Boot Barn Holdings Inc (BOOT) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Boot Barn Holdings Fourth Quarter Fiscal Year 2018 Earnings Conference Call.

As a reminder, this conference is being recorded.

Now I would like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations 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 2018 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 2018 earnings release as well as our filings with the SEC referenced in that disclaimer.

We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Jim?

Thank you, Jim, and good afternoon.

Thanks, everyone, for joining us.

In today's call, I'll be providing a review of our results and an update for our key strategic initiatives.

Greg will then review our financial performance in more detail and provide our outlook for fiscal 2019.

Following Greg, we will open the call up for your questions.

We are very pleased with our fiscal fourth quarter results, which represent an outstanding finish to our year.

Same-store sales growth of 12.1%, combined with 90 basis points of merchandise margin expansion, resulted in net income that significantly exceeded last year and our earnings guidance.

Comps were up double digits in our retail stores and have now been positive for 4 consecutive quarters.

E-commerce comps returned to positive territory and were up double digits in the quarter as well.

Moving to the full year.

Our financial results exceeded the expectation that we initially set for the business.

During fiscal 2018, we achieved same-store sales growth of 5.2%, 50 basis points of merchandise margin expansion, 80 basis points of operating margin improvement and 100% increase in net income.

Our merchandising and marketing initiatives drove top line gains in most regions of the country and strengthened our position as the leading western and work retailer in the U.S.

From a merchandising perspective, we made significant improvement in our ladies business and rolled out a new performance boot platform to bolster our private brands portfolio.

With regard to marketing, we enhanced our branding through improved creative, adjusted our media mix and began radio and television advertising on a national basis.

As it relates to our omnichannel initiative, we continued to invest in our e-commerce platform and our fulfillment center.

Looking at store growth, we added 9 stores during the year, through a combination of new stores and acquisitions, including the successful proof of concept of a 4-store tuck-in acquisition named Wood's Boots.

We are confident that these investments have us well-positioned to continue to drive sales and earnings growth into the future.

I would now like to spend a few minutes providing an update on our 4 strategic growth initiatives.

Let's begin with driving same-store sales growth.

Sales growth in our retail stores were up double digits in the fourth fiscal quarter, with broad-based growth across the chain.

While same-store sales growth in Texas continued to be very strong, sales growth was also strong across most of the country, particularly in California, Arizona, New Mexico and Tennessee.

From a merchandising standpoint, not only did every major product category post positive results for the quarter, but they've also all improved sequentially from the growth rates we experienced during the holiday season.

Work apparel and work boots continued to grow, benefiting to some extent from a healthier macroenvironment.

Western apparel, both men's and ladies, also showed strong growth.

We believe the strength in western apparel is due in part to the ongoing investments we have made in merchandising and marketing.

We've continued to improve our CRM analytics to better understand our customer, their buying habits and how often they shop our stores and e-commerce sites.

These analytics have helped us segment our customer base into 3 categories, which we've identified as core western, work and wonder west, which is a segment that skews younger, more fashion-forward and more female than the other categories.

Through enhanced CRM analytics, we've been able to determine the customer overlap of these segments, and as a result have augmented our marketing strategy, particularly as it relates to e-mail and direct mail, to properly target each customer group.

We believe this more focused marketing approach is enabling us to drive incremental sales with existing customers and also attract new customers while providing efficiencies in our marketing spend.

Finally, from a stores standpoint, we're continuing to realize the benefits from the labor scheduling system we implemented in fiscal 2018 that allows us to optimize labor hours and improve customer service at key selling times.

We're also very pleased with our preparation for rodeo season, which helped us continue our strong performance in Texas.

I would now like to spend a moment to discussing a few of the things we're doing to help drive same-store sales growth in the upcoming year, fiscal 2019.

From a marketing perspective, we continued to adjust our media mix based on our learnings and analytics from prior campaigns.

As our national footprint expands, we're able to use radio, television and social media to effectively reach a greater number of customers.

We've improved the ROI of our direct mail by upgrading our creative and refining our methodology for developing our catalog mailing list.

We've also developed a customized media mix for each consumer segment that we believe will optimize our brand reach and maximize revenue.

From a merchandising standpoint, we are in the process of evaluating the contribution of each area of the store to maximize sales productivity.

We're also starting to build some nice momentum in our denim business, for both Cody James and Shyanne.

Additionally, we are preparing for the launch of our 2 new private brands this year that should help us to improve [both] sales and profitability.

From an in-store perspective, we have intensified our efforts to raise the product knowledge and customer service skills in the store.

We've invested in a store associate training platform, and are pleased with the return it is providing in both sales and customer service.

Moving to our second initiative, strengthening our omnichannel leadership.

Our 3 online brands continue to differentiate us from the competition, and allow us to target a wider consumer audience while benefiting from a shared platform.

Boot Barn is our core omnichannel brand that is connected directly to our stores.

Sheplers is positioned to be promotional and has an extremely broad product assortments appealing to a large customer base, while Country Outfitter provides a curated assortment to a more fashion-oriented customer.

During fiscal 2018, we completed the migration of our 3 e-commerce sites to a new front-end platform and upgraded order management system and [common] back-end fulfillment operations.

As a result of this transition, bootbarn.com, sheplers.com and countryoutfitter.com now have access to a common inventory selection that is managed by one integrated team.

