Boot Barn Holdings Inc (BOOT) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Boot Barn Holdings Fourth Quarter Fiscal Year 2017 Earnings Conference Call.

As a reminder, this conference is being recorded.

Now I'd 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.

Good afternoon, everyone.

Thank you for joining us today to discuss Boot Barn's Fourth Quarter and 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 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 fourth 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.

I would 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 our results followed by a discussion around the key growth initiatives of our business.

Following that, Greg will review our financial performance in more detail and provide our outlook for fiscal 2018.

Finally, we will open up the call up for your questions.

Fiscal 2017 was a challenging year, as the impact from low commodities prices in some of our key markets coupled with a general softness in the overall retail environment pressured sales and earnings growth.

While we were able to achieve slightly positive same-store sales growth for the year, our results fell short of our initial expectations.

That said, we are pleased with the progress we made in strengthening our position as the leading western and work retailer in the U.S. through investments in our digital channel, improvements in merchandising and our in-store environment and new store openings that continue to deliver attractive financial returns.

We are confident that these investments will set a foundation for sales and earnings growth over the long term.

Looking at our fiscal fourth quarter, total sales increased 9% driven by an extra week of sales as fiscal 2017 was a 53-week year, and contributions from the 12 stores opened since the beginning of fiscal 2017.

This growth is partially offset by a 0.9% decline in same-store sales.

While comps in our physical stores declined low single-digits, we did see a modest sequential improvement in this trend versus the third quarter.

This improvement is largely the result of sales in stores outside of markets impacted by oil and other commodities.

During the fourth quarter, our commodity-impacted states continued to face headwinds.

Same-store sales of stores in Texas declined mid-single digits, in line with the incoming trend.

North Dakota, Wyoming and Colorado also declined mid-single digits, which was a sequential improvement from the high single-digit decline in the third quarter.

Turning our attention to e-commerce.

Over the past several months, we have been working to complete our new e-commerce platform.

As a reminder, this new platform consists of a new front-end site and upgraded order management system and common back-end fulfillment operations.

We expect this platform will enable us to achieve expense efficiencies and improved inventory productivity by consolidating operations of all of our e-commerce businesses, as well as our in-store web platform.

In February, we migrated the sheplers.com business onto the new platform.

While this transition is complete operationally, we have seen an unexpected decline in sales of sheplers.com since the migration.

This decline in sheplers.com resulted in a deceleration of our total e-commerce sales to positive mid-single digits during the fourth quarter and negative mid-single digits during April and May, the first 2 months of our fiscal 2018 first quarter.

We had identified the metrics that are underperforming and have a team, comprised of both internal executives and outside parties, focused on rectifying the issues.

While we are clearly disappointed that sales have been negatively impacted post-conversion, we believe that the new platform will benefit us long term and we will continue to work hard to improve the site performance and return sheplers.com to positive sales growth.

Now turning our attention to the merchandise margin.

We saw a healthy improvement in margin rate for the quarter, particularly considering the difficult start we had in January due to outside selling of clearance merchandise.

Despite softer-than-expected top line sales, we did not see erosion in selling price and have not shouldered additional promotions.

Although we saw an improvement in merchandise margin, the combination of slightly negative consolidated same-store sales and some unanticipated operating expenses, resulted in fourth quarter earnings per share that were below our most recent guidance.

I would now like to spend a few minutes discussing some of the exciting things underway that support each of our 4 growth initiatives.

As a reminder, they are: number one, strengthening our omni-channel leadership; two, driving same-store sales growth; three, increasing the penetration of our private brand; and four, expanding our store base.

Let's begin with strengthening our omni-channel leadership.

We are delighted to announce that in February, we completed the purchase of certain assets of Country Outfitter, including the countryoutfitter.com domain with an extensive customer list and all of their social media assets.

We were also able to secure a very talented branch manager from Country Outfitter, who has joined us and has been working diligently to ensure continuity and ongoing growth of that business.

The total purchase price of the Country Outfitter assets was $1.8 million of cash and assumed liabilities.

We expect Country Outfitter to be cash flow positive in fiscal 2018.

Country Outfitter was a pure-play e-commerce retailer, targeting a younger female Western fashion customer.

This acquisition expands our customer base to broader demographic.

In fact, we performed an analysis of Country Outfitters' customers and determined that the majority are not currently active purchasers from either the Boot Barn or Sheplers brand.

We have continued to operate Country Outfitter as a separate website and sales channel and are taking advantage of several synergies made possible by our existing infrastructure.

We have migrated Country Outfitter to our new e-commerce operating platform and are quite pleased with the performance thus far, both operationally and financially.

