Boot Barn Holdings Inc (BOOT) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Boot Barn Holdings Inc third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jim Watkins. Thank you, Mr. Watkins, you may begin.

Thank you, Tim. Good afternoon, everyone.

Thank you for joining us today to discuss Boot Barn Holdings Inc third-quarter 2016 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer, and Greg Hackman, Chief Financial Officer. A copy of today's press release is available on the investor relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay until February 16, 2016, on the investor relations section of the Company's website.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements, and these for 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 2016 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. Thanks, everyone, for joining us. On today's call, I'll be providing a review of our results, followed by a discussion around the key drivers of our core Boot Barn business.

Then, I'll update you on the further progress we've made integrating the Sheplers business that we acquired last June. Following that, Greg will review our financial performance in more detail, and provide our revised outlook for the fourth quarter and full-year FY16. Finally, we will open the call up for your questions.

In the third quarter, we further solidified our share on the Western market, achieving almost 50% growth in sales, as compared to the same quarter last year. This growth was comprised of the sales contribution of the newly acquired Sheplers business, and 22 new Boot Barn stores opened during the last 12 months, partially offset by a 2% decline in consolidated same-store sales.

During the quarter we opened 5 new stores, bringing our year-to-date total store openings to 18. We expect to open four new stores in the fourth quarter of this fiscal year. As a group, new stores opened during the past two fiscal years are in line with our three-year payback model.

Having said this, some of the more recent stores within this group, that have opened in markets impacted by oil and other commodities, have faced some of the same macro challenges impacting the broader chain of stores. These stores, while still EBITDA contributing, will have a longer payback period, which has been offset thus far by new store openings in other parts of the country. Accordingly, we have adjusted our development plan to focus on areas that are not being impacted by some of the macro headwinds we are facing.

From a same-store sales perspective, we continued to face headwinds in the third quarter, associated with the softening of local economies dependent on oil and other commodities, in line with our discussion on our second-quarter call. These factors continued to pressure North Dakota, Colorado, Wyoming, and Texas.

In addition to this challenge, we faced a difficult retail environment, brought about by unseasonably warm weather in some of our other markets. While many core markets without commodity exposure, including Nevada, California and Arizona, showed solid growth, we were not able to offset the macro pressures in other parts of the country.

Analyzing the core Boot Barn performance from a merchandising perspective, excluding the Sheplers business, we saw continued growth in work boots and men's Western apparel. Growth in these areas was offset by declines in work apparel, particularly flame resistant merchandise, outerwear, and cold weather accessories.

In terms of traffic versus ticket, the decline in same-store sales was primarily the result of a decline in average transactions per store. With respect to our efforts to grow our private brand, penetration has now increased to 13% of total core Boot Barn sales year to date, up from 10% for FY15.

In addition to generating improved merchandise margin, our private brands are also a key point of competitive differentiation for us. The final leg of our growth strategy is to expand sales in our e-commerce channel. During the quarter, we achieved solid growth in Boot Barn's e-commerce business, benefiting from a well integrated marketing campaign, our 12 days of Christmas assortment, and a significant increase in mobile traffic.

I would now like to turn the discussion to the Sheplers business. Overall, the integration has gone very well, adding greatly to our scale, filling out some of our core markets, and importantly, building our direct to consumer platform. We completed the rebranding of 19 Sheplers stores to Boot Barn prior to Thanksgiving, as planned. We launched our new product assortment, including our private brands, in these stores, and also implemented our B Rewarded marketing program, enrolling over 100,000 customers since the acquisition. The Sheplers stores already have more than 7,000 B Rewarded customers per store, which is more than a third of an average Boot Barn store.

We had expected same-store sales at the rebranded stores to turn negative initially, and then to turn positive for the month of December, once we got through the rebranding. Unfortunately, same-store sales comparisons remained negative for the balance of the quarter, depressed in part by the store construction. And these 19 stores were up against very aggressive promotions in the comparable prior-year period. We are pleased, however, that quarter to date, these stores are showing positive same-store sales growth, and merchandise margins have shown healthy improvement compared to the prior year.

We are particularly encouraged that this positive sales trend is being fueled by the opportunities we had identified for the Sheplers business, prior to the acquisition. The introduction of work boots and work apparel has been extremely successful, with both categories making significant progress toward achieving chain-wide penetration. And recently introduced private brands have already achieved approximately 8% penetration for the former Sheplers stores, much faster than we experienced in our other acquisitions. Now, turning to the Sheplers e-commerce business.

Sheplers e-commerce achieved solid growth throughout the third quarter, which has continued into the fourth quarter. On a combined basis, the e-commerce businesses at both Boot Barn and Sheplers achieved double-digit sales growth, and we believe we've taken significant share of the e-commerce market in the Western industry.

