Boot Barn Holdings Inc (BOOT) 2017 Q2 法說會逐字稿

Greetings and welcome to the Boot Barn Holdings second quarter FY17 earnings call. As reminder this conference is being recorded. I would now like to turn the conference over to your host, Jim Watkins, Vice President Investor Relations and External Reporting for Boot Barn. Mr Watkins, you may begin.

Thank you. Good afternoon everyone. Thank you for joining us today to discuss Boot Barn's second quarter fiscal 2017 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 Boot Barn's website at Boot Barn.com . Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the investors 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 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 made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter fiscal 2017 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. Please note that we have not presented adjusted measures for the second quarter or the first six months of fiscal 2017 as there were no adjustments. 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. I'm pleased with the results for the quarter which strength of the Boot Barn brand as well as the strategies we put in place to manage through the current cycle. We grew net sales by 3.3%, increased same store sales 1.8% and achieved $0.02 of earnings per diluted share while maintaining our full price selling philosophy. Top line growth was driven by the sales contribution of the 13 new Boot Barn stars opened over the past 12 months and strong e-commerce growth at both Boot Barn and Sheplers. Sales growth was partially offset by the planned closure of eight store over the past 15 months including six low volume Sheplers stores that were closed consistent with our original expectation. On a consolidated basis, we have experienced sequential improvement in same store sales in each of the last three quarters driven by improvement in our store's business. From a merchandising perspective boots have been the primary driver of this improvement in same store sales growth with particular strength in work boots and men's western boots. For the quarter, same store sales in our brick and mortar stores declined low single digits with the legacy Boot Barn stores outperforming the rebranded Sheplers stores.

The sequential improvement in the stores was broad based across all major categories. We continued to see strong sales in many of our markets particularly in the west. While we continue to face sales headwinds in Colorado, Wyoming and North Dakota associated with the softness of local economies, dependent on oil and other commodities we are encouraged as same store sales in the 30 stores across these three states, improved sequentially from negative teens in the first quarter to high single-digit declines in this quarter. Same store sales in our Texas stores performed inline with the prior quarter experiencing negative mid single-digit declines. We again saw a strong performance in our e-commerce channel with e-commerce now representing 17% of our trailing 12-month total sales.

During the quarter we enhanced search engine optimization, saw improvement in both tablet and mobile conversion, and believe we continued to gain market share from other western industry competitors. As discussed last quarter, we are moving forward with a conversion of our e-commerce businesses to a new upgraded technology platform. We expect to complete this conversion before the end of our fiscal year. Same store sales in the core Boot Barn business including stores and Boot Barn.com but excluding Sheplers.com and the rebranded Sheplers stores was slightly positive. We saw sequential improvement in almost every major product category with continued strength in our work boots as we continued the positive growth we experienced in the prior two quarters.

We also saw growth in sales of men's and ladies western apparel, achieving positive results led by sales of dresses and graphic tees as part of our summer festival styling. Men's jeans, shirts and outerwear also experienced strong growth during the quarter. Turning now to the Sheplers business. Same store sales of the Sheplers business including e-commerce and the rebranded Sheplers stores were positive, led by double-digit growth at the Sheplers e-commerce business. The Sheplers e-commerce business achieved growth in virtually every major merchandise category with boots again showing out-sized growth.

Analyzing site metrics we saw an increase in conversion and a continued shift to mobile from desktop traffic. The rebranded Shepler stores saw a decline in same store sales as we continue to anniversary the heavy promotional activity in the second quarter of fiscal year 2016 which represents the period prior to our rebranding. However we continue to see growth in most categories we expanded such as work boots and work apparel which reflect more of the Boot Barn imprint. As a reminder the rebranding of the Sheplers stores to Boot Barn stores took place a year ago in three phases between early October and the middle of November.