With the addition of Country Outfitter, we now own 3 of the top 4 highest traffic generating websites in the western and work wear industry.

Further, once we complete the transition of bootbarn.com to our new platform, we will have all 3 sites leveraging the same e-commerce team, a common performance center and customer service group and a consolidated inventory.

We will also be leveraging the same set of assets with WHIP, our in-store shopping portal, which will enable us to offer a greatly expanded merchandise assortment going forward.

The combined revenue from these businesses will help continue to improve the economics of our e-commerce channel, which is critically important to us strategically.

Moving to our second initiative, driving same-store sales growth.

We are seeing sales momentum build in our physical stores with same-store sales turning positive during the first 2 months of the first quarter.

We are now seeing stabilization in the price of oil and an increase in rig count, and we believe that the strength in sales of flame-resistant apparel we are seeing is a leading indicator of a recovery in store sales in the oil markets.

Same-store sales in Texas have turned positive in the first 2 months of our fiscal first quarter while same-store sales in the states of North Dakota, Wyoming and Colorado as a group have improved to flat leading us to believe that sales in these markets are stabilizing and may be on the road to recovery.

During the fourth quarter and continuing into the first 2 months of the first quarter, we've been able to drive strong growth in work boots and work apparel with particular strength in flame-resistant clothing.

This growth is being driven in part by an expanding assortment of workwear available to a broader based work consumer, another tremendous quarter of growth in our commercial accounts business and, more recently, what appears to be a recovery in stores in the oil and commodities markets.

I would now like to spend a moment discussing a few of the things we are doing to help drive same-store sales growth in fiscal 2018.

First, we are seeking opportunities to further grow our commercial accounts business by supporting our partnership with small and large businesses, municipalities and others focused on meeting the workwear needs of their employees.

Second, we are increasing Hispanic customer initiatives such as hiring more bilingual store associates, creating signage in Spanish and tailoring our product assortment and sizing.

Third, our store managers and associates are looking for enhanced customer experiences in our stores.

We have seen increased interaction with our customers through organized events, such as in-store concerts by local musicians and professional line dancing lessons.

Fourth, we are broadening our assortment in several areas including our selection of performance work boots, Western-style (inaudible) and shorter top booties.

Next, we are expanding our target audience by updating the Boot Barn brand aesthetic.

We have hired a new creative lead, who is driving impressive changes to our marketing materials with the goal of introducing the Boot Barn brand to a broader set of customers.

And finally, we are preparing to launch a Boot Barn branded credit card later this year.

We expect the credit card program to increase customer loyalty and drive increased sales, once the card is launched.

Now to our third strategic initiative, increasing the penetration of our private brand portfolio.

We've been able to generate solid improvement in merchandise margins during the first 2 months of our first quarter, consistent with the merchandise margin growth in February and March.

We believe that our ability to drive core merchandise margin expansion during the fourth quarter, and continuing into the first 2 months of fiscal 2018, speaks to the health of the business and the strength of our customer.

We continue to work extremely hard at expanding our private brand offering to our customers by developing high-quality products to complement the great assortment offered by our third-party branded vendors.

As we have mentioned before, our private brands, Cody James and Shyanne, represent our #4 and #5 top-selling product lines.

For the fourth quarter, our private brand penetration increased by approximately 100 basis points year-over-year and represented 11% of our total sales.

We're optimistic about the expanded products and the newness we have introduced over the past couple of months, including a broader assortment of core Western merchandise under the Cody core brand, and the extremely compelling line of top quality, exotic skin boots under the Cody exotic label.

We expect to grow our private brand penetration another 100 basis points during fiscal 2018 at a merchandise margin that is 1000 basis points higher than product purchased from our third-party vendors.

This growth is being driven by growth in ladies' and kids' apparel, as well as several accessories categories.

Finally, our fourth initiative, expanding our store base.

We opened 12 new stores in fiscal 2017 including 2 in the fourth quarter, bringing our total store count to 218 stores in 31 states.

As a group, these stores that opened during the past 12 months are on pace to pay back in approximately 3 years.

We plan to build 12 new stores and remodel 6 existing stores in fiscal 2018.

As we look ahead to the remainder of fiscal 2018, our current momentum, combined with the addition of Country Outfitter and a number of initiatives under way, has us feeling good about capturing additional market share and further strengthening our industry-leading position.

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

Thank you, Jim.

Good afternoon, everyone.

I will begin by reviewing our fourth quarter results and then comment on our outlook for the first quarter and full year of fiscal 2018.

