Boot Barn Holdings Inc (BOOT) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to the Boot Barn Holdings Third Quarter Fiscal Year 2021 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, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's third quarter fiscal 2021 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Operating Officer and 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 third quarter fiscal 2021 earnings release as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thank you, Jim, and good afternoon. Thank you, everyone, for joining us. On today's call, I will discuss the highlights of our third quarter results, briefly walk you through each of our 4 strategic initiatives and then provide an update on current business. Following my remarks, Greg will review our financial performance in more detail, and then we will open the call up for questions.

We are extremely pleased with the strength of our third quarter results through what continues to be a difficult macro environment. During the third quarter, consolidated same-store sales increased 4.6%, cycling a 6.7% increase in the year ago period. Same-store sales in our physical locations returned to positive territory, increasing 1.9%, with growth driven by an increase in basket size, which more than offset a mid-single-digit decrease in transactions.

Our e-commerce business remained strong during the quarter, with sales up 16.3% over the same period last year. Importantly, our momentum accelerated as the quarter progressed, with same-store sales up 1.7% in October, 4.3% in November and up 6.2% in December. The sequential improvement each month was primarily driven by store comps improving from approximately flat in October to up 3.3% in December. We are extremely pleased with the return to positive comps in our brick-and-mortar stores, particularly in light of the pandemic.

From a margin perspective, our third quarter merchandise margin remained strong, both in stores and online. Resulting in consolidated merchandise margin expansion of 150 basis points during the quarter. The strength in merchandise margin was driven by better full price selling and reduced promotions. It is a testament to the ongoing strength of the brand that we can continue to grow top line sales without resorting to discounts or promotions to drive traffic.

The combination of strong full price selling, reduced promotions and expense management resulted in third quarter earnings per share of $1 compared to $0.85 in the prior year. When adjusting for the tax benefit from share-based compensation in both years, we grew earnings per share 22% to $0.99 compared to $0.81 in the prior year period. I'm extremely pleased with our earnings growth despite ongoing headwinds from COVID-19, including pressure in oil and gas markets, reduced tourism, rising case counts across the country and the ongoing lack of rodeos and concerts.

The fact that we grew earnings per share more than our long-term growth algorithm of 20%, while facing the adversity associated with COVID and the softness in oil markets, truly speaks to the strength and diversity of the business. I would now like to provide an update on each of our 4 strategic initiatives, beginning with driving same-store sales growth.

During the quarter, we saw sequential improvement in the retail stores business, with the stores returning to positive comps and gaining momentum through the month of December. Our same-store sales results during the quarter were fueled by sequential improvement across each of the 3 geographic regions of stores. The West region, which includes California, continue to outperform and posted solid year-over-year growth. The South region, which includes Texas, showed the most sequential improvement of the 3 regions from Q2 to Q3, but remained negative with respect to same-store sales growth. The North region delivered same-store sales that were nearly flat for the quarter.

From a merchandise perspective, we are encouraged by the broad-based improvement in category performance. Every major category, with the exception of work apparel and men's Western boots grew versus the prior year. Work boots remain our strongest performing category with growth in both lace-up and pull-on styles. Additionally, we saw healthy growth in kids' boots, hats and belts as well as both men's and ladies Western apparel, which were driven by solid gains in denim. Demand for our FR work apparel business was soft in the third quarter as a result of top line pressure in many of our oil markets, while sales of non-flame-resistant work apparel showed positive growth as the customers need for functional product continues to be healthy.

We believe a portion of the sequential improvement can be attributed to the work done by the merchandising team in both managing the challenges of the supply chain and in embracing the new Just Country customer segment. They have moved swiftly to capitalize on the trend toward being outdoors and dressing more casually and have augmented the assortment considerably to capture a broader market share. As part of these efforts, we have invested in more inventory of hiking boots, outerwear and casual footwear and apparel, which have started to gain traction.

From a marketing perspective, we feel that we had an appropriate balance between our digital advertising and our more traditional marketing programs that emphasize radio, television and direct mail. These efforts help to briefly minimize the decline in store traffic due to pandemic and helped to drive considerably more traffic to bootbarn.com.

From an operational perspective, our stores team performed extremely well during the holiday shopping season. We were very planful with our approach and we're able to successfully hire seasonal associates to help with the increasing sales volume. I must further commend the stores team, which faced a decline in customer traffic in the quarter, but was able to achieve positive same-store sales growth through a healthy increase in units per transaction.

Based on the level of customer service and salesmanship that they provided, we saw transaction size grow by 6%, with a nice increase in sales of add-on items, including boot accessories, ball caps and belts. This achievement was further notable given all of the operational and staffing challenges that they faced due to COVID.

Moving to our second initiative, strengthening our omnichannel leadership. During the third quarter, e-commerce same-store sales increased 16.3% with our focus on e-commerce profitability driving an approximately 80% increase in operating income. From a brand perspective, bootbarn.com sales were up 37% during the quarter, with the balance of our e-commerce sales declining, largely as a result of the change in promotional posture and pricing on the sheplers.com site to align with a more full price selling model.

From an online and in-store integration perspective, we believe the many omnichannel offerings we had in place for the holiday shopping period helped boost sales, both in our stores and online. Our digital and IT teams have been working extremely hard over the last several months to further enhance our omni capabilities, giving our customers the ability to buy online and receive their product in our stores. These initiatives were well received as approximately 20% of bootbarn.com orders were picked up in a store. These orders include those purchased online and picked up in store, in addition to those shipped to the store from our e-commerce fulfillment center. Our omnichannel offerings helped drive incremental store traffic and provided convenience to our online customers, allowing for same-day in-store pickup, contactless curbside service and even same-day gift-wrapped home delivery.

