Boot Barn Holdings, Inc. (BOOT) Q1 2021 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Boot Barn Holdings First Quarter Fiscal Year 2021 Earnings Call. [Operator Instructions] Now I'd like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's First Quarter Fiscal 2021 Earnings Results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Financial Officer. Copies of today's press release and investor presentation are 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 on the Investor Relations section of the company's website. I would like to remind you that certain statements we will be making 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 during this conference call and webcast. We refer you to the disclaimer regarding forward-looking statements that is included in our first quarter fiscal 2021 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 will 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, everyone, for joining us on today's call. These continue to be unprecedented times, and our hearts go out to those impacted by COVID-19 and its continued effects on the world. Before we begin with the typical content of the call, I do want to speak briefly about the pandemic. This is the time when many people across the U.S. are being faced with difficult decisions. Our customers and our associates are seeking their personal balance between health concerns and economic considerations. And I would be remiss not to recognize the entire Boot Barn team who has led the company through this difficult time. The 4,000 store associates who are committed to servicing workers in essential industries and the more than 200 people across the central organization who answered the call to help ensure a safe shopping environment. They all made a commitment to keeping our stores open and safely servicing our customers. It is a testament to the Boot Barn brand and the culture that permeates the entire nationwide team. I couldn't be more proud to lead this organization, and I know we will emerge even stronger when the challenges in the current environment subside. With that said, I will now turn my attention to the impact that COVID is having on our business, review our first quarter results, update you on our current performance and walk through each of our four strategic initiatives. Following my remarks, Greg will review our financial performance in more detail, and then we will open the call up for questions. The COVID-19 health crisis continues to have a meaningful impact on our business. We have seen a strong correlation, both up and down, between the number of positive COVID-19 tests in specific geographies and its impact on consumer sentiment and retail store traffic. At the same time, we have seen a surge in e-commerce demand as consumers have shifted more of their spending online during the health crisis. This dynamic is reflected in the monthly cadence of our consolidated same-store sales performance as April declined 45%, May declined only 10% and June increased by 3%. While we believe that the sequential improvement was driven in part by external factors, such as easing restrictions or receipt of stimulus payments, I would like to recognize our stores and digital teams for their superb execution during this challenging time. On our last call, we discussed measures we took in order to reduce operating expenses and preserve the balance sheet in response to the COVID-19 health crisis. These measures included pay cuts for management, reduced store hours, corporatewide furloughs and layoffs, reductions in marketing spend and the minimization of third-party expenses. While these were tough decisions to make, we believe they were necessary for the health of the business, and I'm quite pleased with the results. When compared to our March 28 year-end balances, we lowered our inventory $27 million, reduced payables $15 million and increased cash by $14 million without increasing our debt. We believe we are in a strong position financially, yet we plan to continue to proceed cautiously as we anticipate periods of choppy sales during the coming months due to the continued impact of the COVID-19 health crisis. During the first quarter, consolidated same-store sales declined 14.9%. Given that our same-store sales metric removes stores that have been closed for more than five consecutive days, our actual sales erosion was even more pronounced, declining 20.5% when including the performance of the stores that remain closed due to the current health crisis. Same-store sales in our retail stores declined 27% while our e-commerce sales grew 52%. This resulted in our e-commerce channel increasing to 25% of total sales compared with 14% in the prior year period. From a margin perspective, merchandise margin in both channels remained healthy. The merchants did an excellent job of working with our vendor partners, managing down receipts and tightening replenishment algorithms, which enabled us to bring our inventory in line with sales. Our consolidated merchandise margin did erode by 200 basis points in the quarter driven primarily by two factors. First, given the outsized volume of e-commerce, our merchandise margin declined 160 basis points based on composition of the two channels. Second, we experienced a 30 basis point writedown of discontinued inventory at the recently acquired G&L Clothing store that focused entirely on work boots and work apparel. Clearing this merchandise is part of the rebranding process that will change the name to Boot Barn and expand the assortment to include western boots and western apparel. Given the challenging environment, we continued to manage all expenditures closely. The expense control measures we implemented resulted in an $8 million decrease in selling, general and administrative expenses during the first quarter when compared to the prior year period. This all resulted in a first quarter net loss of $500,000 or $0.02 per share compared to net income of $9.7 million or $0.33 per diluted share in last year's first quarter. While we are, of course, disappointed to not have grown earnings, under the current circumstances and when compared to our internal expectations, we are very pleased with the first quarter results. I'd like to now provide an update on current business. Except for temporary store closures due to COVID-19, we are fortunate to have all of our stores open today. As we moved into July, our second quarter, we continued to see a strong correlation between our customer shopping behavior and the number of positive COVID test results in their communities. As case counts increased in certain markets and local jurisdictions took responsive action, customers reacted, and our business slowed from its June sales levels. Preliminary same-store sales in our retail stores declined by approximately 15% in July while our e-commerce sales grew by approximately 24%. Our consolidated July same-store sales declined 10%. This July sales dynamic includes retrenchment in many of our larger markets, such as Texas, Arizona and California. Consistent with the sentiment around COVID-19, same-store sales in our retail stores sequentially improved from mid-July through the first week of our fiscal August. We expect that our retail store sales will continue to fluctuate based upon the news and customer response around COVID-19. We anticipate that fiscal 2021 will continue to be a volatile year, but we are confident in our ability to navigate through this temporary challenge and return to growth when conditions begin to normalize. I would now like to provide an update on each of our four strategic initiatives, beginning with driving same-store sales growth. We saw significant sequential improvement throughout the quarter in the retail storage business ending the month of June with negative low single digit comps. From a merchandise perspective, work boots grew as our customers pivoted to more functional product for their work needs. Sales in non-flame resistant work apparel improved to positive growth in the month of June after declining in the month of May. Sales of our FR, or flame-resistant, work apparel declined largely as a result of the softening in the oil and gas markets. Same-store sales in Texas, Colorado, Wyoming and North Dakota lagged the chain average as many of our stores in these states serve customers working in the oil extraction industry. As we look back to 2015, the last time we saw a significant decline in the price of oil, there was roughly a nine month lag between the beginning of the fall and the price of oil and when we saw a significant impact to our sales. We believe that the speed at which the price of oil has declined over the past couple of months and the sharp reduction in rig counts have resulted in a more immediate impact on our customers in these oil markets when compared to 2015. Sales of western boots in apparel declined during the quarter. We believe that the cancellation of rodeos, country music concerts and other festivals that typically occur in the spring and summer are contributing to sales declines in these categories. In the near term, we expect our sales to shift to even more functional versus discretionary product. As a result, our merchandising team has been refining the composition of our product assortment to reflect the change in demand. From a marketing perspective, we are expanding our focus on the work customer while continuing to nurture the traditional western customer. Given the environment, we have redirected some of the spending and marketing activity away from the more fashionable segments. We believe that pivoting [Technical Difficulty] segments will enable us to continue to grow our customer database and drive additional traffic to both our stores and e-commerce sites over the long term. From a media spend standpoint, most of our recent marketing has been focused on email and paper click with only a modest amount of radio as the sales composition between our two channels has shifted more online over the last few months. We continue to modify our marketing to keep expenses in line with sales and to ensure the tone of the marketing is aligned with customer sentiment. From an operational perspective, we have prioritized safety for our customers and for our employees. We very quickly adapted our stores to take advantage of our omnichannel capabilities and have encouraged our customers to use our integrated omnichannel offerings, including buy online, pick up in store and curbside pickup. As markets began reopening, we were able to expand store hours in locations where traffic was returning to more normal volume. We continue to be focused on optimizing the store hours and labor with the flow of traffic to the stores. We have promoted social distancing behaviors, adjusted our fitting room and returns procedures, mandated the use of face coverings for all of our store associates and encourage our customers to do the same. I want to take a moment to acknowledge our entire stores organization. They've remained extremely positive during this challenging time as we have asked them to implement safety procedures, work through operational changes and be extremely flexible on the time and number of hours that they work. I couldn't be more appreciative of them. Moving to our second initiative, strengthening our omnichannel leadership. Omnichannel has been an area of significant growth over the last couple of months as customers shifted their shopping habits online as a result of COVID-19. We are pleased with the growth we experienced in our e-commerce business during the first quarter with year-over-year sales increasing 52%, an healthy growth in operating profit margin. The growth in online sales was primarily driven by growth in bootbarn.com with increased traffic and conversion from the prior year. Our newly rebranded Sheplers site has exceeded our initial expectations in both sales and margin. This is an extremely positive development as we were able to reduce the promotional activity on the new Sheplers site, drive a higher-margin rate and upgrade the branding with a focus on its western heritage. The outsized e-commerce growth increased the total e-commerce sales penetration to 25% of total sales in the first quarter, up from 14% in the first quarter of the prior year. We are pleased that the enhancements we have made to our digital sites and omnichannel platforms over the last couple of years have enabled us to serve our customers in a manner in which they are most comfortable shopping at the current time. Looking forward, we intend to add two more capabilities to our e-commerce business, including the fulfillment of e-commerce orders from our stores and same-day delivery from our stores using a third-party delivery company. We believe both of these capabilities will allow us to reach more customers, decrease delivery times, make more efficient use of our inventory and provide enhanced customer satisfaction. And to our third strategic initiative, exclusive brands. During the first quarter, exclusive brand penetration grew to 21.9%, an increase of 200 basis points compared to the prior year period. Our exclusive brands, Cody James and Shyanne, continue to develop a loyal customer following and remained our number two and number four top selling brands in the store. The expansion of our exclusive brand portfolio over the last couple of years has been extremely well received by our customers. And while we took a more cautious approach to our exclusive brand gross growth, once the COVID-19 crisis began, we have been pleased that sales of our brands expanded in the first quarter and have further accelerated as we moved into the second quarter. We now expect to see modest growth in our exclusive brand penetration during the current fiscal year, which is a testament to our ability to develop strong and relevant brands. Finally, our fourth initiative, expanding our store base. During the first quarter, we opened five new stores, bringing our store count at the end of the quarter to 264 stores. These five stores were set to open late in the fourth quarter, but we had intentionally delayed their opening as a result of COVID. We are excited about the expansion into our 36th state with the opening of our Russellville, Arkansas store in May as well as the new locations in Pennsylvania, Ohio and North Carolina. As new stores continue to be our largest use of capital, we have planned for slower unit growth until we gain confidence in the external environment. We are targeting the opening of an additional 10 stores in fiscal 2021, including one store expected to open in the second quarter. As a reminder, the time line for new store development is only six months, allowing us the opportunity to reaccelerate growth if market conditions show a marked improvement. I'd like to now turn the call over to Greg Hackman.

