Earnings Call
Boot Barn Holdings, Inc. (BOOT)
Earnings Call Transcript - BOOT Q1 2024
Operator, Operator
Good day, everybody, and welcome to Boot Barn Holdings First Quarter 2024 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Mark Dedovesh, Senior Vice President of Investor Relations and Financial Planning. Please go ahead, sir.
Mark Dedovesh, Senior Vice President, Investor Relations and Financial Planning
Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn’s first quarter fiscal 2024 earnings results. With me on today’s call are Jim Conroy, President and Chief Executive Officer; and Jim Watkins, Chief Financial Officer. A copy of today’s press release along with a supplemental financial presentation is available on the Investor Relations section of Boot Barn’s website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days on the Investor Relations section of the company’s website. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Boot Barn’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Boot Barn’s business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our first quarter fiscal 2024 earnings release, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the call over to Jim Conroy, Boot Barn’s President and Chief Executive Officer. Jim?
Jim Conroy, President and Chief Executive Officer
Thank you, Mark, and good afternoon. Thank you everyone for joining us. On this call, I’ll review our first 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’re very pleased with our start to the fiscal 2024 year and our first quarter results. During the quarter, total sales increased 4.9%, driven primarily by sales from new stores added over the last 12 months, partially offset by a low-single digit decline, a negative 2.9% in consolidated same-store sales. We feel great about this performance given that the business was cycling plus 10% and plus 79% growth in consolidated same-store sales in the prior year and two-year ago periods. Additionally, we are quite pleased with the sales results both in stores and online with both businesses outperforming our guidance for the quarter. In addition to strong sales performance during the quarter, we achieved 80 basis points of product margin expansion driven primarily by more than 600 basis points of growth in exclusive brand penetration. The strength in sales and margin combined with solid expense control drove earnings per diluted share of $1.13 during the quarter compared to our guidance of $0.85. I’m extremely pleased with our start to the year with the team’s execution continues to deliver both top and bottom line results. I’ll now spend some time discussing each of our four strategic initiatives. Let’s begin with expanding our store base. New stores continue to add to our top line growth and outperform our expectations. With our acceleration of new store openings, we have been able to open 86 stores over the last two years. With the opening of 16 new stores in the first quarter, we ended the quarter with 361 stores across 44 states. I’d like to thank the real estate, construction, build, digital merchandising and store operations teams for their collaboration and persistence in getting these new stores up and running successfully. Our new stores continue to pay back in fewer than 18 months with strong average unit volumes in the first year and we remain confident in our ability to achieve our long-term stated goal of 900 or more stores across the United States. Moving to our second initiative driving same-store sales growth, first quarter consolidated same-store sales declined 2.9% with retail store same-store sales declining 1.8% and e-commerce same-store sales declining 10.8%. Notably, comps improved sequentially by month throughout the quarter in both channels. And while still negative, the sequential improvement in store comps was driven by a sequential improvement in average transactions per store. From a merchandise department perspective, nearly all major merchandise categories showed sequential improvement in the first quarter from our fiscal year end. Men’s western boots and apparel achieved low-single digit positive comps. Ladies boots and apparel declined in the quarter, but showed sequential improvement from year-end while cycling strong double-digit comps in a year ago and two-year ago periods. From a geographic standpoint, stores in the North and East regions showed a slight decline in same-store sales and both performed better than chain average. The South lagged the chain average with a mid-single digit decline and the West performed in line with chain average. From a customer perspective, we are very pleased with the growth we continue to see in our customer base with 7.5 million active members in our B Rewarded loyalty program as of the end of our first quarter. This represents growth of 23% from 6.1 million members as of the end of our first quarter of fiscal 2023. Over the past few years, we have used our customer segmentation as a foundation to strategically extend the reach of the brand and attract a broader range of consumers. Historically, Boot Barn was more narrowly focused on the western and work customers. Over the past few years, we added a country lifestyle segment as well as a somewhat smaller segment targeting women seeking western inspired fashion. The new customer count is quite encouraging as we’re seeing both the ongoing development of the newly added segments while we are also expanding the size of the core western and work customer groups. Similarly, we are seeing healthy growth in customer count in our legacy stores, while also capturing a considerable number of new customers as the store portfolio builds across the country. In order to provide more in-depth understanding of the strength of the brand with our customer base, I would like to spend a minute highlighting a recent customer survey we performed. First, the survey results further confirmed that the elevated average store volumes we have seen over the last couple of years were not driven by a transitory fashion trend as more than 75% of customers are purchasing with us because western and work product is part of their everyday lifestyle and wardrobe. Second, the Yellowstone television show does not seem to be a factor behind the significant acceleration we saw in sales over the last several years with only 4% of customer responses citing Yellowstone as a reason for wearing our product. Lastly, our customers' propensity to shop with us continues to be very high with over 90% of customers either very likely