Boot Barn Holdings Inc (BOOT) 2020 Q4 法說會逐字稿

Good day, everyone. And welcome to the Boot Barn Holdings' Fourth Quarter Fiscal Year 2020 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. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's Fourth Quarter and Fiscal 2020 Earnings Results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Financial Officer.

A copy of today's press release is available on the Investor Relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days on the Investor Relations section of the company's website.

I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Boot Barn's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter fiscal 2020 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.

On this call, Jim will begin by providing an update on actions we have taken in response to the COVID-19 crisis. He will then briefly discuss the highlights of our annual performance and current business before concluding with a discussion of our strategic initiatives. Greg will then review the financial results. Following Greg, we will open up the call for your questions.

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.

These are unprecedented times, and our hearts go out to those who are suffering as a result of the COVID-19 crisis. We would like to express our gratitude to the medical professionals who have been caring for infected patients, for the doctors and scientists working to find a solution and for all essential workers performing critical functions to keep the country operating on a daily basis.

We often say that our customers feed America, protect America and build America. Accordingly, when the COVID crisis began to build momentum, the entire Boot Barn team moved with haste to ensure that we would be able to safely provide essential merchandise to our core customers that were continuing to shop with us for products necessary to perform their jobs.

We immediately transformed both our physical stores and our e-commerce sites to meet their specific needs. We expanded assortments in key areas. We merchandised the stores and the site to prioritize essential products, offered advantageous pricing and developed multiple safe ways to shop and buy critical items. Nothing gives us more pride than continuing to support these American workers, farmers, ranchers, first responders and the communities we serve during this difficult time. I would personally like to thank all the Boot Barn associates who have demonstrated tremendous leadership in developing innovative and safe ways to continue to serve our customers. It is a testament to the powerful culture across the entire organization. And I am proud to be a part of it.

I would now like to present a time line as to some of the actions we have taken during the last 2 months. As the crisis began to unfold, we formed an internal COVID task force that meets daily. We spent the initial part of each meeting synthesizing the learnings from the prior day, including new directives from the CDC, guidelines from the federal and local government, and input from our field organization.

In nearly every state where we operate, Boot Barn stores remain open as it is recognized that we serve essential workers. Working closely with local municipalities, we've been able to keep open approximately 200 of the roughly 250 stores throughout the crisis. In order to do so, however, we had to address several significant issues, including sanitation, operational procedures and store staffing.

From a sanitation perspective, we have significantly augmented our in-store cleaning process to ensure that surfaces are cleaned on a consistent basis. We distributed hand sanitizer, disinfectant and cleaning supplies. We've installed plexiglass barriers at the POS registers and distributed face coverings for all of our store associates.

In terms of operational procedures, we quickly pivoted to help ensure a safe shopping environment for both our associates and our customers. We established prescribed maximum occupancy per store. We implemented social distancing behaviors. We changed our boot sizing, fitting room and returns procedures and took several other measures to enable us to continue to operate safely.

Additionally, we augmented and launched several other services that further integrated our digital and store channels, including upgrading Buy Online, Pick-Up In Store capabilities and adding a curbside pickup option.

Finally, from a staffing perspective, we worked in very close partnership with our stores team. First, every associate was given the choice to take a voluntary furlough where they would be paid for a period of time and maintain their health insurance benefits. Alternatively, they could continue to work in the stores where they would receive premium pay for the hours that they worked.

To give you a glimpse into the culture of the company, we were able to open nearly every store that met the local legal requirement with voluntary associates with only a small number of stores not able to assemble a team. Compared to many other retailers, we were quite fortunate to be able to continue operations, service our customers and preserve more than 2,000 jobs in our stores. That said, given the health concerns and the stay-at-home directives, we experienced a significant decline in traffic and sales volume across the store base.

To quantify this, on a quarter-to-date basis through March 7, the end of the second week of fiscal March, and prior to the onset of the COVID-19 health crisis, our consolidated same-store sales had grown approximately 3.4%. We expected sales to accelerate the balance of the quarter due in part to the Houston Rodeo that began 1 week later this year and is a very strong sales contributor for us. At that point in the quarter, we were also experiencing a meaningful year-over-year improvement in merchandise margin rate due to a 600 basis point increase in exclusive brand penetration and more full price selling.

With the combination of strong sales and improved margin, we were projecting another very strong quarter and expected to meet our EPS guidance. However, as a result of COVID-19 and stay-at-home directives, our business declined dramatically in the final 3 weeks of the quarter. Many events were delayed or canceled, including the remaining 12 days of the 20-day Houston Rodeo.

As shopping for Houston Rodeo began, we saw a nice acceleration in same-store sales, which then declined to a negative 8% in the third week of fiscal March before sliding to more than 50% declines for the last 2 weeks of March. Given that our same-store sales metric removes stores that have been closed for more than 5 consecutive days, our actual sales erosion was even more pronounced during this period as many stores were contributing 0 sales but were excluded from the same-store sales calculation.

In response to the significant decline in business, we moved quickly to take measures to reduce expenses. Some of these measures include pay cuts for the management team and Board of Directors, reduced hours of operations for the stores, furloughs of approximately 40% of the employees across our store support center and distribution centers, a significant reduction in our marketing spend and a thorough review of all third-party spending, with an eye toward minimizing all the mission-critical expenses.

In addition to our focus on expense reduction, we also quickly moved to manage our cash position. While we are confident in the strength of the balance sheet, we took certain steps out of an abundance of caution. Accordingly, we have partnered with vendors and landlords to defer payments. We have significantly reduced capital expenditures, and we have delayed the opening of many new stores.

We also increased the draw on our line of credit to ensure the availability of cash during this crisis period. These actions have enabled us to maintain our strong liquidity position. And I would like to personally thank our vendors for demonstrating true partnership as we all try to navigate this unprecedented time. We are confident that we are taking the necessary steps to preserve cash as we work through this period of sluggish sales and prepare for the business to return to growth.

