Good day, everyone and welcome to the Boot Barn Holdings Incorporated Second Quarter Fiscal Year 2019 Earnings Call. As a reminder, this call is being recorded. Now I would like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations. Mr. Watkins, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's second quarter fiscal 2019 earnings results. With me on today's call are Jim Conroy, our 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. 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 2019 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'll now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you Jim, and good afternoon. Thank you for joining us. On today's call, I'll be providing a review of our second quarter results and an update of our key strategic initiatives. Greg will then review our financial performance in more detail. Following Greg, we will open the call up for your questions. We're very pleased with the sustained momentum our business is experiencing across the country. The improvements we have made in merchandising, marketing and omni-channel along with a healthy macroeconomic environment helped fuel second quarter results that exceeded our expectations. Beginning with our top-line, consolidated same store sales increased 11.3% which includes double-digit gains both in our retail stores and online. The combination of strong sales growth in merchandize margin expansion enabled us to grow operating income by more than 50%. This represents a 130 basis point year-over-year improvement in operating profit margin. We are very encouraged by these results and believe they reflect the successful execution of our four strategic growth initiatives. Let me take a moment to review and provide an update of each of them starting with driving same store sales growth. We are very pleased with the 11.3% same store sales growth we achieved in the second quarter. Comps and retail stores have now been positive for six consecutive quarters. Sales growth was driven almost entirely by an increase in transactions with a slight increase in ticket size. We have seen widespread growth across most of the country with Texas again delivering outsized results. Once again every major product category posted positive results for the quarter with particular strengths in work apparel and work boots followed by ladies and men's Western apparel. And modest growth in western boots. The growth in work boots and work apparel was driven in part by the ongoing success…

Thank you Jim. Good afternoon, everyone. In the second quarter the net sales increased 17.5% to a $168 million. As Jim mentioned, sales growth was driven by an 11.3% increase in same store sales. The sales contributions from the stores acquired from Work Boots, Long Star and dry sale in addition to sales from these stores added over the past 12 months During the second quarter, we added three stores including two acquired Drysdale stores in Tulsa bringing our store count at the end of the quarter to 232 in 41 states. Gross profit increased 22% to $50.9 million or 30.3% of net sales compared a gross profit of $41.7 million or 29.1% of net sales in the prior year period. The 120 basis point increase in gross profit rate resulted from a 30 basis point increase in merchandise margin rate and 90 basis points of leverage in buying an occupancy cost. Merchandize margin increased as a result of more full price selling and growth an exclusive brand penetration. Operating expense for the quarter was $42.2 or 25.1% of those sales compared to $36.1 million or 25.2% of net sales in the prior year period. Operating expense increased primarily as a result of increased sales, expenses for new and acquired stores, higher marketing costs as a result of the Idlyllwind launch and costs associated with the addition of a mid-year physical inventory. Income from operations is $8.7 million or 5.2% of net sales in the quarter compared to $5.6 million or 3.9% in the prior year period. Net income for the quarter was $4.5 million or $0.16 per diluted share which includes $0.04 per share of tax benefit related to stock option exercises. This compares the net income of $1.1 million or $0.04 per diluted share in a prior year…

Thanks Greg. We're pleased with the success of our second quarter results and are optimistic about maintaining our positive momentum during the holiday season, and through the back half of the year. We are excited about the launches of Idlyllwind, Hawx and Cody James work and are looking forward to the numerous opportunities that still lie ahead to drive same store sales growth, improve margins grow our store base and increase shareholder returns. In wrapping up, I would like to thank the entire Boot Barn team for continuing to come together to take care of our customers and execute on strategies we have in place to drive long-term success. Thank you for your hard work and consistent dedication to our company. Now I would like to open up the call to take your questions. Ann?

[Operator Instructions] We take our first question from Matthew Boss with JPMorgan.

Congrats on a nice quarter and the continued momentum. So I guess first question on the acceleration income that you have seen quarter-to-date, I guess what are you seeing in oil and gas market maybe versus the rest of the chain? And if you could just provide maybe a bridge between the current comps that you're seeing and the five to seven guides for the full quarter, I think that'd be really helpful.