In summary, we are pleased with the Sheplers acquisition. While we do expect some sales volatility on a month-to-month basis, as we cycle promotions of varying intensity, we have accomplished a great deal.

Operationally, we have integrated every function across the business, and converted all stores, merchandising and financial systems. Strategically, we have further solidified our leading position in the industry, and we've added an important growth vehicle to the Company. And finally, from a financial perspective, we believe we will achieve the original synergy target with growth in sales, considerable improvement to merchandise margin rate, and more expense synergies than we originally anticipated.

As we look at the overall Company on a consolidated basis, we are now five weeks into our fiscal fourth quarter, and have achieved positive same-store sales results quarter to date. We feel that some of the strategies we have put in place to combat macro headwinds are taking hold. Having said that, the ongoing pressure on the price of oil and other commodities, and its impact on local economies, makes visibility into sales forecasting a bit of a challenge.

Now, I would like to hand it over to Greg.

Thank you, Jim. Good afternoon, everyone. I will begin by reviewing our third-quarter results, and then update you on our revised outlook for FY16.

In my discussion, I will be commenting on both actual and adjusted results, excluding any one-time costs, to facilitate comparability. Please reference today's press release for all definitions, and for a reconciliation of GAAP numbers to these non-GAAP adjusted numbers.

In the third quarter, net sales increased 49%, to $194 million. As Jim mentioned, this was driven by the sales contribution from Sheplers, 22 new Boot Barn stores opened in the last 12 months, partially offset by a 2% decline in consolidated same-store sales.

Adjusted gross profit increased 41%, to $65 million, compared to gross profit of $46 million in the third quarter of FY15. In the core Boot Barn business, we did not make meaningful changes to our pricing strategy during our promotional holiday season. There was a slight decline in merchandise margin of 10 basis points at the core Boot Barn business, comprised of higher freight costs, partially offset by better markup associated with increased private brand penetration.

In the Sheplers business, we significantly reduced the number and magnitude of promotions in the stores, resulting in a healthy increase in merchandise margin for the converted Sheplers locations. Sheplers e-commerce merchandise margin was slightly lower compared to the prior-year third quarter. On a combined basis, the Sheplers business, including both stores and e-commerce, achieved an increase in merchandise margin.

We feel good about the margin performance in each of our businesses. At the consolidated level, given that Sheplers historic margin is lower than core Boot Barn, the composition of the business this year with Sheplers, as compared to last year when we did not own Sheplers, resulted in a decline in merchandise margin of 260 basis points, due to mix.

Because of this mix shift, we will see pressure on merchandise margin rate, when compared to the prior-year, continue until we anniversary the acquisition. After that, we expect opportunities to push merchandise margin up, as private brands continue to grow, the benefits of our purchasing economies enhance our overall product markup, and we import more merchandise director from overseas. Our occupancy cost within gross profit decreased 70 basis points compared to the last year period, as a result of the lower occupancy rate of Sheplers when compared to the prior year, when we did not own Sheplers.

Our adjusted operating expense was $41.5 million, which excludes $2.2 million in costs associated with the integration of Sheplers, and $300,000 for SEC filing costs. This compares to $28.4 million in the prior-year period. The increase in adjusted operating expense is attributable to the operating costs related to the Sheplers stores and e-commerce business, and the 22 Boot Barn stores opened in the last year. We leveraged SG&A rate -- SG&A this quarter, reducing our adjusted operating expense rate 30 basis points, to 21.4% of sales.

Adjusted income from operations for the third quarter of FY16 increased 32.5%, to $23.5 million. This compares to adjusted income from operations of $17.7 million in the prior-year period, which includes a $150,000 adjustment to reflect the estimated public Company costs, as if the Company had been public during the entire quarter.

Pro forma adjusted net income for the quarter was $12 million, or $0.45 per diluted share. This is a $0.01 increase over the high end of our pre-announced third-quarter estimate, resulting from a favorable change in our annual effective tax rate. This compares to $10.5 million, or $0.40 per diluted share, last year in the third quarter. As a reminder, pro forma adjusted interest expense was $2.3 million, or $0.09 a share higher than the pro forma adjusted interest expense last year. The prior-year net income has been adjusted to reflect the impact of the post-IPO interest expense.

Turning to balance sheet, as a reminder, our working capital needs are at the lowest levels of the year at the end of the third quarter. During the third quarter, we reduced our outstanding borrowings on our revolving credit facility by $39 million. As of December 26, 2016, we had a total of $229 million outstanding on our revolver and term loan, and our leverage ratio was 3.3.

