Boot Barn Holdings, Inc. (BOOT) Q2 2015 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to Boot Barn Holdings Second Quarter Fiscal Year 2015 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jim Watkins, Director of Financial Planning and Analysis. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn Holdings, Inc. Second Quarter 2015 Earnings Results. On today's call are Jim Conroy, President and CEO; and Paul Iacono, CFO. A copy of today's press release 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 in 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, and 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 in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 2015 earnings release, which was furnished to the SEC today on Form 8-K, 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. With that, I will turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Jim, and good afternoon. I'd like to thank you, all, for joining us for our first conference call as a public company. I'll begin the discussion with an overview of our second quarter results and share with you some highlights of our growth strategy. And Paul will review our financial performance in more detail and provide our outlook for the balance of fiscal year 2015, which ends on March 28, 2015. Following that, we will open the call up for your questions. So let's begin with a review of our second quarter results. I'm pleased with our financial performance, which reflects continued momentum in our business and solid execution by the entire Boot Barn team. Net sales increased almost 12% to $86.4 million over the same period last year. This increase was driven by a 7.3% same-store sales increase as well as contributions from new store openings. While sales growth was healthy across most of the departments in the store, we had particularly strong performance in boots and in the work categories. We were also able to expand merchandise margin through a combination of increased private brand sales and an increase in penetration of boot sales, which are merchandise margin enhancing relative to a apparel. Given that this is the first quarterly conference call since we took Boot Barn public in October, we would like to provide some more background on the Boot Barn proposition and our growth strategies. Boot Barn is a lifestyle retail brand that services the Western, country and work customer groups. We service in lifestyle that permeates nearly every state in America with a category killer assortment of boots, hats, work wear and blue jeans. We operate in a growing $20 billion market that includes Western and work boots, apparel and accessories. The market is highly fragmented with thousands of independent stores. Today, Boot Barn operates 165 stores in 25 states, and we are the largest and the fastest-growing specialty retail chain in the industry. We service an extremely broad American lifestyle comprised of men, women and kids. To give you a sense for the breadth of our customer base, consider the following statistics: country music is the #1 music format in the U.S.; pickup trucks are the #1 vehicles in the U.S.; and NASCAR is the #1 spectator sport in the U.S. As there is considerable overlap between these groups and our customer base, we believe we have ability to grow our store footprint considerably throughout the United States. From a merchandising perspective, approximately half of our business is boots with the balance comprised of apparel, hats, work wear and accessories. We provide one-stop shopping with approximately 200 brands and more than 1,500 styles in an average store, making us the destination for Western and work-related footwear, apparel and accessories. We primarily sell merchandise that serves the everyday clothing needs of our customers. Accordingly, 70% of our merchandise is on automated replenishment, which underscores the low fashion quotient of our product. With a long track record of growing our business, both organically and through acquisition, we've doubled our revenue over the last 2 years, and we believe that we are just getting started. We have a very straight forward growth strategy that consists of 4 components: Number one, build more stores by both filling in existing markets and building out developing markets; number two, grow same-store sales through a combination of merchandising, marketing and customer service initiatives; our third strategy is to increase our