Boot Barn Holdings, Inc. (BOOT) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Boot Barn Holdings Inc. Third Quarter Fiscal Year 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host Jim Watkins, Director of Financial Planning and Analysis. Please go ahead.

Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn Holdings Inc. third quarter 2015 earnings results. On today's call are Jim Conroy, our President and CEO; Greg Hackman, Chief Financial Officer and Paul Iacono, Vice President of Business Development, who served as our Chief Financial Officer during our fiscal third quarter. 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 third 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 their 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'll turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Jim and good afternoon. I would like to thank you all for joining us today. During my discussion, I'll provide you with an overview of our third quarter results and will share with you the continued progress we're making on achieving our growth strategies. Then Greg will review our financial performance in more detail and provide an updated outlook for fiscal year 2015, which ends of March 28, 2015. Following that, we will open the call up for your questions. Before continuing, I would like to welcome Greg to the Boot Barn team. Greg took over as CFO range from Paul Iacono last Monday. January 26 and will be working alongside Paul through the transition period before Paul is fully focused on his new appointment as Vice President of Business Development. With this shift we've further strengthened our leadership team. Greg is a strategic finance leader with significant experience in SEC reporting and he will further bolster the finance function. Paul will move into a new business development role, which will leverage his considerable knowledge of our organization and further accelerate our growth initiatives. Now let's turn to a review of our third quarter results. We were able to capitalize on the positive momentum of the first half of the year through a strong execution across the organization, which led to solid financial results for the third quarter. Net sales increased more than 13% over the same period last year to $130.5 million. This increase was driven by both a strong 7.2% increase in same store sales and the contributions of new stores. Our growth in same store sales was broad-based across most of the major departments in the store and most of our store districts across the country. In line with our objectives, we achieved a healthy expansion in our merchandise margin, partially due to increased penetration in private brands. We believe our continued success this quarter and over our 30-year history is rooted in our leading position as a lifestyle retail brand that serves the Western Country and work customer groups. We do not focus on fleeting fashion trends, but rather servicing and American lifestyle that permeates nearly every state in the country with a category killer assortment of boots, hats, work wear and blue jeans. Accordingly 70% of our assortment in on automated replenishment, which further underscores the low fashion quotient of our products. On our second quarter conference call, we provided an overview of the Boot Barn business and outlined four growth strategies, which are relatively straightforward and have remained consistent for the past several years. These initiatives are number one; build more stores by about 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. Number three; increase our private brand penetration to expand our merchandised margin and number four; continue to augment our Omni-channel capabilities. I would like to provide some detail on the progress we’re making on each of these initiatives. With respect to new store growth, we opened eight new stores in the quarter bringing the year-to-date total to 14 new stores. This brought our store count to a 166 stores in 26 states at the end of the quarter. We’re particularly pleased with the early results of the new stores that are opening in new markets which has further bolstered our confidence in continuing to expand our portfolio of stores nationwide. As we look forward to the beginning of our next fiscal year, the pipeline of quality real estate opportunities is strong, which is allowing us to accelerate our new store openings for the first quarter of fiscal 2016. As we continue to deliver the Boot Barn experience to more consumers across the country we remain disciplined in our site selection and build-out process, which is designed to meet our long-term targets of 10% annual unit growth and pay back in less than three years on average. Our second growth strategy is increasing same-store sales. This past quarter marks our 21, consecutive quarter of positive same-store sales growth, which is being fuelled by strong full price selling. Given the recent news surrounding declining oil prices and the impact to retailers with customers working in oil and gas related industries, I would like to put this in perspective as it relates to the Boot Barn business. Few words that simply the Boot Barn business models are balanced and diversified. We primarily sell Western wear, but we also sell work wear. Footwear is half of our business, but we also sell apparel and accessories and we’re a store for the whole family selling to men, women and kids. We are also diversified regionally with stores in 26 states. As it relates specifically to oil and gas, we estimate that 15 of our stores or less than 10% of store base are relying on the oil and gas industry. Of those 15 stores, six earned markets focused on refining that we don’t believe will be negatively affected by falling oil prices. Overall we believe that lower crude oil prices, which lead to lower gasoline prices will have a neutral and potentially positive impact on our business particularly considering that many of our customers drive pickup trucks. While we don’t plan to disclose mid-quarter trends on a regular basis, I do want to share with you that to-date we had not seen any deceleration in comps for stores in oil and gas markets. Our third strategy is to continue to grow our private brand penetration. During the quarter we successfully launched a new brand called MoonShine Spirit by Brad Paisley which rolled out to all stores in December and is exclusive to Boot Barn. We could not have a better partner than Brad, who has helped us design a collection of boots, apparel and accessories that reflects his lifestyle and personality, which has already demonstrated strong consumer appeal. His marketing support has been tremendous and the new brand is resonating well with our customers. As we have discussed, private brands provide us with competitive differentiation and an ability to grow our merchandise margin. Each of our six private brands has been developed to fill a hole that we identified in our assortment. Our Cody James and Shyanne brands are the number four and five brands in the company for us in dollar volume. While these private brands are important to our ongoing growth, we plan to carefully balance the penetration of private brands as we recognize that our customers still seek the broad array of merchandise we offer from our terrific vendor partners. 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 have enhanced our offerings in this area including the addition of PayPal as a method of payment and upgraded ability to customize our online offers regionally and improved mobile website and various improvements to our CRM loyalty program. Now I’d like to turn the call over to Greg Hackman, to review our financial results for the third quarter.