This leverage ratio compared to 3.9 at the end of the prior quarter. We expect that our leverage ratio will be approximately 3.8 at the end of the fiscal year, given our current projections, as working capital returns to normalized levels. As of December 26, 2015, we have $95 million of availability under our revolving credit facility, and $18 million of cash and cash equivalents.

On an average store basis, excluding the Sheplers stores, our inventory levels were flat to last year. On a consolidated basis, inventory rose 43%, to $174 million, compared to a year ago. This increase is primarily driven by a 22% increase from the addition of the Sheplers stores business, a 13% increase for the new stores added in the last 12 months, and a 6% increase in inventory related to the Sheplers distribution center. We have managed our inventory well, and feel very good about both the level and composition of our inventory, given our relatively low fashion quotient compared to the typical retailer.

Now I would like to turn to our current outlook for FY16. Factoring in our year-to-date performance, as well as the continued market headwinds we are facing, we are revising our outlook for the remainder of the fiscal year. We expect fourth-quarter same-store sales for consolidated Boot Barn, including the Sheplers and both e-commerce businesses, to be flat to slightly positive.

We expect pro forma adjusted income from operations to be between $8.5 million and $9.4 million. Adjustments will be made to exclude acquisition-related integration expenses from the Sheplers acquisition. We expect pro forma adjusted net income for the fourth quarter to be between $2.9 million and $3.5 million. This represents pro forma adjusted earnings per diluted share in the range of $0.11 to $0.13 per share, based on an estimated weighted average diluted share count of 26.6 million shares for the fourth quarter.

Now, turning to the full-year FY16 guidance. We expect FY16 pro forma adjusted income from operations to be between $43.5 million and $44.4 million. Adjustments will be made to exclude acquisition-related integration expenses from the Sheplers acquisition. We now expect pro forma adjusted net income for the full fiscal year to be between $19.1 million to $19.7 million. This represents pro forma adjusted earnings per diluted share in the range of $0.71 to $0.73 per share, based on an estimated weighted average diluted share count of 26.9 million shares for the fiscal year.

Now, I would like to turn the call back to Jim for some closing remarks.

Thank you, Greg.

While external headwinds are bringing some challenges to our business in the short term, I am pleased with how we've continued to execute during the third quarter. We significantly increased our revenue, achieved double-digit growth in e-commerce sales, and adhered to our pricing strategy, resulting in inventory that was well-positioned for the current quarter.

We also completed the integration of Sheplers, which has further expanded our store footprint, augmented our e-commerce capability, and further strengthened our competitive positioning. I would like to express my appreciation to the combined Boot Barn and Sheplers team, for all their hard work as we integrated the two businesses. As we work to drive continued improvement in the near term, I remain confident in our ability to continue to execute on our long-term growth strategies, further expand our store footprint and improve merchandise margins, while further solidifying our position as the largest omni-channel Western and work retailer in the US.

Now, I would like to open the call to take your questions. Tim?

(Operator Instructions)

Matthew Boss, JPMorgan.

Hey, thanks.

A top line question. If you broke down the same-store sales that you saw during the third quarter here, what kind of trends are you seeing in some of your more mature markets, such as, say, California? And then secondly, is Sheplers the primary improvement to account for the return to positive same-store sales, quarter to date?

On the first piece, the California, Arizona and Nevada markets are -- in the third quarter, performed very much in line with historical Boot Barn comps, a very solid mid-single digit comp. Which gives us tremendous confidence in the overall model for Boot Barn, and gives us the sense that once we are able to power through some of the short-term headwinds, the model is still very compelling.

On the second part of your question, we've seen sequential improvement in a number of different places across the Company, between the third quarter and fourth quarter. Admittedly, we're only five weeks into the fourth quarter. Sheplers is only a portion of that improvement.

Great.

And then just a follow-up on margins. So positive gross margin, ex-Sheplers, with 70 basis points buying and occupancy leverage. What's the comp needed, on a consolidated basis, once Sheplers is fully integrated, to lever buying and occupancy? And then, also, SG&A? Any help there would be great.

Yes, we haven't fully modeled out, I'll say, FY17. But we believe it's roughly a 2% comp to leverage occupancy, and a 1% comp to leverage SG&A.

Perfect, great. Best of luck.

Thanks, Matt.

Peter Keith, Piper Jaffray.

Thanks, everyone.

So just to follow up on Matt's question, about some of the sequential improvement, sounds like Sheplers isn't the sole reason. You mentioned, in the prepared remarks, you've taken action to drive sales. So, that might be impacting the broader base. Could you give us an understanding of what some of those actions are?