Throughout this entire process, we have prioritized the health, safety and the financial well-being of our sales associates. In addition to measures already described, many of us have added to our personal contributions to our internal charity called Bootstraps. This fund is an employee-operated, employee-funded charity, where 100% of every dollar donated goes to Boot Barn employees in need.

Given the hardship that COVID has created, we expect to see an uptick in applications for support, which we hope will be more than offset by the increased funding from the entire Boot Barn family.

At this point, we will shift our discussion to a broader review of our annual financial performance. Despite the challenging finish, fiscal 2020 was an outstanding year for Boot Barn. Consolidated same-store sales growth increased 5%, cycling a plus 10% same-store sales in the prior year. E-commerce comped up 7.4%, and retail stores comped up 4.5%. The combination of strong sales and merchandise margin, coupled with a strong focus on EBIT profitability, drove a 40 basis point increase in EBIT margin to 8.7% and 25% EPS growth on a tax-adjusted basis.

We ended the year with 259 stores and enhanced our leading position serving the western and work lifestyles across the country. We continued the transformation of the Boot Barn brand, which has enabled us to further increase the size of our customer database and drive top line sales while reducing our promotional posture.

Turning now to current business. While the environment has created unique challenges, we believe that Boot Barn will emerge strong, and we'll have opportunities to continue to take market share from competitors. During fiscal April, same-store sales declined 45%, with retail stores declining more than 60% and e-commerce growing more than 40%.

While our business saw significant declines in April, midway through the month, we saw a sharp improvement in our sales, both online and in our retail stores, which we believe was the result of consumers receiving government stimulus payments. We have seen an improving trend with each passing week, with strong e-commerce business mitigating the decline in-store sales.

Quarter-to-date through Saturday, our consolidated same-store sales have declined approximately 30%, with stores down approximately 50% and e-commerce up approximately 60%. Given the fact that a portion of our stores have been closed during the last several weeks, total sales quarter-to-date have declined approximately 40%. While the business has declined sharply due to the pandemic, we are seeing some encouraging results beginning to emerge with last week's consolidated same-store sales down only single digits.

From a merchandise perspective, the business has shifted dramatically to products required in critical industries. Work boots, work apparel and basic denim now comprise half of the stores business, which is a significant increase in historical sales penetration. While discretionary and more fashionable products will likely build over time, we expect that the business will be driven by functional products for the next couple of quarters.

Accordingly, we are pivoting our assortment to maximize the sales opportunity. From a channel perspective, we continue to invest appropriately in driving traffic to the e-commerce business. As both traffic and conversion have increased, we have taken the opportunity to fuel that business with additional pay-per-click marketing dollars. Unfortunately, the work we have completed over the past couple of years on our e-commerce infrastructure has enabled us to absorb the sharp increase in sales with no significant change in fixed cost infrastructure.

While our merchants have managed our inventory extremely well throughout this period, we do expect to see headwinds to merchandise margin for the foreseeable future. First, as many vendors are trying to sell through their inventories, they have temporarily relaxed their minimum price guidelines and e-commerce selling. Second, this dynamic, coupled with outsized growth in our e-commerce channel, is exacerbating the erosion of consolidated merchandise margin due to the sales composition of the 2 channels. And finally, we have taken a more aggressive stance in moving through spring clearing, which will have a modest impact on margin in the short term.

At this point, I would now like to provide a view into our 4 strategies. Typically, on the fourth quarter call, we outline the major initiatives under each growth strategy that we intend to execute for the year. Given the current environment, I will simply summarize how we expect each strategy will be impacted. Let's begin with store sales growth.

The work we have been doing over the past few years had us well positioned for another solid years of sales growth in both our store and e-commerce channels. However, with the abrupt change in the retail environment due to COVID-19, our merchandising team has had to pivot extremely quickly to both maximize new sales opportunities and minimize inventory risk. We've expanded our focus on the work boots category, adding a broader assortment to capture additional industries and to end users. We have also expanded our assortment of product for first responders and health care workers, including both industry-specific footwear as well as scrubs in many of our stores.

While we have been looking for sales growth opportunities, at the same time, we've also been deferring, canceling and shifting receipts of merchandise in other categories that are not in high demand and have more inherent inventory risk, like ladies apparel.

As most of the Boot Barn assortment does serve a functional purpose, the fashion liability remains relatively small, mostly limited to ladies apparel and a portion of ladies boots. We plan to clear some of this merchandise at a discount over the next few months, but expect the impact on merchandise margin from the additional clearance to be relatively minor.

As we see the economy reopening, it is encouraging to see the sales trend improving sequentially. As the industry leader, we feel that customers will continue to be loyal to Boot Barn, and we expect to take market share. However, we are also cognizant of the fact that we will face several headwinds in the months to come. The combination of high unemployment, extremely depressed oil prices and a shift toward online shopping will present challenges for us as we progress through the next 6 to 12 months. Accordingly, we will operate very prudently from the inventory, expense and capital expenditures point of view, and look for places to maximize our strength and shore up our vulnerabilities.

Turning to our next strategic initiative, exclusive brands. We are extremely proud of the outsized growth we have experienced in this portion of our business. Historically, exclusive brands penetration grew 2 to 3 percentage points annually. Recently, we have seen great success in each of our 6 major brands, and that growth rate was approximately double at between 500 to 600 basis points of growth in each of the last several quarters. We had invested in our design and development team, grown our legacy brands and launched new brands. In fact, over the past 3 fiscal years, we have grown our exclusive brand penetration from 11% to 22%, with the most recent quarter exceeding 24% of total sales.

During this time, we significantly improved our company-wide merchandise margin and saw sales accelerate. The entire team deserves a great deal of credit for developing this portion of our business.

As we look forward over the next 12 to 18 months, we are taking a more cautious approach with the growth in exclusive brands. The supply chain for this product is different than our supply chain for third-party brands. For exclusive brands, we need to make product commitments much further ahead, pin for goods earlier in the cycle and hold more inventory. Given the uncertainty of the current environment, we intend to take a more risk-mitigated approach until visibility becomes more clear. We still have the ability to push for growth in the more functional categories like work boots, but will need to pull back on some of the more fashionable merchandise classifications.