We believe these capabilities were successful in expanding the number of customers that shopped across channels. We were encouraged by the effectiveness of our direct-to-consumer supply chain, which was able to meet outsized customer demand while avoiding virtually all anticipated issues with package delivery service.

In summary, the ongoing changes we have made and our focus on increasing e-commerce profitability have not only improved our bottom line, but have helped to narrow the margin differential between the stores and online channels.

Now to our third strategic initiative, exclusive brands. During the third quarter, exclusive brand penetration grew to 23.3%, an increase of approximately 80 basis points compared to the prior year period. We are extremely pleased with the quality of our exclusive brands and our customers' receptivity to them. The continued acceptance of our brands helped position 4 of our exclusive brands in the top 10 selling brands in the store during the quarter. We are particularly pleased with the performance of both Idyllwind and Hawx, as both brands have penetrated our top 10 brand list, despite being only a few years old. While the growth and penetration of exclusive brands decelerated during the third quarter as a result of constraints in our supply chain, we expect to finish the current fiscal year with exclusive brand penetration growth of approximately 200 basis points when compared to the prior year.

Finally, our fourth initiative, expanding our store base. Year-to-date, we have opened 7 stores and closed 1 store, bringing our total count to 265 stores across 36 states, and we are targeting a total of 15 new store openings by the end of our fiscal year. Even with the difficult backdrop of COVID-19, the new stores we have opened in new markets, particularly in the Northeast, are outperforming our expectations and are expected to pay back within our targeted 3-year period.

When we couple the performance we are seeing in our new markets with less than expected store cannibalization in our more mature markets, we're further convinced that we can deliver 10% growth in units and double our store count going forward. We are encouraged by the current store pipeline and feel that we are well positioned as we approach fiscal 2022.

I'd like to now provide an update on current business. Our fourth quarter is off to a very strong start, with same-store sales growth of 17% in fiscal January. This marks our sixth consecutive month of sequential improvement. The stores business continues to exhibit solid strength with January comps up 20%.

From an e-commerce perspective, we continue to focus on driving growth and profitability. Strength in bootbarn.com sales has continued with growth in line with our third quarter. Sheplers.com demand continues to be under pressure with declining year-over-year sales as we cycle a very promotional January in the prior year period. As a reminder, the sheplers.com business has been repositioned as a much less promotional business, which, as expected, has put pressure on sales. That said, the rebranding of Sheplers has resulted in a much more profitable site and we believe provides a solid foundation for the long-term health of that business.

On a combined basis, we continue to see very strong growth in EBIT dollar contribution for our e-commerce channel in the first fiscal month of our fourth quarter. Notably, the sales growth in January has been broad-based with all major merchandise categories growing on a comp basis. Additionally, we have seen each of our 3 geographical regions grow double digits in the month. That said, while we are certainly excited about the current sales trend and we believe the underlying business continues to be strong, we do attribute a portion of the acceleration in sales to external factors, including the receipt of stimulus payments at the start of the 2021 calendar year.

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

Thank you, Jim. Good afternoon, everyone. In the third quarter, net sales increased 6.5% to $302 million. The increase in net sales was primarily a result of the 4.6% increase in same-store sales and the sales contribution from new stores opened over the past 12 months.

Gross profit increased 10% and to $106.8 million or 35.3% of sales compared to gross profit of $97 million or 34.2% of sales in the prior year period. The 120 basis point increase in gross profit rate resulted from a 150 basis point increase in merchandise margin rate, partially offset by 30 basis points of deleverage in buying and occupancy costs. Merchandise margin increased 150 basis points, primarily as a result of better full price selling and reduced promotions.

Operating expense for the quarter was $65.2 million or 21.6% of sales compared to $62.1 million or 21.9% of sales in the prior year period. Operating expense increased primarily as a result of additional cost to support higher sales and expenses from new stores. Operating expenses as a percent of net sales decreased by 30 basis points, primarily as a result of expense leverage on higher sales.

Income from operations was $41.6 million or 13.8% of sales in the quarter compared to $35 million or 12.3% of sales in the prior year period. Income tax expense was $9.9 million in the quarter compared to $7 million in the prior year period, resulting in an effective income tax rate of 25.1% in the third quarter. Net income was $29.6 million or $1 per diluted share compared to net income of $24.8 million or $0.85 per diluted share in the prior year period.

Turning to the balance sheet. Inventory decreased approximately 9% on a comp store basis compared to last year. On a consolidated basis, inventory decreased 10.7% to $246 million. This decrease was primarily driven by the reduction in comp store inventory and a decrease in inventory at our Fontana distribution center.

As of December 26, 2020, we had a total of $111.5 million of debt outstanding related to our term loan. During the third quarter, we reduced our line of credit borrowings by approximately $130 million, resulting in 0 drawn on our $165 million line of credit. We had $76 million in cash on hand at the end of the quarter, and our net debt leverage ratio at the end of the quarter was 0.5%.

Given the continued lack of visibility into the business as a result of COVID-19, the company is not providing fourth quarter and full year fiscal '21 guidance at this time.

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

Thank you, Greg. We are extremely pleased with the results of our third quarter and the underlying improvement we are seeing across the business. We believe we are well positioned for a solid finish to our fiscal year and are looking forward to continuing to drive same-store sales growth with the return of a more normalized macro environment.