Sure. Well, Texas is the biggest oil and gas market of course by a lot. The Texas business has continued to be strong and that is being really driven by or at least partly driven by West Texas which is mostly oil driven, and we are encouraged because which was also cycling the recovery of Houston after the hurricane last year, and we were a little concerned as we went up against the recovery that Texas may not be as strong but Texas continued to be above market or above rest of chain performer for us. So that's been them --that's been kind of encouraging for us. In terms of, as it relates to the guide for the third quarter, look, we've had three consecutive quarters' now double-digit comps. We are starting to cycle stronger comps in this particular quarter. Having said that in October last year was a strong month and our total business is this year as we just called out very strong. So I would say there's a little bit of conservatism as we think about how much business that we have ahead of us. While we are 3.5 weeks into the quarter, we're only about 20% into the quarter from sales, volume perspective, and Christmas is a crazy time of year for us and all retailers. So we're just trying to be a little bit prudent with how we guide everybody for this particular quarter.

Great, that's great color. And then just to follow up, can you maybe just talk through expectations for gross margin versus SG&A in the third quarter? I guess in particular are there any one time items that limit your ability to leverage SG&A in the quarter or should we think about the 1.5 comp leverage point is just for the quarter.

Yes. The 1.5 is really a full year worth, Matt and I guess in Q3 last year we had about a $1 million, a little bit over a $1 million in insurance recoveries that we won't be anniversarying in addition to that we expect that our incentive based compensation will be roughly a $1 million higher than last year's as well. Those are the two big outliers in terms of expense, but again when we give guidance on leverage points we look at the full year and then we do that we did adjust out the $1 million of insurance recovery that we had last year. In terms of gross margin -- yes, in terms of gross margin, our merchandise margin, Jim explained that we didn't anniversary a two-week boot sale that we did last year in October, and so we'll expect some of that good news to flow through in addition to the roughly 25 basis points we'll get out of increased private brand penetration. Beyond that we expect that our promotional cadence will be very similar in Q3 as it was last year again outside of that non anniversary boot sale.

We will go next to Jonathan Komp with Baird.

Yes, hi, thanks guys. I want to first just follow up on the sales outlook and kind of dive in a little bit more what you're thinking about the comps, and I certainly understand the conservatism at this stage just wondering how you're building your forecast for the back half. And I know when I look at your two year same store sales, they built each of the last five or six quarters, so is there anything that you look forward to the comparison and that you think would be different from what you've seen recently, just trying to get a better sense of how you're building that up.

So, first, if we think about the two year stack over the past couple of quarters right, in Q1 we posted a roughly plus 12 and that was on a year ago compare of a plus one, so a plus 13 two year stack. If you look at Q2, a year ago we were plus two and now we are posting a plus 11 so again a plus 13 stack. And we're up against a plus five, four I believe last year in Q3 and the high end of the range would get you pretty close to that same plus 12 or plus 13. And so that was one point of triangulation. I think the other piece is we do feel very good about the business through quarter-to-date 3.5 weeks. And Jim mentioned, that we're cycling really good business last year in October and November. In December, the stores business decelerated or was lower so very positive, but is lower than what we saw in October, November. And so we have some level of conservatism I think baked into our December results. And while we expect that our e-commerce business would be strong this year, we've also got out low double-digit increases in e-commerce we've built up the Q3 forecast. In terms of Q4, we haven't really revisited our projections because we'd like to see how Q3 unfolds before we update for Q4.

Okay, understood and we think of the recent private label launches you've had with Miranda Lambert on the Workwear side. How are you viewing those? Are you viewing those as kind of incremental to the private label strategy and a nice margin tailwind or should we think of those as potential sales drivers?