We also implemented a new warehouse management system and installed material handling conveyors and product carousels in our Wichita, Kansas fulfillment center, where substantially all of our online inventory is now held.

While both the platform migration and new automation caused disruptions to our e-commerce sales during the year, we believe those headwinds are now behind us and we are pleased that e-commerce same-store sales have returned to double-digit growth during the fourth quarter.

From an organizational perspective, we are happy to announce that we successfully recruited a new Chief Digital Officer named John Hazen, who was most recently at Ring, the video doorbell company.

John has a deep, softline retail background, having spent time at True Religion, Fox Racing and Hurley.

And has extensive experience with the systems we utilize both online and in-store.

Over the next several months, John will be working alongside Mark Hampton, our former head of e-commerce, through an orderly transition.

Mark is credited for not only building sheplers.com into the largest e-commerce site in our industry, but also for developing the Sheplers brand over the past several decades.

While he will be retiring at the end of the year, he has agreed to continue to focus on the Sheplers business under John's leadership through the holiday season to ensure the transfer of his institutional knowledge.

As we look forward to fiscal 2019, we are focused on improving the financial contributions of our e-commerce sites by increasing the penetration of private brands online, improving marketing return on investment, eliminating unprofitable and low margin items and driving efficiencies by reducing unnecessary costs.

Now to our third strategic initiative, increasing the penetration of our exclusive brand portfolio and expanding our merchandise margin.

Throughout fiscal 2018, we successfully grew our private brands, including a 270 basis point increase in penetration in the fourth quarter when compared to the prior year period.

For the full year, exclusive brands represented approximately 13.5% of our total sales.

The superior quality of this product, coupled with brand-specific marketing, has enabled Cody James and Shyanne to work their way up to our #3 and #5 top selling brands, with growth rates that exceed most of our third-party brands.

With approximately 1,000 basis points of additional margin compared to sales of branded merchandise, our exclusive brands help increase merchandise margin and drive customer traffic.

Looking ahead, we are focused on continuing this momentum through several initiatives, including the chain-wide launch of Idyllwind, fueled by Miranda Lambert, and the development of a new exclusive workwear brand, both of which will debut in the fall of this year.

We believe these investments will allow us to create even greater competitive differentiation and drive additional customer traffic.

Finally, our fourth initiative, expanding our store base.

This past year, we added 9 locations, finishing fiscal 2018 with 226 stores in total.

We continue to believe we had the opportunity to double our store base and are encouraged by the performance of our recent new stores.

In fiscal 2019, we are reaccelerating our expansion to 10% unit growth and plan to add 23 stores, reflecting both a strong pipeline of quality locations as well as a number of tuck-in acquisition opportunities that we have identified.

So far this year, we have added 5 stores, including Lone Star western and casual, a three-store chain outside of Dallas.

This acquisition was modeled after the blueprint that we established when we acquired Wood's Boots in fiscal 2018.

Wood's continues to exceed our sales and payback expectations.

As a reminder, we target a 3-year payback or better on new stores and are committed to staying disciplined in our site selection as we expand our footprint nationally.

Now turning to current business.

We are now at the halfway point of the first fiscal quarter, and the sales trend has continued from the prior quarter with solid margin performance.

As with the prior quarter, our sales performance is strong across all categories and most geographic regions.

In summary, it was a really terrific year for Boot Barn, and we are confident that the progress we have made expanding our presence, both physically and online, have led to additional market share gains and further strengthened our industry-leading position.

I would now 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 fiscal 2019.

In the fourth quarter, net sales grew to $171 million, driven by a 12.1% increase in same-store sales, the sales contributions from 9 stores added over the past 12 months and sales from the Country Outfitter site that we acquired in February 2017.

Gross profit increased 7.2% to $52.9 million or 31% of net sales compared to gross profit of $49.3 million or 30.3% of net sales in the prior year period.

The 70 basis point increase in gross profit rate resulted from 90 basis points of merchandise margin improvement, partially offset by a 20 basis point increase in buying and occupancy costs when compared to the 14-week quarter in the prior year.

The 90 basis point increase in merchandise margin rate resulted from more full price selling, fewer promotions and an increase in exclusive brand penetration.

If we were to normalize for the additional week in the prior year period, we would have further increased gross profit rate by getting sales leverage on buying and occupancy expense.

Operating expense for the quarter was $41.6 million or 24.4% of net sales compared to adjusted operating expense of $40.1 million or 24.6% of net sales in the prior year period.

As a reminder, fourth quarter operating expense includes approximately $300,000 of secondary offering costs.

Adjusted operating expense in the prior year excludes $1.2 million of store impairment charges.

Year-over-year, Q4 operating expense as a percentage of sales decreased as a result of prudent expense management and leverage on higher sales.

Our income from operations was $11.3 million or 6.6% of net sales in the fourth quarter of fiscal 2018 compared to adjusted income from operations of $9.2 million or 5.7% of sales in the prior year period, meaning a 90 basis point increase in adjusted income from operations.

Interest expense in the fourth quarter was $3.8 million compared to $3.9 million in the prior year period.

Net income for the quarter was $6.9 million or $0.24 per diluted share, up from $0.12 per adjusted diluted share in the prior year period.

Excluding the $0.03 per share impact of the extra week in the prior year period, adjusted earnings were approximately $0.09 per share.

The $0.24 of net income per diluted share in the fourth quarter of fiscal 2018 includes $0.03 of additional tax benefit above what was included in our $0.15 to $0.16 EPS guidance.