or extremely likely to shop at Boot Barn again over the next 12 months. While we acknowledge that there is a sample bias in the survey responses that we receive, we are pleased to see that the results are consistent with our CRM data regarding new customers and their shopping preferences. For more details on the survey results, please refer to the supplemental financial presentation that we released today. Moving to our third initiative strengthening our omni-channel leadership. In the first quarter, our e-commerce same-store sales declined 10.8%, which was an improvement from a decline of over 18% in our fourth fiscal quarter. Notably, the Boot Barn brand did see positive sales growth for the quarter, but not big enough to offset the weakness in the Sheplers and Country Outfitter brands. We continue to believe that our e-commerce business will return to a positive growth trajectory beginning in late September or early October when the last year comparisons become easier. Despite the slowness in e-commerce sales, we are quite pleased with the many achievements we have seen from an omni-channel perspective. First, the team has greatly expanded the digital influence in our stores. We have rolled out Bandit, which adds artificial intelligence to our customer-facing shopping tablet, helping customers to get expert styling advice in store. In addition, we have equipped our store associates and call center operators with the same artificial intelligence capabilities to enable all of them to provide much richer product knowledge and shopping recommendations. We’ve also made great progress from an e-commerce fulfillment perspective. Today, we have the ability to ship most e-commerce orders from nearly every store or any distribution center. This will enable us to maximize selling margin by moving product through the limited amount of clearance that we have system-wide at less aggressive markdowns. It’ll also help us to minimize shipping time and cost by shipping orders geographically closer to customer demand. Now to our fourth strategic initiative, exclusive brands. During the first quarter, our exclusive brand penetration increased over 600 basis points to 38%. This is our third consecutive quarter of greater than 500 basis points of year-over-year growth compared to our historical stated goal of 250 basis points to 300 basis points of growth. We now expect to grow exclusive brand penetration for the fiscal year by 500 basis points to 39% of sales. With exclusive brands providing an incremental 1,000 basis points of margin compared to third-party brands, this penetration growth has added meaningfully to our margin profile. To support the substantial growth we have seen in store count and in our exclusive brand business over the last couple of years, we recently expanded our supply chain capability by adding an additional distribution center in Kansas City, Missouri. As a reminder, most third-party inventory is fulfilled directly by our vendors to our stores and does not pass through a Boot Barn distribution center. However, when it comes to our exclusive brand product, we warehouse that merchandise in our DCs and replenish the store demand ourselves. We are pleased to report that the new DC facility opened on time and is operating smoothly as we begin to ramp up the throughput of goods over the next few months. I want to thank our entire supply chain and IT teams for their world-class execution and getting the new DC up and running without any major disruptions. Turning to current business. On a consolidated basis, our July business declined 0.5%, which was an improvement on our first quarter, but a slight deceleration from June. Our retail store same-store sales performance remained positive in the month of July, while e-commerce sales declined 11.4% for the month. While it is exciting to see the tone of business begin to improve, it has also proven to be somewhat unpredictable with weekly comp performance ranging from negative 7% to positive 6% over the past four months. Accordingly, we have attempted to capture this volatility in our sales guide for the balance of the second quarter, which Jim Watkins will provide later on this call. Looking beyond the comp sales growth, we continue to feel great about the new store performance and the pipeline of new locations for the balance of the year. We’re also quite pleased with our exclusive brands, which saw an extremely strong growth in penetration for July that has contributed to a solid product margin for the month. In summary, while macro uncertainty persists, we feel we are well positioned to navigate through nearly any environment that comes our way. I’d like to now turn the call over to Jim.
Jim Watkins, Chief Financial Officer
Thank you, Jim. In the first quarter, net sales increased 4.9% to $384 million. As Jim mentioned, our sales performance benefited from new stores open during the past 12 months, partially offset by a consolidated same-store sales decline of 2.9%, comprised of a decrease in retail store same-store sales of 1.8% and a decrease in e-commerce same-store sales of 10.8%. Gross profit increased 3% to $142 million, or 37.0% of sales compared to gross profit of $138 million or 37.7% of sales in the prior year period. The 70 basis point decrease in gross profit rate resulted from 160 basis points of deleverage in buying occupancy and distribution center costs, partially offset by a 90 basis point increase in merchandise margin rate. The increase in merchandise margin rate was driven by 80 basis points of product margin expansion, resulting primarily from a 630 basis point increase in exclusive brand penetration and a 10 basis point tailwind from lower freight expense as a percentage of sales. Selling, general, administrative expenses for the quarter were $96 million or 24.9% of sales compared to $85 million or 23.3% of sales in the prior year period. The increase in SG&A expenses compared to the prior year period was primarily a result of higher store payroll and store related expenses associated with operating an additional 50 stores over the prior year period and corporate overhead costs in the current year. Income from operations was $46 million or 12.1% of sales in the quarter compared to $52 million or 14.3% of sales in the prior year period. Net income was $34 million or $1.13 per diluted share compared to $39 million or $1.29 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory increased 6% over the prior year period to $566 million. This increase was primarily driven by new store