BOOT - NYSE

Good day, everyone. And welcome to the Boot Barn Holdings First Quarter Fiscal Year 2023 Earnings Call. As a reminder, this call is being recorded. Now I'd like to turn the conference over to your host, Mark Dedovesh, Vice President, Investor Relations and Financial Planning. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn’s first quarter fiscal 2023 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; Greg Hackman, Executive Vice President and Chief Operating Officer; and Jim Watkins, Chief Financial Officer. The copy of today's press release along with a supplemental financial presentation 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 first quarter fiscal 2023 earnings release as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. I will now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer. Jim?

Thank you, Mark, and good afternoon. Thank you everyone for joining us on today's call. On this call, I'll review our first quarter fiscal 2023 results. Discuss the continued progress we have made across each of our strategic initiatives and provide an update on current business. Following my remarks, Jim Watkins will review our financial performance in more detail, and then we will open the call up for questions. We are extremely pleased with our start to fiscal 2023 and the strength of our first quarter results. During the quarter, total net sales grew nearly 20% over the prior year period with strong sales from both existing stores and new stores opened over the past 12 months. Consolidated same-store sales grew 10% comprised of an increase in retail store, same-store sales growth of 10% and e-commerce sales growth of 9%. Consistent with prior quarters, the growth in same-store sales was driven primarily by an increase in transactions with a large portion coming from new customers. We also continued our new unit expansion by opening 11 new stores for a third straight quarter. In addition to strong top line performance. We once again saw merchandise margin expansion as a result of further growth in our exclusive brand penetration and strong full price selling, which more than offset freight headwinds versus the prior year period. The team's ability to drive top line growth and navigate freight and supply chain challenges resulted in an EBIT margin rate of 14.3%, which was 150 basis points above our guidance of 12.8%. Our earnings per diluted share in the first quarter with a $1.29 and when adjusting for the tax benefit from share-based compensation, our EPS was a $1.26 or $0.12 better than guidance. On a tax adjusted basis, we were able to achieve flat earnings per share when compared to the prior year period, which benefited from outsized growth in revenue and significant expense leverage. We believe our sustained success and sales growth reflects the execution of our four strategic initiatives and showcases the future potential of the brand. I will now spend some time highlighting our recent progress on each initiative. Let's begin with driving same-store sales growth. First off, I want to congratulate the entire team for achieving double digit comp sales on top of a 79% same-store sales growth in the prior year period. Over the last few years, Boot Barn sales have reached record levels and to be able to grow on top of our new base by double digits is a testament to the level of execution across the organization. During the first quarter, we saw broad based growth across most major merchandise categories, ladies apparel and boots, work apparel, cowboy hats, ball caps and belts were our strongest performing categories. Additionally, we saw healthy growth in men’s western apparel, kids apparel and accessories. Sales of flame resistant apparel exceeded the chain average while sales of men’s western boots were a headwind during the quarter with negative comps versus the prior year period. From a geographic standpoint, we saw strength in our North and West regions, the Southern region, which includes Texas lagged the chain average, but also posted positive comp sales growth. From a marketing perspective, we continue to balance the priorities of attracting new customers, while also remaining relevant to our legacy Western customer. The strategy to expand the brand into new customer segments has proven successful and we continue to be encouraged by the growth of our active database. We’re also pleased that new customers are shopping with similar frequency to our core customers. From an operational perspective, our stores were sufficiently staffed to service the strong consumer demand. We feel very good about our staffing level and the ability to hire associates in such a strong labor market. I want to commend the entire field team as they continue to provide excellent customer service all while managing sales growth, merchandise flow and multiple omnichannel initiatives. Moving to our second initiative, strengthening our omnichannel leadership. Our e-commerce channel had a solid first quarter with comp sales growing 9% over the prior year period. As our digital business has had multiple years of outsized growth coming out of COVID, we are pleased with the ongoing growth. Additionally, we continued to expand the merchandise margin rate in our e-commerce business driven in part by the increased penetration of our exclusive brands since the implementation of in-store fulfilment last summer. We are very pleased with the success of in-store fulfilment and all of our omnichannel initiatives as they have improved the consumer experience, increased the percentage of omnichannel customers and helped drive profitability in our online business. Now to our third strategic initiative, exclusive brands. During the first quarter, our exclusive brand penetration grew to 31.7%, approximately 540 basis points higher than the prior year period. We are extremely pleased with the ongoing growth of our exclusive brands, which have grown approximately 10 percentage points in the last two years. Once again, three of our exclusive brands were among the top five selling brands in the quarter. Additionally, the initial feedback on the four new brands we launched at the end of last year has been strong and we are very pleased with the initial adoption by consumers. I would like to commend our exclusive brand team for designing innovative and compelling product, expanding our brand portfolio and successfully managing a complicated supply chain environment. It has been remarkable to see the incredible growth in this portion of our business over the last several years. For perspective, our exclusive brand business has grown from $5 million in annual revenue 10 years ago to over $400 million last year. Finally, our fourth initiative, expanding our store base. During the first quarter, we opened 11 new stores bringing our total count to 311 stores across 38 states. New stores open in both existing and new markets continue to perform in line with our $3.5 million sales expectations with results in a payback on our investment much faster than our stated three-year goal. We are confident in our ability to continue this momentum and are excited about our new store pipeline for the year with planned store openings in new markets, including New York, New Jersey and Maryland. Turning to current business, through the first four weeks of our second fiscal quarter, our consolidated same store sales were slightly positive compared to the prior year period. While we have seen a deceleration in discretionary purchases, our more functional businesses remain strong. It is encouraging that we've been able to grow on top of the tremendous growth in the business in fiscal 2022. As a reminder, the step function change in sales growth that Boot Barn has been delivering began in the first quarter last year. While there has been a concern that this trajectory, sorry – while there has been a concern that this growth was transitory and we would revert back to pre-pandemic average store sales. It appears that this new level of revenue and store AUV is sustainable going forward. I'd like to now turn the call over to Jim Watkins.