Turning to the balance sheet.

Our inventory per store was up 4.4% on a comp store basis compared to last year.

On a consolidated basis, inventory rose 12% to $211 million compared to the year-ago period.

The year-over-year growth in inventory is primarily the result of increased inventory at our warehouses to increase the inventory available to be shipped from our warehouses to reduce dropship fees to support our full container purchase program and to drive sales of our exclusive brands, all of which improve our merchandise margin.

Stores opened and acquired during the last 12 months also accounted for a portion of our increase in inventory.

Our inventory entering the first quarter of fiscal 2019 is current and at appropriate levels.

As of March 31, 2018, we had a total of $204 million of debt outstanding, including $21 million drawn on our $135 million revolving credit facility.

Subsequent to the end of the year, we have made a principal payment of $10 million on our term loan.

Now I'd like to turn to our outlook for fiscal 2019.

We expect same-store sales to grow mid-single digits, which equates to approximately 10% same-store sales growth on a 2-year stack.

At these levels, we will see improvement in our EBIT rate as we achieve leverage at approximately 2.5% same-store sales growth.

We expect earnings per diluted share in the range of $0.92 to $1.02 per share based on an estimated weighted average diluted share count of 28.7 million shares for the full fiscal year.

This represents income from operations of $52.5 million to $56.5 million.

We expect interest expense to be between $17 million and $18 million, and we expect net income from -- for fiscal 2019 to be between $26.2 million and $29.2 million.

The high end of our earnings guidance range of $1.02 represents 20% growth over fiscal 2018 earnings per share when applying our fiscal year 2019 effective tax rate of 25% to fiscal 2018 to normalize the impact of tax reform.

We expect capital expenditures to be in the range of $21 million to $23 million, with the majority related to investment in new and acquired stores, store fixtures and our fulfillment center.

As Jim mentioned earlier, we plan to add 23 stores during the year through both organic growth and tuck-in acquisitions.

Turning to our first quarter guidance.

Business continues to be strong from both a sales and margin perspective.

Accordingly, we expect that same-store sales growth for the first quarter of fiscal 2019 to be approximately 10% and earnings per diluted share to be between $0.10 and $0.12 per share based on 28.5 million weighted average diluted shares.

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

Thanks, Greg.

2018 was a very successful year and we expect that the momentum we regained in our brick-and-mortar stores, and more recently in our e-commerce business, will continue into 2019.

We are excited about the upcoming fiscal year and the opportunities we have to drive sales, strengthen our omnichannel business, enhance margin through continued exclusive brand penetration and reaccelerate store growth to 10%.

Before we wrap up, I would like to share some news regarding the change we have made on our Board of Directors.

Today, we announced that Anne MacDonald, an experienced branding and marketing executive, has been appointed to our Board of Directors, replacing Fred Simmons, who has resigned from the board.

Let me begin by taking this opportunity to personally thank Fred for his contributions over the past several years.

Fred helped lead the growth of Boot Barn into a national lifestyle brand, with revenue growing 300% during his tenure, and was a great inspiration to the senior management team and a tremendous personal supporter of me.

Anne MacDonald brings tremendous marketing expertise, having served as Chief Marketing Officer for several global companies, including Macy's, Citigroup and Travelers Insurance.

She also brings extensive agency experience, advising iconic brands including Procter & Gamble, AT&T and Pizza Hut.

Anne brings a world-class marketing background that will enhance our ability to develop the Boot Barn brand nationally and to launch and nurture each of our exclusive brands.

I'm confident that her combination of company and agency experience will further enhance the composition of our board as we continue to grow the Boot Barn business across the country.

Before we open up the call to questions, I would like to thank the entire Boot Barn team for their tremendous hard work and dedication and for the terrific results they delivered in fiscal 2018.

I feel great about the opportunities ahead of us and team's ability to achieve them.

Now I would like to open up the call to take your questions.

Hannah?

(Operator Instructions) And we will go first to Matthew Boss at JPMorgan.

So on your mid-single-digit same-store sales guide for next year, I guess what have you embedded for e-commerce growth?

And how best to think about Texas' oil and gas markets versus maybe the rest of the country embedded in that mid-single-digit same-store sales guidance?

Sure.

So we feel great that e-commerce is now back in double digits.

We expect that will continue throughout the year.

We've invested a lot of time and some money and a lot of hard work is this most recent fiscal year, and we're expecting to see that payoff with the combination of our new Chief Digital Officer, John Hazen, and the work to the former team under Mark had been doing.

So I would think about that as a double-digit growth business.

In terms of oil and non-oil or Texas and non-Texas, the Texas business continues to be strong for sure, but the rest of the business has also been improving.

So we actually saw bigger sequential improvement in the rest of the business outside of Texas between Q3 and Q4, than a sequential improvement in Texas between those two same quarters.

So it's really -- it's great to see just a broad-based growth.

And in answer your specific question, Texas, we're expecting to continue to be double digits and the balance of the chain, probably mid-single, and that's kind of how it's running now.

If you put all that together, you'd say, well, then you're going to get to a higher than a mid-single-digit comp for the year.

And just to kind of address that, we are 10% of the way through the year.

We've got a tremendous amount of business left to do.

We'll start to cycle some of these numbers as we get into the third and fourth quarter, so we're trying to put out a guide for the year that we feel good about.

