Greetings, and welcome to the Boot Barn Holdings' Second Quarter Fiscal 2016 Earnings 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]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Jim Watkins, Vice President, Investor Relations and External Reporting. Thank you. Mr. Watkins, you may now begin.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn Holdings' Inc. second quarter 2016 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Boot Barn's Web site 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 Web site. 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 2016 earnings release, as well as our filings with the SEC referenced in our disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Jim, and good afternoon. Thanks everyone for joining us. I’m going to start today with a brief review of our consolidated results followed by a discussion around the key drivers of our core Boot Barn business. Then I’ll update you on our progress integrating our recently acquired Sheplers business. Following that, Greg will review our financial performance in more detail and provide our revised outlook for the full year fiscal 2016. Finally, we will open the call up for your questions. In the second quarter, we continued to build market share while achieving 50% growth in sales as compared to the same quarter last year. This growth was comprised of the sales contribution of the newly acquired Sheplers business, 25 new Boot Barn stores opened during the last 12 months and 1.6% increase in same-store sales of the core Boot Barn, excluding Sheplers. In the quarter, we faced some of the economic headwinds that many other retailers experienced, including the pressure in markets exposed to oil and gas and those markets that are experiencing declining prices in other commodities. Despite these headwinds, we were able to continue to grow the Boot Barn business within our range of same-store sales guidance without changing our promotional strategy. We remain focused on executing the main long-term drivers of our business that we outlined for our investors just over a year ago at the time of our IPO. Given the complexity in mid quarter associated with Sheplers acquisition, we will provide detailed information on both businesses today. As we move throughout the year, we will be reporting on a more combined basis. At this point, I’ll provide an update on the core Boot Barn business, excluding Sheplers, and also outline the progress we have made on each of our four strategic initiatives.…

Thank you, Jim. Good afternoon, everyone. I will begin by reviewing our second quarter results and then update you on our revised outlook for fiscal 2016. In my discussion, I will be commenting on both actual and adjusted results, excluding any one-time cost, to facilitate comparability. Please reference today's press release for all definitions and for a reconciliation of GAAP numbers to these non-GAAP adjusted numbers. In the second quarter, net sales increased 50% to $129.7 million. As Jim mentioned, this was driven by the sales contributions from Sheplers, 25 new Boot Barn stores opened during the last 12 months as well as a 1.6% same-store sales increase of the core Boot Barn business. On our August call, we provided our second quarter outlook for same-store sales. I’d like to review our second quarter results that relates to those expectations. The core Boot Barn business achieved a 1.6% same-store sales growth, which was at the low end of our outlook range of low to mid single digit growth. The Sheplers stores same-store sales decreased 2.3%, which was better than outlook of a mid single digit decline. The Sheplers.com business declined 5.9% better than our outlook of a high single digit decline and consolidated same-store sales increased 0.1%, which was on the lower end of our outlook range of low to mid single digit growth. While faced with a more challenging retail environment, as Jim discussed, we continue to execute our full priced selling model and did not make any meaningful changes to our promotional strategy. Adjusted gross profit increased 38.3% to $38.4 million compared to gross profit of $27.8 million in the second quarter of fiscal 2015. Our adjusted gross profit rate declined 250 basis points comprised of a 220 basis point decline in merchandise margins and a 30 basis…

Thank you, Greg. This is an exciting time for us at Boot Barn as we complete the rebranding of Sheplers, begin to leverage the strength of its ecommerce infrastructure and further strengthen our competitive positioning. I am pleased with how the entire organization is executing as we faced some near-term challenges and I feel we are well positioned for sustainable long-term growth. Now, I would like to open up the call to take your questions. Manny?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Peter Keith of Piper Jaffray. Please go ahead.

Hi. Thanks. Good afternoon, everyone. I was hoping you could help us understand some of the deceleration in the business. You guys had talked about the 15 oil and gas stores are down negative. Could you give us a little more detail perhaps on how negative that is? And then also on Texas, if that’s still positive. Is that kind of in line with the core Boot business at this point or is that starting to trend below?

So when we went from the first quarter to the second quarter, we had about 400 basis points of deceleration and the 15 stores have turned negative. We don’t intend to provide specific numbers relative to that. We have seen other markets or other stores outside of those 15 have sort of a spillover effect. Texas is a portion of that, right. So Texas has decelerated. It’s slightly positive. And then there is a couple of other states that felt under pressure due to non-oil and gas but other calamities. And as we called out in the script that was parts of North Dakota, outside of the oil and gas piece, a good portion of Wyoming and a portion of Colorado.

