Boot Barn Holdings Inc (BOOT) 2019 Q3 法說會逐字稿

Good day, everyone, and welcome to the Boot Barn Holdings, Inc.

Third Quarter Fiscal Year 2019 Earnings Call.

As a reminder, this call is being recorded.

Now I'd 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 third quarter fiscal 2019 earnings result.

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 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 during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter fiscal 2019 earnings release as well as our filings with the SEC referencing 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.

Thank you for joining us.

On today's call, I'll be providing a review of our third quarter results and an update on each of our 4 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 thrilled with our third quarter results, which reflect continued strength across the business in virtually all geographies in major product categories.

Beginning with our top line, consolidated same-store sales increased 9.2% with double-digit growth in e-commerce and high single-digit growth in retail stores.

Strong sales combined with 120 basis points of improvement in merchandise margin, drove earnings per share of $0.66 in the quarter.

When excluding $0.27 in the prior year related to tax reform, we grew EPS approximately 43% year-over-year in the quarter.

We believe the continued focus on each of our 4 strategic initiatives helped fuel these strong results during the holiday quarter.

I would now like to take a moment to provide an update on each of them, starting with driving same-store sales growth.

We were very pleased with the robust same-store sales growth we achieved in the third quarter, which was highlighted by our seventh consecutive quarter of positive comps in our retail stores.

At the same time, digital sales once again increased double digits as our direct channel maintained the strong momentum it experienced in the second quarter.

The increase in same-store sales was driven by both an increase in transactions and a larger basket with wide-spread growth across most of the country.

Notably, Texas continued to deliver results above the chain average, even as it cycled an exceptionally strong performance in the prior year period.

Nearly all major product categories grew year-over-year with particular strength in work apparel and work boots, followed by ladies' and men's western apparel.

The ongoing success of our commercial accounts business contributed to the growth in our work categories.

Additionally, we are very encouraged by the customer response to both of our new exclusive brands on the work side of the business, namely Hawx and Cody James work.

From a marketing perspective, we continue to develop specific programs for both our traditional and digital media campaigns that focus on each of our 3 customer segments: western, work and Wonderwest.

These efforts have continued to attract new customers to the brand and reengage customers who had previously lapsed.

During the third quarter, we achieved 7% growth over the prior year and the number of customers purchasing on a same-store basis.

Looking forward, we'll continue to refine our marketing mix and messaging in an effort to reach an even broader audience.

To further capitalize on the increase in traffic, we are also focused on improving conversion by adding merchandising and selling opportunities aimed at enhancing the in-store experience.

In addition to offering an endless aisle capability with our in-store web tablets, we rolled out a boot selector touchscreen, called rangefinder to approximately 40 stores prior to the holiday season.

Rangefinder enables our store customers to find the type of boot they are looking for by using a touchscreen to filter in-store inventory by features such as style, functionality, brand and size.

The initial response to rangefinder has been positive, and we believe this tool will help further increase conversion.

Given these early results, we intend to roll out rangefinder to more stores in the coming months.

From a store operations perspective, we were very planful with our approach to the season, and the team executed extremely well.

Given the concern that low unemployment could create challenges finding enough seasonal help, we accelerated our hiring earlier in the season and developed an incentive system to ensure that our seasonal employees stayed through the holiday time period.

Doing so enabled us to deliver customer service at the standard we keep throughout the year and resulted in a measured improvement in our customer service scores during the holiday period.

In addition, we focused very closely on our supply chain to ensure that we could continue to fuel the store sales growth that we were experiencing, while not crowding the backroom during heavy selling weeks.

This approach enabled us to maintain a strong, intact position leading into Christmas, while at the same time, keeping our associates focused on the selling floor and taking care of customers.

Moving to our second initiative, strengthening our omnichannel leadership.

It was a tremendous quarter for our e-commerce business.

In addition to the double-digit increase in sales, we improved EBIT margin 360 basis points year-over-year as our efforts to increase the profitability of this channel continued to take hold.

More than half of the margin gain was driven by a combination of eliminating unprofitable and low-margin items from our sites and increasing the penetration of exclusive brands online.

Also contributing to the EBIT margin rate expansion were the improvements in our Wichita fulfillment center that enabled us to better serve our customers this holiday season.

