Boot Barn Holdings Inc (BOOT) 2019 Q2 法說會逐字稿

Good day, everyone, and welcome to the Boot Barn Holdings, Incorporated Second Quarter Fiscal Year 2019 Earnings Call.

As a reminder, this call is being recorded.

Now, I would like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations.

Mr. Watkins, please go ahead.

Thank you.

Good afternoon, everyone.

Thank you for joining us today to discuss Boot Barn's Second Quarter Fiscal 2019 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 on the Investor Relations section of the company's website.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements.

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 during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter fiscal 2019 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 Operating Officer.

Jim?

Thank you, Jim, and good afternoon.

Thank you for joining us.

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

Greg will then review our financial performance in more detail.

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

We are very pleased with the sustained momentum our business is experiencing across the country.

The improvements we have made in merchandising, marketing and omni-channel, along with a healthy macroeconomic environment, helped fuel second quarter results that exceeded our expectations.

Beginning with our top line, consolidated same-store sales increased 11.3%, which includes double-digit gains both in our retail stores and online.

A combination of strong sales growth and merchandise margin expansion enabled us to grow operating income by more than 50%.

This represents a 130 basis points year-over-year improvement in operating profit margin.

We are very encouraged by these results and believe they reflect the successful execution of our 4 strategic growth initiatives.

Let me take a moment to review and provide an update of each of them, starting with driving same-store sales growth.

We are very pleased with the 11.3% same-store sales growth we achieved in the second quarter.

Comps in our retail stores have now been positive for 6 consecutive quarters.

Sales growth was driven almost entirely by an increase in transactions with a slight increase in ticket size.

We have seen widespread growth across most of the country, with Texas again delivering outsized results.

Once again, every major product category posted positive results for the quarter, with particular strength in work apparel and work boots, followed by ladies' and men's Western apparel and modest growth in Western boots.

The growth in work boots and work apparel was driven in part by the ongoing success of our commercial accounts business.

From a marketing perspective, we continue to focus our efforts on reaching our 3 distinct customer segments: Western, Work and Wonderwest.

We've upgraded the creative in our direct mail, e-mail and broadcast marketing.

We are also continuing to refine our media mix with a tailored message and communications strategy for each specific customer segment.

Our CRM analytics indicate that this marketing segmentation is resonating well by both attracting new customers and by reengaging customers who have lapsed.

We believe the extension of this marketing segmentation across all media, both traditional and digital, will help us continue to drive same-store sales growth in the long term.

From a merchandising perspective, we have been working to bring our customer segmentation strategy to life in the stores.

Our buyers and merchants have developed a curated assortment to fit the customer preferences of each segment.

We've also rolled out new fixtures to support many of the in-store merchandise initiatives.

From a store operations perspective, we continue to see benefits from enhanced associate training and greater efficiency in store labor scheduling to accommodate periods of heavy traffic in the stores.

In addition, we have streamlined the branding across the chain by making signage more uniform and upgrading our visual merchandising.

Moving to our second initiative, strengthening our omni-channel leadership.

Sales in our e-commerce business during the second quarter once again increased double digits.

We have made several changes that we believe drove strong top line e-commerce growth, including enhancing our Search Engine Optimization, refining our pay-per-click spend, improving site navigation, and more actively merchandising the product listing pages.

We also launched additional sites, including Idyllwind.com, Wonderweststyle.com and Shyanne.com over the past few months, each offering a curated assortment to a specific customer group.

While these sites are lower in volume, they provide us with platforms for testing and learning.

For example, we are experimenting with new customer acquisition techniques, web push notifications, conversion rate optimization, and cart abandonment tools.

As we identify and develop successful strategies on these microsites, we expect to be able to implement them on our core site.

We are also implementing a new process coupled with an in-store portal for our customers to return e-commerce purchases to our retail stores, further integrating digital to our brick-and-mortar business.

Our expectation is that this new process will develop more loyal e-commerce customers, give us an advantage versus our competitors, and provide greater opportunities to save the sale and keep the customer.

In addition to these top line omni-channel initiatives, we have completed significant improvements to our fulfillment center in Wichita by completing the installation of a new warehouse management system, material handling conveyors and product carousels.

We believe these improvements have us well-positioned to better serve our customers this holiday season and going forward.

The work in the fulfillment center, coupled with fewer promotions, the elimination of unprofitable and low-margin items and a decrease in duplicative overhead costs are helping us improve the financial contribution of our e-commerce business.

Now, to our third strategic initiative, exclusive brands.

We remain focused on increasing the penetration of our exclusive brands to benefit our customers and improve our merchandise margin.

By developing high-quality product to complement the great assortment from our third-party branded vendors, we're able to meaningfully expand the breadth and depth of our offering.

