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Good day, everyone. And welcome to the Boot Barn Holdings, Inc. Second Quarter 2023 Earnings Call. As a reminder, this call is being recorded. Now, I like to turn the conference over to your host. Mr. Mark Dedovesh, Vice President of Financial Planning. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's Second 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. A copy of today's press release, along with the 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 second 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. And thank you everyone for joining us. On this call, I'll review our second quarter fiscal 2023 results, discuss the continued progress we've 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 very pleased with our second quarter results which reflect continued growth on top of the market share gain we've achieved over the past few years. During the quarter, total net sales grew 12.4% on top of 69.5% growth in the prior year period. The strong sales from both existing stores and new stores opened over the past 12-months. On a three-year basis, total sales grew 88% compared to the second quarter of fiscal 2020. We believe that driving additional growth this year on top of such strong growth over the last several years demonstrates that the market share gain we've achieved will be sustainable. During the second quarter, consolidated same store sales grew 2.3% comprised of an increase in retail store same store sales growth of 3.9% partially offset by any e-commerce sales decline of 7%. On a three-year basis, consolidated same store sales grew 56% compared to the second quarter of fiscal 2020. We also continued our new unit expansion this year by opening at least 10 new stores for a fourth straight quarter. In addition to solid top line performance merchandise margin expanded 50 basis points primarily as a result of growth in exclusive brand penetration and better full price selling. Once again, we expect to maintain our full price selling philosophy and do not anticipate a material change in promotions or markdowns going forward. The combination of top line growth and ongoing strength in merchandise margin resulted in EBIT margin rate of 12.6%. Our earnings per diluted share in the second quarter was $1.06 or $0.13 better than the high end of our guidance range. We believe our consistent 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 thriving same store sales growth. We are quite pleased that we've been able to build on top of the outside same store sales growth last year. For the quarter, our same store sales grew 2.3% as we cycled a remarkable 61.7% increase in the prior year period. Our retail store comp was driven by a 4% increase in transaction size due to an 8% increase in average unit retail price, with average transactions per store approximately flat versus last year. We believe in the fact that we continue to grow on top of last year's level is a testament to the strength of the brand and the durability of the step function increase in sales that we've experienced. During the second quarter, our strongest growth categories were Men's Western apparel, Men's and Ladies' Denim, Work Apparel and Work Boots, and Cowboy Hats. Sales of men's western boots and Ladies' non- denim apparel declined on comp store basis over the prior year period, and sales of Ladies' Boots were almost flat. While the performance of Ladies' Boots and apparel is lagging on a one-year basis, it is important to call out that both categories cycled a comp growth of more than 100% in the same quarter last year. From a geographic standpoint, we had strong results in our east and north regions, solid growth in our south region, and a decline in our west region, which is perennially our strongest region. To put this in perspective, while our west region was negative for this most recent quarter. That region has outperformed the chain average on a three-year comp basis. From a marketing perspective, our creative team continues to modernize and build the brand across multiple forms of media. As we add new segments and nurture our legacy customers. The combination of world class creative, tailored customer messaging and a strategic mix of acquisition and retention-oriented programs has enabled us to continue to grow our customer base across the country. We believe that the strength of the brand continues to build as evidenced by the strong sales performance of new stores in brand new markets on the east coast. From an operational perspective, we are extremely proud of the field organization across the country. Over the past two years, our average store unit sales volume has grown by more than 50%. Our field organization has demonstrated the ability to handle this increased sales level to augment the in-store staffing model, and to manage the additional inventory needed to fuel this growth. In addition, they have taken on several new omni channel initiatives and implemented new in-store technology solutions, further enhancing the store experience. As we approach the holiday season, we feel good about our current staffing and overall preparedness. The team