When looking at the profitability of these rebranded Sheplers stores, merchandise margin rate improved significantly year-over-year driven by purchase economies, the introduction of private brands, and a reduction in the overall amount of promotional activity in the stores relative to the prior year period. While sales in these stores declined on a comp store basis, this improvement in merchandise margin rate largely offset the sales decline. We believe the progress we have made in these areas positions us well for profitable sales growth as we move past the promotional cadence of the prior year and regain sales momentum.

We will now provide an update on current business. Our same store sales through the end of fiscal October were slightly positive despite a couple of unfavorable shifts in events and we saw improvement in our merchandise margin rate when compared to October of prior year. We believe we are well prepared for the upcoming holiday period from a merchandising, marketing and operational perspective. This year we are putting specific focus on enhancing the omni channel experience for our customers. Accordingly, we will be rolling out in-store touch screen devices across all stores in the chain that will allow our customers to access millions of additional boots, apparel and other items from our e-commerce warehouse inventory as well as the inventory at most of our larger third party vendors.

Once implemented, these in-store tablets will enable our customers to choose from a much broader selection of products and sizes, purchase these items in store and in most cases receive free shipping to their home. This new initiative which we call WHIP for the, we have it promise, will be in stores in advance of this holiday shopping season. We expect that WHIP will enhance customer service, solidify our one stop shopping proposition and drive same store sales growth. Now I would like to turn the call over to Greg Hackman

Thank you, Jim. Good afternoon, everyone. I will begin by reviewing our second quarter results and then comment on our outlook for fiscal 2017. In my discussion, I will be commenting on both actual and adjusted results excluding 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 second quarter, net sales increased 3.3% to $134 million. As Jim mentioned, this was driven by the 13 new Boot Barn stores opened over the past 12 months and same store sales growth of 1.8%.

This growth was partially offset by the closure of eight stores during the last 15 months including six low volume Sheplers stores. Gross profit increased 1.6% to $36.4 million or 27.2% of net sales compared to gross profit of $35.9 million or 27.7% of net sales in the prior year period. Adjusted gross profit was $38.4 million or 29.6% of net sales in the prior year period. The 240 basis point decline in the gross profit rate when compared to the prior year was primarily the result of a 160 basis point increase in occupancy and buying costs. 130 basis points of this increase is the deleveraging effect of increases in store occupancy costs associated with the 13 new stores opened during the last 12 months. The remaining 30 basis points was incremental depreciation related to the capital investment we made in the rebranded Sheplers stores that was not incurred in the prior year period.

We did not experience a full quarter of depreciation expense for these remodeled stores until the fourth quarter of last year. As a result, we also expect this depreciation expense to be a ten basis point head wind for the third quarter. The 80 basis point decline in consolidated merchandise margin resulted from three factors that we reviewed -- that we view as short-term headwinds. First as we explained to you on the last two calls, we have a higher shrink provision for the first three quarters this year because our higher shrink results -- because of the higher shrink results we had in the fourth quarter physical inventory count last year.

The shrink accrual is 20 basis points higher consistent with the last quarter. The second factor is a 20 basis point increase related to an accounting provision for aged inventory, primarily related to inventory at the rebranded Sheplers stores, which is largely attributed to these stores performing below our expectations and thus having inventory levels higher than we had expected. Having said that, less than 8% of our inventory is considered aged at the end of the second quarter. The third factor relates to an increase in rewards expense associated with our customer loyalty program and was approximately 30 basis points.

To put the rewards expense into perspective, half of the increase in rewards expense was versus the prior year was due to the fact that the second quarter last years, the Sheplers stores were not yet rebranded and we did not need to accrue rewards expense for those sales which lowered the aggregate rewards percent. The other half is due to some more aggressive messaging to our most loyal customers to encourage them to visit a store and use merchandise credits that they had earned for being a frequent Boot Barn shopper. While this rewards expense hits merchandise margin, we view it as another form of marketing. For context at the same time we increased our focus on these most loyal customers, we also eliminated an entire direct mail campaign in September that we had won last year.

