Greetings and welcome to the Boot Barn Holdings Second Quarter Fiscal Year 2018 Earnings Conference Call. As a reminder, this conference is being recorded. Now I'd like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations and External Reporting for Boot Barn. Mr. Watkins, you may begin.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Boot Barn's second quarter fiscal 2018 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 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 on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter fiscal 2018 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'll now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thanks, Jim. Our second quarter financial results exceeded our expectations. Starting with our top-line, we're very pleased that sales trends accelerated following the solid first quarter especially in light of some temporary disruptions from Hurricanes Harvey and Irma. Intra sales increased 1.8% driven by low-single-digit gain in our stores partially offset by low-single-digit decline in e-commerce same-store sales. Importantly, we were able to expand our merchandize margins 130 basis points compared to the prior year. This improvement was a result of a reduction in promotions, continued growth in exclusive brand penetration, an increase in full container purchases, and our commitment to full price selling. A combination of sales growth and higher merchandize margins allowed us to double earnings per share year-over-year to $0.04 per share which was ahead of our guidance range at breakeven to $0.02. Our performance has been fueled by our steadfast commitment to our four strategic growth initiatives that we believe will drive increased profitability and greater shareholder value over the long-term. I will review our recent progress for each initiative beginning with driving same-store sales growth. During the second quarter we continue to drive positive same-store sales growth in our stores despite the disruption of business from Hurricanes Harvey and Irma. Collectively the impact of these two hurricanes resulted in the closure of 25 stores in Texas, Florida, and Georgia, in most cases for less than a week. On top of this two Houston areas store sustained major flooding and were closed for approximately 10 weeks. Fortunately, one of those stores reopened earlier this week and we're planning to reopen the second store next week after significant restoration at both locations. We estimate that the store closures and lost e-commerce sales due to the hurricanes negatively impacted our second quarter sales by approximately $1million and eroded…

Thank you, Jim. Good afternoon everyone. In the second quarter net sales increased 6.8% to $143 million. Sales growth was driven by the sales contributions from new stores opened over the past 13 months and the Four-Stores acquired from Woods Boots, a 1.8% increase in same-store sales and sales from the Country Outfitter site. Gross profit increased 14.4% to $41.7 million or 29.1% of net sales compared to gross profit of $36.4 million or 27.2% of net sales in the prior year period. The 190 basis points increase in gross profit resulted from a 140 basis points improvement in merchandize margin and a 50 basis point decrease in buying and occupancy cost. As we discussed on the last call, there were some timing differences that impacted buying and occupancy costs and operating expense between Q1 and Q2 last year. As a result, the year-over-year comparison was unfavorable for buying and occupancy in Q1 but was favorable in Q2. Year-to-date our buying and occupancy rate is 10 basis points higher than last year. Looking ahead, we continue to expect to drive merchandize margin improvement in fiscal 2018 by increasing our exclusive brand penetration and volume purchases from our third-party vendors. Operating expense for the quarter was $36.1 million or 25.2% of net sales which was in line with our expectation. This compares to $32 million or 23.9% of net sales in the prior year period. The $4.1 million increase was driven by the increases in sales and the additional costs associated with the stores we've opened or acquired over the past 13 months. Year-over-year, Q2 operating expense as a percentage of sales were in line when excluding the benefit in the prior year from lower bonus expense, a gain from a legal and contract settlement, a benefit from employee compensation costs…

Thanks, Greg. We are pleased with our second quarter results and the positive momentum we are experiencing across the business. Looking forward, we will remain focused on driving shareholder value by growing same-store sales, enhancing our omnichannel capabilities, improving our merchandize margin, and expanding our store base. As I wrap up, I would like to take a minute to thank the entire Boot Barn organization across the country in not only overcoming the adversity that we faced in the quarter due to some very unfortunate external factors but we are coming together as a team to continue the solid performance and accelerate our sales growth. Now I would like to open up the call to take your questions. Kevin?

Thank you. [Operator Instructions]. We'll go first to Peter Keith with Piper Jaffray.

Hi thanks guys. Congratulations on the improving trend here, digging into the e-commerce dynamics sounds like Sheplers getting a little bit better, I was curious on Q3 and the go-forward trend, do you at this point do you still think Sheplers will be positive in the several quarters thereby taking your total e-com business positive for the quarter?