inventory and exclusive brand growth partially offset by an approximately 9% decrease in average comp store inventory. We finished the quarter with $17 million in cash and $26 million drawn on our $250 million revolving line of credit. Turning to our outlook for fiscal 2024. As outlined in our supplemental financial presentation, we’re raising our guidance for both the second quarter and full year. As the presentation lays out the low and high end of our guidance range for both periods, I will only speak to the high end of the range in my following remarks. As we look to the second quarter, we expect total sales at the high end of our guidance range to be $379 million. We expect the same-store sales decline of 3.5% with a retail store same-store sales decline of 2.5% and an e-commerce same-store sales decline of 9%. We expect gross profit to be $134 million or approximately 35.4% of sales. Gross profit reflects an estimated 50 basis point increase in merchandise margin, including flat freight expense year-over-year. We anticipate 180 basis points of deleverage in buying occupancy and distribution center costs. Our income from operations is expected to be $38 million or 10% of sales. We expect earnings per diluted share to be $0.90. As a result of our first quarter performance and our updated estimate for the second quarter, we are raising our full year guidance. Our guidance for the second half of the year remains unchanged. For the full fiscal year, we now expect total sales at the high end of our guidance range to be $1.75 billion, representing growth of 5.5% over fiscal 2023, which as a reminder was a 53-week year. This compares to our previous guidance of $1.72 billion. We expect same-store sales to decline 3% with a retail store same-store sales decline of 3.5% and flat e-commerce sales. This compares to our previous guidance of a same-store sales decline of 4.5% with a retail store same-store sales decline of 5.2% and e-commerce same-store sales growth of 1%. We now expect gross profit to be $646 million or approximately 36.9% of sales. Gross profit reflects an estimated 160 basis point increase in merchandise margin, including a 100 basis point improvement from freight expense. We anticipate 150 basis points of deleverage in buying occupancy and distribution center costs. Our income from operations is expected to be $223 million or 12.7% of sales. We expect net income for fiscal 2024 to be $163 million and earnings per diluted share to be $5.35. We also expect our interest expense to be $3.2 million and capital expenditures to be $95 million. Now I would like to turn the call back to Jim for some closing remarks.
Jim Conroy, President and Chief Executive Officer
Thank you, Jim. We’re quite pleased with our financial performance during the first quarter and are looking forward to the balance of the year. I do want to thank the entire Boot Barn team for their hard work and briefly acknowledge some well-deserved third-party recognition. Every year, Newsweek conducts an independent consumer survey and assembles a list of America’s best retailers. The assessment measures the customer’s view on product assortment, in-store service, store design and merchandising, as well as a few other factors. For 2023, Boot Barn topped that list with the highest score of any company across 39 different categories of retailing. A heartfelt thank you to the entire team nationwide for working so hard and for earning the accolades that you all deserve. Congratulations. Now, I would like to open the call to take your questions, Sherry?
Operator, Operator
Thank you. Our first question is from Matthew Boss with JPMorgan. Please proceed.
Matthew Boss, Analyst
Great, thanks and congrats on another nice quarter.
Jim Conroy, President and Chief Executive Officer
Thanks Matt.
Matthew Boss, Analyst
So Jim, could you just maybe help break down drivers of the sequential traffic acceleration that you saw through the quarter, notably as you cited the return to positive store comps in both June and July. And then just how best to think about your forward comp assumptions that you’ve embedded, which obviously do embed a level of deceleration?
Jim Conroy, President and Chief Executive Officer
Sure. Matt, you did a nice job of clarifying that you wanted Jim to answer that one. So I’ll take a first crack. The progression from Q4 to Q1, a few different things improved depending on if you want to look at it by channel or by merchandise category, etc. First, our e-commerce business, while still negative, improved sequentially by about 8 points. Our store business improved notably; our West division improved by about two full points. Within the merchandise hierarchy, men’s western boots had some nice sequential improvement, men’s western apparel had some nice sequential improvement, both of those turning positive. Ladies’ western boots, while still negative, improved by about 700 basis points. So there were a number of different factors, whether you’re looking at it by merchandise category or by channel or by geography within the stores business. In terms of looking forward on the guidance piece, I’ll turn that over to the other Jim.
Jim Watkins, Chief Financial Officer
Hey, Matt. So the sales assumptions for the second half of the year are unchanged and we’ve largely left August and September unchanged as well. We did increase the store sales a little bit and decreased e-commerce sales a little bit just based off of what we’ve been seeing in the business over the last four weeks. So August and September are planned at minus 4% in stores and e-commerce for August looks similar to July with September improving to negative single digits. And then just as a reminder, kind of recapping from the last call, we were really using the sales volume from February, March and April and projecting the sales for the balance of year using historical weekly sales curves. And when we were contemplating the guide for this quarter, we took a similar approach looking at the most recent four weeks for the balance of this quarter and also looked at it at varying time periods and we got to a similar spot regardless of which of those time periods we used.
Matthew Boss, Analyst
Okay, that’s great color. And then maybe just to follow-up on new stores that you cited. So can you touch on recent productivity that you’re seeing from some of your newer store builds maybe across regions? And just could you elaborate on any key structural changes that you’ve made to the business that support now the higher mid-teen store growth?