Thank you, Jim. In the first quarter, net sales increased 19% to $366 million. Sales growth was driven by a 10% increase in consolidated same store sales and sales from new stores added during the past 12 months. Gross profit increased 18% to $138 million or 37.7% of sales compared to gross profit of $116 million or 38% of sales in the prior year period. The 30 basis point decrease in gross profit rate resulted from 70 basis points of deleverage in buying occupancy and distribution center costs, partially offset by a 40 basis point increase in merchandise margin rate. The merchandise margin rate increased was primarily result of growth and exclusive brand penetration and better full price selling, partially offset by a 70 basis point headwind from higher freight expense. Selling, general and administrative expenses for the quarter were $85 million or 23.3% of sales compared to $63 million or 20.5% of sales in the prior year period. As expected SG&A expense deleveraged primarily as a result of higher store labor and marketing expense as we normalize our cost structure compared to the first quarter of fiscal 2022. Income from operations was $52 million or 14.3% of sales in the quarter, decreasing 320 basis points compared to $54 million or 17.5% of sales in the prior year period. Net income was $39 million or $1.29 per diluted share compared to $41 million or $1.35 per diluted share in the prior year period. Excluding the tax benefits primarily resulting from share-based compensation in each year, net income per diluted share was a $1.26 in both periods. Turning to the balance sheet, on a consolidated basis inventory increased 80% over the prior year period to $534 million. This increase was primarily driven by a 50% increase in average comp store inventory in order to support the increase in average unit sales volume. When evaluating our in-store inventory against our updated sales projection, we have approximately 24 weeks of forward supply, which is in line with the inventory levels required to turn twice a year consistent with our historical average. Additionally, we have added inventory to our distribution centers in order to support our exclusive brand growth, which continues to exceed our expectations. The final portion of the increase in total inventory can be attributed to new stores, both the 36 new stores opened over the past 12 months, as well as the inventory needed to stock the pipeline of stores that will open over the next couple of quarters. The team has done a tremendous job of securing the merchandise needed to fuel our growth. And we continue to feel that the composition and the freshness of our inventory is healthy. We finished the quarter with $75 million drawn on our revolving line of credit and $16 million in cash on hand. Earlier this month, we amended our revolving credit facility. This amendment increased our capacity on the line of credit by $70 million, from $180 million to $250 million and extended the maturity date by three additional years to 2027. Turning to our outlook for fiscal 2023. In light of recent macroeconomic uncertainty, coupled with a deceleration in our business, we have updated our guidance for the year. For the fiscal year, we now expect total sales to be between $1.68 billion and $1.70 billion, representing growth of 12.9% to 14.2% over the prior year. We expect same store sales to be in the range of approximately flat to positive 2% and earnings per diluted share to be between $6 and $6.20. Our income from operations is expected to be between $247 million and $255 million or 14.7% to 15.0% of sales. We expect net income for fiscal 2023 to be between $182.7 million and $188.6 million. We also expect our interest expense to be $4 million and capital expenditures to be between $80 million and $87 million. For the balance of the year, we expect our effective tax rate to be 25.2%. We are on track to open 40 new stores during the year, including the 13 stores we have already opened year-to-date. Please refer to pages 13 and 14 of the supplemental financial presentation that we will be releasing shortly for further information on our revised fiscal 2023 guidance. As we look to the second quarter, we expect total sales to be between $339 million and $346 million and same store sales of approximately flat. We expect earnings per diluted share to be between $0.87 and $0.93. Now I'd like to turn the call back to Jim for some closing remarks.

Thank you, Jim. We are very pleased with our strong start to fiscal 2023. We are confident in our ability to execute on our four strategic initiatives and drive growth this year and over the long term. I would also like to extend my gratitude to the thousands of associates in our stores, distribution centers, call centers and the Irvine office for their hard work and dedication. Now I would like to open the call to take your questions. Kevin?

Thank you. [Operator Instructions] Our first question today is coming from Matthew Boss from JPMorgan. Your line is now live.

Great. Thanks. So Jim, maybe to kick off on July same store sales, could you help maybe speak to drivers in your view of the sequential moderation relative to June? And if we broke it down, how the composition breaks down between basket size, purchase frequency, or did you see any notable differences in performance by region?