private brand penetration to expand our merchandise margin; and the final component of the strategy is to continue to augment our omni-channel capabilities. We will walk through each of these strategies briefly starting with building more stores. We believe we have an attractive and versatile store model that allows us to take advantage of a variety of real estate formats. The Boot Barn store model pays back in less than 3 years on average and is proven to be successful across a variety of geographies, markets and types of real estate locations. In fact, every Boot Barn store in our comp base is profitable on a trailing 12-month basis. In an effort to maximize our new store growth plans, we conducted an extensive project to outline our real estate growth strategy. This study sized the U.S. market at over 400 stores or nearly tripled our current store count, and provided us with a roadmap to build out the 48 contiguous estates. We have invested in our real estate and new store construction department, and we have opened 13 stores year-to-date, including 7 store openings in the 9 weeks since the beginning of the third quarter. We believe we are on pace to achieve 10% unit growth annually. Our second growth strategy is to drive same-store sales growth. We have a strong track record of 20 consecutive quarters of positive same-store sales growth. This growth has been driven by full-priced selling strategy and is not the result of ongoing aggressive sales promotions. As we look forward, we see opportunities to continuing to drive additional growth through merchandising, in-store selling techniques and improved CRM capabilities. Our third strategy is to continue to grow our private brand penetration. In fiscal 2014, our private brand penetration was approximately 7%. And we believe we can increase this penetration over time. We have developed each of our 6 private brands to fill a hole that we identified in our assortment. Our Cody James and Shyanne brands cover both boots and apparel, and target the men's Western and ladies Western customer, respectively. These 2 brands are the #4 and 5 brands in the company for us in terms of dollar volume. We've also recently launched a new brand called Moonshine Spirit by Brad Paisley, which rolled out to all stores this week. Moonshine Spirit has been developed as a merchandising and marketing partnership with Brad Paisley, and is exclusive to Boot Barn. I'm very pleased with both the esthetic and the product line, and the tremendous marketing support we have received from Brad. While private brands provide us with competitive differentiation and an ability to grow our merchandise margin, it is important to note that we don't believe private brands will evolve to the point where they overshadowed the collection of third-party brands that we carry. As our customers still seek the merchandise from our terrific vendor partners, we plan to balance the penetration of private brands carefully. Our fourth and final growth strategy is to continue to grow our omni-channel capabilities to enhance customer connectivity and drive sales across all channels. We are pleased with the progress this initiative has made. Currently, we have the ability to buy and return merchandise across channels, and the ability to purchase merchandise through our endless aisle portal, which provides our store customers with access to the entire assortment of merchandise from both our e-commerce channel as well as most of our major vendors for special ordering. We also managed our social media as part of our omni-channel capability and are pleased with those results. In fact, we added more than 2 million Facebook fans in less than 2 years. And today, we have 2.2 million total fans that are engaged with the Boot Barn brand. Supporting these 4 growth initiatives is a highly experienced management team and a passionate organization. Our senior management team has extensive experience across all key retail disciplines, and has been instrumental in developing a robust and scalable infrastructure to support our growth. This team has created a positive culture of enthusiasm and entrepreneurial spirit, which is shared by team members throughout the entire organization. I'm very proud to lead this terrific team and excited for the opportunities that we see before us. And now I'd like to turn the call over to Paul Iacono to review our financial results for the second quarter ended September 27, 2014.