Jim Conroy, President and Chief Executive Officer
Sure. The new store productivity is in line with the $3.5 million new store sales that we’ve been calling out recently. And Matt, as you fully recognize, that is nearly double what we originally had thought in our original long-term algorithm. In terms of the infrastructure changes, we do tend to run pretty lean. We have added one real estate deal maker that sits on the East Coast to help develop that part of the country. We continue to use an extensive broker network. We’ve added a couple of project managers, of course. And then within the field organization, we have a few more people working in visual merchandising that help with the in-store setup, etc. And I think maybe even more than additions to the organization, we’ve changed our process quite a bit, where we have a really solid onboarding and training program for new store managers and new teams within a new store. As soon as it became apparent that we weren’t always going to be able to transfer an assistant manager to promote them to be a store manager to another part of the country, we really relied on the HR team and the store ops team to figure out a way to bring in external talent and teach them the Boot Barn methods and the Boot Barn culture. And that has worked extremely well. We continue to feel very optimistic about our new store openings, their performance, our pipeline, our target of at least 900. And we’ll just continue to stamp out what is proven to be a working model.
Matthew Boss, Analyst
Really helpful color, best of luck.
Jim Conroy, President and Chief Executive Officer
Thanks, Matt.
Operator, Operator
Our next question is from Steven Zaccone with Citi. Please proceed.
Steven Zaccone, Analyst
Great. Good afternoon guys. Thanks for taking my question. I wanted to follow-up about your commentary regarding some volatility in the comps by week over the last two months. How much of that is just weather? We know it’s been hot in the South, so I’m curious for your perspective on that. And I guess, has there been anything changing from a consumer purchase activity, whether it’s potential trade down or anything of that nature that’d be helpful.
Jim Conroy, President and Chief Executive Officer
Steve, I would submit that it’s just been difficult to pin it down to a particular external factor. We’ve had extremely hot weather as you’ve pointed out, that didn’t necessarily always correlate to tougher business. We’ve had some great concerts come into town in some parts of the country that have spiked business. Conversely, big concerts in the comparable period have brought business down. So we felt it was important to call out that while we do feel good about the present tone of the business, it has been a word that’s been used by other public companies reporting recently — choppy. It’s been a little choppy and when we were trying to lay out guidance for the second quarter, we wanted to just take note of the fact that June and July were great, the last week in July wasn’t so great. So let’s just kind of build that uncertainty into the guide for the balance of the quarter and for that matter for the year.
Steven Zaccone, Analyst
Okay, I appreciate that detail. Then a question for Jim Watkins, just on the gross margin outlook, it doesn’t sound like much has changed, but I noticed in the second quarter, I guess freight still expected to be flat year-over-year. So it sounds like that freight benefit is largely going to be back half weighted. Is that fair?
Jim Watkins, Chief Financial Officer
That’s right. Yes. The freight expectation is consistent with what we were seeing last quarter: the first half of this year would be kind of flat and then we’d really see that benefit pick up as we get into Q3 and Q4 and pretty significantly to get us to a 100 basis points of tailwind on the full year.
Steven Zaccone, Analyst
Okay, thanks. Thanks very much.
Operator, Operator
Our next question is from Max Rakhlenko with TD Cowen. Please proceed.
Bradley Jamison, Analyst
Hi, this is Bradley Jamison on for Max. So first sticking with gross margin. Jim Watkins, can you speak to where your markdown percentage of goods is today compared to pre-pandemic? And then how do you expect that to trend ahead? Is this sort of a more normalized state now or could they fluctuate higher or lower ahead?
Jim Watkins, Chief Financial Officer
Great question. The markdown percentage of sales is very much in line with where it was pre-pandemic. In the last couple of years, we saw a historically low markdown percentage, but it’s back to where we’ve seen it historically over the years pre-pandemic and we expect that to stay in a similar place as we move throughout the year and going forward.
Bradley Jamison, Analyst
Great. And then Jim Conroy, your footwear mix over the past few years has declined to 47% in the last fiscal year from 52% to 53% in a few years prior to the pandemic. What do you attribute that decline to and what do you think the implications of that mix shift could be? And do you think footwear will continue to trend lower over time? Thanks guys.
Jim Conroy, President and Chief Executive Officer
Sure. I tend to view that more positively. The decline is largely a function of other categories growing faster, most notably ladies apparel, which grew considerably over the last few years. When one category grows rapidly — ladies apparel grew roughly 100% at one point — it reduces the percentage share of other categories like footwear. I expect ebbs and flows over the next few years; I don’t see this as a persistent one-way trend. Five years from now, footwear may be around the same share, roughly on either side of a 50/50 split with apparel. In terms of margin profile, there’s almost nothing to read into that; margins across footwear and apparel are fairly similar. Anecdotally, as we have broadened the definition of Boot Barn to reach customers slightly outside the core, apparel can be an easier first purchase for newcomers, who may later invest in higher-ticket footwear.
Bradley Jamison, Analyst
Great. Thanks guys. Best of luck.
Jim Conroy, President and Chief Executive Officer
Thanks, Bradley.
Operator, Operator
Our next question is from Jason Haas with Bank of America. Please proceed.
Jason Haas, Analyst
Hey, good afternoon and thanks for taking my questions. So I wanted to follow up on the e-commerce business. I was just curious if you could provide a little bit more color on what is going on with the Sheplers business. It sounds like that’s been the biggest drag, at least for a couple quarters now. So just curious why that business has been softer and I know the compares will start to get easy, you’ll start to lap this, but I’m just curious what you’re doing, if anything to try to lessen those declines.