For the second quarter, our exclusive brand penetration increased by approximately 250 basis points year-over-year and represented more than 15% of our total sales.

In mid-September, we launched Idyllwind, a new line that was developed with the country music artist, Miranda Lambert.

Although early, the initial feedback on Idyllwind has been positive and initial sales indicate that the brand is resonating well.

Miranda and her team are tremendous partners, and we believe that this relationship has resulted in an outstanding lineup of boots, apparel and accessories.

We have brought this new assortment to life by rolling out dedicated fixtures to our stores and developing a special Idyllwind.com website.

These will enable the customer to shop a curated assortment both in-store and online.

We believe Idyllwind will not only improve the penetration of our exclusive brands, but will also introduce new customers to Boot Barn.

We are also very excited about the initiatives we have in place that will allow us to continue to fuel our exclusive brand Work business.

In fact, just last week, we launched Hawk's workwear, an inclusive line of apparel and accessories chain-wide.

This brand is designed to attract a more traditional work customer that hasn't historically been a frequent shopper of Boot Barn.

The initial wave of Hawk's will be bolstered by the launch of work boots in the coming weeks.

In addition to Hawk's, we've extended our Cody James Western Brand to the work side of the store.

The Cody James brand will soon expand to 25 work boot styles and will be available across the chain.

This brand will be extended to include apparel and is intended to meet the work needs of our existing western customer.

Cody James is our #3 brand in the company, and we are encouraged by the acceptance we are seeing of the new work book styles.

Consistent with our other exclusive brands, Hawk's and Cody James Work are expected to generate approximately 1,000 basis points of merchandise margin above that of our third-party brands.

Finally, our fourth initiative, expanding our store base.

During the quarter, we opened one new Boot Barn store and acquired Drysdales, which was comprised of two large volume stores in Tulsa.

We've recently been augmenting our new store development with the addition of tuck-in acquisitions, which also target a 3-year payback on invested capital.

As a group, these tuck-in acquisitions are tracking better than the 3-year benchmark we use for a new store.

We continue to believe that a combination of new store openings and the acquisition of stores from local operators can drive meaningful sales growth and allow us to quickly get a foothold in new markets.

We plan on utilizing this approach as we look to grow new units by 10% annually.

We remain confident in our ability to develop a truly national concept with a store presence from coast to coast.

With the addition of new stores both organically and through acquisition, we continue to believe we have the ability to double our store count over the next several years.

Turning our attention to current business.

Although still very early in our holiday quarter, we are encouraged that through the first 3 weeks, our consolidated same-store sales are above the 11.3% comp we just reported.

This sequential improvement in same-store sales growth is primarily the result of an increase in average boot prices during the first 3 weeks of October, as we did not repeat last year's October boot sale in the current year and it appears to have had no negative impact on the number of boot transactions compared to the prior year.

We are also benefiting from a healthy e-commerce business that is cycling an easy comparison from last October.

With the macroeconomic environment and positive momentum in the business continuing, we are optimistic as we head into the holiday shopping season.

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

Thank you, Jim.

Good afternoon, everyone.

In the second quarter, net sales increased 17.5% to $168 million.

As Jim mentioned, sales growth was driven by an 11.3% increase in same-store sales, the sales contributions from the stores acquired from Wood's Boots, Lone Star and Drysdales, in addition to sales from new stores added over the past 12 months.

During the second quarter, we added 3 stores, including 2 acquired Drysdales stores in Tulsa, bringing our store count at the end of the quarter to 232 stores in 31 states.

Gross profit increased 22% to $50.9 million or 30.3% of net sales compared to gross profit of $41.7 million or 29.1% of net sales in the prior-year period.

The 120 basis point increase in gross profit rate resulted from a 30 basis point increase in merchandise margin rate and 90 basis points of leverage in buying and occupancy cost.

Merchandise margin increased as a result of more full-price selling and growth in exclusive brand penetration.

Operating expense for the quarter was $42.2 million or 25.1% of net sales, compared to $36.1 million or 25.2% of net sales in the prior-year period.

Operating expense increased primarily as a result of increased sales, expenses for new and acquired stores, higher marketing costs as a result of the Idyllwind launch and costs associated with the addition of our mid-year fiscal inventory.

Income from operations was $8.7 million or 5.2% of net sales in the quarter, compared to $5.6 million or 3.9% in the prior-year period.

Net income for the quarter was $4.5 million or $0.16 per diluted share, which includes $0.04 per share of tax benefit related to stock option exercises.

This compares to net income of $1.1 million or $0.04 per diluted share in the prior-year period, and our guidance of $0.07 to $0.09.

Turning to the balance sheet.

Inventory increased 2.6% on a comp store basis compared to last year.

On a consolidated basis, inventory rose 8.7% to $230 million compared to a year ago.