Thank you, Jim, and good afternoon, everyone. I'll begin by reviewing the details of our second quarter results, and then provide our outlook for the balance of the full fiscal 2015 year. In my discussion, I will be commenting on both actual and adjusted results, excluding any one-time costs, to facilitate comparability between periods and going forward. Please reference today's press release for all definitions and for a reconciliation of GAAP numbers to these adjusted numbers. For the second quarter, net sales increased 11.7% to $86.4 million, primarily driven by a 7.3% same-store sales increase as well as contributions from new store openings. Gross profit increased 17% to $27.8 million. This compares to $23.7 million in the second quarter of fiscal 2014, which included adjustments of $434,000 related to the amortization of inventory fair value adjustment, and $183,000 related to remerchandising the Baskin stores, which were acquired in the first quarter of fiscal 2014. Excluding those prior year adjustments, gross profit increased 14% to $27.8 million from $24.3 million. Gross margin, as a percentage of net sales, increased 60 basis points to 32.1% from 31.5%, excluding the prior year adjustments previously mentioned. The improvement was driven by an increase in net merchandise margin resulting from a mixed shift towards higher margin footwear and private brands, and benefits from remerchandising the Baskin stores, offset by increases in store occupancy and depreciations due in part for the higher store count and increases in procurement and warehouse costs to support our growth. Operating expenses totaled $23.4 million or 27.1% of net sales, and included $864,000 in nonrecurring expenses related to a potential acquisition that we chose not to pursue. This compares to $23.9 million or 30.8% as a percentage of net sales in the prior year period, which included $1.8 million of integration-related expenses from the Baskin's acquisition and losses on disposal of assets of $291,000. Noncash stock-based compensation was $478,000 compared to $383,000 in the prior year period. The combination of strong sales growth, expanded gross profit margin and lower SG&A costs as a percentage of net sales led to income from operations of $4.4 million compared to a loss from operations of $132,000 in the prior year period. Adjusted for $864,000 of acquisition activity and a $24,000 loss on the disposal of assets, income from operations was $5.3 million or 6.1% of net sales. This compares to $2.6 million or 3.4% of net sales in the prior year period after the elimination of $2.5 million of acquisition-related costs associated with Baskin's, and a $291,000 loss on the disposal of asset. Net income for the second quarter was $944,000 or $0.05 per diluted share based on a weighted average diluted share count of 20.6 million shares. This compares to net loss in the second quarter of 2014 of $1.4 million or $0.07 per diluted share based on a weighted average diluted share count of 18.9 million shares. We have presented in a supplemental table to the press release a reconciliation of pro forma adjusted net income, which reflects the issuance of 5.75 million shares in connection with our initial public offering, which occurred after the end of our second quarter, as well as the subsequent repayment of $81.9 million of term loan principal and a 25 basis point reduction in our interest rate. The pro forma calculation of net income assumes the debt was repaid and the interest rate was lowered at the beginning of the previous fiscal year on a tax adjusted basis. On that basis, our pro forma adjusted net income for the second quarter was $2.4 million or $0.09 per diluted share based on a pro forma weighted average share count of 26.3 million shares compared to $929,000 or $0.04 per share based on a pro forma weighted average share count of 25 million shares in the prior year. Turning to our balance sheet. As of September 27, 2014, we had $1.4 million of cash and cash equivalents compared to $1.1 million as of March 29, 2014. We ended the quarter with $51.9 million of outstanding borrowings on our revolving credit facility and $129.7 million outstanding on our term loan facility. Subsequent to the end of the second quarter, on November 4, 2014, we successfully closed our initial public offering at $16 per share. As a result of this offering, we increased our number of shares outstanding by 5.75 million and received net proceeds of $82.5 million after deducting underwriter discounts and commissions and estimated offering expenses. Following the completion of our IPO, we repaid $81.9 million of our existing term loan principal and paid $562,000 in prepayments fees. After this loan repayment, we had $47.4 million (sic) [ $47.5 million ] outstanding on our term loan facility, and we will incur $1.7 million in accelerated deferred loan fee amortization expense in our third quarter associated with this partial repayment. In connection with the term loan repayment, we amended our term loan facility with Golub Capital, which lowered the LIBOR floor from 1.25% to 1%. This brings our effective interest rate on our term loan from 7% to 6.75%. Quarter ending inventory rose 16.3% to $119.4 million compared to $102.7 million at March 29, 2014. Average inventory per store was 5% higher than the comparable period last year and 7% higher since the beginning of the fiscal year to support higher sales. We have increased the amount of inventory in our distribution center to support our private brands and our e-commerce as well as inventory for new stores that we have opened in our third quarter. Now I'd like to turn to our outlook. For our full fiscal year 2015, we expect same-store sales growth to be in the mid-single-digit range, following 6.7% for fiscal year 2014. To date, we have opened 13 stores and expect to open 4 additional stores by the end of the fiscal year for a total of 17 new stores. We expect income from operations for the year to be between $31 million and $33 million, and net income is expected to be in the range of $11.9 million to $13.1 million. This represents earnings per share in the range of $0.52 to $0.57 based on an estimated weighted average diluted share count of 22.9 million shares for the full fiscal year, including the addition of 5.75 million shares in the company's IPO. On a pro forma adjusted basis, net income is expected to be in the range of $16.3 million to $17.5 million or $0.62 to $0.66 per diluted share based on an estimated weighted average diluted share count of 26.3 million shares for the full fiscal year. Our pro forma calculation assumes that our initial public offering that occurred at the beginning of the year and adjust for lower interest expense due to our lower term loan balance and lower interest rates on a tax adjusted basis. In addition, pro forma adjusted net income has been adjusted for the acquisition activity and the loss on the disposal of assets previously discussed. Overall, this is another good quarter for us, and we continue to focus on fiscal discipline even as we invested in our business and opened 3 new stores during the quarter. The successful completion of our IPO in October, subsequent to the end of our second quarter, allowed us to repay a significant portion of our debt and further strengthen our financial position. Now I'd like to turn the call back to Jim for some closing remarks.

