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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Boot Barn Holdings Fourth Quarter Fiscal Year 2018 Earnings Conference Call. As a reminder, this conference is being recorded.
Now I would like to turn the conference over to your host, Mr. Jim Watkins, Vice President, Investor Relations for Boot Barn. Mr. Watkins, you may begin.
Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's fourth quarter and fiscal 2018 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Greg Hackman, Chief Financial Officer.
A copy of today's press release is available on the Investor Relations section of Boot Barn's website at bootbarn.com. Shortly after we end this call, a recording of the call will be available as a replay for 30 days in the Investor Relations section of the company's website.
I would like to remind you that certain statements we will make in this presentation are forward-looking statements and these forward-looking statements reflect Boot Barn's judgment and analysis only as of today and actual results may differ materially from current expectations, based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made on this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter fiscal 2018 earnings release, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise.
I'll now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?
Thank you, Jim and good afternoon. Thanks everyone for joining us. In today's call, I'll will be providing a review of our results and an update of our key strategic initiatives. Greg will then review our financial performance in more detail and provide our outlook for fiscal 2019. Following Greg, we will open the call up for your questions.
We're very pleased with our fiscal fourth quarter results which represent an outstanding finish to our year. Same store sales growth of 12.1% combined with 90 basis points of merchandise margin expansion resulted in net income that significantly exceeded last year and our earnings guidance.
Comps were up double-digits in our retail stores and have now been positive for four consecutive quarters. eCommerce comps returned to positive territory and were up double-digits in the quarter as well.
Moving to the full year, our financial results exceeded the expectations that we initially set for the business. During fiscal 2018, we achieved same-store sales growth of 5.2%, 50 basis points of merchandize margin expansion, 80 basis points of operating margin improvement and 100% increase in net income.
Our merchandising and marketing initiatives drove topline gains in most regions of the country and strengthened our position as the leading western and work retailer in the U.S. From a merchandizing perspective, we made significant improvement in our ladies business and rolled out a new performance boot platform to bolster our private brands portfolio.
With regard to marketing, we enhanced our branding to improve creative, adjusted our media mix and began radio intelligent advertising on a national basis. As it relates to our Omni channel initiative, we continue to invest in our e-commerce platform and our fulfillment center.
Looking at store growth, we added nine stores during the year through a combination of new stores and acquisitions, including the successful proof of concept of a four store tuck in acquisition named Wood's Boots. We are confident that these investments have us well positioned to continue to drive sales and earnings growth into the future.
I would now like to spend a few minutes providing an update on our four strategic growth initiatives. Let's begin with driving same-store sales growth. Sales growth in our retail stores were up double-digit in the fourth fiscal quarter with broad-based growth across the chain. While same store sales growth in Texas continue to be very strong, sales growth was also strong across most of the country, particularly in California, Arizona, New Mexico and Tennessee.
From a merchandising standpoint, not only did every major product category post positive results for the quarter, but they also all improved sequentially from the growth rates we experienced during the holiday season.
Work apparel and work boots continue to grow benefitting to some extent from a healthier macroenvironment. Western Apparel both men's and ladies also showed strong growth. We believe the straight in Western apparel is due in part to the ongoing investments we've made in merchandising and marketing.
We continue to improve our CRM analytics to better understand our customer, their buying habits and how often they shop our stores and e-commerce sites. These analytics have helped us segment our customer base into three categories, which we have identified as Core Western, Work and Wonder West, which is a segment that skews younger, more fashion forward and more female than the other categories.
Through enhanced CRM analytics, we've been able to determine the customer overlap of these segments and as a result have augmented our marketing strategy, particularly as it relates to email and direct mail to properly target each customer group.
We believe this more focused marketing approach is enabling us to drive incremental sales with existing customers and also attract new customers, while providing efficiencies in our marketing spend.
Finally, from a stores standpoint, we're continuing to realize the benefits from the Labor Scheduling System we implemented in fiscal 2018, that allows us to optimize labor hours and improved customer service at key selling times. We're also very pleased with our preparation for Rodeo season, which helped us continue our strong performance in Texas,
I’d like to spend a moment discussing a few things we're doing to help drive same store sales growth in the upcoming year, fiscal 2019. From a marketing perspective, we continue to adjust our media mix based on our learnings and analytics from prior campaigns.
As our national footprint expands, we're able to use radio, television, and social media to effectively reach a greater number of customers. We've improved the ROI or direct mail by upgrading our creative and refining our methodology for developing our catalog mailing list.
We've also developed a customized media mix for each consumer segment that we believe will optimize our brand reach and maximize revenue. From a merchandising standpoint, we're in the process of evaluating the contribution of each area of the store to maximize sales productivity.
We're also starting to build some nice momentum in our denim business for both Cody James and Shyanne. Additionally, we are preparing for the launch of our two new private brands this year, that should help us to improve both sales and profitability.
From an in store perspective, we have intensified our efforts to raise the product knowledge and customer service skills in the store. We've invested in explorer associate training platform, and are pleased with the return it is providing in both sales and customer service.
Moving to our second initiative, strengthening our Omni channel leadership. Our three online brands continue to differentiate us from the competition and allow us to target a wider consumer audience while benefiting from the shared platform. WHIP is our core Omni channel brand that is connected directly to our stores.