has already begun hiring seasonal store partners for the holiday sales surge, and the application flow from new candidates is quite healthy. I want to commend the entire field team as they continue to provide excellent customer service, all while managing sales growth, supply chain challenges and multiple omni channel initiatives. Moving to our second initiatives strengthening our omni channel leadership, we continue to build our omni channel capabilities and integrate our two selling channels. As we evaluate the broader retail landscape, we are increasingly confident that our long-standing strategy of leveraging the combination of our store and digital businesses is proving to be a successful model to profitably fulfill customer demand. For example, we continue to use our e-commerce business to prospect for new customers and then convert them to store or omni channel customers. Conversely, our stores are extremely instrumental in the growth of our e-commerce business as they have some involvement in more than two thirds of our digital sales. Over the past year, we have expanded our ability to fulfill our e-commerce demand from our stores. Adding this capability has given us multiple advantages, including the ability to dramatically increase the exclusive brand penetration of our ecommerce sales, as well as the ability to move through store clearance inventory more efficiently and at a higher markup by making all inventory available to all shoppers regardless of channel or location. For the most recent quarter, our ecommerce sales or e-commerce same store sales declined 7%. There are two primary drivers of the decline in e-commerce sales. First majority of the erosion in online sales during the quarter is attributable to a sharp decline in sales on Amazon marketplace. This business is relatively small, making up approximately 10% of our online sales, or 1% of total sales. Additionally, given the third-party nature of the Amazon relationship, this portion of our business is less strategically important and less profitable than our traditional e- commerce sites. The second factor relates back to our e-commerce business last year. Last year, we made considerable gains because we had a strong online inventory position while many competitors and branded sites were low in stock. Now as competitors are back in stock, we have given back some of the gains we made over the past year. From a longer-term perspective, we are quite pleased with the multiyear growth we have seen in sales with our e-commerce business up 55% on a three-year basis, and continued multiyear growth in online profitability. Now to our third strategic initiative exclusive brands. During the quarter, our exclusive brand penetration grew to 32.3% more than 350 basis points higher than the prior year period. Compared to three years ago, our exclusive brand penetration has grown over 10 percentage points, which is a testament to the quality product and compelling design created by the team. We continue to be encouraged by the performance of the newly added brands that are optimistic in their future growth prospects. Additionally, three of our more well-established exclusive brands were among the top five selling brands for the quarter on a consolidated basis. Our exclusive brands create a strategic point of differentiation for us, and we believe provide an ongoing opportunity for us to build our merchandise margin. For the full fiscal year, we expect to grow exclusive brand penetration to 31.8% and approximately 350 basis points increase over fiscal '22. Finally, our fourth initiative expanding our store base. Our new store development capability continues to build the business on a national scale. During the second quarter, we opened 10 new stores including expansion into New Jersey and Delaware, bringing our total count to 321 stores across 40 states. New stores opening both existing and new markets continue to perform in line with our $3.5 million first year sales expectations, which results in a payback on our investment much faster than our historical 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 plan to store openings in new markets including New York, Connecticut and Maryland. Turning to current business, through the first four weeks of our third fiscal quarter total net sales have grown approximately 8% over the prior year period, driven by continued sales growth and the new stores we have opened over the last 12-months. Our preliminary consolidated same store sales through the same period are down 1.3% compared to the prior year period, driven by 17.6% decrease in e-commerce sales, partially offset by retail store same store sales growth of 1.7%. We have seen further softness in our e-commerce sales, which we believe is a result of many of our online competitors and third-party vendors returning to impact position on their sites and on Amazon marketplace. On a three-year basis, store and e-commerce same store sales are up more than 48% in October. We are pleased to see the growth in retail store same store sales particularly given the very strong sales we saw in the prior year periods. I'd like to now turn the call over to Jim Watkins.