In addition to our plan to be more conservative with exclusive brands, the composition of the business will also impact our penetration rates. As e-commerce grows disproportionately relative to store growth, this will negatively impact the mix of our own brands. Similarly, as we expect that growth in ladies apparel and ladies boots will lag the overall growth, this will further drive our composition of exclusive brands down. We expect that the combination of managing supply chain risk with the expected changes in the composition of our sales will result in exclusive brand penetration being roughly flat compared to the prior year. We will closely monitor the quickly changing environment, and we are prepared to reengage in outsized growth on short notice as appropriate.

Our third initiative is new store growth. Prior to the pandemic, we continue to see success in our new stores, adding 20 stores during the fiscal year, including stores in Pennsylvania and Ohio. Each group of stores opened over the past few years was projected to meet or exceed our new store payback hurdle of 3 years or better.

As new stores are our single biggest usage of capital, we intend to slow our growth until we gain confidence in the external environment. We are targeting the opening of approximately 10 stores in fiscal 2021, plus the 5 that were deferred from March. For Boot Barn, the time line for new store development is only 6 months. Accordingly, if we begin to see a healthier outlook, we can accelerate this growth and open additional stores at the tail end of fiscal 2021.

Our final strategy, omnichannel, is one area that has seen an improving trend, partly due to the current environment. Many of the improvements we have made to bootbarn.com over the past 12 months, like same-day order processing in our DC, Buy Online, Pick-Up In Store and curbside pickup have proven to be worthwhile investments, particularly during this time.

We've also spent considerable time rebranding Sheplers and transforming that site. Historically, Sheplers has been the deep discount site that would attract much of its traffic from pay-per-click advertising and convert that traffic with promotional pricing. Over the past few months, that business has been repositioned to celebrate the iconic heritage of a western brand that is more than 100 years old. We have completely revamped the branding, upgraded the creative look and feel substantially and dramatically changed the promotional posture of the site. We expected to see an erosion in traffic and sales with an increase in merchandise margin. Instead, we have seen a steady increase in sales with that business turning positive comp.

Looking forward, we are in the process of adding 2 more capabilities to our e-commerce business. First, we are working on the ability to fulfill e-commerce orders from our stores in addition to the Wichita fulfillment center. This would enable us to reach consumers more quickly with leveraged store inventory and could enable us to clear slower-moving merchandise without a deep clearance discount. Additionally, we are about to roll out testing of same-day delivery from our stores using a third-party delivery company.

I do want to commend the e-commerce and creative teams for their great work on both online brand and for the agility to add meaningful digital capabilities quickly to enable us to maximize the online sales opportunities. In this environment, these enhancements will help us to continue to build market share and gain customer loyalty.

At this point, I'd like to turn the call over to Greg Hackman.

Thank you, Jim. Good afternoon, everyone. In the fourth quarter, net sales decreased 2.1% to $189 million. The decline in sales was driven by a 4.7% decline in same-store sales. Same-store sales were solid during the first 10 weeks of the quarter before declining significantly during the last 3 weeks, primarily from the decreased store traffic as customers stayed at home in response to the COVID-19 crisis.

During the fourth quarter, we added 8 new stores, bringing our store count at the end of the quarter to 259 stores in 35 states. Gross profit decreased 8.6% to $58 million or 30.7% of sales compared to gross profit of $63.4 million or 32.9% of sales in the prior year period. The 220 basis point decrease in gross profit rate resulted from a 210 basis point increase in buying and occupancy costs and a 10 basis point decline in merchandise margin rate. The deleverage in buying and occupancy costs was primarily a result of lower volume sales.

Merchandise margin declined 10 basis points as a result of higher shrink when compared to lower-than-normal shrink in the prior year and higher outbound freight resulting from growth in e-commerce sales. These increases more than offset the product margin expansion from increased exclusive brand penetration and more full-price selling.

Operating expense for the quarter was $48.3 million or 25.6% of sales compared to $46.9 million or 24.3% of sales in the prior year period. Operating expense increased primarily as a result of additional expenses for both new and acquired stores and COVID-19-related expenses. Operating expense as a percentage of sales increased by 130 basis points as a result of deleverage from lower sales in the current year period and COVID-19-related expenses in the current year period.

Income from operations was $9.7 million or 5.1% of sales in the quarter compared to $16.5 million or 8.6% of sales in the prior year period. This decline in income from operations was a result of the negative impact of sales and gross margin and increased operating expenses due to COVID-19.

Income tax expense was $900,000 in the quarter compared to $3.7 million in the prior year period, resulting in an effective income tax rate of 14% in the fourth quarter. Our lower income tax rate is the result of income tax accounting for share-based compensation and the realization of a state tax operating loss that was previously reserved.

Net income was $5.7 million or $0.20 per diluted share compared to $8.7 million or $0.30 per diluted share in the prior year period. Net income per diluted share in the current year period includes $0.01 per share benefit due to income tax accounting for share-based compensation and $0.01 per share benefit from the realization of a tax operating loss. Net income per diluted share in the prior year period includes $0.02 per share of tax expense related to a return to provision adjustment. Excluding the tax adjustments in both periods, net income per diluted share was $0.18 compared to $0.32 in the prior year period.

Turning to the balance sheet. Inventory increased approximately 9.3% on a comp store basis compared to last year. On a consolidated basis, inventory rose 20% to $289 million compared to a year ago. This increase was primarily driven by inventory for new and acquired stores added in the last 12 months and an increase in inventory at our Fontana distribution center, which supports our exclusive brands and new store openings.

As Jim mentioned, we have significantly slowed merchandise purchases. We expect these measures to reduce our inventory balance over the course of the first quarter and expect that to continue throughout the year.

As of March 28, 2020, we had a total of $241 million of debt outstanding, including a $111 million term loan and $130 million outstanding on our $165 million revolving line of credit. We have $35 million of availability on our revolver and $70 million in cash on hand at the end of the quarter. Our net debt leverage ratio at the end of the fiscal year was 1.7.

We believe we are in a strong position financially, and we are confident that we are taking the appropriate measures to navigate the business and expect our cash from operations will be sufficient to support our business and anticipated capital expenditures for the foreseeable future.