In my discussion, I will be commenting on both actual and adjusted results excluding onetime 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 fourth quarter, net sales increased 9% to $163 million.

As Jim mentioned, our sales performance benefited from the sales contributions from the 14th week, the new stores opened -- and the new stores Boot Barn opened over the past 12 months, partially offset by same-store sales decline of 0.9%.

Gross profit increased 12.4% to $49.3 million or 30.3% of net sales compared to adjusted gross profit of $43.9 million or 29.4% of net sales in the prior year period.

The 90-basis point increase in adjusted gross profit rate resulted from 30 basis points of merchandise margin improvement and an improvement in shrink of 50 basis points, as we anniversaried the large shrink expense in the prior year.

We also saw 10 basis points of occupancy leverage from the 14-week quarter.

The 30-basis point increase in merchandise margin rate resulted from an increase in private brand penetration and volume purchases from our third-party vendors.

We are pleased to have been able to maintain our pricing during February and March, which offset increased penetration during the month of January.

As Jim mentioned, we continue to drive merchandise margin improvement in fiscal 2018 by increasing our private brand penetration and volume purchases from our third-party vendors.

Adjusted operating expense for the quarter was $40.1 million or 24.6% of net sales compared to adjusted operating expense of $36.2 million or 24.2% of net sales in the prior year period.

Adjusted operating expense in the fourth quarter excludes $1.2 million of noncash store impairment charges, primarily associated with 2 former Sheplers stores: one that is relocating due to the closing of an adjourning mall; and the other one, a Sheplers store opened just prior to our acquisition, which has not achieved the financial performance anticipated.

In the prior year period, adjusted operating expenses exclude the impact of acquisition-related integration costs and the loss on disposal of assets.

Adjusted operating expense in the fourth quarter was higher than we projected as a result of unanticipated store expenses, store repairs and maintenance and outside services primarily related to transition -- transitioning and operating the newly acquired Country Outfitters e-commerce site.

Our adjusted income from operations was $9.2 million in the fourth quarter of fiscal 2017, compared to $7.7 million of adjusted income from operations in the prior year period.

Interest expense in the fourth quarter was $3.9 million compared to $3.6 million in the prior year period.

Adjusted net income for the quarter was $3.3 million or $0.12 per diluted share compared to adjusted net income of $0.09 per diluted share in the prior year period and compared to our guidance of $0.17 to $0.20.

Our earnings shortfall is committed to sales shortfall in our physical stores, unanticipated operating expenses and a decline in sheplers.com sales.

GAAP earnings per share for the quarter were $0.10 in fiscal 2017, compared to $0.04 in the fourth quarter of fiscal 2016.

Turning to the balance sheet.

I'm pleased with our efforts to diligently manage our inventory, which on an average store basis, was down approximately 5% compared to last year.

On a consolidated basis, inventory rose 7% to $189 million compared to a year ago.

This increase was primarily driven by an increase in our warehouse inventory used to support our private brand initiatives and our merchandise purchased at volume discounts, as well as the increase related to inventory for our new stores opened over the past 12 months.

Turning to capital expenditures.

Our fiscal 2017 capital expenditures totaled $19 million.

As of April 1, 2017, we had $226 million of debt outstanding including $33 million drawn on our $125 million revolving credit facility.

We had $8 million of cash and cash equivalents and our net debt leverage ratio was 3.7x.

Last week, we opportunistically took advantage of the favorable credit markets and amended our revolving credit facility, extending the maturity of the credit facility 2 additional years to May 2022 and increasing the capacity of the credit line $10 million to $135 million.

Additionally, we amended the financial covenant of our term loan, increasing the total net leverage ratio maximum requirements for the next 6 quarters.

These amended terms afford us the opportunity to pay down $10 million of our term loan and decrease our interest expense without losing borrowing capacity on the line of credit.

We believe these amendments provide us additional operating flexibility in our use of cash over the next few years.

Now I would like to turn to our outlook for fiscal 2018.

We expect same-store sales to be flat to slightly positive.

For modeling purposes, I want to point out that Country Outfitters sales will not be included in our same-store sales base until April 2018, consistent with how we treat new stores.

Country Outfitters sales are expected to be approximately $10 million in fiscal 2018.

We expect earnings per diluted share in the range of $0.52 to $0.57 per share, based on an estimated weighted average diluted share count of 27.1 million shares for the full fiscal year.

This represents income from operations of $37.8 million to $40 million.

We expect net income for fiscal 2018 to be between $14 million and $15.4 million.

Our fiscal 2017 adjusted earnings per share results of $0.55 included $0.03 of earnings generated from the 53rd week of business.

