Boot Barn Holdings Inc (BOOT) 2015 Q3 法說會逐字稿

Greetings and welcome to the Boot Barn Holdings, Inc. third-quarter fiscal-year 2015 conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I'd now like to turn the conference over to your host, Jim Watkins, Director of Financial Planning and Analysis. Please go ahead.

Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn Holdings, Inc. third-quarter 2015 earnings results. On today's call are Jim Conroy, President and CEO; Greg Hackman, Chief Financial Officer; and Paul Iacono, Vice President of Business Development, who served as our Chief Financial Officer during our fiscal third quarter.

A copy of today's press release is available on the Investor Relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the Company's website.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Boot Barn's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third-quarter 2015 earnings release, which was furnished to the SEC today on Form 8-K, 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.

With that, I will turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Jim, and good afternoon. I'd like to thank you all for joining us today. During my discussion, I'll provide you with an overview of our third-quarter results and will share with you the continued progress we are making on achieving our growth strategies. Then Greg will review our financial performance in more detail and provide an updated outlook for fiscal year 2015, which ends on March 28, 2015. Following that, we will open the call up for your questions.

Before continuing, I would like to welcome Greg to the Boot Barn team. Greg took over the CFO reins from Paul Iacono last Monday, January 26, and will be working alongside Paul through a transition period before Paul is fully focused on his new appointment as Vice President of Business Development.

With this shift, we have further strengthened our leadership team. Greg is a strategic finance leader with significant experience in SEC reporting, and he will further bolster the finance function. Paul will move into a new business development role which will leverage his considerable knowledge of our organization and further accelerate our growth initiatives.

Now let's turn to a review of our third-quarter results. We were able to capitalize on the positive momentum of the first half of the year through strong execution across the organization, which led to solid financial results for the third quarter. Net sales increased more than 13% over the same period last year to $130.5 million. This increase was driven by both a strong 7.2% increase in same-store sales and the contributions of new stores.

Our growth in same-store sales was broad-based across most of the major departments in the store and most of our store districts across the country. In line with our objectives, we achieved a healthy expansion in our merchandise margin, partially due to increased penetration in private brands.

We believe our continued success this quarter and over our 30-year history is rooted in our leading position as a lifestyle retail brand that serves the Western country and work customer groups. We do not focus on fleeting fashion trends, but rather servicing an American lifestyle that permeates nearly every state in the country with a category killer assortment of boots, hats, workwear, and blue jeans. Accordingly, 70% of our assortment is on automated replenishment, which further underscores the low fashion quotient of our products.

On our second-quarter conference call, we provided an overview of the Boot Barn business and outlined four growth strategies, which are relatively straightforward and have remained consistent for the past several years. These initiatives are: number one, build more stores by both filling in existing markets and building out developing markets; number two, grow same-store sales through a combination of merchandising, marketing, and customer service initiatives; number three, increase our private brand penetration to expand our merchandise margin; and number four, continue to augment our omnichannel capabilities.

I'd like to provide some detail on the progress we are making on each of these initiatives. With respect to new store growth, we opened eight new stores in the quarter, bringing the year-to-date total to 14 new stores. This brought our store count to 166 stores in 26 states at the end of the quarter. We are particularly pleased with the early results of the new stores that are opening in new markets, which has further bolstered our confidence in continuing to expand our portfolio of stores nationwide.

As we look forward to the beginning of our next fiscal year, the pipeline of quality real estate opportunities is strong, which is allowing us to accelerate our new store openings for the first quarter of fiscal 2016. As we continue to deliver the Boot Barn experience to more consumers across the country, we remain disciplined in our site selection and buildout process, which is designed to meet our long-term targets of 10% annual unit growth and payback in less than three years on average.

Our second growth strategy is increasing same-store sales. This past quarter marks our 21st consecutive quarter of positive same-store sales growth, which is being fueled by strong full-price selling.

Given the recent news surrounding declining oil prices and the impact to retailers with customers working in oil- and gas-related industries, I'd like to put this in perspective as it relates to the Boot Barn business. Two words that typify the Boot Barn business model are balanced and diversified. We primarily sell Western wear, but we also sell workwear. Footwear is half of our business, but we also sell apparel and accessories. And we are a store for the whole family, selling to men, women, and kids. We are also diversified regionally, with stores in 26 states.

As it relates specifically to oil and gas, we estimate that 15 of our stores, or less than 10% of our store base, are reliant on the oil and gas industry. Of those 15 stores, six are in markets focused on refining that we don't believe will be negatively affected by falling oil prices.