Given the lack of visibility into the business as a result of COVID-19, the company is not providing first quarter and fiscal year 2021 guidance at this time.

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

Thanks, Greg. Fiscal 2020 was a great year for Boot Barn. While things may be difficult in the coming months, we are confident in our ability to navigate through these challenging times in the short term and set the company up for a solid return to growth over the longer term.

Before we open up the call to take your questions, I would like to thank the entire Boot Barn organization for their commitment and execution in fiscal 2020, which shaped up to be a great year financially. But more than that, I am humbled by the perseverance, loyalty and resolve of the entire organization as we have faced into the adversity over the past few months. I would like to especially recognize our stores organization that has shown incredible leadership and continues to take care of customers on the front line every day.

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

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

Maybe on gross margin, what's your expectation? Or any range of outcomes to consider for first quarter merchandise margins, maybe as we put together the multiple moving pieces that you just walked through?

Matt, we really can't give you a lot of guidance. I mean, I think Jim laid out some of the pressures that are impacted -- impacting margin. As we see, the e-commerce business is comping plus 60 on a same-store sales basis and now represents 38% of our total business. That will certainly be a headwind. We do have some clearance merchandise that we haven't been able to clear through in a meaningful way as the business was largely work-focused. So we really can't help you much more than lay those kind of pressure points out. And the fact -- the other fact on e-commerce is that some of our vendors have reduced the allowed upon selling price online as they want to move through product as well. So I think Jim laid those out, but we really can't put a range around that.

Sure. And then maybe just a follow-up. So by region, have you seen any notable impact on sales from some of the more recent volatility in the energy markets? And maybe just higher level, how exposed are you to this industry overall? And just how do you think the company is positioned today relative to 2016 or 2017?

Well we haven't really seen a big difference geographically. I'd caution everybody, it's a little hard to read through the numbers that we get every day, right? We have some places that stores are closed, some places where they're in stay-at-home directives or more strict, et cetera. Having said that, the geographical differences haven't become apparent.

In terms of our exposure, Texas continues to be our #1 state. So what we saw last time was the oil drilling markets got impacted first and then sort of the secondary or outlying markets got impacted right after that. And we saw, as you well know, Matt, having been with us through that period, we saw 4 consecutive quarters of negative 5 comps in Texas.

When we look at the business now, 2 early reads that we look for are telling us different things. So one, we would see a reduction in sales of flame-resistant work apparel. And we have seen that. Flame-resistant work apparel is comping down. Conversely, the boots that are worn in that industry are distinctively pull-on work boots as opposed to lace-up work boots, and the pull-on work boot business isn't really bad at all. In fact, it's -- given the environment, it's actually holding up just fine.

So we are going to watch it closely, and there are some places that we're exposed in maybe slightly less than we were back in 2015. Because we are in more stage, we have strengthened our lady's apparel business. But we still sell boots to guys that are in West Texas and in Minot, Dakota, and the northern part of Colorado, and to guys and men and women out working the oil refining industry across Houston.

So it's something that we'll need to watch closely. Presently, we can't really discern a big falloff in that business relative to the rest of the business. So that's a bit encouraging. But when you look at the rig count numbers, they are falling precipitously.

Great. And last one for me, just to circle back to that '16 and '17 because that was the last time I think that you cut square footage.

I guess, maybe, Jim, what drove your decision to cut store growth this time around? And what would you need to see to reaccelerate growth?

I would say as we and many other retailers saw the onset of this pandemic, you do some scenario planning, and you could play out some just terrible Draconian scenarios where the economy doesn't open and stores don't open and people don't shop. So we went into a complete lockdown on cash and capital and expense in the beginning parts of April or the end of March, beginning of April.

Presently, things are emerging a little bit, right? Presently, markets are reopening. Everybody's watching the news closely to see what's happening to, first, the health crisis; and secondarily, the economy. But if the current trajectory continues, I would say the outlook is getting healthier and healthier, and we can reengage in store openings in relatively short order. If you think about the real estate process, we were looking at multiple deals, and deals were somewhere along the pipeline prior to being signed leases. So we could just dust those real estate packages off and get those stores reopened.

I think what we would have to see is a few months of some sustainable business, clear visibility and some sense of security that we won't see a reemergence of the COVID crisis as we get into the fall sort of driving everybody back into a cash conservation.

So I would say now we are absolutely taking a pretty conservative stance. And more recently, we're feeling a little bit more bullish, but we're certainly not yet prepared to become more aggressive until we see that more consistently.

Our next question comes from the line of Oliver Chen.

It's Max for Oliver. So first, as we think about various options that you have in your toolkit to deal with the weakness in the oil markets, as we look ahead, how do you characterize more offensive versus defensive initiatives? And then also, as demand from those core shoppers is expected to be pressured, what are top opportunities to grow your new shopper base? And then we have a follow-up question.

Okay. On the first one, relative to oil, defensively, the playbook is relatively straightforward. We manage expenses very carefully in those markets and manage our labor very carefully. What we did last time is we changed the inventory assortment, particularly for the work customer that was typically looking for flame-resistant merchandise, and we brought in less expensive options because, generally, that worker, that American worker, that oil guy, will go out and try to get a different job and still needs work gear but not necessarily flame-resistant work gear. So we'll look at expenses from a labor perspective, we'll look at inventory levels, we'll look at the composition of our assortment.

From an offense standpoint, we've -- over the last several years, we've really been developing our commercial accounts business. So we'll continue to try to source additional industrial accounts and grow those businesses. 5 or 6 years ago, we probably had 2 to 3 people in that organization. Now we probably have 10 people in that organization. So that could help to ease the burden if the oil patch gets weaker.

We've also been accumulating more customers, and we've been pretty vociferous about the change in customer count on a same-store sales basis, so that will help. We have another segment that we're starting to nurture, the country segment, so to speak, that is sort of an offshoot of our core western guy. And that's another area for growth. So we'll continue to try to expand the pool of customers that we can address.