Sheplers is positioned to be promotional and has an extremely bad product assortment, appealing to a large customer base. While Country Outfitter provides a curated assortment for more fashion oriented customer.
During fiscal 2018, we completed the migration of our three ecommerce sites to a new front end platform and upgraded order management system and common back end performing operations. As a result of this transition, we bootbarn.com, Sheplers.com and countryoutfitter.com now have access to a common inventory selection that is managed by one integrated team.
We also implemented a new warehouse management system and installed the material handling conveyors and product carousels and our Wichita Kansas performance center where substantially all of our online inventory is now held.
While both the platform migration and new automation cause disruptions to our ecommerce sales during the year, we believe those headwinds are now behind us and we're pleased that ecommerce same store sales have returned to double digit growth during the fourth quarter.
From an organizational perspective, we are happy to announce it successfully recruited a new Chief Digital Officer named John Hazen, who was most recently at Ring, the video door company.
John has a deep soft line retail background having spent time at True Origin, Fox Racing, and Hurley and has extensive experience with the systems we utilize both online and in store. Over the next several months, John will be working alongside Mark Hampton, our former head of ecommerce through an orderly transition.
Mark is credited for not only building Sheplers.com into the largest ecommerce site in our industry, but also for developing the Sheplers brand over the past several decades. Well, he will be retiring at the end of the year.
He has agreed to continue to focus on the Sheplers business under John's leadership through the holiday season to ensure the transfer of his institutional knowledge.
As we look forward to fiscal 2019, we were focused on improving the financial contributions of our ecommerce sites, by increasing the penetration of private brands online, improving marketing, return on investment, eliminating unprofitable and low margin items, and driving efficiencies by reducing unnecessary costs.
Now to our third strategic initiative, increasing the penetration of our exclusive brand portfolio and expanding our merchandise margin. Throughout fiscal 2018 we successfully grew up private brands, including a 270 basis point increase in penetration in the fourth quarter when compared to the prior year period
For the full year exclusive brands represented approximately 13.5% of our total sales. The superior quality of this product coupled with brands specific marketing has enabled Cody James and Shyanne to work their way up to our number three and number five top selling brands with growth rates that exceed most of our third-party brands.
With approximately actually 1000 basis point of additional margin compared to sales of branded merchandise, our exclusive brands help increased margin and drive customer traffic. Looking ahead we’ll focus on continued momentum through several initiatives including the launch of Idyllwind fueled by Miranda Lambert and the development of a new exclusive work brand both of which we’ll view in the fall of this year.
We believe these investments will allow us to create even greater competitive differentiation and drive additional customer traffic. Finally our fourth initiative expanding our store base, this past year we added nine locations finishing fiscal 2018, with 226 stores in total. We continue to believe that the opportunity to double our store base and are encourage by the performance of our recent new stores.
In fiscal 2019 we are calibrating our expansion to 10% unit growth and plan to add 23 stores, reflecting both a strong pipeline of quality locations as well as the number of tuck-in acquisition opportunities that we've identified.
So far this year, we have added five stores including lone star western and casual, a three store chain outside of Dallas.
This acquisition was modeled after the blueprint that we established when we acquired Woods Boots in fiscal 20. Woods continues to exceed ourselves and payback expectations. As a reminder, we targeted three okay backward, better on new stores and are committed to staying disciplined in our site selection as we expand our footprint nationally.
Now turning to current business, we're now at the halfway point on the first fiscal quarter and the SaaS trend has continued from the prior quarter with solid margin performance, as with the prior quarter our SaaS performance is strong across all categories and most geographic regions.
In summary, it was a really terrific year for Boot Barn and we are confident that the progress we have made expanding our presence that physically and online has led to additional market share gains and further strengthened our industry leading position.
I now like to turn the call over to Greg Hackman.
Thank you Jim. Good afternoon everyone. I will begin by reviewing our fourth quarter results and then comment on our outlook for the first quarter and full year and fiscal 2019. In the fourth quarter net sales grew to $171million driven by a 12.1% increase in same store sales.
The sales contributions from nine stores added over the past 12 months and first from the Country Outfitter site that we acquired. February 2017
Gross profit increased 7.2% to $52.9million or 31% of net sales compared to gross profit of $49.3 million or 30.3% of net sales in the prior year period. The 70 basis point increase in gross profit rate resulted for 90 basis merchandise margin improvement partially offset by a 20 basis point increase in buying and occupancy costs and comparative 14 week quarter in the prior year.
The 90 basis increase in merchandise margin rate resulted from more foot price selling fewer promotions and an increase in exclusive brand penetration. If we were to normalize for the additional week in the prior year period, we would have further increase gross profit rate by getting sales leverage on buying and occupancy expense.
Operating expense for the quarter was $41.6 million or 24.4% of net sales compared to adjusted operating expense of $40.1 million or 24.6% of net sales in the prior year area. As a reminder fourth quarter operating expense includes approximately $300,000 and secondary offering costs.
Adjusted operating expense in the prior-year excludes $1.2 million of store impairment charges. Year-over-year Q4 operating expense as a percentage of sales decreased as a result of prudent expense management and leverage on higher sales.
Our income from operations was $11.3 million or 6.6% of net sales in the fourth quarter of fiscal 2018 compared to adjusted income from operations of 9.2 million or 5.7% of sales in the prior year period, 90 basis increase in adjusted income from operations.