We estimate that our fiscal 2018 earnings at the high end of the guidance range of $0.57 will represent 10% earnings growth over fiscal 2017 earnings per share of $0.52, when adjusted for the $0.03 of earnings from the 53rd week.

We expect capital expenditures to be in the range of $15 million to $17 million with the majority related to investments in stores and in the Wichita DC.

We plan to open 12 new stores during the year, with all but one of them expected to open in the second half of the fiscal year.

We expect our tax rate to be approximately 39% and interest expense to be approximately $15 million.

Based on our earnings per share projections of $0.52 to $0.57, we expect to generate free cash flow of $14 million to $16 million.

As we look to the first quarter of fiscal 2018, we expect same-store sales to be flat over the prior year period.

We expect our first quarter earnings per diluted share to be breakeven.

Included in our guidance is $500,000 of onetime marketing expenses related to the relaunch of the Country Outfitter site that began this week.

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

Thanks, Greg.

We are encouraged by our recent positive trends and we continue to be confident in our ability to execute on our 4 strategic growth initiatives to drive profitable growth and increase shareholder value over the long term.

Now we'd like to open the call up to your questions.

Karen?

(Operator Instructions) Our first question comes from Matthew Boss of JPMorgan.

It's Annie on for Matt.

Could you provide some color on cadence within the quarter, what you're seeing in 1Q to date?

And then help us with the drivers to bridge the flat to same-store sales in 1Q and then flat to up slightly for the full year?

Sure.

In the -- within the fourth quarter, and we had said this on our last call, we were -- had pretty solid same-store sales coming out of January.

I think like a lot of other retailers, we got caught up in the decline in sales in February given tax refunds.

And we've recovered a portion of that, but I don't think all of that in March so we had kind of a roller coaster fourth quarter as we went month to month to month, between January and then February and then into March.

As we got into April and May, our business in the stores certainly has improved and the stores business has actually turned positive which is very encouraging, particularly given that we've had a nice, solid merchandise margin rate in the stores as well.

Unfortunately, what's weighing us down now paradoxically is since we've converted over to the new Sheplers site, we've seen, first, a deceleration in our e-commerce business and then a decline in this quarter, so we have to address that clearly.

So when you think about the totality of the business, I'd see a bit more strength in stores, a portion of that is the oil patch.

I see a solid merchandise margin rate, which is encouraging.

And I see, what I hope to be, a short-term issue with our e-commerce business since the transition to our new platform.

Great.

And then could you touch on productivity and returns that you're seeing from some of your more recent classes of new stores, maybe versus some of the metrics historically to give us some perspective?

Yes, Annie, this is Greg.

The stores that we opened last year in fiscal '17 have been better than our 3-year payback, modestly better than our 3-year payback model and that's roughly in line with the stores we've opened over the past 3 years or so when we started the ramp-up of new stores.

So I'd call them in line with that less than 3-year payback.

Our next question comes from Peter Keith of Piper Jaffray.

I was hoping you could just give us maybe some more color around the new platform for Sheplers?

It looks like the website has a different feel and look to it.

Is it a shopping experience that's not resonating?

Is it a technical issue?

I guess not really quite sure what the issue is.

And then when you talk about addressing it, what steps are being taken to address it, specifically?

On the first part of your question, the new site is, I would say, modestly different than the old site in terms of look and feel and aesthetics.

Yes, the Sheplers site was never intended to be a branding pretty, sort of aesthetically pleasing site but instead, a mega site that carries everything, it's easy to search and competes on selection and price against the biggest e-commerce competitors, Zappos, Amazon, et cetera.

So while I think we've upgraded the aesthetics a little bit, we actually haven't changed the shopping experience all that much.

In fact, one small piece of good news in what's otherwise been a pretty disappointing transition of that platform, is conversion on a desktop platform has actually increased.

Where we're getting hurt on the transition to a new platform is really in 2 fundamental areas.

The first is our traffic has fallen off from an organic search perspective.

Now we expected a minor blip in SEO traffic as we converted from one platform to another, even though we kind of built all the links and the redirects from the old platform to the new platform.

So we expected a couple-of-week pickup but it's been more protracted and deeper than we had anticipated.

So the organic search problem has lowered traffic to the site, both on desktop and on mobile.

The second problem that we had and these issues are linked, which I'll come back to in a second, the second problem that we've had is the conversion on our mobile site -- or mobile device, it's a responsive design site, so it's the same site but when a user is on the site on their mobile phone, conversion has declined.