Thank you, Jim. Good afternoon, everyone. In the first quarter, net sales decreased 20.5% to $147.8 million. The decrease in net sales was driven by a 14.9% decline in same-store sales with same-store sales in our retail stores declining 27.1% and e-commerce same-store sales increasing 51.9%. The decrease in retail store sales was primarily a result of decreased traffic in our stores that resulted from customers staying at home in response to the COVID-19 crisis and temporary store closures. On average, approximately 30 of our 264 stores were closed during the quarter. During the first quarter, we opened five new stores, bringing our store count at the end of the quarter to 264 stores in 36 states. Gross profit decreased 35.3% to $40.2 million or 27.2% of sales compared to gross profit of $62.2 million or 33.5% of sales in the prior year period. The 630 basis point decrease in gross profit rate resulted from a 430 basis point increase in buying and occupancy costs and a 200 basis point decline in merchandise margin rate. The deleverage in buying and occupancy costs was primarily a result of lower volume sales due to the COVID-19 crisis. Of the 200 basis point decline in merchandise margin, 160 basis points is attributable to the increased sales penetration of the lower merchandise margin, e-commerce business, and 30 basis points related to the write-off of discontinued inventory at the recently acquired G&L Clothing work-only store. Operating expense for the quarter was $38.4 million or 26% of sales compared to $46.1 million or 24.8% of sales in the prior year period. Operating expense decreased primarily as a result of expense reduction measures previously discussed, lower stores payroll and reduced non-payroll-related expenses. Income from operations was $1.8 million or 1.2% of sales in the quarter compared to $16.1 million or 8.6% of sales in the prior year period. Income tax was a $290,000 benefit in the quarter compared to income tax expense of $2.4 million in the prior year period, resulting in an effective income tax rate of 37.1% in the first quarter. Net loss was $0.5 million or $0.02 per diluted share compared to net income of $9.7 million or $0.33 per diluted share in the prior year period. Turning to the balance sheet. Inventory decreased approximately 3% on a comp store basis compared to last year. This is an improvement from the end of our fourth quarter where inventory on a comp store basis was up 9.3%. On a consolidated basis, inventory was 3% higher than a year ago. As a reminder, inventory at the end of our fourth quarter was 20% higher than the previous year. We are very pleased with the team's ability to manage inventory levels down to reflect the current environment with virtually no impact on merchandise margin rate. As Jim mentioned, we significantly slowed merchandise purchases and reduced our inventory balance from year-end by $27 million. As of June 27, 2020, we had a total of $241 million of debt outstanding, including a $111 million term loan and $130 million outstanding on our $165 million revolving line of credit. We had $35 million of availability on our revolver and $83 million in cash on hand at the end of the quarter. Our net debt leverage ratio at the end of the quarter was 1.8 times. Given the lack of visibility into the business as a result of COVID-19, the company is not providing second quarter guidance at this time. Now I'd like to turn the call back to Jim for some closing remarks.