Okay. And we have had a significant amount of warm weather the last few months and that’s been called up by a number of retailers. Did you feel that that impacted your business in any direction in recent months?

Probably. I mean our outwear business has been difficult. Our work apparel business, which a good portion of that is coats, has been difficult. It’s hard to separate the impact of weather specifically versus some of the other headwinds. But I would contend that weather probably had some piece of the deceleration as well.

Okay. And then on the merchandise margin pressure you saw in the core Boot business, I guess it was about 50 basis points with some freight and shrink. How should we think about that markdown and merchandise margin risk looking forward for the rest of the year? I mean do you have some potential markdown risk post holiday if things don’t pick up or there anything that changes out of Q2 as we look to the back half in terms of that merch margin trajectory?

Peter, it’s Greg. Our aging profile looks a lot like last year. We have just a slight bit more of aged goods entering the second quarter and we exited the second quarter with slightly lower inventory of aged goods. So we feel very good about how ‘clean’ our current inventory is. And just as a reminder, over 70% of our inventory is on a replenishment model. It’s boots, it’s denim, no fashion risk, no markdown risk. And so I don’t believe that you need to model in any increased markdown risk going forward.

Okay. Lastly for me just looking at the Sheplers business, it’s great to see that those are kind of trending to plan. If we look back at your two prior acquisitions with Baskins and RCC, I’m curious on the sort of trough, the peak comp trajectory, did those take some time to build in terms of same-store sales or did they post rebranding immediately move to mid single digit and hold that rate? Just trying to contextualize that for how Sheplers might trend over the coming year?

I don’t know if we’ve ever really disclosed those numbers specifically. It’s complicated for a couple of reasons. One, the two acquisitions operated reacted differently. The RCC business acted a little differently than the Baskins business. Baskins being more recent, it did have a trough followed by kind of an increase. And in that increase built over a few successive quarters, it will be difficult to scale that specifically for you on the call. But it did kind of build over time at Baskins.

Okay. Thanks for answering my questions and good luck with the rest of the year.

Thank you.

Thanks, Peter.

Thank you. The next question is from Matthew Boss of JPMorgan. Please go ahead.

Hi. Thanks. So can you guys talk about the performance of your new stores versus the older stores? And also anything that you’ve seen to lead you to believe that you should slow the pace of growth given what we’ve seen?

Matt, it’s Greg. Our new stores continue to meet our three-year payback and we feel like there’s still a great opportunity to continue to expand. So, our plan is to continue to grow units that have 10% for the foreseeable future.

Great. And then just a follow up. Aside from the oil-impacted stores, what’s the best comp to think about at the core Boot Barn business, meaning have you seen any signs of stabilization? Just trying to think about beyond this year, what is the best way to think about the underlying core Boot Barn business?

I’d probably refer back to sort of our long-term outlook and I think that is still intact in terms of same-store sales in the low to mid single digits. That’s part of the business model that we came to market, it was about a year ago and I think that’s still a good way to think about the growth trajectory of the core business.

Okay, great. And then any signs of stabilization post [ph] the quarter?

We commented a bit that September and October were sort of in line with each other, so I suppose you can read into that. There’s been a bit of a stabilization.

Great. Thank you.

Thanks.

Thank you. The next question is from Jonathan Goff of Robert W. Baird. Please go ahead.

Hi. Thank you. Maybe Jim first just following up on a comment you just said, looking longer term at low to mid single digit same-store sales for the business, any thoughts on when you might be able to return to that level for the core business? And you called out the impact you’re seeing in oil markets and other commodity markets, maybe any thoughts on the duration at how long those might impact the business and any high level thoughts there would be appreciated?

Sure. Thanks. On the second piece, it’s hard to forecast how long headwinds will last and each of them are a little bit different in different parts of the country. So we’ll kind of manage through it and looking for growth in different areas to offset some of headwind. In terms of the long-term outlook, we would love to be able to return back to 7% or a 5% comp. Even in this quarter, we were in that range in our view of low to mid for the core business. So as we look forward, we think if you were modeling Boot Barn and modeling Boot Barn’s core business, just like we said last year, I think we over a long period of time are low to mid single digits stronger on a same-store sales basis including ecom.