Importantly we continue to adhere to our full price selling philosophy in our store base and excluding the downward pressure from the shrink provision, we expect the merchandise margin rate in the third quarter to be approximately flat when compared to the prior year period. Operating expense for the quarter decreased 11.8% to $32 million or 23.9% of net sales compared to operating expense of $36.3 million or 28% of net sales in the prior year period. Adjusted operating expense was $32.6 million or 25.1% of sales in the prior year period. The decrease in operating expense is attributed to improved expense control which offset the added expenses associated with more stores as well as the inflationary pressures on other expense lines. We also benefited to a lesser extent from legal and contract settlements.

Our income from operations was $4.4 million in the second quarter of fiscal year 2017. Compared to $5.8 million of adjusted income from operations in the prior year period. Interest expense was $3.7 million which is flat to adjusted interest expense in the prior year period. That income for the quarter was $500,000 or $0.02 per diluted share compared to adjusted net income of $0.04 per diluted share in the second quarter of fiscal 2016. In the prior year period we reported a GAAP net loss of $3.3 million or $0.13 per diluted share. Turning to the balance sheet, I'm pleased with our efforts to diligently manage our inventory. Inventory was flat until last year on a comp store basis. On a consolidated basis, inventory was 7.2% to $191 million compared to a year ago.

The increase is primarily driven by a 3.7% increase from new stores added in the last 12 months and increases in our warehouse inventory to support our initiative to enhance merchandise margin by increasing our private brand penetration and our third party full container purchase program. As of September 24, 2016, we have a total of $250 million outstanding on our revolver and term loan. Including $57 million drawn on our $125 million revolving credit facility. At the end of the quarter we had $11 million of cash and cash equivalents and our net debt leverage ratio was just below 4. Turning to fiscal 2017, we have updated our outlook for the full fiscal year and now project same store sales to be slightly positive

While stores in oil and gas markets continue to be a drag on our consolidated same store sales growth, we have seen that impact diminish slightly in the most recent quarter. We now expect income from operations of between $43.7 million and $46.8 million and net income to be between $17.7 million and $19.6 million for fiscal 2017. Earnings per diluted share is expected to be in the range of $0.66 to $0.73 per share based on an estimated weighted average diluted share count of 26.9 million shares for the full fiscal year. As a reminder our current fiscal year is a 53-week year and we estimate that week, that 53rd week will contribute $0.03 per share.

Turning to our outlook for the third quarter of fiscal 2017, we expect same store sales to be slightly positive when compared to the prior year period. We estimate our third quarter earnings per diluted shared to be in the range of $0.38 to $0.43 per share based on an estimated weighted average diluted share count of 27 million shares for the third fiscal quarter. Now I would like to turn the call back to Jim Conroy for some closing remarks.

When I reflect on the second quarter, I want to recognize the entire team and the results we were able to achieve. We fought hard to achieve a positive 1.8% same store sales growth and we were able to offset the drag of the oil and commodity pressures in Texas and Colorado, Wyoming and North Dakota. We did this while at the same time eliminating an entire direct mail campaign in the month of September and managing our average store inventory to be flat last year. And finally we demonstrated a strong cost conscious culture across the organization as evidenced by the improvement in operating expenses. Given the macro retail environment, coupled with the out-sized pressure we feel in oil and commodity markets, I'm pleased with the outcome and I would like to thanks the entire Boot Barn and Sheplers team for delivering the second quarter result we just summarized for you all. Now I would like to open up the call to take your questions. Mike?

(Operator instructions). Your first question is from Peter Keith from Piper Jaffrey.

Hi. Good afternoon, everyone. Thanks for taking the call. I was curious on a couple of dynamics being called up by other retailers. One would be the dynamic of weather and at least in certain parts of the country we've had a fairly warm fall this year. Curious if that's shown up as an impact on your business thus far and then secondly, any thoughts around what's been characterize as weakness in the agriculture economies now, maybe less exposure there but curious if you're seeing any developing trends when in that segment?