One of the things we've seen, and it's been more on the e-commerce channel is we've seen new customers being introduced to Boot Barn through our online business. So given the shift to online shopping, we've been much more present from a pay-per-click standpoint, and we've seen a pickup in customer acquisition online. So that may also help us continue to find growth areas.

So I think when you put all those things together, we'll manage through it like we did last time. I think we're better positioned than most of our competitors, particularly the mom-and-pop guys in this space. So we'll look to be taking share from them.

Got it. And then can you just discuss early performance and learnings from curbside? And is this a service that you expect to maintain once the environment normalizes?

Sure. Well, necessity is the mother of invention, right? And I think many retailers have brought a lot of new capabilities to bear throughout this crisis period as we have. And it's certainly something that we will most likely continue going forward. We're curious to see how same-day delivery operates with us from the stores. That's something that we're really keen on getting up and operating. And if it gains traction, we want it to be perfected prior to getting into the holiday period, so we can extend our online shopping even further closer to the holidays and not fall victim to the shipping window.

So right now, I'd expect all of the new capabilities to continue forward. I would say that while we were able to get them launched quickly if all -- they all are operating extremely well with very few hiccups, it's still a relatively small part of our business today. But we'll continue to push and market those services more and more, and it may become a more familiar way for people to shop going forward.

Our next question comes from the line of Peter Keith with Piper Sandler.

I appreciate some of the color on the quarter-to-date trends. Curious if you could maybe just kind of fill in with a little bit more detail.

Certainly, you guys are a stimulus check beneficiary, but a bulk of those direct deposits came in, in mid-April. And yes, that seems like, at least your comp is still getting less bad here in the most recent week. So is it simply dynamic as states are opening up? And do you have stores in those states that you're seeing a more meaningful lift in sales as customers are coming back?

It's a very good question, Peter. And we'll try to give you as honest an answer as we possibly can. We -- part of us wants to feel encouraged by the sequential improvement in the business. And you're right on the timing of the stimulus checks, of course. On the other hand, we are also cognizant of some of the realities out there, right?

We happen to be a retailer that's operating, and many retailers, particularly malls, are closed. So for every consumable -- or consumer dollar out there, we might be getting preferential treatment today. And as more and more retailers open, we do worry that we'll be splitting that up with more people.

We do have a -- and this is relatively minor in the grand scheme of things, but for the last few days, the last week or so, we've had a clearance sale going on that started earlier this year than it did last year. So that might be artificially driving sales.

So again, I would just say that we are, of course, cautiously optimistic that the business continues to improve. We're also pragmatic enough to know that there's a number of other pretty strong forces at play, and it's hard to isolate one from the other.

Okay. And then just pivoting maybe over to the competitive landscape. Obviously, it's intriguing that you guys are kind of the gorilla in the space. You compete against a lot of smaller 1- to 2-store retailers. Are you hearing about any closures at this point? Or conversely, are you even getting calls, looking -- people that want to sell their business?

Just curious if the competitive landscape has shifted downward in a way that you might be aware of at this point?

Peter, we have heard and seen some competitors closing up or choosing not to reopen as a result. I wouldn't say we've seen a lot of that, but we have certainly seen that in some markets. And my phone hasn't been ringing off the hook, but I do expect that as states start to open up and allow people to assess their business that, in fact, people may be reaching out to us and talking to us as a result.

So we'll see how that plays out, but it certainly seems like it could be a good opportunity for us.

Okay. Great. And maybe one last one. You said you had 50 stores that were closed. Are those remaining closed? Or are they -- those are starting to open now?

So we had about 200 open through most of this COVID crisis. Having said that, I think as of today or yesterday, we had 242 of the 260 stores open. So about 18 of the 260 haven't reopened yet.

Our next question comes from the line of Jonathan Komp from Baird.

Maybe just a follow-up on some of the discussions you've had, but thinking back a few years, you saw maybe 8 quarters or so, give or take, of some pretty significant comps pressure with a lot of different factors at play then. But how do you think about kind of the duration of the impact you're seeing today and just even thinking differently about the parts of your business, work?

And then separately, maybe any thoughts on what will be needed to get the fashion side of things back?

I think when we compare to last time, I do think we're a little bit more diversified. Our assortment is a little bit broader so we do have some other areas to find growth. The other thing that we have somewhat of a luxury relative to 2015, 2016 is we're in a much stronger position from a capital structure standpoint, a liquidity standpoint. So one of the things that created nervousness last time, as you well remember, was the combination of slowing sales and an increasing leverage ratio. So that dynamic isn't nearly as concerning as it was back then.

I also I think we've improved as a company from a merchandising and marketing perspective, using analytics to drive new customer acquisition and really trying to understand how we can maximize lifetime value of customers more and access new customer markets, right? So our segmentation is really the underpinning of how we go to market. And fortunately, the -- this new split between a core western customer and a more casual country customer is already well underway. And once we feel like it's appropriate to market heavily to that customer, we have some weapons in place to introduce more people to the Boot Barn brand.

So I think when you pull all of that together, assuming a more normal environment, which of course, is a pretty significant simplifying assumption, I think we can want the softness in the oil patch to some degree. Sort of what we did last time, to be honest. I mean, last time we got the flattish comps and didn't really have any massively negative quarters for the last 10 years.

So maybe we won't be plus 10, but I do think we could still have a pretty decent business even in a difficult oil environment, if we can get through some of these other challenges that we and the rest of the world are facing.

And do you think on that fashion and lifestyle side, I mean, how significant are music events or rodeo, things of that nature? Like, do you think you'd need those types of events to come back for any meaningful portion -- a part of that business?

They definitely do drive the business in the local markets when those events happen. That said, in the grand scheme of things, it's a relatively small piece of our business going after festival wear and concerts. But it's another headwind that we'll face where rodeos, country music concerts, stagecoach, other festivals are being canceled, that's just another part of our business that is going to have to find other outlets to sell the merchandise.

So it's a good -- it's an excellent question, an insightful question, and it is a bit concerning. I think the pressure that we are -- or we might see an oil patch would be a higher magnitude than the elimination of concerts and events soon.