Sure. They expand merchandising, marketing, e-commerce digital, et cetera. So taking it through some of the high points, from a merchandising standpoint, we've done a few things to broaden the assortment around work boots, and extending into performance work boots, which you might think of more if like a hiking boot. And that has been something that we've rolled out across the chain. Consistent with that, we've added a tremendous amount of work boots to the Sheplers business in total. So those two are related.

We've been refining our work apparel assortment. The work apparel business had been driven for a while by flame resistant product when the oil boom was growing. And with that as a headwind now, we've been bringing in a few other work apparel lines that are a little bit lower priced point. They typically don't need to be flame resistant, and we've seen some nice growth opportunities there. We've had an initiative underway, for a year plus, around the front one-third of the store, which includes jewelry, home, accessory product.

And when you combine all of that together, that's a decent sized business for us, and that has shown nice sequential growth between the third quarter and the fourth quarter. Just quickly, on -- from a marketing perspective, we've continued to get better and more sophisticated, from an analytic standpoint, on -- mostly on our direct mail program. So we send some piece of direct mail almost every month. And with that, we are mining our B Rewarded database of customers. And our team here, along with an external consulting firm, has continued to get better at finding a higher ROI of our direct-mail spend.

So I would bundle that all together in CRM analytics. So those are some of things I was working on. And the last piece is, we really doubled down our store training, our in-store training, from a customer service standpoint, with a focus on building a selling culture

Okay. That's great color, Jim, appreciate it.

Maybe even just to parse apart the core boot, you have classified those four commodity/energy impacted states. Are those states -- here in the fourth quarter, are they stabilizing at a negative rate? Have they gotten any worse, with the precipitous decline in oil we've seen in recent weeks? Could you gives us some color there?

Sure. It's a bit of a mixed bag, and it's a little hard to give you some color, and have you extrapolate it. The Texas business is still negative. It has gotten slightly better sequentially, and that, of the four states, is the biggest by far.

The state North Dakota, which is heavily reliant on fracking specifically, has -- is still very much under pressure. I'm not sure if it's actually better or worse, but it is still significantly down. So that's a little bit of color for what's happened sequentially, in those four states.

Okay, thank you for that.

And then maybe pivoting to a question to Greg, just to help understand the balance sheet, that covenant dynamic. So you're at 3.3 times at the end of the third quarter. Should we think about that as, from a covenant standpoint, the low watermark of the year, just based on seasonality? Or if we look out a couple of quarters, you could potentially be below that, in some other quarter outside of Q3?

Yes, Q3 is going to be our lowest ratio month, because of the significant cash we generate in that quarter, and our ability to leverage our inventory -- or our AP on those inventory purchases during that quarter. We turn more quickly. We haven't worked on 2017 guidance. We do expect to see year-over-year decreases or deleveraging, if you will, but the 3.3 times is going to be lowest ratio in any year.

Okay. Great. One last question for me, then.

We are getting a lot of investor questions about store growth. I know you addressed some of this at ICR. So we just want to get an understanding of the timing. I think you said you were going to assess the store growth strategy and the comp trends over the coming months. If you were to decelerate store growth, would we hear about that on the Q4 call, just to set up expectations for the coming months?

Yes. Our intention will be to outline our FY17 guidance on our Q4 call, which I think is scheduled -- or would be scheduled, logically, in May.

Okay. And right, and so the assessment of store growth will just be based on how business trends between now and then, and how you package -- you want to package the whole year together?

That's right. That's right.

So to get to the heart of the matter, and the question behind the question, to give you a bit of color now, if we think about how we've put our long-term strategy together, of 10% new unit growth, and we reflect on the last couple of years, where we opened 18 stores and then 22 stores, and then added the Sheplers acquisition, both the 18 stores and the 22 stores were greater than 10% growth, we do intend to continue to grow new units, going forward.

Based on business, as we look at the next 90 days worth of selling, we might temper that a little bit, but we don't expect that number to come down very materially. So you might think about 15 stores for FY17, if we are sitting here today. That number might be refined, once we get to our full-year guidance, and really have modeled out the next couple of years. But I wouldn't expect that number to be 5; I wouldn't expect that number to be 30.

Okay. Great. Thanks a lot for all the color. I appreciate it.

No problem, Peter.

Thank you, Peter.

Randy Konik, Jefferies.

Yes, thanks a lot. Just want to go back to the macro affected states. What's the math again, around the native impact from a top line and a margin contribution standpoint? Think you can give us some color there, on what they impact would be? That's my first quick question.

Sure. The four states are about 30% of sales for the Company. The margin impact would be roughly the same. I mean, the margin across the different parts of the country are roughly the same. So, I'd figure about 30% of the business.