Thank you, Jim. Good afternoon, everyone. I’m very pleased to be part of the Boot Barn team and want to express my appreciation to Jim for giving me that opportunity and to call for his assistance in helping me get up to speed quickly. I’ll begin by reviewing the details of our third quarter results and then provide our updated outlook for the full year of fiscal 2015. In my discussion I’ll be commenting on both actual and adjusted results, excluding any one-time cost to facilitate comparability between periods in going forward. Please reference today’s press release for all definitions and for reconciliation of GAAP numbers to these non-GAAP adjusted numbers. For the third quarter net sales increased 13.1% to a $130.5 million driven by a 7.2% same-store sales increase and from the contributions of new stores. Gross profit increased 16.3% to $46.2 million. This compares to $39.7 million in the third quarter of fiscal 2014, which included a $288,000 adjustment related to the amortization of inventory fair value and a $1 million adjustment related to remerchandising the Baskin stores. Excluding those prior year adjustments, gross profit increased 12.7%. Merchandised margin improved in the quarter driven by improved mark-ups across the store, increased penetration of private brands and improvements we made to the assortment and pricing at the former Baskin stores. This increase was offset by the higher occupancy rate of new stores that have not yet matured; the associated depreciation of our increased number of new stores as well as an increase in procurement and distribution costs. We expect these increased costs will continue through the fourth quarter and additionally expect to incur some incremental expense in Q4 related to the new stores we will begin opening in April, which falls in our first quarter of fiscal 2016. Operating expense was $28.3 million. This compares to $26.6 million in the prior year, which included $1.2 million of Baskin’s integration costs and a $500,000 loss on asset disposals. The increase was primarily attributable to store operating costs associated with new stores and increased sales, an increase in incentive compensation expense associated with our improved sales and earnings. Additionally marketing expense including the Brad Paisley product launch and non-cash stock compensation contributed to the increase. We expect cost pressure to continue in the fourth quarter including cost associated with opening new stores in Q4 and Q1 of next year, increased incentive compensation related to higher sales. Non-cash stock compensation expense and the increased cost associated with me joining the company including my relocation. Income from operations was $17.9 million, compared to $13.1 million in the prior year period, which included $2.5 million of expense related to the Baskin’s acquisition and a $500,000 loss in asset disposals. Excluding these items adjusted income from operations was $17.9 million, compared to $16 million in the prior period. On a year-to-date basis we have improved adjusted income from operations as a percentage of sales 80 basis points from 8.8% in the prior year to 9.6% in the current year. Net income for the third quarter was $8.8 million or $0.36 per diluted share, which includes $562,000 of prepayment penalties and $1.7 million of accelerated loan fee amortization associated with the partial repayment of our term loan. This compares to $6.3 million or $0.33 per diluted share last year. In the press release we have presented a supplemental reconciliation to pro forma adjusted net income, which reflects the issuance of 5.75 million shares in connection with our initial public offering, the subsequent repayment of $81.9 million of our term loan and the 25 basis point reduction in our interest rate all of which occurred during the third quarter. The pro forma assumes the IPO debt we pay down and reduced interest rates occurred at the beginning of fiscal 2014. On a net basis, our pro forma adjusted net income for the third quarter grew by 20% to $10.7 million or $0.40 per diluted share, compared to $8.9 million or $0.35 per diluted share. Turning to the balance sheet as of December 27, 2014, we had $3.6 million of cash and cash equivalents, compared to $2.4 million as of December 28, 2013. We ended the quarter with $32 million of outstanding borrowings on our revolving credit facility and $47.4 million outstanding on our term loan facility. Inventory rose 18.8% to a $121.9 million, compared to a year ago. This increase was primarily driven by a 7.1% increase in store count, a 6.5% increase in inventory per store to support our current sales strength and an increase in our distribution center inventory related to our private brand growth initiative. Now I’d like to turn to our outlook. Based on the strong results in the third quarter, we are further raising the full year outlook from the guidance provided January 9, when we share our preliminary third quarter results. We now expect the full fiscal year 2015 same-store sales growth to be approximately 6.5% to 7% raising the whole end of our range modestly from previous guidance. We expect income from operations for the year to be between $33 million and $34.5 million, which is $1 million higher than the January 9, guidance. We expect net income to be in the range of $13.2 million to $14.1 million. This represents earnings per share in the range of $0.52 to $0.55 based on an estimated weighted average diluted share count of 22.9 million shares for the fiscal year. On a pro forma adjusted basis, net income is now expected to be in the range of $17.5 million to $18.4 million or $0.67 to $0.70 per diluted share based on an estimated weighted average diluted share count of 26.2 million shares. Our pro forma cancelation assumes that our IPO occurred at the beginning of the year and adjusts for lower interest expense due to the lower term loan balance and lower interest rate. Pro forma adjusted net income has been adjusted for the onetime items previously discussed. Now I’d like to turn the call back to Jim for some closing remarks.

