reason to believe that over time we shouldn't be able to get back to a new store waterfall sort of a more traditional waterfall. The only other thing that sort of is in the mix there is our new stores are opening had so much higher volumes than they had when we had a really strong waterfall. As you know, we used to open stores of $1.7 million. Now they are north of $3 million. But I expect that over time, we'll get that new store waterfall back. I don't think that will be in the next couple of quarters though. In terms of the underlying comp performance of the business, if you go back to our long-term algorithm, we would always say low to mid-single-digit comps. I think that's where the business should ultimately settle in at. We are a victim of course to posting a 53.7% a few years ago. And when we look at that step function change in sales, and then realize that we gave back almost nothing the year after that and just a small piece in the next year, we're pretty encouraged that we've held on to sort of once in a lifetime comp. But I think over time, we'll get back to that low to mid-single-digit comp growth. And based on what we're seeing right now you think it could come sooner rather than later, we are clearly guiding that for this year, but perhaps as we get into the next fiscal year.

Max Rakhlenko, Analyst

Right. That's great. Thanks a lot. And then just given the conservatism in the comp guide, is there a rule of thumb that we should consider for potential margin upside if comps do outperform expectations?

Jim Conroy, President and CEO

Yes. I think Max is using the leverage points that I just provided. I mean that should get you the best indicator that you can also look at the low and the high end of the range and see kind of how we've got that modeled in there from an EBIT margin perspective. Again, if you just look at gross margin, we'll get an improvement on gross margin year-over-year just by beating the high end of the comp guide range and then you kind of work through the leverage points on your way down from there.

Max Rakhlenko, Analyst

Great. Thanks a lot guys and best of luck.

Jim Conroy, President and CEO

Thanks Max.

Operator, Operator

Your next question comes from Dylan Carden from William Blair. Please go ahead.

Dylan Carden, Analyst

Okay, great. Thanks. First, just a real simple one. Jim W, I think we've talked in the past about the private label penetration maybe getting or continue to decline before it starts to grow. I wonder if that's still the case.

Jim Watkins, Chief Financial Officer

Yes. The exclusive brand penetration will be back to growth. I think I said on the last quarter call, it would be a one quarter situation where the exclusive brand penetration would be negative. This quarter, we're planning that to be up 50 to 80 basis points. The following quarter will be less than the 110 basis points of exclusive brand penetration we guided for the year. And then as we get into Q3 and Q4, we are going to really see that ramp back up again north of the 110 basis points for the rest of the year.

Dylan Carden, Analyst

Great. So, to ask a question we've been discussing on this call, does it seem like the business is experiencing a shift? If you examine new customer repurchase trends and consider how much you've lost compared to peak levels, what might be influencing some of your end markets? Are there specific factors that need to be emphasized? Additionally, when thinking about the New Store performance, are you beginning to observe stability in year one for some of these new locations, which could potentially allow the entire fleet to compare more favorably? Does that make sense?

Jim Conroy, President and CEO

Yes. I believe there are a couple of macro drivers at play. While inflation remains persistent, it seems to have less of an impact on our customers, who are returning to shopping. Many of our functional industries and customers are beginning to buy again, and we’ve noticed improvements in some of these areas. We’ve also made some adjustments from an assortment perspective that have contributed to increased sales. For instance, over the past few years, in response to inflation, we have continued to adjust our retail pricing to reflect cost increases. This has led us to move away from some more affordable price points in men's and ladies' cowboy boots, among other products. The merchant team has done an excellent job of filling those price gaps, and we are now observing positive momentum in more moderately priced items where we had previously raised prices too high. Overall, it’s encouraging to see improvements across all categories and channels, with sales growth driven by an increase in transactions in our stores.

Dylan Carden, Analyst

Thank you very much.

Operator, Operator

Your next question comes from Janine Stichter from BTIG. Please go ahead.

Janine Stichter, Analyst

Hi, thanks for taking my question. So on the 60 stores you're opening this year, what's the split between new markets and legacy markets? And maybe give us an update on how some of the newer stores are performing and some of the newer markets that you've opened. Thank you.