These enhancements stemmed from the automation we have put into our warehouse during the past few years that have reduced picking times and shortened the time from order to delivery.

From an online and in-store integration perspective, we continue to roll out more features to enhance the shopping experience.

We currently offer online outpost, which allows our customer to order merchandise online and have it shipped to the store for pickup.

In the coming weeks, our customers will be able to shop online, select boots from the inventory that is available in their local stores.

We expect this added functionality will increase traffic to the stores and provide an additional selling opportunity for our store associates.

We also recently implemented a new in-store returns portal where our customers can return e-commerce purchases to our retail stores.

As a result of this improved process, approximately 2/3 of bootbarn.com returns came to the stores during the holiday period, allowing our associates the opportunity to save the sale by exchanging the item for a different product in the store.

We believe this improved returns process further integrates our digital and stores business and provides better customer service to our loyal shoppers.

Now to our third strategic initiative, exclusive brands.

For the third quarter, our exclusive brand penetration increased to more than 16% of total sales.

With the recent addition of Idyllwind, Hawx and Cody James work, we believe we are well positioned to continue to grow our exclusive brand business.

Cody James and Shyanne, our #3 and #4 top-selling brands, addressed our legacy Western customer, while Moonshine Spirit by Brad Paisley and Idyllwind fueled by Miranda Lambert, offer a merchandise assortment developed for an expanded customer base, including a more fashion-oriented Western customer.

We see our recently launched exclusive brands, Hawx and Cody James work, as opportunities to further grow our Work business.

We have seen positive customer reception to each of our 3 new brands, resulting in an acceleration of our exclusive brand penetration in the fourth quarter.

Accordingly, for the month of January, our exclusive brand penetration improved more than 350 basis points year-over-year.

By developing these high-quality products to complement the great assortment from our third-party branded vendors, we're able to expand the breadth of our offering, create true competitive advantage and enhance our merchandise margin.

Finally, our fourth initiative, expanding our store base.

During the quarter, we opened 2 new Boot Barn stores, bringing our total count to 234 stores in 31 states.

We continue to believe we have the opportunity to double our current store count and further develop our presence nationally by growing new units approximately 10% per year.

As we open new stores, we will remain focused on targeting a 3-year payback on invested capital and will continue to augment our new store development with opportunistic tuck-in acquisitions, similar to those we've executed over the past 18 months.

These tuck-in acquisitions provide us with a unique opportunity to leverage higher average unit volumes relative to our new store target and enable us to quickly enter a new market.

Turning our attention to current business.

Through the first 5 weeks of our fourth quarter, our consolidated same-store sales were in line with our third quarter performance.

Our storage business grew double digits in January and have grown 20% on a 2-year stack basis.

We continue to manage our e-commerce business with the objective of driving profitability.

Despite not repeating an online promotion in January, we continue to grow our e-commerce business year-over-year.

Once again, Texas continues to outperform the chain average, which is particularly important in the fourth quarter when rodeo season significantly distorts the business in many of our Texas markets in February and March.

This strength in our stores and the continued success in our Texas markets give us the confidence to anniversary a very strong comp with a solid increase in same-store sales in the fourth quarter.

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

Thank you, Jim.

Good afternoon, everyone.

In the third quarter, net sales increased 13% to $254 million.

As Jim mentioned, sales growth was driven by a 9.2% increase in same-store sales.

The sales contribution from acquired stores and from sales of new stores added over the past 12 months.

During the quarter, we added 2 new stores, bringing our store count at the end of the quarter to 234 stores in 31 states.

Gross profit increased 19% to $85.7 million or 33.7% of net sales compared to gross profit of $71.9 million or 32.0% of net sales in the prior year period.

The 170 basis point increase in the gross profit rate resulted from a 120 basis point increase in merchandise margin and 50 basis points of leverage in buying and occupancy cost.

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

Operating expense for the quarter was $56.4 million or 22.2% of net sales compared to $47.5 million or 21.2% of net sales in the prior year period.

Operating expense increased primarily as a result of additional cost to support higher sales and expenses for both new and acquired stores.

As a percentage of sales, operating expense increased primarily as a result of higher incentive compensation in the current year and a gain from insurance claims that lowered operating expense in the prior year.