Sure. So our first quarter total sales growth was 19. Our second quarter, at least in July was plus 10. From a comp standpoint that our first quarter went from plus 10. And now we're sort of slightly positive. Most of the delta in same store sales growth is transactions based. So our transactions for July were down about 1% – a little over 1%. And in the first quarter, they were up about 7.5% or something like that. So most of the deceleration has been due to a follow-up in transactions. We made up a little bit of that ground with our basket size getting slightly bigger in the second quarter-to-date versus the first quarter, which got a slightly positive growth in the stores. In terms of the regional differences, the way I would think about it is the West had a very strong first quarter and has gone slightly negative in the second quarter. The complication there is the West is up against incredibly strong numbers. So as we look at the business and we try to look at what’s going on in our West business, we still actually feel it’s quite strong. On a two-year basis, last year, it was up 60% or 59% or something like that. So it gives two points of that back, isn’t so bad on a kind of a three-year comp basis. The other business that turned negative in the second quarter was our South business. That’s slightly negative. And our two other regions, both the North and the East are doing well. And they’re positive in the second quarter. So that’s kind of the composition of what’s changed between Q1 and Q2 in terms of transactions versus basket and by region. The other cut, Matt, which wasn’t your question. But the other way to look at it is we continue to try to remind investors that most of our business still is functional in nature. So when we look at many of our functional categories, work boots, work apparel, men’s Western apparel, hats, all of those businesses in July were pretty solid. So the fall off and perhaps expectedly given what everybody’s talking about in terms of discretionary purchases has been a slowdown in ladies apparel and ladies boots. So that’s kind of where the business has decelerated from the merchandise category perspective.

That’s helpful. And then maybe just to follow up, Jim on gross margin. So how best to think about second quarter and back half drivers as now you walked through some of the categories and components on the top line. But maybe if we’re thinking about merchandise margin incorporating some of what you’re seeing in terms of sales by category versus freight and occupancy, just how best to think about gross margin in the second quarter and the back half of the year?

Yes, Matt, the – one thing I would say to the group is we did post the supplemental presentation on our site that we’re having some technical difficulties with the SEC and then posting it on our site. So if that’s not up now, it will be up shortly. We’ve got some more detail there. If you’ve got access to it great at slide 14, I’ll refer to where we’ve updated the fiscal 2023 financial guidance. As far as the margin drivers, we would expect to generate 80 basis points of product margin. And that’s going to be driven by 300 [ph]. And so again, this is for the full year piece. So balance of the year will be a little bit less than the 80 basis points. And that’s going to be driven by more full price selling similar to what we’ve seen in this last quarter in the previous quarters, as well as product margin improvement will be around, what we’ve got in there 80 basis points for the full year offsetting that we’ve updated our guidance to be a 100 basis points of freight headwind for the full year. So what we found this last quarter was 70 basis points. We expect that the freight expenses will continue to be elevated. And so that’s what we’ve got baked in for the last half of the year. As far as the occupancy deleverage and SG&A expense, when we outlined our guidance at the beginning of the year, we were pretty granular on what we had guided there as the top line has come down. We’re not guiding the different parts like we did before, but as the top line comes down, we’ll expect to deleverage around SG&A and buying an occupancy to continue to be probably a little bit worse than what it was before.

That’s helpful. Best of luck.

Thank you.

Thanks, Matt.

Thanks, Matt.

Thank your. Our next question is coming from Steven

Great. Good afternoon, everybody. Thanks for taking my question. I wanted to focus specific on – specifically on inventory positioning. It sounds like you’re pretty comfortable, but Jim curious, are you going to elaborate a little bit more, because it looks a little high. I guess, the question I’d have too is if the sales trends were to deteriorate from here, what are the levers that you could pull to appropriately manage inventories?

Steven, it’s Greg and I’m going to take this question, given, I have direct line of side over merchandise planning and the inventories. As Jim mentioned, we do feel really good about our inventory position, understand the point of your question. But if we look at the increase, the 80% increase, it’s really broken into three parts. Jim spoke to the first part, which is the comp store inventory build, and I’ll go into a little bit more depth there. The second piece is we’ve built up inventory in our Fontana distribution center that supports exclusive brands and container buys. And then the third piece is directly related to new stores added over the last 12 months. So if we take that first chunk that the growth in our average inventory per store, that’s about 45% of the 80% increase, right? So almost half. And the average inventory per store is up 50% over the prior year. And as you may remember, we were chasing inventory last year as our business continued to do very well. If you were to look at our inventory growth over the three-year period, meaning a pre COVID Q1 compared to this quarter, our inventory is up 47%, but our sales in that timeframe are up 61%. So we’ve actually spend the turn a bit. And then in the supplemental deck, if you have it available on Page 5, we kind of show historic weeks of supply, forward weeks of supply and where we’re positioned now, given our new guidance, we have about 24 weeks of supply and that compares, I’ll say favorably to Q1 of three years ago. And Q1 of two years ago, it’s a little bit more inventory than last year, but again, we had a very strong sales trend and we were light on inventory. The second piece is Fontana. That’s about 30% of the growth. And in March of last year, we signed an amendment to our DC lease there where we doubled the space. So we went from 200,000 square feet to 400,000 square feet. We weren’t really in a position to grow inventory in that additional 200,000 square feet during the first quarter last year, again, as we were trying to get inventory into the stores. So that’s a piece of the growth. And then finally, 18% of the 80% growth is because of the 36 new stores that we added over the past 12 months. So Jim Conroy commented right that the most of what we sell is functional and basic in nature. 70% of what we sell is on replenishment. That’s what we disclosed in our 10-K a few months ago. So we feel like there’s not significant markdown risk here. As we look at sales, we are continuing to be cautious and push receipts. We’re appropriate, but we feel really good about our inventory content and quantity.