Jim Conroy, President and CEO

It's a bit challenging to differentiate between new and existing markets since we're now present in nearly every state, specifically the 48 contiguous states. To give you some clarity, I would say that roughly two-thirds of the stores we are opening are in areas where we already have some presence, while about one-third are in either entirely new markets, which are becoming increasingly rare, or in markets that are significantly underpenetrated. Regarding the performance of the new stores, it continues to be a very positive narrative. On average, we project new stores to generate around $2 million in sales. At this level, they meet the return on invested capital threshold we aim for. However, they are actually exceeding $3 million, and this trend appears consistent across various regions, including those not typically regarded as traditional Western markets.

Janine Stichter, Analyst

Great. And maybe just on the e-commerce business, it was nice to see that start to improve. I know it's been a longer haul than expected there. Just maybe your thoughts on what's been driving that? Is that just kind of the broader improvement that you've seen in the business? Or is there anything different that you're doing on the marketing side?

Jim Conroy, President and CEO

I believe there are a few factors at play. Let’s concentrate on the bootbarn.com business, as it's the larger segment. This is primarily a traffic issue. The traffic on bootbarn.com continues to grow positively, which we attribute to brand building, our marketing team's efforts, and the presence of new stores in new areas. For instance, in the first quarter thus far, traffic to the site has increased by 20%. Although conversion rates have dipped slightly, our revenue is still rising. Our marketing strategy for digital spending is consistent; we take an algorithmic approach and set a return on ad spend target, adjusting our spending accordingly. When the cost per click rises, we decrease our spend, maintaining our ROAS target. Conversely, when costs go down, we can increase sales. Recently, we have become more efficient with our pay-per-click strategy by utilizing new tools, mainly through Google, which have been effective. It is encouraging to see this segment of the business grow. However, it's important to note that bootbarn.com is not primarily reliant on paid traffic; it’s a smaller portion of the overall business. The recent improvement we've observed on bootbarn.com is mainly due to organic growth from more customers visiting the site.

Janine Stichter, Analyst

Great. Thanks so much for the color.

Jim Conroy, President and CEO

Thanks, Janine.

Operator, Operator

Your next question comes from Jay Sole from UBS. Please go ahead.

Jay Sole, Analyst

Great. Thanks so much. Jim, I'm sort of curious what you see in the competitive landscape from sort of the smaller independent mom-and-pop type retail stores out there. I think there's a perception that maybe some of those closed during the pandemic; maybe they reopened. Is that true? And have you seen them be sustainable? Or are they starting to sort of lose some share again? Thanks.

Jim Conroy, President and CEO

Sure. Good question. We just continue to take share from the mom-and-pops. So there's fewer now than there were pre-pandemic. It's hard to give you an exact count, but we do know that there's been more closings than openings. There was a time when their supply chains were struggling more than ours, we probably had some opportunistic growth there. And now I think they're back to sort of a normal business. Over time, we will continue to build our market share and take it from within the industry and from the mom-and-pop part of the business. We, of course, have other competitors out there, right? We've got big players like Tractor Supply. We've got online players, et cetera. We've got the whole farm and ranch channel. But where we operate there is one direct competitor of meaningful size based in Texas. That's a very strong company. And we go head-to-head with them in many of our markets. But after that, we're typically going up against an operator that has one or two stores, and they just don't have the professional management team, the systems, et cetera, to operate effectively as I think if you were to look at our sales growth over the last few years, and compare it to the industry sales growth, you'd see that we've taken sort of an enormous amount of share. We've doubled the business in the last few years, and the industry certainly hasn't doubled. You're welcome.

Operator, Operator

Your next question comes from Jonathan Komp from Baird. Please go ahead.