Excluding these items, we had approximately 30 basis points of operating expense leverage.

Income from operations was $29.3 million or 11.5% of net sales in the quarter compared to $24.4 million or 10.9% in the prior year period.

This represents more than 60 basis points of improvement in operating profit margin.

Net income for the quarter was $19 million or $0.66 per diluted share, this compares to net income of $20.1 million or $0.73 per diluted share over prior year.

Excluding $0.27 related to tax reform, net income per diluted share over the prior year period was $0.46.

Turning to the balance sheet.

Inventory increased approximately 4% on a comp store basis compared to last year.

On a consolidated basis, inventory rose 8.5% to $225 million compared to a year ago.

The increase was primarily driven by inventory for new and acquired stores added in the last 12 months.

As of December 29, 2018, we had a total of $174 million of debt outstanding with our revolver undrawn and $51 million in cash.

Turning to our outlook for fiscal 2019.

We've increased our full year guidance and now expect same-store sales growth to be approximately 10%.

We are also raising our full year EPS from a range of $1.16 to $1.24 per share to $1.31 to $1.33 per share, based on an estimated weighted average diluted share count, 28.8 million shares for the full fiscal year.

This represents income from operations of $62 million to $62.7 million.

We now expect net income for fiscal 2019 to be between $37.7 million and $38.2 million.

As we look to the fourth quarter, we expect same-store sales to increase 5% to 7% and net income per diluted share to be in the range of $0.25 to $0.27.

This guidance compares to $0.24 of net income per diluted share in the prior year period, which includes $0.06 per share of tax benefit related to stock option exercises.

Now I would like to turn the call back to Jim for some closing comments.

Thanks, Greg.

We are pleased with the strength of our third quarter results and are excited about the current momentum we are seeing in the business through the first 5 weeks of our fiscal fourth quarter.

As we look forward to the end of the year and into fiscal 2020, we are eager to drive same-store sales, continue our store growth, strengthen our omnichannel capabilities and enhance margins through increased exclusive brand penetration.

Before we open up the call to take your questions, I would like to thank the entire Boot Barn team for their hard work and dedication to growing the brand and delivering strong results.

Thank you for your many contributions towards the success of Boot Barn.

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

Justin?

(Operator Instructions) The first question will come from Matthew Boss with JPMorgan.

Congrats on a nice quarter, guys.

So as you break down the comps that you're seeing, I guess maybe can you speak to the composition between traffic and ticket?

And then anything other than potential conservatism and just time remaining in the quarter behind the embedded moderation in trend that you have in the 4Q guide?

Sure.

I think the comp, we're really pleased with the health of the comp, right?

It is driven by more customers, more transactions and a higher basket.

So in the most recent quarter, transactions was about 60% and basket was about 40%.

For the last few quarters prior to that, it was probably 80%, 20% in favor of transactions.

And in the quarter we're in right now, it's probably about 80%, 20% in favor of transactions.

So this is a very, very healthy same-store sales growth, driven by more people shopping.

As you know, we've reduced promotions and so we're getting a nice pickup in merchandise margin rate.

And we've seen strength across the country, right?

Across the country in virtually every geography, virtually every merchandise category.

So we're pleased not only with the overall business but with the health of the comp.

And we've been able to do that while really focusing our e-commerce business on the bottom line almost more than the top line, so if we were just trying to drive same-store sales growth higher, we could, "buy some more sales online" and get even a better comp.

But we're not focusing on doing that, we're really focusing on the profitability of that piece of the business.

So that gives you a bit of color on sort of the growth and the health of the comp.

In terms of the fourth quarter guide, we're 5 weeks into the quarter, but we're not 5/13 of the way through our sales volume, given the large volume that comes at the end of February and into March with rodeo season in Texas.

So yes, I think, you can say there's some conservatism in the guide, we'd like to put out a number that we feel good about.

And as you know, we're wrapping a plus-12 in the fourth quarter of last year.

So that's in the back of our mind but as we look at the January business, I think we are further emboldened that we can kind of cycle a pretty strong quarter last year and continue to deliver a positive same-store sales growth number.

That's great.

On the expense front, I guess, what's the comp you see needed to leverage SG&A in the fourth quarter?

And is that the same as we think to next year?