Thank you, Jim. In the second quarter, net sales increased 12% to $352 million. sales growth was driven by sales from new stores added during the past 12 months and a 2.3% increase in consolidated same store sales, which saw an increase in average unit retail prices driven in part by inflation. Gross profit increased 9% to $129 million, or 36.7% of sales compared to gross profit of $118 million or 37.8% of sales in the prior year period. The 110-basis point decrease in gross profit rate resulted from a 150 basis points of deleverage in buying, occupancy and distribution center costs, partially offset by a 50-basis point increase in merchandise margin rate. The merchandise margin rate increase was primarily a result of growth in exclusive brand penetration and better full-price selling. Included in our merchandise margin expansion were 10 basis points of freight expense leverage. This improvement in freight expense was better than the 100 basis points of deleverage we had anticipated for the quarter as we continue to experience elevated container costs along with some inventory storage fees, which were capitalized at a higher rate than what we experienced a year ago. We expect to see elevated freight expense in the third and fourth quarters as we sell through the inventory burdened with these peak freight charges. Fortunately, we are now regularly booking containers at spot rates 50% lower than recent peaks and have eliminated most off-site storage fees with the opening of our new distribution center in Kansas City, Missouri. Given these encouraging trends, we anticipate reverting back to normalized freight expense as we move into next fiscal year. Selling, general and administrative expenses for the quarter were $85 million or 24.2% of sales compared to $68 million or 21.8% of sales in the prior year period. As expected, SG&A expense as a percentage of net sales increased primarily as a result of higher marketing expenses, other store-related expenses and higher store payroll. Income from operations was $44 million or 12.6% of sales in the quarter compared to $50 million or 16% of sales in the prior year period. Net income was $32 million or $1.06 per diluted share compared to $38 million or $1.25 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory increased 83% over the prior year period to $641 million. This increase was primarily driven by additional inventory in our distribution centers in order to support new store openings and our exclusive brand growth, which continues to exceed expectations. Average comp store inventory increased approximately 39% over the prior year in order to support the sustained increase in average unit sales volume. When evaluating our in-store inventory against our updated sales projection, we have approximately 23 weeks of forward supply, which is in line with our historical average. The final portion of the increase in total inventory can be attributed to new stores, both the 43 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 is doing a great job maintaining our in-stock position as a house of brands, and we continue to believe that the composition of our inventory is healthy. We finished the quarter with $20 million in cash on hand and $147 million drawn on our $250 million revolving line of credit. Turning to our outlook for fiscal '23. We have updated our guidance for the fiscal year and now expect total sales to be between $1.65 billion and $1.67 billion, representing growth of 10.9% to 12.2% over the prior year. We expect same store sales to be in the range of approximately minus 1% to growth of 0.5% with the retail same store sales increase of 2% to 3% and e-commerce same store sales decline of 11% to 13%. We expect gross profit to be between $617 million and $625 million or approximately 37.4% of sales. Gross profit includes an estimated 100 basis point headwind from freight extent. Our income from operations is expected to be between $235 million and $243 million or 14.2% to 14.6% of sales. We expect net income for fiscal '23 to be between $173.3 million and $179.3 million. We expect earnings per diluted share to be between $5.70 and $5.90. We also expect our interest expense to be $4.6 million and capital expenditures to be between $80 million and $87 million. We remain on track to open 40 new stores during the year, including the 22 stores we have opened year-to-date. Please refer to the supplemental financial presentation we released today for further information on our revised fiscal '23 guidance. As we look to the third quarter, we expect total sales to be between $502 million and $514 million. We expect the same store sales decline of 3% to 5%, with retail store same store sales of approximately minus 2% to flat and e-commerce same store sales decline of 17% to 21%. We expect gross profit to be between $184 million and $189 million or approximately 36.8% of sales. Gross profit includes an estimated 200 basis point headwind from freight expense. Our income from operations is expected to be between $71 million and $76 million or 14.1% to 14.8% of sales. We expect earnings per diluted share to be between $1.71 and $1.83. There are two primary drivers of the change in our full year guidance. First, we expect the softness of our September and October e-commerce sales to continue for the balance of the year. We believe that this softness is the result of many of our online competitors and third-party vendors returning to an in-stock position on their sites and on Amazon Marketplace. Second, construction and permitting delays in many of our new stores has resulted in planned new store opening dates being pushed back from their original plan. These delays in store opening dates are expected to result in a reduction in sales from these stores in the back half of our fiscal year. Despite these delays, we remain on track to open 40 new stores this year, with approximately nine stores opening in the third quarter and 10 stores opening in the fourth quarter. In addition to the above and while not impacting our full year guidance, the timing of the freight expense within the year has been difficult to predict. On our last call, we expect the freight expense to more negatively impact our earnings during the first half of the year than what was actualized. We now anticipate additional freight headwind in the back half of the year, particularly in the third quarter as we sell through the inventory burdened with peak freight charges. Third quarter freight expense is expected to be a 200-basis point headwind and fourth quarter freight expense to be 90 basis points higher than in the prior year period. Now I would like to turn the call back to Jim for some closing remarks.