But we certainly feel very positive and optimistic about the momentum coming out of the fourth quarter and coming into the first quarter.

And Jim, as just a follow-up for multiyear.

So unit growth now back to 10% next year, mid-single-digit same-store sales guidance is at the high-end of your historical target range.

I think our model points to high teens operating income growth for next year.

I guess, Jim, is it fair to say you're comfortable that the mid -- that the multiyear model has returned to the 20%-plus annual net income growth algorithm that you used to talk about at low- to mid-single-digit same-store sales?

It's a great question, Matt.

Yes, we are comfortable that the algorithm remains intact.

In this particular year, we feel good about, as Greg pointed out, a 20% guide or 20% growth in our guided EPS.

And if you think about this particular year, we're calling out a 20% growth in EPS, and that is offsetting an increase in share count, an increase in interest expense, some investments we're making in private brands, preopening costs associated with new stores.

So we -- I would say we feel good about it this year, and this year's got 3 or 4 sort of unique things working against it.

So long-winded answer to, I do feel pretty confident about the long-term algorithm.

Incidentally, I'd never had lost confidence in the long-term algorithm, ever over the last 24 months, but here we are and it certainly feels great to be back on the winning side.

We'll go next to Peter Keith with Piper Jaffray.

I wanted to just dig into the private label launches.

I know you've got some interesting product that's kind of in the pipeline and set to roll out.

Could you give us a sense on when some of the larger chunks of that new product is going to start hitting shelves?

Sure.

Idyllwind by Miranda Lambert will launch in the fall, so call it September-ish, and that is a really exciting product line.

We just kind of reviewed the fall and holiday deliveries one more time yesterday.

It is boots and apparel, so top to bottom, plus accessories and jewelry, and we feel great about how that assortment has come together; and that should be in all stores in the September timeframe.

The other exclusive brand is a workwear brand, and that one, we'll start to bring in pieces of it, certain categories in the fall, call that September, October, but by January, February, it should be fully in store and we'll kind of have a grander launch in the spring of next year.

So that will be -- we'll start to see some selling of it in the fall in certain categories, but other categories will have longer time lines, won't be rolled out until after Christmas.

Okay.

And the private label penetration that you're seeing, 270 basis points this most recent quarter, is that something that you would expect to continue or accelerate, decelerate?

How should we think about that trending forward?

We've been pretty consistent growing 250 basis points or [200] basis points of penetration each year over the last few years.

I think as we look forward, that number still feels good.

If anything, it will accelerate a bit.

So once those 2 brands take root, you could see how additional brands, plus the expansion of Cody James, some expansion that we are doing in Shyanne for a more traditional western -- core western customer could get that number to 400% of increased penetration points each year.

That's not how we've modeled this year, partly because those 2 new brands aren't going to -- we're not going to benefit from them for 12 months.

We're only going to benefit from them for 3 to 6 months or so.

Okay.

One last question for you, Jim.

I can recall back in 2014, even early 2015, we used to talk about the steadiness of the business that was running at a nice, steady 7% comp run rate.

I think -- I remember conversations we had, you talked about how remarkably steady it was.

Curious if you're starting to see that today, just kind of week-to-week across the store base, if there feels like there's a lot more consistency just given the functional usage of lot of products you sell?

It's a great question.

Yes, I think the business is certainly very steady now.

And if you're going to take the historical context that you called out, Peter, I think if you stripped away the impact of oil on the headwind or the tailwind side, it's been incredibly consistent for a decade.

It's just for the last 24 months, up until recently, oil was a headwind, and now it's a bit of a tailwind.

And we've taken an inherent mid-single-digit comp first down to flattish and now up to double digits.

But as we look at the business day-to-day and week-to-week, it's remarkably consistent.

It's not like we've had a couple of just outside incredible weeks and the rest has been average.

It's week over week, it's much more predictable and it certainly makes you feel better from a visibility standpoint when you see a little bit more consistency in the numbers each day when you open up [flat] sales.

We'll go next to Jonathan Komp with Baird.

I want to follow-up on the last question and really just, when you step back and look at the results in the double-digit comps, pretty handily out -- exceeded what you had planned for the quarter.

How much, if you could try to attribute some of it to the internal initiatives versus the external environment, especially now with, obviously oil about $70 a barrel, maybe some more tailwinds there, but how do you think about the business when you try to parse out the drivers of the strength?

It's a fantastic question.

It's one that we wrestle with all the time on the downside and on the upside.

Yes, I think we're clearly getting some external help and some tailwinds.

I would have said naturally that it's half of the comp.

If I'm honest, I'm looking at some other numbers that are being posted and it doesn't feel like it's rippling through many other retailers that we would kind of benchmark ourselves against.

Having said that, I still think it's maybe 1/3 of the help.

And the balance of it is -- a lot of things that we're doing internally, I would have to acknowledge one step function change, right?

Our e-commerce business went from a negative comp in the third quarter to a strong positive comp in the fourth quarter.

And while it might be handy for me to take credit for that for an internal initiative, we created the negative e-commerce comp in the first place.

So if you were to strip that piece out, then I think the balance is sort of what we're doing from a marketing perspective, what we're doing from a merchandising perspective, what the stores team is doing in terms of in-store training and customer service.

So that's the way I think about it.

Okay, great.

And then, Greg, I wanted to follow up, I think you mentioned for the year, hitting mid-single-digit comps would be about a 10% 2-year stack, and I just wanted to ask about that.