Just maybe any incremental investments you see constraining model flowthrough or is it pretty clean from here on out?

It's relatively clean, Matt.

Bonus or incentive-based compensation has been a little bit higher this year than last year and continues to be higher.

The e-comm team delivering outsized EBIT growth, et cetera.

So that's been a bit of a pressure point.

We do expect to see leverage based on our guidance of 5% to 7% in the quarter.

And our next question comes from Jonathan Komp with Baird.

I wanted to ask first just following up on the quarter-to-date commentary.

Could you just remind us how things started off last year?

Just trying to get a sense of the multiyear trend that you're seeing and then maybe color on the balance of the quarter too, what you'll be facing?

Just to give a little more color there.

Sure.

The quickest way to answer that is the fourth quarter of last year across the 3 months was roughly consistent.

The only inconsistency actually was related to the prior year when tax refunds came later and it dipped February's business and improved March's business.

But when we look at last year's Q4, the business was roughly consistent throughout the months as -- when we were on the call, I think we called out a high single-digit comp in the stores last year in January.

And what we called out today was we're -- from a 2-year stack basis, we're plus-20 in the stores.

So we're thrilled with the ability to go up against essentially a double-digit comp last year and post another double-digit comp this year.

And for the balance of the quarter, while there is more volume ahead of us, there's not necessarily an inclined plane from a same-store sales perspective.

I mean is there any -- just following up on what you just mentioned, the acceleration in January in the store performance relative to the third quarter, is there anything you can pinpoint within that, any geographies or categories that stand out?

I guess we've seen strength across the business.

The Texas business in January is actually stronger than the Texas business was in the third quarter.

And as a reminder, Texas was better in the third quarter than the chain average, even as it went up against the recovery from Houston.

So that's helped us but essentially everything seems to be working right now across the country and across merchandise categories.

So we feel great about the underlying strength of the business.

Okay, great.

And then maybe one other margin-related question for Greg.

Just wondering if the recent -- in the last quarter or so, the pullback in some of the promotions, I'm curious if that's a shift in mindset that you have internally.

And as you look forward, how much more opportunity is there to pull back on the promotional activity?

I'm just trying to think about as you formulate the merchandise margin projections for the quarter ahead and further out, what we should expect there?

Yes, we talked about this for probably 3 or 4 quarters, Jon, it's a great question.

The mindset here is to make sure that the promotions are delivering incrementality, meaning more customer shopping and it's not gratuitous, right, that we're not just giving a discount to a customer that shows up to buy work boots that day.

So the mindset across the organization is to be careful with our promotions and we'll continue to look at that as an opportunity.

The big promotions for us are Christmas time and we're pleased with our merchandise margin expansion in the quarter of 120 basis points.

Part of that was because of the 17-day promotion at the beginning of the quarter where we had a boot sale the prior year and we're didn't anniversary that.

So a fair amount of that 120 relates to more regular price selling because we were off promotion for those 17 days this year.

As we look forward, we do think this is an area to expand margin but it won't be the main driver like increasing private brand penetration where we get 1,000 basis points of improvement for every point that we increase the exclusive brands.

And a next question will come from Peter Keith with Piper Jaffray.

It's actually Bobby Friedner on for Peter.

First, just on oil market.

I know there's always a lot of focus on Texas, but one of the bigger problems in the oil downturn a few years ago was in the Dakotas and Colorado, Wyoming area.

So I was wondering if you could give an update on how those stores are performing.

And also, maybe where those stores are from a sales base standpoint versus 4 years ago when oil rolled back?

Sure.

So the quick answer is on the oil markets that are non-Texas, they are essentially in line with the rest of the business.

So we haven't seen any real pressure there.

I think the other thing that's worth noting and it's kind of coming to the second piece of your question, if you went all the way back to when oil was at $100 a barrel, some of those stores were extremely high sales volume.

And when oil prices came down to $30 a barrel, they lost a lot of their volume and have been building it back up.

But they're not close to where they were.

So even -- but we're frankly not very worried about the price of oil.

I think that is something that is kind of now, in our rearview mirror.

But even if it became a depressed oil price for an extended period of time, we have just not as far to fall in some of these stores from where they were at their peak sales volume and average store basis back in 2014.