I think they're both. I think they are drivers of increased penetration of private brands. And I think if I look at each of the two or three brands maybe separately I think Idlyllwind, part of the goal for Idlyllwind is to really leverage the unbelievable brand name and personality of Miranda Lambert. And while many of her fans are already Boot Barn customers, her fan base is quite extensive. So that would be an ability or opportunity for us to get net new customers introduced into Boot Barn based on the fact that they follow her and our fans of hers et cetera. I think of Hawx might be a bit of an opportunity to get new work customers that are not necessarily buying Western apparel, but will probably also cannibalize some of the other brands in the store from the perspective of the third-party brands mostly. So I think Hawx is a little bit of maybe 50% incremental and 50% transferring and just increasing our private brand penetration. And then I think of Cody James work, the Cody James work is really to take our existing customer for the most part because it has a western aesthetic that might have a steel toe in the boot or might be FR related apparel when that product comes in, and can take our existing customer and either sell them more product or have them convert from one of the third-party brands over to Cody James. So I think that one probably is more of a pure increase in private brand penetration and maybe a little bit less than driving incremental sales. So they all behave a little bit differently, but I think when you kind of couple them together or combine them all, we'd like to see both, we'd like to see an ongoing increase in private brand penetration perhaps with a bit of an acceleration there and the introduction of Boot Barn brand to new customers, and additional traffic.

Great and just one last one for me on SG&A. A little bit related here but any way to quantify how much you might have spent on launching and marketing some of those, the new private label side and especially just in the second quarter kind of the lack of G&A leverage. If you could give any more color on any unusual or any factors that impacted that?

Sure, John. It's Greg. And between, I called out the Idlyllwind launch, I also had mentioned that we added a bid year fiscal inventory this year mainly to get our stock unit keeping more accurate right, get that reset for holiday. So we could take advantage of business, but the combination of those two things and we had a small asset disposal cost that you can see in the press release for about a 100k but the combination of all those things was about a 100 basis point headwind to SG&A rate. Said differently we probably would have had 110 basis points of leverage in SG&A if you account for those things.

And probably to add that going forward -- sorry, John, just to finish - to add to that a little bit and when we officially launched Hawx and there's an official launch of Cody James Work. I don't expect that to be the same additional marketing push, rather I think both kind of fold that in queue are sort of day-to-day and more routine marketing spend as it's kind of more of a traditional customer and part of our normal assortment, but we really wanted to make sure that Miranda and that new line had a nice running start.

We'll go next to Peter Keith with Piper Jaffray.

Hi. Good afternoon, everyone, nice quarter. I want to follow up on the margin discussion for the quarter. You did a nice job of explaining SG&A but on the gross margin the product margin expansion improvement was good, but it slowed down a fair amount from prior quarter. I think last quarter you guys were up 140 on margin I think this quarter you set up 30. Maybe there's compare dynamic but could you give us an understanding what happened there? And then also I didn't catch the increased penetration to private-label.

Sure. So it's Greg. The private brands increased 250 basis points in terms of penetration first, and second when we talked about Q1 and the expansion of a 140 basis points of improvement. I think we talked about the fact that really starting in Q2 last year was when we took a look at -- started looking at our promotional stance and what traffic we were driving versus what the cost to AUR was. And so last year we moved from a four week boot sale that used to happen in August, and we cut that in half. And so we had I believe a 140 basis points of improvement year-over-year in Q2 last year. This year as we cycled that we didn't reduce that two-week event any further. And so we had a more normal comparison but we started doing the work on analyzing our promotions starting in Q2 last year, so we were anniversary that work this year in Q2. Q1 this year, we were --we had a fresh slate if you will and we're reviewing everything fresh for the first time.

Okay, that's helpful, Greg. Thank you. And also I wanted to ask about the commercial sales opportunity. Jim you had called that out in the prepared remarks as a driver to the work boot and apparel up performance. Is the commercial sale something that has accelerated as of late or is there anything that they evolved there that becoming a bigger driver?