But those margins -- if you think about the margin contribution of those, there's going to be more promotions there, and fixed cost deleveraging those areas. Are they -- I'm just trying to figure out how disproportionate the margin impact has been, from the deflated sales volumes. Do you know what I mean?

On the merchandise margin piece, we're really not much more promotional there. As you know, Randy, if our sales soften, we are not typically faced with a situation where we are running heavy clearance, to run through or move through unsold product. I suppose there are occasions where we'll run a market-specific promotion. Those are typically around rodeos. They are not typically around an area that just has difficult business. So the merchandise margin component is still roughly 30% of the total. I don't know if you want to handle the deleveraging piece. We don't usually think about the -- specifically like that.

I think these stores -- the stores within those four states are somewhat representative of the entire chain. So I think that the flow through on a sales miss in those four states is going to flow through, similar to what you would see on a decline in sales in any -- on the chain as a whole.

Got you. And then as it relates to Texas, I think that sounded a little more encouraging. Is there any more perspective you can give there? If it's getting a little bit better? I know a little bit better is better than worse. Is it something that -- is it led by stabilization, a little bit better in work or West -- non-work? How should we think about that dynamic?

The areas that are growing are work boots, work apparel, not really that much flame resistant work apparel. But I would -- and of course, we feel better about an improved trend in Texas sequentially, quarter over quarter. But it's still -- we are still watching it very closely, monitoring business on a week-to-week basis. There's -- where we feel better, but it's still concerning to us, to see the Texas business comping negative

Got you. Okay, and my last question.

You commentary around the total combined e-commerce business, up double digits. Is there any more clarity you can give on just differential between the bootbarn.com business versus the Sheplers business, e-commerce wise? And if one's a little bit more commercial versus the other, is there anything you're gleaning from the disparity in the trends of what consumers are gravitating towards on the one website, relative to the other? Just trying to get some color on what you're seeing there?

Sure. It's a fair question, and I think the natural hypothesis would be that the more promotional site is outpacing the less promotional site. They're both growing quite nicely, but bootbarn.com as a growth rate, is outpacing sheplers.com in growth rate. I would actually chalk that up to two things. One, the base of business at Boot Barn is just much smaller than the base of business at Sheplers business. And the Sheplers business, therefore, is much more mature.

And two, the bootbarn.com business is really benefiting from the addition of our Chief Digital Officer in May, John Kubo. And the sheplers.com business is still under the stewardship of an executive named Mark Hampton, who is continuing to do a terrific job for us, but he has been running that business for a while. So I can't really help you prove out your hypothesis, but I wouldn't say that people have become less promotional based on that. I think it's more of the context of our two businesses.

Very helpful. Thank you.

Thank you, Randy.

Jonathan Komp, Robert Baird.

Yes, thank you.

I wanted to ask Jim, first, on the consolidated comps, another question. It looks fairly obvious that there were some unique factors in the third quarter, with weather and the promotional overlap for Sheplers. And I know it's only five weeks that you're seeing better trends. But as you look at the business, and the tone of the week-to-week trends, what's your level of comfort that you're seeing overall stabilization? And that you're not just seeing a positive blip, on the road to more negative trends ahead?

I would say it's modest at best. And we specifically have chosen words like visibility is tough, not to frighten people, but just to lay out what we're seeing. And when we look at year-over-year comparisons on the Sheplers business, they were extremely high/low promotional last year. It was -- they were more promotional in the third quarter, in general, than they were in the fourth quarter and the next quarter for us, the first quarter. But there still are periods of time when we're going up against extraordinarily promotional activity events for them in the prior year.

In total, still less than the third quarter. But when we ramp against those, we will see how business performs. So I would say our comfort level is modest. I wouldn't declare victory, nor would I say the sky is falling. I guess we're cautiously optimistic.

Got it. And to that point, on the forward-looking comparisons, obviously, we don't have access to those comparisons for Sheplers, given that it wasn't consolidated back then. But is there anything to be aware of the next few months, or in quarters, in terms of the comparison, prior to when you had the business last year?

So, I'm going to dive into the specifics of their promotions for a second. They have two types of promotions in their prior-year period. One is a percent off a single item, and one is a percent off the entire purchase. In the third quarter, they ran 20% or 25% or 30% off entire purchase for most of that quarter.

As we look at the first quarter and the second quarter going forward, the promotion, while still much more promotional than Boot Barn, the promotion that we're running up against, or cycling, is a percent off a single item purchase. So that might be 25% off a single item.

They do, however, have, maybe in total, three or four weeks where we are up against entire purchase promotions, over the next three or four months. And it's unclear to us what that will look like as we cycle those. But it isn't every month -- sorry, it isn't every single week like it was for the third quarter, which actually just accelerated into December, where they had events that were 30% off an entire purchase.