Okay. Appreciate all the detail there. And just to follow up on Matt’s questioning around quarter-to-date, how much of the drought in the South like Texas, I guess a little bit in California is an impact. I guess we’re trying to assess as the consumer slowing down because maybe gas prices are high and they’re feeling it a bit there or is it some of it just you’ve seen drought here and it’s maybe impacting some of your farm and ranch customers?

I think there’s a combination of things that might be impacting demand. Drought inflationary pressure concerns about the economy, all those things. For us, we’re candidly quite pleased that we continue to grow on top of the base that we built last year, right? Had we gotten into this current fiscal year and we were plus to the whole year, we would’ve been thrilled. We had a very strong first quarter as we cycled that growth from last year. But that doesn’t make us disappointed in the second quarter growth, if I’m honest and we’re quite happy that we’re holding on to the business that we have really put together over the last couple of years and that large influx of customers that coming out of COVID we were able to add to the business seems to be sticky. So will we get some tailwinds in the future potentially, right? July was particularly hot. There’s been in drought, it’s a small month for us, et cetera. We’ve got some things that might help drive business for the balance of the year. But even flat to low single digit comp for the balance of the year we’d be pretty happy with.

Great. Thanks for the detail guys.

Thank you. Next question is coming from Max Rakhlenko from Cowen and Company. Your line is now live.

Thanks a lot, guys. So first, can you maybe elaborate a little bit more on how your new shoppers have behaved compared to your core shoppers? Are they starting to slow maybe similarly to the core or are there any divergences? I think you noted that most of the delta in July is transaction based and leaning towards discretionary a little bit, which is where I would guess that those new shoppers probably over index a little bit more. So any commentary would be helpful.

Sure. It’s a very good question and probably a good hypothesis. We have better data on our first quarter. And our first quarter, the customers both new and legacy were behaving similarly. In the second quarter, we – it’s hard for us to do that kind of analysis on a kind of weekly or monthly basis. If you’re hypothesizing that the new stores are coming into more fashionable categories and now they're potentially shopping less. I guess that's a fair guess, but we don't – we can't really prove or disprove that if I'm honest. So as we get more information over the balance of this quarter, we'll be able to opine on it. But that said, I mean, I think when you look at how much the business has grown over the last two years, even if we're getting slightly less frequent shopping from a sliver of our new customer base, we're pretty pleased to be able to hold onto the other 99% of the business that's been growing over the last 24 months or so.

Got it. That's very helpful. And then can we discuss what you're seeing in the competitive environment, are your primary peers maintaining pricing discipline? And then what about just secondary and tertiary, obviously the promo environment is picking up. So just curious there, and then is that having any impact on how you're thinking about your own pricing structure over the next several quarters?

Sure. On a second piece, we're a full price selling retailer. We feel like we have a very strong handle on our inventory position. We'll have our typical promotional periods and our typical matter, course of business, markdown for the balance of the year, but we don't expect to change our promotional posture at all, to be honest. In terms of the competitive set, we compete against two or three groups of retailers out there. The number one competitive set is hundred of single store operators, the mom and pop industry. And some of those folks may become more promotional. Some may hold price. We honestly will not change our promotional stance regardless of what they do is they're just not we don't trade customers with them very much. We typically take share and maintain sort of a stickiness with those customers and we wouldn't chase any single store operator from a sales and promotion standpoint. We have one other chain of pure Western stores based in Texas called Cavender's. Cavender's operates very similar to what we operate, the way we operate, which is mostly full price selling, occasional modest promotions and tend to be extremely rational. And then the last big competitor we have is sort of a group of farm and ranch players led, I guess, by tractor supply. And they continue to hold a EDLP strategy. And frankly, continued to raise their prices, right. I mean, that's one of the things they called out on their call was that sales growth they've gotten thanks to inflation. So I don't really expect to see a promotional environment within our industry. And nor do we believe that as mass market retailers and mall based retailers and big boxes, if they become more promotional, candidly, we just don't think that's going to impact on who shops with us and our core customer.

Great. Thanks a lot. That's helpful. Best of luck.

Thanks Max.

Thanks Max.

Thank you. Next question is coming from Peter Keith from Piper Sandler. Your line is now live.

Hey, thanks for taking my question, guys. Just looking at the revision to the EBIT margin guidance for the year, is it – just purely a function of just taking a reduced sales outlook or are there any other puts and takes with regard to gross margin or expenses?