And we believe that the primary reason for that is the mobile site is slower, unfortunately, than it was before the transition.

So when a customer is on the mobile site and if the experience is lower, they just exit.

They just leave and either go to another site or they get distracted to some other activity.

And we've seen the conversion on our mobile sites getting worse because of the speed, we believe.

And the way these 2 issues are linked is as your site is slower and you have a higher abandon rate, you then get penalized in organic search.

So it's been a difficult 8 or 10 weeks as we're trying to solve this.

What we're doing to rectify it is a couple of things.

We've got our internal team working on the organic search.

They've reached out to 2 separate groups from a kind of advisory or consulting perspective on organic search to see if there's something that we're just flat out missing, in terms of how we are attracting customers to the site through organic.

And then in terms of speed of site, we're -- there's a couple of things we're doing there as well.

The first thing we're trying to do is make the code literally more efficient.

So lighten the code base on the mobile site.

We are looking into something now where the caching on the cell -- on the mobile site wasn't working properly.

We think there's something there.

I don't think that's going to be the silver bullet but that was something that was slowing the site down and hurting conversion.

So -- and we've got a couple of people looking at that as well.

So it's a -- kind of an all hands on deck to try to get this part of the business back to growth mode because big picture, if we can get that platform for Sheplers to be working, it really enables us to do a lot more things.

And the encouraging piece, if there is an encouraging piece here, is Country Outfitter is on the exact same platform and is working extremely well.

And that part of the business is at least meeting our expectations, if not doing a little bit better than that.

So we're going to continue to try to rectify what we've got with Sheplers.

And the long-term plan is exactly the same, which is to bring all brands to the new platform with the same inventory, the same folks working on it because I think there's a number of things that we can do to improve our efficiency within e-commerce, as well as to kind of really combine the stores and our e-commerce channels in a much better kind of omni-channel way.

Okay, that's very good detail.

I appreciate that and then maybe I'll stay on that same topic.

So when you're looking at the guidance, how long are estimating that Sheplers is a drag?

And secondarily, when you think about the same-store sales guidance, what is the impact of sheplers.com today for Q1 or for the full year?

So sheplers.com represents somewhere in the low teens of our overall business.

And in Q1, we certainly are expecting to see the trends continue.

We don't think that we're going to be able to fix this in the next 2 weeks.

I think as Jim outlined, part of this stuff is self-fulfilling.

So if your speed is down, then Google penalizes you in the search and all that kind of stuff so it takes time to restore that high ranking that we typically get.

So I'd say in the first half of the year, we think that it will be roughly flattish for us and then we'll start to see improvements, I'll say, in the second half, so holiday and thereafter.

But we're certainly not expecting it to hockey stick in the next couple of weeks or month.

Okay.

And then I guess, one bright spot of the quarter is the merchandise margin expanding.

You've had a couple of quarters with some declines.

Some of the issue has been the mix of e-com as a headwind.

Is that issue resolved or is it just a function of e-com now running below stores that maybe removed that headwind for the time being, and that could return as Sheplers bounces back in, hopefully, the coming quarters?

Yes, I think the way we've described this in the past, Peter, is we could improve margin both in e-com and in stores and still mix down.

So to your point, to the extent that it's not growing mid-teens and the stores are flattish or slightly negative, that certainly helps.

But we did see, and we talked about it in the script, we did see nice improvement on our stores margin on a year-over-year basis, specifically in February and March.

We commented on the last call, that January clearance was deeper and negatively impacted us.

And in February and March, we were able to again maintain our pricing promotion and not only drive top line sales improvement and growth but also, add strong margins.

Our next question comes from Jonathan Komp of Baird.

Yes.

First question maybe, first, just to clarify, Jim or Greg, what are you running in total in terms of the same-store sales quarter-to-date relative to the flat guidance you gave for the first quarter?

We haven't said, Jon, but you can probably assume that we're flattish.

Okay.

And maybe just a broader comment there, if you could.

I know, Jim, you described the fourth quarter as a roller coaster and I'm just curious what you're seeing on the core markets outside of the oil and commodity-impacted markets?

How the California and other core markets are performing?

Sure.

As we went from the fourth quarter into the first quarter, total stores went from negative to positive.

Oil and commodity market stores improved pretty substantially, call it, 6 points of comp or something because we had called out that Texas was mid-single-digit negative and is now slightly positive, and we called out the other states as being mid- to high single-digit negatives and are now flat.

So the oil and commodity markets have gotten a lot better.

Admittedly, we're 8 weeks into the quarter, we have 5 to go.