Thanks, Greg. While the current environment remains difficult, we are confident in our ability to execute upon our four strategic initiatives over the long term and further establish Boot Barn as the leading brand in the western and work industry. I would like to express my gratitude to both our stores and e-commerce teams for their continued innovation, diligence and commitment in making our customer shopping experience as seamless as possible during this time. They've all shown great leadership, and I'm both proud and thankful to work with such a dedicated team. Now I would like to open up the call to take your questions. Maria?

[Operator Instructions] Our first question is from Matthew Boss with JPMorgan. Please proceed with your question.

Great, thanks. So maybe to start on same-store sales. If you broke down the negative 9% to 10% comps in July and early August that you're seeing today, maybe relative to the positive three comp that you drove in June, what would be or maybe how best would you rank the drivers of this 12% to 13% negative swing in comps? Any color by category or by region I think would be really helpful.

Sure. It's we would rank the impact as COVID, number one. Specifically in Texas and California, as the case count started to increase in both of those states in the beginning of July, both governments and sort of local jurisdiction started to really kind of retrench, move back into a safer home kind of environment. And while there is a lot of other noise, good or bad in the system, it was really the retrenchment in Texas and California, which, while, of course, somewhat disappointing, what we've seen is there's a bit of a pendulum effect when a state retrenches, customers react very strongly in the short term and then slowly. Either benefited by more favorable numbers or perhaps customers just getting fatigue at being home at home, they start to release and come back to the stores a bit more. So while we don't necessarily want to predict the future here, that's seemingly the dynamic that's at play. In terms of category changes, they were inconsequential in terms of the differences between June and July. It was almost entirely store traffic, and it was largely our two biggest states.

Great. And then maybe just a follow-up on gross margin. How best to think about second quarter and full year merchandise margin trends relative to the 200 basis point decline that we saw in the first quarter?

So I'll take it from a merchandise margin standpoint. And if further color is necessary from sort of gross margin standpoint, maybe Greg can weigh in. We were extremely pleased to deliver the merchandise margin that we delivered, right? Both channels had healthy merchandise margin. There had been some concern by some folks that we had gotten overextended from an inventory standpoint. And if you look at our inventory position now, we are completely in line with sales. So I think we can extinguish that concern entirely. In terms of the merchandise margin going forward, I think there's probably an occasional clearance sale that we'll have to add from time to time. I think it will be de minimis in terms of the entire margin rate of the company. On the plus side, we are seeing a little bit more penetration of exclusive brands than we had anticipated for this year. So while the long-term algorithm was always two to three points of penetration, and more recently, we had been at five to six points of penetration growth each year, I think we'll probably settle back down to two or three points of exclusive brand penetration growth for fiscal 2021. And of course, that will be a mild tailwind to the merchandise margin. On the consolidated merchandise margin, there's sort of no way around the math of the composition between the margin rate in the stores and the margin rate online. So while we're thrilled to get the e-commerce business, and we're actually very pleased with the EBIT rate of the e-commerce business, from a merchandise margin perspective, it's margin eroding. Fortunately, we're seeing some new customer acquisition through our e-commerce channel. So it's long term, it might be a great thing for us to gain new customers. We're actively trying to make them omnichannel customers so they can shop both in-store and online. So the composition at the merchandise margin line, though, will continue to bring that consolidated merchandise margin number down. As we get below merchandise margin, we get the gross margin, you want to talk to what we've been seeing with the costs?