So I hate to get so tactical, but that's what we're looking ahead to. I can tell you that once we get to the point where we cycle our own marketing, which will come a little bit after the anniversary of the acquisition, will be up against ourselves, and it will be much more predictable.

Got it. And I hate to split hairs, but as a follow-up, does that -- is it a fair assumption, then, that as you look at the fourth-quarter guidance for the comps, that flat to slightly positive, does that maybe assume more modest trends than what you've seen the last five weeks? Or have they flat lined at the recent run rate, going forward?

There's two things. One is the dynamic that I mentioned at Sheplers. The second, though, is in this particular quarter, Texas is a bigger portion of our business. And while we are pleased that business has gotten sequentially better, it's still negative.

And it's a bigger -- it's not enormously bigger, but it's a bigger portion of our business in the fourth quarter than it is throughout the rest of the year, by virtue of the fact that there are four consecutive rodeos in a row. And I think most of the callers understand, a rodeo for us is 7 to 21 days long. This is not a one Saturday afternoon event. So as Texas becomes a bigger portion of the business for the quarter -- what we're trying to manage against is, will that composition our comp down?

Got it. Great.

And then, if I could, just two quick ones for Greg. Greg, first, on the leverage, following up, I know you said that 3.3 times probably will be the low water mark, just given the seasonality of the cash flows. Maybe asked differently, as you look out, I know you had a peak level of 3.9 times at the end of September last year. Do you think you'll stay at or below that level? And then maybe a step further, at this time next year, do you suspect you'll be lower than 3.3 times?

Yes, again, we haven't provided 2017 guidance. But yes, I would expect that we would continue to see improvement in that rate, or performance around that rate. So, we're saying 3.8 for Q4, and I wouldn't expect it to be materially different from that in Q1.

Q2, we start to build inventories a bit. So there could be some working capital need in Q2, but a year from now, we would expect to see a lower ratio than 3.3 times, correct.

Okay, and then last one for me. Understanding you're not ready to give detailed guidance for 2017. But maybe just to frame my question, if I look, at least, at the consensus expectations that are out there, there certainly is some earnings growth for 2017, on pretty modest comp store sales growth, less than 1% positive. Is that an algorithm -- I know you have the accretion from Sheplers, and a few other moving parts.

Is that an algorithm that you think looks okay at this point? Or do you think there's some significant flaws with that line of thinking?

To be honest with you, I don't think we can comment on that, given we haven't talked about 2017 guidance.

Okay, got it. All right, thanks.

Thanks, Jon.

Mitch Kummetz, B. Riley.

Thanks. Just to drill down a little bit on the macro impact, I'm encouraged to hear that Texas is improving slightly sequentially. But I'm still unclear as to whether or not you're actually seeing sequential improvement from 3Q to 4Q, in aggregate, across these four states? I don't know if you can help me out on that?

We've seen a slight improvement, in aggregate, across those four states, but that's mostly driven by Texas.

Okay. Thank you.

And then North Dakota, I know it's not a huge market for you. But Jim, you talked about pretty significant downward pressure there. Is there anything you can do about that? Is there any way, or would you even want to consider, closing any stores based on that pressure? And how exposed that market is to fracking? I don't know if you have any perspective on where you think fracking is going from here. But is there anything that can be done, in that market in particular?

Most of the stores -- in fact, virtually every single store in the chain, at least from the comp base, still contributes, from a four-wall contribution standpoint. So we're not going to close stores that are making money, to help manufacture a better comp. Having said that, if there is a store -- and there's not that many opportunities for this, if I'm honest. But if there is a store, or two stores, in a market, and one is close to lease expiration, we might try to negotiate out of one, I suppose, if we believe we can transfer the business over to another store. But we've looked at, for some of those opportunities, and there are few times that they have presented themselves, we've done it. But that's not something that we'd be doing in the near term.

Okay. And then the comp guidance on Q4, you guys are staying flat to up slightly. And obviously, when you look at the business over the last few quarters, you've seen some sequential decline in comps, quarter to quarter, over the last three quarters. So essentially, you're saying that you expect that to turn a bit in Q4. And you've got five quarters worth of data to look at.

But I'm just trying to understand, how confident are you in that flat to up slightly? It sounds like your visibility is pretty limited. You talked about being cautiously optimistic. But is there anything that you're doing in the business, over the next couple of months, that really gives you confidence that you can put up those numbers, even as the business has been challenged sequentially over the last few quarters?