Thank you, Greg. I’m pleased with our third quarter performance, which reflects the strength of our balance and diversified business model and solid execution of our growth initiatives. We increased our sales, expanded our merchandise margin and grew our store base, while maintaining healthy operating margins. We see considerable opportunity before us to expand the Boot Barn concept nationally. And I’m confident that we have the right strategies in place to take advantage of our leading position in the market place. I’d like to thank all of our team members both in the stores and in the corporate office for their hard work and dedication to Boot Barn and for delivering another solid quarter. I’d now like to open the call up for your questions. Shane?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Randal Konik from Jefferies.

Can you hear me?

Yes, Randy, how are you?

How are you?

We’re good.

Great. So I guess my question is on around the Moonshine Spirit success, can you just give us a little bit more color on some of that success early days, do you had other plans in the potential product pipeline or thinking about types of partnerships going forward. And then -- may be Moonshine Spirit are there other categories in the expenditure and then finally around the Moonshine Spirit, how does the economic, the economic value worked from a mechanized margin perspective relative to a true private labelled products, a truly branded products .Thanks.

Sure. Thanks. So on the first part of your question we’re very pleased with the partnership with Brad. From a marketing perspective he has really kind of above and beyond to get the Boot Barn name and the Moonshine Spirit name out there multinational television in the CMA awards as well as tweeting about us multiple times. So he has been a fantastic partner in getting the brand out there and in helping us develop the merchandise. In terms of the performance of it, we don’t really plan to provide specific sales on any single brand in the company, but it has exceeded our expectations in December. We're racing to kind of get back in stock on some of the merchandise I had sold exceedingly well around the country. In terms of additional plans within Moonshine Spirit it’s a fairly a broad-based assortment already. So it already includes Boots, denim, woven shirts, T-shirts, ball caps and accessories. We'll likely expand into some of those categories, particularly in Boots where we're are currently expanding the style count there. So I think that’s demonstrative of how positive we feel about the partnership. In terms of other partnerships, additional partnerships right now we really want to focus on letting the Moonshine Spirit line and the partnership with Brad Paisley continue to develop. Having said that, in the future we may look at other potential relationships either with country music artists or otherwise, where we take a private brand and having it augmented by the name of a star or celebrity. And then the final part of your question was around the economics of Moonshine Spirit. We have publicly disclosed that private brand product is margin enhancing by about a 1,000 basis points relative to third party brands. And while we don’t want to disclose this specific royalty that we are paying to Brad, suffice it to say, we're roughly splitting the thousands basis point improvement, of private brands within in some way. So it is margin enhancing to us at the end of the day relative to national brands, does that help Randy?

Yes, extremely helpful. Yeah extremely helpful. Thank you.

Thank you.

Thank you. Our next question comes from Matthew Boss from JPMorgan.

