Boot Barn Holdings Inc (BOOT) 2017 Q3 法說會逐字稿

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

Thank you. Chris.

Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's third-quarter, FY17 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 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, 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 be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third-quarter FY17 earnings release, as well as our fillings 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 third quarter of FY17, as there were no adjustments.

I'll 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 that we were able to generate our third consecutive quarter of positive same-store sales growth. As we look at the underlying fundamentals of the business, we feel good about the key drivers of our positive same-store sales trends over the last six months.

Within the quarter, same-store sales increased slightly in October, declined to a negative 5.2% in November, and then grew 2.3% in December. We believe that November was an anomaly, due to unseasonably warm weather in many of our core markets, and the distraction of the presidential election. Fortunately, sales rebounded in December and we have seen positive same-sales growth continue into the first five weeks of our fiscal fourth quarter.

We continue to face macro pressures in many of our core markets, being impacted by the price of oil and other commodities. Having said that, we were still able to achieve a slightly positive same-store sales result for the quarter, which further validates the benefit of our diversified business model, and the strength of both the Boot Barn and Sheplers brands.

While it is difficult in our industry to precisely measure the sales performance of other western and work retailers, we believe that we continue to take market share from many of our competitors, in both the store and e-commerce channels. I am encouraged by the progress we've made executing our major strategic initiatives, aimed at driving sales growth and increasing profitability.

These growth strategies have remained intact for the past four years, although we continue to evolve our approach and execution to adapt to a changing marketplace. For reference, the four growth strategies are as follows; number one, continue omni-channel leadership; two, drive same-store sales growth; three, build out private-brand portfolio; and four, expand our store base.

I would like to provide some detail on the progress we are making on each of these initiatives. First, continue omni-channel leadership. Our third quarter marks our fifth consecutive quarter of double-digit e-commerce growth, which highlights the competitive advantage of our two online brands. This increase was driven by solid sales gains across all major merchandise categories.

On a trailing 12 months basis, e-commerce amounted to $111 million, or 18% of total sales. And we believe this will move higher as we continue to take share from other western and work competitors. Our latest omni-channel initiative is called WHIP, for we have it promise.

The premise of WHIP, is to demonstrate our market leadership position to our customers, by offering the breadth of our full e-commerce assortment, coupled with the service levels of a retail store environment, including experiencing a broad selection of merchandise, speaking with knowledgeable store associates, and getting expert advice on product fit and function.

Utilizing touch screen devices, customers in our stores can now access millions of items in our e-commerce warehouse inventory, as well as the inventory of our larger third-party vendors. Purchase these items in-store and in most cases, receive free shipping. Following its launch, WHIP contributed 2% of store sales in the first four weeks of December, and we've continued to see a positive customer response to this enhanced shopping service in January.

During the next three months we plan to complete the migration of the bootbarn.com and sheplers.com websites, onto a common, upgraded platform. Once complete, we will be able to combine the fulfillment of bootbarn.com and sheplers.com into our e-commerce distribution center in Wichita, Kansas.

Not only will this allow us to more efficiently fulfill all e-commerce sales in the middle of the country, but it will further expand the product available to both the bootbarn.com site, and our WHIP tablets. In addition to the platform change, we have increased automation in the fulfillment center, and have accelerated some of this investment into the current fiscal year. We also believe that this combination, together with other investments we are making in our e-commerce infrastructure, will enable us to continue to improve the margin in this channel.

Our second initiative is to drive same-store sales growth. I am encouraged to see our top-line sales continue to grow with particular strength in December. From a merchandising perspective, we have seen strength in work boots and men's western boots, as well as work apparel. Geographically, we continue to see strength and some of our western states, particularly California.

Unfortunately, the negative sales trend in states being impacted by oil and other commodities, which is approximately one-third of our stores, did not yet improve relative to he prior quarter. Specifically, North Dakota, Colorado and Wyoming have been under the most pressure, and posted a negative high-single-digit decline in same-store sales.

Texas, our biggest state, again experienced a negative mid-single digit decline. While the price of oil has stabilized, and rig count is up modestly, we did not seen an improvement in these stores in the fourth quarter to date, and expect any improvement to lag the recovery in the oil market, similar to the lack we saw when oil prices declined.

Despite this ongoing pressure, we were able to grow same-store sales by offsetting these declines with outsized growth online, coupled with modest growth in some of our other states. Our merchants were able to expand into adjacent product lines, and find growth in performance work boots, western-styled driver [macks], and short-shaft boots for women. Notably, we did not meaningfully increase the level of promotional activity to drive same-store sales.

Our third strategic initiative is to build our private-brand portfolio. We are pleased with the ongoing progress of our private brands, and continue to build those businesses across the store and online. For the quarter, our penetration of private brands grew more than 100 basis points versus the prior year, driven by stronger double digit growth in Cody James, our largest private brand.