I would like to express my personal appreciation to the more than 5,000 associates across the country who continue to show great dedication to both our Boot Barn family and our customers, and who have delivered an exceptional holiday quarter through a challenging environment.

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

(Operator Instructions) And our first question is from Matthew Boss with JPMorgan.

Congrats on the business acceleration, guys.

Thanks, Matt.

Jim, on the sequential improvement across your 3 regions, any key lead indicators that you're focused on in the oil and gas markets and how best to think about competitive market share opportunity in your more mature markets, given I know the backdrop is very fragmented?

Sure. Well, each of the 3 regions have improved sequentially quite nicely between Q2 and Q3. And then when we got into January, it's just been fantastic business across the country. The West has always been the lead since COVID began a year ago or so. The South, which does have Texas in it and has some connectivity to the oil markets, had started to get sequentially better in the third quarter and turned positive as we got into January. We're not oil experts by any stretch, but it does seem that there seems to be a bit of a reemergence of that industry. The price of a barrel of oil is up about $10 versus a few months ago, employment and rig count seems to be improving. And we can see it in our business. That part of the business is getting a little bit better. And again, January, which might be obscured a bit by stimulus checks. Essentially, everything was strong.

In terms of share, we continue to believe that our #1 competitor in each of our markets where we have stores is an operator that has 1 or 2 stores, it's a mom-and-pop and just simply can't put together the assortment that we have, the level of inventory that we have. They can't compete against a national brand like we have. And I think we just continue to take share from the several hundred or more than 1,000 single store operators around the country. So while we know we have other competitors that are maybe secondary to our market or big competitors online, et cetera. And we do want to combat those guys and go up against the best. Frankly, for us to be successful going forward, we just need to continue to execute on our current plan and take share from the market.

Great. And then maybe just a follow-up more from a bottom line perspective. On your comments around continued margin strength in January, could you just elaborate on drivers of pricing power that you see from a merchandise margin perspective? And any impediments to driving similar or greater merchandise margin expansion in the fourth quarter? And then, Greg, is 3 to 4 comps the best way to think about the leverage point for buying and occupancy within that gross margin?

On the first part of our merchandise margin, if you think about the complexion of the business, when we started the third quarter, our inventory was down about 10%. The business started to accelerate. As Greg mentioned, we ended the quarter with our inventory down about 9% on a comp store basis. And our January business was just extremely strong.

So there's -- one of the things -- one of the very few things that erodes merchandise margin is when we try to clear through clearance merchandise. And by virtue of the fact that our inventory is lean and our sales have accelerated, we will continue, we believe, to see margin expansion for the foreseeable future.

Going forward, if you look multiple quarters going forward, we continue to look at areas within e-commerce to get more margin expansion. For example, can we improve the exclusive brand penetration online. We continue to look for ways to reduce supply chain costs, whether it be more efficient in our performance center or try to figure out ways to lower shipping costs, et cetera. So there's still opportunities for us to find margin improvements, either merchandise margin or operating margin in both channels, stores and online. I wouldn't necessarily encourage you to model 150 basis points for the next several quarters, but it's not like we're out of ideas to find more margin rate.

And then on the margins question.

Matt, in terms of the leverage, we've typically guided -- this year, we're not guiding, of course, but we've typically guided roughly a 3.5% same-store sales increase to get leverage out of buying and occupancy. In this specific quarter, we had 20 basis points roughly of deleverage in occupancy and 10 basis points in the buying line. The buying line was driven by higher bonus costs. We had a really phenomenal quarter, and we had to accrue more bonus expense, both at the buyer line and also within operating expense. So we've got 30 basis points of leverage in operating expense, and that's also had a headwind from incremental bonus expense.

The 20 basis points of occupancy cost deleverage, I would attribute a portion of that to -- while we had strong comp growth at 4.6%, the total sales grew about 6.5%. And that 6.5% would have been larger if, for example, the National Finals of Rodeo event would have been held in Las Vegas, like it historically is, and it would have been attended by lots of people, and we would have had higher boot sales, for example. So NFR went on, but it went on in Fort Worth with reduced capacities. We had a smaller boot. And so that negatively impacted the top line a bit. So we'll hopefully give guidance next year and be able to update anything as it relates to leverage points. But that's just a little bit more color around the deleverage.

And our next question is from Max Rakhlenko with Cowen and Company.

Great. And congratulations on a nice quarter. So first, in your bootbarn.com business, how much of the growth would you attribute to new shoppers? And in your stores, despite the traffic decline, are you seeing new shopper growth there as well? And can you just touch on the strategies to get these new shoppers to become more loyal and productive shoppers for you over the longer term?

Sure. On the bootbarn.com, it's hard to give a specific number. We believe it's about 1/3 of the growth coming from new customers online. From a stores perspective, while transactions on a comp store basis were negative in the third quarter, we continue to see them improving over the last several months, right? It's -- we can -- we feel pretty confident that we can anchor that right back to what's going on with COVID. And then while we didn't say this specifically, when we got into January, clearly, transactions on a comp store basis, our proxy for traffic was up and frankly, up significantly as a component of the plus 20% comp in the store.

On the last piece, we have a very methodical, deliberate, spelled-out process when someone enters our customer database, our B Rewarded loyalty program, based on how they've entered, either they've entered in-store or online; based on the product that they purchased, whether that's local, Western or Just Country or Wonderwest, they get a series of e-mails that are specific for that person or maybe that small segment over the course of a few weeks that really gets them introduced to Boot Barn, not only highlighting the area that they were first interested in, but also giving them a taste of the rest of the product and the assortment that we carry.