The rest of the stores as we went from the fourth quarter to the first quarter also improved just not by nearly as significant order of magnitude, just a small improvement sequentially.

So those 2 things taken together is -- it makes us feel a bit better about the stores' business.

And as we said in our prepared remarks, no meaningful change in pricing structure or promotional stands.

The amount of advertising or marketing that we're doing on the stores side.

So we're hopeful -- not ready to completely declare victory in the oil and commodities market, but we are hopeful that this is the beginning of a recovery with some of the markets that have been a headwind for us for several quarters now.

And when you look at the full year guide, that flat to up slightly for comps, I understand the website issues, but 8 or 12 weeks ago prior to the website issue, I think we would have given you flat to slightly positive trends in the oil markets.

I think you would have been feeling better than flat to slightly positive, in terms of the guidance for the year.

So do you think there's an opportunity for upside to that to hit the number as you get throughout the year?

Or are you being conservative, just given the volatility?

Or how should we think about the progression throughout the year?

I think we're trying to give as good a view into the year as we know.

Right now, I don't think we've overly -- are trying to be overly conservative but I think that's accurate a view as we can provide.

Of course, if we get the e-commerce, the Sheplers side of the e-commerce business back to growth, yes, there might be a little bit of upside there.

But we've got work to do and we've been working pretty hard on it for a few weeks now and haven't been able to find the silver bullet to rectify that problem.

But it does seem like you have the initiatives laid out in terms of the stores and some of the opportunities, you have a pretty full pipeline of potential drivers.

So do you think any of those are potentially meaningful drivers as you get them in place at the store level?

Or how should we think about that, the same-store sales initiatives?

I think they all work together.

I think some of the bigger ones, they were really seeing some nice growth in the work side of our business.

We're continuing to look for outsized growth on commercial accounts that ties into it.

We're adding new working fixtures and expanding the work ahead within some of our stores.

And as we do that, we see a relatively immediate uptick in sales in those stores.

Having said that, we hope -- we are talking about 20-ish stores that we can do something on the work boot and work apparel side to get additional products and additional space and outsized workforce to help there.

Many of the other sources either wouldn't want more space or already have it.

So I think, the work piece is going to be compelling.

The other piece, and that I'd like to think adds to our customer loyalty and to our ability to drive sales to customers by providing and extending credit, our own credit, as you probably understand, is our new store credit card.

So we intend to launch that over the next few months.

When that launches, there'll be a store branded card.

It will tie to the B Rewarded loyalty program.

All the other retailers would say that, that's your best customer, of course.

You know everything about them.

Their average transaction size is higher, et cetera, et cetera.

So I think, while we have a lot of things working and a lot of them are working in unison, I think the press and the push into the work business, coupled with the credit card, are probably the 2 biggest that will help drive same-store sales.

Okay.

And just last one if I could, just in terms of the guidance and what's embedded from a gross margin standpoint.

I know that you sound pretty optimistic about the store merchandise margin prospects and a lot of it depends on the relative growth rates across the channel.

So I'm just wondering what you baked in when you net that all out, in terms of the overall gross margins?

Just to be clear, merch margin or gross profit?

Because they will have deleverage on the occupancy line.

Yes, I guess, I'm thinking in total.

If you want to give any color on the pieces, that would be great but at least overall gross margin.

And so we continue to think we'll expand our merch margins, round numbers 20 basis points, 30 basis points similar to what we saw in Q4.

And occupancy costs could be 10 basis points of drag, based on a slightly positive comp.

Our next question comes from Randy Konik of Jefferies.

I just wanted to clarify back to the e-commerce side.

Do you -- so is the major issue a conversion issue or a traffic issue?

And what was the -- can you explain what you're saying about Country Outfitters is on the same platform as sheplers.com but they're not having the same problems, it sounds like you're saying?

So again, I'm just trying to figure out what is the main issue of people not going there now?

Or the site is compromised from a speed perspective to not encourage them to complete a purchase?

I'm just -- just wanted to re-clarify that.

Sure, no problem.

The -- it's a little bit of both.

Organic search has been impacted so that's traffic driving.

And the speed of the mobile side has hurt conversion of the mobile sites.

So those are the 2 bigger factors and then you put those 2 together, particularly as business starts to evolve more and more to mobile away from desktop, it's been a tough combination for us.

The example relative to Country Outfitter, Country Outfitter when we acquired them was operating their site on a legacy version of Demandware and we brought it over to this, our new platform, which is Demandware-based.

And that site is actually working quite nicely and the sales and performance of that site is, again, meeting our expectations, if not exceeding them a bit.

So I think we have to continue to work on what we're seeing on a sheplers.com side.