Thank you, Jim. We are pleased with the performance of the business in the second quarter and look forward to a strong finish to the year. I do want to take a minute to express my gratitude to the entire Boot Barn team. The past three years have been impacted by a global pandemic, massive supply chain challenges and now a looming recession. Despite these obstacles, we are on pace to grow our annual sales by nearly 100% to add considerably to our merchandise margin and to more than triple our earnings in that same three-year time period. We've added more than 50% to our average store sales, and that new level of sales has proven to be sustainable. You should all be proud of these incredible achievements. Finally, as I look forward, the opportunity for us to triple our store count provides considerable future sales growth and clear growth opportunities for you and your team. Now I would like to open the call to take your questions. Ryan?

[Operator Instructions] Our first question comes from the line of Matthew Boss from JPMorgan.

Great. Thanks and congrats on a nice quarter. So Jim, could you elaborate on business in October? What's driven the moderation relative to the second quarter, maybe by category? And help us to bridge the back half comps now implied down mid-single digits for the back half of the year relative to negative low single digits, which I think was implied in the prior forecast.

Sure. Happy to give you sort of the sequential change between Q2 and October, and we'll give you some color commentary. I do want to put it into context first, though. Our October business on a three-year basis is plus 80% growth in total sales. That is slightly less than our Q2 business, which was plus 88%. And I do kind of want particularly those that are new to the story to let that sink in for a second, because while we can view that as a sequential deceleration, it's hard for me to really get that upset over a plus 80%, three-year growth. And I think when we look at the quarter, it was just a phenomenal quarter, right? We're up 88% in total sales on a three-year basis and up 300% in earnings on a three-year basis. So back to the specific question around what changed sequentially from a category perspective, the biggest thing that changed sequentially really relates to our Ladies' Boots and Ladies' Apparel businesses. So there's 20-or-so major merchandise classifications within Boot Barn. Some are up a little bit, some are down a little bit, et cetera. But the biggest change is between -- frankly, between Q1 and Q2, and then Q2 and Q3 was Ladies' Boots and Apparel. So Ladies' Boots was very strong in Q1, flat in Q2 and down 9% in Q3 or at least in October. Ladies' Apparel was down about 8% in October. I'd say once again that we have to kind of reflect back on what they're up against. Those businesses from a comparison standpoint are up against 100% in the case of Ladies' Apparel last year and 76% in the case of Ladies' Boots last year. So from a merchandise classification standpoint, that's probably the biggest single change. The other change that affects our consolidated same store sales is the deceleration or decline in our e-commerce business, which -- it has a few different pieces to it. One of it is the softness on Amazon Marketplace, and the other is just a lot more people selling the same product that we had sort of the leg up on them last year because we were flush with inventory and they were struggling a bit more with their supply chain.

And Matt, I would just add to that and looking at the back half of the year and the comp assumptions on slide 17. We're speaking here to the high end of the range, but you can see that the e-commerce same store sales, we did -- have guided at 1.5% at the high end of the range, now at minus 11% for the full year, and stores actually increased a little bit from 2% at the high end of the range to 3%. And so we're continuing to see nice strength in our stores. Year-to-date, we're at plus 6.1% same store sales growth in our stores. In the month of October, we continue to see growth there at plus 1.7%. And so we've guided the back half of the year in stores to minus two to flat. So there's some conservatism in there in the stores. I would also note that November and December last year were our strongest month of the quarter. And so we want to be mindful of that as we were planning our, the rest of Q3 based off of kind of current business and considering last year and the regular flow of sales volumes within a quarter in our third quarter.

Okay. That's great. And then maybe just as a follow-up, relative to your guidance for operating margins to finish the year in the mid-teens, are there any material margin drivers from here that you believe the model has over earned if we looked at the past two years to consider? Or maybe if it's easier to walk through the other way, what would be the sustainable drivers of a higher-margin profile relative to pre-pandemic that you would call out?

I think from the merchandise margin standpoint, the product margin has been very sustainable. And if you look back over the last several years, our product margin has increased, I don't know what the number is, 24 quarters in a row with the exception of two quarters in the pandemic, I believe, is the number. And so we've continued to guide product margins strong. Our exclusive brand penetration is giving us a nice lift there from a product margin standpoint. But a couple of things as we look to the back half of this year, we were slow to -- as we received cost increases on inventory a year ago, we were slow to raise our retail prices on those. And so as we get into the third quarter or continue in the third quarter and the fourth quarter, we're going to get our margin -- sustained margin benefit from having those price increases that we've put in over the last several months. Again, initially, we were thinking that these cost increases were going to be more transitory. It looks like they weren't. We were still to react in raising those prices. So again, I think those are sustainable as we see product cost decrease from our vendors. And that's something we can react to, but I think the product margin rate is sustainable. And then just going down the P&L, the freight headwinds will be transitory. I mean it looks like as we get through the end of this year that those will go away, at least that's our expectation. The one thing that is a little bit new in our P&L from a buying occupancy and distribution cost standpoint is our new distribution center in Kansas City. So that will create a little bit of pressure on buying and occupancy as we look at some of the deleverage, we see in Q3 and Q4.

And Matt, it's Greg. I would just add that we are getting really nice leverage on the new average sales volume per store compared to the pre-COVID period. So any of the fixed cost, whether it's the occupancy line or in SG&A, the fixed cost embedded in that help us have sustainable or structural improvement in operating margin.

Our next question comes from the line of Steven

Great. Good afternoon, everyone. Thanks for taking my question. I wanted to focus on the e-com commentary. Could you elaborate a little bit more on what you're seeing from the e-comm channel peers? Are you seeing more promotional activity online that you're not willing to participate in? And do you see this as a few quarters' trend of kind of a give back of sales and then things should normalize?