Sure. On the weather piece, I always think that's hard to specifically isolate as an impact. Therefore we didn't call it out. I do think that it had been a warmer fall and probably did create a bit of a headwind for us, but it's very hard to estimate the impact of it. In terms of your question around agriculture, we are impacted by that in some states. Some of that is embedded in the three states of Colorado, Wyoming and North Dakota. So while it's often abbreviated as oil and gas, we choose the words oil and commodity prices very specifically because in many of those markets, including some of the markets in North Dakota, it's pressure on some of the specific agricultural commodities, corn, canola, soy, that are creating some of the headwind pressure in the eastern part of the state anyway. Having said that, we were able to find some growth in other areas and, changed a few things from a merchandising and marketing standpoint that helped us find some same store sales growth.

Okay, thanks, Jim. That's helpful. And maybe then on gross margin if it would be a better question for Greg. You had mentioned the three headwinds to gross margin or merchandise margin. When would we expect those to abate? and does the guidance imply fairly healthy gross margin gains by fiscal Q4?

Yeah, so the first dynamic which is the shrink dynamic that we've seen in Q1, we'll also see that in Q3 and then that should actually reverse for us a bit in Q4. Obviously we have to see the results of the physical inventory count to see what that impact is in Q4. But presuming it's the flat or same rate year-over-year, we'll see a pickup in Q4 because we won't have that charge that we incurred all at one time in Q4 last year. In terms of the aged inventory, as I said in my prepared remarks, we've got a pretty healthy inventory freshness, less than 8% of our inventory is aged so I don't expect that we'll see this recurring charge. And then the third factor is the rewards expense and the one piece was that, you know, last year in the second quarter, the stores were branded as Sheplers. We weren't giving customers that stopped in the stores, Boot Barn reward points but that does start at post rebrand and most of those rebrands did happen by mid-November so there's a slight piece of Q3 this year that will have the same phenomenon that we saw in Q2 but I don't think that's a material item. And then the second piece in terms of how we've been marketing to our most loyal customers, we were pleased with the result we got out of that in terms of the customers, appreciating us making them aware of their rewards points and using those. So that might continue, but frankly, we don't have anything planned at this point. And then in terms of healthier merchandising margins in Q4, we've got a pretty consistent promotional calendar both in Q3 and Q4 and so I don't expect to--see any step function changes either way in our merchandised margin. We have the initiatives to improve margin that I talked about briefly in terms of private brand and container purchases. But, you know, we expect Q3 to be roughly flat and again we start to see some improvement in weight I think in Q4 subject to the physical inventory.

Your next question is from Matthew Boss from JP Morgan

Hi this is Steven (inaudible) for Matt today. Thanks for taking our questions.

No problem.

So just following up on that last question, if we're thinking about merchandise margin being flat in the third quarter and then growing in the fourth quarter, how should we think about the buying and occupancy line just trying think about overall gross margin performance in the second half

Yeah, as we've said before on calls, we need, similar between a 3% and a 4% same store sales growth to have flat occupancy costs year-over-year. And so to the extent that we'll be comping below that, we will very have some deleverage effect on the occupancy line.

Okay. Very helpful. And then the cost controls are very impressive in Q2 to drive SG&A leverage. Do you expect to see continued leverage in the second half of the year on the SG&A line?

What we expect -- I mean, in Q3 specifically, we expect to be flattish. And then Q4, we'll see a slight benefit because of the 53rd week. We should be able to leverage some of the fixed costs that occur in March with an extra week, if you will. So that's a way to think about it.

That's all the questions. Thanks very much.

Thank you.

Your next question is from Randy Konik from Jefferies.

Hi. Thanks, guys. I first want to ask about the e-commerce division. You said it's 17% of total sales I believe. Is there any color you can give us between how that divvies up between the penetration of e-come of, of Boot Barn.com to its divisional sales versus Sheplers.com to its divisional sales? and any kind of color you can give around, like, a margin differentials between the two sites and skew overlap and what I'm trying to get towards is how do you think about, you know, the long-term vision of, you know, total e-com penetration, margin profile between the two sites skew productivity, etc. I'm just trying to get a sense of how you are thinking about in longer term in the next quarter. Thanks.

