Good day, everyone, and welcome to the Boot Barn Holdings Second Quarter Fiscal Year 2021 Earnings Call. As a reminder, this call is being recorded. 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 second quarter fiscal 2021 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Operating Officer and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Boot Barn's Web site at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days on the Investor Relations section of the company's Web site. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. 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 second 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, I will review our second quarter results, update you on our current deployments 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. Before we begin, I would like to acknowledge the entire Boot Barn organization for their continued hard work and execution as we navigate through the current macro environment. The team has adapted quickly to the ever-changing nature of the pandemic and has done a tremendous job serving our customers, while focusing intensely on maintaining a safe shopping environment. I continue to be humbled by the culture of the company and I'm grateful to be part of this wonderful organization. We are very pleased with our second quarter results which exceeded our expectations. Beginning with our top line, net sales were down 1.4% from a year ago with same-store sales decreasing 5.1%. Given the environment and the many pressures on the business, our ability to nearly maintain our sales volume year-over-year was quite an accomplishment. By channel, same-store sales in our retail stores declined 9.1% and e-commerce same-store sales increased 17.6%. Following a slow start to the quarter due to an increase in COVID cases in several of our key states, same-store sales growth improved sequentially each month of the quarter and has continued to increase during October. Consolidated same-store sales declined 9.8% in July, 8.9% in August, before turning positive in September increasing 1.3%. The acceleration in consolidated same-store sales was driven by sequential improvement in our retail stores. As we mentioned on our last quarter's call, we have seen a correlation between consumer sentiment around COVID-19 and retail store sales.…

Thank you, Jim. Good afternoon, everyone. In the second quarter, net sales decreased 1.4% to $184.5 million. The decrease in net sales was driven by a 5.1% decline in same-store sales with same-store sales in our retail stores declining 9.1% and e-commerce same-store sales increasing 17.6%. The decrease in retail store sales was primarily the result of decreased traffic in our stores that resulted from customers staying at home in response to the COVID-19 crisis. Gross profit decreased 6.5% to $55.5 million or 30.1% of sales compared to gross profit of $59.3 million or 31.7% of sales in the prior year period, and 150 basis points decrease in gross profit rate resulting from a 110 basis point increase in buying and occupancy costs and a 50 basis point decline in merchandise margin rate. The deleverage in buying and occupancy costs was primarily a result of lower sales due to the COVID-19 crisis. Merchandise margin declined 50 basis points, of which 30 basis points is a result of higher e-commerce penetration and the balance a result of higher freight, partially offset by better product margins. Operating expense for the quarter was $45.4 million or 24.6% of sales compared to $46.4 million or 24.8% of sales in the prior year period. Operating expense decreased primarily as a result of lower marketing and pay-per-click expenses. Income from operations was $10 million or 5.4% of sales in the quarter compared to $12.9 million or 6.9% of sales in the prior year period. Income tax expense was $2 million in the quarter compared to $1.9 million in the prior year period, resulting in an effective income tax rate of 25.6% from the second quarter. Net income was $5.8 million or $0.20 per diluted share compared to net income of $7.7 million or $0.26 per diluted…

Thank you, Greg. Although the current environment remains challenging, we are pleased with our second quarter results and are optimistic about maintaining our positive momentum through the holiday season and back half of the year. We continue to believe in the strength of the Boot Barn model and look forward to the opportunities that lie ahead. Once again, I would like to thank the organization for their hard work and commitment, taking care of our customers and executing on our initiatives through a difficult backdrop. Now, I would like to open the call up to take your questions. Stacy?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Matthew Boss with JPMorgan. Please go ahead.

Great. Thanks and congrats on the business momentum.

Thank you.

Thanks.

So maybe first on your positive 2% comp in October, what performance are you seeing in maybe some of your core markets such as California relative to Texas oil and gas markets? And Jim, given the top line stabilization, is there any impediment to returning to 10% new unit growth as early as next year?