Okay. That's really helpful. Maybe just the last one for me. Maybe just want to understand the gross margin or product margin mix impact from the near-term prioritization of the work categories. Just any major mixed call-outs that you can give us?

Sure. The overarching answer is unless there's dramatic shifts in the merchandise classifications, a different composition of departmental selling doesn't massively change our merchandise margin mix. If there's one small silver lining to the oil patch, flame-resistant work apparel happens to be a low-margin business for us, probably one of the lowest. But that's -- it's not a -- it would be very difficult for one business to grow so much and another business to decline so much where mix by department has a major impact on the merchandise margin.

Having said that, the composition that is meaningful is e-commerce versus stores. Our margin rate online is lower than in the stores for a variety of reasons. Part of that is pricing, particularly on Sheplers. Part of that is the exclusive brand penetration online is lower than exclusive brand penetration in the stores. And that is an area that is a bit more concerning where we'll mix out or composition out our margin rate down a bit.

That said, if the very recent trajectory of our stores business continues to build, which is a big if, it will help moderate that composition impact over time.

Our next question comes from the line of Dylan Carden from William Blair.

Yes. Just curious with these events gone, maybe how you're reallocating some of those marketing dollars? It sounds like you had some remarks about maybe moving those online, I think, I heard. And then, so the new customers that you're getting online, if that is the case, any way you can quantify kind of percentage-wise or anything that might be helpful there?

Well, we have changed our marketing mix over the last couple of months pretty dramatically, right? Almost all of our marketing over the last few weeks has been in the form of digital, mostly pay-per-click and a small amount of social.

That said, as markets are starting to reopen and reemerge, particularly in places like Texas, we're reverting back to a more typical Boot Barn media mix, where we're using some very traditional marketing media to go after new customers. Like radio, perhaps some television. And the goal is to continue to bring the lifestyle brand of Boot Barn to life and get more trial from customers that perhaps haven't shopped with us in the past.

In terms of the how to quantify a number -- the net new customers coming through the online channel, I think if you look at the sales growth being so outsized, it's hard to say how much of it is specifically new customers and how much of it is stores customers shifting over. Anecdotally though, we know only a portion of it is new stores. Then we have a pretty decent handle on our stores customers through our loyalty program. And we know that some of them have shifted to e-com, but it would be surprising if the entire outsized growth in e-commerce is from stores customers. And we do believe that much of it is from new customers.

So it's hard to give you a hard figure there, but it does absolutely feel like maybe behalf of the increased business online, our customers that weren't necessarily buying from us over the last year or 2, definition for us of a new customer.

Got you. And then just one follow-up. I take your point on the competition. But I'm just curious sort of in the back half of this year, if you do find yourselves in a position where a lot of the mom-and-pop, in particular, locations are sort of going out of business or up for sale. I mean, I know you were buying some of these businesses for inventory cost anyway.

Do you have sort of the financial flexibility as you envision it from here to kind of act on that such that you might even see kind of an accelerated expansion into 2021?

Yes. Dylan, it's Greg. We do have that flexibility. As I mentioned in my prepared remarks that our net debt leverage ratio is a healthy 1.7. And so the credit markets are functioning well, and we could access capital, I believe, pretty easily, if these opportunities pop up.

Our next question comes from the line of Paul Lejuez with Citigroup.

Jim, curious if you can share with us what you see -- what you've been seeing on the competitive landscape in terms of how many of your competitors were able to keep stores open throughout this? And I'm sure that there may be some differences by market. I'm not sure if you can give any color there. What are you seeing in terms of the stores that are open that you would consider competitors from a discounting perspective? And what do you think that means for the next couple of quarters?

And I guess a bigger picture, just given you're seeing a surge in e-com, I think many people might be of a view that e-com will gain share a little bit more -- at a more accelerated rate over the next couple of quarters, if not years. Curious if any of this changes your long-term view about the right number of stores to have in the fleet just on a long-term basis.

Okay. So let's unravel a couple other questions there. On the first piece, from a competitive standpoint, many of the pure western and work businesses stayed open. So the one comparison, many of the Cavender's stores stayed open, and they are a formidable competitor outside of Texas. Most of the farm and ranch stores stayed open, notably Tractor Supply stayed opened who is perhaps a secondary, while very large and very strong retailer, in our specific categories, kind of a secondary competitor.

In terms of feeling pricing pressure within our industry, I think there'll be some, but that's actually not a major concern for us. We have the strongest brand. People tend to shop us because we're the national lifestyle retailer out there.

We do feel a little bit that every other retailer when they reemerge will be marking down and clearing through spring goods. So every store in the mall that's been closed for 8 or 10 weeks is going to have to clear through inventory. And while we'll be fighting for our share in the market, there'll be a lot of companies out there just on deep discounting.

So within the industry, I think the pricing pressure will be moderated. But within retail, I think the pricing pressure will build momentum over time as companies reopen.

On the strength of the e-com business versus storage business and the long-term store count, it's a little hard to reproject that number, but our experience has been for countless years now that we can open up new stores in new markets, have them pay back in 3 years. Our stores channel continues to be more profitable than our e-commerce channel despite all the work we've done from an EBIT profitability standpoint in e-com. We have just opened some new stores in brand-new markets that are, even in this environment, doing quite well. So it's -- this is a call that we've kind of promised that we're not going to give guidance on, but it's -- I think it's much too early to pull back on our long-term store count until we see how the next couple of quarters plays out and see how shoppers behave.

There is a thesis out there that says, people have been in lockdown mode for so long that they're going to want to get out and shop. And perhaps the store environment or perhaps the store environment connected to a digital experience is going to become even more important.

So we'll stay tuned. But right now, we still have some optimism about continuing to open 500 stores across the country. And as visibility becomes more clear, we'll update you on that number.

Our next question comes from the line of Tom Nikic from Wells Fargo.

I was kind of -- I know you said about 50 of your stores had to close at some point during the crisis. I know a lot of them have reopened. Is there any way that you can parse out performance in stores that had to close for a portion of time and how the volume has recovered once they reopened, perhaps relative to the stores that never had to close?