Sure. Let's just start at the highest level. We have two brands online as you've pointed out. Sheplers.com and Boot Barn.com . We expect that those two brands will continue from a strategic perspective. The Boot Barn.com online brand is truly an extension of the store, it's our omni channel brand. We're connecting it more and more with store level experience. And the Sheplers brand is more of the mega site and really gives us an ability to go head-to-head with price competitors including some of the biggest sites in our industry and outside our industry. So from a strategic perspective, they take on two very different roles for us. In terms of their relative size, the Sheplers site is three times bigger than the Boot Barn site. So it definitely does more volume.

Having said that, the expertise that runs the Sheplers.com piece of the business is continuing to bleed over to the Boot Barn.com piece. In fact, the same person now runs both businesses which is already starting to pay some dividends from the Boot Barn.com part of the business. In terms of margin rates of the two businesses, without walking everybody through a very detailed P&L of the two, Boot Barn.com 's prices tend to be a little bit higher than Sheplers.com so we get a higher merchandise margin rate and when we take the e-commerce division as a whole and compare it to the store's business as whole, the operating margin is slightly less than the store's business but it's one that we're starting to make some in-roads on closing that gap. So we want to get to the point where we're indifferent between -- we're indifferent from a financial perspective between an in-store sale and a e-commerce sale. So we've made some progress there and we'll continue to work on it until we get to that point. In terms of your last part of your question was breadth of assortment. Right now the Sheplers assortment is also broader than the Boot Barn assortment. Over time, when we integrate the back end and using that term back end very generically, that will ultimately include the inventory and the warehouse. The assortment breadth and depth will be identical between the two brands albeit pricing may continue to vary across the two brands. Hopefully that gives you some more color in terms of how we're going to market with the e-commercial channel

That's very helpful. So I guess my next question would be you talked about, quarter-to-date trends slightly positive. You did mention a sentence that talked about important events that had timing shifts. I just wanted to be curious how impactful those might have been from a native standpoint? and then you talked about the rebranding, remember the rebranding took place in October and November of last year. So I guess what--would be helpful for everyone is how do you think the story plays out as we lap that effort, you know, not just October/November but past. What should we be seeing in the marketplace as we're monitoring the story from a merchandise margin perspective, a sales perspective, etc. Thanks.

Sure. On the first part of your question, the timing shift, there's three or four things that I could call out, all in aggregate the way I would help guide the investor is as we look at our business in October and we compare it to the most recent quarter, I think it's virtually in line if we were to normalize it for some of the shifts. Two of the shifts that I call out just to give you some specifics, there's a PBR world final every year in Las Vegas. It's two weeks later this year versus last year so we've already cycled the sales that would generate in the Las Vegas market last year and that's upcoming for us this year. The PBR starts on November 2 this year so it's next Wednesday. The second thing we've done is-- and it kind of relates to that in Las Vegas.

We had historically before we had put our new store in the Las Vegas market, at this point in time we would put a tent outside one of our stores, kind of a permanent tent, if you will, and it would be up for two-and-a-half months or so, and it would sell through a lot of kind of clearance product or product that we bought specifically in closeout to sell through in that tent during the time period. Given the fact that we now have a brand new flagship store in the Vegas market and we've split our work in western stores in two different stores in our market, we decided to not do the tent. And while that will erode our same store sales a little bit, it's from a margin dollars perspective, it's proving to be a good decision. And in the third thing that I would say that was kind of year-over-year comparison was when we cycled the first set of Sheplers stores that got rebranded last year, they had a nice pickup when they were rebranded during the grand opening. And now that is behind us. For the next two phases, the increase that they experienced during their grand opening was more muted so I don't expect it to be a big deal for the next couple of phases. But again, the headline there is that the business in October was very much in line with the business that we just reported for the second quarter.