Is that based on what you're currently running?

Or how did you formulate that thinking?

And I ask in the context, I think you were starting to improve in terms of the trends at this time last year, so if you're running double digits, it seems like you might be a little bit ahead of that now.

But just wanted to clarify the thinking there.

We're roughly 10% of our way through the year, John, and our softest comp was Q1 last year.

We were roughly 1; in Q2, we were roughly 2; and then Q3 was plus 5; and this quarter, obviously plus 12.

So given where we are through the year, and given the tougher compares coming in the back half of the year where more of the sales are weighted, we felt that the mid-single-digit, which is roughly, call it a plus-5, was the right way to think about planning the business.

The benefit of our model is that if the business comes 70% of our inventories on automatic replenishment so we can get into that inventory quickly.

So we feel like we are well-positioned for growth, but also planning the business in a proven fashion.

Got it.

And last one from me if I could.

If you had any perspective on the direction of the merchandise margin improvement, obviously it was quite strong in the quarter, so just wondering as you look forward what the puts and takes there might be?

I think that on the upside it continues to be the private brand penetrations to the extent that we do 2.5 to 3 percentage point increase in private brand penetration, we'll get 25 or 30 basis points of increase.

In addition to that, we continue to look at our promotions and evaluate that.

We've done that for a couple quarters in a row, and we continue to work hard at that.

It's hard for me to tell you exactly what that's going to be worth, but that's certainly something we continue to look at.

And we do see a little bit of a headwind out there in freight.

It hasn't been material to us, but it is something that's on our radar.

So I guess those are kind of the pluses and minuses I would think about.

The other thing, as the e-commerce business turns around and continues to improve, and Jim talked about the fact that we're working hard to improve the profitability of that, that may also be a tailwind for us.

We'll go next to Randy Konik with Jefferies.

I first want to talk about the private label business as well.

I guess first, for Jim, when you think about long-term product architecture, do you think about, given the success you've had in private label, do you think about increasing the umbrella or penetration of private label a little bit more than you might have thought in the past?

Then I guess as a follow-up on private label for Greg, when you look at the spread between the merch margin of private label versus branded, do you see opportunity for that spread to widen further as you potentially get more, I would say, I guess, economies of scale or scale benefits from bigger buys for that private label product as you source it?

Just curious on that first topic.

Sure.

So on the first piece, we feel pretty good about 300 points of improved penetration each year, maybe 400, so that will get us to 20% in a couple of years or so.

Yes, I would want to acknowledge that the success that we're having feels great.

It's differentiated product.

It's margin-enhancing.

But we also do feel very strongly that we're a house of brands and that we have really terrific relationships with our branded vendor partners.

And I wouldn't expect our private brands to take up in the future even 40%, 50% of our business, just because I think people are coming in looking for Wrangler, Carhartt, Justin, Ariat and those types of brands.

So I think it's a careful balance.

We want to help our customer find what they need and part of that is bringing new and exciting brands and part of that is showcasing the third party brands that are in the marketplace and have helped us grow to the business and the size that we are today.

In terms of margin expansion in 1,000 basis points, want to take that one?

Yes, sure, I will.

So I do think, Randy, that conceptually, there is an opportunity to expand beyond the 1,000 basis points.

One of the things that we've really wanted to do as we've developed these private brands is to invest some of that money back into the make of the product so that our product stands out and is among best-in-class or is best-in-class.

So we are doing that and continue to do that.

But I do think that as we continue to invest in the team, the design team, that we'll be able to get some more experience and perhaps scale.

And again, as we continue to grow the store base, we can buy in bigger quantity.

So I think all those things could lead us to expansion of the 1,000 basis points.

But again, we're not trying to just talk at a differential.

We are putting the make into the product.

Got it.

And I guess, second topic.

Use of analytics, you gave us some perspective on how you're using analytics to kind of distort your ad budgets and different -- I guess, different media venues, et cetera.

How do you think about -- are you looking at different types of analytics for -- to enhance inventory allocations or anything around supply chain?

Give us some -- or even on the e-commerce side, what's kind of going on there that we can kind of look forward to or your project-based thinking about that will help the medium- to long-term?

So good question.

There's certainly a number of things that we're doing from an e-commerce perspective.

And the recent appointment of John Hazen has brought in sort of fresh set of eyes as to how to grow more traffic using more modern kind of marketing approaches, everything from social media, shoppable Instagram stories, et cetera.

We've done some more work around influencers, and that's all intended to drive traffic to our site.

And those guys have really gotten, I think, much improved in terms of how they evaluate each of the steps within the funnel and how to continue to try to drive more conversion.

In terms of your other question of using analytics for supply chain and interim management and those sorts of things.

Perhaps giving you a somewhat contrarian answer, I think someday there might be some opportunities for us to go after that.

The honest answer is, right now, we're focusing on keeping things simple from a supply chain standpoint.

Our business is highly replenishable.

It's very predictable.

And if a particular store sells a size 12 work boot, we order a size 12 work boot for that store and it gets replenished.

I think we've got a pretty good handle on our inventory investment.

I think the buyers have a fantastic handle on assorting different parts of the country with different nuances.

But we, right now, aren't intending to spend a tremendous amount of time or money on supply chain initiatives because I just think we get a much bigger return on some of the other things that we're doing that are growing demand.

Great.