So that's kind of the way we're thinking about the business.

All right.

Just as a follow up on tax refunds and there's reports out there and we're of the view that tax refunds will be up for a lot of middle America.

I was just wondering if you could discuss how you think about your position as a beneficiary of higher consumer spend, if it is indeed a strong tax refund season?

Well, we're not really banking on that.

There has been a lot of discussion about that in the news and some other retailers have called it out.

We haven't built it in to our Q4 sales forecast.

Having said that, it would be nice additional tailwind to our business.

The one piece of color that we can share, and I sort of said this earlier, is if you went back a couple of years when the tax refunds were later, we absolutely saw the impact to our customer.

So our customer does get that check and in many instances, it's the largest check they'll get throughout the entire year.

And if that check this year does come, and it's outsized, it would be a nice incremental tailwind to what we're guiding to and -- so we'll see.

And if that comes, we'll be quite pleased.

And if it doesn't, we'll -- I think our business will still be pretty solid.

And moving on to Oliver Chen with Cowen and Company.

Great quarter.

Regarding e-commerce, as you think about the momentum there and the opportunity, you will be anniversarying some nice increases as well.

What do you see happening in terms of growth and traffic and the opportunity for traffic in the market versus factors that you are driving in terms of keeping up momentum as compares toughen?

And also the factors that you spoke to about driving profitability, would just love your view on what inning you are with profitability drivers online as well?

So that's a good question.

And yes, we are beginning to cycle stronger numbers, right.

In the third quarter last year e-commerce business actually comped negative.

So we cycled those numbers and posted I think a pretty solid double-digit comp with some really strong improvement in our EBIT rate.

Even in January, as we're starting to cycle some very strong e-commerce business, we're continuing to focus on profitability.

We're continuing to look at our return on ad spend.

We're looking at pricing and margin for EBIT eroding items on the site and that will slow our overall comp.

We're still positive with e-commerce, of course.

But we're just going to continue to focus on driving more profitability there.

And in terms of what inning we're in, I'd say we're about halfway through the fourth inning.

Fourth -- the bottom of the fifth or top of the fifth or something.

We started this about 6 month ago.

We really pressed the accelerator down during the holiday quarter and Black Friday and Cyber Monday and didn't chase unprofitable sales.

And I think we can continue to do that for this quarter and going into the first and second quarter of the next fiscal year.

And it's a constant day-to-day tweaking and remixing of the business and looking at what items are selling?

What their out-the-door EBIT is?

What our return on ad spend is?

How that splits between brand and nonbrand.

So I give a lot of credit to that team for really focusing on a healthy e-commerce business and healthy growth and not chasing sort of unprofitable growth.

And you've had a lot of success in private label.

So has that changed or helped informed more optimism about where private label should go next?

And how you think about inventory as well as product planning in the year ahead?

It's a very astute question, Oliver.

We're quite pleased with the receptivity of the 2 new brands on the work side of the business.

The conventional wisdom had always been that our core work customer might be a little bit harder to switch over to a new brand because they're tried-and-true to whatever brand they had worn either as workwear or work boots.

And with the launch of Hawx apparel and Hawx boots and the launch of Cody James work boots, we've seen a really nice pickup in those businesses.

We called out that January's improvement in exclusive brands, there's 3.5 points of penetration, which is an acceleration from where we've been over the last few years.

So I do think there's a bit more opportunity in exclusive brands given the fact that we've demonstrated, while early, that the work customer would be receptive to a new brand and/or we're getting a new work customer that is buying Hawx and entering Boot Barn perhaps for the first time.

Having said that, I would want to ensure that we will continue to rely on our third-party-branded vendors for the majority of our business for a long period of time going forward.

So maybe some of the tertiary brands will be minimized or removed from the stores, but some of our bigger vendors continue to grow in shipments to us and continue to be extremely important to the house of brands that Boot Barn is.

And last question.

Some of the techniques you've been using in terms of segmentation as well as marketing strategy are quite advanced.

What are your thoughts on the impact that that's having and what we should know about in terms of driving traffic and transactions in the stores and online?

Look, I think we've gotten -- we developed a CRM capability a couple of years back.