We believe this is really working for us, right? More than half, in fact, the vast majority of our sales, particularly in store, are connected to a loyalty number, a B Rewarded member, and that's part of the reason why we feel that the customer continues to be very loyal to us. They accumulate points. Those points then get converted into what amounts for a modest merchandise discount and then they come back in and make another purchase and accumulate more points. So that's a program that's been in place for several years now. But the uptake by the customer is by one of the things that differentiates us from a lot of other retailers that have attempted the same thing.

Got it. That's very helpful. And then on the EBIT margin pre-COVID, I believe 10% was the medium-term target that you discussed. Where we stand today with e-com being much more profitable than before, how are you thinking about what the profitability profile of the company could look like over the next few years?

Good question, Max. You're right. We had signaled the 10% as kind of the near term target. And longer term, I think we had pointed out companies like Ulta that sell both branded and exclusive brands. And I believe their profitability profile is 13% or 14%, I believe, and we think that, that could be a reasonable proxy for what we might be able to achieve.

And our next question is from Jonathan Komp with Baird.

Yes. Great. Maybe a bit of a follow-up. Maybe you touched on this a little bit already, but if I look back here early during fiscal 2016 and 2017 when comps were challenged. Coming out of that period, you had 2 years of very outsized earnings growth. And I'm wondering, just directionally, as you look forward today, some of the puts and takes of why that may or may not be kind of a good framework to judge what you might be able to produce going forward. Just kind of any high level thoughts.

Well, I think we're positioned well to grow on top of the COVID quarters, of course, right? Unfortunately, in Q1 last year, with top line sales eroding so much and stores being closed, et cetera, we'll get what will look like very outsized earnings growth. We do always want to anchor people back to our long-term algorithm, which is -- calls for 20% EPS growth. Arithmetically, we'll do more than that presumably in our next fiscal year, just considering we're cycling in the first and second quarter less strength in the earnings line.

I think one of the things we're really encouraged by is the business seems to be recovering and January seems to be very strong. And many of the things that we thought could provide future growth haven't kicked in yet. So oil, while improving, it's still a drain. The oil markets are still a bit of a drain on our comp. COVID is still impacting country music concerts and rodeos. While we feel good about our inventory, we'd love to get a little bit more product through the supply chain. We haven't yet cycled the sheplers.com chain. So that's been a drain on top line. So we think there's plenty of places where we can get ongoing top line growth, which, of course, we expect to drop that down to bottom line.

I'd say the last thing is, coming out of this, and this is not necessarily the way we want to gain share, if I'm honest, but we believe we've been able to weather the pandemic better, if not much better, than many of the -- of our competitors that have 1 or 2 stores. So we believe there has been and will continue to be either some shakeout or some ongoing weakness from those players. And that gives us the opportunity to, frankly, just continue a trend that had been going on for several years, which is us taking more share. So perhaps a long-winded answer to your question, but that's why we're thinking about it.

And maybe just a follow-up, would you be content really executing the plan back to 10%-plus unit growth? And so I assume kind of deleveraging the balance sheet going forward? Or would there be any other alternative investments, either operational internally or M&A that you'd look at? Just how are you thinking about the strategies going forward.

I think for the foreseeable future, our strategy is going to be relentless focus on execution, continue to do what we're doing, open up stores that pay back in less than 3 years. Maybe there's some upside to the 10%, continue to develop great exclusive brands, march forward with our omnichannel initiatives, work with our segmentation and with marketing and merchandising to bring the Boot Barn experience to life and drive same-store sales.

Perhaps over the next couple of years, there'll be some acquisition that comes our way that we'll take a look at. But I would say, for the foreseeable future, we're just going to put heads down and continue to execute like we have been. And we really don't need to do anything in an outsized way, anything more than we've been able to do for the -- if you can x out COVID, for the last few years for us to continue to drive EPS growth. So it's perhaps a boring and not super sexy story, but it's also one that we believe has a fairly strong road map and low beta.

And our next question is from Tom Nikic with Wells Fargo.

So I'd like to ask about the private brands business. So I think you said that for the full year, it should grow something like 200 basis points penetration, which will get you up into the kind of the mid-20s, I guess. How should we think about that on a longer-term basis. Are we still thinking 200 basis points of penetration a year? Like what -- is there a ceiling that you see for that business? Any color around the private brands would be helpful.

Sure. Yes, you're right in recounting the numbers. When we had our call in May of 2020, we actually had expected exclusive brands to be even more challenged and purely based on the fact that out of abundance, of course, of caution, we really held back the supply chain. We deferred orders or canceled orders. And then when it started to appear that COVID, while very detrimental to the environment -- I mean, to the economy and to the country, that our business started to build back. We turned that supply chain back on. So while we thought we'd see 0 growth, we got about 2 points of penetration growth, which was better than we expected.

As we lay out our fiscal 2022 guidance, which I don't intend to do right now, I think it's safe to say, we'll expect to see, in keeping with past years, 2 or 2.5 points of penetration going forward. We have plenty of opportunities for us to continue to grow. That might get us to 25%, 26%, being mindful of the fact that we continue to want to have a variety of brands for our customers. We have some extremely strong vendor partners that have helped us grow our business and continue to help us grow our business. So the ceiling -- we'll hit the ceiling at some point. I don't think we're there yet. But I don't expect group volume to have 50%, 60% exclusive brands in the foreseeable future.