Interest expense in the fourth quarter was $3.8 million compared to $3.9 million in the prior year period. Net income for the quarter was $6.9 or $0.24 per diluted share; up from $0.12 per adjusted diluted share in the prior year period.
Excluding the $0.03 per share impact of the extra week in the prior year period, adjusted earnings of approximately $0.09 per share. The $0.24 of net income per diluted share in the fourth quarter of fiscal 2018 includes $0.03 of additional tax benefit above what was included in our $0.15 to $0.16 EPS guidance.
Turning to the balance sheet inventory per store was up 4.4% on a comp store basis compared to last year. On a consolidated basis inventory rose 12% to $211 million compared to the year ago period.
The year-over-year growth in inventories primarily resulted increased inventory at warehouses to increase the inventory available to be shipped from our warehouses to reduce drop ship fees to support our full container purchase program and drive sales of our exclusive brands on which improve our merchandise margin.
Stores opened and acquired during the 12 months also accounted for a portion of our increase in inventory. Our inventory entering the first quarter fiscal 2019 is current and at appropriate levels. As of March 31, 2018 we had a $204 million of debt outstanding including $21 million for the $135 million revolving credit facility.
Subsequent to the end of the year we had made a principle payment of $10 million in our term loan. Now I would like to our outlook for fiscal 2019. We expect same-store sales to grow mid single digit which equates to approximately 10% same-store sales growth on our 2 year stack.
At these levels we will see improvement in our EBIT rate as we issued leverage and 2.5% same-store sales growth. We expect earnings per diluted share in the range of $0.92 to a $1.02 per share based on an estimated weighted average diluted share count of 28.7 million shares for the full fiscal year.
This represents income from operations of 52.5 million to $56.5 million. We expect interest expense to be between $17 million and $18 million and we expect net income from – full fiscal 2019 to be between $26.2 million and $29.2 million. The high-end of our earnings guidance range of $1.02 represents 20% growth over fiscal 2018 earnings per share by applying our fiscal year 2019 effective tax rate of 25% to fiscal 2018 to normalize the impact of tax reform.
We expect capital expenditures to be in the range of $21 million to $23 million the majority related to investment and newly acquired stores and our performance center. As Jim mentioned earlier we plan to add 23 stores during the year through both organic growth and tuck in acquisitions.
Turning to our first quarter guidance, business continues to be strong from both a sales and margin perspective. Accordingly, we expected same store sales growth for the first quarter of fiscal 2019 to be approximately 10% and earnings per share to be between $0.10 and $0.12 based on 28.5 million weighted average diluted shares.
Now I'd like to turn the call back to Jim for some closing remarks.
Thanks, Greg. Turning the key was a very successful year and we expect that the momentum we regained and our Brick & Mortar stores and more recently in our ecommerce business will continue to 2019.
We're saddened about the upcoming fiscal year and the opportunities we have to drive sales strengthen our Omni channel business enhanced margin through continuing to exclusive brand penetration and we accelerate store growth to 10%.
Before we wrap up, I went back to share some news regarding the change was made on our board of directors today. We announced that and Anne Mcdonald an experienced branding and marketing executive has been appointed to our board of directors, replacing Fred Simmons who has resigned from the board.
Let me begin by taking this opportunity to personally thank Fred for his contributions over the past several years. Fred help lead the growth of Boot Barn into a national lifestyle brand with revenue growing 300% during his tenure, and he's a great inspiration to a senior management team and a tremendous personal supportive of me.
Anne Macdonald brings tremendous marketing expertise, having served as Chief Marketing Officer for several global companies including Macy's, Citigroup and Travelers Insurance. He also brings extensive agency experience advising iconic brands including Procter & Gamble, AT&T and Pizza Hut.
Anne brings a world class marketing background that will enhance our ability to develop the Boot Barn nationally and to launch and nurture each of our exclusive brands. And companies that have kind of a combination of company and agency experience will further enhance the composition of our board as we continue to grow the Boot Barn business across the country.
Before we open up the call to questions, I would like to thank the entire Boot Barn team for their tremendous hard work and dedication and for the terrific results they delivered in fiscal 2018. I feel great about the opportunities ahead of us and team’s ability to achieve them.
Now I would like to open up the call to take your questions. Anna?
[Operator Instructions] And we'll go first to Matthew Boss with JPMorgan.
Thanks. Congrats on a great quarter guys.
Thank you Matt.
On your mid single digit same store sales guy for next year, I guess, what have you invented for ecommerce growth and how best to think about that and oil and gas market versus maybe the rest of the country that is in the single digits into your sales?
Sure. So we feel great that ecommerce is now back in double digits. We expect that will continue throughout the year. We've invested a lot of time and some money and a lot of hard work in this most recent fiscal year and we're expecting to see that pay off with the combination of our new Chief Digital Officer John Hazen and work the former team under Mark has been doing. So I would I would think about that as a double digit growth business.
In terms of oil and non-oil or Texas and non-Texas, the Texas business continues to be strong for sure that the rest of the business has also been improving. So we actually saw bigger sequential improvement in the rest of the business outside of Texas between Q3 and Q4 then the sequential improvement in Texas between two same quarters. So it's really great to see just a broad based growth.