Got it. And then maybe more near term as you look to the holiday period coming up. It sounds like maybe September, October with the core business tracking slightly positive maybe towards the lower end of your flat to low single digit outlook for the quarter, any thoughts on specific initiatives that you’re planning to help drive the business or any internal factors that you think could help offset some of the external headwinds?

Sure. A great question. That’s what we work on virtually every day, right. So from a merchandising perspective, we’re looking for growth in a number of areas. We’ve launched a new line or collected a few different pieces of our assortment around performance, so that could be performance apparel and performance boot, both work and western. We’ve done some things in terms of ladies boots around bootlegs and adding fringe to our assortment. We’ve really expanded the front door to the store in terms of our jewelry assortment and some accessory items. We’ve put some increased emphasis on the Christmas shop and Christmas décor within our stores for this upcoming holiday season. Those are mostly merchandising related. From a stores perspective, we just rolled out a new sales training program to all stores, all 200 plus stores including the Sheplers stores that we hope will help convert traffic that we are getting in the stores. And I said probably from a marketing perspective just to kind of round out the thinking, we’ve really placed a lot more emphasis on our loyalty program and how we can really convert the reward members to use more of their rewards, to be engaged more in the program so they can build a point that get converted to merchandise credits and then use those credits in the store. And I think that has two pieces. One is, help us build sales and two is help us continue to take market share by establishing more loyalty to Boot Barn. So we’re working on a number of different fronts across virtually every functional area to find opportunities for growth.

Got it, that’s helpful. And maybe one more for Greg. Just trying to reconcile the change in guidance for earnings for the year. I know you’re pointing now to $0.76 to $0.80 in adjusted net income per share on a low single digit comp. I think previously it was $0.85 to $0.90 on a low to mid single digit comp. So I’m just wondering if you still do a low single digit comp, why the earnings range is now adjusted lower than the $0.85 low end you previously had for earnings?

Yes. I think a piece of this is conservatism given we’re guiding it flat to low versus – when we think of low, we think of 1 to 3 and when we think of mid we think of 4 to 6. So we had modeled something in that range, if you will. And now with being the bottom, that’s I’ll say conservatism.

Okay. And maybe one more just looking ahead to 2017, I know obviously a difficult question given all the top line volatility. But if you got back to more than normalized low to mid single digit comp, is there any reason to think that if you have the core business growing in the 20% range plus accretion from Sheplers to be even higher than that, is that still a reasonable framework to think about, a potential scenario for 2017 or has anything shifted in kind of the broader thinking there?

I’d say there’s nothing structural that has changed. We haven’t begun to work on our fiscal '17 plans and guidance. But when we went public a year ago and we laid out kind of our thesis, if you will, there’s nothing structural that’s changed if we can comp up low to mid single digits and grow units by 10% that we can’t get that same net income growth.

Okay, great. Thank you very much.

Thank you.

Thank you. The next question is from Paul Lejuez of Citigroup. Please go ahead.

Hi. Thanks, guys. Just wondering what are your expectations for the Sheplers.com business once you rebrand the Sheplers stores and move that store connection with the customer, you’d expect to have to kick up marketing spend to kind of keep that business growing. At some point, you maybe direct that Sheplers.com customer to the Boot Barn. I’m just trying to think of how that will work itself out. Thanks.

Sure. When we think about Sheplers.com going forward, it think it’s a mid to high single digit growth business separated from the stores. We’re operating the brand pretty much entirely separately. So the Sheplers.com customer and the Boot Barn store customer are affectively two different groups and we’re marketing and merchandising to them separately. I think as we rolled into September, it was nice to see the Sheplers.com demand go back up to a high single digit number and we expect that mid to high going forward over a long term is the right way to think about it regardless of – or even after the Sheplers stores are fully rebranded to be Boot Barn.

Okay. What percent of overlap is there between the Sheplers.com business and the Sheplers stores, percent of customers shop both?

I don’t have a specific number for you. It’s a relatively low portion of their customers’ Sheplers channels. The Sheplers.com customer – while there are pockets around stores, there’s also lots of Sheplers.com customers in lots of rural markets around the country.

Got you. Then just last one for Greg. The pressure from shrink, was that a one-time true-up where the pressure going forward would be less or should we expect to see kind of similar pressure in future quarters?