This increase was primarily driven by inventory from new and acquired stores added in the last 12 months and an increase in the inventory at our Wichita fulfillment center used to support our e-commerce business.

As of September 29, 2018, we have a total of $200 million of debt outstanding, including $26 million drawn on our $135 million revolving credit facility.

Turning to our outlook for fiscal 2019.

Given our Q2 performance and revised outlook for the third quarter, we've increased our full year guidance and now expect same-store sales to grow 6.5% to 8% and have raised our EPS outlook from a range of $1.04 to $1.14 to $1.16 to $1.24 per share based on an estimated weighted average diluted share count of 28.9 million shares for the full fiscal year.

This represents income from operations of $57.5 million to $60.5 million.

And we now expect net income for fiscal 2019 to be between $33.6 million and $35.8 million.

As we look at the third quarter of fiscal 2019, we expect same-store sales to increase 5% to 7% and we estimate third quarter net income per diluted share to be in a range of $0.56 to $0.60 per share.

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

Thanks, Greg.

We're pleased with the success of our second quarter results and are optimistic about maintaining our positive momentum during the holiday season and through the back half of the year.

We are excited about the launches of Idyllwind, Hawk's and Cody James Work, and are looking forward to the numerous opportunities that still lie ahead to drive same-store sales growth, improve margins, grow our store base and increase shareholder returns.

In wrapping up, I would like to thank the entire Boot Barn team for continuing to come together to take care of our customers and execute on the strategies we have in place to drive long-term success.

Thank you for your hard work and consistent dedication to our company.

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

Ann?

(Operator Instructions) We'll take our first question from Matthew Boss with JPMorgan.

Congrats on a nice quarter and the continued momentum.

So I guess, first question, on the acceleration in comp that you have seen quarter to date, I guess what are you seeing in oil and gas markets maybe versus the rest of the chain?

And if you could just provide maybe a bridge between the current comp that you're seeing and the 5% to 7% guide for the full quarter, I think that would be really helpful.

Sure.

Well, Texas is the biggest oil and gas market, of course, by a lot.

The Texas business has continued to be strong, and that is being really driven by -- or at least partly driven by West Texas, which is mostly oil-driven.

And we're encouraged because we're also cycling the recovery of Houston after the hurricane last year.

And we were a little concerned that as we went up against the recovery, that Texas may not be as strong.

But Texas has continued to be an above market or above rest-of-chain performer for us, so that's been kind of encouraging for us.

In terms of as it relates to the guide for the third quarter, look, and we've had 3 consecutive quarters now of double-digit comps.

We are starting to cycle stronger comps in this particular quarter.

Having said that, October last year was a strong month and our October business is, this year, as we just called out, very strong.

So I'd say there's a little bit of conservatism as we think about how much business that we have ahead of us.

While we are 3.5 weeks into the quarter, we're only about 20% into the quarter from a sales volume perspective.

And Christmas is a crazy time of year for us and all retailers, so we're just trying to be a little bit prudent with how we guide everybody for this particular quarter.

Great.

That's great color.

And then just a follow-up.

Can you maybe just talk through expectations for gross margin versus SG&A in the third quarter?

I guess, in particular, are there any onetime items that limit your ability to leverage SG&A in the quarter?

Or should we think about the 1.5 comp leverage point that's good for the quarter?

Yes, the 1.5 is really a full-year look, Matt.

And I guess, in Q3 last year, we had about $1 million -- a little bit over $1 million in insurance recoveries that we won't be anniversarying.

In addition to that, we expect that our incentive-based compensation will be roughly $1 million higher than last year as well.

Those are the 2 big outliers in terms of expense.

But again, when we give guidance on leverage points, we look at the full year, and when we do that, we did adjust out the $1 million of insurance recovery that we had last year.

Great.

And then (multiple speakers).

Yes, in terms of gross margin or merchandise margin, Jim explained that we didn't anniversary a 2-week boot sale that we did last year in October.

And so we will expect some of that good news to flow through in addition to the roughly 25 basis points we'll get out of increased private brand penetration.

Beyond that, we expect that our promotional cadence will be very similar in Q3 as it was last year, again, outside of that non-anniversaried boot sale.

We'll go next to Jonathan Komp with Baird.

I want to first just follow up on the sales outlook and kind of dive in a little bit more on what you're thinking about the comps.

And I certainly understand the conservatism at this stage.

Just wondering how you're building your forecast for the back half?

And I know when I look at your 2-year same-store sales, they've built each in the last 5 or 6 quarters.

So is there anything that you look forward to the comparison that you think would be different from what you've seen recently.

Just trying to get a better sense of how you're building that up.

Sure.

So first, if we think about the 2-year stack over the past couple of quarters, right, in Q1, we posted a roughly plus 12.