Jonathan Komp, Analyst

Good afternoon. Thank you. Jim, can I just follow up? There's been some scrutiny by some about your store growth strategy, maybe the predictability of your stores, the amount of CapEx that you're spending. Could you maybe just address sort of the consistency or degree of variability you see in the average store performance if you break that down by types of markets or other indicators that you watch both maybe on the returns and also on the CapEx side?

Jim Conroy, President and CEO

We have noted a 60% return on invested capital for new stores, including inventory costs. We believe this is a very positive figure, definitely exceeding our cost of capital. While not every store hits that 60% mark, most do. We also have some impressive metrics in retail, such as every store being EBITDA positive, which is outstanding. If it were a gamble, we would open as many stores as possible due to the high likelihood of success and low likelihood of failure. However, we have a whole team responsible for managing these new stores and ensuring they are stocked, and we face supply chain challenges, so opening 300 stores overnight isn't feasible. If we could, we would. If a better investment opportunity offering over a 60% return came up, we might consider reallocating some cash, but I haven't seen one in a while. We will keep opening new stores, and when we analyze performance by state, we find exceptional returns in established markets like Texas and California, as well as impressive results in places like New York and New Jersey, which may not be considered traditional markets but are performing very well.

Jonathan Komp, Analyst

Yes, that's really helpful. Thanks for sharing the additional color. And then really for either Jim, a broader question, how you think about the right margin structure for the business. I know two years ago, you had a high level that was a function of a unique environment. But as you think about the fiscal 2025 guidance in context of ultimately the operating margin potential for the entire business. What's your current thinking on that opportunity?

Jim Watkins, Chief Financial Officer

I still believe we can return to the 12% to 14% range that was mentioned a couple of years ago. Looking back at fiscal years '18 and '19, our goal was to reach 10% for everyone's benefit. By fiscal '21, we were nearly at that 10%. In fiscal '22, we exceeded 17%. Since then, we've been in the 11% to 14% range. We expect that as we return to positive comparable sales, our EBIT margin will continue to improve, eventually surpassing the 12% to 14% range and reaching 15% over the next five years.

Jonathan Komp, Analyst

That’s really helpful. Thanks again.

Jim Conroy, President and CEO

Thanks Jon.

Jim Watkins, Chief Financial Officer

Thanks Jon.

Operator, Operator

Your next question comes from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin, Analyst

Thanks and congrats on the improved results. I wanted to just quickly touch on sourcing for a second and get a sense of with your exclusive brands continuing to penetrate and industry conditions improving a bit with your comps improving. Just first to get a sense from what you are seeing from some of your suppliers in terms of pricing? And then secondly, as it relates to your sourcing in general and the noise around potential for tariffs to increase on a go-forward basis in 2025, obviously, hypothetically, what type of exposure do you have at this point in China? And how does that compare to let's say, 2018 when tariffs were really ramped up for the first time.

Jim Conroy, President and CEO

Thank you for the question, Jeremy. Regarding the first part, many of our major vendors have recently improved their efficiencies and are passing some of those benefits on to us. For instance, freight rates that had increased significantly are now down, and our vendors have done well in relaying those savings. Additionally, we can take advantage of quantity discounts from many of our large vendors. We focus on purchasing products that carry minimal fashion risk, which represents a significant portion of our merchandise, and we buy directly from vendors in bulk. This approach reduces costs for our vendors, allowing them to offer us better discounts. We've also observed a decrease in some of their input costs, and we are experiencing some benefits from that. Although we would always like to see more of this pass-through, we are receiving some. In terms of our inventory markup, both from third-party and exclusive brand vendors, we are noticing an improved markup as we receive goods and apply our average cost methodology for inventory accounting. Now, regarding your second question about our exposure to tariffs or countries facing potential tariffs, our exclusive brand team has effectively diversified our risk. In the past, approximately 50% of our inventory came from China, but it is now around 40%, even slightly below that. They have significantly reduced our dependency on China over recent years. We prefer to operate without tariffs, but if the situation changes, we believe we can navigate through it well. We've successfully managed similar circumstances in the past and even emerged stronger competitively due to the various strategies we have within our supply chain, including the ability to pivot towards exclusive brands. I hope this addresses your questions, but feel free to ask if you need more information.