Okay, so good question. From a regional perspective, the way we think of the field organization is we split into three different regions. The West region, which includes California and a few other states, has performed the best. The South region, which includes Texas, has been under the most pressure, largely due to some of the oil markets in West Texas and some softness in overall Texas. And then the North region includes essentially the rest of the country and that's been somewhere in between those two. But I think as we see the business progressing month after month after month, the story that's emerging that's pretty encouraging is we – three or four months ago, we were selling work boots and some work apparel. And then sort of one by one, each department started to sequentially improve and then turn positive, et cetera. So we've seen a nice steady improvement in men's cowboy boots and ladies cowboy boots, a nice steady improvement in men's work apparel, a nice steady improvement in ladies apparel. And many of those departments are now positive, not all of them, but many of them have turned positive, which is great to see a broader base growth than just being single threaded through sort of the work business. The second part of your question was around new store development. And while this might seem like a paradox in the height of a pandemic when stores are curtailing hours and people are shifting to online, the truth here at Boot Barn is we are probably even more involved than we've ever felt about opening up new stores. There's a couple of reasons for that. One, we have opened brand new stores in new markets that didn't really even know the Boot Barn brand right in the middle of the pandemic, and they are exceeding our expectations. Will pay back at least in totality – the group of stores will pay back faster than the three-year benchmark that we hold for ourselves. And this is, again, opening up in kind of worst of environments and these stores are doing great. The second reason is as we continue to open stores in existing markets, we're realizing that our store density assumptions actually may have been too conservative, and we probably can open even more stores in existing markets than we had originally thought. So you put all that together, I think returning to 10% once we get back to somewhat of a normal environment, and we’re not sure when that will happen, I think we'll absolutely be able to return to 10%. I think we’ll absolutely be able to at least double our store count. And we're continuing to look for more and more opportunities to grow the Boot Barn brand across the country.

Great. And then maybe just a follow up for Greg. On gross margin, what's the best way to think about merchandise margin in the third quarter maybe relative to the 50 basis point contraction in the second quarter? And just maybe as a reminder for the back half of the year if there's any puts in takes, but what is the comp that you think you need to leverage buying and occupancy costs in the back half of the year within the gross margin?

Yes, we haven't given guidance at all really on those kinds of things this year. Having said that, I think the leverage points we've given in the past probably hold true today. There's nothing abnormal about this year other than pressure from the top line, of course, that is going on. So I think if you revert back to what we said in the past, that's probably a pretty good guide. As you think about the merchandise margin in Q3, of the 50 basis points decline in merchandise margin, 30 basis points of that was related to growing e-commerce penetration year-over-year. And the e-comm penetration I think at the end of October was 60%, which is probably more in line with what we would see in October last year, for example. So I don't know that we'll have the same – I don't know the composition of sales in Q3. But to the extent that e-comm penetration grows by 1 percentage point, that cost is about 15 bps of pressure on the merchandise margin line. So in Q2, we had 2 points of increased penetration year-over-year and that was 30 basis points of headwind for us. The other piece of this was we had expansion in what I’ll call product margin. The sale of the product that's in our store, but we have some headwinds related to freight. And you may have seen that from some other retailers. So there's a little bit of freight pressure out there, backups in the West Coast ports and so we are having to do some things differently to get product in. I don't expect that to be a significant headwind in Q3, but that affected us a little bit in Q2. But it really comes down to what the composition of our sales will be in Q3 in terms of how you think about merchandise margin.

That’s great color. Congrats again.

Thanks very much.

Thank you.

Our next question comes from Max Rakhlenko with Cowen and Company. Please go ahead.

Hi, guys. Thanks a lot. Congrats on a nice quarter. So on the e-comm comps, can you maybe share how much of that came from new shoppers? And then can you talk about how those baskets look similar or different from your typical shoppers? And then we have one more?

Sure. Well, there's two different stories online, right, the BootBarn.com business, very strong top line, very strong bottom line performance and that is a combination on the top line of healthy traffic and healthy improvement in conversion. On the Sheplers side, we've completely rebranded that site. We've taken away the sales and promotional aspect of it. And we're really pleased that traffic has continued to improve. But given the fact that the price points are a little higher and it's not nearly as promotional and it’s really trying to underscore the legacy of this 100-year-old Western brand called Sheplers, the conversion has come down. And that's not entirely unexpected. But given the fact that we've changed the promotional posture and put all of that together, our e-commerce profitability is up over 100% versus last year. So, we essentially view that as a comp growth of 100% in e-comm, despite the fact that it's a combination of sales and margin. In terms of your specific question of new customers versus existing customers, about – if you just think about Boot Barn, about a third of the increased traffic, maybe a little bit more than that is new customers. And the others are either existing customers shopping more frequently or stores customers shifting over. You have one other question before you had your additional question that you were going to ask, which was around how does the basket differ? There is not huge differences. Boots are penetrated a little bit higher on BootBarn.com. Denim is penetrated a little bit higher on Sheplers.com. The average basket online is a little bit higher, about $30 higher than the basket in the store, so roughly $130 or $135 versus $105 in the store, something like that. But other than that, the composition of the business as you look at all the different channels and the different brands is sort of in line with each other, and there's some nuances that the merchants would be – by and large, we're selling new boots and denim, hats and work apparel.

Understood. And with some of the various supply chain risks in mind for the holiday season, how are you thinking about maybe moving some of those sales shifting them from December earlier into the quarter, we’d just love to hear about that?