And I think there will be a series of small fixes that, if we ultimately can get this back to positive sales, it will be a number of different things, not kind of 1 big lever that we just had neglected to find when we went through the transition.

And then just on bootbarn.com, it's on a different platform.

Is this basically saying you're not going to switch the platform there for a very long time?

And just did you comment on -- I didn't really catch the performance on bootbarn.com during the quarter.

The bootbarn.com continues to perform nicely.

It hasn't yet transitioned to the new platform.

It has a different starting point than Sheplers does, so bootbarn.com is already on a version of the Demandware similar to the Country Outfitter business.

So right now, our plan would be to proceed with the bootbarn.com transition over to the new platform.

We will continue to take a look at that over the next few weeks but that's our current thinking.

Got it.

And then, I guess Greg, question on, I believe your guidance on free cash flow was positive $15 million to $16 million.

I believe CapEx was $15 million to $17 million.

How should we be thinking about multi-year free cash flow generation?

I see you improved the financial flexibility and duration of your credit facility, I believe, up to 2022.

So just trying to get some color on how you're thinking about the nuances of leverage, targeted leverage, targeted free cash flow.

Is that going to be more done through expense management on the actual SG&A line or more on the capital expense side?

Just trying to get some color there on how you're thinking about these items?

Yes, sure.

So if you think about CapEx of $15 million to $17 million and the fact that we'll still generate somewhere between $14 million and $16 million of free cash flow this year, that means we are generating between $29 million and $33 million pre-CapEx.

And if you think about it, average store costs us $300,000.

We can build 20 new stores and only spend $6 million of, I'll call it the $14 million on low end.

So there's a lot of opportunity for us to continue to use free cash flow to pay down debt and that's really our objective.

Frankly, the reason we've pulled back a bit on our new stores both last year and this year, is just visibility.

And also, we're investing heavily or more heavily, $3 million or $4 million in our Wichita distribution center to make that a more efficient operation to improve profitability.

So we still think that we can build 10% units and even doing that, we can still drive free cash flow to pay down debt.

So that's how we're thinking about the next couple of years.

Got it.

And my last question is it seems like we're coming out of the dark tunnel and into light with regards to the oil states, as well as even the -- and the [ex] oil states are -- sound like they're continuing to do better.

So if you think about -- you gave us nice color on the 1Q comp estimate is impacted by the e-commerce, do you think we should continue to see nice, I guess, extense acceleration in the oil-impacted states as well as the non-oil-impacted states from a stores perspective?

And then as it relates to e-com, when you talk to the software vendor or partner for the platform, have they seen this movie before?

And if they have, what's the duration to fixed it?

Again, you might have covered that but I'm just trying to get a sense of duration of the problem, in terms of the fix.

That's all.

Thanks, Randy.

So that's 2 questions.

The first was really around acceleration in stores and commodities, et cetera.

We're not modeling an incredible growth rate in those states or those markets for this year.

While we've had a few solid weeks of decent business, again, I think it's too early to call that, that's already going to become a tailwind so we're planning them roughly, I think we're planning Texas to be flat to slightly up and the other states to be slightly down.

The other states being North Dakota, Colorado, Wyoming.

Hopefully, that becomes more of a tailwind.

But we're not ready to declare that yet for sure.

On the second piece, have the vendors involved in the transition seen this movie before?

I would say some of the things that we're seeing have come up before, I would say, what we have been experiencing has gone on longer and runs deeper than they let us -- they had seen before and than we expected.

And so I think it's -- some of it is a little bit familiar.

But it's a little bit more of a significant issue than they have seen before.

And in terms of a path to getting things pointed in the right direction, I can't layout a timeline for you.

I mean, if we knew how to fix it, we would have fixed it already.

We're starting to make some small progress in different areas, we believe.

We'll keep you guys apprised of it.

Of course, disappointing, certainly for the quarter, fourth quarter.

And first quarter that we're in, hopefully, it will be a very solid foundation for us longer term to fulfill all the goals that we had of bringing all sites together in one consolidated operation.

So that vision is still intact at the moment.

We just have to get the sheplers.com business back on track and again, the Country Outfitter site working the way it is gives us hope that it's possible to rectify and fix the Sheplers site.

Our next question comes from Mitch Kummetz of B. Riley.

Let me just start as a follow-up to Randy's question.

Jim, you were just talking about the oil and gas market.

So I think you said Texas, flat to slightly up, and the other 3 states, slightly down.

So I'm guessing, sort of net-net, that gets you maybe flattish or down a little for those markets.