I'd go back to the answer from the prior question. That is, I think we have a modest level of confidence. We feel good about the progress that we've made thus far into the quarter. There's a lot of sales left to be had in the fourth quarter. More of that is Texas, as a percentage. And as we said, visibility is hard. So I'd say our level is confidence is somewhat in the middle.

Okay, fair enough. And then last question, just in terms of the Q4 comp again. Any way you could break it out, stores versus e-comm? I know in the past, when you're speaking of Sheplers, you give a break-out between stores and e-comm there. But is there anything -- any more color you can give on the fourth quarter comp, either by concept or by channel?

Overall, I'd say that we're pleased with each of the components of the business, but we do look at the business in a consolidated manner now. Particularly given that we've integrated the Sheplers business in, we've got very much the omni-channel capability between stores and e-commerce at Boot Barn. We've actually been thinking about how we segment customers between sheplers.com and bootbarn.com. So it's becoming less meaningful for us to split out the businesses into the components.

Got it. All right. Thanks. Good luck.

Thanks, Mitch.

Paul Lejuez, Citigroup.

Hey, thanks. Can we just back up a second? Can you remind us, when you first started to see the pressure in some of those oil markets, which state really led that pressure? And I just wanted to make sure I was clear. In this third quarter, was there more of a drag or less of a drag from those states than last quarter? I know you said you're seeing slight improvement in aggregate, led by Texas, in the fourth quarter. But how about just the third quarter versus the second? And part of my question is, I'm just wondering if Texas was the first one that led the decline, and you're starting to see that get less negative? Does it say something about potentially, finally, bottoming out in some of those markets?

So it's a terrific question. I wish I could agree with the hypothesis.

The first state, however, was North Dakota, and it was the fracking, the drilling up in the Bakken formation, that we started to detect it. And if we look at Texas, that was actually, probably, the last state. Sequentially, it was above Company average, then positive, but below Company average. And then the second quarter was roughly flat, and then in the third quarter, it was down.

So the third quarter was the first time that the Texas business was down, so I don't think we can call that this is the bottom, unfortunately. I think the dynamic at play is two different things. One is the, as well prices began to fall, there was very much a time lag before it started to impact our Business, right? Oil, I think, began to fall November of the prior year, of 2014. And for our fourth quarter last year, we were plus 7. And for our first quarter we were plus 5,6, or thereabouts.

So we had a lag of when oil prices fell, and then the layoffs had started to occur. So that's the first dynamic that we have to understand. And I think the second is -- and we've unfortunately had to become more knowledgeable, but we're hardly experts, on how to drill for oil. But it's more expensive to drill for oil in a fracking environment than in a conventional drilling environment. So as oil started to fall, the fracking companies became unprofitable, prior to the conventional oil companies turning unprofitable. Which is why we think that the fracking markets got hit first.

Got you, helpful, thank you. And then just remind me, the third quarter versus second quarter, I'm not sure if I just missed the answer there. But was there more of a drag in 3Q versus 2Q? Or in line?

No, so the second quarter, Texas was a little bit better than flat. And in the third quarter, Texas was down. I don't think we provided a specific number, but it was pretty solidly down. And then in the fourth --

And in aggregate, the markets that you referred to?

Yes, the -- it's funny, I don't have the aggregate numbers as committed to memory, but they will -- they are heavily influenced by Texas.

Got you.

Okay. And then a lot of the Sheplers business, you talk about improving that business at the store level, and instituting best practices there. Is there anything that you've picked up from the Sheplers business, either in supply chain or their mark-down model or cadence? Anything that you're learning from them, that you can incorporate, or have incorporated, into the core Boot Barn business?

On the digital side, there certainly is -- there is a number of things, right? They -- we are sharing best practices, in terms of how to maximize SEO, search engine optimization, for the Boot Barn site, based on what the Sheplers team has been able to achieve. We've been consolidating how we purchase our pay-for-click advertising online between the two channels - sorry, between the two brands online. So Sheplers has had a heavier hand in how we market in a digital environment.

From a merchandising perspective, one of the things that Sheplers was very strong with was exotic boots, so we are trying to understand what we can do with our exotic boot program that's mostly men's Western boots. And should we pull those into a shop environment in certain key markets or high-end stores, to really merchandise those and shine a light on them? Which is something that was similar to what Sheplers had done in the past. So that is something that we're contemplating doing. That would be a lesson learned from them.

So I think -- and there's a lot of things going the other way, of course. So when I look at the organization, and how we're working as a team, I'm extraordinarily pleased to how the integration has gone, and how the whole Company has come together, to fight off a very strong headwind across the business. And that includes the guys in the Frisco office, the guys in the Wichita office, and the folks in the Irvine office.

So hopefully, that answers your question.