In the quarter, we expanded the Cody James business, with a broader assortment of core-western merchandise, under the Cody core brand. And recently introduced an extremely compelling line of top-quality exotic skin boots under the Cody Exotic label. We continue to see a very strong reception to all of the private brands and the rebranded Sheplers stores, and we have recently introduced these brands on sheplers.com, as well.

Our fourth initiative is to expand our store base. We opened six new stores in the quarter, including, our first stores in the states of Alabama and Washington. We've now open 10 new stores year-to-date, and at the end of the third quarter, we operated 219 stores in 31 states. We expect to open two new stores in the current quarter.

As a group, new stores opened during the past 12 months are in line with our three-year payback model. Additionally, we've been working hard to reduce the capital requirements for a new store to help further accelerate the payback.

And now I'd like to turn the call over to Greg Hackman.

Think you, Jim. Good afternoon, everyone. I will begin by reviewing our third-quarter results, and then comment on our outlook for FY17.

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 third quarter, net sales increased 2.9% to $199.4 million. As Jim mentioned, our sales performance benefited from the contribution of the new Boot Barn stores opened over the past 12 months, partially offset by the closure of two stores.

Gross profit decreased 1.3% to $63.4 million, or 31.8% of net sales, compared to gross profit of $64.2 million, or 33.1% of net sales in the prior year period. Excluding the amortization of inventory fair value adjustment and acquisition-related integration costs, adjusted gross profit was $65 million, or 33.5% of net sales in the prior year period.

The 170 basis point decline in adjusted gross profit rate resulted from a 100 basis point decline in consolidated merchandise margin, and 70 basis points of occupancy deleverage. The decline in merchandise margin rate resulted primarily from four factors.

First, 30 basis points of decline is the result of a shift in sales composition, as we had a higher percentage of e-commerce sales compared to the prior year. Second, 30 basis points of the decline resulted from increased freight costs.

The third factor related to a high redemption rate in our annual bounce-back promotion, which accounted for 20 basis points of the decline. Finally, the shrink accrual was higher, consistent with the last two quarters.

As Jim mentioned, we continue to expect to drive merchandise margin by increasing our private brands penetration. We also expect to see a meaningful increase in full-container purchases of branded merchandise of boots purchased at volume discounts. This should further bolster the merchandise margin rate.

Sales of goods purchased through volume discounts now account for more than 7% of sales, and we expect these sales to grow to high-single digits by the end of FY18. The sale of these goods contributes merchandise margin approximately 500 basis points higher than the same goods when sourced through our normal procurement channels.

Operating expense for the quarter was $42.5 million, or 21.3% of net sales, compared to operating expense of $44 million in the prior-year period. Excluding acquisition related integration costs, loss on disposal of assets, contract termination costs, and SEC filing costs, adjusted operating expense was $41.5 million, or 21.4% of sales in the prior year period.

I am pleased with our expense control during the period, that allowed us to achieve slight leverage in operating expense, compared to the prior year. Our income from operations was $20.9 million in the third quarter of FY17, compared to $23.5 million of adjusted income from operations in the prior year period.

Interest expense was $3.6 million, which is flat compared to the prior year. Net income for the quarter was within our guidance, at $10.5 million, or $0.39 per diluted share. In the third quarter of FY16, our adjusted net income was $0.45 per diluted share, or $0.37 per share on a GAAP basis.

Turning to the balance sheet, I'm pleased with our efforts to diligently manage our inventory. Inventory on an average store basis was down by approximately 3% compared to last year. On a consolidated basis inventory rose 3.4% to $180 million compared to a year ago. The increase was primarily driven by inventory at the new stores added in the past 12 months, and an increase in our warehouse inventory used to support our private brand initiative and our goods purchased at volume discounts.

As of December 24, 2016, we had a total of $216 million outstanding on our revolver and term loan, including $23 million drawn on our $125 million revolving credit facility. We had $31 million of cash and cash equivalents, and our net debt yet leverage ratio was 3.2 times.

As a reminder, our working capital needs are at their lowest levels of the year at the end of third order. Turning to capital expenditures, as Jim mentioned, we have accelerated investments to support our e-commerce growth, and we now expect our FY17 spending to total between $17 million and $18 million.

Now to our outlook, as we look at the fourth quarter, we expect same-store sales to be between flat to a positive 2%. Adding this to our third quarter year-to-date same-store sales performance, we now expect our full year same-store sales growth to be approximately 1%.

With respect to earnings, we now expect income from operations of between $41 million to $42.3 million, and net income to be between $16.1 million and $16.9 million for FY17. Earnings per diluted share is now expected be in the range of $0.60 to $0.63 per share, based on an estimated average-weighted diluted share count of 26.9 million shares for the full fiscal year. This compares with our previous earnings per share range of $0.66 to $0.73 per share.

There are three factors that have caused us to reduce our full-year projected profitability. First, while we were pleased with our third-quarter performance given the macro sales pressure, our earnings were $0.04 below our high-end range. Second, given the headwinds in our oil and commodity states, and expected lag in the recovery, we have lowered the fourth-quarter sales forecast for sales in these states.