There's been a lot of discussion about how to shift sales earlier and I do think that is something that retailers try each and every year. We have sort of a similar promotional cadence to last year. As you know, we don't have massive sales or massive promotions planned anytime during the year, including during the holiday period. We've adjusted our marketing a little bit to be a little earlier. But in terms of price points and breaking price, et cetera, we have no intention of doing that this year. Just like last year, we have overemphasized marketing spend prior to Thanksgiving a little bit differently than last year. And I think that the last thing that we've done to try to mitigate either people shopping late or people running out of time to shop online is to develop every flavor of omni-channel capability that you can imagine to make it easy for customers to shop with us in any manner that they want. So that's our current strategy. And I know some other retailers are probably going to be out early with more promotional pricing and it’s just not a strategy that we think would work for us.

Got it. Thanks a lot. Congratulations again.

Thanks, Max.

Our next question comes from Janine Stichter with Jefferies. Please go ahead.

Hi. Thanks for taking my question. Similar questions on the e-commerce channel also. Naturally we've seen it slow a little bit month-over-month as the store performance has improved. Do you have any sense of what you would consider kind of a normalized rate of growth there, understanding that there's a divergence in performance between BootBarn.com and the other banners? Then also just wanted to ask about profitability at e-comm, I think you've noted that the profitability has been improving. Maybe give us some perspective on where the gap in profitability versus store stands and maybe how much more room you think there is in essentially bridging that gap? Thank you.

So I'll take the second part of your question, Janine, which is on the margin profile of e-comm versus stores. Our stores continue to outperform the e-comm channel. But as Jim mentioned, we doubled our earnings in the e-comm channel on a reasonable comp performance of plus 18 in the quarter. So we continue to make progress. The places where – the most significant place that e-comm is disadvantage on is the freight piece, right. And Jim talked a lot about some of the initiatives we’ve made to be able to fulfill an e-commerce order from the store and that will help that freight line or that disadvantage on the freight line. But that's the most significant piece. But freight going to our stores is rapidly inexpensive in sending a pair of boots to a customer in New York City is more expensive on a rate basis. Beyond that, there's a little bit of disadvantage in the e-commerce channel as it relates to exclusive brand penetration. As you know, in-stores, the customer can see and feel and recognize the quality of our exclusive brands and that's harder to do online. So the stores business has a heavier penetration or bigger penetration of exclusive brands which of course helps the profitability profile. Those are probably the two biggest things that make it difficult to overcome catch up to the stores’ margin rate. I can cover the first question or --

No, that’s okay. I got it. You had asked about how we would expect the business to look going forward from an e-commerce perspective? And while that falls a little bit into “guidance” which we haven't provided, we can give you a sense for I think what we're thinking which is Boot Barn continues to be a solid grower. The 42% top line growth in the quarter was quite nice. I would imagine we'll continue to have solid double digits, maybe 42 will be a high watermark, but I think our business will be probably double digits on Boot Barn. The rest of the online businesses will be probably slight drags on our comp like it was in this quarter. And it is something that we tried to overly amplify on the call, because we – if we weren't focused on rebranding Sheplers, we weren't focused on really improving the margin profile of our e-commerce business, we probably pretty easily could have had a plus 30 or 40 comp on e-comm and driven our consolidated same-store sales higher, but it would have been even eroding. So, I would just kind of remind everybody that it’s a very strategic and conscious decision we're making to focus on the bottom line performance of our e-commerce business, despite the fact that it's slowing or at least restraining top line growth. It's absolutely been an EBIT enhancing tactic that we've taken.

Okay. Thank you.

Thanks, Janine.

Next question is from Jonathan Komp with Baird. Please go ahead.

Yes, great. Thank you. Jim, I want to back up and ask about the category performance and I wanted to hear your thoughts on what's driving the non-work businesses to rebound like they have? And maybe a broader question understanding you're not guiding but with most of the categories trending well and positively. Any thoughts on – there's the chance that their comps might be back to more of a sustainably positive trajectory going forward here?

Sure. So I think it's sort of followed a natural storyline, right, from pure needs base to the next business that got turned on to positive was something like men's denim, right, somewhat and on the Western side, somewhat needs base, but not perhaps as much as work boots. And then we started to see an improving trend in men's Western boots, which is just about flat now, which is great and it's somewhat needs base, but oftentimes discretionary spend. So I can see how it's playing out as customers are now starting to just shop for more traditional clothing in apparel and boots for them or their family. I think the other thing, perhaps giving a little credit to the merchant team and the store's team, is we have pretty quickly made some adjustments, right. So to give you a few examples, the trends in the business now have tended to be more casual. So rather than buttoned down woven shirts, they're buying more t-shirts and they're buying things that they might just wear sort of more casually. For example, we believe some of our lace-up work boot sales without a safety toe have been selling because people are using them for weekend hikes and things of that nature. We've also added some pieces to the assortment, right. So we have adjusted to what we're seeing out there. We've expanded a hiking boot assortment in not all of our stores, but a good number of our stores. And we're trying to kind of manufacture some sales where we see the consumer taking us. And then the last thing, I give some credit to the stores. Embedded in the comp performance is a nice increase in our units per transaction. Part of that admittedly is selling face masks and hand sanitizer, but even if you split that out, we've really had the stores focusing on adding a pair of socks, adding boot care or booth trees to booth purchases. And our units per transaction have helped as well. So I think we – put all that together, while it's still a battle to gain positive same-store sales, particularly in the stores, we are starting to see some really nice momentum across multiple departments and that’s encouraging.