Jim Conroy, President and Chief Executive Officer
Sure, great question. The Sheplers business has two dimensions that have challenged their top line: both traffic and conversion have come down. We are working on anything we can internally to stem the tide on conversion, such as site setup and usability. From a traffic perspective, about half of traffic to Sheplers is paid traffic. We hold ourselves to a profitable return on ad spend metric. Once we lock in that return on ad spend, if traffic is down while we could spend more and improve traffic, it would be EBIT-eroding, so we generally do not do that. We behave with a focus on bottom-line contribution — if the next customer is going to be an unprofitable purchase, we won’t pursue them. We are looking for ways to improve conversion and traffic in effective ways. Bootbarn.com benefits from our brand and store presence with over 360 billboards around the country; we think that business will grow over time. There are other players in e-commerce always taking share, whether new entrants or vendors, etc. But when we look at the full portfolio of the company, while we’re an omnichannel business, we prioritize the 90% of sales that come through stores. That strategy has worked for us, and as we see e-commerce traffic more difficult to get for us and for others, our five-year head start on stores is an advantage.
Jason Haas, Analyst
That’s great, thank you. And then as a follow-up, you mentioned concerts in response to an earlier comment on some of the volatility. We’re continuing to get questions about Taylor Swift’s tour. I don’t know if that’s what you’re referring to or other ones, but yes, maybe you could help clarify that. Thank you.
Jim Conroy, President and Chief Executive Officer
Sure. While she is an amazing performer, we actually don’t see massive swings in our business from Taylor Swift. The names that tend to drive our business are more traditional western artists like George Strait, Garth Brooks, and Morgan Wallen. Morgan Wallen in Phoenix a few weeks ago caused a spike in Phoenix business. We are cycling a Garth Brooks concert we had in Houston last year. The concerts and events business is a low single digit piece of our overall business; however, in specific markets or weeks it can be impactful because the denominator is smaller, making the impact noticeable.
Operator, Operator
Our next question is from Jonathan Komp with Baird. Please proceed.
Jonathan Komp, Analyst
Yes. Hi, good afternoon, Jim. I want to ask, when you look back at March and April, just what do you make of the comp softness that you saw and then the recovery from those lows. And could you just share a little bit more, I believe your full year guidance was based on those volumes back then, and it sounds like you haven’t changed your second half guidance. So just how should we think about that second half and how you’ve contemplated it and kind of the degree of conservatism, if you will?
Jim Conroy, President and Chief Executive Officer
So starting with the guidance for the balance of the year: March and April were softer months for us and we have a slide that goes through those store comps by month. As we’ve looked at the back half of the year, there is probably a little bit of conservatism embedded in the sales trends for the back half. Given the volatility we’ve seen over the last few months — as depicted in our materials — leaving the back half where it is for now made sense. As I mentioned earlier, we took different cuts looking at the most recent 13 weeks, 26 weeks, and four weeks, and at least getting through Q2, leaving that guidance where it was seemed prudent. The back half of the year probably has some conservatism built in, but we think that’s appropriate given the variability.
Jonathan Komp, Analyst
And just to follow-up, did you have any sort of diagnostic looking back at March and April, maybe what happened and more insight on what changed and turned pretty quickly there?
Jim Conroy, President and Chief Executive Officer
No, I don’t think we have any one thing to point to. There was a lot of noise in the market then — tax refunds, weather, heavy rain, or coming out of heavy rain — and we were cycling periods that had noise around the onset of COVID, Omicron, tax stimulus and child tax credits. There may be things in the two-year or three-year comps that created some noise, particularly in March and April in those prior years.
Jonathan Komp, Analyst
That makes sense. And then Jim, if I can follow-up on SG&A, it looks like this year obviously you’ve maintained a healthy pace of investment in initiatives plus cost to support the growing store base. As we look forward on SG&A, how should we think about the growth rate and the level of comps and really timeline to get back to showing leverage on SG&A overall?
Jim Watkins, Chief Financial Officer
Great question. We’ve talked about leverage points in prior calls around SG&A being achievable with around a 2% to 2.5% comp. We’ll have to get through this year and see fiscal 2025 guidance, but if we return to positive comp growth in that range, we should see leverage. We have seen pressure from wage rates and inflationary costs for supplies, insurance, and utilities. As these inflationary pressures subside, that would also help the SG&A line.
Jonathan Komp, Analyst
Perfect. That’s really helpful. Best of luck. Thanks.
Jim Watkins, Chief Financial Officer
Thanks, Jon.
Jim Conroy, President and Chief Executive Officer
Thanks, Jon.
Operator, Operator
Our next question is from Dylan Carden with William Blair. Please proceed.
Dylan Carden, Analyst
Thank you. Just curious the new distribution capacity that you’ve added for private label out of Kansas City, what level of business can that support even sort of broadly and how you’re kind of thinking of that business? It’s still growing sort of at higher levels and I think we’d even thought a couple years ago.