It's a good question. As we look into Q3, we are expecting that e-commerce same-store sales will be positive. One thing that's happened, that's been a pleasant surprise is when we bought bootbarn.com to the new platform, the sales have grown in a much more outsized way than what we had even modeled in kind of a best case scenario. So I think bootbarn.com plus Sheplers.com and those two brands comprise e-com same-store sales for us until we wrap the acquisition of Country Outfitter. Those two brands we believe will be positive in the third quarter. I can swear that I know the split right now, I think Boot Barn's over performance may actually be taking a little bit of business from Sheplers.com. But I at this point, I'm pleased with where we stand; I’m pleased that we expect same-store sales to be positive. And frankly if the customer wants to shop one brand versus another brand that we'll let them make that decision. But coming to the root of your question, I think the Sheplers.com issues that we were working on now the two that we had called out were traffic, traffic declining from organic search and conversion on our mobile site, both of those issues have gotten sequentially better since we started working on it a few months ago and I feel good about that progress and good about the trajectory that we're in.

Okay, that's a good feedback and maybe just a follow-on, it’s encouraging to hear about the acceleration that you’ve seen quarter-to-date, maybe just provide some context is that because of ongoing improvement in e-com or the Texas energy markets or is simply just kind of broad-based improvement across chain and website.

So we’ve seen a lot of things get better and the overarching business has improved basically across the -- each of the three regions. Texas has certainly improved and part of that is the improvement as Houston kind of continues to recover. But even if you were to strip that out, the underlying business without that has improved. So we're pleased with where we stand now. And just part of the conservatism in our voice I suppose is while we are four-and-a-half weeks into a 13-week quarter; we are now one-third of the way through the sales of that quarter of course given the importance of December. But right now, we feel like we're in a pretty good condition.

Okay, sounds great. Thanks a lot and good lucky for the holiday quarter.

Thanks, Peter.

We will go next to Jonathan Komp with Baird.

Yes hi thanks guys. I want to follow-up on the last line of questioning and just broader question really I know when some of the oil and commodity new markets have the downturn at least starting with the commodity prices when they are in decline, I know back then talked about your business is possibly lagging the downturn in some of the commodity prices, I’m just curious to get your thoughts, do you think there is any signs now that you’re -- the benefit took some of the rebound in prices and activity you’re actually lagging and just starting to see the benefit from now, just curious to get your thoughts there?

I do think there is a lag and in some cases like with the price of oil improved the day it's certainly not worth November of 2014, I think the fact that it’s stable.

It's stable in the 50s right?

Right stable and hovering in the 50s is certainly better for us and for some of our high volume states than when oil was down in the 30s. So that feels good and I think if you were to still all the things that have changed in the business over time while a number of different components of the business improve with the single biggest driver of the improvement is the change in the trend in our largest state which is Texas of course from mid-quoted this last year essentially minus 5 for four consecutive quarters and then in the first quarter of this year, it turns probably positive and then it improved into the second quarter of this year. So with 52 stores in Texas, that’s sort of the single biggest change in the trajectory of the business that we've also seen a lot of improvement in lot of other areas.

Great. And maybe to follow-on kind of more of a forward-looking question but how long would you need to see that trend line to hold to get more confidence to reaccelerate the pace of unit additions either through opening or acquisitions?

Hey, Jon, it's Greg. I mean we’re certainly pleased with Q2 building on top of Q1. I think we'd like to see this continue through Q3, with the specific strength in stores business, the brick & mortar stores before we are able to make a comment that side as we’ve always talked about, we can sign a lease and open a store pretty quickly. So we do think that we'll be able to hit that switch pretty quickly and to eventually feel confident to holiday.

We will go next to Paul Lejuez with Citigroup.

Hey guys, thanks. Just curious, Paul Lejuez by the way. Just curious about your comment on to your promotions, was that part of a strategic decision that you guys made to be less promotional or was it more a function of the environment around you becoming less promotional, so you didn't have to discount as much as you thought, I guess it's the latter, what do you think -- why do you think that is?