We married up the science and analytics of that group with sort of the art of the creative, and we have taken essentially every single one of our customers and assigned them into 1 of 3 different customer segments and in some cases, you can belong to more than one.

And while I think that has absolutely helped our business thus far and helped us communicate to these customers in a much more meaningful way specific to what they are interested in, I think there's even more opportunity for us to get better at that.

So we continue to develop our capability.

We continue to test and learn new techniques from a targeting standpoint through e-mail and direct mail and social.

So that will continue to push the team to further sophistication using more advanced analytics and seeing how far we can take it.

And our next question comes from Janine Stichter with Jefferies.

Congrats on the quarter.

I'm interested in that number you quoted.

I think you said a 7% increase in the number of same-store customers purchasing.

I just want to dig in a little bit there, if you can give some thoughts on what might be driving that, how that compares to prior quarters, and then if you have any sense of how much of that might be new customers [versus last]?

And to the extent that you are seeing new customers, any sense of maybe where that customer is coming from?

Okay.

So those are 2 different questions.

So we've seen an increase in net new customers on a same-store basis over the last several quarters.

I think it's 5 quarters in a row now.

And that growth is 2 pieces, which we haven't really split out, but it is brand-new customers trialing Boot Barn as well as customers that had shopped with us in the past and have now come back.

And I think what I attribute that to is probably 2 different things.

If you are a Boot Barn customer in the past and for whatever reason had lapsed, well, we've changed the assortment, we've changed the in-store merchandising, and probably more than anything, we've changed the look and feel and creative of our marketing.

And I think we've reawakened that customer to bring Boot Barn back into the store.

In terms of new customers, we've also shifted our media mix a little bit away from spending money on direct mail, only going to our own customers that are already in our database, and doing more broadcast-type marketing, whether that's television or radio or social to introduce brand-new customers into the brand.

And I think what works in conjunction with that strategy is the launch of Idyllwind by Miranda Lambert.

We are clearly thrilled to have that product line in the store, but equal to the merchandise is the marketing muscle that comes with a performer like Miranda and what she does to bring the Boot Barn brand and its awareness to her 3-plus million Instagram followers and 8 million Facebook followers and the countless fans that go see her in concert.

So it's a very coordinated strategy to go after brand-new customers both from a marketing standpoint and from a merchandise partnership standpoint.

All right.

That's helpful.

And then just on the in-store returns.

I think you said 2/3 of the online returns are now coming to the stores.

Do you have any sense of what the attachment rate is there and how often the sales can be saved by being returned in-store versus online?

It's a fantastic question.

And the quick answer is we don't other than anecdotally, and the reason for that is while we're very excited that we're able to get the returns portal rolled out, we haven't yet connected it back to POS.

So it's going to take us another few months before we can see if customer XYZ comes back in for a return if they also buy.

From the dial-up in the stores, we -- they -- those guys are thrilled to see a customer come back in with a return and they are incented just by nature of -- or by virtue of the fact that they're trying to grow their same-store sales in the store to turn them around and show them the assortment in the store.

One very minor point of clarification: when we quoted the percentage of returns coming back into the store, that was a bootbarn.com's business, not of the total e-commerce business.

We haven't fully brought the Sheplers e-commerce business to the point where they can return in the store.

And of course, if they walked in with a product, we'd probably allow the customer to return it but we haven't marketed that.

So it is -- the statistic that was quoted was really of the bootbarn.com business, which is roughly half of the e-commerce business.

And the next question will come from Paul Lejuez with Citi.

I'm curious if there were any places that you felt you actually missed sales during the holiday quarter, maybe you were running a little light on inventory.

And I'm also curious, as you grow the private label business, where are you on lead times right now?

Did we miss sales?

Look, we very plan-fully turned unprofitable sales away online so that -- we definitely left demand on the table in the effort to grow earnings, which I don't think is really the spirit of your question.

In terms of inventory, we -- as we've started to get into September and October, the merchants and the planning team really stepped up our inventory build and changed our replenishment models.

So I think we were pretty well positioned for the holiday quarter.

Probably the one area that we were -- we couldn't change as quickly as some of the other areas, ironically, was our own brands because we source those overseas.

We were writing orders and replenishing back in, but the lead time was a little bit slower than our domestic third-party brands that have product in warehouses around the country.