And that was on a year ago compare of a plus 1, so a plus-13 2-year stack.

If you look at Q2 a year ago, we were plus 2 and now we are posting a plus 11, so again a plus-13 stack.

And we're up against a plus 5, 4, I believe, last year in Q3, and the high end of the range would get you pretty close to that same plus 12 or plus 13.

And so that was one point of triangulation.

I think the other piece is, we do feel very good about the business through quarter to date, 3.5 weeks, and Jim mentioned that we're cycling really good business last year in October and November.

In December, the stores' business decelerated or was lower.

Still very positive, but is lower than what we saw in October and November.

And so we have some level of conservatism, I think, baked into our December results.

And while we expect that our e-commerce business will be strong this year, we've also put out low double-digit increases in e-comm as we've built up the Q3 forecast.

In terms of Q4, we haven't really revisited our projections because we'd like to see how Q3 unfolds before we update for Q4.

Okay, understood.

And when we think of the recent private label launches you've had with Miranda Lambert and now on the workwear side, how are you viewing those?

Are you viewing those as kind of incremental to the private label strategy and a nice margin tailwind?

Or should we think of those as potential sales drivers?

I think they're both.

I think they are drivers of increased penetration of private brands.

And I think if look at each of the 2 or 3 brands maybe separately, I think Idyllwind, part of the goal for Idyllwind is to really leverage the unbelievable brand name and personality of Miranda Lambert.

And while many of her fans are already Boot Barn customers, her fan base is quite extensive, so that would be an ability or opportunity for us to get net new customers introduced into Boot Barn, based on the fact that they follow her and are fans of hers, et cetera.

I think of -- Hawk's might be a bit of an opportunity to get new work customers that are not necessarily buying Western apparel.

But we'll probably also cannibalize some of the other brands in the store from the perspective of the third-party brand, mostly.

But I think Hawk's is a little bit of -- maybe 50% incremental and 50% transferring and just increasing our private brand penetration.

And then when I think of Cody James Work, the Cody James Work is really to take our existing customer, for the most part, because it has a Western aesthetic but might have a steel toe in the boot or might be FR-related apparel, when that product comes in.

And can take our existing customer and either sell them more product or have them convert from one of the third-party brands over to Cody James.

So I think that one probably is more of a pure increase in private brand penetration and maybe a little bit less in driving incremental sales.

So they all behave a little bit differently.

But I think when you kind of couple them together, combine them all, we'd like to see both.

We'd like to see an ongoing increase in private brand penetration perhaps with a bit of an acceleration there, and the introduction of the Boot Barn brand to new customers and additional traffic.

Okay, great.

And just one last one for me on SG&A, a little bit related here, but any way to quantify how much you might have spent on launching and marketing some of those -- the new private label side and especially just in the second quarter, kind of the lack of G&A leverage.

If you can give any more color on any unusual or any factors that impacted that?

Sure, Jon, it's Greg.

And between -- I called out the Idyllwind launch.

I also mentioned that we added a mid-year fiscal inventory this year, mainly to get our stock unit keeping more accurate where I get that reset for holidays, so we could take advantage of business.

But the combination of those 2 things, and we had a small asset disposal cost that you can see in the press release for about $100k, but the combination of all those things was about a 100 basis point headwind to SG&A rate.

Said differently, we probably would've had 110 basis points of leverage in SG&A if you account for those things.

(Multiple speakers).

Sorry, Jon, just to add to that a little bit, when we officially launch Hawks and there's an official launch of Cody James Work, I don't expect that to be the same additional marketing push.

Rather, I think we'll kind of fold that into our, sort of day-to-day and more routine marketing spend, as that's kind of a more traditional customer and part of our normal assortment.

But we really wanted to make sure that Miranda and that new line had a nice running start.

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

I wanted to follow up on the margin discussion for the quarter.

You did a nice job explaining SG&A, but on the gross margin, the product margin expansion improvement was good, but it slowed down a fair amount from prior quarter.

I think last quarter, you guys were up 140 on merch margin.

I think this quarter you said up 30.

Maybe just compare dynamics, but could you give us an understanding of what happened there?

And then also, I didn't catch the increased penetration to private label?

Sure, so it's Greg.

The private brands increased 250 basis points in terms of penetration, first.

And second, when we talked about Q1 and the expansion of 140 basis points of improvement, I think we talked about the fact that really starting in Q2 last year was when we took a look at -- started looking at our promotional stance and what traffic we were driving versus what the cost to AUR was.

And so last year, we moved from a 4-week boot sale that used to happen in August, and we cut that in half.

And so we had, I believe, 140 basis points of improvement year-over-year in Q2 last year.

This year, as we cycled that, we didn't reduce that 2-week event any further.

And so we had a more normal comparison.

But we started doing the work on analyzing our promotions starting in Q2 last year.