So I agree with the last part of your sentence. I don't think this is sort of a structural problem going forward. We've had some nice growth over the last few years. We had some advantages last year because we were lucky or slightly more successful in managing our supply chain and getting product available to sell and making the product that was available in the stores online really further help that. So I'd say we outperformed the last couple of years. From a pricing standpoint, most of our product online has a floor pricing, iMAP price. So very rarely does a competitor go below that price if they're forbidden to do so and will face repercussions. It's really not a pricing thing. The way to buy the business is to overspend on marketing, pay-per-click or social marketing. And there are countless examples of direct-to-consumer companies that do that but not really in our industry. I mean in our industry; we're selling third-party branded goods. Some of the other big competitors are also selling those same goods on their site. We have one direct competitor, formidable competitor in Texas called Cavender's. They have -- their website is fine. They sell the same product at the same price that we do. And if someone loads their site versus ours, they'll get the sales just as quickly as we will. The other people we compete against, of course, is our vendors themselves, right? And one of the reasons why our exclusive brands are so strategically important to us is that some of our vendors continue to build, understandably, their direct-to-consumer business online. And that piece of the business could easily go to wrangler.com or justin.com or ariat.com, before it would come to us. So I do think this is somewhat transitory. There'll be a new normal level over the next couple of quarters. And we want to build that business based on the strength of our brand, the lifestyle nature of Boot Barn and not go out and overspend on pay-per-click to buy the sale and drive our profitability down. And we spent the last few years doing exactly the opposite and really improving the profitability of that channel, and we have no intentions of reverting.

That's helpful, Jim. Thank you. The second question I had was for Greg because I asked it last quarter. And I just wanted to follow up on inventory. It seems like still elevated, but I guess you're pretty comfortable with the positioning. You kind of cited some reasons. But just as you think about it today relative to three months ago, do you still feel pretty comfortable with it? Any areas of concern or pockets of elevated product?

Yes. Great question, Steve. No, I continue to feel really good about the quantity and quality of our inventory. There's been no change in how I view the inventory from three months ago. We're a highly functional business. Where we may be a little bit heavy in inventory, it would be in Work Boots and Men's Performance or Rubber Sole Boots, and those have very, very little fashion risk or markdown risk. And we'll work through those as the business continues to come to us.

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

Hey, good afternoon, everyone. Nice results today. I wanted to ask a question, Jim, about the 88% growth over the last three years. I think we still get a lot of concerns that Boot Barn is over earning. You certainly have compounded up the last three years at a much faster rate than you did pre-COVID. So maybe just reiterate why you guys think the sales that you've gained here in the last three years is structural and something that you can hang on to going forward?

Sure. I'm actually very happy that you asked that question because I'd rather address it on the public call head on. The single biggest factor that drives the profitability of this company is our stores channel. It's been our focus for the last several years. Even when it wasn't involved to build stores, we were building stores. We were sort of bucking conventional wisdom and continuing to focus on a brick-and-mortar strategy that now seems to be the one that many people are gravitating towards. In March of '21, we saw a step function change in our average unit store volume. That's -- we usually run at roughly $2.7 million per average store 19 months ago on a run rate basis, anyway. That volume went up to $4.2 million. And we've actually included a graph in our supplemental presentation to try to give investors a sense for what does that $4.2 million look like and how sustainable is it. And the answer is it's now been 19 straight months of right around $4.2 million. If you take that, coupled with the guide for the balance of the year, we believe it will continue to be roughly $4.2 million through the end of this upcoming March. Could that number go to $4.3 million? It could. Could that number go to $4.1 million? It could. Could that number overnight go back to $2.7 million, I find that hard to believe. There is nothing that's happened in our business that would have driven a -- I think it's a 56% increase in our average store sales that is transitory. I just don't understand how that number can go all the way back down to $2.7 million. So it does seem to be a little bit, if not well understood, certainly not appreciated. But we believe we'll remain at these elevated levels of average store volume. Hopefully, e-commerce will work itself out and get back to a growing business over the next few quarters. And as you well know, we'll continue to open 40 or 45 or 50 stores a year. We do that for enough years, it's another $1 billion in sales. And every single store in the company makes money. So we'll continue to press the accelerator on new store growth.

Okay. That's helpful. Maybe just even with some share gains that you've seen over the last couple of years. I know in the past, you've talked about key competitors would be like the mom-and-pop stores, Cavender's and the Farm and Ranch chain. Do you think you're pulling in customers that may have historically shopped in other channels, maybe just thinking like some of your denim, maybe that's a Walmart customer or even some of your kind of fast fashion customers with the Just Country launch?

So yes, we do. I think some of the share gains we've got are from within the industry. I would probably point more towards mom-and-pops than against Cavender's. I think their business pie continues to be pretty strong. I think we also are getting it from just more traditional retail channels. I mean our assortment, we -- the bull's eye of our customer is still a Western cowboy customer. They were in Cowboy Boots and Jeans and Cowboy Hats. And Peter, you know that customer and appreciate that customer very well. But we've also really tried to expand the aperture of the product that we sell to capture sort of one circle -- one concentric circle of customers around that target. And part of that is the Just Country initiative. So it's more of a casual outdoor lifestyle. They may be -- they may not be a rodeo fan, but they probably do enjoy hiking, camping, being outside, et cetera. We have a small piece of our business that is a little bit more fashion in Wonderwest. And the share gains there could have come from any number of traditional retailers. To your point, denim is a great example. We now sell denim that could have been otherwise bought at any number of traditional, mall-based specialty stores that are forfeiting share, just given mall traffic trends. So I think it's coming from a lot of places. I wouldn't think it's necessarily coming from Walmart. I certainly doubt that people in Bentonville are worried about their share loss, too. But I don't think -- I actually think we share a number of customers, but I think the price point of our goods and their goods are just going after a different piece of the wallet.