Sure. Yes.

Right. So the main driver, of course, as you bridge from merchandise margin to gross margin is the occupancy line and our ability to leverage that. And so if you look at what happened in the occupancy buying line, that was, I believe, approximately 430 basis points of deleverage on really what I would consider to be a minus 20.5% net sales decline, right? So I think that's how you would think about it going forward is what is what happens to the top line relative to last year. Again, occupancy is the main piece of that expense. There was some buying and DC costs that we were able to minimize as we furloughed folks and as we really ratcheted back payroll in Q1 and as business improves, we'll probably reinvest. We have brought back virtually all of the furloughed folks, especially at the SSC and DCs. So that's the way to think about it, Matt.

That's great color. Best of luck.

Thanks.

Our next question is from Oliver Chen with Cowen. Please proceed with your question.

This is Max on for Oliver. So first, the minus 15 comp, how did that look between western and work? And then you touched on the oil patch states a little bit, but could you maybe discern and then give us a little bit more color on Texas? And how was work versus western sales there?

So on the first part of the question, the work business has two components, boots and work apparel. The work boots business has been quite strong. And we've seen some really nice growth there. The work apparel business and by the way, that's much bigger than the work apparel business. The work apparel business splits roughly evenly between FR and non-FR. And one of the things that we've seen we saw in the quarter was the more traditional work apparel business was negative at the height of COVID, but turned positive and has remained positive, and yet FR has been negative. And that's that was what we called out on the last call saying this might be a leading indicator of softness in the oil patch. In terms of how that split is between work and western in Texas, Texas has 50-plus stores, and that split is very different in West Texas versus sort of Houston and Dallas. But it's if you took the entire state as a composition, you wouldn't see a meaningful difference in the split between work and western in Texas versus worst work and western for the balance of the chain. So I hope that answered your question.

Yes. And then just separately, so assuming the oilfield employment trends in Texas remain pressured, how does that impact your longer-term store opening plans? Would you potentially pull back any openings in Texas and accelerate in other regions? Or how are you guys thinking about that plus 10% growth?

So yes, Texas isn't a high-priority development state for us right now, anyway, even pre-oil and oil rig decline. So we're we continue to find opportunities that have been pleasantly surprising in terms of their performance in North Carolina and in Pennsylvania and in Ohio. So we're somewhat emboldened to continue to grow the concept in the southeast and up into the mid-Atlantic states. And the other place where we're looking at stores is to continue to fill in our California market. While we had thought that we had reached close to saturation, it seems that each time we open up another store in California, it exceeds our expectations. So while we may occasionally open up stores in Texas going forward, it's certainly not a high-priority state for us, at least for the foreseeable future.

Got it. Thanks a lot.

Thanks, Max.

Our next question is from Peter Keith from Piper Sandler. Please proceed with your question.

Good afternoon, everyone. It's Rob Friedner on for Peter. First, I just wanted to ask about e-commerce trends in Q2 quarter to date. It might be a little shortsighted, but seeing some moderation versus Q1, are you surprised at that moderation in context of retail stores declining from June to make argument that e-com would accelerate if retail is slowing down a little bit? So is there any view or call out on that?

So it's a good question. There's not quite as much transference between the channels as you might think. So I wouldn't necessarily expect a major lift in e-commerce business with softness in the stores business. The other piece of it, we continue to be completely focused on the bottom line of our e-commerce business. So while it's not growing quite as much in July as it was in the quarter, the growth in the bottom line of that business is still extremely, extremely strong. And we just simply have decided over the long term to never really buy our e-commerce business to the point where it's EBIT eroding. So while we continue to be quite pleased by the e-commerce business, there was probably a piece of it in the first quarter that was spiked due to the stimulus payments. When we look at the daily and weekly data, literally, at the very moment when stimulus payments came out, which our e-commerce business spike up. So as I look at the business in e-com right now, we're extremely pleased with how they're doing, both top line and very much from a bottom line standpoint.

That's great. Maybe just more broadly, over the past few months, do you have an updated view on the health of your customers and end markets? There's clearly understanding around auto market headwinds, but at the same time, it seems like there's some strength in the broader farm and ranch and rural channels. Housing is rebounding quickly. So how do you think of all that in balance with the Boot Barn customer?

Well, you're right. There's a lot of factors at play. And when we step back and look at the business and the health of the customer and we think about the number of headwinds and the magnitude of the headwinds that we're facing into, whether that's the pandemic, the cancellation of these concerts and rodeos and festivals, the pressure in the oil markets, the fact that we've actually slowed our marketing expense and pulled back our marketing to sort of preserve expense and with less of a focus on driving top line sales, we're actually somewhat encouraged by the most recent trends of the business, including June and July taken together. And believe that once the sentiment relative to COVID-19 eases up and hopefully, the case count continues to improve, particularly in California and Texas, we think there's a vibrant customer beneath that all. We've got a number of pretty strong headwinds, and our business is actually kind of hanging in there. So I think if we can just, if not removed, just alleviate the transitory pressure of specifically in Texas and California of COVID, we might get back to a more healthy comp. And we can look at the business exing out COVID or exing out states that have had a marked change that we believe is transitory. And if we ex those pieces of the business out, it's a much more optimistic view.