So we were anniversarying that work this year in Q2.

Q1 this year, we were -- we had a fresh slate, if you will, and we are reviewing everything fresh for the first time.

Okay, that's helpful, Greg.

And also, I wanted to ask about the commercial sales opportunity.

Jim, you had called that out in the prepared remarks as a driver to the work boot and apparel outperformance.

Is the commercial sales something that has accelerated as of late, or is there anything that's evolved there that's becoming a bigger driver?

The commercial accounts business, in terms of year-over-year growth, exceeds our overall sales growth.

Actually, it exceeds it pretty healthily.

But it's been doing that for a few quarters now, so I don't -- it's fantastic business, a very high growing business, not necessarily accelerating sequentially quarter-to-quarter-to-quarter, but is comp enhancing to -- certainly to the work business and even to the overall business.

To give you some dimension for how big that business is, it's a low single-digit portion of our business.

So it's -- while we're thrilled with it and we continue to put some resources against it in terms of commercial account sales force, it's not any more than a low single-digit piece of the business overall.

Okay, that's helpful.

Lastly for me, just on the tariff discussion, any updated thoughts on how your business might be impacted should the 25% tariffs kick in at the beginning of the year?

Yes, Peter, it's Greg.

Less than 10% of the product that we sell is sourced from China and is subject to tariff right now.

And some of -- a piece of that is private brand and a piece of that is our third-party vendor product, and so I think we'll see some impact to that.

We are also looking for opportunities to cut costs and source from different countries.

I don't think Boot Barn is going to be uniquely disadvantaged, given that a fair amount of this product is coming from a third party vendor that is likely to increase the price to all of their partners, if you will, and it will unfortunately be borne probably largely by the customer.

We'll go next to Janine Stichter with Jefferies.

I just wanted to ask a little a bit more about the thought process behind reducing the boot promotion in October.

It sounds like you haven't seen any resistance there.

So as you look at the promotional calendar for the rest of the year, even beyond, is there any opportunity to remove other events like that?

And then along those same lines, can you give a little bit more color on what you're seeing just as you evaluate the pieces of your e-commerce business, whether it's pulling back on your business with Amazon, or also I think you mentioned reducing some unproductive SKUs, and how much more opportunity do you see there?

Sure, thanks, Janine.

Look, we had run a boot sale last year in October for three weeks and it was -- it's basically as promotional as we ever get throughout the year.

And we sort of were just looking at the underlying momentum in the business and said, hey, if we just unwound this, would we be merchandise dollar ahead and hopefully still have some comp?

And it was worth the experiment because, as it turned out, we had fantastic business.

And we haven't disclosed a specific number, but you can surmise that our merchandise margin rate quarter to date is better than it was last year, given the fact that we weren't running the most aggressive sale that we do all year.

Having said that, when we look at the overall business, about 85% of our business is conducted at full price, and of the balance, the 15%, roughly half of that is clearance.

So we've made some improvements in clearance, we've really cleaned from an inventory perspective.

But clearance will always be in the system, as we need to clear some small portion of our goods all the time.

So that leaves only about 7% of our business to go after from a promotional standpoint.

And while we are continuing to look for places to squeeze and reduce the level of promotions, as I look forward for the next 52 weeks, the only time we're heavily on sale is the next boot sale over the summer, which tends to be in the first couple of weeks of August, other than some more rifle-shot promotions on a month-to-month basis for small portions of the assortment.

So we'll be looking at all of that.

We'll be looking at our promotional stance during Christmas with an eye towards rolling back promotions even further.

But there is an enormous amount of promotional juice left to squeeze, so to speak, but we'll continue to look for those places.

In terms of e-commerce, we've really taken the last couple of quarters and viewed it as an opportunity for us to really focus on the profitability of that piece of our business, and we've done that sort of top to bottom in terms of the P&L, if you will, of our e-commerce business.

So we have removed product, low-priced product, from our site and from Amazon Marketplace.

We have warehoused more inventory, so we can eliminate drop ship fees from the vendors.

We have taken a very careful look at pay-per-click spend and are holding our investment in pay-per-click marketing to a standard of profitability and not just sales growth at breakeven.

We've also become more efficient from a shipping standpoint.

We have consolidated some roles organizationally, so we're really trying to make that business increasingly more profitable with a aspirational goal of making us agnostic between a sale online versus a sale in store.

And while we're not there yet, we're going to continue to plug away at that by trying to really look at prices that we're selling online, the penetration of private brands and some of the other operational and marketing expenses that I called out.

We'll go next to Paul Lejuez with Citi Research.

I know you had only a couple weeks of Idyllwind in the quarter that you just reported, but you've got some -- a few more weeks under your belt since then.

So just curious if you could maybe give us a little bit more in terms of what you're seeing on that product.