Yes, that's great. Maybe one more question looking forward to the holiday. Can you just remind us how some of the mixed changes play out for your business across channel and across categories in the store? And then the initiatives we talked about adding, so the same-day delivery and the virtual client selling, just any thoughts on potential contribution there from a sales perspective? And what does the economics look like for those new lines of business?

Sure. So on the mix, in our third quarter and our holiday quarter, if we just think of work versus Western work, those decreased slightly as a percent of the total business and Western becomes a little bit more gifted than the work business. And we're not exactly sure how that will play out, right. The work boots business is very strong. The FR work apparel is very weak. So it could almost offset, maybe not quite, but the mix might be a slight headwind to same-store sales, although I think we have some other things that are maybe pushing from a tailwind perspective. In terms of the new capabilities that were built, right now, they are a very small portion of our business. We built them out because it can be additional sales, it can be margin accretive versus a regular e-commerce sale, it's a product that's already in the store, and the customer is going to pick it up, we can save the freight fees that Greg spoke about earlier. And the other pretty significant reason that we really wanted to have every possible omni-channel capability built out that we could was in the downside scenario where COVID surges tremendously and local or state governments take significant action with curtailing store traffic or store hours, we wanted to have sort of every hedge possible against that and to help bolster the business if we did have to shut down in a market or we did have to curtail store hours or curtail the number of people in a store during the holiday period. And so we built the ability to you can buy from the local store and have it shipped directly to your house or delivered directly to your house that day by delivery service. You have the ability to order a gift for somebody across the country and have it delivered to them from the store local to them. And all those capabilities came together extremely quickly and hats off to the e-comm and the IT team for getting them up and running and working with very, very little speed bumps in the process.

Yes, that's great. Good luck gearing up for holiday. Thank you.

Thank you.

Next question comes from Paul Lejuez with Citigroup. Please go ahead.

Hi. Thanks, guys. Sorry if I missed this, but you mentioned your store comps in October. I was curious if you could talk about actually seeing traffic turn positive, or if that's being driven more by AUR, UPT overall transaction size? And then curious if you could talk a little bit more about marketing. I think you said you pulled back a little bit. You're going to start going back to normal. Were there any timing shifts as well that impacted your second quarter? Just how maybe we should be thinking about marketing expense in 3Q? Thanks.

So I'll start with the marketing spend. We did save a little bit of marketing in Q2 on a year-over-year basis and we called that out as one of the contributors. And we do expect to see a little higher marketing spin this year in Q3 than we did in Q2. It's not millions of dollars, but we do expect just to invest a little bit in the businesses as we’re trying to play offense a little bit, given the sales trajectory and improvement from August into September and then September into October shows we’re playing a bit of offense. We're open our normal hours. Jim talked about the fact that we're doing a good job of hiring our seasonals. So we're investing in the business and prepared to play a little bit of offense. So we're also investing in marketing in Q3, which is a little bit higher than last year.

In terms of your question, Paul, around October's business, we are encouraged that the business on a consolidated basis has sequentially improved a little bit. The stores business is roughly flat. Traffic, or at least in our world, average transactions per store as a proxy for traffic is down slightly. ADT is up slightly, so that has offset to become roughly a flat comp. But one of the other encouraging things, and with no intent to try to get people too overly energized, we are cycling a pretty strong October last year and we were on our call last year, we said we had plus 10 comp in the month of October. So to be able to post a plus 2 on a plus 10 in this environment we feel pretty good about that.

Got it. Thank you. And just one follow up. On the inventory, it seems very well controlled from an inventory perspective. Are you too light anywhere, maybe talk about categories that may be running a little bit lower than you would like? You did mention some port delays. Curious if there's a difference in terms of the inventory change every year in your private label versus your branded goods? Thanks.