Yes, that is the main driver, Peter, it's the top line driven. The other puts and takes that, that I would say is the product margin expansion that we had originally guided was going to be 50 basis points. What we're seeing is strength in Q1 and even into July, when it comes to product margin, we had about 100 basis points of product margin expansion, before being impacted by freight. And so we've raised that to 80 basis points of expansion for the year. So freight headwinds that we had initially called out as being 130 basis points for the year, we've lowered that to a 100 basis points again. So quite a headwind, we're still seeing elevated freight costs, but we are seeing the cost of containers come down. We're seeing the highs come down or we're coming down off of those highs. And so we're encouraged that while we'll still see a freight headwind, the rest of the year, that a hundred basis points per quarter seems more reasonable. And then hopefully, as spot rates continue to come down and at some point the fuel surcharges that we've seen increase at some point, those will reverse, whether that's next year or beyond, but there'll be some good news coming our way at some point in the future probably next fiscal year. But we're encouraged by what we saw this last quarter. So 100 basis points there. Those were the two drivers that we called out. And then we didn't provide updated guidance around buying an occupancy, deleverage and OpEx deleverage. We had previously guided to 40 basis points and 90 basis points of deleverage, respectively in those categories. And the deleverage will be a little bit worse in both of those areas, so that that's kind of the driver to get to that updated guide from an OpEx, or sorry, from [indiscernible] rate.

Okay. Helpful. And then just maybe more of the near-term question is everyone trying to understand what's going on with the consumer and the competitive set. So interesting that you're seeing this continued positive trends in the north and the east, anything to read into the geographic disparity at top of mind for me is maybe it's a little less competitive in those segments versus south and west, but I'd love to hear if you have any thoughts,

It's hard to create a cogent narrative. If I'm honest, when we look at sort of the pockets of strength and pockets of relative weakness. For example, we've had strength in West Texas from a drilling perspective, but we had weakness in Houston from a refining standpoint. So again, it's hard to find a bunch of dots that line up. Texas is definitely more competitive. We have a very strong competitor down there in Cavender's, but in the west, we've grown up here. We've been here for 40 years. Were the strongest player out here? I think by a lot. So I can't really place sort of the slowdown in the west on competitive pressures. Candidly, I think the west is partly due to some of the core ag markets in California, experiencing drought and inflation on their raw materials, et cetera, plus just going up against monster numbers for multiple years in a row. So our west region, if you were to parse through the last several years of earnings calls, we almost always led with growth in the west. And for them to finally have a pretty modest slowdown on top of a gigantic growth last year, it's kind of hard to blame it on anything other than that business. Can you possibly grow to the sky and with some of the pressures that they're facing now, perhaps transitory, they'll probably get back to growth over the next couple of months or quarters knowing that team. So that's kind of how we view it and you're right. In the north and in the east, perhaps there's less organized competition, it's more mom and pops but we've seen some really nice growth in those two regions.

Okay. All right. Sounds good. Thanks so much.

Thanks Peter.

Thanks Peter.

Thank you. Next question is coming from Jonathan Komp from Baird. Your line is now live.

Yes. Hi, thank you. Good afternoon. I want to just ask a question on the implied back half outlook. I think the comps guidance is something like flat to down low single-digits in the back half. So maybe could you just talk through the factors you've considered, in formulating that guidance and then maybe a bigger picture, just what your thoughts are in terms of how the business would react today in a recessionary scenario?

Sure. So really what we did Jon on the back half of the year is, we looked at the current trend in July and we're up 0.6% from the same-store sales standpoint. And so on the back half, we looked and we said, okay, if we were to hold that trend and be flat for the rest of year, that seems like our best estimate as to where the business goes. I mean, we saw really nice growth in Q1 with a plus 10% comp and 19% total sales growth. There's a scenario where we reaccelerate as well as, as hold where we are or maybe it deteriorates a little bit from here. But I think based off of just four or five weeks of business, guiding, reducing that guidance to be more in that flat range or flat to minus two for the balance of the year and total sales growth of around 11% to 13% seemed like the prudent thing to do given the backdrop.

And then you have the question on the recession. What was your question on the recession, Jon? I apologize.

Yes, I would love to hear just your broader perspective on how that the business would react in a recessionary scenario, or if you have any views on how your core customer would hold up. Just any thoughts there?

Sure. Look, when we've had turn down from the economy, including when we had the big crunch in the oil patch several years ago, our core customer still needs our product, right. They're still wearing through work boots and denim and jackets. Many of our Western customers work in that product as well and they use our merchandise for real functional purpose. And certainly if there was a massive change in employment, maybe we'd see some slow down in those categories, but most of our business isn't really discretionary in nature. So even when we had that turned down in the price of a barrel of oil in 2015 and 2016, the worst our annual comp ever got to was fly. So I think it speaks to sort of the resiliency of the model and the diversification of our market base now, and our consumer and stores further helps us to offset weakness in one area with strength in another. So look, we're not completely resilient to, or immune to a downturn in the economy, but for the most part, our customers turning to us for functional product and not for discretionary or fashionable purchases.