Jim Conroy, President and Chief Executive Officer
Absolutely. The way we have modeled it, the Kansas City DC should take care of our needs if we stay on a 15% store growth trajectory and 300 basis points of exclusive brand penetration increase each year. We probably have about six or seven more years of capacity before we’d need to add an additional facility, which would likely be on the East Coast.
Dylan Carden, Analyst
Got you. And the online guidance, I’m just trying to understand it, and you’ve kind of been asked a couple times here about sort of the level of conservatism. But I guess, part of that business is also related to what you’re seeing in the brand channel, the owned brand channel or your sort of partner brand channel. Can you help us understand the inflection? I get that it’s easier comparisons, but not necessarily on a stack basis. Does part of it have to do with sort of the behavior of some of your partners, and I guess maybe what are you seeing there as you look to the back half?
Jim Conroy, President and Chief Executive Officer
If you’re talking about vendor partners, yes — there are vendors that in certain instances are encroaching on our digital business by going direct to consumer, seeking higher margins. That’s been in our environment for several years. It could be some competitive pressure or comparisons against last year. It could also be the fact that we won’t chase unprofitable traffic by increasing ad spend. We will continue to try improving the business operationally, changing site merchandising, and looking for novel ways to grow traffic or conversion.
Jim Watkins, Chief Financial Officer
Dylan, regarding guidance, similar to stores, we looked at weekly sales volume of the e-commerce sites and how that builds throughout the year, week over week and month over month, and how it relates seasonally as a percentage of sales. That gives us confidence in the e-commerce guide and in leaving the back half where it was.
Dylan Carden, Analyst
And that back half is really just lapping promotional activity from the brand partners as they sort of reflush their own inventory balances, right?
Jim Conroy, President and Chief Executive Officer
Yes. There’s a little bit of that in Q2. If you look at the chart in our deck, you’ll see some of that as we get into September at the end of this quarter. That’s where we talked about the end of Q2 or early Q3 that business returning to positive.
Dylan Carden, Analyst
Awesome. Thanks a lot guys.
Jim Conroy, President and Chief Executive Officer
Thanks, Dylan.
Jim Watkins, Chief Financial Officer
Thanks, Dylan.
Operator, Operator
Our next question is from Janine Stichter with BTIG. Please proceed.
Janine Stichter, Analyst
Hi, everyone. Congrats on momentum. Wanted to ask a bit about the private label business. It’s growing really nicely. It sounds like better than you expected. And maybe elaborate a bit more on what’s working there. And then it looks like we’ll be at close to 40% penetration by the end of the year, I think 38%. So we’d love some updated thoughts on what the ceiling is for that business. How big could it ultimately become? Thanks.
Jim Conroy, President and Chief Executive Officer
We’ve seen broad-based success. Our biggest brands Cody James and Shyanne continue to gain ground. Cody James is now the biggest brand in the company, which is remarkable for an exclusive brand. It’s only a men’s brand. We’ve seen strong growth from Idyllwind — that brand started five years ago and the partnership has been very strong. Newer brands have come out of the gate quickly; others slower, but we haven’t had any new brand be a complete failure. That has helped penetration grow. Regarding the upper limit, we will always be a house of brands and customers expect to find iconic national brands in our stores. But I don’t see any reason why we can’t continue to grow roughly three points a year for the next five years and get to 50% or 55% over time. Consumers trust us as a curator, and exclusive brands offer an attractive margin profile. Vendor reactions will influence the pace somewhat, but the big national brands will always have a home with us.
Janine Stichter, Analyst
That’s helpful. I guess, I would be curious to know if you had any perspective or maybe survey work you’ve done just on how your consumers view your exclusive brands. Do they view them as national brands or are they aware of their Boot Barn brands?
Jim Conroy, President and Chief Executive Officer
It’s a mixed bag. We track social media and forum posts for our brands to get unfettered feedback. Sometimes customers complain, sometimes they’re quite happy, and sometimes they know it’s a Boot Barn brand and sometimes not. The bigger legacy exclusives have built more independence and aren’t as anchored to the store brand; Idyllwind is in that camp as well. We position exclusive brands like regular brands — priced in line with national brands and treated similarly in marketing and merchandising so they look and act like national brands.
Janine Stichter, Analyst
Perfect. Thanks so much.
Jim Conroy, President and Chief Executive Officer
Thank you.
Operator, Operator
Our next question is from Corey Tarlowe with Jefferies. Please proceed.
Corey Tarlowe, Analyst
Great. Thanks for taking my question. I’m curious how you’re thinking about pricing throughout the rest of this year. Obviously inflation’s receded some and it felt like for quite some time, inventory was a really significant topic of conversation. But now it seems like inventories are well in control. So could you maybe also talk a little bit about your expectation for inventory throughout the rest of the year?
Jim Conroy, President and Chief Executive Officer
On pricing, over the last 24 months we had to push some inflationary costs through to retail pricing. Where we can, some vendors lowered wholesale costs and we’ve lowered retail prices while maintaining the same markup percent, which has sometimes increased velocity. I think we have reached a more stable equilibrium and don’t see obvious places for meaningful retail increases or decreases. Regarding inventory, we have seen an improvement. The inventory number came down about $23 million from three months ago despite adding new stores and exclusive brand growth. The team is doing a nice job managing inventory and aligning product availability with sales levels. With supply chains stabilizing, we can get product when and where we want it.