Lastly, I just want to ask, one thing that Greg talked about was, it sounded like there was opportunity to look at the promotional, either cadence or calendar, maybe suggesting that the consumer is kind of being a little less price sensitive.

I'm curious, when you look at the comp or just think about the business generally, not just on a near-term basis, does the consumer feel like their frequency of shop is greater and the price sensitivity is lower?

Just curious how do you think about how the consumer is feeling right now versus maybe 6 or 9 months ago?

And that's all I have.

I can take that one.

As you know, we're mostly a full price selling model at Boot Barn to begin with.

And recognizing that many retailers are increasing their promotional intensity, either frequency or deck.

What we found is -- and this harkens back to your question, what we found is that we can promote and perhaps get a slightly bigger basket, lower margin in that particular sale.

But over a period of time, we're just moving demand around or pulling it forward.

And we offer our customers, I think, a very fair price.

We're virtually always in stock for what they need, and we haven't trained them nor do we intend to train them to wait for the next sale before they shop us.

In terms of are they shopping more frequently or less frequently, I think they're probably shopping slightly more frequently and buying a bit more of the discretionary items.

Part of that might be the macro environment, part of that might be what we're doing internally.

But to give you an example, ladies western apparel, which has been a difficult business for a while, had a tremendous sequential improvement between the third quarter and the fourth quarter.

And for the most part, that product line is not a necessity, right?

It's a discretionary item.

So I think they had always -- if they were a workwear customer and they needed a new pair of work boots, they were always going to come in and buy them.

But as their -- perhaps the economy has improved or their wallets has improved, they're buying outside of the core, core product and some items that just might be more discretionary.

So I think that's what -- part of what's driving the comp.

And we're fueling that fire with the segmentation.

We're treating that customer differently now and communicating to her, and it's mostly a her, very differently than we had in the past with our more general broad-based core western communication.

We'll go next to Oliver Chen with Cowen and Company.

Regarding exclusive brands, our Cowen survey really indicates a high degree of familiarity with your existing exclusive brands and high satisfaction rates.

As you launch the new brands, what are your thoughts on managing the inventory buy appropriately and having the right guardrails around risk as well as your thoughts on building awareness of new brands and developing lifestyle brands?

So great question.

There are 2 very different brands that are coming.

One is Idyllwind, fueled by Miranda Lambert.

And if you think about how that product line will break down, a portion of it will be ladies boots, of course, and a portion will be denim, and a portion will be ladies tops.

So I think we're extremely excited about the launch of that, the partnership with Miranda.

She is just going to be a tremendous voice, no pun intended, for the brand and for the company.

And she's been a fantastic partner to us.

I think from a risk standpoint, the boots part of the business has a pretty low markdown exposure as does the denim piece, so now we've kind of isolated any inventory risk to the non-boots, non-denim piece of the Miranda line; and frankly, that just doesn't worry me that much.

I think the products will be good.

We'll probably have to mark some of it down to move it, but that will be a small percentage of a small percentage of the business.

On the workwear brand, there's -- I wouldn't say there is no risk, but this is a brand that is going after boots and apparel and will be kind of our own exclusive brand.

It's, as Greg had pointed out, while we will undoubtedly achieve a higher markup, we have been very generous to the product in terms of the make and the fabric and materials that go into the boots and the workwear.

And this is a product that will be very quickly put on replenishment and our work business in general has the lowest markdown [rate] in the company.

And I wouldn't expect that our new workwear brand would be any different than that.

So I actually am really excited about the launch of both of them, not only in the business that those 2 brands will generate, but in the overarching excitement that those new launches will bring to Boot Barn and I feel very comfortable on the downside risk management piece of it.

Okay, great.

And our survey also illuminated that shoppers actually would visit you more often if there was a store closer to them.

My question is about, I'm thinking about physical and digital expansion, and did a lot of digital trends really help inform where your next vintage of stores should be located?

And a related digital question is, as we look across longer term, what are some of the drivers that you're focused on to improve profitability within that channel?

Okay.

So 2 different questions.

On the new stores, for context for everybody, we had, a while ago, done a study that says how many stores could we have?

And we have since updated that.

And we firmly believe that we can still hit our 450 or 500 stores or double our store count, and we've gotten increasingly more sophisticated in terms of site selection.

And part of that is exactly what you're calling out, which is how do we use the online sales in a particular market to help inform the affinity for Boot Barn or the affinity for the product that we sell.

So we're starting to see the use of that information to help us place new stores or at least pass demand in different areas.

So I think that is one way that the 2 channels have connected.

The second part of your question, remind me the second part of your question on the digital piece.

Digital margins and profitability, key drivers and what you see happening.

I think you've done a good job managing split shipments and also shipping costs, but what are the key drivers?

And what do you see happening in the margin mix over time as customers do value the convenience which comes at a cost?

Right.

Right.

Well, there's 3 or 4 different things that we're looking at.

One was getting the Wichita fulfillment center up and running.

And with the investment in material handling in WMS there, we're now shipping from middle of the country, so we've taken shipping costs down.

The automation will -- has reduced the cost per pick and pack the items, so we've seen some operational efficiencies there.

We've been spending a tremendous amount of time looking at the return on ad spend for paper click and have found that we can pare back some paper click, not lose demand and simply pocket some of that money and we are continuing to test and learn there.

But each time we do that, we realize that we can -- so far, anyway, we've realized that we can make a sale more profitable if we don't have to spend 15% on customer acquisition through paper click.