Is it doing what you were hoping it would do in terms of expanding the customer base?

Any particular regions that you're seeing react more positively versus others to that Miranda product?

Anything else you could share there?

Sure.

We are really, really pleased with the partnership with Miranda.

Miranda personally and her team have just been incredible to work with.

In terms of overall sales volume, we're pretty much as expected in terms of how we laid out the year.

So I think that's a victory because we had pretty aggressive sales aspirations.

I do want to scale that for everybody, though.

Because while the Miranda product and the Idyllwind product has been a nice contributor to our business, and if we look at quarter to-date for example, while we're calling out that we're a double-digit comp, if we took the Idyllwind sales to 0, we'd still be a double-digit comp.

So it's -- again, it's a nice contributor.

I think it will expand our customer base, but it certainly isn't the sole driver of our comp.

Maybe to give you one more anecdotal fact is we launched it in the first week in September, and our September business was nicely growing from a comp perspective.

But it actually wasn't any better than our August business.

So I think it's helping to continue what is a very strong sales growth.

It certainly will help us build our private brand penetration.

And I do think her fan base and the energy that she brings will help us introduce more customers to Boot Barn.

So I would put it in the category of we're extremely pleased, but we also have a lot of other things working in the business.

And the Idyllwind line is just another contributor to I think what is a very solid underlying business now for several quarters and running, so we're quite encouraged by it.

And I think the women's boot category, I think, has been weak for some time.

Any signs of a turn in that business?

So if you went through the comp drivers by merchandise category, you're -- it's an astute question, right?

We called out that essentially every merchandise category has been positive, and that does include ladies' Western.

However, in terms of the sequence from strongest to less -- least strong, Western boots has only had a modest increase year-over-year from a same-store sales perspective.

And the way I think about that, if I put my sort of optimistic hat on -- Greg is laughing because I'm always wearing my optimistic hat.

I think that's great for us, because I think the ladies' boot business is one portion of the business that does have some cyclicality in it and it's been less strong than the rest of the business for a few quarters now, and at some point I believe that that will kind of begin to build some momentum.

When I think about it from a fashion trend standpoint, and we are -- we call out often that our business is not trendy and doesn't have a tremendous amount of fashionable ups and downs to it.

But the ladies' boot business specifically, there's a portion of it that does go up and down.

And one of the areas that's trending up for us now is short-shafted boots or booties, which we are in stock, we're selling well and it's a nice part of our business.

Unfortunately, they are lower a AUR than a full-size cowboy boot, but that's what the ladies want to wear and that's what we're providing.

And I think if we looked at the ladies' boot business from a unit perspective, we'd see a nice comp growth, not that we'd call out something like that specifically.

But we've been eroding AUR a bit just because customers are trading down to this ladies' booty trend or short-shafted boot trend.

I do think that that business will build momentum over the next several quarters or couple of years.

But now we're -- I'm trying to prognosticate a fashion trend, but I think at some point it will come back and we'll see some nice growth there.

Got you.

And then last one for me.

Last year around holiday you guys did have some fulfillment issues, I believe.

I am not sure if that's the way that you would describe them.

But there was, I think, some issues with split shipments, maybe late shipments.

Can you just maybe talk about where you are in terms of correcting those, the problems that maybe led to that?

And how you feel you are going be able to handle the pickup and the bump in sales volume this holiday?

Sure, no, your memory is right.

We had both an operational issue in our warehouse in Wichita and a systemic issue in our warehouse in Wichita.

And over the last several months, we've been really focusing on refining and tweaking and improving what we thought was going to be in working order last year, and unfortunately, we were surprised, negatively surprised.

Having said that, we have called out that that work is now complete.

We have pressure tested it with -- by sort of trying to model or simulate Black Friday and Cyber Monday throughput, and everything seems to be working, both operationally and systemically.

So we feel well positioned as we go into this holiday season.

And hopefully, we'll be able to really take all the demand that we can generate and push it through that facility and convert every demand into an actual shipped sale.

And to your -- one of the points you made, do that in a consolidated shipment rather than a split shipment and save the freight that we had essentially overspent last year.

In an effort to keep customers happy, we were jumping through hoops to splitting orders, shipping them overnight because we had taken too long to pick them, et cetera.

And the last piece that we hope to see a benefit in is, given all the operational and systemic issues we had last year, we had a pretty significant influx of customer service issues which drove SG&A expense in terms of the call center.

And we've made some -- hopefully, we won't have as many issues this year and certainly aren't expecting them, and we've made some operational efficiency improvements in terms of the call center as well with some automated voice response and those sorts of things.

So we're looking forward to the next couple of months of business and the increase in online and in stores that undoubtedly will come as we move sequentially through the year, and I think we're well positioned to handle the e-commerce business.