Third, we expect lower merchandise margins due to a higher concentration of e-commerce sales, combined with additional pressure from increase clearance penetration during the month of January. For the fourth quarter, same-store sales are expected to be between flat to a positive 2%, with income from operations between $11.4 million and $12.7 million, and net income to be between $4.6 million and $5.4 million.

Earnings per diluted share is expected to be in the range of $0.17 to $0.20 per share, based on estimated weighted-average diluted share count of 27.1 million shares.

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

Thanks greg. I'd like to open up the call to take your questions. Chris?

Thank you, Mr. Watkins.

(Operator Instructions)

Our first question comes from the line of Matthew Boss, with JP Morgan.

Thanks, guys. Can you just talk about the performance and the returns that you are seeing in your new stores? And then, just what metrics you are watching to consider square footage re-expansion next year and beyond?

Sure. Thanks, Matt. The new stores are in line with our three-year payback model, that we have outlined and been public, and been have consistent to, throughout. A new store does $1.7 millionish on average, and with the investment in both capital and inventory we get about a three-year payback.

In terms of whether we are going to accelerate going into our next fiscal year, we certainly will lay that out on our year-end call for everybody. The earnings algorithm for Boot Barn, has typically been 10% new unit per year, and the year that we are presently in, we are opening fewer than 10%. Over the last few years prior to that, we had exceeded that number pretty handily, coupled with acquisitions on top of new-store growth.

I think were true to the 10% number over a long period of time. I think it's a little premature to commit to a number for our FY18.

What we would need to see is good stable business over a few quarters. We are starting to build that over the last couple of quarters. We would like to get through the balance of Q4, and understand where we stand from a same-store sales perspective, and from a capital perspective. And then we will make the call as to how many new stores for next year, as well as what return on investment we can get for remodels. Does that answer your question?

Yes. No, it does. Thank you.

Just as a follow up, if we parse through some of the regional noise, what is the underlying core comp that you are seeing in some of the non-oil and gas markets? And just, any change in foot traffic, in just given your heightened e-commerce penetration now?

So, two different questions. On the core-underlying comp, the model that we laid out, when we're in public was, a low-single-digit underlying comp. And, I think if we stripped out some of the headwinds that we're facing, and included the benefit of e-commerce, we would be certainly within the low-single-digit comp that we had always had in our earnings algorithm.

It is, admittedly, tempered from the plus 7s we were posting a couple years ago, but it's in line with the earnings algorithm, if you will, or model that we had outlined.

In terms of the second part of your question, given that our e-commerce has been growing double digits, and while, on a consolidated basis, we were positive -- admittedly, we were fairly positive. Therefore, the stores comp negative for the third quarter, most of, in fact all of, the negative comp in the third quarter can be attributed to transactions as opposed to traffic, we don't have traffic counters we can rely on just yet. But our transactions were down, our basket was, actually, slightly up. We would infer from that, that it was a foot traffic challenge that drove the store's business to a negative comp.

Great. Best of luck, guys.

Thank you.

Our next question comes from the line of Peter Keith, with Piper Jaffray.

Hi. Good afternoon. Thanks, everyone. I was wondering around the gross margin mix headwinds, with the strength in e-com, two questions on that. Is -- did you actually quantify the drag on your business? And, maybe, why has that now popped up as a headwind, when I don't recall seeing it in the past?

I am not sure we understand the first part of your question. Can you try that again on us?

What was the gross margin negative impact from the shift to e-com sales?

Overall it was up 30 basis point [hurt] to merchandise margin.

Okay. So, why is that now -- I don't recall that being called out in the past. It seems like that's a meaningful headwind. Why has it popped up now? And how long should we expect that to remain in place, keeping in mind you are making some e-com investments?

Great. So, I think it's more pronounced in the most recent quarter, because we had such strong growth in e-commerce. And frankly, we had stronger growth in e-commerce than we had anticipated.

So, the channel shift was a little bit more accelerated in the most recent quarter than we had initially, sort of, modeled ourselves. So, that is the reason for calling it out.

And the reason the margin is lower, is -- there's a couple reasons, we think, specifically merchandise margins. The first is, the online channel tends to be a little bit more price competitive, so our merchandise margin rate -- literally the price that we are starting the goods for, tends to be a little bit lower online than it is in the stores. That's even more pronounced on sheplers.com versus Boot Barn stores.

The second piece is, the shipping costs associated with the online purchase, also erodes our gross margin. And, in today's world, in order to be competitive online, we need to offer free shipping at minimum, and in some cases, free two-day shipping, which while not economic for us, or probably for anybody, it's table space in today's world.

Okay, thanks.

Does that help?

That answers the question. So then, I guess as you are consolidating down to a single DC, obviously, there should be some cost savings there over time. Is your goal then to make that e-commerce shift neutral, or should we expect, just over time that's going to be a constant headwind on gross margin?

So, look. A couple of responses to that. It's a very good question. Firstly, we are agnostic to how the customer wants to shop. We want to be there in either channel for -- to take care of consumer demand. And, what we will be working on, is trying to get the e-commerce channel to be equally profitable to the stores channel for us.