The commercial accounts business in terms of year-over-year growth exceeds our overall sales growth, actually it increases pretty healthy, and but it's been doing that for a few quarters now. So I don't-- it's fantastic business, a very high growing business not necessarily accelerating sequentially quarter-to-quarter-to-quarter but in comp enhancing to certainly to the work business and even to the overall business. To give you some dimension for how big that business is, it's low single-digit portion of our business. So it's a -- while we're thrilled with it and continue to put some resources against it in terms of commercial account sales force, it's not any more than a low single-digit piece of the business overall.

Okay, that's helpful. Thanks. And lastly for me just on the on the tariff discussion, any updated thoughts on how your business might be impacted should the 25% tariff kick in the beginning of the year?

Yes, Peter, it's Greg. Less than 10% of the product that we sell is sourced from China and is subject to tariffs right now. And some -- a piece of that is private brand and a piece of that is our third-party vendor product. And so I think we'll see some impact of that. We're also looking for opportunities to cut costs and source from different countries. I don't think Boot Barn is going to be uniquely disadvantaged given the fair amount of this product is coming from a third-party vendor that likely to increase the price to all of their partners, if you will. And it will unfortunately be borne probably largely by the customer.

We go next to Janine Stichter with Jefferies.

Hi, guys. Just want to ask a little bit more about the thought process behind reducing the boot promotion in October, it sounds like you haven't seen any resistance there. So as you look at the promotional calendar for the rest of the year or even beyond, is there any opportunity to remove other events like that and then along the same lines, can you give a little bit more color on what you're seeing because you evaluates a piece of your ecommerce business, whether it's pulling back on your business with Amazon or also I think you mentioned reducing some unproductive use, and how much more opportunity you see there. Thank you.

Sure, thanks Janine. Look we had run a boot sale last year in October for three weeks and it was --it's basically as promotional as we ever get throughout the year. And we sort of were just looking at the underlying momentum in the business and said, hey, if we just unwound this would we be merchandise dollar ahead and hopefully still have some comp and it was worth the experiment because as it turned out we had fantastic business, and we haven't disclosed a specific number, but you can surmise that our merchandise margin rate quarter-to-date today is better than it was last year given the fact we weren't running the most aggressive sale that we do all year. Having said that, when we look at the overall business about 85% of our business was conducted at full price and of the balance the 15% roughly half of that is clearance. So we've made some improvements in clearance. We have really cleaned from inventory perspective, but clearance will always be in the system as we need to clear some small portion of our goods all the time. So that leaves only about 7% of our business to go after from a promotional standpoint, and while we are continuing to look for places to squeeze and reduce the level of promotions, as I look forward for the next 52 weeks the only time we're heavily on sell is next boot sale over the summer which tends to be the first couple weeks of August. Other than some more rifle shot promotions on a month-to-month basis for small portions of the assortment. So we'll be looking at all of that. I will be looking at a promotional stands during Christmas with an eye towards rolling back promotions even further but there…

We go next to Paul Lejuez with Citi Research.

Hey, thanks guys. I know you had only a couple weeks if Idlyllwind and in the quarter you just reported, but you've got some a few more weeks under your belt since then. So just curious if you can maybe give us a little bit more in terms of what you're seeing on that product. Is it doing what you were hoping? It would do in terms of expanding the customer base any particular regions that you're seeing, react more positively versus others to that Miranda product. Anything else you could share there. Thanks.

Sure, we're really, really pleased with the partnership with Miranda. Miranda personally and her team have just been incredible to work with. In terms of overall sales volume, we're pretty much as expected in terms of how we laid out a year. So I think that's a victory because we're pretty aggressive sales aspirations. I do want to scale that for everybody while --because while the Miranda product and the Idlyllwind product has been a nice contributor to our business, if we look at quarter-to-date for example, while we're calling out there were double digit comp, if we took the Idlyllwind sales to zero, we'd still be a double-digit comp. So it's, again, it's a nice contributor. I think it will expand our customer base, but it certainly isn't the sole driver of our comp. Maybe to give you one more anecdotal fact is we launched it in the first week in September and our September business was nicely growing from a comp perspective, but it actually wasn't any better than August business. And so I think it's helping to continue what is a very strong sales growth. It certainly will help us build our private brand penetration. And I do think her fan base and the energy that she brings will help us introduce more customers to Boot Barn. So I would put in the category of we're extremely pleased but we also have a lot of other things working in the business and the Idlyllwind line is just another contributor to I think what is very solid underlying business and now for several quarters and running. So we are quite encouraged by it.