Next question comes from the line of Max Rakhlenko from Cowen & Company.

Hey, guys. Thanks a lot for taking my question. So maybe just staying on a pretty similar topic, but any differences in shopping behavior last quarter as well as in October to date, just between your core shoppers and then those gained during the pandemic? And then maybe just as a follow-up there, are you able to bucket the shoppers that you gained into, say, Western Peter, so the ones that you're taking share from the moms-and-pops versus more of that country or fashion shopper.

So we are. We have -- in the last piece of your question, we have very good information as to sort of who is buying why. It's all tagged back to our loyalty program, our Be Rewarded program. So we can parse out how the different types of customers are behaving. The quick answer is we've retained our customers or we continue to see customer count growth. Coming back to a prior question, if we had gotten a whole bunch of new customers that drove average store sales up and you would then worry that average store sales would come back down, you'd see the customer count decline. We haven't seen that. We see customer accounts continue to appreciate, not at the same high-level acceleration that we've seen in the most recent year or so, but we're not seeing a deterioration in customer count. I would say they're probably shopping slightly less frequently, both groups, sort of the traditional and the new customers. You could sort of just deduce that if customer count is up and transactions are flattish, they clearly must be shopping slightly less frequently. The other thing that we mentioned that if you went back to prior calls, we always try to be very honest about the additional tailwind we got from Ladies' Boots and Ladies' Apparel over the last several quarters. In fact, we spiked out what impact it had on our comp for several quarters. And we were -- these are rough numbers, but we were plus 68 or something. And we said that without the ladies' businesses, we would have been plus 60 or something. Again, those are estimated numbers, but I'm pretty close. And I think that -- and we said there was a small bit of a fashion trend in those businesses. That was probably adding to -- or creating really outsized gains for a few quarters in those two departments. And here we are now, giving some of that back. On balance, we're still really happy with our ladies' business. It just was up over 100% and now it's giving back 5 or 10 points of that. But on a two-year basis, you would take that all day long. You all might prefer it to be 50% a year for two years in a row, but we can't wave the magic wand to make that happen.

Got it. That's very helpful. And then what is your confidence in the ability to drive greater full-price selling in product margins in this current promotional environment? And then you walked us through your inventory positions, but how would you assess the risk that you potentially would need step up promos, especially if holiday in the next couple of quarters remain very promotional across just the broader retail landscape? Thanks a lot.

Sure. I'll take the first piece, anyway. From a pricing promotional standpoint, competitively, look, we have no desire or intention of changing the way we go to market. We have invested in the Boot Barn brand and the experience associated with that. And I suppose there could be mom-and-pop competitors out there that have overbought and are running sales. We just aren't going to respond to a single store operator doing something to work themselves out of an inventory position. Our number one direct competitor, Cavender's, very consistent. We have a lot of respect for that company. They tend to operate very similarly to the way we operate, which is mostly full-price selling, occasionally some modest sale to drive some excitement in the store but rarely get to the point where they are highly promotional or in a massively overbought position, where they're clearing product at a deep discount. So I don't think -- and then when we look outside the industry, there's been a lot of chatter around -- well, other channels of retail will be more promotional. There'll be a higher level of sales and markdowns going to holiday. That may in fact be true. It's really not going to change the way we operate our business. I just don't think someone is going to go by a discounted payer of athletic shoes rather than a full price payer of cowboy boots. So we're going to keep our pricing very consistent, at bare minimum with where it was two years ago. Last year, we had a little bit of artificial help because we were -- sales were incredibly strong and we were chasing the good product. This year, it feels very much like our business was prior to last year with very modest promotional activity. And we're fortunate to be in an industry with rational competitors, both the farm and ranch channel and our direct competitor in Cavender's. I don't know if --

I think you mostly covered it. Max, I guess I would just add that on -- with the inventories, Jim said it perfectly, we don't need to be more promotional to sell more inventory to raise cash. We have a healthy balance sheet. We're headed into our holiday quarter. We'll raise plenty of cash to pay down the line of credit. And so Greg mentioned if there is an area where we're a little heavy on inventory, it may be worked with. If we have to hold on to that for a couple more months, we'll do that rather than get promotional.