Hey good afternoon. Good print guys. Can you talk about in more, I guess more or less hierarchy outline, the drivers of the gross margin upside here versus kind of the initial expectation into the quarter. And then more so as we think to next year and beyond, headwinds that would prevent continued gross margin expansion.

Sure. Decomposing that first, starting with merchandised margin, which probably is sort of a question behind the question, we’ve seen merchandised margin expansion across a number of different dimensions. One is we’re just getting better mark-ups partly through economies of scale and purchasing, partly through improved private brand penetration, partly through an increase in container load sourcing where we buy full container loads of merchandise from our vendors bringing into the distribution center and then split it out. And partly due to the mix of Boots relative to rest of the business, continues to grow a little bit. So that's sort of the drivers of the merchandized margin piece, but we had a bit of a pickup in the Baskin's merchandize margin because they -- we set their prices and we’ve expanded the Boot penetration there. The offsets to that, nearly all of the offsets to that relate to the growth of new stores. So we've been as we've discussed, we've been on a plan to grow new units by 10% annually and we're well on our way along that initiative but by doing so, were adding new stores that haven’t yet matured. That composition are occupancy rate up, we’re adding depreciation which gets included into our margin calculation obviously gross profit calculation the why we disclosed publicly. So that is creating almost a one-to-one headwinds to the tailwind that we're generating from more merchandized margin.

Perfect. And then on just an additional question, in terms of the upcoming catalyst in the reminder of the year, is there some kind of a regulation around fire existent according that’s potentially something that we were -- something we heard about its one of that, see if it’s something that’s throughout.

Yes, also past a regulation for flame resistant apparel for essentially industrial, electrical works, thin utility workers and that regulation was passed in the past, but it's starting to -- you can start to enforce it on April 1st. So once that goes into effect formally, that we may feel a tailwind in that particular part of our business but it’s a little bit too already count.

Okay, great. Nice quarter.

Thank you.

Thank you. Our next question comes from Paul Lejuez from Wells Fargo.

Hi guys its Tracy Cohen filling in for Paul. Two questions, I was wondering if you could give us a little more detailed performance by category, which categories were above your expectations and if there any that didn’t meet your expectations and I am talking Boots, apparels and also work versus western. And then if you could talk about the performance of the Boot Barn store versus the regional Baskin's versus RCC stores in the quarter, the comp performance and what the productivity of those stores looks like compared to other depart stores, so comps for this quarter and then overall productivity. Thanks.

Sure. Thanks Tracy. On the first part of your question, in broad brush strokes, men’s product outpaced ladies product in terms of growth. Work product outpaced western products in terms of growth and Boots outpaced apparel. Keep in mind though we -- for the quarter certainly we are very fortunate where nearly every department not everyone but nearly everyone went ahead, so when -- some of those comparisons, I’m just comparing better growth versus average growth. In terms of what was disappointing, I think we have some more opportunity to focus on ladies apparel particularly Denim. So we have a few things in place to get that part of the business headed in the right direction. And in terms of segments by Boot Barn versus Baskin's versus RCC, we really don’t think of the business that way anymore, now that we’ve wrapped anniversaried the Baskins re-branding. All of the stores are run as one chain of 166 stores and we don’t really think about one particular part of the business versus the other.

So there is no outsized increase then at Baskin's or RCC that might be driving the comp or you just don’t really look at it that way.

We don’t really look at it that way. If you went back to the regional Boot Barn stores with no acquisitions, we still had a very happy comp.

Got it. Great thanks guys.

Thank you. [Operator Instructions] Our next question comes from Mitch Kummetz from Robert W. Baird.

Yes, thanks for taking my questions. Got a couple, first I just wanted to drill down on the comp just a little bit more. Can you may be speak to it traffic versus ticket in the quarter and then also if there is any way to breakout stores versus the E-commerce and I got a follow up?

Sure. On the first traffic versus ticket, in this particular quarter roughly 20% of the comp was on more transactions store and the balance was on ticket and most of the increasing ticket was on units per transaction. On the as you know we disclosed our same store sales in a combined basis within retail stores and E-com but give you some color, what we guided to in the past, as the E-com provides 50 to a 100 basis points of tailwind which frankly for us getting that right now it's a roughly 4% to 5% of our business, it’s not a tremendous tailwind for us. So the underlying stores comp was still pretty healthy.

Okay. Great and then you partly answer my second question. I was hoping to get kind of a year-to-date assessment of were private label penetration is and E-commerce penetration so its sound like the E-commerce and still in a 4% to 5% range, what about private label, where is at now like a year-to-date basis?