And to your specific question, Texas we're expecting to continue to be double digits in the balance of the chain, you know high mid single, and that's going to running now. Keep it all together you'd say well, then you're going to get a higher than a mid single digit comp for the year.
And just to kind of address that you know we are 10% of the way through the year. We've got a tremendous amount of business left to do. We'll start to cycle some of these numbers as we get into the third and fourth quarter.
So we're trying to put out a guide for the year that we feel good about. But we certainly feel very positive and optimistic about the momentum coming out of the fourth quarter and coming into the first quarter.
Great. And then Jim just as follow up for the year. So unit growth now back to 10% next year mid single digits same sales guidance that's the high end of year historical target range. I think our model points to high teens operating income growth for next year.
I guess Jim is it fair to say you're comfortable that the multiyear model has returned to the 20% plus annual net income growth algorithm that used to talk about that low to mid single digit same store sales?
It is a great question. Yes, we are comfortable that the algorithm remains intact. In this particular year we feel good about, as Greg pointed out 20% guide or and growth and our guided EPS.
And if you think about this particular year, we're calling out at times that growth in EPS and that is offsetting any increase in share count and increase in interest expense and investments were making in private brands, food opening cost associated with new stores. So I think we've given that this year and this year is that three or four sort of unique things working against it.
So long winded answer to, I do feel pretty confident about the long term Algorithm. Incidentally I never had lost confidence in the long term algorithm over the last 24 months. But here we are and it certainly feels great to be back on the winning side.
Great to hear, congrats again.
We'll go next to Peter Keith with Piper Jaffray.
Good afternoon. My congratulations as well on a great quarter. I wanted to dig into the private label launches. I know you've got some interesting product that's kind of in the pipeline and the rollout. Could you give us a sense on when some of the larger chunks of that new product is going to start hitting shelves?
Idyllwind by Miranda Lambert will launch in the fall, so call it September-ish and that is a really exciting product line we just can reviewed the following holiday deliveries one more time, yesterday.
It is Boots and Apparel so top to bottom, plus accessories and jewelry and we feel great about how that assortment is coming together and that should be in all stores in the September timeframe.
The other exclusive brand is a work wear brand and will start to bring in pieces of it, certain categories in the fall, fall that September October but by January, February it should be fully in store and we'll kind of have a grander launch in the spring of next year.
So that will be – we’ll start to see some selling of it in the fall in certain categories, but other categories have longer timelines won't be rolled out until after Christmas.
Okay. And the private label penetration that you're seeing to 270 basis - 230 basis points, this most recent quarter is something that you would expect to continue or accelerate decelerate. How should we think about that trending forward?
We've been pretty consistent growing 250 or 300 basis points of penetration each year over the last few years. I think as we move forward that number certainly has slowed if anything at all. Sorry a bit.
Yeah. So once those two brands take one you can see how additional brands plus the expansion of 30 jeans some expansion they were doing in Shyanne for more traditional customer to get that number to 400% increased penetration points each year.
And that's not how we've modeled this year partly because it's – two new brands aren’t going to – it’s not going to benefit from them for 12 months, really going to benefit from them for three to six months or so.
Okay. Thank you one. One last question for you Jim. I can recall back in 2014 even early 2015 we used to talk about the steadiness of the business that was running at a steady 7% comp run rate.
I think memory conversations we had talked about how remarkably steady it was, curious if you're starting to see that today, just kind of week to week across the store base if there feels like there's a lot more consistency. Just given the functional usage of a lot of product you sell.
It a great question. Yes I think the business is certainly very steady now. And if you take the historical context that you call out Peter, I think if you strip away the impact of oil on the headwind or the tailwind side, it's been incredibly consistent for a decade.
It's just for the last 24 months. Up until recently always a headwind and now it's a bigger tailwind and we've taken a inherent mid single digit comp first down to flattish and now up to double digits.
But as we look at the business day to day and week to week, it's remarkably consistent. We know we've had a couple of just outsized incredible weeks and the rest has been average it's we've got a week it's much more predictable.
And it certainly makes you feel better from a visibility standpoint. When you see a little bit more consistency in the numbers each day when you open up sales.
Okay. Great feedback. Thanks a lot and good luck.
We'll go next to Jonathan Komp with Baird.
Yeah. I want to follow up on the last question in really just when you step back and look at the results and the double digit comps pretty handily out you exceeded what you'd planned for the quarter.
How much if you could try to attribute some of it to the internal initiatives versus the external environment. Especially now with obviously oil above $70 a barrel maybe some more tailwinds there. But how do you think about the business when you try to pass out the drivers of the strike?
Fantastic question is questions when we wrestle with all the time. On the downside and on the upside, I think we're clearly getting some external help and some tailwinds. I would have said naturally that it's half of the comp.
If I'm honest I'm looking at some other numbers that are being posted and it doesn't feel like it's rippling through many other retailers that we would kind of benchmark ourselves against. Having said that, I still think it's maybe a third of the help.
And the balance of it is a lot of things that we're doing internally, I would have to acknowledge one step function change rather e-commerce business went from a negative comp in the third quarter to a strong positive comp in the fourth quarter.