That's right. We remain very disciplined on the businesses where we could get into trouble. Ladies' Apparel is the biggest one, both denim and non-denim. Ladies' Boots is another. We've cleared some Ladies' Boots in the most recent quarter. It's in our numbers already. So we are pretty diligent about keeping those businesses that do have more of a fashion cycle certainly than the Work categories and typically more than the Men's Western category. So we watch those businesses very closely and they turn faster. And we feel that we're pretty clean in both of those categories.

Our next question comes from the line of Corey Tarlowe from Jefferies.

Hi. Good afternoon and thanks for taking my question. And congrats on the strong results. So one thing that's, I think, clear is that exclusive brands continue to grow, and they've been really well received by your customers. I think the exclusive brand penetration is up something like 350 basis points this quarter year-over-year. So can you talk a little bit about some initiatives there? I know you just launched a bunch of new exclusive brands. How those are trending? And then what the opportunity you see ahead for this segment of your business specifically is to drive more sustainable profitability ahead?

Sure. Great question. Yes. We've added new brands. So we used up six, now we have 10. The new brands are all off to a good start. We're pleased with the sell-through. We've had some runway winners and some other things. We had a clear out. But on balance, the launches of each of the four brands, we're quite pleased with. What tends to happen is we start a new brand in a certain number of different categories. And we see what's working, we respond there. And then we sort of expand on the successes and then maybe go into sort of related categories. So we might launch a brand and then later on, add outerwear to it or add hats to it. So that's how when the -- every once in a while, it was a few years ago now where we added a couple of brands. And then in the last year, we added the four brands. That gives us some growth. But then each of those brands start to expand into related categories. So we continue to believe we can increase our exclusive brands by three points or 300 basis points a year. There'll be a point where we may want to slow that. I don't think we're that close to that point yet. We do have some very strong third-party brands and great vendor partners out there that we want to continue to grow with. They've helped us grow this business to where we are today. And they are customer is expecting a house of brands kind of experience within Boot Barn. So I wouldn't expect exclusive brands to get north of 50%. And even if it were to hit 50%, that's five years, six years away from now. So that's the way we're thinking about it. We have a great team up there. We continue to invest in that team. We have a relatively new leader who has taken that group to new heights. And we're pretty excited and energized about what's going on in the exclusive brands.

Got it. Very helpful. Thank you. And then I just wanted to follow up with -- there was, I think, a new partnership that Boot Barn established with a business called Packsize that should -- it looks like really help on the automation side of the supply chain, which I think should also probably help to underpin more sustainable profitability ahead and drive efficiencies in the supply chain. So could you talk a little bit more about the opportunity that lies ahead there?

Corey, it's Greg. Thanks for noticing that. Yes, we love that partnership, being able to reduce waste in the shipping, if you will, of the goods to the customer. It's a great opportunity for branding as well. And we think it's right as we work toward our ESG efforts to use that versus the bags that we've used historically. So it probably is a push financially or maybe just a slight cost. But in general, it's the right thing for us to do.

Our next question comes from the line of Sam Poser from Williams Trading.

Thank you for taking my questions. So I want to go on to the e-commerce business, and of course, I want to touch on inventory. So you talk about the e-commerce business being impacted by better in-stocks by your competitors. So the question I have is how many people -- how many consumers did you add to your files or your quality program through e-commerce over the last couple of years?

I don't have that specific number at my fingertips. I would tell you that when we look at our e-commerce business, particularly on Boot Barn, we're still getting a fair amount of traffic. I mean our traffic has been relatively strong. I think what's happening is conversion is on, either they're then shopping elsewhere or they're not shopping with some of the stimulus money that they had shopped within the past. So from a bootbarn.com standpoint, we actually feel pretty good about the strength of the site and the traffic of the site on a year-over-year basis, less so about our performance in Amazon Marketplace, right? Amazon Marketplace, we called out as significantly down. If Amazon themselves carry the product and have it in stock, they're going to win the buy box. No matter what we do, it's just going to be the same price because it's iMAP protected. And they are more in stock than they were last year. The paradox for us not to take this down, a complete [Inaudible]. But the paradox for us is given that we have been really pushing a brick-and-mortar strategy, seeing weakness in e-commerce channel across retail, to some degree, has just reinforced that our long-standing strategy of focusing on the 85-plus percent of our business and of most retail businesses that go through physical stores was right. So we work for our e-commerce business to return to growth. But if the pendulum is swinging back, and you can see a number of D2C digital native customers are now becoming less digital native and opening up stores, we've had a 10-year head start in building a chain across the country. And I feel great about what we've been able to do to create a national brand of stores that can support our digital channel. And I think that will be sort of our strength going forward.