Overall, we believe that lower crude oil prices -- which lead to lower gasoline prices -- will have a neutral and potentially positive impact on our business, particularly considering that many of our customers drive pickup trucks. While we don't plan to disclose mid-quarter trends on a regular basis, I do want to share with you that to date we have not seen any deceleration in comps for stores in oil and gas markets.

Our third strategy is to continue to grow our private brand penetration. During the quarter we successfully launched a new brand called MoonShine Spirit by Brad Paisley, which rolled out to all stores in December and is exclusive to Boot Barn. We could not have a better partner than Brad, who has helped us design a collection of boots, apparel, and accessories that reflect his lifestyle and personality, which has already demonstrated strong consumer appeal. His marketing support has been tremendous, and the new brand is resonating well with our customers.

As we have discussed, private brands provide us with competitive differentiation and an ability to grow our merchandise margin. Each of our six private brands has been developed to fill a hole that we identified in our assortment. Our Cody James and Cheyenne brands are the number four and five brands in the Company for us in dollar volume. While these private brands are important to our ongoing growth, we plan to carefully balance the penetration of private brands, as we recognize that our customers still seek the broad array of merchandise we offer from our terrific vendor partners.

Our fourth and final growth strategy is to continue to grow our omnichannel capabilities to enhance customer connectivity and drive sales across all channels. We have enhanced our offerings in this area, including the addition of PayPal as a method of payment; an upgraded ability to customize our online offers regionally; an improved mobile website; and various improvements to our CRM loyalty program.

Now I would like to turn the call over to Greg Hackman to review our financial results for the third quarter.

Thank you, Jim. Good afternoon, everyone. I am very pleased to be part of the Boot Barn team and want to express my appreciation to Jim for giving me that opportunity and to Paul for his assistance in helping me get up to speed quickly.

I will begin by reviewing the details of our third-quarter results and then provide our updated outlook for the full-year fiscal 2015. In my discussion I will be commenting on both actual and adjusted results, excluding any one-time costs, to facilitate comparability between periods and going forward. Please reference today's press release for all definitions and for a reconciliation of GAAP numbers to these non-GAAP adjusted numbers.

For the third quarter net sales increased 13.1% to $130.5 million, driven by a 7.2% same-store sales increase and from the contributions of new stores. Gross profit increased 16.3% to $46.2 million. This compares to $39.7 million in the third quarter of fiscal 2014, which included a $288,000 adjustment related to the amortization of inventory fair value and a $1 million adjustment related to re-merchandising the Baskins stores. Excluding those prior-year adjustments, gross profit increased 12.7%.

Merchandise margin improved in the quarter, driven by improved markups across the store; increased penetration of private brands; and the improvements we made to the assortment and pricing at the former Baskins stores. This increase was offset by the higher occupancy rate of new stores that have not yet matured, the associated depreciation of our increased number of new stores, as well as an increase in procurement and distribution costs. We expect these increased costs will continue through the fourth quarter and additionally expect to incur some incremental expense in Q4 related to the new stores we will begin opening in April, which falls in our first quarter of fiscal 2016.

Operating expense was $28.3 million. This compares to $26.6 million in the prior year, which included $1.2 million of Baskins integration costs and a $500,000 loss on asset disposals. The increase was primarily attributable to store operating costs associated with new stores and increased sales; an increase in incentive compensation expense associated with our improved sales and earnings; additionally, marketing expense -- including the Brad Paisley product launch -- and non-cash stock compensation contributed to the increase. We expect cost pressure to continue in the fourth quarter, including costs associated with opening new stores in Q4 and Q1 of next year; increased incentive compensation related to higher sales; non-cash stock compensation expense; and the increased costs associated with me joining the Company, including my relocation.

Income from operations was $17.9 million compared to $13.1 million in the prior-year period, which included $2.5 million of expense related to the Baskins acquisition and a $500,000 loss on asset disposals. Excluding these items, adjusted income from operations was $17.9 million compared to $16 million in the prior period. On a year-to-date basis, we have improved adjusted income from operations as a percentage of sales 80 basis points, from 8.8% in the prior year to 9.6% in the current year.

Net income for the third quarter was $8.8 million or $0.36 per diluted share, which includes $562,000 of prepayment penalties and $1.7 million of accelerated loan fee amortization associated with the partial repayment of our term loan. This compares to $6.3 million or $0.33 per diluted share last year.