And while, it may be handy for me to take credit for that for an internal initiative, we created the negative ecommerce comp in the first place. So if you were to strip that piece out that the balance is the sort of what we're doing from a marketing perspective, what we're doing from merchandising perspective, what the stores team is doing in terms of in-store training and customer service. So that's the way I think about it.
Okay great. And then Greg I wanted to follow up I think you mentioned for the year heading mid single digit comps would be about a 10% to your stack. And I just want to ask about that, is that based on what you're currently running or how did you formulate that thinking and ask in the context I think, I think you're starting to improve in terms of the trends at this time last year.
So if you're running double digits, it seems like you might be a little bit ahead of that now but just wanted to clarify the thinking there?
We’re roughly 10% of the way through the year Jon and our softest comp was Q1 last year we were roughly 1 in Q2 we were roughly 2 and then Q3 was plus 5 and this quarter obviously plus 12.
So given where we are through the year and given that tougher compares come in the back half of the year were more of the sales are weighted, we felt that the mid single digit which is roughly plus 5 was the right way to think about planning the business.
The benefit of our model is that the business comes 70% of our inventory is automatically replenishment. So we can get into that inventory quickly. So you know we feel like we've got position for growth, but also planning the business in a proven fashion.
Got it and last one for me, if I could if you had any perspective on the direction of the merchandise margin improvement. Obviously, it was quite strong in the quarter. So just wondering as you look forward to what the puts and takes there might be?
Yeah I think so. You know on the upside it continues to be the private brand penetration so to the extent that we do 2.5 to 3 percentage point increase in private brand penetration we'll get 25 or 30 basis points of increase.
In addition to that you know we continue to look at our promotions and evaluate that we've done that for a couple quarters in a row and we continue to look hard at that and you know it's hard for me to tell you exactly what that's going to be worth, but that's certainly something we continue to work out.
And we do see a little bit of a headwind out there in fleet. It hasn't been material to us but it is something that's on our radar. So I guess those are kind of the pluses and minuses, I would think about.
The other thing is as the e-commerce business turns around and continues to improve and Jim talked about the fact that we're working hard to increase the profitability of that that may also be a fill in for us.
Okay great. Thank you very much and thank you.
We'll go next to Randy Konik with Jefferies.
Great thanks a lot. I first want to talk about the private label business as well. I guess first for Jim when you think about long term your product architecture, do you think about given the success you've had in private label, do you think about increasing the umbrella or penetration of private label little bit more than you might have thought in the past?
I guess as a follow up on private label for Greg, when you look at the spread between the March margin of private-label versus branded, do you see opportunity for that spread to widen further as you potentially get more I would say I guess economies of scale or scale benefits from bigger buys for that private-label product, as you source it, just curious on that first topic.
So on the first piece, we feel pretty good about 300 point-ish improved penetration each year, maybe 400 so that will get us to 20% in a couple of years or so. Yeah I would want to acknowledge that the success we're having feels great, it's differentiated product, it's margin enhancing, but we also do feel very strongly that our warehouse or brands and that we have really terrific relationships with our branded vendor partners and I wouldn’t expect our private brands to that up in the future even 40%, 50% of our business to just I think people are coming in looking for Wrangler, Carhartt, Justin, Ariat and those types of brands.
So I think it's a careful balance. We want to help our customer find what they need and part of that is bringing new and exciting private brands and part of that is showcasing the third-party brands that are in the marketplace and have helped us grow to the business and the size that we are today.
In terms of margin expansion and the 1,000 basis points do you want that one.
Yeah sure. So I do think Randy that conceptually there is some opportunity to expand beyond the 1,000 basis points. One of the things that what we wanted to do is we've developed these private brands is to invest some of that money back into the making of the product, so that our products stands out and is one of the best in class or is best in class.
So we are doing that and continue to do that, but I do think that as we continue to invest in the team, the design team that will be able to get some more experience and perhaps scale and again as we continue to grow the store base, we combine bigger quantities.
So I think all those things could lead us through expansion of the 1,000 basis points, but again we're not trying to just talk at a differential read. We are putting the make into the product.
Got it and then I guess second topic, use of analytics, can you give us some perspective on how you're using analytics kind of distort your ad budget in different, I guess different media venues etcetera?
How do you think about, looking at different types of analytics for to enhance inventory allocations or anything around supply chain, give us some or even on e-commerce side, what's currently going on there that we can look forward to or your project base, perhaps can give us that will help the medium to long term.
Yeah good question. There are certainly a number of things that we're doing from an e-commerce perspective and the recent appointment of Jan Hayes and has brought in sort of fresh set of eyes as to how to grow more traffic using more modern kind of marketing approaches. So everything from social media, shoppable Instagram stories etcetera.
We've done some more work around influencers and that's all intended to drive traffic to our site and those eyes have really gotten I think much improved in terms of how they evaluate each of the step within the funnel and how do you continue to try to drive more conversion.
In terms of your other question of using analytics or supply-chain and internal management and those sorts of things, perhaps giving a somewhat contrarian answer, I think some day there might be some opportunities for us to go after that.
The honest answer is right now, we are focusing on keeping things simple from a supply-chain standpoint. Our business is highly replenishable. It's very predictable and if a particular store sells base size 12, work boot, we order a size 12 work boot for that store and gets replenished.