(Operator Instructions) We'll go next to Oliver Chen with Cowen and Company.

Just regarding your guidance and your full year guidance, was the raise for the full year guidance primarily based on the upside to the comp store sales this quarter?

And as we look forward to the comp store sales in the back half, is that going to be split between average unit retail or transaction driven?

And what are you seeing with those metrics?

Oliver, it's Greg.

We raised our EPS full year guide by $0.10.

And that's comprised of the Q2 beat of $0.07 from $0.09 to $0.16, and the balance is related to the Q3 increase in comp assumption where we we're going 5% to 7% in terms of same-store sales.

And that's all top line driven with an appropriate flow through.

We haven't revisited our Q4, again, because we're waiting to see how Q3 unfolds.

And so we'll be talking about Q4 when we talk about Q3 results.

And in terms of where we're seeing the sales come from, it's coming mainly from transactions.

We've seen a little bit of an increase in average daily transaction, but it's largely driven by transactions.

And just to make sure I was clear -- sorry Oliver, this is Jim.

Just to make sure I was clear in my prepared remarks, when I called out the increase in AUR, or on basket size really, because we weren't cycling the sale, that really only explains sort of the step-up in the comp.

Most of the comp for the quarter, quarter to date is still transactions-based, to Greg's point.

Great, that's really helpful.

And on the private label front, have you been pleased with the relative amount of buy in terms of how you purchase the inventory in breadth versus depth, because there's probably complexity by brand, but have there been learnings there in terms of matching supply and demand?

I have been very pleased with that.

If I go through them individually, Idyllwind was the most complicated because we had called out a day, essentially, where we were going to launch it and we wanted to be fully in stock, fully set up in-store and online and with multiple sites.

And I think the merchants and the planning team had us ready to go and the stores were extremely well positioned from an assortment standpoint.

And when I think about Hawk's, Hawk's is a little bit different because we are just kind of growing into that business.

We have the apparel that has now launched and I think we're well positioned from an inventory investment standpoint there.

Cody James Work is kind of a brand that's just evolving.

We had a few boots that we brought from Cody James Western over to the work side and just made them work appropriate, and they started selling.

So we expanded that line and now we'll add some apparel to the Cody James Work business.

And so that's sort of just a evolution or a line extension, if you will, of a brand that's been in the store for a while.

If I got back to maybe a question behind the question, if I think of Cody James Work and Hawk's, there is very limited markdown risk in either one of those, right.

These are work-oriented brands.

They -- we're not trying to catch any particular trend.

It's just a functional purchase for a guy that needs something either on a [Sea Rock] or new apparel to wear to do his job.

On the Miranda side, there's a little bit more of a fashion trend there.

Having said that, I think we are -- I think we've gotten sort of the exact right amount of product and inventory to not only support the sales but not take undue risk from a markdown perspective.

And our final question was about digital and what you're seeing with what your customers may want in terms of capabilities you're looking to add.

And that -- what topics that come to mind include shipping speed and mobile and other conveniences and where you want to be.

Would love your thoughts on what's higher priority for the future, just to make sure you're proactive within that channel and also integrating it well with your physical store experience.

Sure, great.

Well, you kind of hit -- the last piece of your question is one of the things that we've been focusing a lot on, right.

When we think about the competitive landscape from an e-commerce perspective, I think we have a couple of competitive advantages against pureplay online players, and virtually all of them.

And one is, we are the biggest brand in this industry and that makes us the biggest player online.

Not only we're the biggest player in stores, but we're the biggest player, at least per most of our vendors, from an online perspective.

So continuing to focus on the Boot Barn brand and the underlying private brands is one thing that we want to try to continue to create some differentiation versus other players.

The second thing you called out that we're really focusing on is the integration between the 2 channels.

So one thing that we can offer an e-commerce customer that virtually nobody else can offer or anybody of significant size is the ability to buy online and return it to our store.

So we just put in place our return portal, which is a extremely user-friendly touchscreen tablet in the store that returns any online purchase directly into sort of the online part of our business.

And that has made our returns process from an e-commerce order into a brick and mortar store extremely seamless and frictionless.

So I think that has been a nice addition.

Adding to that, we're experimenting now with bringing a boot selector into the store, a touchscreen tablet or screen and enabling a customer to walk through their purchase process, their purchase decision, to see and to help them get to a proper boot for what they -- what their need is.

We're excited about that because I think it brings a digital component to our in-store environment.

It also enables us to take care of customers when traffic goes up and we have a lot of seasonal help.

Having said that, that's only in a couple of stores now and we'll see if we can roll that out before Christmas, so we'll wait and see on that one.

And then perhaps the last piece that you called out which we have, I think we're extremely well-positioned in, is the migration to mobile.