Our next question is from Janine Stichter from Jefferies. Please proceed with your question.

I think placement all right, thanks for taking my question. Just curious what you're hearing from maybe some of the independent retailers who occupy a large portion of the market share in the western wear market. Are you hearing any independents calling you and maybe potential acquisitions? I'm just curious how you think about and as you do resume a more normal cadence of store growth, the mix of opening your own units versus potentially going forward with some of the acquisitions that have been very successful for you in the past?

Janine, good questions. We have seen a weakening of the core mom-and-pop competitor out there. And we are we believe we're gaining share from that group because they simply haven't been able to organize themselves, at least in totality, as well as we have to operate in a safe environment given what we're facing into. So we do believe we're up against a weakened competitive set, at least close in within the western specialty industry. In terms of are there additional acquisition candidates, absolutely a great question. It's a time where while we're trying to play defense and pull back on things like inventory and expenditures. It's also a time where we might try to be opportunistic and look for tuck-in acquisitions. I would lead everybody to believe that's still going to be small players, one store, two stores, not major chains or any kind of strategic acquisitions. That's not kind of in our current headset. But it is something that we've seen some mom-and-pop raise our hand and say, this is might be a better time as any to exit. And we're certainly willing to have those conversations. So stay tuned.

And can you just remind us what the economics look like on the stores that you acquired versus stores that you opened, that you build outright?

The volume on an acquired store tends to be larger. We tend to focus on bigger operators, so the payback tends to be faster than the three years that we pencil out. And so that's compelling financially. I think as we've said before, the there is a fair amount of work with converting an existing store or operator to the Boot Barn way. And so we have to weigh the work effort to convert that store to a Boot Barn store with the, I'll say, improved economics.

Great, thank you for the color.

Thank you.

Our next question is from Jonathan Komp. Please proceed with your question.

This is Steve Nowotarski on for Jon. Thanks for taking our questions. I guess my first one would really just be could you clarify maybe some of your comments around I think you said a lot of the traffic declines and deterioration in trends is really Texas and California. If you look at kind of all your other markets, would you say July sequentially improved or even kind of stable from June? Or any more color on kind of Texas and California?

It's certainly more in line with June. As you probably well know, Texas and California is 100-plus stores and more than that proportion in terms of sales volume. So as those states go, so does the sort of consolidated chain. In terms of other markets, we've had pockets of extreme strength and we've had pockets of more negative results across the 24-or-so districts out there. And it's hard to really find an underlying trend to anchor you back to. So [Technical Difficulty] very helpful. But it's those two states sort of set the tone for the overall business, which, again, while that was somewhat disappointing for the last few weeks, firstly, from a health standpoint, both of those states are improving in terms of COVID cases and the proverbial curve. And we I do believe that we're we'll start to see and have started to see in a very short period of time some sequential improvement in both of those states.

Got it. And then maybe just one more. You talked a little bit about new customer acquisition for e-commerce. I was wondering if you could share anything more on that. Is that do you have a sense if that's customers that were coming into your stores that are now going online? Or is it totally new customers, customers from some competitors? Just anything you might have on that.

Sure. I would say a healthy portion of it is brand-new customers. We have seen some customers that were stores customers convert over to e-commerce or some variant of omnichannel. So they're placing their order online and willing to drive to the store and pick it up or go to the curb and pick it up. But we're encouraged by the fact that this was a time where we could use our e-commerce channel, our digital channel to go out and introduce new customers to the brand and some again, some healthy portion of that customer count are net new entrants or net new customers to Boot Barn. And what we're working on now is how do we turn those customers into repeat customers, how do we get them to shop across channels, how do we leverage the strength of our stores plus our digital channel to really maximize their experience and our business.

Thank you.

Thank you.

Our next question is coming is from Paul Lejuez with Citi. Please proceed with your question.

Curious if you could share what the EBIT margin was in the e-com channel versus store channel this year. I think you referenced an improvement in the e-com EBIT margin. So just curious where you are on the absolute levels. And then could you also talk about the mix of business online versus stores? How does that category mix differ? And specifically, what does private brand penetration look like in-store versus online?

I'll take the easy part of your question, Paul. We haven't disclosed the EBIT rate, the absolute EBIT rate or the differential between those two businesses. Jim, you want to cover the mix of business?

Sure. Well, e-commerce as a percentage of sales has, of course, grown in the quarter. So for the quarter, it was 25% of the business. On an annualized basis, it's 17% or 18% of the business. Admittedly, for the first quarter, it's 14% of the business, typically. It was 14% last year. As we got into July, we got back to 17% or 18% e-commerce penetration. And I think we'll probably as we go forward get to 16% or 17% during normalized times. It spikes during holiday and Christmas. So we'll see what happens then. And we're certainly up for a unique holiday season, as is every retailer, given where the COVID crisis is then. The third part of your question was around exclusive brands. We always quote a consolidated penetration of exclusive brands. The exclusive brand penetration in stores is higher than our consolidated number, and e-commerce is roughly half of the consolidated number. So we've got some room to grow exclusive brand penetration online. And as we do that, we'll continue to get roughly 10 points of incremental margin on that piece of the business that converts over. So that's certainly a focus for the e-commerce team to continue to drive that business. That said, they also are servicing the long tail of consumer demand. So we don't ever expect e-commerce to have the same penetration of exclusive brands as the stores do.

Got it. And the gross margin difference between the channels, how much of that can be attributed to the lower penetration of exclusive brands versus just running a little bit more promotional online?