Yes. That’s really helpful. And then just one follow-up, Jim, I know you mentioned no plans to change your promotional stance. I thought you mentioned maybe some other drivers that you could pursue during the year. So any other color on specific drivers you have in mind outside of using promotions to drive traffic?

Yes. I think our marketing team is doing a fantastic job and continues to elevate the brand and we’ve entered into some really nice sponsorships and extended the brand reach into some areas that we haven’t been in before, whether that’s Major League Baseball or NASCAR. And so that’s a nice driver from a sales standpoint. I think from a margin standpoint, we talked on the last call when asked about markdowns and whether we’d see more markdowns. And we continue to believe that we’ll have exclusive brand penetration growth, we’ll have better full price selling. And we expect to have some markdowns in some areas that if we need to clear out some seasonal goods, and we’ll be doing that. But again, for the most part our product is basic and core. And if we have too many work boots, we can use those again next year and work our way through that inventory. So we don’t expect markdowns to be significant. And to the extent that we need to do those markdowns, what we talked about also on the last call was with the in-store fulfillment that that went live last summer, we have the ability to take product that’s in one store, maybe broken sizes, put that on our website and get the views of the online customer and sell that product without having this deep a markdown as maybe what we used to have. And so, again, another thing that will help us from a margin standpoint or merchandise margin standpoint. So we’re not out of ideas as far as increasing that merchandise margin and that’s what reflected in the guidance that we have around product margin for the balance of the year.

Yes. Great. Thank you very much.

Thanks, Jon.

Thanks, Jon.

Thank you. The next question is coming from Corey Tarlowe from Jefferies. Your line is now live.

Hi. Good afternoon and thanks for taking my question. The first question I wanted to ask dealt with inflation, just curious as to how you’re dealing with that. Are you taking price and passing it through the customer? Or do you have certain initiatives in place where you’re looking to mitigate some of the higher costs that you’re witnessing? And then also, if you could just talk a little bit about trends that you are currently seeing in western – men’s western boots, and maybe how you expect that to trend as we look ahead and just remind us how sizable that business is? Thank you very much.

Sure. Corey, on the inflation piece, we have seen some modest inflation on product cost and input costs. And similar to what others have seen, and our merchants and our exclusive brands teams have been hustling and working with our vendor partners and manufacturers to – and using our, I guess, growing economies of scale to offset some of these inflationary pressures. And we’ve talked a little bit about the freight pressures that we’re seeing and that’s a temporary headwind that eventually will dissipate. But our approach, as you stated, has been consistent, which is pass those price increases onto the customers while maintaining the same merchandise margin rate. And so that’s been working for us so far and we’ll continue to do that approach and use that approach. But yes, we are seeing some of that inflation come into our product cost and we’re going to maintain that margin rate.

I would add to that. And then I’ll come back to the men’s western boots piece of it. The credit to the merchants who have actually been managing cost inflation so well that it’s – for us, it’s been a relatively small piece of our assortment. That’s gone up in price, a relatively small amount. If there’s a downside to that we’re not getting sort of the artificial comp driver that you get from raising prices more. On the men’s western boots business, it’s about – it’s a pretty big business for us. It’s about 13% of sales. It splits into performance sold boots and leather sold boots. That may not mean a lot to everybody listening, but the performance sold boots are more functional in nature. And candidly, we’ve had some difficulty trying to get some of that product in stock and it’s now coming back online. So we’re hopeful that that business sees some life going forward. Now we’re in a better inventory position with the performance sold side of the business, which is the bigger part of the business. That’s how – I guess I would characterize the men’s western boots business. Notably the men’s western apparel business was strong in Q1 and almost equally strong in Q2. So we’re still getting that customer in the door. And perhaps they’re just waiting a little bit longer on a higher AUR product, like a cowboy boot versus a pair of jeans or a shirt. So we’ll see, stay tuned.

Got it. And then have you seen any sort of interesting dynamics where people are trading down from different brands, because maybe they’re a little bit more scrapped for cash if you will. And you’ve seen – obviously you’ve seen the transactions decline in July, but just curious if you’re starting to see any sort of interesting changes by pricing tier within the brands that you do carry.

Honestly, we’re not really seeing that. Using an example on the men’s western boots, for example, in the first quarter, our men’s western boots business was slightly down, but the most expensive category of boots that we sell men’s western exotic skin boots was actually up. So while the natural or conventional wisdom would be, people are trading down, et cetera, we actually haven’t seen that. One possible explanation of that is on a relative basis, we are seeing our higher income customers performing better than our lower income customers. So maybe that’s why we’re not seeing the trade down because our slight more affluent customers are still shopping kind of more frequent way than our less affluent customers. But we have looked for that trade down. We honestly haven’t seen it. We were anticipated that call. We recognize that other companies are calling that out. We haven’t seen that here though.

Great. Very helpful. Thank you very much and best of luck.

Thank you.

Thank you. Our next question is coming from Dylan Carden from William Blair. Your line is now live.