A couple of other things that we're looking at, you called one of them out, as did Greg, which is as we inventory more of the selection of our inventory or assortment in our own distribution center, we can avoid the dropship fee that our vendor partners charge us when they ship for us.

So that's another area that we can have cost avoidance.

And I've said, the last thing is just as we continue to build scale, 3 brands working with 1 team and 1 distribution center, starting to see some nice growth will leverage the fixed overhead components of the e-commerce business.

And I think, when you put all that together, coupled with improvement in private brands, we'll get to kind of a convergence of the contribution of online and the contribution of stores, at least for every month of the year with perhaps the exception of December, where the retail stores get a lot more leverage on occupancy and the fixed costs associated with that.

But setting that aside, we -- our goal is to get to the point where we are agnostic or indifferent between a customer buying online and buying in store from a financial perspective and we certainly go to market and want to be there for them in any way they want to interact with our brands.

Our last question is about, as you think about the reality of Amazon and the trade-off between the customer breadth they offer versus the data that you collect and what's incremental to you.

What's your framework for thinking about that relationship as well?

Well, it's a very careful balance, right?

They have millions of eyeballs and an incredibly strong brand presence, and the ability for us to get in front of customers with our brands and/or with Boot Barn to Marketplace or Sheplers and Marketplace, et cetera.

As they've made it a little bit less profitable on Amazon as it increased their rev share, we're starting to probably diminish a piece of what we sell on the Marketplace, not abandon it, but diminish it a little bit, and I still think we'll continue to be partners with them with our brands on Amazon Marketplace.

But I would remind just everybody that, that piece of our business right now is very small, right?

If our online business is 18% or 20% of sales, Sheplers is the biggest, Boot Barn is the second biggest and Amazon is the third biggest, and it's a pretty small piece of our business right now.

I do think that Amazon gives us a very unique platform to get our private brands out in front of 100 million Prime members pretty quickly.

So that's something we're looking forward to as we kind of get started into fiscal 2019.

We'll go next to Paul Lejuez with Citi.

Two questions.

One, can you talk about the credit card -- private label credit card?

You've got -- how much might that be helping sales in your view?

And do you plan to have a greater focus on credit this year?

And then a second, just curious if you could talk about the store locations for this year, the size, where they're going to be and the timing of opening throughout the year?

Paul, it's Greg.

I'll take the first part, which is how big a business is the credit card business and how is it helping comp.

When we introduced the credit card program for our customers, it really was to create some loyalty and provide them some [open] to buy, and we really didn't think it was going to be incremental to our sales.

And that's really what we've seen so far.

So our customers like it, we have some appreciation days or early advanced view of a Black Friday sale or something.

But in general, the credit card business is not a big business for us.

And again, it may be helping comps a little bit, but it would be very small, I think.

In terms of store locations and the phasing of that, we announced the Lone Star acquisition or purchase a month ago.

We've opened 2 stores this year.

So we've got 5 new stores in Q1.

I think Q2 will be somewhat similar -- I would say it's pretty much a normal phasing throughout the year, with maybe a little bit more weight in Q4 as we started to ramp up a little bit later than we normally would be in a pipeline perspective.

I think that we'll wind up opening stores somewhat in 1/3 of the country, 1/3 on the west, 1/3 in the middle of the country and 1/3 in the -- on the east coast.

And we're trying to move up from the Southeast into mid-Atlantic states, that kind of thing.

Not sure if we'll get there all the way this year, but that's how we're thinking about the 23 new stores this year.

We'll go next to Tom Nikic with Wells Fargo.

I just wanted to ask about the margin structure of the business.

Sort of based on your EPS and operating income guidance, we can kind of sort of figure out what you're looking for, for the Q1 and full year.

Should we think about there being sort of more opportunity on the gross margin line versus a CNA leverage, just given the private label penetration and you had some positive trends in mark down rates lately and occupancy leverage on the comps.

And then just longer-term, a couple years ago, your operating margin was more in sort of the 8% to 9% range versus the 6% to 7% that it's been in the last couple of years.

Do you think you can sort of get back to that 9-ish kind of range or better than that, like worse than that?

I guess, just kind of how you think about the long-term opportunity for your business?

The -- so it's Greg, Tom.

And the structure of the P&L, if you will, we expect margin to expand, call it, 30 basis points, something like that.

Maybe it's a little bit higher.

It'll be dependent on our private brand penetration.

You mean merge margin.

Merge margin, thank you very much.

From -- we get leverage on the SG&A line of roughly a 1.5% comp this year; and for occupancy, it's roughly a 3.5% comp this year.

This year, the one thing that's causing a little bit of expense pressure, if you will, is in the buying line.

We've added -- we beefed up our designers and private brand folks, and so that puts a little bit of pressure on the, what I'll call, the buying and occupancy line, but it's really the buying group where you see that blip.

So occupancy will leverage it roughly 3.5.

But that line combined will be north of that.

In terms of EBIT margins, the 9% you quoted before was before we bought Sheplers, which was more heavily penetrated in private brand -- I'm sorry, in e-commerce, about 40% of their business was e-commerce.

So we took a step down as we mixed that business in.

But we do expect to continue to expand EBIT margins each year.

Last year, we expanded 60 basis points of EBIT margin, and that was going up against a year that had an extra week, a 53rd week as well as where we had to add back incentive-based compensation, which was roughly a $3 million to $4 million number, so when you adjust for all those things, we had better than 60 basis points of expansion in EBIT margin, and we should expect to continue to grow that.