In the press release we have presented a supplemental reconciliation to pro forma adjusted net income, which reflects the issuance of 5.75 million shares in connection with our Initial Public Offering; the subsequent repayment of $81.9 million of our term loan; and the 25 basis point reduction in our interest rate, all of which occurred during the third quarter. The pro forma assumes the IPO, debt paydown, and reduced interest rates occurred at the beginning of fiscal 2014. On that basis, our pro forma adjusted net income for the third quarter grew by 20% to $10.7 million or $0.40 per diluted share compared to $8.9 million or $0.35 per diluted share.

Turning to the balance sheet, as of December 27, 2014, we have $3.6 million of cash and cash equivalents compared to $2.4 million as of December 28, 2013. We ended the quarter with $32 million of outstanding borrowings under our revolving credit facility and $47.4 million outstanding on our term loan facility.

Inventory rose 18.8% to $121.9 million compared to a year ago. This increase was primarily driven by a 7.1% increase in store count; a 6.5% increase in inventory per store, which supports our current sales trend; and an increase in our distribution center inventory related to our private brand growth initiative.

Now I'd like to turn to our outlook. Based on the strong results in the third quarter, we are further raising the full-year outlook from the guidance provided January 9, when we shared our preliminary third-quarter results. We now expect the full fiscal year 2015 same-store sales growth to be approximately 6.5% to 7%, raising the low end of our range modestly from previous guidance.

We expect income from operations for the year to be between $33 million and $34.5 million, which is $1 million higher than the January 9 guidance. We expect net income to be in the range of $13.2 million to $14.1 million. This represents earnings per share in the range of $0.52 to $0.55, based on an estimated weighted average diluted share count of 22.9 million shares for the fiscal year.

On a pro forma adjusted basis, net income is now expected to be in the range of $17.5 million to $18.4 million, or $0.67 to $0.70 per diluted share based on an estimated weighted average diluted share count of 26.2 million shares. Our pro forma calculation assumes that our IPO occurred at the beginning of the year and adjusts for lower interest expense due to the lower term loan balance and lower interest rate. Pro forma adjusted net income has been adjusted for the one-time items previously discussed.

Now I'd like to turn the call back to Jim for some closing remarks.

Thank you, Greg. I am pleased with our third-quarter performance, which reflects the strength of our balanced and diversified business model and solid execution of our growth initiatives. We increased our sales, expanded our merchandise margin, and grew our store base while maintaining healthy operating margins. We see considerable opportunity before us to expand the Boot Barn concept nationally, and I am confident that we have the right strategies in place to take advantage of our leading position in the marketplace.

I'd like to thank all of our team members, both in the stores and in the corporate office, for their hard work and dedication to Boot Barn and for delivering another solid quarter. I'd now like to open the call up for your questions. Shane?

(Operator Instructions) Randy Konik, Jefferies.

My question is on -- around the MoonShine Spirit success. Can you just give us a little bit more color on some of that success, early days? Do you have other plans in that potential product pipeline? I was thinking about other types of partnerships going forward.

And then within MoonShine Spirit, are there other categories you may expand into? And then finally, around the MoonShine Spirit, how does the economic value work from a merchandise margin perspective relative to a true private-labeled product -- a truly branded product? Thanks.

So on the first part of your question, we are very pleased with the partnership with Brad. From a marketing perspective, he has really gone above and beyond to get the Boot Barn name and the MoonShine Spirit name out there, both on national television in the CMA awards as well as tweeting about us multiple times. So he has been a fantastic partner in getting the brand out there and in helping us develop the merchandise.

In terms of the performance of it, we don't really plan to provide specific sales on any single brand in the Company. But it has exceeded our expectations in December. We are racing to kind of get back in stock on some of the merchandise that sold exceedingly well around the country.

In terms of additional plans within MoonShine Spirit, it's a fairly broad-based assortment already. So it already includes boots, denim, woven shirts, T-shirts, ball caps, and accessories. We'll likely expand into some of those categories, particularly in boots, where we are currently expanding the style count there. So I think that's demonstrative of how positive we feel about the partnership.

In terms of other partnerships -- additional partnerships -- right now we really want to focus on letting the MoonShine Spirit line and the partnership with Brad Paisley continue to develop. Having said that, in the future we may look at other potential relationships, either with country music artists or otherwise, where we could take a private brand and have it augmented by the name of a star or a celebrity.

And then the final part of your question was around the economics of MoonShine Spirit. We have publicly disclosed that private-brand product is margin enhancing by about 1,000 basis points relative to third-party brands. And while we don't want to disclose the specific royalty that we are paying to Brad, suffice it to say we are roughly splitting the 1,000 basis point improvement of private brands with him in some way. So it is margin enhancing to us at the end of the day relative to national brands. Does that help, Randy?