Got you. And I think that you the women's boot category I think it has been weak for some time. Any signs over turn in that business?

So if you went through the comp drivers by merchandise category, and you're --it's an astute question right. We called out that essentially every merchandise category has been positive and that does include ladies western. However, in terms of the sequence from strongest to less, least strong western boots had only had a modest increase year-over-year from the same store sales perspective. And yes -- the way I think about that if I put my term sort of optimistic hat on, Greg is laughing because I'm always wearing hat, my optimistic hat. I think that great for us because I think the ladies boot business is one portion of the business that does have some cyclicality in it. And it's been less strong than the rest of the business for a few quarters now. And at some point, I believe that will kind of begin to build some momentum. When I think about it from a fashion trend standpoint and we are, we call out often that our business is not trendy and doesn't have a tremendous amount of fashionable ups and downs to it. But the ladies boots business specifically there's a portion of it that does go up and down. And one of the area's that's trending up for us now is short shafted boots or booties, which we are in stock, we're selling well and it's a nice part of our business. Unfortunately, there are lower AUR than a full size cowboy boot, but that's what ladies want to wear, and that's what we're providing and I think if we looked at the ladies boot business from a unit perspective, we see a nice comp growth. And that we would call out something like that specifically, but we've been eroding AUR a bit because customers are trading down to this ladies bootie trend or short shafted boot trend. I do think that business will build momentum over the next several quarters or a couple of years, but yes now we're trying to prognosticate a fashion trend, but I think at some point it'll come back and we'll see some nice growth there.

Got you, thank you. And then last one for me, last year around holiday you guys did have some fulfillment issues I believe. I'm not sure if that's the way that you would describe them, but there was I think some issues with sports shipments maybe lead shipments. Could just even talk about where you are in terms of correcting those-- the problems that may be led to that and how you feel you're going to be able to handle the pickup and the bump in sales volumes in this holiday? Thanks.

Sure. Now your memory is right. We had both an operational issue in a warehouse in Wichita and a systemic issue in our warehouse in Wichita. And over the last several months, we've been really focusing on refining and tweaking and proving what we thought was going to be in working order last year, and unfortunately we were surprised, negatively surprised. Having said that, we have called out that work is now complete. We have pressure tested it with by sort of trying to model or stimuli Black Friday and Cyber Monday throughput and everything seems to be working both operationally and systemically. So we feel a well positioned as we go into this holiday season and hopefully we'll be able to really take all the demand that we can generate, and push it through that facility and convert every demand into an actual shipped sale. And to your one of the points you made do that in a consolidated shipment rather than split shipment and save the freight that we had essentially overspent last year in an effort to keep customers happy. We were jumping through hoops to splitting order, shipping them overnight because we had taken too long to pick them et cetera. And the last piece that we hope to see a benefit in is given all the operational systematic issues we had last year, we had a pretty significant influx of customer service issues which drove SG&A expense in terms of the call center, and we base them, hopefully we won't have as many issues this year. I certainly am not expecting them. And we've made some operational efficiency improvements in terms of the call center as well with some automated voice response and those sorts of things. So yes we're looking forward to the next couple of months of business and the increase in online and in stores that undoubtedly will come as we move sequentially through the year. And I think we're well positioned to handle the e-commerce business.

We question well go next Oliver Chen with Cowen and Company.

Hi, thank you, great quarter. Just regarding your guidance and your full-year guidance what was the --it was the raise for the full-year guidance primarily based on the upside to the comps were sales this quarter. And as we look forward to the comp store sales in the back half is that going to be split between averaging at retail or transaction driven? And what you're seeing with those metrics that would be really helpful.