Thanks a lot. Just two quick ones here. If you could just give me a sense or us a sense of where marketing costs are in regards to historic ranges? And maybe when you might start lapping some of that headwind? And similarly, on the merch margin side, when you lap the most significant kind of increase in freight costs and when maybe the higher penetration rates, lower promotion cadence can kind of offset that more fully? Thanks.

Yes. So going on the marketing costs, Q1 and Q2 of last year, the marketing costs were lower as a percent of sales and what we’ve guided for the full year. So again, just a reminder, we tend to target a 3% of sales spend in marketing a year ago in Q1 and Q2 as sales accelerated the planned marketing expenses were lower percent of the increased sales, right? So in Q1 and Q2, we’re up against kind of that timeframe where we had the lower spend in marketing as a rate of sales. And so that headwind should get a little bit better in Q3 and Q4. And then as far as freight from a prior year standpoint, the freight was pretty consistent last year’s headwinds. I think if you look back at container costs and some of the things that we had, it did kind of peak in really, I guess about six months ago, if I look at the freight headwinds going back Q4 was 60 basis points, Q3 was 60 basis points, Q2 was 10 basis points and Q1 was 10 basis points, right? So we saw in the third quarter, the freight really getting elevated. So I think as we move into the back half of this year, we’ll see that I guess the compare ease a little bit. Again, there’s a little bit of accounting nuance with how it takes six months for the freight – the higher freight charges to work its way through the P&L as freight expense. And so that’s really why we’ve got the guide out there of 100 basis points of headwind for the rest of this year and that we would expect that next year is when we might start seeing some relief as it comes to freight headwind.

Excellent. Thanks a lot.

Our next question is coming from Sam Poser from Williams Trading. Your line is now live.

Thanks for taking my questions. Good afternoon. Can we – can I just ask the gross margin question, straightforward? How should we think about the total gross margin for the year? I mean, are we looking at like mid 37% range? Is that a good number as it should improve in the back half? Or is that too high?

I think that’s a pretty good number, Sam. I think – yes, the 37%, I think that’s great.

And then I might have missed it, but your sales in your work category, how were they in the quarter?

In the first quarter, both work boots and work apparel grew and grew nicely. Our work apparel business was a solid double digit growth in the first quarter. In this part of the year work apparel is only about 5% of our sales, so that was a help to overall comp, but it’s just not that big of business. Work boots were also high single digit positive comps in the first quarter. As we got to the second quarter, both businesses are still solidly positive. They both slowed a little bit, but what we really saw sequentially between Q1 going into July is ladies boots and ladies apparel decelerated massively. Now they’ve started with a very strong trend, but they lost double digit pieces of their trend. They came down almost 20 points in comp. Ladies western boots in the second quarter, still slightly positive. Ladies western apparel is slightly negative, but they were strongly positive in Q1.

And I guess my question as a follow up to that is what can you do through your expanding omnichannel operations and your loyalty program and so on without getting promotional to encourage that woman or the customers that have slowed down to come back, given what's going on, or are we dealing with potentially a six-week blip and back to school starts and gas prices come down and I mean, you're guiding, it sounds like just to what's happening now and not assuming that there's going to be much improvement except for maybe some fall off of some freight costs that'll help to gross large. Is that a fair?

No, that's very fair. I think our guide right now, and I think every management team is trying to outguess a number of different, highly impactful macroeconomic factors all at the same time and try to give Wall Street not a nine month view into their business. That said we had an extremely strong last year. We had an extremely strong first quarter and we had four weeks of less strong business, which if you really wanted to look at it with the microscope, that's slightly better in the latter part of July versus the first part of July. So I think part of it is we're extrapolating current business, and we're also looking at all the macro factors and trying to be conservative with what our outlook is. And part of the thinking was even in this scenario, our business still holds up pretty strongly. Our earnings holds up pretty strongly. I mean, it certainly seems that the market is expecting much worse, right? At least looking at our multiple. So even with this conservative guide, we generate $6.20 worth of earnings on a year, which over the last few years it's a nice growth rate going back for three or four years. So that's the way we were thinking about it. It's not intended to be overly pessimistic, but it is looking at a very short time period and candidly, a very small or low volume month of sales and trying to project what's going to happen for the balance of the year.

Thanks very much and appreciate the info.

Thanks Sam.

Thanks Sam.

Thank you. Our next question is coming from Jeremy Hamblin with Craig-Hallum. Your line is now live.

Thanks. I wanted to follow up on exclusive brand penetration and just in terms of thinking about price points for that, you had another quarter of extraordinary penetration or growth and share of mix in that closing in on 32%, do you see that as, one, how do you view those brands price points versus some of your other kind of high sales mix brands, like an area or so forth? And then secondly, wanted to get a sense for you've launched a whole bunch, four new exclusive brands this year, and to get a sense of how those brands are tracking versus some of the incredible success you've had with Idyllwind or Shyanne, Cody James, Hawx, et cetera over the years.