Yes. So, Paul, we get the 14% reduction in average store inventory and we were not targeting to be minus 14. We thought we'd have a little more inventory than that. But our sales have improved in September. And so we also see a little bit of receipt disruption and you've heard about that I'm sure. There's backups in the West Coast ports that are delaying a little bit of our exclusive brand product. And some of our vendors reacted in the middle of COVID and cut back on their commitments as well. So we're a little wider than we had targeted. But I don't think we're exposed in any meaningful categories. And we have lots of substitution opportunities. So if we were light in ladies denim in a certainly brand, we’ve got plenty of other denim in the store. So the major categories are covered by substitution opportunities. So we think we're fine. As a reminder, we turn about 2x a year. And if you were to look at last year's transcript, you'd see that our average inventory per store was up about 15% from the prior year. So when you put those things all together, we feel pretty good about our inventory position at this point.

Got you. Thank you, guys. Good luck.

Thanks, Paul.

Thanks, Paul.

Next question, Peter Keith with Piper Sandler, please go ahead.

Hi. Thanks a lot. Nice to see the improvement in the business, guys. Maybe to follow up on the inventory question. So one dynamic we've heard about the industry that's somewhat unique is the drop ship to store model, right, vendor to store, would impact you guys, but what impacts sort of everyone in the industry? And with all the delays with UPS and FedEx that might cause some out of stocks for the holiday season? Is there anything you're thinking about or planning around in advance?

Yes, it is. And the UPS news and we're managing it like everybody else is managing it. We have done something to help mitigate it. So we've tried to accelerate inventory receipts earlier in the holiday season than we normally would. Now in fairness, we're also being – there's a countervailing force there where some receipts were just coming in late from overseas. So we are trying to build the inventory in the stores a couple of weeks early. So if we're a little late, we'll still be fine. We've taken a couple of vendors that would do exactly what you're describing. And rather than be at their behest, we brought some of those brands into our own distribution center and we're distributing ourselves. Perhaps still beholden to UPS, but at least we can control when we ship it. It is something we're watching. We've asked the stores to ensure a very quick put away of product that that is brought in. We've augmented the replenishment models to bring in a little bit more safety stock. So we’ve done a number of things. One of the things that does help us relative to the vast majority of retailers is, and Greg called this out, we have the luxury of being able to carry 26 weeks of supply or something like that, because we have no markdown risk. So even if we're a little bit delayed in getting some product in, we do have to get through the holiday season and replenish as we get into January.

Okay, that's good to hear. On a totally different topic, I wanted to ask about the country segment that’s certainly interesting and feels like something different than what you guys have done in the past where you're almost bolting on a potential new customer opportunity. So, Jim, could you just flush that out a little bit more for us? Do you think there will be a lot of overlap with the existing customer base or do you think their majority of sales will be new customers and anywhere to frame up like the TAM, or where you hope it might land as a percent of sales over time?

Yes, that's a great question. It is another step in the process. If you really follow the long Boot Barn for 8 or 10 years, we will Western only; then we added work; then we added Wonder West which is this sort of very contemporary fashion segment. And now we've said, all right, let's look at the customers in one big concentric circle around our core Western customer and this person wears boots and jeans but wears t-shirts, not woven shirts, wears baseball hats, and not cowboy hats. And you're right. The addressable market there is quite a bit larger than the addressable market for sort of the pure Western lifestyle customer. In terms of where we think the sales will come, I think a portion of it will be coming back to that share of wallet concept with our existing customers. If you walk into our stores now or even over the last few quarters, particularly on the ladies side, ladies apparel, we've expanded quite a bit around a core Western customer and has brought in some more casual fashion. And I think the assortment there is built quite nicely. I think more recently, the men's side has done the same. So it’s part of the share of wallet with our current customers. We're also changing how we go after new customers. And from a media mix standpoint, from the stations and channels that we market on, from some of the Adwords that we buy on pay-per-click, how do we prospect for new customers. That tends to take longer, of course. It tends to be a little bit more expensive to get that new customer, but I think we can do it. And if you were to look at our same-store sales growth for the last two years, almost every single quarter, at least prior to COVID, a really healthy contributor to our same-store sales growth was an increase in customer count on a comp store basis. And frankly, this is an extension of that strategy. And ironically, we’re somewhat fortuitous that we're bringing this more casual assortment to the stores at a time when the customer has started to move in that direction anyway. So it's – we were pretty pleased with the progress so far, but really encouraged by the outlook because I think it fits well with where the customer is. And I can't say that we planned that nine months ago when we started this, but once in a while you get lucky.

Yes, it's remarkably well timed with the step up in outdoor activities. So look forward to seeing how that progresses. Thanks so much.

Thanks, Peter.

Thanks, Peter.

Next question comes from Rick Nelson with Stephens. Please go ahead.

Thanks a lot. Curious, Jim, about the lead times to restart that 10% store growth. If you come through this fiscal third quarter December with positive comps, that October momentum is sustained, is that the point you think where you are going to commit to that 10% store growth for fiscal '22?