I guess he's asking if there's a spring back in demand?

Right. Tom, we haven't really looked at that. And when I said 200 of roughly 250 were operating pretty much during the entire time, there was a period when all 47 California stores were closed, and so we were operating at 150 stores of the 250 or something like that. And it wasn't always a consistent number. Sometimes a store would be closed because they had trouble staffing the store perhaps because an associate who's going out for a COVID test, and we would close the store and clean the store thoroughly before reopening.

So I couldn't tell you how many stores stayed open the entire time, but my sense is there wasn't really a meaningful change in terms of whether the store is closed for 5 days or remained open the entire period.

I do think when we were closed for 6 weeks or something like that because of local mandate, perhaps in New Mexico, for example, that business came back a bit stronger. But again, that's more about pent-up demand for 6 weeks.

Got it. Okay. That's helpful. I also wanted to ask, from a modeling perspective, how should we think about inventory levels? I'm assuming that at the end of Q1, your inventory growth would probably be a little bit higher than you would like. Just if there's any help you could give around inventory, maybe Q1 and then as the year progresses, that would be helpful.

Sure. So our merchants did a phenomenal job of, I'll say, getting out of receipts as quickly as they could when we saw this happening. Having said that, we had exclusive brand product that was on the water, and so it was received into April. And we had purchase orders written to land from branded vendors that hit in April. So we couldn't affect April receipts in a meaningful way, so we received good NIM in April like business was normal-ish, but they were able to impact May forward. And we've done a pretty good job of rationalizing receipts. Our inventory is in a healthy position.

So we're going to be able to fuel the business off the inventory we have on hand with the exception of things like work boots, where we buy into a replenishment model, and we'll probably be bringing in receipts from there. But in general, you should expect to see our inventory balance continue to walk down from the level it was at, at year-end.

Got it. Okay. And just last one, Greg, is there any help or color you can give us around operating expenses and how we should think of that, either in the near-term or for the full year?

Tom, I really can't give you anything enough that will help you model. I mean we've done things to reduce discretionary spend. And frankly, most of the spend we are viewing as discretionary at this point, even things that we've been committed to in the past, are on the table for review.

We've got folks furloughed at this point. We're operating on lower hours of operation in stores. And so we've got, what I'll call, base minimum coverage, which is good from a productivity perspective, and it does save us some payroll costs in the stores. But I can't give you anything specific because, frankly, our decisions and how we're doing some of these things changes day-to-day.

Jim mentioned that we kind of went silent in marketing with the exception of pay-per-click, and we typically spend about 3% of store retail sales on marketing. So we spent virtually nothing of that in April. I think we'll be very thoughtful as we move forward. But again, can't really give you a number or point you in a direction.

Our next question comes from the line of John Morris with D.A. Davidson.

Happy to hear that everybody's safe and healthy, and wanted to get a little bit more color on the challenges of the supply chain. You've talked about them a little bit here, but I'm wondering, on a go-forward basis, maybe talk a little bit about -- enumerate a little bit better, give us a little bit better color on where those challenges are and at what point would you be getting back to kind of a more normal, I guess, pipeline as things kind of roll through so that -- or is it something that you see extending quite a bit into the future?

So I'm also trying to kind of get a feel for how long we should expect some of these uncontrollables to continue.

So John, it's Greg. And I think what you're saying is the pullback on exclusive brands where we've uncommitted, if you will, or decided to not have a commitment for 6 months out, and I would expect that we'll continue to operate, trying to maintain maximum flexibility until we see some consistency and stabilization in the business. There's things that we'll produce on an exclusive brand front that are basics like our men's Cody James denim product that we'll continue to buy into as needed. But buying Christmas at this point for exclusive brands feels like a stretch for us. It feels like we're tying up some capital, and we don't know what's going to happen as it relates to COVID-19.

So in that regard, if the business accelerates and we can't buy into that exclusive brand product because of the time line, we will buy in from a branded vendor to support that sales. But we're trying not to lose sales, but maintain maximum flexibility. Did that answer your question?

Yes. Yes, I think it does give me a pretty good feel for it.

Our next question comes from the line of Sam Poser with Susquehanna.

This is Will on for Sam. So I just wanted to touch on inventory. How -- you guys discussed you're pivoting from fashion product towards more functional and work product. What does your inventory composition look now fashion versus functional?

Greg can address this a little bit. The merchants really did a nice job of managing receipts down throughout the last couple of months, whereby we've actually made some progress on our average inventory on a comp store basis. In other words, it's better than or less than the 9.3% that was at the end of the quarter. So that's pretty good news, particularly given the backdrop.

The other thing I would say is pretty good news is -- and we've mentioned this in the past -- where we've been on the heavier side tends to be on categories that have much more limited markdown exposure. We didn't give crystal clear color on this call, but we did last time saying work apparel tends to be heavier. That continues to be true. It's probably the single category that is -- has had the most growth on a year-over-year basis. And while we might see some softness in flame-resistant work apparel going forward in the oil patch, that merchandise has extremely long longevity, right? There's no fashion risk for it. No. There's very, very limited markdown risk or fashion risk in our work apparel business regardless of a disconnect between sales trend and inventory build.

So the one area that we do want to work through some clearance merchandise is on ladies apparel and less so on ladies boots. And while it will drive some markdowns slightly more outsized than we typically have done in the past -- as you know, we've been growing our merchandise margin, I think since you guys picked up coverage, with very little markdown exposure. There'll be some now as we clear through mostly ladies apparel. I don't think it will be massively outsized or we would have called that out more explicitly. And if it was really outsized, we would have had a reserve for it in our fourth quarter financials.

So from a composition standpoint, I think that's working a little bit in our favor where the area that we have higher growth in inventory tends to be an even lower markdown risk.

Got you. And just one follow-up. Are you -- I mean how backed up for you guys are the ports? And are you guys taking in new product at this point?

We are. So we went from shut off all the faucets 8 weeks ago and let's preserve cash at all costs, to okay, things are starting to ease up, and markets are starting to open. Our business is getting sequentially better. Let's turn on replenishment for staple and functional products. Let's look at forward receipts for things like men's and ladies, basic denim and certainly, work boots as they continue to sell well.