Jeremy Hamblin, Analyst

No, I think it does. Thanks and congrats. And good luck this year.

Jim Conroy, President and CEO

Thanks very much.

Jim Watkins, Chief Financial Officer

Thanks Jeremy.

Operator, Operator

Your next question comes from Mitch Kummetz from Seaport Research. Please go ahead.

Mitch Kummetz, Analyst

Hi, thanks for taking my question. First, I would like to get more details about the comparisons you mentioned, particularly regarding your cautious approach to same-store sales due to tougher comparisons. Looking at Slide 16, I see that May is challenging from a one-year perspective, and even more so from a two-year perspective. You're currently showing a positive 11 in stores for the first two weeks. Could you provide details on what those two weeks were compared to last year and on a two-year basis?

Jim Conroy, President and CEO

I can tell you for last year, I don't know if I know it off the top of my head on a two year basis. the month of May last year was pretty consistent from week to week to week.

Mitch Kummetz, Analyst

Okay. Jim, you don't know what it was or what it was two years ago?

Jim Conroy, President and CEO

I'm sorry, the weekly cadence of the business of two weeks – two years ago has escaped my memory. Let me say we can pull it for you. I know we have a follow-up call with you if it's helpful, maybe we can provide it there. I can tell you, you called it out though, you're right. On a one-year basis, June and July are more difficult, on a two-year basis, at least on a consolidated basis, May is our most difficult comparison on a 2-year basis. Yes, I don't want to read too much into that and say that business is going to just continue to get even better from where it is today. But we are cycling our strongest month on a two-year basis right now.

Mitch Kummetz, Analyst

Yes. For my second question, I want to address any potential emails I might receive. You've clearly demonstrated solid sequential comp acceleration. One way to achieve this could be through promotions. However, the merchandise margin guidance for the quarter indicates that this isn't the case. I would like to confirm that this is not a factor in the comp acceleration.

Jim Conroy, President and CEO

Yes, I think that's a very fair statement. We are not purchasing our comparable sales. Our margin rate so far this quarter is up year-over-year. We haven't really altered our promotional approach. That is a reasonable question, and I understand you may ask it frequently. However, I believe you could ask us that question for the next five years, and the answer would remain the same: we don't significantly change our promotional strategy from year to year. Occasionally, we may adjust slightly when it comes to clearance, but clearance constitutes a very small portion of our business. Overall, our promotional strategy has remained largely consistent, at least in the broader sense, every year for the last 12 years that I've served as CEO of this company.

Jim Watkins, Chief Financial Officer

Coming back to the 2-week, 2-year ago May number, it was positive 17%.

Mitch Kummetz, Analyst

Okay, positive 17% is a compare on a two year for the first two weeks. All right. That’s really helpful. Thank you.

Jim Conroy, President and CEO

Of course, thanks Mitch.

Operator, Operator

Your next question comes from Corey Tarlowe from Jefferies. Please go ahead.

Corey Tarlowe, Analyst

Hi, good afternoon. I was wondering if you could talk a little bit about what you've seen in the oil markets and in your core functional business. Jim, I think you mentioned that your functional business is doing a little bit better. Could you remind us what you're seeing and how significant that is as a percentage of your business? Also, since that's not a product that would require markdowns, it should be potentially beneficial from a margin standpoint as well?

Jim Conroy, President and CEO

Yes, that’s a great question. Work boots have improved sequentially, but for full transparency, sales have been down about 1.5% this quarter. It’s not fully turning around yet. You’re right that this segment has little markdown exposure. We also have a strong men's Western functional business, including both boots and apparel. Men's Western denim has performed well for several months, showing mid-single digit growth this quarter and high single digits, approaching double digits in May. A significant part of our men's Western denim business is functional. Likewise, men’s cowboy boots turned positive in April and made slight improvements in May, now showing mid-single digit growth, with a large portion being functional as well. It’s encouraging to see these segments leading the way in positive growth. Additionally, while it's still early to make definitive claims, our ladies business, despite comp erosion, is not dragging down the overall comp as much. This segment is divided between functionality and fashion, with some improvement noted, though it remains slightly negative overall.