So, a couple of things that we are looking at, and are in the process of doing, one we talked about combining the two fulfillment centers. Right now, bootbarn.com is fulfilled out of California, and sheplers.com is fulfilled out of Wichita. In the next couple or three months they will both be fulfilled out of the same place. So there is some natural economy to scale there.

The second is, we are -- we had always planned to invest in the online part of our business. Now, I think we are moving more quickly, and perhaps in a more augmented way, to add more automation to the Wichita facility. So, that should take the pick cost down.

The third piece is, shipping, particularly on bootbarn.com, given the way the Company is set up, you could understand why bootbarn.com fulfillment was out of California. But other than that, it doesn't make sense to have e-commerce fulfillment coming out of the western part of the US. As soon as we move the bootbarn.com fulfillment operation, to be combined with the sheplers.com fulfillment operation, we should be able to reduce the shipping cost per package, for each customer. That will continue to help improve the profitability.

And I would say the last piece of it is, kind of coming back to top-line or merchandise margin. Right now, our online inventory turns much more quickly than our stores' inventory. We think with a modest investment in our inventory online -- and frankly, some of that could just be a shift from store inventory, we can do a couple things. One, we can offer consumers a broader assortment and kind of push into the critical long tail of demand, and by doing so, it's a little bit less price competitive because fewer people are playing in that space.

The second piece of it, that is a little bit unique to our industry, is, often times the long tail portion of the demand curve is fulfilled directly by vendors. We drop ship from an Ariat to our customer, or from a Wrangler to our customer. And, while that is a customer accommodation, and it certainly takes care of the sale, it's a little bit less profitable for us.

So once we -- with a relatively modest investment in the online inventory, we think we can reduce the amount of drop shipping that we need to do, and that will further improve the profitability.

I think when you put all those things together, I think the gap will get more and more closed and a little bit more scale. If e-commerce continues to grow at the rate it's growing, we'll get a little bit more scale on the fixed-cost overhead for e-commerce. And, I think we can get -- for most of the year, I think we can get the two parts of the business to be pretty close. The part that it's -- when we get into December, when the stores really get leverage on occupancy, that's where the delta is, the biggest piece. We are going really have to work hard to close the gap in December.

Okay. That's great feedback. I appreciate it.

One last question, unrelated, the former Sheplers stores, now that you have fully lapped the conversion process or annualized it, how are those performing in year two under the Boot Barn banner?

Yes, Peter, we looked at those stores, and those stores performed in line with Boot Barn stores in similar markets. The Sheplers stores in Texas perform like other Boot Barn stores in Texas, the stores in Denver perform similarly, et cetera. We were pleased to see that the Sheplers stores had improved to the Boot Barn level of performance.

Okay. Thank you very much guys. I appreciate it.

Thanks, Peter.

Our next question comes in line from Jonathan Komp, with Robert W Baird.

Yes, hi. Thanks. My first question, just a couple clarifications to start. The unit growth for the year, I think it was now 12 units for the year, and previously was 15, but I wanted to confirm that. And if that's either a timing shift or something else going on?

John, it's Greg. Two stores that we thought were going to open this fiscal year have slipped into FY18. And then, we had one store that we opened that we had targeted as a remodel -- I'm sorry, it's a relocation, it's in Concord, North Carolina. We had initially counted that as a new store that is really a relocation. As we closed a mall store in that same market, where the lease had expired. And it made more sense to move that store outside the mall.

Okay. Got it. And then, just to clarifying the drag from freight on gross margin during the third quarter. Was that -- I guess, what drove that? Was that a mix issue or some other source of pressure?

It was a mix issue, we really saw it at sheplers.com. Sheplers.com had outsized growth, as we talked about. And as part of that, and Jim touched on it as well, we want to invest more inventory into that business. It's turning faster, and one of the costs associated with not owning that inventory in the distribution center, is a little bit extra freight costs from the vendor to get it to the store -- or to the customer, excuse me. It was partly due to the success of how strong Sheplers performed in the quarter.

Great, okay. And then, turning to the guidance. I know, Greg, you mentioned three or four factors contributing to the slight reduction for the year. And I just wanted to, maybe ask if you could give more color on the degree of impact from each of those factors that you mentioned?

Right, so if we thought about the previous range of $0.66 to $0.73, and now we are at $0.60 to $0.63, it's basically $0.10 of reduction. $0.04 is missing Q3 on the high end of our guidance range. We had guided to $0.43 and we came in at $0.39, so we were below the high end.

The second piece is really the headwinds in those oil and commodity states that continue to lag, and so it is taking down our top-line store sales as the result of that lag. And then, finally, it's merchandise margin we are seeing a little bit of continued pressure, as e-commerce penetrates a bit more in the business.

That was pretty pronounced in Q3, and Q4 seems to have continued that trend. We talked about it, I believe at ICR, that January is our normal clearance time of the year, and we had more success with that event this year. And so, we had increased penetration of clearance, which brought down our margins in the month of January.