We'll go next to John Lawrence with Coker & Palmer.

Would you comment a little bit -- Greg, you commented a little bit about new store performance doing really well.

And then, you mentioned the state of Tennessee.

So I know there's an unusual situation that you've got to be doing really well downtown Nashville with the investment you've made there.

Unique environment, unique opportunity.

Can you comment, are there some more places like that through the country that you could replicate that model?

The downtown Nashville store on Broadway is an incredible store, love the design and the expansion into the adjacent space with the ladies part of our business.

It's kind of hitting on all cylinders, and we feel great about it.

Having said that, our model going forward is, we'll continue to be a 10,000 square foot, maybe 11,000 square foot square box, close to a highway or a freeway and -- while we won't turn away opportunistic deals like the one on downtown Nashville, we are frankly just going to keep things simple and continue to build stores or acquire stores that fit our basic model.

Are there places like that, that we could open up stores?

Yes, of course there are.

But it's a small handful of stores, and they tend to require undue management time, attention and capital.

So as we ramp up, we are looking to sort of roll out a fairly standard model just to keep everybody's life, buyers, store operators, district managers, keep their life simpler and let them spend more time with customers.

Just a comment, it's a unique situation, but seems to be working very well.

Thank you.

It's a fun store.

We'll take our final question from Mitch Kummetz with Pivotal Research.

I guess I have 2. Let me start on the E-com piece.

So you're going to be lapping some weak E-com performance, I think, in the first half of the year.

You've talked about that being self-inflicted.

So I would think it sort of artificially deflated your performance there.

So is there any reason to believe that E-com, at least through the first half, will be unusually strong?

I mean, you've talked about -- Greg, you talked about kind of a 10% to your stack on the overall comp.

I would think that lapping some of those weak E-com numbers that the E-com performance could potentially be quite a bit better than that.

If so, is that kind of contemplated in the plan, particularly from a margin standpoint?

It's contemplated in our plan for sure.

We kind of look at a 2-year stack by store, and e-commerce is some of our bigger stores.

So it's contemplated at -- when we get to September, we start to cycle the transition of the bootbarn.com platform.

And when we transitioned going into the bootbarn.com platform change, the business was pretty darn strong and coming out of it, it was incredibly strong.

So while we might have a easy road ahead of us between now and September, the incline that we're up against gets much steeper in September.

The Sheplers business will cycle a difficult few months.

The net business improved for a bit, and then unfortunately, for last year's Christmas, we had a difficult business at sheplers.com, and we'll get to cycle that.

So that might be a bit of an artificial help when we get into November, December given the supply chain problems we had.

So it's all kind of built up from the bottom up and contemplated in the way we're thinking about the business.

And in answer to your specific question, yes, I suppose for the next few months, we have a bit of an easy compare from an e-commerce perspective, and then that gets a little bit more difficult when we get to September and we hit the transition of bootbarn.com.

And then Jim, in your prepared remarks, you talked from like a category perspective, sounds like there was strength across the business, whether it was men's or women's or work or western or boots or apparel.

Is there any way to provide a little bit more texture to that?

I don't know if you can sort of rank some of these things in terms of their contribution to the overall comp.

And then, when you think about the 2019 plan, I don't know how much you actually sort of think about things by category in terms of how they contribute to comp.

But is there any way to kind of speak to, where do you have more confidence in some areas versus others based on either the trends that you're seeing or the merchandise that you guys are putting out there?

Sure.

In terms of size and growth rate, yes, we have to acknowledge the work part of the business overall.

Work boots is probably the biggest single department in the company, rivaling men's western boots, and work boots has had some nice growth, steady growth, healthy growth for a while.

And work apparel, while not quite as big, has had steady growth in even a more outsized way than work boots.

So both of those, I think, are in our DNA already.

They've been helping the business grow over the last few quarters, and we don't see any signs of that slowing down or expect it to slow down.

And frankly, once we start getting our new brand out there, we might see some even more upside.

The men's business, men's western business between boots and apparel is -- I've added 2 kind of parts of the store there, but that's the majority -- or the biggest single or collection of business in the store and their growth rate has been strong, not quite as strong as the work business but the growth rate has been strong and got better between the third quarter and the fourth quarter.

And then, the final piece of it is ladies, particularly on the ladies apparel side, that is not a huge part of our business, it's less than 10% of our business.

But the growth in ladies apparel has really been exceptional in terms of the sequential change between the third quarter and the fourth quarter.

We changed the assortment quite a bit.

We've launched wonder west, which is our sort of view towards a more female, younger, fashion-oriented customer.

We've developed a terrific new television spot that really showcases our ladies apparel.

And I think the combination of those things has really helped a relatively small business start to see some outsized growth.

So just to recap, work is a big business and growing strongly.

Men's western is even -- if you put boots and denim and apparel together, an even bigger business, growing strongly, not quite as strongly as work, and the ladies apparel business is smaller, but is really starting to build some terrific momentum.

That concludes the question-and-answer session.

I'll turn it back over to Jim Conroy for any additional or closing remarks.

Well, thank you, everyone, for joining today's call.

Look forward to speaking with you all on our first quarter earnings in August.

Take care.

And that concludes today's conference.

Thank you for your participation.

You may now disconnect.