And our next question is from Peter Keith with Piper Sandler.

It's Bobby Friedner on for Peter Keith. Just looking at January trends, why do you think stimulus impact has led to reversal in channel strengths with retail stores accelerating and e-com decelerating? And are there any indications that retail store comps will remain positive once stimulus benefits were out?

So it's an excellent question. A portion of it, for sure, is the sheplers.com business last January was even more highly promotional and recycling that. So the sheplers.com business is more of a drag on our e-commerce business in January than it was in the third quarter. Bootbarn.com is kind of in line with the third quarter. So in the third quarter, I think we called out a 37% growth. So we're in line with that in January. I don't have an easy answer as to why we think it's more being flushed through the stores.

In April, when stimulus last hit, a lot of our stores were closed, people weren't comfortable being shopping and being outside. The whole COVID thing was new. And so I think e-com got the benefit of that because people were at home, they had this money to spend and they wanted to spend it. This time around, they're more comfortable in a store environment. And so they're going to where they prefer to shop, I think.

And I agree with Greg. And then the last part of your question is, it's very hard to strip out the impact of stimulus payments. We are -- so we have to use our intuition to try to understand or estimate what the underlying growth is. But if you look at the 5 months leading up to January, we've seen a steady ramp of sequential improvement. The tail end of December prior to stimulus was very solid. And then when we got into January, the business just got extremely strong in terms of its duration. I think stimulus tends to be very relatively short-lived, 6 weeks, maybe. So I would say over the next couple or 3 weeks, we'll start to see a slowdown, or if not a slowdown, less outsized growth, I would -- I guess, is how I would characterize it.

And then just as a reminder, in our fiscal fourth quarter, when we get to the tail end of March, we'll start to cycle very soft numbers because that's when COVID really started to impact our top line kind of mid-March last year.

That's all very helpful. Just maybe separately on advertising and marketing. How much was -- how much of a benefit for lower ad expense is in calendar 2020? And do you anticipate this becoming more of a headwind this year as the ad market gets more competitive and the consumer appears to be strengthening?

I think that's a small piece of the pie for us, right? There's so much of our marketing is -- the dynamic you're speaking to is most prevalent in television, and that's a very small part of our marketing. So all of our direct mail will be roughly the same cost as last year. And yes, we're still sending catalogs to homes. Radio, I don't think will have a big change in CPM. Paper click is we've seen ups and downs. I'm not sure we had a particularly inexpensive cost per click in the third quarter anyway. So I just don't think that's going to be a big impact as it relates to Boot Barn. It's -- I'd be shocked if it's a headwind that whichever will be big enough to were meaningful enough that has to call out to the public markets.

And our next question is from Janine Stichter with Jefferies.

I wanted to ask a little bit about the units per transaction, the accessories trend. Is there anything particularly going on there that you could elaborate on? Is it merchandising? Is it a change in product trend a bit? A change in how you're compensating your store associates? Just any additional color you could provide there would be helpful.

Sure. It's a very good question. And once again, if any of them are listening, kudos to the field team for driving basket size through more units per transaction. One of the things that happened ironically is in a COVID environment, we had to provide stores with sufficient labor to take care of customers in a safe way. So ironically, we wound up perhaps with more hours than we otherwise would have scheduled, which could have given the stores the opportunity to take better care of customers, et cetera. I think we -- and Mike Love, our Head of stores, he really put a focus on building the basket and calling out growth in ABT, and we've got reporting on that, but I think it also just becomes part of the mantra.

I think if I'm really honest, what makes it even more compelling is one of the things that tends to drive more units per transaction is -- and they're not -- we don't do them that often, but we do run clearance sales that are buy 1 get 1 off -- or get 1 free, or buy 1 get 1 50% off. And given the fact that we didn't have that much clearance in December, or even for the quarter, they were able to grow our UPT despite not having that tailwind. So it's -- I think I could really attribute it to the stores team mostly. And certainly, the merchandising team, we have a great buyer of belts. And as we're selling more denim, we're selling more belts. As the boots business started to improve, we started to sell more boot care. But at the end of the day, it's the sales associates in the field that were really encouraging customers to build the basket and increase their gift giving, et cetera.

Okay. Great. And then you mentioned on the labor, putting more hours in the store than you might have otherwise just for COVID precautions. As we think about maybe some of those, the need for some of those precautions wearing off in the back half of the year, do you, hindsighting the success of this, maybe choose to keep those hours on? Or how do you think about flexing store labor as we no longer need the COVID precautions?

Janine, it's a great point, and it's probably an arm wrestling match between me and Jim later. I don't think we'll overstaff the stores once some of these coded requirements unwind. It is great, and the stores team did a fantastic job of, again, building a basket, as Jim described. We do think the way we've managed the store labor historically has worked extraordinarily well for us.

I think when we held the Q2 call, we said that we were going to invest in marketing and labor, so that we'd be ready if the customer came. And that bet paid off. But I'm not sure, outside of the holiday period, that we need to "overstaff" the stores like we did in holiday, when it's just a little bit more difficult to manage the traffic.

And our next question is from Sam Poser with Williams Trading.

First of all, I'd like to know just what -- given how strong the e-commerce business has become and especially at -- I mean, the Boot Barn e-commerce business has become, what have you learned from that business that's going to help inform how you assort the stores and better engage your customers at store level?