It's the exclusive brand piece of it is probably 1/4 of the difference. The promotional piece is probably a portion of it also, but that's not the bigger piece. The bigger piece is the freight associated with shipping the product. So that the pricing is depending on the product, depending on the category and depending on the state, to be honest, the pricing is getting more in line with the stores, but it's more the freight component that burdens the merchandise margin of our e-commerce business.

Great, thank you.

Thank you.

Our next question is from Tom Nikic with Wells Fargo. Please proceed with your question.

Greg, I want to ask about so the expense management in the quarter. I think clearly, you managed expenses very, very tightly and you did a really good job there. How should we think about expenses going forward? I mean should we think about SG&A being down year-over-year in Q2, the balance of the year? Just any color around SG&A would be helpful.

Yes. So Tom, we're not going to give specific guidance, but I can give you some directional ways to think about SG&A. The biggest save we saw in Q1 was in our stores, labor and bonus and kind of the benefits program. We were running basically about seven on average, we are open about seven hours a day in most of our stores. So we ran base minimum coverage, which is roughly stores roughly have about 140 hours per week to operate the store. And we did that because the traffic dictated how much business was being done. That allows us to really be efficient in terms of payroll management and deliver a high sales per labor hour statistics. So as we've opened the stores up a bit more, we'll probably be less efficient in terms of store labor, but I would expect us still to be watching that very carefully. Jim mentioned also that we had reduced our marketing spend, focused on emails and, to a lesser degree, pay-per-click advertising. And I would expect that to continue. As the business returns a bit, we're going to invest more in marketing. But as a rate of sale, I think that we'll be able to manage that pretty tightly. So that should that discipline should be ongoing. And the e-commerce team has been really diligent in terms of pay-per-click advertising and return on ad spend. The next piece is probably store-related costs. So that's things like store travel and repair and maintenance and things that go along with the top line. And again, I would expect us to manage that pretty closely. I think about other parts of the P&L, we did have furloughs in the corporate office or what we call the store support center. We had payroll reductions for a period of time. Those have ended, and we brought most of the folks back, so we won't have that same run rate savings. And we have invested in premium pay for our associates in the store. We did pay for the employee portion of health insurance. And both of those programs extend through August. So we will have increased spending for most of the quarter. But that's how we're managing the business is very tightly. We were, again, very, very conservative in our approach to managing the business in the first quarter. I think we'll continue that, albeit as business returned in June, we felt much better about starting to make investments like operating stores longer and operating more typically. So I think that's about as much color as I can give you as we proceed through the year.

That's helpful. And just a quick follow-up. You sound pretty optimistic about merchandise margins and your ability to manage keep your margins intact with everything that's going on. We've had a lot of companies talk about how they expect a very promotional environment in the second half of the calendar year over the next six months or so. Do you think that maybe because you're sort of the one big dominant player in the industry, you're a little bit more insulated from maybe competitor discounts and promotions maybe relative to some other apparel footwear companies out there?

So it's a very good question. We do expect other people to be more promotional, not even necessarily in our industry, although I'm sure that will be a piece of it. Just in general, retailers trying to clear goods, particularly those that didn't have the luxury of being open during the last few months or at least 100% opened. That said, you're right to call out that we are the brand in the industry. We're the leading brand in the industry, and we really almost never turn up the promotional lever because it just doesn't seem to pay back either in that year and certainly not in the following year when we have to go off again, sort of an artificial lift in sales that may have been margin eroding. So we'll view the competitive marketplace as we go forward. We'll try to understand what other retailers are doing like e-commerce players are doing that have less of an earnings obligation than some more traditional retailers and what they're doing. But what we typically focus on is sort of a long-term brand position of Boot Barn. We are in stock at a reasonable everyday price. And I don't expect us to have a knee-jerk reaction in the next several months from a promotional standpoint. And fortunately, we have really no reason to clear any inventory because we've gotten ourselves into such a great spot from an inventory standpoint. So I'd expect more of the same focusing on the brand, focusing on customer loyalty once we get back to playing a little bit of offense, continuing to grow our customer base in the stores. Continuing to build our brand online, integrating those two channels better and better and kind of looking forward from a service and an assortment standpoint and not from a race to the bottom from a discounting and promotional standpoint.

Thank you.

Thank you.

Our next question is from Dylan Carden with William Blair. Please proceed with your question.

Good morning. Just curious, now you're through the quarter, if you have any better read on sort of the benefit of the stimulus payments, albeit sort of may most likely anecdotally, if you saw any sort of interesting conversion of traffic patterns, particularly toward the end of the quarter as those rolled over.

The anecdotally, certainly was a spike in e-commerce in the middle of the quarter that has moderated a bit toward the end of the quarter and into July. So yes, I mean we definitely saw that business has been so strong for the last 13 or 17 weeks or 18 weeks, but it was even outsized for that one period of time when the checks were sort of being received. I mean there's no question about the impact on the e-commerce business because it correlated to almost to the day. So at least anecdotally, we certainly believe that helps the business in the middle of the quarter.

Great. And then the comments on sort of the infill opportunity in California. I know we're in a different environment here as per sort of slowing down the openings. But do you kind of suspect that you might have similar types of opportunities in some of your older markets as per sort of pretty more stores you initially thought that the market could sustain?