Thanks. That was extremely helpful. Yes, it was extremely helpful. Thank you.

Matthew Boss, JPMorgan.

Good print, guys. Can you talk about in more -- I guess more or less hierarchy outline the drivers of the gross margin upside here versus the initial expectation into the quarter? And then more so as we think to next year and beyond -- you know, headwinds that would prevent continued gross margin expansion?

Sure. Decomposing that first, starting with merchandise margin -- which probably is sort of the question behind the question -- we've seen merchandise margin expansion across a number of different dimensions. One is we're just getting better markups, partly through economies of scale in purchasing; partly through improved private brand penetration; partly through an increase in container load sourcing, where we buy full container loads of merchandise from our vendors, bring it into the distribution center, and then split it out; and partly due to -- the mix of boots relative to the rest of the business continues to grow a little bit.

So that's sort of the drivers of the merchandise margin piece. We had a bit of a pickup in the Baskins merchandise margin, because we have reset their prices, and we have expanded the boot penetration there. The offsets to that -- nearly all of the offsets to that relate to the growth of new stores.

So we have been -- as we've discussed, we have been on a plan to grow new units by 10% annually, and we are well on our way along that initiative. But by doing so, we are adding new stores that haven't yet matured that composition our occupancy rate up. We are adding depreciation, which gets included into our margin calculation -- obviously, gross profit calculation, the way we disclose publicly. So that is creating almost a one-to-one headwind to the tailwind that we are generating from more merchandise margin.

Perfect. And then just an additional question in terms of upcoming catalysts in the remainder of the year. Is there some kind of a regulation around fire-resistant clothing that's potentially something that -- I don't know. It's something we heard about. I just wanted to see if it's something that's true.

Yes. OSHA passed a regulation for flame-resistant apparel for, essentially, industrial electrical workers -- think utility workers. And that regulation was passed in the past, but it's starting to -- they are going to start to enforce it on April 1. So once that goes into effect formally, we may feel a tailwind in that particular part of our business, but it's a little bit too early to tell.

Okay, great. Nice quarter.

Paul Lejuez, Wells Fargo.

It's Tracy Kogan filling in for Paul. I have two questions. I was wondering if you could give us a little more detail on performance by category -- which categories were above your expectations, and if there are any that didn't meet your expectations? And I'm talking boots, apparel, and then also work versus Western.

And then if you could talk about the performance of your Boot Barn stores versus the original Baskins versus RCC stores in the quarter -- the comp performance and what the productivity of those stores looks like compared to the Boot Barn stores. So comps for this quarter and then overall productivity. Thanks.

On the first part of your question, in broad brushstrokes, men's product outpaced ladies' product in terms of growth. Work product outpaced Western product in terms of growth, and boots outpaced apparel.

Keep in mind, though, we -- for the quarter, certainly, we are very fortunate where nearly every department -- not every one, but nearly every one -- went ahead. So some of those comparisons I'm just comparing better growth versus average growth.

In terms of what was disappointing, I think we have some more opportunity to focus on ladies' apparel, particularly denim. So we have a few things in place to get that part of the business headed in the right direction.

And then in terms of segments by Boot Barn versus Baskins versus RCC -- we really don't think of the business that way anymore. Now that we've wrapped and anniversaried the Baskins rebranding, all of the stores are run as one chain of 166 stores. And we don't really think about one particular part of the business versus the other.

So there's no outsized increased spend at Baskins or RCC that might be driving the comp? Or you just don't really look at it that way?

We don't really look at it that way. If you went back to the original Boot Barn stores with no acquisitions, we still had a very healthy comp.

Got it. Great. Thanks, guys.

(Operator Instructions) Mitch Kummetz, Robert W. Baird.

Thanks for taking my questions. I've got a couple. First, I just want to drill down on the comp just a little bit more. Can you maybe speak to it traffic versus ticket in the quarter? And then also if there's any way to break out stores versus e-commerce? I've got a follow-up.

Sure. So on the first part, traffic versus ticket -- in this particular quarter, roughly 20% of the comp was on more transactions per store, and the balance was on ticket. And most of the increase in ticket was on units per transaction.

As you know, we disclose our same-store sales in a combined basis between retail stores and e-comm. But to give you some color, what we've guided to in the past is that e-comm provides 50 to 100 basis points of tailwind -- which, frankly, for us, given that it right now is roughly 4% to 5% of our business, it's not a tremendous tailwind for us. So the underlying stores' comp was still pretty healthy.

Okay, great. And then you partly answered my second question. I was hoping to get kind of a year-to-date assessment of where private-label penetration is in e-commerce penetration. So it sounds like the e-commerce is still in that 4% to 5% range. What about private label? Where is that now on, like, a year-to-date basis?