Right, Oliver, it's Greg. We raised our EPS full-year guide by $0.10 and that's comprised of the --as the Q2 be of $0.07 from $0.09 to $0.16 and the balance is related to the Q3 increase in comp assumption so were 5 to 7 in terms of same store sales. And that's all top line driven with an appropriate flow through. We haven't revisited our Q4 again because we're waiting to see how Q3 unfolds, and so we'll be talking about Q4 when we talk about Q3 results. And in terms of what we're seeing the sales come from, it's coming mainly from transactions. We've seen a little bit of an increase in average daily transaction, but it's largely driven by transactions. [Multiple Speakers]

Just to make sure, I was clear, sorry Oliver, this is Jim. Just make sure I was clear in my prepared remarks when I called out the increase in a AUR or basket size really because we weren't cycling the sale that really only explained sort of a step up in the comp. Most of the comp with for the quarter to date is still transactions based to Greg's point.

Great, that's really helpful. And on the private label front have you been pleased with the relative amount of buy in terms of how you purchase the inventory in breadth versus depth because there's probably complexity by brand, but have there been learnings there in terms of matching supply and demand.

I've been very pleased with that again go through them individually. Ideally was the most complicated because we had called out a day essentially where we're going to launch it, we want to be fully in stock, fully set up in store and online and with multiple sites and I think the merchants and the planning team had us ready to go and the stores were extremely well positioned from an assortment standpoint. And when I think about Hawx, Hawx is a little bit different because we're just kind of growing into that business. We have the apparel that has now launched and I think we're well positioned from an inventory investment standpoint there. Cody James work is kind of a brand that's just evolving. We had a few boots that we bought some Cody James Western over to the work side, and just made them work appropriate and it started selling. So we expanded that line and now will add some apparel to the Cody James work business and so that's sort of just a evolution or a line extension if you will of a brand that's been in the store for a while. If I got back maybe to the question behind the question, if I think of Cody James work and Hawx, there is very limited markdown risk in either one of those right. These are work oriented brands. We are not trying to catch any particular trend. it's just a functional purchase for a guy that you need something either on a Sear or needs the apparel to wear to do its job. On the Miranda side, we're -- there's a little bit more of a fashion trend there. Having said that, I think we are --I think we've gotten sort of the exact right amount of product and inventory to not only support the sales, but not take undue risk from the markdown perspective.

Thank you. And our final question was about digital and what you're seeing with what your customers may want in terms of capabilities you're looking to add and that --and what topics that come to mind include shipping speed and mobile and other conveniences and where you want to be? Would love your thoughts on what's higher priority for the future just to make sure you're proactive within that channel and also integrating it well with your physical store experience?

Sure, great. Well, you kind of hit the last piece of the question is one of the things that we've been focusing a lot on right. When we think about the competitive landscape from an e-commerce perspective, I think we have a couple of competitive advantages again pure play online players virtually all of them. And one is we are the biggest brand in this industry, and that makes us the biggest player online not only with the biggest player in stores, we're the biggest player at least for most of our vendors from an online perspective. So continuing to focus on the Boot Barn brand and the underlying private brands is one thing that we want to try to continue to create some differentiation versus other players. The second thing that you call that that we're really focusing on is the integration between the two channels. So one thing that we can offer an e-commerce customer that virtually nobody else can offer or anybody of significant size is the ability to buy online and return it to our store. So we just put in place our return portal which is an extremely user friendly touch screen tablet in the store that returns any online purchase directly into sort of the online part of our business. And that has made our returns process from an e-commerce order into a brick-and-mortar store extremely seamless and frictionless. So I think that's been a nice addition, adding to that we're experimenting now with bringing a boot selector into the store, a touch screen tablet or screen and enabling a customer to walk through their purchase process, their purchase decision to see and to help them get to a proper boot for what they --what their need is. we're excited about that I think…

We will go next to Tom Nikic with Wells Fargo.