I think it's more related to the macro – it's actually more related to the pandemic really. We're in a very solid position right now, as Greg mentioned. We're about to go through a holiday that just bolsters our capital structure even more. But we pull back simply because we were preserving capital, and didn't think that new store openings during the pandemic, a, could be tone deaf and, b, they may not work. As it turns out, once we were able to get some of these stores open, we realized that there was a market, there was a customer ready to shop there. And even in some of these new markets, they're performing quite well. So I don't think we necessarily need a plus 10 store comp to be confident that opening up new stores is a good investment. I think we need any kind of normal in the world over the next few months to – once we get to January, February to reengage for growth on new stores. In terms of timeline, we can move pretty quickly. It's a five or six-month process from finding a location to getting a store built. So we probably have to hustle a little bit, but I think we could get 10% new stores in our upcoming fiscal year, particularly if we see the macro environment stabilized and we have a very solid new head of real estate started about nine months ago and he has already found some great locations. So, I think we can get there pretty quickly, including next year.

Thanks for the color. Also interested in drilling down a little bit into the October trend, maybe the sequential week-to-week, is that possible and [indiscernible] in terms of your customers and sales and channel stores and e-comm?

So, I’d say the encouraging thing – without going into very specific detail, the encouraging thing is over the last nine weeks, which include our fiscal September and our fiscal October, seven of them were positive. So it hasn't been sort of one great week masking a bunch of lousy weeks and they've been pretty consistent, and one was flat. Most of them were pretty solid. As we got into October, there's been very little difference across the weeks. And frankly, once the weather broke, that helped our business a little bit more in a very, very short amount of time since that happened. But the cooler weather in many parts of the country has been a nice uptick, at least in the last part of October going into November.

Okay, [indiscernible] there’s recent mix shift I guess away from work wear toward the more fashionable categories. How you plan that on a go-forward basis? Do you think those trends have legs to them?

So on a go-forward basis, we've got I think the appropriate amount of inventory on what you described as a more fashionable piece of the business, the Western side of the business. And the work business can grow very quickly without requiring big new inventory commitments. We simply just replenish faster. So we sort of have a natural ability to feed certainly the work boot business, most of the work apparel business, just by spinning the inventory slightly faster because we just replenish it. And the only business that we're going to need to – I guess two pieces of it, that we need to look further out is parts of ladies apparel, typically non-denim, and we have to make some decisions around exclusive brands with longer lead-time commitments. But even a good portion of that is basic in nature. So we'll buy with the ability to fuel a growing business. And if we fall slightly short of that growing business, we'll do what we just did over the last nine months and bleed down the inventory slowly without having to kind of feel it in the margin line.

Thanks a lot and good luck.

Thank you.

Next question comes from Mitch Kummetz with Pivotal Research. Please go ahead.

Yes, thanks for taking my questions. A follow up on Rick's question about COVID. There have been spikes in the upper Midwest of late. I know you guys don't have a lot of stores up there; Iowa, Indiana, Michigan, Wisconsin. But I'm just curious if you've seen any change in the pace of business traffic store comp in some of those markets as COVID rates have gone up again?

Yes. Mitch, it’s Greg. We haven't really seen a meaningful change in the trajectory of North regions business and that's what we’ve described. So we haven't seen that yet. We hope not to see it. But we're certainly prepared if it does.

Yes. And I’d add to that just quickly. Our core customer has an affinity to the job in a store and perhaps doesn't have quite as much concern shopping in our store, because we're -- the store is relatively large. There's not tons of customers in a small space. And we're not typically in mall. So they can kind of drive over, come in to a pretty socially distance environment and continue to shop with us. So what cost us more is when there's regulations that curtail our ability to operate in some way.

Got it. And then, Greg, obviously October – you're comp in October was pretty similar to September, a little bit of an improvement. But as Greg mentioned, you did a 10 comp in October last year, so the two-year stack on October is a plus 12. Could you remind us what September was last year or what the two-year stack on September is?

It was plus 8 or 9. Plus 8.

Okay, got it. I was just wondering if there was some big improvement sequentially on a two-year stack. It doesn't sound like it a little bit, but not hugely meaningful. And then last question, just on the improving Western trend that you're seeing, is there some macro behind that? Is that you think as – particularly in kind of some of the Western and Southern markets as COVID has died down a little bit, some of those big consumer confidence has gone up, or maybe disposable income has gone up. Is there some underlying macro issue? I wouldn't imagine it's really a fashion thing for you guys, but I wonder if there's something else that you're seeing that’s leading to this uptick in your Western business?

I think from a hypothesis standpoint, I think it's the word you use is confidence, right. Consumer confidence or people are just more comfortable shopping in this crazy environment that we have. Many of the macro factors that would drive our business, particularly concerts and rodeos, et cetera, are still essentially all canceled, right, because we haven't gotten any help there. It's still a headwind. I just think people are either desensitized or slightly more comfortable that if they take the appropriate precautions, they'll likely or hopefully be safe and therefore they're out and about and buying more than just what they absolutely need to get work.