It's a very intriguing question, particularly given the current environment. And the answer, which might challenge conventional wisdom, is yes. We're actually seeing our ability to increase the density of stores. We've opened up stores in new markets in the height of a pandemic, and they've gotten out of gate extremely quickly. So we feel as emboldened, if not more emboldened, to increase our retail store footprint given what we're seeing. So and as we open up more stores in markets where that have already matured, we're seeing an inconsequential amount of cannibalization and new stores opening with very good numbers. So we're certain this is certainly not the call or the time to play heavy offense and raise our store count estimate, etc, but we're certainly not pulling it back either.

Thank you.

Thank you.

Our next question is from Sam Poser with Susquehanna. Please proceed with your question.

Good morning. A couple of things. On the I just want to follow up on the product mix by channel and the margins there. Can you give us any more color on this? How about the sales by channel as a percent of total, on how the exclusive brands were versus the branded product and how that may have changed within both channels in the quarter year-over-year?

So both channels increased in the quarter. I'm trying to give you a more helpful number. The e-commerce business was about double just into double-digit territory from a penetration standpoint. The storage business was higher than what we reported from a consolidated standpoint. And if you took the composition of the business as a 75-25 in terms of stores and e-com, you could pretty much get to the difference in the penetrations. Actually, I don't have the numbers right in front of me, either. I just tell you right there.

And is that business more promotional online than it is in the stores? Or is it fairly equal? And then I have one other thing.

It's not more promotional at bootbarn.com. It had been much more promotional at sheplers.com. But one of the things we're quite proud of is we've rolled back those promotions, and Sheplers now is much more a western heritage branding site focused on building customer loyalty and not the latest sale. There are store markets that give a slightly higher price than some of our online businesses in certain categories, but it's sort of a small difference in certain categories in certain states. The biggest difference between the two channels by a lot is the impact of freight.

Got you. And then secondly, on your denim business, how are both in-store and online? How did that hold up within the quarter and then also branded versus house brands as well or exclusive brands as well?

So the denim business, it's, of course, hard. When you look at the whole quarter, given that the beginning part of the quarter was so pressured, sort of every business with the exception of work boots was under a tremendous amount of downward pressure. As we got into June and you look at the denim business, the men's denim business started to come back to us. It was actually men's denim in June was actually positive. And we've got as you know, because we look at the inventory and the stores together in Orlando, we've got some new kind of increased inventory and styling from Cody James perspective in men's denim. And we're pretty pleased with that performance certainly in the stores and, of course, a slower start online because as we try to build by brands those brands online, it takes a little bit longer. So our denim business has been decent. It's been better in men's than in ladies. We're happy about the Cody James denim business. We're happy about the Moonshine Spirit business on the men's side. And on the ladies' side, I think Cheyenne and Idyllwind are doing well as well, maybe just not quite as well on the at the on the men's side.

And then I'd be remiss not to ask an inventory question. Are you like are you shutting off some branded product now? Or is the replenishment of that back on?

So we're not shutting off anything. I say this in quotation marks, "We're back to business as usual." We're selling product, replenishing it, sending orders back to vendors, and our vendor partners have just been fantastic in supporting us through this. First, in deferring purchase orders or deferring receipts and canceling some and now as business started to get sequentially better, the product was available and we started writing orders and we're trying to, frankly, return the favor and give them as best view as we possibly can into the future of our business, so they can plan their business. And I think the motto of the current time is we're sort of all in this together. So they've really helped us out across the board in terms of getting through March and April. And we're trying to partner with them and say, look, here's how we see the business going forward as best as we possibly can, given I think everybody's crystal ball is extremely blurry. So I think all of our vendors are quite pleased with where we're at right now. They're still getting some really healthy orders from us. And within our industry, we'll still be the largest, we'll still be growing with them, they'll still be quite pleased. And as you had pointed out in past calls, we you were concerned that our inventory had gotten too high and was outpacing our growth in sales. And they helped us get us right back in line. I mean, I think you would acknowledge that we're now sales to stock is couldn't be better. So the vendor is a part of that.

Great. Thank you.

Thank you.

Our next question is from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Hey, good morning. I wanted to come back to the store operations and in terms of it sounds like you've had a lot of stores operating on kind of four to five hours fewer than typical. As we move forward here in the second half of 2020 and haven't seen trends bounce back fully, how do we think about how you're going to manage the store operating hours as we get into fall and then probably more importantly, as we get toward the holiday season when hour sometimes expand? Are you going to adapt really to the environment that you're seeing on sales? Is it something where that typical jump that you see in store payroll doesn't happen in nearly the same level simply because you're not operating top line at the same level? But how are you thinking about managing that aspect of operations?

Jeremy, it's Greg. It's a great question. We are managing this on kind of a store-by-store basis. And as volume dictates, right, as the business returns to more normalized levels, we've been opening up for more hours. And with the slide backwards in a few states in July, we've had to go back to kind of those base hours that we were operating within, say, May. So it's a pretty dynamic kind of store-by-store decision. I think as we get into holiday, perhaps, we'll expand that a bit. But in the near term, we're just managing it very closely to make sure that we're getting the right productivity out of our teams. So we haven't gotten to the decision of every store is going to be open for 14 hours in December. We'll probably get to a point where we have to make that call, but I do think that if the business dictates, we'll be open for those hours. And if it doesn't dictate, then we'll probably continue to operate on more modified hours, perhaps opening more than the seven or eight hours that we're open today, but probably not, again, 14 or 16 hours that you might be opening open during really busy times during holiday.

But at this point in time, is it fair to assume, unless something truly dynamic changes in the environment that you would maybe even expect your SG&A to be down as we get into that holiday season simply because the hours are going to be fewer than you would typically have, again, outside of something kind of magically happening in most of the country from a COVID perspective?