That's super helpful. My last question, I know I want to ask, the first couple questions asked about more I feel near-term gross margin puts and takes and what-have-you. I guess my question is, do you feel good about, the long -- from an IPO perspective when you went out, the long-term gross margin kind of opportunity with private label, etc. Like IE, is there any change to the long-term gross margin profile for the business in your view?

Right. So it's a great question. No, there's no change in the long-term outlook of merchandise margin expansion going forward. We continue to build our private brand businesses. We will be launching -- likely launching a new brand over the next six months or 12 months that we just started early days working on. We're also taking our current private brands and introducing them into Sheplers.com for the Christmas or holiday season. And, you know, if we can get traction on that part of the business, that will be another call it e-commerce in total 17%, that will be another 13% of our business if we add Sheplers -- if we add private brands to Sheplers where we're getting margin enhancement on the private brands piece. So that's another area where we should be able to improve merchandise margins. And the last piece of it is we've had some really nice traction in direct importing full container loads of vender products and when we take over the container and import it ourselves, we get expanded merchandise margin, and that merchandise margin is --or the differential on that merchandise margin is big enough to improve our rate even after the additional SG&A costs that has to go into the distribution center and other things to break it down. So I think all of those things will help us continue to build some expansion in merchandise margin rate going forward.

Very thorough and very helpful. Thank you.

No problem, thank you.

The next question is from Mitch Kummetz from B. Riley

Thanks for taking my questions. You made some comments around oil and gas as always and Texas you mentioned that it was negative single digits sort of in line with last quarter. I'm just kind of curious to try to understand some of the comparisons. Was Texas a similar compare, was it an easier compare and when you think about kind of these four states in total, just remind us, when you're lapping the easiest comparisons in those markets?

So in the first part, so yeah, just starting with the -- it was called out in the script and then I'll get back to the second part of the comparisons to last year. What we said was Texas in the second quarter was very much in line with the first quarter. The other three states that we tend to group together, Colorado, North Dakota and Wyoming have improved. And then when we think about the year-over-year comparison which was the second part of your question, the three -- the worst is yet to come for the three states in the year-over-year comparison. And I guess frankly the worst is yet to come in year-to-year comparison for Texas. So to some degree I don't want everybody to read too much into that but that's what the data will tell you.

So when you say the worst is yet to come, can you give us a sense as to when that worst is coming?

yeah, the easiest compare we have just in the commodity states unless you group them all four together for this particular fact is the third quarter.

Okay. Got it. Thank you. And then Greg, on the SG&A for Q3, you mentioned some benefit from some legal and contract settlements. Can you just be a bit more specific as to what the benefit was on the margin in the quarter for that

I would characterize it as saying it was smaller piece of the overall savings in SG&A. We wanted to call it out because it's one-time in nature but it's not material to -- I'll say the rates and the guidance I've kind of laid out in terms of how Q3 will look takes into account that --going away.

Got it. And then Jim you mentioned that on the quarter the work comp, I think for both apparel and footwear was positive and I think this is the third quarter in a row that you've seen that. I think last quarter you talked about some challenges on the discretionary side. Can you maybe address that a little bit? and I have one last one

Sure. So work boots continues to be a nice driver of sales. Part of that is the Sheplers stores have really introduced work boots since we rebranded so that's been a nice piece of our growth. In terms of the work apparel, work apparel is a little bit more complicated. It's very strong in the Sheplers stores. It actually was less strong in the Boot Barn stores. Having said that, I think that's almost entirely due to the change in the mailer because when we did our October mailer that had the work apparel business turned immediately positive in the Boot Barn stores. The other thing that we've seen that is I think underlying good news from an apparel perspective, and this is now just looking at Boot Barn kind of the core Boot Barn business is we've seen the men's and ladies western apparel businesses improve.