Well, we're constantly feeding learnings between the 2 channels. The bootbarn.com has an assortment that's much broader than what's in the store. So when we start to see something emerging on the online business, we'll funnel that in and start to bring that part of the assortment into story. So it is a good way to get testing on many more styles, even more brands, et cetera. So we'll see, for example, as we start new businesses off, like hiking boots, we'll start to see what's selling online and use it as a bellwether to determine what to bring into the stores, where we should invest in key items and really bring the best of what we see online to the store channel.

I must tell you, though, we also see things going the opposite direction. I would -- we see things that emerge in the stores that we can make a bigger deal out of and tell a story with online and we'll go the opposite way as well. Yes, [margin] teams are very well integrated across channels.

I'm more speaking towards like being able to identify certain styles, there might be an existing style that during the crisis where more people were shopping online, where you said, oh, in this particular location or group of stores, the customer is telling us they want this, but we don't have that in the stores. And it's more on the basics, like to be able to not find the new products, new ideas, that's one thing. But more to make sort of your core business more efficient through specifically the learnings this year where there seem to be a shift more towards online, given that high double -- very strong double-digit results, essentially in the third quarter in e-commerce -- in bootbarn.com.

No, there's been place in -- I'll give you a more [mini] example that's more basic merchandise related. We saw lace-up work boots start to sell in markets that were pull-on work boot markets. And that's a place where we started to build out the assortment in the store and started to see some real growth. I think it's a very good question. We absolutely use the e-commerce channel on a market-by-market basis to help inform and to identify breaking trends.

And then lastly, you talked about in your press release and in your conversation about sales by month this past quarter, and then you also talked about January. Can you tell us last year, what the comp was, brick-and-mortar and digital by month for January, February and March?

We can. Let me give you more of a conceptual sense, and we want to be a little bit hedged here because we don't want people modeling plus 1-year or a 2-year stack or whatever. But our January business -- of the 3 months last year in Q4, our January business was the strongest. February was slightly less than January. And then March, COVID, fell off the table. We also had a shift in a rodeo, et cetera, et cetera. But the upshot of it all is January was the strongest month last year fourth quarter, and I think it was roughly a plus 5. But again, we don't -- I think you have to take that with a grain of salt. You have to kind of think about the stimulus checks, and it would be much too aggressive for us to say, therefore, we expect a 25% 2-year stacked comp in February. That's not what we're expecting. March gets -- once again, March gets more complicated because the beginning of March is very strong, the second part of March fell off the table because stores were closed and COVID hit, et cetera.

And our next question is from Paul Lejuez with Citi.

2 questions. One, on the competitive landscape, I'm curious what you're seeing from a promotional perspective, are you able to be less promotional as you have been because your competitors have also been less promotional? Have you been able to get less promotional despite the competition being promotional, curious if there's any difference by region there.

And also, just curious, big picture, how you're thinking about where to grow, your store base is now more confident in terms of your ability to grow that 10% per year. And I'm curious if it's more of a push or a pull kind of system in a sense, do you know where you want to be and then you pursue that region as opposed to kind of landlords reaching out to you and then assessing if it makes sense and just how that might have changed as a result of the pandemic.

Sure. On the first piece, I don't think the promotional posture within our industry has changed all that much. And candidly, regardless of what happens within the industry, we like to put a great assortment out there at a very fair price with excellent service and nice stores and a great in-store experience and just choose not to run significant promotions, discounts, sales, et cetera, regardless of what our competitors are doing, bearing in mind that in most of our markets, our biggest competitor has one store. We do have one regional chain. They're based in Houston. It's a very formidable competitor. We actually have a lot of respect for what they do. And they tend not to be very promotional. So that's -- it's -- I think it's just good for the industry.

On the store expansion piece, between push and pull, I would say it's a push. We look at the map of where our current stores are, how our field teams organized, where we see competitors either places where there may not be enough stores or places where there might be competitors that we can take on. And we then look for real estate.

Given what's going on in the world of retail, finding a 10,000 or 11,000 or 12,000 square foot freestanding retail store has proven to be relatively straightforward. But we have a strategy as to where we want to go and what the road map looks like. And of course, that twists and turns a little bit. But fundamentally, we want to follow the path that we've set out.

And our next question is from Rick Nelson with Stephens.

Jim, you talked about a gap between online sales and margin in the stores. Can you discuss where we are with that gap? And is there anything that would prohibit online EBIT margins from matching those stores?

Look, it's Greg, and it's a great question. We've made really good progress over probably the last 2 years, and we're probably in the fifth or maybe the sixth inning in terms of continued opportunity. The places that are just a little bit harder to get at that caused that disconnect a bit is, first, the exclusive brand penetration is less online. When a customer goes into our store, they can touch and feel the existed brands, and they tend to select our merchandise when given an opportunity to look at the quality and the make of the product. So it's less online, and that's a harder story to tell online than it is in the store, number one.

Number two, if you just think about the components of the P&L outbound shipping or e-com shipping is expensive. And most -- all of our boots ship for free. And if you spend more than $75, I think, you get free shipping. So that's expensive, of course. We've done some things to try to reduce that cost, whether it's using USPS as an alternative to UPS or whether it's encouraging customers to buy online and pick it up in the store or perhaps even shipping purchases from our stores versus Wichita have all helped that freight and will continue to help that outbound freight cost. But those are kind of the 2 structural things that are just a little bit more difficult to overcome.

Okay. Got you. And to push into just country, I assume it's more apparel than footwear driven if you could is that -- if you could size up the opportunity and where apparel margins, as said, versus footwear margins.