So we have absolutely adopted a mobile-first strategy from an e-commerce perspective, and when we are looking at how our customers interact, we start with the mobile environment and are solving for that.

So I think there's a lot of things that we're doing to try stay ahead of the curve.

In terms of shipping speed, we do provide multiple options to customers in terms of how quickly they want to get their product.

We do provide free shipping for at least most boot orders and orders over a certain dollar threshold.

We have not gone to free shipping or free 2-day shipping for everything, because for us that is just not an economic decision and it would probably erode earnings more than drive in additional sales.

So we are still keeping either free shipping in a more ground shipping environment, or if you want to pay for 2-day shipping, you can pay for 2-day shipping.

So that's the way we're approaching the different pieces that you called out and perhaps a few others.

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

Just a couple of quick ones on the cost side.

We've been hearing a lot about things on the freight side and truck driver shortages and things like that.

Are you seeing much inflation on the freight side?

And then also obviously, wage inflation has been a big topic of conversation in retail?

And how should we think about payroll cost in your stores and the effect of wage inflation there?

Yes.

Sure, Tom, it's Greg.

On the freight side, we leverage UPS for most of our shipments.

As you know, about 70% of our merchandise is on automatic replenishment, so if we sell a boot from the Ariat or Justin, we write an order and it's shipped out of their distribution center directly to our store within 7 days or 10 days.

We renegotiated our contract on small parcel with no increase, and so we don't have really any pressure on that line.

We do bring some things across from China, and so we do see a little bit of pressure on freight, but it's been pretty small.

In terms of wages, we have seen average wage rate increases across the chain and we're proactively addressing markets where we need to increase wage rate.

But what we've also found is that we're able to offset that increase by improved productivity, some of that driven through what Jim talked about, which is our store labor scheduling model.

And so we've been able to improve productivity and keep our labor costs largely in check.

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

Just a couple of questions as far as most of everything has been addressed.

But can you comment a little bit on new store performance, class of '17 versus class of '18?

And sort of, with sort of the assortment and some of these items in private label that's adjusted, is there as much variance opening stores, different geographies?

Or what could you speak to as related to maturity curves or et cetera with the new store classes?

Yes, sure.

So we're still pleased with the new stores that have been added to the business, I think we've been extremely pleased with the tuck-in acquisitions.

So when we can tuck in the new stores and put them together, we are nicely exceeding a 3-year payback.

And the new stores in their own right are very much in line with how we've always modeled them.

On average we want them to open at about $1.7 million and then grow into the average over a few years.

Traditionally that means a comp above company average for a few years until they get into kind of a rhythm.

So it's -- now if we look at the roughly 230 stores that we have now and we continue to add stores to the portfolio, we think we can double the store count and we think we can do that at a roughly 3-year payback, tends to be a 30% year-on-year return in the first year, and all of those return metrics are better than our cost of capital.

So we'll continue to do that as we roll out across the country.

There is variability by market as sometimes it correlates that a new store in a new market takes a little bit longer.

But it hasn't been such a consistent performance that we've ever really called it out or tried to model it out for everybody.

There's too many other random factors involved to give a -- here's what a new store looks like in a new market and here's what a new store looks like in a mature market.

If there was more consistency in the performance of those 2 groups, we'd be happy to share it.

But there's too much other sort of deviation or variability inherent in it.

Does that help?

Great, that's very helpful.

And second question is, Greg, when you -- responding to the earlier question regarding the situation with the distribution centers last year, it was helpful to walk through that again.

Can you remind us roughly, from a gross margin and an SG&A side, on those probably 2 buckets as you pointed out, quantifying what those expenses were or what you felt like that cost you with those inefficiencies in the quarter last year?

Yes.

Thanks, John, it's Greg.

And we said last year, we thought it added about $1 million of costs to the P&L and that was roughly split, I believe, 2/3 in gross profit line and 1/3 was in SG&A.

The SG&A portion was the call center and we had to add labor for that.

The other piece is in gross margin and it's the freight expense.

And the last question for me.

Any thoughts, as I know from a real estate standpoint, with some of these centers and offsite -- some available real estate, any difference in cost of entering new markets from a real estate standpoint?

It's Greg again, and I'd say there really isn't.

What we've tried to do as real estate has perhaps become cheaper as we're trying to get better placement, so where we can get highway access -- or highway sightline, I should say, easy access on and off the highway, we've been, I'll say, reinvesting some of that rent expense or occupancy cost to get better locations.

So same dollars, just a better experience, better location?

That's correct.

That's right.

And with no further questions in the queue, I would like to turn the call back over to Jim Conroy with any additional or closing remarks.

Thank you.

And I appreciate everybody joining the call today.

We look forward to speak with you all on our third quarter earnings call.

Take care.

And this does conclude today's conference.

We thank you for your participation.

You may now disconnect.