It was a strategic decision that had a few different factors involved. One was we've gotten to the point after we entered Texas in a big way where our big August sale which we call Stinky Boot, was right on top of back to school which is a -- it's a decent business for us nationally it's a very big business for us in Texas. So we decided to move Stinky Boot into July and shorten it and let the back to school sale which is a relatively modest promotional price position for us, standalone in August. The second piece of it is we have just seen a strengthening of the business and decided that there is really no reason to discount sales or otherwise could be full price. And we want to maximize the value of each sale and each customer that was coming in and it was a little bit of a gamble but it paid off. Sales continued to be strong actually accelerated a bit and we saw a very nice pickup in merchandize margin improvement. So it's -- I suppose a bit of paradox in today’s retail environment but for us it seemed to work to our favor. And I think it really underscores the continued strength of the coupon brand and how we can deliver full priced selling product at a good fair value price in-store and online and we don't have to discount it to try to drive traffic. That’s the current thinking and as you well know we're not a heavily promotional business anyway right and 85-plus-percent of business is full priced. This was just bit of a gamble to see if we can make that even higher and it paid off.

Great. And can you talk about the comp drivers both in the second quarter and just how are you thinking about the third quarter just in terms of traffic versus ticket perspective?

Sure in the second quarter -- I will answer that a few different ways. In the second quarter when you think about the comp drivers arithmetically traffic which we measure as average transactions per store was essentially flat and our comp increase came from a higher basket which was driven by higher AUR which ties right back to the lower promotional spend. If I think about the drivers more from a kind of merchandising standpoint, we continue to see nice performance in our work business, we continue to see -- and that's both work boots, which is a very large department for us as well as work clothing which is a growing department and is probably the highest growth department we have. The buyer there has really done a fantastic job. The other nice thing that we saw in the quarter was both men's and ladies denim was slightly positive which was a change. And one would think that has impacted the business over the last few years particularly on the ladies side is the trend towards athletic leisure, leisure and with some albeit modest growth in Lady Denim that was kind of a thing that kind of further helped enhance the comp. And if I just give you one other direction which I don't think specific to your question and I think comp drivers by panel within the company, the stores business in the second quarter was kind of in line with what it was in the first quarter but has certainly accelerated into the current quarter. E-com drag which is a paradox, the headwind of e-commerce is new cost and hopefully that return to be in line or tailwind like it had been historically so that's improved from the first quarter into the second quarter. And we expect again that e-commerce same-store sales in this current quarter will be positive and just as a reminder that doesn't include Country Outfitter right, if with the inclusion of Country Outfitter e-commerce sales in total for Q2 with high-single-digit growth and it's a meaningful impact on the overall business, we can't count Country Outfitters as part of our same-store sales, the way the definition works. But if we were our consolidated comp would have been about a plus four. And in our view, a Country Outfitter sale is exact same revenue and profitability as a bootbarn.com or Sheplers.com sales. So our business from an internal perspective, it’s actually a bit stronger than even it might appear from external same-store sales perspective.

Thank you.

So I think that hopefully answered your question plus some more.

Yes, very helpful. Just one more. The private label credit card, what percent of the business did that represent this quarter?

Yes, we just launched it during the quarter and if I looked at September’s business about 3% of our business was done on the credit card. So it's early days so for us to measure but we are pleased to hit the rollout so far.

We will go next to Matthew Boss with J.P. Morgan.

Hi good afternoon guys. This is Steven Zaccone on for Matt. Thanks for taking our question. Just following up on the merchandize margin, we’re curious do you think the level of expansion you saw in this second quarter can continue through the balance of the year and then just thinking about the mix shift of the business as e-commerce grows here in the second half, will that hurt you a little bit on the gross margin line?

Good question, Steven, thanks. The merchandise margin expansion we saw in Q2, I would call more one-time in nature in the quarter because we did shorten the promotion that we have our deepest promotion that we run, we shorten the timeframe in half and so that provided outside -- outsized growth in expanding margin. What we've said is we expect to grow merchandise margin roughly 30 basis points on the year. When we started the year, we didn't anticipate reducing the Stinky Boot promotion. So we’ll probably be more than 30 basis points for the year but the main drivers are the exclusive brands and that includes penetration and Jim talked about the fact that that improved over 200 basis points in the quarter. And then obviously the container purchases where we get better pricing from our third-party branded vendors. As it relates to e-commerce, to the extent we grow the e-commerce penetration in that outsized in Q3 that will put some pressure on merchandize margin specifically because the merchandize margin in holiday is tends to run lower in e-commerce than it typically does and so there will be some pressure on that however we think we've got initiatives to offset some of that pressure. So I just to reiterate I think 30 or 40 basis points of expansion in merchandized margin was what we're thinking about the growth on an ongoing basis.