Hey, good afternoon, everyone. Thanks for taking my question. Just a couple of quick ones on the cost side. We've been hearing a lot about all things on the freight side and truck driver shortages and things like that. Are you seeing much inflation on the freight side? And then also obviously wage inflation has been a big topics conversation in retail. And how should we think about payroll cost in your stores and the effect of wage equation there? Thanks.

Yes, sure. Tom it's Greg. On the freight side, we lever GPS for most of our shipments as you know about 70% of our merchandise is on automatic replenishments, so if we sell boot from area that just, we write an order and it shipped out of the distribution center directly to our store within 7 days or 10 days. We renegotiated our contract on small parcel with no increase. And so we don't have really any pressure on that line. We do bring some things across from China. And so we do see a little bit of pressure on freight, but it's been pretty small. And in terms of wages, we have seen average wage rate increases across the chain and will proactively addressing markets, where we need to increase the wage rate. But what we've also found is that we're able to offset that increase by improved productivity. Some of that driven through what Jim talked about which is our store labor scheduling model. And so we've been able to improve productivity and keep our labor costs largely in check.

We go next to John Lawrence with Coker & Palmer.

Yes, just a couple of questions as far as most everything's been addressed, but can you come in a little bit on new store performance class of 2017 versus class of 2018, and sort of --with sort of the assortment and some of these items and private label that's adjusted. Is there as much variance opening stores different geographies or what could you speak to is related to maturity curves or et cetera with the new store classes?

Sure. So we're so pleased with the new stores that have been added to the business. I think we've been extremely pleased with the tuck-in acquisition so when we tuck-in a new store and put them together, we are nicely exceeding a three-year payback and the new stores in their own way are, I think very much in line with how we've always modeled them. On average, we want them to open at about $1.7 million and then grow into the average over a few years traditionally. That means they come above company average for a few years until they get into kind of a rhythm. So it's a-- as we look at the roughly 230 stores that we have now and we continue to add stores to the portfolio, we think we can double the store count, and we think we can do that at a roughly three year payback tends to be a 30% year-on-year return in the first year. And all of those return metrics are better than our cost of capital. So we'll continue to do that as we roll out across the country. There is variability by market sometimes, it correlates that a new store in a new market takes a little bit longer, but it hasn't been such a consistent performance that we've ever really called it out or try to model it for everybody because there's too many other random factors involved to give a --here's what a new store looks like in a new market and here's our new store looks like in a mature market. If there was more consistency in the performance of those two groups we would be happy to share it, but it there's too much other sort of deviation of variability inherent in it. Is that help?

Great, thanks. that's very helpful. And second question is, Greg, when you responding to the earlier question regarding the situation with the distribution centers last year, it was helpful to walk through that again. Can you remind us roughly from a gross margin and an SG&A, I don't know those probably two buckets as you pointed out. Quantifying what those expenses were or what you felt like that cost you with those inefficiencies in the quarter last year.

Yes. Thanks John, it's Greg. And we said last year we thought it added about a $1 million of cost to the P&L. And it was roughly split I believe two thirds in gross profit line and a third was in SG&A. The SG&A portion is the call center and we had to add labor for that. The other piece is in gross margin and it's the freight expense.

And last question for me. Any thoughts as I know you from a real estate standpoint with some of these centers and off sites some available real estate, any difference in cost of entering new markets from a real estate standpoint.

John, it's Greg again. And I'd say that really isn't. What we've tried to do as real estate has perhaps become cheaper as we're trying to get better placement. So while we can get highway access, highway site line I should say easy access on and off the highway, then I'll say reinvesting some of that rent expense or occupancy costs to get better locations.

So same dollars just a better experience, better location.

That's right.

And with no further questions in the queue, I would like to turn the call back over to Jim Conroy with any additional or closing remarks.

Thank you. I appreciate everybody joining the call today. We look forward to speak with you all on our third quarter earnings call. Take care.

That does conclude today's conference. We thank you for your participation. You may now disconnect.