So the way we like to disclose private brands in ’14 which was last year right it was 7% and our plan is get that to double in three years, so we’re essentially adding 2 to 2.5 points of penetration a year for each of three years to get at that 14% at the end of fiscal ’17.

Okay.

And Ron pays for that..

Okay. Let me just one more, if you talked about accelerating some store openings in the first quarter, can you may be address what the store opening plan looks like for next year and if there is any way you kind of give us some cadence by quarter or at least may be kind of where you think if you're in the first quarter and then where you think the year ends that would be helpful.

We intend on our next call to outline, not only have the fiscal year ’15 ended up, the outline guidance for fiscal ’16 but give you some specific answer or at least some directional answer. We’ve been saying that we’ll grow by 10% new units a year so on a basis of roughly 170 stores at the end of this fiscal year that would imply 17 stores next year. We’ve been on the record to say we get 20 stores next year and I would say that that number may even have some conservatism in it. In terms of cadence by quarter, at this point it’s a little early to really laid that out, what we if I’ve to look at our internal model, it’s a five of quarter for four quarters but it’s we haven’t really slashed that out yet. What we singled in our script is some of them are coming earlier in the first quarter than we had otherwise anticipated which is driving pre-opening costs some rents and some other cost into our Q4, which will give us a little bit of SG&A and I suppose occupancy headwinds into Q4 based on great stores, a leased stores we believe will be great, opening early in Q1, so it's to some degree at the high class problem, pushing cost up but simply because we have better and more opportunities to open stores earlier in the quarter than we had a originally anticipated.

Got it, alright thanks for the color on that. Good luck guys.

No problem. Thanks Mitch.

Thank you. Our next question comes from Peter Keith from Piper Jaffray.

Hi Peter.

Thanks guys. Great quarter. Jim I just wanted to follow-up on the discussion regarding the new stores, so intriguing comment that you're pleased with or particularly pleased with new stores and new markets, I was wondering if that's attributed to -- are these newer market stores running above your new store plan or are you planning them to be a little bit light in the running kind of now at the corporate average or existing markets will be?

The former of your two choices. What we didn't necessarily planned in the because they were in new markets. We may have planned -- and every store obviously gets a different pro forma plan depending on the associated occupancy, the co-tenancy, the particular market etcetera, but it's not -- it's not categorically lower in new markets versus existing markets. So to get to the question behind the question, we are seeing the entire basket of new stores taken as a whole is exceeding or beating our hurdle rate right of less than a three-year payback, so that's good and clearly a big part of our future growth strategy is to continue to roll out new stores. But the news that we shared is genuine good news, which is brand new stores in virtually brand new markets have exceeded not only the expectation for that store, but likely be above average stores for the chain once they reach maturity.

Okay. That's fantastic. Thank you. And then I just also want to follow-up on a question that Mitch was asking about -- was intrigued with the increase in ticket, you're seeing more units per transaction, could you give us some color about what might be driving that? I know you had some initiatives around the current store to drive more accessory sales, wondering if that might be related.

Yes, we believe it is. It's a little hard to dig specifically into that, but two years ago, so in December of calendar 2013, we had put Christmas out as an initiative in a big way for the first time at Boot Barn and then this past December of calendar 2014, we had some learnings from the prior year, so that helped to build Christmas related gifts and accessories. We've also expanded into categories in jewelry and added some fixtures there and other accessory and gift categories. So I believe some of the units are associated with the thrust to build out the front door of the store to your point.

Okay. That's great. Last question for me then, just for modeling purposes, you talked about some of the nuances with SG&A in the fourth quarter, are there anything or any items related to gross margin that we should be aware of?

Yes and no. So there is nothing to be concerned about certainly from a merchandize margin standpoint right. Having said that, when we think about gross margin or gross profit, the way we report, some of the new stores that are moving earlier into Q1 will hit our cost structure in Q4 and as you well know that hits margin.

And pre-opening rent.

Yes pre-opening rent, right. So that's the biggest portion of it.

Okay. Just a little bit of negative pressure I guess from the occupancy.

Correct. Associated with opening up the stores in Q1 earlier than we had otherwise, but we would.

Very good. Thank you very much.

Thank you, Peter.

Thank you. At this time, we have no further questions. I will turn the call back over to management for closing comments.

Well thank you again for joining us and we look forward to discussing our fourth quarter results with you in May and speaking to many of you in the interim. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.