Thank you, Paul. In closing, we're very pleased with our performance during the second quarter, and are equally excited about the growth opportunities we see ahead of us. Boot Barn is a genuine lifestyle retail brand, offering an authentic shopping experience, both in-store and online, with a strong brand identity and broad product offering. Reflecting the Western lifestyle and country values and strong American work ethic, our brand and our merchandise assortment are resonating with customers. We have significant opportunity to further expand the Boot Barn concept across the country, and we remain focused on executing our growth strategies in the years ahead. I'd like to thank all of our team members for their hard work and their dedication to Boot Barn. I'd now like to open the call up for your questions. Jen?

[Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan Chase.

So your second half sales for sales guidance, is there some -- it looks like a degree of deceleration. Can you just walk through some of the drivers, also potential upside opportunities? And any color on November comp would be very helpful.

So I wouldn't count on deceleration of same-store sales. The guidance we provided was a full fiscal year of mid-single digits. So we kind of -- have planned mid-single digits for the year and we've been outperforming that for the first 6 months. So I wouldn't read anything further into that guidance. In terms of color commentary on quarter to date, as a matter of policy, we're not going to provide intra-quarter guidance on sales performance on our earnings calls.

Okay, great. And then could you just talk to some of the underlying drivers of merchandise -- the core merchandise margin in the quarter, private label performance and just different opportunities as we look forward?

Sure. Sure. I guess, there's a few. One, you called out these private brands. Private brand continues to be a bigger portion of our business. Obviously, that is margin enhancing. Our boots business has been growing at a faster rate than the other parts of our business. And boots for us is margin enhancing. That has become another component to the merchandise margin. There's a few other things that we're shifting a little bit more business into our fun part of the store initiative, which is accessories, and we're sourcing much of that product on a more direct basis. So that has a small contribution in merchandise margin as well.

Our next question comes from the line of Randy Konik with Jefferies and Company.

I guess, my first question is when you think about long-term growth, can you give us some perspective on how you think about NIM market penetration versus existing market backfill? And when you look at an acquisition or potential acquisition that you didn't go through with, how do you kind of think about bolting in potential acquisitions going forward or lack of acquisition going forward? That's my first question.

Okay, great, thanks. In terms of new stores, right, we -- you think there's a potential for more than 400 stores in the U.S. So our strategy is relatively straightforward to take a pretty compelling four-wall store model and continue to replicate it across the U.S. In terms of your question, specifically, around new versus existing, we think of the country in thirds, for simplicity, so roughly 1/3 of our new store growth will continue to be in the legacy Boot Barn westernmost states, where we really have an extremely strong brand and kind of a stronghold of stores. Roughly, 1/3 of our growth will be in the sort of center of the country, revolving around Texas, Louisiana and perhaps going up into Oklahoma, Nebraska and Kansas. And the remaining 1/3 will be in kind of developing markets. And that's really brand new to us. For example, we have relatively new store that we opened in Nashville, but we already have 5 or so stores in the Nashville market. So we've really roadmap the growth to be 1/3 in the West, 1/3 around the Central U.S., 1/3 in the, call it the Southwest, if you will. You also asked a question around acquisitions. The core of our strategy going forward is to build more stores. Replicate what's been working and continue to expand the store footprint. Having said that, we will, of course, look at acquisitions, opportunistically, if they come up going forward. And we will, in certain cases, look at smaller "tuck-in" acquisitions in a particular market. So if we're looking at a city and our roadmap says, we can develop 5 stores in that particular city, and there's an independent operator there with 2, we may build 3 stores, add that operator to our store base, and have that 5-store market built out. We would view that as essentially buying the real estate location, but that would be a possible acquisition going forward for us. Does that help?