They're not up on a consolidated basis mostly because the Sheplers stores or rebranded stores are dragging them down but if we were to exclude the rebranded stores and impact of the promotional coupons and the LY, we've seen some nice traction and a lot of credit goes to the merchants who have really worked hard to evolve those assortments. In terms of discretionary purchases versus the sort of necessary purchases, if exotic skinned boots is the bellwether for luxury or discretionary purchases, that business is still pretty tough. So, you know, the anecdote of the guy working in the oil field buying his work boots and his work apparel and also buying a pair of $400.00 or $500.00 exotic-skinned boots, that guy in that business is still under pressure. But we've been able to offset it about some other areas.

Got it. And last question I had was some of your venders as they've gone through this earnings season have talked about an abundance of off-priced inventory. I don't know to what extent you're seeing that in terms of competing against that. Obviously you guys have more of a full price stance. So I don't know if that's having any impact.

Yeah, it's -- our competitor, if I'm honest, it's somebody who's selling boots and devaluing the category regardless it's whether its full price items or not. We see that in stores because a lot of the pressures that we've been facing that fortunately have been able to kind of fight through have really impacted many of the local mom & pop competitors out there and we've seen those guys in many markets going out of business and liquidating our inventory. We've also seen some pressure online from a couple of pure play western boot retailers and, that's another area where that price erosion and that battle for market share is frustrating, particularly in the short term. In the long term it gives us more standing as the leader in the industry. We continue to build market share and we'll continue to have less competitors going forward of any formable nature

Got it. Thanks, guys.

Thank you.

Thank you, Mitch.

The next question is from Paul Lejuez from Citi.

It's Tracy (inaudible)in for Paul. I have two questions. The you guys mentioned you had a sequential improvement in almost all categories and I think you just said men's and women's apparel got better. So I'm wondering which product category did not get better and then I have a follow-up. Thanks.

Yeah, I think the Only notable call-out would be work apparel. And again I think that's kind of a fooler because I think if the shift -- I'll just tell you specifically what we did last September. -- And it had been a perennial promotion where we did a "work mailer." We sent more than a half a million direct mail pieces, picture mini catalogs out last September that featured Carhartt and Rigs and our other work apparel brands. We eliminated that catalog altogether. We built in some of that merchandise into our October mailing and when we went from September to October, the work went from negative to positive. So again we wanted to make sure we were being intellectual honest and calling out that wasn't every single category but I think in the case of the work apparel business it was simply a shift of when we kind of went to market and promoted it with our catalog and with the radio support that almost always supports the catalog directly.

And your next question is from Benjamin Bray from RW Baird

Thanks for taking my question. I just wanted to ask with comp stabilizing now, how should we think about the unit outlook now and what do you need to see to potentially reaccelerate that next year?

Yeah, I think what we've said is that we needed to get through Q3 or holiday to see. To take a better temperature check of the business. So I think we might talk about it in the next call but we're not prepared to talk about that at this point.

Okay. Thanks. And then I also just wanted to ask about the financial leverage and some of the puts and takes, when you do eventually make those decisions with the unit outlook? What's your comfort level for the current financial leverage and, how would increasing this unit outlook impact your cash flow?

So a new store on average costs us about $800,000. A mix of capital and inventory investment. And what we said this year in terms of our guidance was that with 15 stores unit growth -- yeah, 15 stores unit growth instead of 22, that would save roughly $5 million or $6 million in cash by not building at a 10% unit growth. We also said that our cash flow projection was between $13 million and $20 million. So we would still generate excess cash flow this year even if we built 10% unit growth. And in terms of our comfort level with the leverage rate below 4, going forward we're comfortable with that.

All right. Thanks very much.

Thank you.

(Operator instructions) And there are no further questions at this time. I will turn the call back over to the presenters.

Great. Thank you everyone for joining the call today. We look forward to speaking with you all on our third quarter earnings call after the new year. Thank you.

This concludes today's conference call. You may now disconnect.