I think we've got a pretty good handle on our investment. I think the buyers have a fantastic handle on assorting different parts of the country that with different nuances but we right now aren’t intending to spend a tremendous amount of time or money on supply chain initiatives is I think we get a much bigger return on some of the other things that we're doing, but are growing demand.
Great. Lastly, I just want to ask one thing that Greg talked about was it sounded like there was opportunity to look at the promotional either cadence or maybe suggesting that the consumer is kind of being a little less price sensitive.
I am curious when you look at the comp or you just think about the business generally not just on a mere term basis, does the consumer feel like there that frequency of shopping is greater and the price sensitivity is lower, just curious how do you think about how the consumer is feeling right now, versus maybe six or nine months ago and then that's all I have thanks?
I can take that one. As you know we're mostly a full priced selling model at Boot Barn to begin with and recognizing that many retailers are increasing their promotional intensity either frequency or dept, what we found is and what's back to your question, we founded that we can promote and perhaps get a slightly bigger basket, lower margin in that particular sale.
But over a period of time, we're just moving demand around or pulling it forward and we offer our customers, I think a very fair price. We're virtually always in stock for what they need and we haven’t trained them nor do we intend to train them to wait for the next sale before they shop us.
In terms of are they shopping more frequently or less frequently, I think they're probably shopping slightly more frequently and buying a bit more of the discretionary items and part of that might be the macro-environment part of that might be what we're doing internally.
to give you an example, ladies western apparel, which has been a difficult business for a while, had a tremendous sequential improvement between the third quarter and the fourth quarter and for most part, that product line is not a necessity right. It's discretionary item.
So I think they had always if they were a work wear customer and they needed a pair of work booths, they are always going to come in and buy them, but as their and perhaps the economy has improved or their wallet has improved, they're buying outside of the core, core product and some items that just might be more discretionary.
So I think that's what's part of what's driving the comp and we are fueling that fire with the segmentation and we're treating our customer differently now and communicating to her and it's mostly her, very differently than we had in the past with our more general broad-based core Western communication.
Great perspective. Thanks. Appreciate it guys.
Thank you.
We'll go next to Oliver Chen with Cowen and Company.
Hi Jim and Greg, congratulations.
Thanks Oliver.\
On the exclusive brand our accounts really indicate a high degree of familiarity with your existing exclusive brands and high satisfaction rates, but as you launch the new brand, what are your thoughts on managing the inventory by appropriately and having the right guardrails around risk as well as your thoughts on building awareness of new brands and developing lifestyle brands.
So great question. They're two very different brands that are coming, One is Idyllwind, fueled by Miranda Lambert. And if you think and how that product line will breakdown, a portion of it will be ladies boots of course and a portion will be denim and a portion will be ladies tops.
So I think we're extremely excited about the launch of that. The partnership with Miranda. She is just going to be a tremendous voice, mill plan intended for the brand and for the company and she has been a fantastic partner to us at.
I think from risk standpoint, the Boots part of the business has a pretty low mark and exposure as does the denim piece. So I we’ve kind of isolated any inventory risk to the non-Boots non-denim piece of the Merinda line.
And frankly that just doesn't worry me that much. And I think the products will be good, we’ll probably have to mark some of it down to move it, but that will be a small percentage of a small percentage of the business.
On the Workwear brand there – I won’t say there is no risk, but this is a brand that is going after Boots and Apparel and well will be proud of our own exclusive standing. As Greg had pointed out, while we were undoubtedly achieve a higher mark up.
We have been very generous to the product in terms of the make and the fabric and materials that go in to the Boots and the Workwear, and this is a product that will be very quickly put on replenishment and our Work business in general has the lowest mark down ROE in the company. And I wouldn't expect that our new Workwear brand would be any different than that.
So I actually am really excited about the launch of both of them not only in the business that those two brands will generate, but in the overarching excitement that those new launches will bring to Boot Barn. And I feel very comfortable on the downside risk management piece of it.
Okay great. And our survey also eliminated that shoppers actually would visit you more often. If there was a store close to them. My question is about thinking about physical and digital expansion and did a lot of digital trends really help inform you know where your next vintage of stores should be located?
And a related digital question is, as we look across longer term what are some of the drivers that you're focused on to improve profitability within that channel? Thank you.
So two different questions, on the new store is for context for everybody we had a while ago done a study that says how many stores could we have? And we have since updated that, and we firmly believe that we can still hit our 450 or 500 stores or double our store account.
And we've gotten increasingly more sophisticated in terms of site selection. And part of that is exactly what you're calling out which is, how do we use the online sales in a particular market to help inform the infinity for Boot Barn or the affinity for the product that we sell. So we're starting to see that the use of that information to help us place new stores or at least test demand in different areas. So I think that that is one way that the two channels have connected.
The second question, can you remind me the second question on the digital piece?
Digital margins and profitability to key drivers and what you see happen? I think you've done a good job managing split shipments and also shipping costs. But what are the key drivers and what do you see happening in the margin mix over time, as customers do value the convenience which comes at a cost?
Right. There's three or four different things that, one was getting there which performance that are up and running and with the investment in material handling and WMS out there we're now shipping from middle of the country, so we have taken shipment cost down.
The automation has reduced the cost per pick and pack the items. So we've seen some operational efficiency is there. We have been spending a tremendous amount of time looking at the return on ad spend for paper click and have found that we can pay back some paper click not lose demand and simply pocket some of that money and we're continuing to test and learn there.