It sounds like e-com, Greg, I think you said on Sheplers, I think you said flat in the first half then up in the second half.

So that would seem, in aggregate, to be up a little bit.

I guess the remaining piece would be bootbarn.com and the non-oil and gas stores.

I mean, are you -- I would expect you would -- well, I don't want to put words in your mouth, but I mean, are you expecting those to be up for the year?

The oil and gas?

No, the -- so oil and gas, it sounds like you're expecting that to be flat, flattish, maybe down a little bit.

Sheplers.com, it sounds like first half, second half combined, you're expecting that to be up a little bit.

So I'm just trying to understand the non-oil and gas stores and bootbarn.com, what are you looking for that to do for the year?

Sure.

So the rest of the stores we would expect to be slightly positive, and we expect bootbarn.com to continue to be teens positive.

But again, it's a very small portion of our overall business, doesn't have a big impact.

Got it.

And then on the gross margin, Greg, I think I heard you say 20 to 30 basis points of merch margin improvement for the year but then offset by about 10 basis points of occupancy deleverage.

I guess, I'm just surprised that you're not expecting more deleverage on sort of a flat to slightly positive comp.

Could you give us what -- where the leverage points are now on comp, both for occupancy and then on the SG&A side as well?

I know that you gave us last year's break points but what are they this year?

Yes, and the story is flipped a bit this year versus last year.

And part of that is because the new stores, we're opening 12, and they're more back-half-weighted.

So before, when we've had that, we've had 18 new stores or 20-plus new stores in the pipeline and not getting that mix in.

And now with 12 new stores and back-half-weighted, the leverage comp per occupancy is in the 1.5 to 2 range.

And for SG&A, it's actually higher.

It's more like 3 or so 3, 3.5, and that's driven by a couple of things.

One of them is the effect of bonus-based compensation, or bonus compensation, incentive compensation.

The other is we've got slightly higher operating costs for Country Outfitters.

Their SG&A rate is slightly higher or is higher, and part of that was relaunch, $500,000.

So anyway, there's a couple of factors that are impacting that SG&A leverage point.

Okay.

And then Jim, I think you said that Country Outfitter was accretive from a cash flow perspective?

Could you say what it from an earnings standpoint?

We didn't comment on that, Mitch.

Oh, you didn't.

Okay.

And then the 12 stores that you guys are opening, can you give us a sense as to are these sort of backfilling existing markets?

I'm guessing not in oil and gas related markets, anything in terms of new states?

Yes.

Mainly, we're filling in existing markets.

So last year, we opened a handful of stores or so in California, and we continue to look for those opportunities in California and Arizona.

So maybe a new market in Mobile, Alabama, for example, but -- or the Southeast, but largely going to be concentrated in the West filling in those markets.

Our next question comes from Tom Nikic of Wells Fargo.

I think you touched on this earlier, in answer to Randy's question, but about the store growth.

You grew the store base mid-single digits last year.

You're planning to grow mid-single digits this year.

But you indicated that double-digit unit growth is still the eventual goal.

I mean, I'm just thinking, like, when does maybe the footage growth reaccelerate, if it does?

And as far as the big picture, longer-term store target, is there any adjustment to your thinking?

Are you still kind thinking of doubling the store base from here?

Or is that more vague now than it was maybe a couple of months ago?

So good question, Tom.

I think on the -- when will we reaccelerate to 10% or more, I think the answer's the same maybe as the last couple of calls, which is when we feel that the comp store base is growing solidly and consistently, I think we'll feel better about kind of hitting a [5%] unit growth up to a 10% or 10-plus percent unit growth.

I continue to believe that we can double our store count.

And when we look at the map of the United States, we saw the number of places where we can add density of stores both on a number of markets that we know have customers that is based on our e-commerce data where we can put stores in where we have no stores.

So I think the long-term algorithm of 10% unit growth will return at some point.

Right now, we're being a little prudent in saying, let's be -- let's grow modestly.

But again, if we see stability, we'll accelerate.

Got it.

And just a quick question, in regard to the debt financing actions that you took.

I think you said that you should see a more favorable interest rate on your borrowings.

Did you quantify what kind of savings you would see or how we should think about interest expense this year?

Yes.

So what we've said was we probably use $10 million of revolver capacity to pay down the term loan and you can look at the 10-K that we'll be filing the next week or so.

But the spread between those 2 is roughly 4 percentage points.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

I would like to turn the call back over to Mr. Jim Conroy for closing remarks.

Thank you, everyone, for joining the call today.

We look forward to speaking with you on our first quarter earnings call in August.

Take care.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.