Sure. On the second piece they're tracking well, they're tracking in line with expectations are slightly better. There's four different trajectories there. So they're all, not all exactly the same, but we feel very good about their additions to the business and we expect them to build over time. We have somewhat of a balanced approach. We want to bring out those brands with a somewhat of a splash, but we also are a little risk mitigated in how much dollars we commit to them. And we get to see a couple of quarters of selling, and then we push on what's working and we pull back on what's not working. And then we really have the ability to accelerate more going forward. If I were to think of the most recent two exclusive brand launches, probably the better one to look at. That's more analogous is when we launched Hawx workwear and it got out of the gate relatively quickly and then expanded nicely to the point where it's a pretty decent penetration businesses that it operates in. Idyllwind was sort of a runaway home run from the very beginning, the product line was fantastic. Our partner with Miranda Lambert was just a great partnership and marketing push, et cetera. So that's kind of an unfairly or artificially high bar to hold ourselves to. But the Hawx launch I think is more appropriate and the four new brands feel like they're all following that trend line to a large extent. In terms of our exclusive brands relative to the portfolio of other brands, while some companies are looking to bring out more value oriented product to in anticipation of a weakening economy or in response to actual inflation today, we continue to stick to our strategy that our exclusive brands should be high quality, best-in-breed boots or apparel that should be very much in line with the best brands in the space. Most of the other vendors that we do business with, Ariat is great example. I mean, Ariat has helped us build our business. They're an extremely strong partner. They will continue to get growth with us going forward. Typically what happens is when we bring in our exclusive brand, a more tertiary brand gets excluded or diminished to make room for one of our new brands. But we always want to make sure that we have a nice variety and assortment of different brands and different products, both within our own exclusive brand portfolio, as well as the national brands out there.

Okay. So interpretation is, the price points kind of holding firm on price points and you don't feel like your exclusive brands are slightly lower price points than some of the other national brands than you could maybe potentially benefit from a margin perspective if there was a trade down – by trade down?

Correct. Right. I mean, well, yeah, it's, they're in line with the national brand. So it would be – it would be disingenuous for us to say a customer's going to trade down to our exclusive brands and help our margin rate, because they're really match trading down in price. If they trade over, so to speak retail price is equal. We of course make more margin and as we build our inventory in that part of our business to the extent that we wind up with future markdowns, which again, I think we've tried to we really make people, people feel comfortable that we don't – we're not too worried about ongoing future markdowns, but even if we have them, we're starting with much higher margin rate on our exclusive brand. So we have a bit of a hedge on the downside anyway, but it's – we're really not pricing them lower to take care of a customer that's trading down. We have been able to keep the price from increasing in many cases. So by default we may wind up slightly lower than some third-party brands, but that's more because in some cases we've had to raise prices for our third-party brands.

Got it. And just clarifying one point too, in thinking about the guidance change, is it kind of a fair rule of thumb here? So you guided down about $50 million here at the midpoint and that equated to about 40 basis points to your EBIT margin. Is that a pretty fair rule of thumb, kind of going both ways if sales end up a little better than you're thinking you might get, let's say by $50 million, you're going to get that 40 basis points back or conversely, if it's a little softer by another $50 million than 40 basis point that's about kind of the incremental margin rates, so to speak every $50 million?

Yeah. I think within the narrow range that's okay. I think you could look at what our guidance was and how we got to where we re-guide and kind of see what that would look like on the upside next. And I think – again, I think between the range we provided for the current guidance and then the metrics and the margin we had out there before, you can kind of build a model on the downside scenario, if that's what you're looking to do, but at some point that range, kind of falls apart, if you get too high or too low off of what we've provided you.

Got it. Well, thanks for taking the questions and best wishes.

Thanks Jeremy.

Thanks Jeremy.

Thank you. Next question is coming from John Lawrence from Benchmark. Your line is now live.

Good afternoon guys. Jim, would you talk a little bit about just construction cost, inflation anything that's surprising you as you move forward with these contracts delays, et cetera, permitting to maybe alter the growth rate at all?

Sure. Well separating the question on the cost side, certainly there's been some inflation, but it's kind of baked into our model and staked into our capital assumption, just baked into our payback model and our stores are performing so well. Our new stores are performing so well that even if our capital expenditures have gone up slightly there, the payback has been so strong that it just gets overwhelmed by the sales that the stores are generating. In terms of timing, I would say we feel very good about the phasing of stores by quarter. We're kind of holding ourselves to the standard of opening 10 stores each quarter. They've flipped a little bit within each quarter. In fact ourselves are slightly off in the quarter, even in the first quarter, because we were – they opened a little bit later in the quarter than we initially anticipated. I view that as noise. But it is things like you talked about. We can't get an electric box, we can't get it permitted. We can't, whatever. I think our real estate construction team has done just a phenomenal job of hustling through countless jobs across the country to minimize or mitigate the delays in that area.

And then I would just add John that we've modeled that into our updated guidance a little bit of slippage in construction timing, just to make sure that we're being cognizant of that.

Right. Thanks guys appreciate it. Good luck.

Thank you. We reached end of our question-and-answer session, I'd like to turn the floor back over to management for any further or closing comments.

Very good, thank you everyone for joining the call today. Look forward to speaking with you all on our second quarter earnings call. Take care.