Okay. And then, the last one for me, I just wanted to throw out a bigger picture question, just on the policy standpoint and tax policy and trade. Obviously, a lot of moving parts and uncertainties. But, I wanted to maybe ask if you have given any thought about some of the potential implications from what's been discussed out there? And maybe, if you could help quantify some of the sourcing exposure in terms of country of origin for your products?

Sure. So, starting the big picture to your point, I think, in general, and certainly there are a complicated set of dynamics at play here. And we are following it extremely closely, as I'm sure everyone on the phone is. But, in general, we believe that the new administration could be good for our core customer.

We do service a blue-collar US worker. We certainly are closely connected to the oil business. So to the extent that either of those can be improved, based on new policies that could be helpful for the underlying business and for the core customer.

Having said that, I think some of the recent news has the potential to create a little bit of uncertainty in the market. And when we think about it, kind of to your specific question, around the economics of it and can we scale it for you.

If we think about the most obvious question for us is, we do import most of our product. The two countries that we import mostly from, are China first, and Mexico second. We do have some vendors that produce for us domestically. And, in fact, I mean, some of those are -- some of our bigger vendors have domestic manufacturing.

But, if we want to isolate the specific Mexico import tariff discussion, the way I would think about how exposed you are to Mexico is, most of our denim, probably comes from Mexico. And call that about 10% of our imports -- or of our product.

And then, within the boots part of our business, half of our sales are boots, a third of that portion is work boots, and very little if any of that comes from Mexico. That leaves Western boots, men's and ladies. And, I would say about half of the men's and lady's work boots are made in Mexico. If you work through all of that arithmetic, you'd probably get to about 10% denim, and 15% or 16% cowboy boots. So, you're at 25%, 26% of our product coming from Mexico that could potentially be taxed.

The way we think about that, is we are certainly going to have to be very closely monitoring it. I do think that we've have had some experience in the past, where, with any kind of increase of import costs for whatever reason, sometimes we bear part of that, sometimes the consumer bears part of that, and this particular case, I would expect the vendors to bear a portion of that.

Particularly given that if all of it were to play out the way we are thinking about it, is we would expect the US dollar to become stronger relative to the peso, and lower the cost of goods for our vendor, in which case we would just go back to the vendor and say, based on the two pieces taken together, their cost of production is now lower, and they should bear a bigger portion of it.

That's the way we are thinking about it. I don't think it would be a massive problem for us, if it's isolated to importing from Mexico.

Got it. I appreciate the perspective. Thank you.

Thank you.

Our next question comes from Paul Lejuez, from Citi.

Hey. Thanks, guys. A couple questions. First, you guys gave your comps by month. I'm just curious if you saw any change in ticket by month, or was it all just fluctuations in traffic? And, was there any change in promotional cadence in December? As you think about November versus November last year, and December versus December last year.

And then second, on the new store productivity, any differences that you are seeing in new stores that are opening in existing markets versus new markets? Just in terms of how they are performing relative to your expectations or hurdles. Thanks.

In the first part, with composition of the comp by month, sort of connected to the second piece which is promotional cadence. The honest answer is, right in front of me I don't have all that data. Having said that, I think the driver of each week, each month, and the quarter is the traffic -- or the way we measure that is transactions. I don't think the basket size, the units per transaction, the AUR, were varied wildly -- or even much at all, between October, November, and December.

In terms of the year-over-year promotional cadence, on one hand, we tweaked and refined a bunch of different things. But I think, when we look at it in totality, there was virtually no change in promotional posture or level of promotional discount, or number of sales, or campaigns. When we look back at the last six months of business leading up through the third quarter, November really sticks out. Which is why we called it out so specifically, and of course, the election was underway, and that was a distraction.

And for us, and we tend to not use this as a reason, typically for sales good or bad, but for us, in November specifically, in some of our core market it was meaningfully warmer in which we could literally quantify. I just thought that was necessary to call out.

We also saw, specifically in the merchandise categories, in November where outerwear and coats, and some of the work wear -- Carhartt jacket products were struggling the most. (multiple speakers)

Yes, it does. (multiple speakers)

On new versus existing [stories]?

New versus existing markets.

Sorry. On balance, we ramp up more quickly in new markets. Having said that, we are still pleased with the entry into new markets. We've been investing -- if you look at the last 36 months time, we've been investing in the southeast, we've been investing in Texas, and we've been investing in the western part -- western region, and in many cases in California.

The group of stores is performing well. And we do, however, get a quicker ramp up in the California stores.

So, when we are looking to de-risk new store growth, we will tend to come back to markets where we have a good separation. And frankly, that's one of the things we are thinking about as we go forward to next year is -- another way to get a three year payback is to remodel a relatively high volume store. It just so happens that many of the stores that are potential remodeled candidates are also in our legacy markets, which is California, Arizona, et cetera.