So the -- we can turn the supply chain back on and have been doing that opportunistically. And if things continue to march along positively, we'll open the aperture a bit more and continue to bring in more receipts. So the stores will feel -- I think we'll continue to feel fresh enough as we go forward. And again, we're managing it week to week. And if things turn one way or the other, we'll react accordingly.

Our next question comes from the line of Rick Nelson with Stephens.

So the e-commerce growth rate has really accelerated here in April again into May. If you could speak to any stresses that that's put on the organization and your shift now to in-store fulfillment, the rationale behind that, is that a cost, say the speeds of delivery issue or inventory residing in the stores? And you want to push some of that out?

Very good question. I would separate the comments though. While you could connect them, it really wasn't cause and effect. I give a lot of credit to the e-commerce team and certainly the e-commerce supply chain and fulfillment center in Wichita, that the business overnight essentially doubled. And when it doubled, we had actually already furloughed some people in that warehouse or in that fulfillment center. So the head of that part of our business called people off of furlough, brought them back in to manage the increased throughput and has been managing really well. We hold ourselves to a pretty high standard of getting 98% of our orders roughly out the same-day that they come in and we haven't really relaxed that standard, but for a day or 2 here or there. So the e-commerce business has been able to respond extremely quickly and with great agility to the increased volume.

Changing back to -- the second part of your question is utilizing the stores, that's more a reaction to a potential change in shopping behavior going forward, right? If the world changes how they shop day-to-day or how they shop for gifts during holiday, we want to have more ammunition at our disposal to drive the business. And our biggest competitive advantage is our stores. So if we can give a consumer the ability to buy product and have it delivered to their house from the store or picked up by themselves from the store, it makes us more competitive than some pure-play e-commerce players out there.

And if you think about Boot Barn and many retailers in apparel and footwear, the holiday period is going to be extremely important. And we want to make sure that we can remain as competitive as possible with every potential way to service our customers, either the way they want to buy or the way they want to have that product fulfilled. So that's really -- that's the biggest reason why we're trying to get to using our stores as an extension of our Wichita fulfillment center.

And just to give you scale, mainly 8-ish-percent of our business going through our online channel is still being fulfilled by Wichita or perhaps Wichita and drop ships from vendors and not from our stores. So it's still a small piece of our business, but we want to use that as, I suppose you could call it a strategic option as we get into the holiday period.

Okay. Got you. That makes sense. Curious what the discussions with the landlord and your deferral of rents, how those conversations are going? And what sort of cost save is involved with that?

Rick, as you might expect, I really can't talk about that in any great detail, given it's a fluid negotiation. Needless to say, we've explained to the landlords how adversely affected our business was as a result of COVID. In spite of the fact that we remained open, our stores' business was incredibly challenged in April, for example, where we were down 64 on a comp basis.

So I think they've been -- they've listened. They understand the position we're in, and we continue to work with them on a deferral.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum.

I wanted to just first ask about -- marketing events have changed, and that schedule is going to change, the dollars and so forth. You mentioned that you've also changed some of the promotions you brought forward, I think, a little sooner than normal, a clearance event. As you look forward to the summer season -- last year, you removed the anniversary sale that you had run for, I think, like 20 years. Is that something that you would consider given the situation bringing back? Or other types of events along those lines that could be a possibility?

Yes. It's a very good question. We've worked pretty hard the last few years to take a business that was already pretty low in the promotional scale, meaning we sold most of our product at full price and making it even more full-price selling. And I don't think even a pandemic of this scale that we're facing into and a disruption to the business at the scale we're facing, would really change that for us.

What we found for our product, given the functional nature of it, is people tend to come to Boot Barn because they -- we're the lifestyle brand in the industry. We are going to typically be in stock in product that they need and want in their size. And when we discount a big section of the store, we don't really see unit velocity pick up in any meaningful way to sort of pay for that sale, and we certainly don't want to anniversary it the next year and the third year.

From a clearance perspective, coming back to your question around the timing, I think there were 2 reasons why we did that. One was we have some clearance product, particularly on the ladies side that we wanted to work through. But more than that, we -- it was somewhat of a strategic opportunity for us to take where, if we could get out and be a little bit more promotional before lots of other retailers started to open, we would take that opportunity. And as customers were shopping and if they were looking for sale, we wanted to sort of beat competitors, if you will, to the punch, or beat even a mall retailer that will undoubtedly have to clear some goods, and we don't want to just be in the fray with everybody else.

So part of the timing shift was a competitive move as much as it was a necessary move to move on -- move out excess inventory. So just kind of concluding that -- those comments, I don't expect us to become highly promotional. I just don't view that as a winning hand in -- at least in our industry and probably in most retail industries.

That's great discipline in a tough environment. Last question here. There are tensions -- there's going to be some obvious fallout from this crisis, and trade tensions continue to be a potential source of concern. As you think about sourcing arrangements, whether it's your own on private label goods or some of your key vendors, is there any movement in terms of potentially altering where your sourcing arrangements are coming from, moving some of that out of China?

I'd say yes and no. At Boot Barn and perhaps many other retailers like us, the tariff saber rattling created a lot of that flexibility over the last year or so. So we have diversified our supply chain quite a bit based on that. And you're right to call out that that's just another area of risk going forward for us. So we're continuing to, like everybody else, I suppose, monitor the different political actions that are happening out there for different countries that we're sourcing from.

And we have brought China down as a percentage of our imported goods. But it's still a pretty good chunk, and it will probably remain so until something really meaningful happen. So I would say we're watching it carefully. But as we sit here today, one of our most important countries going forward, either for ourselves or for our third-party vendors, is going to be China.

So I think it's a fair question, and I think we're on top of it, but it's -- we'll have to just wait and see.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Mr. Jim Conroy for closing remarks.

All right. I appreciate everybody spending so much time with us today. I know it was a long call. But thank you for joining, and we look forward to speaking with you all on our first quarter earnings call. Take care.

This concludes today's conference call. You may now all disconnect your lines. And have a great day.