But you shown me do that, we realize that we can since so far, we've realized that we can make a far more profitable if we don't have to spend 50% on customer acquisition through a paper click. A couple of other things that we're looking at you called one of them.
And as did Greg which is as we inventory more of the selection of our inventory or assortment in our own distribution center, we can avoid the dropship fee that our vendor partners charge when they ship for us. So that's another area that we can we can have cost avoidance.
And I said the last thing is just as we continue to build scale, 3 brands working with one team and one distribution center starting to see some nice growth. We will leverage the fixed overhead components of the e-commerce business.
I think when you pull that together coupled with an improvement in private brands, we will get to kind of a convergence of the contribution of online and the contribution of stores at least for every month of the year with perhaps the exception of December, where the retail stores get a lot more leverage on occupancy with fixed costs associated with that.
But setting that aside if you will we are going to get to the point where we are agnostic or indifferent between a customer buying online and buying storefront financial perspective, and you certainly get a market in want to be there for them in any way they want to interact with our brands.
Thank you. Our last question is about as you think about the reality of Amazon and the tradeoff between the costs breath they offer versus the data that you collect and what's incremental to you? And what your framework for thinking about that relationship as well? Thank you.
Well it's a very careful balance right. They have millions of eyeballs and an incredibly strong brand presence and the ability for us to get in front of customers with our brands and or with Boot Barns in marketplace or Shepler's in marketplace etcetera.
As they've made it a little bit less profitable on Amazon as it increased their rev share, we're starting to probably diminish a piece of what we sell on the marketplace not abandon it, but diminish it a little bit. And I think we'll continue to be partners with them with our brands and Amazon marketplace.
But I would remind everybody that, that piece of our business right now is very small. If our online business is 18% or 20% of sales Shepler's is the biggest, Boot Barn is the second biggest and Amazon is the third biggest and it's a pretty small piece of our business right now.
I do think that Amazon gives us a very unique platform to get our private brands out in front of 100 million Prime numbers pretty quickly. So that's something that we're looking forward to as we kind of get started into fiscal 2018.
Thank you. Best regards.
We’ll go next to Paul Lejuez with Citi.
Thanks guys. Two questions. One, can talk about the credit card private label credit card you've got, how much might that be helping sales in your view and the point of a greater focus on credit this year?
And then second just curious if you could talk about the store locations for this year, the size whether you know we're going to be and the timing of opening throughout the year? Thanks.
Paul, its Greg. I will take the first part, which is how big of a business is the credit card business and how is it helping comp? When we introduced the credit card program for our customers it really was to create some loyalty and provide them some open to buy and we really didn't think it was going to be incremental to ourselves.
And that's really what we've seen so far. So you know our customers like it. We have some appreciation days or early advance view of Black Friday sale or something. But in general, the credit card business is not a big business for us. And again it may be helping comps a little bit, but they would be very small I think.
In terms of store locations and the phasing of that, we announced the Lone Star acquisition or purchase a month ago. We've opened two stores this year so we've got five new stores in Q1 and Q2 will be somewhat similar.
And I would say it's pretty much normal phasing throughout the year with maybe a little bit more weight in Q4, as we started to ramp up a little bit later than we normally would be in a pipeline perspective.
And I think that will wind up opening stores somewhat in a third of the country, you know a third on the WAFL in the middle of the country and a third on the east coast and we’re trying to move up from the south east into mid-Atlantic states that kind of thing. Not sure if we'll get there all the way this year, but that's that sort of thinking about the 23 stores issue.
Great. Thanks and good luck.
We'll go next to Tom Nikic with Wells Fargo.
Good afternoon everyone. Thanks for taking my question. I tried to ask about the margin structure of the business, sort of based on your EPS and operating income guidance. You know we can kind of sort of figure out what you're looking for Q1 and the full year?
Should we think about there being more opportunity on the gross margin line versus SG&A leverage just given the level of penetration and some positive trends and markdown rates lately and occupancy leverage on the comps?
And then just longer term a couple of years ago your operating margin was more in sort of the 8% to 9% range versus the 6% or 7% that it's been the last couple of years to sort of get back to that 9insh kind of range or you know better than that like worse than that I guess is kind of how do you think about the long term margin opportunity for your business? Thanks.
Yeah. So it's Greg and the structure of the P&L if you will, we expect margins to expand 30 basis points something like that maybe it's a little bit higher it will be dependent on our private brand penetration emerge versus margin. Thank you very much.
So from we get leverage on the SG&A line of roughly a 1.5 comp this year and for occupancy its roughly a 3.5% comp this year. This year the one thing that's causing a little bit of expense pressure if you will is in buying line.
We've added -- we've beefed up our designers and private brand folks and so that puts a little bit of pressure on those that are buying and occupancy line, but it's really the buying group that you see that that so occupancy average at roughly 3.5 but that line combined with the north of that.
In terms of EBIT margins you know the 9% you quoted before it was before we got Shepler's which was more heavily penetrated in private – in ecommerce, that 40% of their business was e-commerce so we took a step down as we mix start business end.
But we do expect to continue to expand EBIT margins each year. Last year we expanded 60 basis points of EBIT margin and that was going up against a year that had an extra week of 53 week as well as, we had to add back incentive based compensation which was roughly a $3 million to $4 million number.