There is still a white space for us in core markets, and there is certainly plenty of white space in the Southeast, and up through the mid-Atlantic states. Given everything going on in the country, coupled with what's going on within our business, while growing positively, we would like to be on even more solid ground before we start expanding into brand-new markets, like climbing north up through the Southeast and into the mid-Atlantic states of, Maryland, Pennsylvania, Ohio, West Virginia, et cetera. That may be a long answer, but does that help give some color around your question?

Yes, absolutely. Just, one more if I can. Any update you can give on the competitive landscape? Any changes that you are seeing in terms of some of your major competitors opening stores, closing stores? What are you seeing with some of the online guys? Anything you can help us with there?

Sure. It is hard to give specific facts, which is frustrating for us, because we can't get great, great data in the industry. We do of course interact very frequently with our vendors, and what the vendors would say is, there's a lot of the mom-and-pop guys that are struggling. And many of those guys didn't have the financial wherewithal, or perhaps the stomach to kind of fight through a down environment, particularly in the oil market. Some of those guys, probably have gone away. And I think the vendors would confirm that.

When you think about our number one competitor, in a way, is the group of hundreds of mom-and-pop shops out there that have one store. And, I think those guys have had some difficulty. And we'll probably be able to take some share, going forward, from that group.

The second big bucket if we think about brick-and-mortar stores, is Cavender's specifically. And Cavender's is a pure-play western and work retailer, based in Texas. A very formidable competitor, and a terrific operator, if I am honest. They are private. So, we do not know their specific plans.

They have seemed to have, at minimum, slowed their new store development pretty substantially. Now, they were never at a 10% credit. They were opening three or four stores a year, and now they are probably in the, I'm guessing, but in the one to two stores a year mode.

The third bucket, from a brick-and-mortar perspective, would be, we have a little bit of indirect competition with the category of stores called Farm and Fleet. Those guys are probably a little bit more healthy, and building some more stores. Which is fine, we compete against them, with a breath of assortment. They tend to have a very narrow assortment of boots and apparel, both work and western. That is one group that is probably adding locations. They might be taking share from the industry. I don't think they are taking share from us.

And then, the final piece, just to round out the full competitive side. Online, about four or five years ago, we had seen an introduction of a pure-play, dot-com player called Country Outfitters. Candidly, I think they were a terrific company. Fantastic site, great branding, and they took the industry by storm and grew pretty nicely over the first three or four years, from what we understand.

It seems to us now, that their traffic is down substantially year over year. We have quoted numbers based on third-party traffic data, of down, maybe 75% year over year through the third quarter. And it seems that their -- at least the e-commerce part of their business, and they have a few other businesses, is either shrinking quite a bit, or potentially winding down.

Which just opens up more market share for us to take online, and of course we will be battling with a number of folks including, most formidable competitor online, of Amazon. That is more share for us to take online, and it really underscores the importance for us, of the Sheplers acquisition. Because while we were growing our bootbarn.com business nicely, the Sheplers brand, the Sheplers team, the Sheplers whole operation was just so sophisticated that they can really go after that share, and absorb it and help continue to get growth from that part of the business.

There is a lot going on within the industry, sort of, in addition to all the macro forces at play. Long-term, I think we are very well set up in terms of how we're positioned within the western and work industry.

That's great. Thank you. Good luck guys.

Thanks, Paul.

Our next question comes from the line of Randy Konik, with Jefferies.

Can you hear me?

Yes, Randy.

Thanks, guys. I guess what I wanted to ask is -- or just to clarify, when you kind of analyze the oil-commodity-states stores, the discrepancy in the comp versus the non-oil-commodity states, is the discrepancy of the comp totally all transaction count related? Or is there anything else, as it relates to maybe UPT's or AUR, that is sticking out between those stores and the non-oil-commodity-state stores?

Yes. Randy, it's Greg. It's really all about transactions. I would say, primarily, or the vast majority of the issue is a traffic issue, or a transaction issue.

Got it. The next question is, within those oil-commodity-state stores, are there any types of learnings from the work wear business then, that's really different? So, is the work wear business any (technical difficulties) oil, work wear, work-shoe business in the oil-commodity-state stores, markedly different from a penetration and performance standpoint than in the non-oil-commodity state stores?

Yes, FRA is really -- or, flame resistant clothing, obviously, is very heavily penetrated in those oil markets. Jim, you probably have --

Yes. You're right. It's -- we certainly sell work versus western in those markets. Work boots is the biggest boot category in those markets, and I think on balance, we sell more apparel than overall boots, because there aren't as many ladies boots in some of those markets.

What we've done to control our destiny there a little bit is, when the stereotypical oil worker winds up having to find a different job he no longer needed FR, he no longer, necessarily, needed steel toe boots. So, we refined and tweaked the assortment, brought down the price point for our work wear product with a couple of new brands, and shifted the assortment a little bit, so it wasn't all steel toe or safety toe. And, I think that helped us keep the customer, and maintain some sales.

It probably did erode our -- well, it certainly did erode AUR, and therefore, our basket size. So, that's probably a portion of it, but I still agree with Greg, that the majority of it would just be fewer transactions, less traffic.