That's super helpful. My last question would be, when you think about your current merchandise mix of or about 30% work and 70% Western, how do you envision that mix to change, if at all, over the next 5 years? And then, with private label's sub 10%, your target towards '15. And you said in your commentary, you didn't want to, I guess, overshadow the third-party brand, how do you think about private label penetration in the workwear category versus the Western category?

So there's a couple of questions there. The first one on work versus Western, we've made a push to really extend our work boot and work apparel part of our business, but what's happening over time is the Western business is growing and the work business is growing. Works -- the work business growth is outpacing Western by a bit. So the mix will shift, but candidly it's going to shift pretty slowly, right? Even if it -- the growth outpaces it, because the Western business is still growing, the mix shift won't be that dramatic. In terms of private brands, we have private brands in both Western and in work. The penetration is a little bit higher in Western, but that just means there's more opportunity for us to continue to grow the private brand business and work to us.

Our next question comes from the line of Peter Keith with Piper Jaffray.

I want to ask a little bit more detail on that, the much larger expansion. It looks like it was pretty healthy during the quarter. Is that the type of expansion that we could expect going forward? Or was there something unique with Q2 or the various drivers?

So the 2 work boot drivers that I call from a merchandising perspective, were those that we will continue to be looking to help expand merchandise margins going forward. The other component of it, though, that might be inflating or that is inflating merchandise margin a little bit on a year-over-year comparison for Q2 is that we've really had a positive impact on the merchandise margin in the Baskins stores. So when we acquired that business, their merchandise margin was considerably lower than at Boot Barn and bringing our assortment, our markup, our pricing strategy, we've been able to really lift that piece of the business. So that, as a mix, has added to the mix of merchandise margin. It's a great question.

And so I guess the Baskins dynamic, you're largely done with that at this point?

Well, we won't begin until we anniversary the acquisition, which is May. And candidly we'll probably go a little bit beyond that, but didn't have immediate impact on the Baskins business, day 1, after the acquisition. So there might be a little bit of tailwind on the merchandise margin line going forward.

Okay, good enough. Just speaking of Baskins and RCC, I don't know if you guys have it at your fingertips, but are you able to break out how those stores comped relative to the core Boot Barn stores this past quarter?

We don't really look at the business that way. Our comps have been strong at the core Boot Barn business, if you will. We'd maybe have a little bit of a tailwind from the Baskins piece of the business, but the core original Boot Barn 90-ish stores had a pretty good quarter as well. But we don't really think of it that way, and we certainly don't kind of report on it that way.

Okay, good enough. Last question for me then, this business is probably very early, but since you come public, there's been a big drop off in oil prices. I guess, there are some concerns out there that you guys have a negative impact on that. Have you noticed any change in business tone in the certain markets that have exposure to oil drilling?

No we haven't. We haven't seen that dynamic. Speak candidly, if I were to get, I think, the lower price of oil and the lower price of gasoline might help our business more than anything. But we haven't seen particular markets starting to soften purely based on the price of crude oil.

Our next question comes from the line of Paul Lejuez with Wells Fargo.

Just wondering how we should think about inventory growth versus sales growth going forward? Do have an opportunity to reduce inventory levels and increase churns?

Paul, I think, the way we think about it is our proposition succeeds because we are in stock on everyday clothing needs. And the cost of the lost sale to us is much greater than the benefit we can get from spinning our inventory faster. Now of course, we're -- we'll continue to try to maximize our inventory productivity. But the core of our strategy is everyday replenishment business and it's exceedingly important when our customer comes in looking for a size 12 work boot that it's there and it's in stock. So while we may have some opportunities, we just brought in a new Planning Vice President to help us manage our inventory. We're really looking to maximize sales first. And from an inventory position, we feel good about where we are now relative to the sales that we've been experiencing.