I don't think that is a meaningful sales erosion.

In terms of the second part of your question in terms of our supply chain going forward, when we think about the businesses that we're investing in from an exclusive brand standpoint -- and admittedly, Idyllwind has a bit of a fashion quotient to it, but Hawx, Cody James western, Cody James work, and frankly most of Shyanne is a pretty basic assortment, right?

So we can write our orders.

We work in a pretty traditional product development calendar.

We're working the year out writing orders, 6 months out and we get the product a couple of months before we get it into the store or a month before we get it into the store, and we are well-positioned to manage that change in the supply chain with our current warehouse.

Maybe we'll expand it a little bit to have a little bit more capacity, but we're really not taking on any more fashion risk for 3/4 or more of the exclusive brand product that we're bringing in.

So hopefully, that helps to answer your question.

Yes, definitely.

And then just -- one just bigger picture question.

When you guys look back at this year, you hit that 10% comp, I'm curious what you would call out as -- what were the primary drivers of the strong comp performance this year?

If you had to kind of choose a few between macro or certain product categories, certain regions and marketing campaign, product launch, which are the real biggest drivers of the business if you had to kind of pick the top 3?

So probably not the answer that you're looking for but I really couldn't assign it to any single thing.

I mean, it is the entire team working in concert, the merchants embracing the segmentation that was driven by the analytics part of marketing, the creative team within marketing bringing that segmentation to life through how we talk to customers, the stores bringing our new brands to life by really learning about our new exclusive brands and the in-store training.

There's not -- the work business, I guess, is probably the one thing that has been a bit of a continual driver of the business, work boots and work apparel.

But virtually every merchandise category is going ahead.

Virtually every geography is going ahead.

So work is a little bit better.

Texas is a little bit better.

But if we strip back Texas and strip that work, the underlying business is still pretty strong.

So just sort of a proverbial flywheel and we'll continue to have the whole team pulling in the same direction, and frankly, it's just a -- it's -- coming back to the baseball analogy earlier, it's a series of singles and doubles, where we haven't swung for the fence on any given thing and have that amount to half of our comp.

And moving on to Dylan Carden with William Blair.

I just wanted to follow up on a prior question.

Just there seems to be sort of a lot of change here in the business, higher penetration of online at a more profitable level, some new functionalities from an inventory management standpoint that presumably helps some of the efficiencies in the box.

Can you just update us on the sort of steady-state leverage point as you see it now in the model particularly ahead of a period of likely comp deceleration?

What?

That's a heck of an assumption at the end there, Dylan.

You don't have to bless that, by the way.

That's personal.

Dylan, long term, we continue to believe that those leverage points are still roughly 3.5% for occupancy as we grow 10% units and SG&A is in the 1.5% to 2% range.

That's kind of our long-term algorithm and that's -- while we're not giving guidance for next year, that's kind of the way we're thinking about our initial planning or budgeting process.

Okay.

And then just a final one, if I may.

As you enter these new markets, are there sort of more opportunities?

Or do you anticipate doing more tuck-in acquisitions?

And if so and even sort of more broadly, as you do these tuck-in acquisitions, what are the comp and margin applications given that comps probably are more mature but margins are presumably higher as you kind of run through that?

Yes.

No, we do continue to contemplate the tuck-in acquisitions.

We've been very pleased with the 3 that we completed over the last, call it, 18 months.

You're right, they tend to be higher-volume stores, so the Drysdales stores.

There are 2 of them in Tulsa, are very big in size.

And so we'll benefit from getting that mature volume.

We may not have the same acceleration.

Having said that, Lone Star, which is a 3-store chain kind of in the Dallas metroplex area, has had really nice growth in same-store sales as we've gotten our product assortment in.

So I'm not sure that we can't grow the business as significantly as we do with the new organic builds.

It kind of depends on that chain that we're acquiring and how they were merchandised, et cetera.

We typically see the margin profile improve when we put that in to a Boot Barn model.

Our private brands resonate well.

And when we get the penetration up, that adds to the merchandise margin.

Again, these stores would have higher volumes.

And typically, our staffing model allows us to be a little bit more efficient with labor.

So we think the tuck-in acquisitions are a nice way to approach doubling our store count.

And moving on to Tom Nikic with Wells Fargo.