Got it. Okay. Thanks, guys.

Next question, Jeremy Hamblin with Craig-Hallum, please go ahead.

Thanks and I’ll add my congratulations on the momentum. I have two questions I wanted to ask about. First is just in the change and getting back to your more normalized operating hours, I think in most of your markets, you're back to kind of 9 AM to 9 PM. And I think that mostly started in September. Can you just give me a sense of, a, the factors going into getting back to those more normalized hours? And, b, as we look to this December quarter here, in terms of thinking about your SG&A expenses having reduced hours, like we've seen over the last four to five months, what does this imply in terms of SG&A in the December quarter? Should we assume that it's going to be up on a year-over-year basis in absolute dollar terms or are there changes that you had made this year that are permanent in nature?

Great question. I'll take the second piece of that question. It’s Greg. I think as we look at the SG&A in Q3, we're not providing guidance on the top line, unless it's impossible to guide on SG&A. What I did say earlier in the call is we are playing a bit of offense, right. We're going to invest in more marketing. We're investing in seasonal hires. So we're doing some things that would suggest to you that we're playing offense. And then if the sales don't come, which we do believe the sales will come. But if they didn't come, we're not going to be able to leverage our expenses as opposed to Q2 where we were still playing a bit of defense with the reduced hours, et cetera. So I can't tell you how to model that other than to say that we're not trying to leverage the SG&A rate in Q3.

Got it. And then the other question is, just looking at some of the competition out there and I think you indicated that you feel better about your competitive positioning moving forward. Can you give us a sense of how kind of your market still continues to be quite fragmented? How your mom and pop competition is performing, if they've gotten a little bit more promotional? And then related to this is, are you seeing maybe some increased M&A opportunities, some tuck-in deals, and what would be the earliest, given the environment we're in today that you’d consider looking at opportunities for some tuck-in deals?

So on the first piece, I think it's safe to say that the mom and -- the traditional mom and pop retailer in our industry, which is the majority of the industry, that group is our biggest competitor has unfortunately, if I’m honest, struggled through this, because they just didn't have necessarily the capital structure or the wherewithal to continue to fight through it. So we have seen weakness. We've had some inbound calls. We’ve seen some guys go out of business or leave markets that we were in. So that does present us with an opportunity, of course, competitively. There is a – in all fairness, there is a counterbalance of that because there's other channels that have strengthened with trip consolidation going to the farm and ranch channels, selling a little bit more product. So maybe they offset in the current environment. I think going forward, we will likely benefit because I think the mom and pop group will be weakened or whittled down a bit permanently. And I think our customer will come back to get a broader assortment of the products that we sell rather than consolidate their trips elsewhere where they just can get sort of the most basic stuff. From an M&A standpoint, I think there will be some opportunities. That said, there isn't really any meaningful chains left other than one big one in Texas that is unlikely to be an acquisition candidate. So that gets us to use the word tuck-in. So the guys that have one store or maybe two stores, and we'll look at them just as we decide to enter a market as they build versus buy and is there some advantage in moving more quickly by buying one of those guys and getting their customer base, et cetera, or should we just open a store that fits our model better and frankly is a bit easier to open a brand new store. So I don't think that's going to be a massive impact on our store count or the economics or whatever. If I were modeling them, I would just model them as a new store.

Got it. All right. Good luck, guys. Thanks for taking the questions.

Thank you, Jeremy.

Next question comes from Tom Nikic with Wells Fargo. Please go ahead.

Hi, guys. Thanks for taking my questions. So I wanted to follow up from the questions earlier about e-commerce. So I know – pretty impressive improvements in profitability in the channel and I know it's been a few quarters now that you've sort of had this trading sales for profitability situation with Sheplers. And you kind of feel like – or how far along are you in sort of rebasing the Sheplers business, sort of retraining that customer to not look for promos, et cetera? Like at what point does that Web site become a grower, again, a contributor to the top line?

We made the changes between, call it, April and July. So the aesthetic changed around April and then the price changed over a series of weeks in July. So, once we wrapped those two timeframes, we'll be back – we'll have a more normalized [indiscernible] comparison. So I guess if I'm – if you just work through that, it's probably July of next year where we get that where we have a comparison that we should be able to grow from. Don’t know if that helped?

Yes, that’s helpful. And can you just kind of like remind us, like, what sort of the core differences are between both the Boot Barn customer, the Sheplers customer, the Country Outfitter customer?