Sure. Well, taking the second part of your question, our footwear margins tend to outpace our apparel margins across virtually the whole store, men's or ladies, workwear, Western. With that said, the just country initiative does absolutely include footwear. So while we might be selling some more casual apparel, more outdoor, soft shell jackets, et cetera, we're also augmenting the assortment and building inventories in more and more stores for hiking boots and casual footwear, et cetera, drivers mocs -- drivers moccasins. So I think the composition, and I doubt we'll ever try to present this separately, but the composition of the just country part of the business between footwear and apparel will likely resemble the whole store, kind of 2:1 in favor of footwear.

And our next question is from Mitch Kummetz with Pivotal Research.

I've got a couple. So first question, I was hoping you guys could provide a little more color on the trajectory of your South region. So it's been your worst-performing region, but you also mentioned it was the one that improved the most sequentially. So if we think of the delta between the South and the overall business, I mean, has the delta gone from like minus-800 basis points to like minus-5, to now you're like down 100? Or can you just give us a little color on kind of how that's improved on a relative basis?

Mitch, I'm afraid. I'm looking at Jim, I'm afraid we can't help you with that. Don't have anything out there that framed up that delta target. So at this point, I don't think we're going to -- we do that color.

Okay. Let me ask about the South a different way, and then I do have another question. When you think about that business on a go-forward basis, given the improvement that you're seeing, like when is the easiest comp on the South on a relative basis? I mean does that happen by like the first quarter of '22? Or I'm just trying to understand how much easier those comparisons get for that region?

Yes. So COVID was an equal opportunity to [pressure] in terms of sales and impacted all of our regions in week 50, which is the middle week of March, if you will, and everybody was down significantly in comp. So the first full quarter of really tough business will be the Q1 quarter that you called out and COVID negatively impacted West Texas, first from a COVID concern but then obviously, the follow-on was global economy shut down, and we saw a reduction in WTI and rigs drying up, if you will, or pulled off-line. So that's what caused the South to be disproportionately impacted. So long story short, you nailed it in terms of it will be Q1 where we'll see outsized negative business in the South compared to some improvement in the North and the West. If you recall, April and May were difficult months for us. And then in June, kind of the West and the North improved a bit and the South was still under pressure.

Yes. Okay. That's very helpful. And then my last question, I know the absence of rodeos and festivals and concerts has been a negative for your business. I'm just wondering what visibility do you have in terms of some of those things coming back online. I know Houston has been pushed back from March to May, and hopefully, it happens in May. And I guess, maybe start with Houston. So for the fourth quarter, you're going to have 0 days of the Houston Rodeo this year versus 8 last year. But then in May, hopefully, you'll have 20 versus 0. I mean can you maybe just address how you think about -- I believe that's the most important rodeo for you guys. And I'm just curious if that's material to the fourth quarter? And then what visibility, if any, do you have on some of these things coming back online?

Great question, Mitch. I don't think the lack of Houston Rodeo in March this year is going to be that impactful to our business. Of course, we'd love to have the rodeo held. But the reality is, as Jim has described, we're going to have phenomenal numbers in March because there's some sales happening. Even if it's not from Houston Rodeo, there will still be normal sales as opposed to COVID-impacted sales in March. One thing we don't know about on Houston Rodeo is that they've talked about keeping the kid events at the normal timing. Now that may have changed or may change but -- so there may be some Houston Rodeo business in March. But again, it's not going to be meaningful to the quarter in any way. And it will be interesting to see what happens in May when they hold the rodeo given vaccine rollout, et cetera, et cetera, if we'll have a full-fledged rodeo with the concert or not. I mean those are the things that are hard for us to predict. I don't think we've seen anybody announcing a concert tour this year yet. So we'll see.

Is that business typically several million dollars for you guys? Or…

What we've said, I think, in the past is on the year, it's a low single-digit piece of our business. So we're going to call it 2% or 3%. It ebbs and flows in different parts of the year. I think Greg is right, though. We absolutely want for a variety of reasons. We want that business to come back, we want those events come back online, et cetera. The noise of it, though, I think it's completely subsumed in a much bigger noise of COVID and wrapping COVID numbers. So while we might have a little bit of a pressure point in margin, more help in May, cycling the numbers that we're cycling, they're just so soft, given what happened in the very beginning of COVID, that I think it will be very hard to understand what's going on with the rodeo piece of it.

And our next question is from Jeremy Hamblin from Craig-Hallum.

And I'll add my congratulations on the business momentum and strong execution. I wanted to revisit something you mentioned, Greg, on the potential for longer-term EBIT margins. And the prospects for not just 10% EBIT margins, but something closer to 13% or 14%. Could you give us a sense of that extra 300 to 400 basis points? The drivers or the components of that, is that coming from product margins? Is it coming from SG&A leverage? I don't know how clearly you've thought about it, though, in detail of how we get from 10% to 13% to 14%. I'm just wondering if you could give us a sense for where those drivers are going to come from.

Yes, good question, Jeremy. I haven't put pencil to paper and map this out over the next number of years, right? But you've touched on the things that would be important. Expanding -- continuing to expand merchandise margins is something that we want to continue to do, whether it's more exclusive brand penetration or better margins on the exclusive brands. It's the continued philosophy around full price selling, less promotions. We talked about the fact that we're in a cleaner inventory position and so maintaining that is important of course. I think getting leverage out of the occupancy line is important. And we'll get some leverage we believe, for sure, in operating expense as we grow the store base. So it's all the things kind of that you talked about.