I understand. And then, as we approach this idea of lag duration, when oil collapsed, remember there was that lag we were talking through over a couple quarters where the store would be, we are not seeing it in the stores yet and it finally hit you.

How do you think about the duration coming -- the lag duration coming the other way, as oil has now started to stabilize. To your point on the call of rig counts are starting to modestly go back up. What are you thinking about, in terms of trying to assess or predict lag duration this time around going back up, as it was going back down? And, are there any types of things you are particularly looking for, whether within the business or within the macro economy, to give you some perspective and getting closer towards that inflection point in those oil-commodity states?

It's a great question. On the downside of oil, I think the price of oil started to fall in November, 2014. And, we didn't really feel any significant pressure until we got to July, probably eight or nine months later, maybe even August. So, that was the lag on the downside.

Now, we are trying to become as knowledgeable about this is we can, of course. Which we can -- if we can be agile, we might be able to ride it back up if the oil and the industry gets healthier. One of the things that might happen is the lag might be a little bit shorter.

I think, on the downside, companies were slow to reduce their workforce, they wanted to hold on to what, in many cases is pretty skilled labor. And, it probably had a slightly longer lag time due to that. And, again, for us it was maybe even nine months.

On the upside, we are speculating a bit, but we are trying to forecast and learn from some of the industry experts. It might ramp up more quickly. And we want to be ready for it, if it does.

Got it. Okay. Thanks for your perspective. I appreciate it.

No problem. Thank you.

Our next question comes from Mitch Kummetz, with B. Riley.

Yes. Thanks for taking my questions. I just want to drill down on the revised guidance, a little bit. Greg, I know you mentioned three buckets. I think the first one is obviously very clear.

The second one on the change in outlook on the oil patch. Is it safe to assume that you are looking for a similar run rate in Q4, as the experience in Q3? Meaning, Texas down mid-singles, the rest of the oil patch down to high-singles. It sounds like that is what the trend is early in the quarter. Is that how we think about that?

I'd say we expect, perhaps, a little bit of improvement, but still, I'll call it significantly negative. That's tough.

Okay. And then, on the third piece, on the merch margins, I know you said that merch margin was down 30 Bps in the third quarter. Are you expecting it to be a bigger pressure point in Q4? Is there any way to quantify that?

And then, how should we think about the split between the mix shift to e-commerce, versus a worse promotional environment?

Yes. I mean, the way we looked at that is the order of magnitude. So, the e-commerce is having a bit more of an impact, I think, than the clearance activity in January that I talked about. That's about all the color I can really give you, I think.

Do expected to be worse than down 30 like it was in Q3?

Yes, we do expect it to be worse than that.

Okay. And, then, obviously, to your guys' credit, you leveraged SG&A a bit, in the quarter. Is that something that the guidance contemplates -- SG&A Leveraging in Q4? Or is that not the case?

Yes. So, let me come to the merchandise margin rate for just a minute.

Sure.

Your compare is a little bit polluted, if you will, because Q4 last year we took the shrink charge. So, you would have to adjust that out of the results, and then, expect that it would be a little bit worse than what we saw in Q3.

In terms of -- I'm sorry, the second piece was -- OpEx leverage. Yes, we do benefit from the 53rd week that gives us some leverage. With a plus 2 comp at the high end of our range, we'd expect to see a little bit of leverage.

Okay. And, then, lastly, I know it's going to be a little early to ask about the next fiscal year, but just kind of a reminder on the leverage point. It sounds like you just said a plus 2 gets you some leverage on the SG&A side. Remind me, what the leverage points are both occupancy and SG&A. Any then, any other puts and takes we should be already thinking about for next year? Maybe with regard to mix on e-commerce, or anything like that, that could impact the business?

Yes, we've only really given guidance about this year in terms of leverage points. And, we haven't modeled out what our new store plan is, et cetera. There are moving parts that make it difficult for me to give you FY18 guidelines, but again, as a reminder occupancy is in that 3 to 3.5 range, and OpEx is 1 to 2. And so, we tend to get leverage at a combined 3 comp or less. That's how we did it this year.

In terms of puts and takes this year, next year, obviously, we won't have the benefit of the 53rd week next year, which will be a challenge. We do expect to continue to see e-commerce accelerate, specifically, in Q4 -- Q3 excuse me. Thank you.

Because we saw that happen the last two years, and expect that to continue. So that will put a little bit of pressure on overall operating margins. But again, as Jim said, we've made some investments and we're working hard to narrow that gap. Because we do want to be agnostic from a profitability perspective, regardless in whatever channel that the customer comes to us from.

Got it. Thanks guys. Good luck.

Thanks Mitch.

Our next question comes from the line of Tom Nikic, from Wells Fargo.

Hey. Good afternoon, everyone. Thanks for taking my question. Just wanted to ask a quick question about the Q4 guidance.

Even stripping out the $0.03 from the extra week, it kind of seems like a lot of growth in Op income and EPS. Is that kind of like a function of some of those things you talked about like the shrink accrual? I guess, it just seems like a lot of margin expansion in the fourth quarter, and I'm having a little trouble reconciling that.