Jim Watkins, Chief Financial Officer
Yes. We’re back to seeing regular price increases that we would expect. And as far as inventory goes, we’re really pleased to see that number come down just a bit, $23 million lower than three months ago despite the addition of new stores and continued exclusive brand growth. The team is managing inventory well to support the sales level and the supply chain stability has helped.
Corey Tarlowe, Analyst
Great. Thank you very much. And then just another question on the men’s business, it sounds like you have some pretty decent momentum there. Are there any specific call outs within the men’s business that you would say are really driving momentum there?
Jim Conroy, President and Chief Executive Officer
It’s been broad-based. Boots have seen outsized growth in exotic skin boots, which are higher price points. Men’s apparel, particularly denim, has been stronger than non-denim. Those are the main callouts.
Corey Tarlowe, Analyst
Great. Very helpful. Thank you very much and best of luck.
Jim Conroy, President and Chief Executive Officer
Thank you.
Jim Watkins, Chief Financial Officer
Thanks.
Operator, Operator
Our next question is from Jay Sole with UBS. Please proceed.
Jay Sole, Analyst
Great. Thank you so much. I just wanted to follow-up on some of the commentary on the new stores. Is it possible to talk about some of the new stores and some of the markets where people don’t traditionally think of Boot Barn from an investor side, like Manchester, Connecticut as a store that opened recently. Can you talk about a store like that? Not to get too specific compared to Texas, Southwest California, where traditionally most people think the stores work. Can you just talk about how the stores are doing in some of the newer markets?
Jim Conroy, President and Chief Executive Officer
Quick answer: they’re doing quite well. New stores in Texas and California — if there isn’t a nearby store — stand out with the highest average unit volumes. Excluding those two states, new stores in places like Connecticut, outside Philadelphia, Niagara Falls, or outside Albany generally perform similarly to other parts of the country that sell western-oriented product. We open them with our traditional brand footprint and do not significantly alter the look and feel or assortment. Strategically, that allows us to scale the concept without major changes to the model. The merchants, planners, and allocation teams do tweak assortments, but the major brands and categories are present across the chain.
Jay Sole, Analyst
Got it. Jim, that’s interesting. If I can just follow-up on one more, just because you talked a lot about the success of brands like Cody James and Cheyenne and Idyllwind, how much — when you see the success, do you think bigger in terms of turning these brands into more than just Boot Barn brands, like maybe creating their own websites, creating a premium product, maybe placing them in premium boutiques or things like that and really building them out in their own right to sort of enhance what they are and in turn enhance Boot Barn?
Jim Conroy, President and Chief Executive Officer
It’s an ongoing consideration and something we will likely pursue selectively. We’ve done some brand-level promotional and athlete partnerships; for example, we have rodeo athletes and other advocates who wear our exclusive brands. We do treat them as quasi-independent brands and may invest more over time to build their equity beyond the store. It’s a strategy we’ll continue to evaluate.
Jay Sole, Analyst
Got it. Okay. Thank you so much.
Jim Conroy, President and Chief Executive Officer
Thank you.
Operator, Operator
Our next question is from Sam Poser with Williams Trading. Please proceed.
Sam Poser, Analyst
Thank you for taking my questions. I have a couple here. One: as you grow the exclusive brand business and you’ve mentioned you’re committed to having national brands as well, how is your assortment changing? What gets squeezed out because you can’t get everything into the store all the time. So as that penetration grows, how do you manage what falls to the side?
Jim Conroy, President and Chief Executive Officer
Typically, the third or fourth player in a product category is minimized or eliminated and exclusive brands take that space. Exclusive brands must turn in line with sales-to-stock ratios; if they don’t, we make changes. We generally don’t squeeze out the bigger iconic national names — customers expect them. The smaller, lesser-known brands that do less marketing tend to cede share to exclusive brands.
Sam Poser, Analyst
Thank you. And then, rather than talk about the revenue, what percent of your customers touch your mobile app or website and then maybe come to the store? Is your digital presence a traffic driver beyond what the comps and sales trends show?
Jim Conroy, President and Chief Executive Officer
Absolutely. Digital helps drive store traffic, which is why we built the app and continue to invest in mobile. Many shopping journeys start digitally, particularly on handheld devices, even if the final purchase is in-store.
Sam Poser, Analyst
Do you have a measurement of that, like do you poll customers how they first heard about you when they sign up for membership?
Jim Conroy, President and Chief Executive Officer
I don’t have a precise measurement offhand. Perhaps that’s something we’ll add to our next round of customer research.
Sam Poser, Analyst
And then this was asked earlier, but you came in significantly better than prior guidance. One, can you attribute anything specific to that outperformance? And two, has there been a change in how you approach guidance versus a year or two ago?
Jim Watkins, Chief Financial Officer
Regarding guidance, the way we provide guidance now emphasizes weekly sales trends and how they play through the rest of the year. Historically we used one-year or two-year stacks, but the variability coming out of COVID made those approaches less reliable. We’ve leaned more into looking at the weekly build and how that compares to historical seasonal patterns.