Corey Tarlowe, Analyst

Great. That's very helpful. I was just curious as well on the newer exclusive brands that you've launched, I believe there were four of them maybe within the last 18 months or so, how are those trending? And are there any new developments that you could share around those?

Jim Conroy, President and CEO

So the exclusive brand portfolio across the board is doing quite well. So our leading brand in the company right now is Cody James. Just nudging out a fantastic brand called Ariat, who's our Number Two brand now. If we look at our top eight brands, half of them are exclusive brands and half of them are third-party brands. Getting to the heart of your specific question, the new brands have been, overall I'd say, pretty good, and they've sort of met or exceeded our expectations. We're tweaking some of the styling for some of it. But we don't foresee any significant downside risk, and we do expect those to sort of grow and continue to build around their footprint over the next few years of where they started. So I'll give you one example. We have a brand called Rank 45, which is very strongly targeting a rodeo customer and a slightly younger rodeo customer. That brand has really started to build on the men's side quite nicely. We have a great spokesperson there who's a rodeo athlete named Rocker Steiner. And that is sort of the core of customers we can get, and it's nice to be able to put a brand out there that's going after a core Western consumer and a younger consumer and a rodeo athlete and have it do so well. So we're pretty encouraged by the new brand launches.

Corey Tarlowe, Analyst

Okay thank you so much. And best of luck.

Operator, Operator

Your next question comes from Sam Poser from Williams Trading. Please go ahead.

Sam Poser, Analyst

Good afternoon. Thanks for taking my questions. I just had a question. In the fashion businesses, can you talk a little bit about how the difference or how the management of those businesses are evolving from the management of the core or if they are.

Jim Conroy, President and CEO

Certainly. They are managed quite differently. When I consider the extremes of the spectrum, such as ladies' cowboy boots, which represent the fashionable side, and compare that to men's denim or work boots, the fashion items move more quickly. We manage inventory more tightly and have a more regional assortment. We operate with a high level of agility in that area. This is evident from the most recent fiscal year, where, despite experiencing significant negative same-store sales in our ladies' segment, we were still able to build merchandise margin. Credit goes to the team handling the fashionable side of the business, which, while still a smaller part of our overall company, has managed to maintain and even increase performance. On the more basic and staple side of the business, our philosophy is to be in stock by size in our stores. If you visit our store, you’ll notice full shelves, which is intentional. Our goal is to never disappoint a customer, as the cost of a lost sale far outweighs the potential markdown on these basic products.

Sam Poser, Analyst

Thank you. I have two more questions. First, what strategies are you implementing to enhance customer loyalty, as you've added many customers to your loyalty program and are seeing some improvement despite negative comparatives? How are you ensuring these customers return frequently? Secondly, you mentioned having eight top brands; could you please list them for us?

Jim Conroy, President and CEO

On the first point, we are customizing our customer communication by segment. If you're introduced to Boot Barn as a work customer, you'll hear about our work-related offerings, even if they're not in your specific industry. For younger, trendier customers on the ladies' side, our messaging will focus on contemporary fashion and country music festivals. Regarding the top eight vendors, while I won't list them in order, I can mention that Cody James and Chien, Idle Wind and Hawks are the four largest exclusive brands, while the top third-party brands are Ariat and Wrangler, with Twisted X and Justin rounding out the list.

Sam Poser, Analyst

Thank you.

Jim Conroy, President and CEO

Thanks Sam.

Operator, Operator

And there are no further questions at this time. I will turn the call back over to Jim Conroy for closing remarks.

Jim Conroy, President and CEO

Very good. Thank you, everyone, for joining the call today. We look forward to speaking with you all on our first quarter earnings. Take care.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.