So when you adjust for all those things we have better than 60 basis points of expansion on EBIT margin and we should expect to continue to grow that.
Sounds good, I'd like to share.
We'll go next to John Lawrence with Coker & Palmer.
Thanks. Good afternoon guys. Would you comment a little bit, Greg you commented a little bit about new store performance doing really well. And then you mentioned the state of Tennessee.
So I know there is an unusual situation that you've got to be doing really well, downtown Nashville with the investment you've made there, unique environment, unique opportunity. Can you comment are there some more places like the country that you could replicate that model?
In Downtown Nashville and Broadway is a incredible store, love the design and expansion into the adjacent space with the ladies part of our business. Yeah, it's kind of hitting on all cylinders and we feel great about it.
Having said that, our model going forward is, we'll continue to be a 10,000 square foot, maybe 11,000 square foot square box close to highway or freeway and while we won't turn away opportunistic deals like the one in Downtown Nashville, we are frankly just going to keep things simple and continue to look, build stores or acquire stores that fit our basic model and are there places like that, that we could have better store.
Yes, of course there are that there are now a handful of stores and they tend to acquire undue management time, attention and capital.
So as we ramp up, we're looking to roll out a fairly standard model just to keep everybody's life buyers, store operators, district managers, keep their life simpler and let them spend more time with customers.
Just to comment, it's a unique situation which seems to be working really well.
Thank you. It's a fun store.
Yes.
We'll take our final question from Mitch Kummetz with Pivotal Research.
Yes, thanks for taking my questions. I guess I have two, let me start on the comp piece, so you're going to be lapping some weak e-com performance I think in the first half of the year. You’ve talked about that being self inflected. So I would think artificially deflated your performance there.
So is there any reason to believe that e-com at least in the first half won't be unusually strong? I mean you’ve talk about, Greg you said about kind of a 10% two-year stack on the overall comp. I would think that lapping some of those weak e-com numbers that the e-com performance could potentially be quite a bit better than that and if so, is that contemplated in the plan particularly from a margin standpoint?
It's contemplated in our plans for sure. We kind of look at it two year stack by store and e-com versus some of our bigger stores. So it’s contemplated and when we get to September we start to cycle the transition of bootbarn.com platform and when we transitioned going into the bootbarn.com platform change, the business was pretty darn strong and coming out of it, it was incredibly strong.
So while we might have a easy road ahead of us between now and September, the incline that we were up against gets much steeper in September. The Sheplers business will cycle a difficult few months and that business improved for a bit and then unfortunately for last year's Christmas, we had a difficult business at sheplers.com and we'll get to cycle back. So that might be a bit of an artificial help when we get into November-December given the supply chain problems we had.
So it's all kind of built up from the bottom up and contemplated in the way we're thinking about the business and in answer to your specific question, yeah I suppose for the next few months, we have a bit of an easy compare from the e-commerce perspective and then getting back it's a little bit more difficult when we get to September when we hit the transition of bootbarn.com.
Okay. And then Jim in your prepared remarks you talked from like a category perspective, it sounds like there was strength across the business whether it's men's or women's or work or Western or boots or apparel. Is there any way to provide little bit more texture to that? I don’t know if you can rank some of these things in terms of their contribution to the overall comp.
And then when you think about the 2019 plan I don’t know how much you actually sort of think about things by category in terms of how they contribute to comp, but is there any way to speak to like where do you have more confidence in some areas versus others based on either the trends that you're seeing or the merchandise that you guys are putting out there.
Sure if you trend out size and growth rate, we have to acknowledge that work part of the business overall work boots is probably the biggest single department in the company, rivaling men's Western boots and work boots has had some nice growth, steady growth, healthy growth.
And work apparel, while not quite as big, had had steady growth and even more outsized rising work groups. So both of those I think are in our DNA already. They’ve been helping the business grow over the last few quarters and we don’t see any signs of that slowing down or expected to slow down and frankly once we circuiting our new brand out there. We might be see and more upside.
The men's business, men's Western business between boots and apparel is I've added two parts of the store there but that's the majority, I guess the biggest single or collection of business is in the store and their growth rate has been strong, not quite as strong as the work business, but the growth rate has been strong and got better between the third quarter and the fourth quarter.
And then the final piece of it is ladies, particularly on the ladies apparel side, that is not a huge part of our business. It's less than 10% of our business, but the growth in ladies apparel has really been exceptional in terms of the sequential change between the third quarter and the fourth quarter which changed the assortment quite a bit.
We launched Wonder West, which is our sort of view towards a more female, younger, fashion oriented customer. We've developed a terrific new television spot that really showcases our ladies apparel and I think the combination of those things has really helped a relatively small business. Start to see some outsized growth.
So just to recap, work is a big business and growing strongly. Men's Western is even going to get put boots and denim and apparel together and even bigger business, growing strongly, not quite as strongly as work and related apparel business is smaller but it is really starting to build some terrific momentum.
Got it. That's helpful. I appreciate that color.
And that concludes the question-and-answer session. I'll turn it back over to Jim Conroy for any additional or closing remarks.
Well thank you everyone for joining today's call. Look forward to speaking with you all on our first quarter earnings in August. Take care.
And that concludes today's conference. Thank you for your participation. You may now disconnect.