Yes. And then, just -- it does. And then just last, on the buying side, are you seeing any benefits, just from increased size? Just a little more buying power, now that you've got Sheplers there? You're already seeing that flow through the merchandise margin line.

I'm going to separate your question into two pieces. So yes, we are seeing some benefits. Of course, we always hope and expect that they could be bigger. The second piece, though -- and I don't mean to be coy -- is it takes a while for the abettor discount to flow through our merchandise margin, simply by the way we account for our inventory on an average cost basis. And we have to turn our inventory about twice a year -- or we turn inventory about twice a year, and we have to get through two turns before we fully capture the discount. So yes, but there is a bit of a time lag before we see the economies of purchasing flow through the P&L.

Got you, helpful. Thank you, and good luck.

Thank you.

Corinna Freedman, BB&T.

Hello. Good evening. A bit of a random question.

I think the last time oil was about this level was late 2008, early 2009. Understanding that Boot Barn was under different management, and private, did you do any research or digging into what the comp downside could be? That is, our historicals only start at 2010, but is there -- at that point turned positive. But is there anything, any color you can give us on what -- how the business performed during that downturn in oil, in Texas specifically? Thank you.

Sure. No, it's a good question, Corinna. I honestly can't remember the specific number. The business did comp negatively in that period. There's two differences, though, that might be countervailing. One is, the whole economy was obviously down at that point in time, so the business was down.

Right.

The other, though, was at that point in time, the Company was only in California, Arizona and Nevada. So admittedly, as we've grown across -- we had 68 stores then, I think, and don't hold me to that specific number. But I think it was 60-something stores, in three states. Now, we're 200 stores in 29 states. Actually, we must have been less than 60 stores at that point.

But in any regard, we're a much bigger Company. We have much more exposure to oil and other commodities, just by virtue of the fact that we're in the Dakotas, we're in Colorado, Wyoming, Texas, et cetera.

Okay, and then if you could break out the inventory for the core Boot Barn business? And what that was up, year over year, understanding that you don't really own that much inventory in like a distribution center or anything? But curious.

Yes, on an average store base, our inventory was flat on a year-over-year basis.

Okay.

The main drivers were the addition of the Sheplers business. That was roughly 22% of the increase. And then we added 22 new stores, and that's 13% of the increase. And then finally, with the addition of the Sheplers distribution center, which supports their e-commerce business, that was 6% of the increase. So bore Boot Barn, on an average store basis, the stores were flat to last year.

Perfect, great. Thank you so much.

Tom Nikic, Wells Fargo.

Hello. Thanks for taking my question. I just want -- was wondering about the puts and takes in the gross margin. You said that you got 70 basis points of occupancy leverage, but I would assume that, for the core Boot Barn business, you had a significant amount of de-leverage, given the comp. Would you be able to quantify what occupancy lift you got from the Sheplers mix? Or what the core business did, on occupancy? Thanks.

Yes, at the occupancy level, we don't look at the business that way. We look at it on a combined basis. And we attributed most of that 70 basis points of leverage to the Sheplers addition. But we don't break that apart. We do look at merchandise margin between the two brands, and the different channels. Because that's a good read of profitability of those businesses. But beyond that, we look at the consolidated Company, both in occupancy and SG&A.

Okay, thanks. And as I look to next year, I know that you haven't provided guidance. But -- so the liquidation type of sales that you did at Sheplers, to get rid of the old, stale merchandise, you stripped that out of the adjusted gross profit, right? So we shouldn't think that there's a very easy compare, until that gets lapped, apples to apples, going forward?

The way we adjust the merchandise margin for that NGF is, we normalize it at what Sheplers merchandise margin was for that product the previous 12 months. So to the extent that Sheplers had a lower merchandise margin rate than Boot Barn, we will expect to see some improvement, because we're only normalizing it to the Sheplers rate. But there won't be a big pick-up, on a year-over-year basis, as you cycle those what I'll call NGF clearance events, because we have normalized that in our adjusted results.

Got it, yes, I just wanted to clarify that. And just one last weird model thing. I noticed that the share count went down from Q2 to Q3, and then it's guided to go down again in Q4. Why would that be happening?

Yes, Tom, this is Jim.

That's really a function of the share price. As the share price goes lower, the options that are outstanding become anti-dilutive, which then brings the average share count down

Got it, that makes sense. All right, thanks guys.

Just for clarity, the attribution there is to Jim Watkins. (laughter)

Thanks, Tom.

There are no more questions in the audio portion of the conference. I would now like to turn the conference back over to Mr. Conroy for closing comments.

Thank you, everyone, for joining the call today. And we look forward to speaking with you on our fourth-quarter earnings call in May. Take care.

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