Sure. The Boot Barn customer is sort of slightly younger than the Sheplers customer. It's more balanced between male and female. The Sheplers customer is a little bit older, a little bit more male. And just given the way that brand has grown up, more heavily focused on denim than Boot Barn. So Boot Barn, when they first launched the Boot Barn site with boots only, then apparel was added and just given that legacy, BootBarn.com business used more heavily boots than the Sheplers business. Country Outfitters continues to do a very nice job going after sort of more fashionable, female, younger customer. But in all candor, it’s just much smaller than the other two big brands.

Got it. That's helpful. Thanks, guys. And best of luck this holiday season.

Thank you.

Thanks, Tom.

Next question comes from Sam Poser with Susquehanna. Please go ahead.

Thank you for taking my question. And this time, I would say great job on the inventory. And I have a question. Does that sort of create a new base for the second quarter? And somebody else asked, you have enough, but I guess the question is, is this a good new base to work from than increasing your annual turn over the long term?

It’s Greg. I guess in answering one of the questions, I commented that we had targeted not quite a 14% reduction. So I would tell you, it's not the new baseline. We had expected to have more inventory than we had. We’ve been managing inventory closely and trying to control receipts and then a supply chain got started to be the news and disruptive. We started to write some orders to bring in more of the replenishment product that carries no markdown risk, which I think we've done in the quarter. So we tried to bring in more inventory and we've experienced some delays. So I would say it's not the new base – it's not last year's level, but it's not the new base issue.

I have a few more questions, but just a follow up on that. What was the target you were aiming at?

Yes, we're not going to disclose that.

Okay. On the just country new initiative, what brands if we go to your Web site should we be looking for that’s part of that?

Sure. I’ll give you one example we talked about earlier was we've added a nice selection of hiking boots to the stores and many of them are on online as well. But brands like Merrell or Keen hiking boots. And then on the apparel side, just a number of different brands that might be a little bit less Western in nature, but we're certainly focusing pretty intently on the boots side. There are also places where we have a traditional Western brand that has a broader assortment that we've just bought more deeply into their assortment.

Thank you. And then two more. Holiday e-comm versus the stores, given COVID and everything, do you foresee that there could be some – even though your stores are big and they're off mall, could you see capacity constraints leading to more gift giving via e-commerce and having the third quarter e-commerce sales tick up from growth rate from Q2 to Q3, despite the fact that you have all your stores open now?

So, we can almost guarantee that Q3 e-comm as a percent will be the highest of the quarters for us. It is every year. What you're asking I think is, is it going to be even more outsized than typical? It's very hard to say. Certainly if there's another major problem with COVID and a surge and a shutdown, it will spike right back up, e-comm will spike right back up just like it did in the first quarter. But if it's business as usual, it will be maybe a little bit more than it was last year, because e-comm business is growing pretty nicely. But when you throw any kind of store comp in there, even if it's flat, and you have new stores coming into the mix, it tempers the shift for us maybe more so than a lot of other places. In terms of store capacity, if you're asking about store capacity, or e-commerce capacity to take care of customers?

No. I was really talking about stores. Like, for instance, you're still probably having to keep social distancing requirements in the stores and so on. So when you get into your highest traffic time of year, that also could have more people move over to e-commerce more so than let's say in the second quarter when you're not seeing the traffic in the stores that you normally would see during holiday.

Yes, Sam, I think that's true. And it's true in a handful of days. It's a concerning handful, right? It’s Black Friday or it’s the Saturday before Christmas. But even when we get busier during holiday, just the way the model works is you’d see 15 customers, 20 customers in the store, you're not going to see 200 customers in the store. It's just not sort of the way our store model works. But you're right to call it out. And it's the reason we've been so intent on saying what we can deliver to your house. You can pick up in store. You can pick it up at the curb. And I fully recognize we're not the only retailer doing that, but we're really trying to give them every opportunity to shop with us in whatever manner they feel best doing.

Thank you. And lastly, the e-comm business, due to shipping – a lot of shipping rates and the mix, your margins are less than the stores. But have you considered trying to entice people with a small promotion to build the basket size of something that could ship along for free? For instance, like a facemask or some aged goods that you say, okay, we'll give you 20 off, but it increased the ticket enough and you don't pay this – it doesn't add as much weight to the box so you actually get – your shipping costs as a rate goes down. Have you thought of ways to do that to sort of try to increase the average ticket even though it is already higher than the stores, but to try to push it higher maybe through a little bit of promotion, but that would more than be offset by the great savings and you'd get some more merchandise as well.

Yes. Sam, it’s Greg. And our Head of e-commerce, a gentleman named John Hazen, has been doing e-commerce for 15 years. He's a big test and learn guy. And so he's been doing that kind of testing to see if it moves the needle at all. So you can be sure that we're looking for opportunities to do just that.

Thank you very much and have a successful holiday season.

Thanks, Sam.

I would like to turn the floor over to Jim Conroy for closing comments.

Thank you everyone for joining the call today. We look forward to speaking with you on our third quarter earnings call Take care.

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