Great question. I believe that they’re one-off. The company used to conduct inventory semiannually and in Q2 last year we recorded, I’d say, a benefit or less shrink expense as a result of that physical inventory true-up. We have since migrated to an annual physical inventory and so we didn’t get the benefit of that, I’ll call it, true-up in Q2.

Got you. Okay. Thanks, guys, and good luck.

Thanks, Paul.

Thank you. The next question is from Mitch Kummetz of B. Riley. Please go ahead.

Thanks. Jim, you mentioned that there was a spillover effect in the quarter. Is there any way you could try to quantify the number of stores that were impacted by that spillover effect?

It’s very difficult to give you a specific number, Mitch. I think when we look at certain states that have had either a less of a growth or a bit of a decline, it’s hard to count up which stores are specifically related to spillover and oil and gas, which stores are specifically related to weather or other factors. I think it would be too hard for us to do that per site.

Okay. You mentioned on a merchandised standpoint that work apparel was the softest category in the business. Is there any way that you can kind of parse out comp if you were to ex out that piece of the business? And can you remind maybe what percent of your overall mix work apparel represents?

Yes, work apparel is maybe a mid single digit portion of our business. Its decline isn’t going to explain the entire deceleration. So the way we look at the business now is when we go kind of department by department, work apparel took a step down with a decline that was pulled down mostly by flame-resistant but also non-flame resistant, also the regular typical work apparel was also down. But admittedly, the other departments while most of them were still growing, they were growing at a slightly higher rate. So I think it was those two factors combined that led to the deceleration from the five-six to the one-six.

Okay. And then on the updated guidance, we can obviously back into kind of a Q4 outlook which I’m coming with a range of like $0.13 to $0.15 on the earnings line, which is a little bit down from what you guys reported last year. Is there any way you can provide a little bit more color in terms of what you’re thinking on the fourth quarter either by comp or margins or something that can explain why you’d expect the earnings to be down year-over-year?

Yes, a piece of that is definitely our comp assumption being flat to low single digits. And as I cited, our interest expense was higher in Q2. That will continue as a pressure point for Q3 and Q4 as well. And then finally, we don’t get as much leverage on the occupancy and SG&A line with a flat comp as opposed to a plus three or a four, something like that.

Got it. All right, thanks. Good luck.

Thank you.

Thanks, Mitch.

Thank you. Our next question is from Corinna Freedman of BB&T. Please go ahead.

Hi. Good evening, guys. I wanted to circle back on your comments about inventory. I think you indicated a 5.6% increase of the core Boot Barn brand and I think you also mentioned you’re building some boot inventories in private label. Is there something in the results now that is causing you to keep this business? Is this a net increase or are you just replacing branded with private?

Well, we continue to grow our private brand assortment and that’s really done to fill gaps and to service the customer, if you will. So we have expanded or continued to increase our penetration of private brands. I’m not sure if that answers your question or not.

Okay. And then any comp trends by category; boots, apparel, accessory comps that you can share with us?

Sure. The boots business was still up – work boots were up solidly, men’s western boots were up very solid. The apparel business was dragged down mostly by work apparel and the biggest drag was the flame-resistant part of that piece of the business. Some of the initiatives we have for the front door to the store have paid off. That business was up and accessories in total was up. So it’s just a little bit less up than in past quarters of course but with the exception of work apparel and a little bit of softness in ladies denim, which is a relatively small portion of our business, the rest of the categories were either flat or a little bit up.

Great. I wonder if you could also give us an update on the IMAP impacts that you’ve seen on Sheplers conversion? I know you’ve said better – it’s going better than expected but is there any quantifiable impact on conversion or traffic?

It’s a great question. We had called that out on our last call and said that while it may create some short-term headwinds, we thought it was a good thing for the business overall. We continue to believe that to be the case. As we think about the second quarter, the Sheplers business returned to growth in September as we expected, Sheplers.com. Bootbarn.com grew also in double digits. Both businesses had an increased merchandise margin rate. We believe part of that is associated with IMAP. So as we had said back in August, we had expected that IMAP would be a good long-term thing for the business. I feel equally confident about that today and I think some of the things we’ve seen play out in the second quarter would demonstrate that.

Great. Thank you.

Thank you. I would now like to turn the conference back over to management for any additional or closing remarks.

Thank you everyone for joining the call today. We look forward to speaking with you all in the coming weeks. Take care.

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