Just taking a look at the balance sheet.

You've got $50 million of cash.

I don't believe you've ever had that much at the end of a quarter so far as the public financials go back.

And clearly, you're generating some pretty nice free cash flow.

How should we think about use of the cash go forward besides just building out the store base?

Should we think about debt paydown?

Maybe something else like dividend or a buyback or something like that eventually but just -- if you can just give us an idea about use of the cash go forward, that'd be helpful.

Yes, sure, Tom.

We do plan to continue to build out the 10% unit growth, and that could involve buying a business where the cash outlay may be a little bit more than an organic build initially.

But aside from the unit growth opportunity, we're going to continue probably to pay down debt.

We've said we want to get the leverage point below 2. And at the end of the quarter, we were at 1.6, and that's an artificially low point.

That's why you're seeing $51 million of cash in the balance sheet.

We've generated a lot of cash this year and we haven't paid down the term loan because we want to maintain our liquidity at this point, but we continue to look at opportunities to refinance the debt.

And again, we'll use that cash to continue to delever.

And our next question will come from Mitch Kummetz with Pivotal Research.

So Texas, Texas has been running better than average for a little while now.

Can you remind us when that inflection occurred, when Texas went from below-average to above-average comp?

Sure.

If you went back to fiscal '17, Texas was minus 5% essentially for 4 straight quarters.

As we've gotten to the first quarter of fiscal '18, it turned positive and has been, I think, better than company average every single quarter since.

Okay.

So Texas has obviously been comping the comp, in recent quarters producing above-average comp against above-average comp.

But I'm just wondering, what do you make of that?

Is there anything you can put your finger on?

Is it just the bounce in oil employment?

Or is there something else that's kind of specific to Texas that's working well for you guys?

Well, I think we've seen that dynamic across the country.

I think it's a little bit more enhanced in Texas because it was depressed in fiscal '17 and it's going up against a negative 5%.

And yes, part of that is oil.

I think part of that is we have now cycled a couple of years past the Sheplers acquisition and pulling that -- their promotional strategy from high-low pricing to the typical Boot Barn, everyday low price kind of point of view.

We've learned a lot about the Texas business over the last few years since we've gotten into it and how to compete in probably the biggest and certainly stereotypically most Western market that we have with a very strong competitor.

So I think we've continued to get more knowledgeable and more capable in driving the business forward there.

Got it.

And then on the comp guide for Q4, 5% to 7% comp, mid-point is at 6%.

If I add that back to last year's Q4, I'm getting kind of an 18% 2-year stack at the mid-point.

I'm just curious how instructive you think that is as we look at the business beyond the fourth quarter?

You mean how far you can extrapolate an 18% 2-year stack?

Well, if you want to answer that.

I mean, you've accelerated your 2-year stack, and so now you're looking at your -- I mean, the midpoint's at 18%, and I'm just wondering if there's something unusual about that 18% or if there's any reason to think that the business couldn't trend at that level beyond the quarter.

Yes, I think the company, over a long period of time, has averaged for the last 36 quarters an 8% comp.

So it hasn't been 8% every quarter, but that would be a 2-year stack of 16% forever or at least for 9 years.

Going forward, if we think about, as we started this most recent fiscal year off -- I think we're 11.6% and 11.3% in the first 2 quarters, do I think we could have a 2-year stack of 18% in those first few quarters?

I do.

It is -- we're far from providing a guide for that quarter, but that would be a high guide for us to put out for an entire year and have everybody banking on a plus 18%.

But having said that, the company certainly has proven its ability recently, but frankly, before I got here and some -- most of my management team got here, had the ability to comp on top of comp for years.

So I don't look forward at the upcoming quarters with great trepidation that we can't comp against it and be strong.

And frankly, I mean, we're -- to some degree, we're restraining our consolidated comp by the work that we're doing on e-commerce.

So -- and still even with that, I think we can get growth on top of growth.

And that does conclude the question-and-answer session.

I'll now turn the conference back over to you for any additional remarks.

Thank you, everyone, for joining the call today.

We look forward to speaking with you on our fourth quarter earnings call.

Take care.

Well, thank you.

That does conclude today's conference call.

Thank you for your participation.

Have a wonderful day.