That's I think you could think about it that way. Again, we're not giving any specific guidance, but based on what I've described, I think you could come to that conclusion.

Okay. And then moving on to unit growth. You had a kind of a quick comment on it I think, Jim. But in terms of the performance that you've seen, you opened five locations, that new unit productivity, can you give us a sense of what you're seeing there? And then a second part to the question, as we look forward into calendar 2021 and maybe getting back to a little bit more aggressive unit growth, is there kind of a target for where sales need to be to get back to your more typical 10% unit growth? Or is it a level of profitability that you're looking for?

Okay. On the second piece, getting back to 10% growth or perhaps even more than that, frankly, it's all external, right? It's both. Everybody, you guys have heard it from one million companies is facing into challenges and adversity that none of us have ever really seen before. So if we can get to the point where we don't think we think that pandemic is easing considerably, we don't think that extending ourselves from a capital standpoint on additional stores adds unnecessary risk, then we'll start to increase our unit growth. The stores, in general, our new stores pay back in better than three years. It's a great use of our capital. We've seen nice take-up in new stores and new markets. The to give you a real read on the latest openings is another one of those statistics that's extremely hard to handicap because we have some stores that are just really exceeding our expectations and some that are falling a bit short and you don't know, particularly on the downside, if those that are falling short are a bad location or are just being impacted by COVID. I can tell you that when we look at the composition of the latest five or the latest 25 stores that have opened, we continue to feel great about our new store development program, the ability to continue to get three years or faster payback and the ability to essentially double the store count going forward. It's in terms of when we get back to more normalized or accelerated growth, it's almost entirely based on what's happening in the country from a pandemic standpoint.

Thank you.

Thank you.

Our next question is from Mitch Kummetz. Please proceed with your question.

Good morning. I guess I've got a few. I was hoping you could give us a little bit more specifics on Texas. I know in years past, you kind of broke it out when the oil patch was tough, and it is your biggest market, and it's kind of got the double whamming of COVID double whammy, I should say, of COVID and the oil patch right now. So if there's any way you can kind of give us how that business is performing, particularly kind of Q2 to date since that's when we've had the resurgence of COVID in Texas plus the oil patch. So.

Sure. So the quick answer is West Texas is under a lot more pressure than the rest of Texas. And if we were to normalize the business in Houston, Dallas, San Antonio, Austin and sort of look at the business prior to the resurgence, we'd say Texas was doing pretty well. As we look at the business now, West Texas is still under a tremendous amount of downward pressure. And the big cities are faced with the, unfortunately, too all too familiar stay at home, wear a mask, don't go out in the crowd, etc, and that's just been hurting store traffic in some of our biggest markets within the state of Texas. We do think, of course, that's transitory. I don't know if that's two more weeks or two more months or hopefully not two more years, but that will abate. And it seems to what we've seen is the market seem to have a knee-jerk reaction and then sort of come back slowly. And what we have seen again, it's only been 2.5 weeks since we saw the trough in mid-July of the pullback in Texas, but we have seen those businesses start to come back slowly. And again, West Texas is still very difficult. But even with very difficult business in West Texas, just as a reminder, and I know you know this, Mitch, those stores will still be extremely profitable for us, just negative comps and a drag on comp. Hope that helps.

Go it. Okay. And then when you look at your digital business, can you maybe speak a little bit to adoption? I'm wondering if you're seeing adoption pretty consistent across categories. I mean I just sort of generally think of the work boot business in particular is kind of a sit-and-fit business. And I'm wondering, it's your work boots business sounds like it's really good. So I'm wondering if you're seeing sort of outpaced adoption on the work boots. And if so, what does that mean for the business longer term, if anything?

Well, you're right to call out that work boots has been a very strong business online. I think that's partly just given the environment, people have gone online. And those guys that are working out there, the men and women that need work product are defaulting to come to us often enough that we're getting some nice growth there. So we are we do think that is a good place to build the business. On the Sheplers side, we have a very healthy business on the sheplers.com site in denim. So that's a bigger portion of that site than either bootbarn.com or in Boot Barn stores. So our goal is to try to introduce customers that are either squarely in the work industry or squarely in the western industry or one concentric circle outside of those businesses and if they're online shopping were using pay-per-click advertising, social media advertising to try to convert them or at least get them to browse the site. And we've seen a nice pickup in traffic in both of the sites and a very nice increase in conversion because I think people are motivated to purchase online and more hesitant to go to a store.

Got it. And then, Greg, last question. On the SG&A, I just want to probe a little bit. Still so your SG&A in dollar terms was down $8 million roughly year-over-year. I was hoping you could say how much of that was a decline in store payroll. And then when you think about store payroll in Q2, should it be pretty even year-over-year just based on kind of all your stores being opened? Or will it still be down based on kind of reduced store hours? Or so a little bit more color there would be helpful.

Right. So I'm not going to tell you how much the store payroll was of the $8 million reduction, but it was the first one I listed, and I tend to talk about things in terms of order of magnitude. So at least directionally, I'll let you know, it's the it was the biggest save year-over-year. And then in terms of how to look at Q2, based on the conversation about opening a little bit longer and being a little bit less productive. You can assume that the rate, if you will, is going to go up a bit compared to Q1. But I can't tell you that it's the dollars are going to be less because I don't know what the top line is going to look like. So I'm sorry, I can't help you with that.

Great, thank you.

Thank you.

We have reached the end of our question-and-answer session. I would like to pass the floor back to Jim Conroy for closing remarks.

Very good. Thanks, everyone, for joining the call. Look forward to talking to you at the end of our second quarter. Take care.

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.