Sam Poser, Analyst
Thank you.
Jim Conroy, President and Chief Executive Officer
Thanks, Sam.
Operator, Operator
Our next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed.
Jeremy Hamblin, Analyst
Thanks, and congrats on the strong results. I wanted to ask another question on the exclusive brands. Flashing back five years, penetration was under 20% and now it's roughly double. You expected 200–300 basis points of penetration growth historically, but you've achieved roughly double that. As you’ve gone from a roughly 10,000 square foot store to 12,000 square foot store, how much of the change is due to dedicated floor space to exclusives versus velocities outpacing third-party brands?
Jim Conroy, President and Chief Executive Officer
Good question. The increase in store size and the increase in exclusive brand penetration are correlated but not causal. The lift in exclusives came partly from lessons during the supply chain constraints coming out of COVID — exclusive brands were the supply chain we could fully control and get 100% of what we ordered. When we increased exclusive inventory in stores, consumers responded strongly. We upgraded the exclusive brand team, added designers, and improved collaboration between buying and design and stores. Regarding store size, that was driven by a strategic decision to open larger stores with more opening inventory to drive higher new store volumes; the two initiatives were developed separately.
Jeremy Hamblin, Analyst
Thanks. That’s helpful. And any noticeable changes in markdown or promotional behavior in the competitive set?
Jim Conroy, President and Chief Executive Officer
Not really. Some competitors may run a promotion a week longer or start at a different time. Most of the competitors we face at a store level are single-store operators. We don’t change our plan based on what others do; we stick to our strategy.
Jeremy Hamblin, Analyst
Great. Thanks for the color. Best wishes.
Jim Conroy, President and Chief Executive Officer
Thank you.
Operator, Operator
Our next question is from Mitch Kummetz with Seaport Research. Please proceed.
Mitch Kummetz, Analyst
Yes. Thanks for taking my questions. Drill down a little bit more on ladies boots and apparel. Last quarter, you mentioned that ladies boots and apparel were down 11% and down 13% respectively, and that was against an over 80% two-year stack. I believe, Jim, you said that ladies boots improved about 7 points this quarter from last. So can you give us those comps for the quarter and can you say what the two-year compare was?
Jim Conroy, President and Chief Executive Officer
The 7 point sequential improvement was for boots, not apparel. Apparel was roughly in line between Q4 and Q1. Q1 comps last year were quite strong — both boots and apparel had 20%+ comps last year, and in the prior year, Q1 comps were over 100% due to cycling the April/May 2020 COVID period. There’s a lot of noise in those multi-year stacks. It’s encouraging to see sequential improvement in ladies boots and that ladies boots were positive in July.
Mitch Kummetz, Analyst
And when does the ladies business get easier on comps? Is that 2Q or 3Q?
Jim Conroy, President and Chief Executive Officer
The comps start to get easier in Q3.
Mitch Kummetz, Analyst
All right. Thanks. Good luck.
Jim Conroy, President and Chief Executive Officer
Thanks, Mitch.
Jim Watkins, Chief Financial Officer
Thanks.
Operator, Operator
Our final question is from John Lawrence with the Benchmark Company. Please proceed.
John Lawrence, Analyst
Hi guys, congrats.
Jim Conroy, President and Chief Executive Officer
Thank you, John.
John Lawrence, Analyst
Would you comment just a little bit: when you look at the store fleet and some of the older stores, neighborhoods change, traffic patterns change a little bit. Are there any of those older stores that are slated for productivity improvements, partial expansion, or relocation? If you do that, do you get a higher return on those stores if that construction or expansion takes place?
Jim Conroy, President and Chief Executive Officer
We have an ongoing program with three buckets. One is relocation — moving a store across town to a larger or growing part of the city. When we do a full remodel and rebrand, we typically expect a pickup in sales. A third tranche is refresh work: replacing carpeting, changing lighting, and fixtures to align older stores with the current brand aesthetic. Newer store designs are more aspirational, so we will touch around 25 stores this year with capital improvements; some will be full remodels and others will be targeted upgrades to bring the store to brand standards.
John Lawrence, Analyst
And last thing: when you look at the exclusive brand pipeline going forward, you’ve done a lot over the last five or six years. Is the pipeline for new products and adjacencies still strong?
Jim Conroy, President and Chief Executive Officer
Yes. Growth in exclusive brands will likely continue, though perhaps not at the exceptional recent clip. We might see more normalized penetration growth of 250 to 300 basis points a year. Growth comes from launching new brands and expanding existing brands into additional categories or sizes. Sometimes growth is achieved by taking a brand and extending it into related categories. We’ll continue to double down on what’s working and cut losses on what’s not.
John Lawrence, Analyst
Great. Thanks. Thanks for squeezing me in. Good luck.
Jim Conroy, President and Chief Executive Officer
No problem. Thank you.
Jim Watkins, Chief Financial Officer
Thanks, John.
Operator, Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Jim Conroy for closing comments.
Jim Conroy, President and Chief Executive Officer
Well, thank you, everyone for joining the call today, and we look forward to speaking with you on our second quarter earnings call. Take care.
Operator, Operator
Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.