So the way we like to disclose private brands -- in fiscal 2014, which was last year, right, it was 7%. And our plan is to get back triple -- I'm sorry -- to double in three years. So we're essentially adding 2 to 2.5 points of penetration a year for each of three years to get us to 14% at the end of fiscal 2017.

Okay.

And we're on pace for that.

Okay. Let me just -- one more. I think you talked about accelerating some store openings in the first quarter. Can you maybe address what the store opening plan looks like for next year? And if there is any way you can kind of give us some cadence by quarter, or at least maybe where you think -- through the first quarter and then where you think the year ends, that would be helpful.

We intend on our next call to outline -- not only have the fiscal-year 2015 and the outlined guidance for fiscal 2016, but to give you some specific answer or at least some directional answer. We have been saying that we will grow by 10% new units a year. So on a base of roughly 170 stores at the end of this fiscal year, that would imply 17 stores next year. We've been on the record to say we'd get to 20 stores next year. And I would say that that number may even have some conservatism in it.

In terms of the cadence by quarter, at this point it's a little early to really lay that out. What we -- if I were to look at our internal model, it's five a quarter for four quarters. But we haven't really fleshed that out yet.

What we signaled in our script is some of them are coming earlier in the first quarter than we had otherwise anticipated, which is driving preopening costs, some rent, and some other costs into our Q4, which will give us a little bit of SG&A and, I suppose, occupancy headwinds into Q4 based on great stores -- at least stores we believe will be great -- opening early in Q1. So it's -- to some degree it's a high-class problem, pushing costs up, but simply because we have better and more opportunities to open stores earlier in the quarter than we had originally anticipated.

Got it. All right. Thanks for the color on that. Good luck, guys.

Peter Keith, Piper Jaffray.

Great quarter. Jim, I just want to follow up on the discussion regarding the new stores. So -- intriguing comment that you are pleased with -- or particularly pleased with new stores in new markets. I was wondering if that's attributed to these newer-market stores running above your new store plan? Or were you planning them to be a little bit light, and they're running kind of now at the corporate average, where existing markets would be?

The former of your two choices. We didn't necessarily plan them light because they were in new markets. We may have planned them -- every store obviously gets a different pro forma plan, depending on the associated occupancy, the cotenancy, the particular market, etc. But it's not categorically lower in new markets versus existing markets.

So to get to the question behind the question, we are seeing the entire basket of new stores taken as a whole is exceeding or beating our hurdle rate of less than a three-year payback. So that's good.

And clearly a big part of our future growth strategy is to continue to roll out new stores. But the news that we shared is genuine good news, which is: brand-new stores in virtually brand-new markets have exceeded not only the expectation for that store, but will likely be above-average stores for the chain once they reach maturity.

Okay. That's fantastic. Thank you.

And then I just also want to follow up on a question that Mitch was asking about -- was intrigued with the increase in ticket. You are seeing more units per transaction. Could you give us some color about what might be driving that? I know you've had some initiatives around the front third of the store to drive some more accessory sales. Wondering if that might be related.

Yes, we believe it is. It's a little hard to dig specifically into that, but two years ago -- so in December of calendar 2013 -- we had put Christmas forth as an initiative in a big way for the first time at Boot Barn. And then this past December of calendar 2014, we had some learnings from the prior year. So that helped to build Christmas-related gifts and accessories.

We have also expanded into categories in jewelry, and added some fixtures there, and other accessory and gift categories. So I believe some of the units are associated with the thrust to build out the front third of the store, to your point.

Okay. That's great. Last question for me, then. Just for modeling purposes, you talked about some of the nuances with SG&A in the fourth quarter. Are there any items related to gross margin that we should be aware of?

Yes and no. So there's no -- there's nothing to be concerned about, certainly, from a merchandise margin standpoint, right? Having said that, when we think about gross margin -- or gross profit, the way we report -- some of the new stores that are moving earlier into Q1 will hit our cost structure in Q4. And as you well know, that hits margin.

Pre-open rent.

Pre-opening rent, right? So that's the biggest portion of it.

Okay. Just a little bit of negative pressure, I guess, from the occupancy?

Correct -- associated with opening up the stores in Q1 earlier than we had otherwise thought we would.

Very good. Okay. Thank you very much.

At this time we have no further questions. I will turn the call back over to management for closing comments.

Well, thank you again for joining us, and we look forward to discussing our fourth-quarter results with you in May and speaking to many of you in the interim. Thank you.

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