Got you. And the retail environment has been promotional, has been for a while. You guys are in a pretty nitchie business. So just wondering if you can maybe talk about what you're seeing in your world in terms of promotional pressures and how maybe that's changed over the past several quarters or several years?

So yes, the general retail environment continues to be highly promotional. We are not a promotionally-driven retailer though, right? We have stocked to our full price model. We have stocked to bringing a great assortment in-stock, good value, everyday value, but we have not changed in any material way from our split of business in terms of full price selling versus promotional selling. And we obviously continue -- we continue to follow that strategy going forward.

I know it's early. Any initial read, though, on the Brad Paisley merchandise? Any signs if it's an incremental customer or just an incremental sale when the customer is in the store? Or is it may be replacing another brand in the store?

Well, to kind of -- on the partnership broadly, we are very pleased with the overall relationship with Brad Paisley. He as an individual and as an artist has just been incredibly supportive of us of the merchandise, of the marketing. And so we have -- we're optimistic about the future of our relationship with Brad. Having said that, it has literally been in all stores for basically 2 days. So it's just impossible to get a read on that right now, but we'll have more color to share on the Q3 call for sure.

[Operator Instructions] Our next question comes from the line of Mitch Kummetz with Robert W. Baird.

A couple of questions. Jim, let me start, you mentioned in your -- early in your prepared remarks that comp was driven by boots and work. Could you just elaborate a little bit on that? And maybe talk about the impact that you saw from the Carhartt shops and adding a sixth shelf to the work boot fixtures and kind of where you are with those strategies?

Sure. Sure. So I guess, first, it's important to note that we had a pretty fortunate situation in the second quarter, where, with a couple of exceptions, every single department -- again, with a couple of exceptions, every other department went ahead. So when we talk about where the growth has come from, it sort of a matter of degree. The boots business has been outpacing the apparel business, and there are some other businesses in there, of course, also. And the work boot business has been the strongest of the 3 boot businesses, but again, they've all been comping up. In terms of your question around work and the -- for the benefit of the folks on the call, we added some capacity in our work boot fixtures going from 5 shelves to 6 shelves, and a number of stores. And we've also added Carhartt shops as part of an initiative for fiscal '15 to really expand our footprint in the work business. We rather not disclose specific results of either of those 2 sub-initiatives, if you will, but suffice it to say, we will continue to expand those going forward until we get to a point of kind of diminishing returns.

Got it, that's helpful. And then on the outlook for the year, just in terms of what's implied from a margin standpoint in the back half, how should we think about that kind of the spread between gross margin and SG&A. I mean, in the quarter that you reported, you saw some nice gross margin improvement, but also some good SG&A leverage. I'm just wondering how we should think about those 2 pieces over the back half to kind of get your full year outlook?

Yes, Mitch, this is Paul. I think, on the back half of the year, given the new store growth, added stores that we -- we'll see potentially some gross margin either flat or maybe slightly down just from the addition of 13 stores. And then from an SG&A perspective, as you know, we've invested in the business since the previous quarter, adding the infrastructure to execute the growth strategy with additional people in our procurement, additional distribution capacity to support private brands. So I think from a margin percentage standpoint, we can be flat to maybe down 10, 20 basis points.

Great. And then just one last thing, maybe more of a housekeeping item. I think you guys have said that you expect to end the year having opened 17 stores. Is that a net number? I mean, are you looking to be at 169 at year end? Or was it 168? Are you closing a store in the fourth quarter, or -- I'm sorry, yes, the fourth quarter?

So year-to-date, we've opened 13 stores. And we have a pipeline that we feel good about for 4 stores in the fourth quarter. And we have 1 store coming on next week. So I think in terms of new store openings, that would get us to 18 stores, and we closed 1. Yes, we'll close 1.

If there are no further questions at this time, I would like to turn the floor back to Mr. Conroy for closing remarks.

Well, thank you, again, everybody for joining us. I look forward to discussing our third quarter results with you all after the New Year, and we wish you all a happy holiday season. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.