Okay great, that's helpful. And then just one quick modeling question, did you quantify how much how many sales from Country Outfitter you saw in the second quarter and whether it was no accretive at all to EPS?

What we didn’t comment about that, I could answer more broadly that we’re pleased with the Country Outfitter addition to the overall business, it’s net new sales for the most part there might be some customers that are trading between the brands and leveraging the exact same assortment and performance center and team as the other brand. So a dollar through Country Outfitter is the equivalent of a comp dollar through Boot Barn or Sheplers.com. So that's kind of all we commented on it. I think we’re quite pleased with that acquisition that added a third brand online for us that was targeting a completely different customer. Just as a reminder the Boot Barn brand online is our omnichannel brand, it’s connected to the stores is kind of a nice, balanced brand between men's and ladies work and restroom boots and apparel. Sheplers is more of a mega brand that's got several broadest assortments and lowest prices in the industry and that's how it sort of competes and Country Outfitters is a site that targets customers that are slightly outside the bulls eye of our core Western customer and opens up our assortment in a much more curative way to customers that are not necessarily living the Western lifestyle but they view it more as a kind of fastening type Road Rover or merchandize. So it has a distinct purpose in the portfolio of our online brands and we’re quite pleased with the addition of it into the portfolio that we have.

Okay, great, thanks for that detail.

Just one clarification I may have misspoken in my prepared remarks, we expect full-year income from operations for the year to be between $40.0 million and $42.5 million which is to $2.5 million higher than our previous guidance. I'm not sure if we got that before but wanted to make sure that was clear.

[Operator Instructions]. We will go next to Tom Nikic with Wells Fargo.

Hey guys, thanks for taking my question. I had a question about the acquisition of Woods Boots and sort of the overall M&A strategy. I know you mentioned that you would sort of look at that as a way of assessing potential future tuck-in acquisitions. I was just sort of wondering like what made that little chain appealing to you, why did it makes sense to acquire them rather than just open a couple of stores from scratch in the region and I also know that -- I know it’s not a perfect comparison but when you bought Sheplers and converted on the stores over, there was a little bit disruption to those doors after the rebranding and do you expect like any sort of potential disruption as you make potentially under tuck-in acquisitions and convert them to the Boot Barn matter. Thanks.

Sure. Now I think it’s a great question. The way if you go backfive years and look at the industry five years ago you would have seen five chains of any significant size, Boot Barns, Baskins, RCC, Sheplers and Cavender's. Four of those are combined now in Boot Barn and think I would do every one of those acquisitions again with immediate and significant increases in sales and profitability as we acquired Baskins, we had a great performance at RCC. Sheplers as a reminder moved up strategically into Texas, which [indiscernible] year ago was done and today looks genius. But really Sheplers was an acquisition that helped us tremendously step forward from an e-commerce perspective. So now when we look at the landscape, we have a very formidable and frankly a terrific competitor still based in Texas called Cavender's. Beyond that most of the people that remain in the industry have one -- most actually have one stores and small handful have two, three or four stores. So those acquisitions we're looking at really as real estate acquisitions and it's a simple equation of where we think the payback will be better for the associated risk of a new store versus an existing store. For Woods, we obviously knew the purchase price, we knew the EBIT levels, we were estimating what we thought would happen with sales based on what we could do with them, they were a fantastic operator in their own way and it was a very attractive payback with a very low risk of sales erosion. Notably and notably different in the Sheplers business they were not a highly, highly promotional business that we had to pull that promotional cost away and her track again and since we brought Woods that business has experienced very, very healthy comp. So when you look at the next market and as we build out, continue to built out the country, we will look at whether we want to open new stores acquire one, two or three stores in a particular market or more than likely a combination of both based on whose available, where they're located, what their strategic positioning is and what the availability of real estate is. But the benchmark now is how does it measure up to building a new store. And with Woods, it was more attractive for us to just acquire the business and just to be super clear we acquired the assets of the business rather than building new stores. Does that answer your question?

That answers it perfectly. Thanks very much.

Thank you.

Ladies and gentlemen that does conclude our question-and-answer session. And I would like to turn the call back over to Jim Conroy for any additional or closing remarks.

Just wanted to thank everyone for joining the call today. Look forward to speaking with you all on our third quarter earnings call after the New Year. Take care.

Ladies and gentlemen, once again that does conclude today’s call. We do appreciate everyone’s participation.