No, you're right in terms of the shrink accrual is definitely -- I'm sorry, the shrink accrual is definitely something we don't expect to repeat in Q4. The 53rd week at $0.03. We do have a comp assumption, at the high end of a plus 2. And, so, we start to get some leverage there. There is a variety of initiatives both in expense and margin that we're pressing.

Anything in particular as far as those initiatives go? Or just --

Yes. We are working very hard to optimize our labor in stores. We've been working on that for four or five months, and I think we've got it to a point where we are pretty happy with how we've got the stores staffed and making sure we are maximizing selling associates on key selling days, and minimizing that investment on days where business is lighter.

All right, great. Thanks, very much. Best of luck in Q4.

Thank you.

Our next question comes from the line of Alex Pham, with Mizuho Securities.

Hi, guys. Thanks for taking my question. I was wondering if we could talk a little bit about the e-commerce drag. I guess, is bridging that difference between, sort of, the store and online profitability more a function of scale and increasing the penetration, or is it more in terms of fulfillment, and sort of the back-office operations of getting product to customers?

And then, just to follow up on that, have you guys talked about the overlap between sheplers.com versus bootbarn.com? And, I only ask, because Jim, you mentioned that you were -- the Company would start introducing some of the Boot Barn private label onto Sheplers. And, I was wondering if that would be a concern from a brand perspective. Thanks.

On the first part of your question, the e-com drag, I think, our e-commerce business is nicely profitable. It's just -- and frankly it's probably equally if not more profitable, than a lot of pure play e-commerce businesses. It's just not quite as profitable as our stores business, that gets a lot of leverage on occupancy.

In answer to your question, well, what's driving that? Well, the two big things -- the stores have the cost of rent and payroll. On the e-commerce side, the increased cost on the e-commerce side that shrinks the profitability there, is one, the merchandise margin is a little bit lower. Two, the cost of customer acquisition, so marketing in general, is higher. And frankly, typically for an e-commerce customer, they're a little more fickle. So, the lifetime value of the customer is a little bit lower in general.

We like the strength of our brand, because that helps us maintain the lifetime value of that customer a bit more. But, frankly, we, and I think most people, spend more money in marketing to get and e-commerce sale than a store sale. As you go through the cost beyond that, the -- then we have to get the product to the customer, and now we are overnight shipping, in some cases -- or sorry, two-day shipping in some cases, but at minimum we offer free shipping for product -- for sales over a particular threshold.

Typically, boots will ship for free, because they are almost are always over that threshold. So, for a huge portion of our business we are shipping the product for free, and that just erodes the profitability a bit more.

Now, a portion of it, you're exactly right, is scale. Right? So, if we can lower the operating cost of the Wichita fulfillment center, if we can leverage the fixed-cost SG&A For that portion of the business, then we can get a little bit more improvement in the profitability, and close the gap a bit more.

I'll get to your second question, but you can feel free to circle back to either portion of it. The second part of your question was around the overlap of customers between bootbarn.com and sheplers.com.

Right.

Without going through the specifics of our share on database, I would say it this way. The brands have different positioning. So, the Boot Barn brand tends to be more balanced between male and female. The Sheplers brand tends to be more male.

The Boot Barn brand tends to be a little bit younger. Median age is roughly 44 years old. The Sheplers' customer tends to be a little bit older. So, I think the overlap is in -- there certainly is some. We have a lot of the same products on our site at bootbarn.com and on the sheplers.com site, as well.

When we add private brands, frankly, the goal there is twofold. One, give sheplers.com a set of merchandise that is unique to them. Admittedly, they will be competing, if you will, against bootbarn.com. But not against anybody else. Right? So, the pure play guys in our space, or the mega sites like Amazon, don't have our private brands. So, we have a little bit of competitive differentiation there.

And, as a reminder, I think I've already recognized this, recognizes that they're margin enhancing, by 900 to 1000 basis points, relative to our third-party brand. So, it creates some differentiation they are more profitable. But the other thing we are hoping for is, sheplers.com drives a tremendous amount of traffic. And, when we put our private brands up there, part of the goal, it might seem paradoxical, is to bring more eyeballs to those brands, and give those brands more of an opportunity to be found by the western and work customer.

And that would then just grow the inherent value of our private brands which would then continue to the grow the inherent value of that product in sheplers.com, bootbarn.com, or Boot Barn stores. So, I'm not sure I totally answered both your questions. I'm happy to have a redirect.

No. That was extremely helpful. Thank you.

No problem. Thank you.

There are no further questions at this time. I'd like to turn the call back over to management for any final remarks.

Thank you, everyone, for joining the call, and we look forward to speaking with you on our fourth quarter and FY17 year-end call in May. Thank you, very much.

Thank you. Ladies and gentlemen, this does conclude our call for today, and we thank you for your time and participation. You may disconnect your lines at this time. Have a wonderful rest of the day.