Okay. And then a follow-up on that. In terms of thinking about store counts and so forth, I think you mentioned this not that long ago. But in terms of thinking about your opportunity, how much do you think it may have expanded given the kind of current conditions of some of maybe your weakened competitors, the mom-and-pop type stores. Is it something where maybe it's not that you're doubling your store base, but tripling your store base? Can you give a sense of magnitude on where you think it's evolved to?

Another good question, Jeremy. We are further emboldened by our success of stores opened in Ohio and Pennsylvania, and how strong those opened, again, kind of in a COVID environment. In addition to that, the stores we've opened in California that we would have thought might cannibalize an existing store and really had no impact, gives us confidence that the 500 number we put out there is, I'm going to use the word conservative. We haven't started to update our store count potential work. We're going to do that, of course, but it's a little bit tone deaf probably today to come out and tell you that we think that 500 is really 600 or something like that, just given COVID. What we have learned is our customer -- in the COVID environment, what we have learned is our customer does enjoy shopping in our stores. The penetration of e-commerce to total sales is roughly in line with what it was last year in Q3, and that tells us that our customer wants to shop stores. So we have a lot of confidence in building more stores. And I guess, I'd say, stay tuned in terms of what that opportunity is.

Yes. No doubt interesting and somewhat unique given the trends that you're seeing. Last thing I wanted to ask, again, coming back to some of your -- some of the mom-and-pop type competition. Have you been approached or are you getting approached with greater frequency now as we're in 2021? And perhaps their businesses are recovering to some degree, maybe not the same magnitude as yours. But wanted to get a sense for whether or not some of the mom-and-pops that might be hurting might not have as much of a long-term horizon is Boot Barn.

Are they approaching you about potentially doing deals? Are you getting increase in inbound calls about potentially acquiring some of these stores? And if so, how do we think about funding on the capital side of the equation? If you have maybe some really good opportunities to consolidate geographies, maybe even geographies that you're not currently in. Any color you can share on that would be helpful.

Sure. Jim, I'd say there's probably more inbound calls over the last 90 days than there were pre-COVID. But it's not game-changing numbers. And I think we've talked about this before, we've acquired a -- we've acquired a 1-store company a couple of years ago, we acquired a 2-store chain called Drysdales that did the volume of, say, 5 Boot Barn stores. But historically, we've tried to buy operators -- we bought a chain of 3 stores and 4 stores. And before that, we bought 25 store chains. And Jim touched on this that there's one regional guy out there that's pretty big and we respect a lot. But there's not a lot of folks in between them, [calendars] and a 4-store chain or a 3-store chain. So I'd say the numbers are up, but I wouldn't say they're all of interest to us. We would kind of be interested more in a 3- or 4-store chains.

And then in terms of capital structure, et cetera, I mean, I think I talked about the fact that our term loan is $112 million. We've got nothing drawn on the ABL, and we have $76 million of cash. So I think we've got the wherewithal to probably fund just about any acquisition that we would have interest in, in our industry.

And our next question is from Jay Sole with UBS.

Great. A question, just as everybody is watching the pace of vaccine rollouts, does it change your view of how you're thinking about buying inventory for the first quarter of next fiscal year or the second quarter?

Not really. Right now we're chasing product to get back in stock as quickly as we can, we were -- last year at this time, we were a little heavy. Now we're probably a little light. And perhaps we want to get to that just right position going forward. We want to have a full assortment, the full-size runs for boots and denim and cowboy hats, workwear and Western, et cetera. And if vaccines and the COVID environment improves greatly, we'll be ready. And if it takes longer, we'll just turn our inventory a little slower. We don't really run the risk of bringing in a whole bit of inventory having something turn south on us and then having a bunch of markdowns.

So we'll build back the assortments that we feel are a little light, we'll add to some of the businesses that we're trying to expand. Some of those are within the country initiative. And we are certainly looking forward playing, which is much more enjoyable, playing offense than playing defense. And we'll -- I think we'll be very well positioned going into the new fiscal year with some more work to do over the next couple of months to shore up some -- a few select departments that are still probably a little light.

Got it. Okay. That's super helpful. Maybe if I could ask one more. Just a lot of talk over the holiday season about freight cost pressures and port issues. How do you see that impacting the business as we go forward? Do you think the freight cost pressures will recede a little bit? Do you see the port issues impacting the business? Will those get easier? What's your thought?

Jay, it's Greg. It's certainly something that is impacting us, right? There's a bunch of ships out in the water outside of Long Beach and Los Angeles ports, the dock workers are being affected by COVID or infected by COVID, and therefore, harder for them to work. I think the governor is trying to get them vaccinated quicker, but there's a strain, certainly in getting those ships unloaded in our inventory that we can sell. So -- and to your point on freight costs, we're seeing that as well that with the shortage of equipment and again, reduced productivity perhaps of the ports that our freight costs would probably be a pressure point for us over the next, I don't know, 3 months or 6 months, but I think it will take a bit of time for this to work its way through.

We were able to offset a lot of the freight issues that other retailers called out during the holiday quarter, fortunately. So a lot of people called out UPS surcharges and issues of getting product delivery. And we -- some gratitude going to the supply chain and the folks in Wichita that run the direct user fulfillment. But we just were able to avoid a big uptick in the freight charges, and we'll see what happens going forward.

And we have reached the end of the question-and-answer session. And I'll now turn the call over to Jim Conroy for closing remarks.

Very good. Well, thank you, everyone, for joining today's call. We look forward to speaking with you all on our fourth quarter earnings call. Take care.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.