So I guess the question is what can you better do to engage, get that customer to open up his or her pocket book when there -- I'm not talking about promotions necessary. But how can you maybe pull more people with more purpose coming to the site to overcome to anchor them in as -- for Boot Barn because of the strength of Boot Barn brand to become the place to go? And I have a whole another group of questions, but --.

No, that's a fair question. We continue to reinforce that we are the authority and the authentic brand online. So they should feel a great deal of trust in buying from Boot Barn. We've added and really need more frictionless the ability to earn Be Rewarded points. Our Be Rewarded program has always been extremely strong in the stores but less well developed online. So we're continuing to try to make that a bigger piece of the puzzle there. And that's one that tactically going forward should help exactly what you're describing. And I'd say the third piece is leveraging the localized nature of our store base to get product to customers in a more timely fashion or to offer same-day delivery would be sort of the third thing we would try to do. Beyond that, it's -- we're selling commodity boots in many cases that are, again, at the same price across different sites. And we -- the way to win is to present the brand as the leading brand in the industry.

Cool. And how big -- what percent of the quarter is October? So you're 25%? And then what, like December is like 45%? Is that a fair number?

Probably sort of 50 but yes.

50. So with the women's business that is struggling right now -- I was traveling a lot, saw a lot of both junior fashion brands to brands like Celine having Western boots in their now assortments. So the question I have is do you think this is sort of just a lull? And when you get into the meat and potatoes of the fourth quarter holiday when the when you -- when more people are there, you'll be -- that all of a sudden, you might see this women's business sort of reemerge as an event business versus what you're lapping last year -- from last year?

I suppose that's possible. And of course, we would love to see that happen. When we look at it as a percentage of our business, though, Ladies' Boots used to be, call it, 8% or 9% of our business, and now it's 11% of our business. So while the year-over-year comparison might be suffering a bit, it's still a bigger portion of our business than it has been historically. But it could have a reinvigoration as we get into a more gift-giving part of the season for sure. And the season quite literally then change and we get into holiday and approaching New Year's and more party business, et cetera. We do sell a bit of product that caters to that customer as well. So we'll see. Hopefully, your instinct is right there.

And then one last thing. The e-commerce business by month, again -- I mean when you get into that -- to December, let's say, Thanksgiving through Christmas there, does that pick up? Or can you use the e-commerce business to draw people in stores better? I mean so like how are you lapping it by month? Or was like November and December just huge last year and that's why you're guiding the quarter the way you are?

So e-commerce last year on a year-over-year basis, October and November were roughly in line and December was weaker, considerably weaker than November on a year-over-year basis. So we might benefit a bit from cycling a weaker December, but we'll see.

And some of that was calendar shift and Black Friday and different things between the month -- between November, December. I think we're guiding, Sam, the e-commerce business that we're seeing in October, we're playing that out through the third and fourth quarter. So that's kind of the way we're looking at it.

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

Thanks and congrats on the sustained success. So first, I think you included it, I just don't have it in my notes. I want to confirm if you're looking for 200 basis points of freight drag in Q3, remind me what that was in Q2.

It was 10 basis points of a tailwind, actually, Jeremy. So call it lot, we really have it.

Okay. And then in terms of just -- I want to come back to inventory for a second. It's clearly a hot topic. And if inventories are up about 110 percentage points versus three years ago, sales are up 88% in Q2, it's up about 80% versus three years ago here, as we start Q3, it looks like you have probably about $100 million of inventory, above where the desired level would be. You're not going to be promotional; you feel pretty comfortable. But in terms of thinking about this, about your buying of inventory and your order rates, it's probably -- I think you might acknowledge that it's a little higher than you'd like to be. You have a couple of categories where you feel like it might be a little -- whether it's work boots or other items, possibly ladies' fashion, where it might be a little higher. Have you taken action to reduce future orders on a go-forward basis? Because I think, frankly, that probably the inventory levels are what made people the most anxious about where the company is positioned today.

Yes. Jeremy, it's Greg. So a couple of things to think about when you cite the three-year-ago analysis, you know our distribution model very well, that most of our inventory is fulfilled by the vendor directly shipping to our store after we sell the product. As we continue to increase exclusive brand penetration, we need to own that inventory immediately, right? It needs to be made in a factory, we need to take possession of it and put it in our distribution centers. So over those three years, we've grown EB, call it, 10 points, 9 or 10 points on a base of, call it, 20%. So we've had significant increase in the amount of inventory that we need to own to support EB. So that's one factor that you need to consider. As it relates to taking action, Jim, kind of where I mentioned this a few minutes ago, which is the categories where the merchandise has a go bad day buyer or whatever, that's Ladies' Apparel and denim, fashion denim, not replenishment denim, and Ladies' Boots. And so we've taken some action over the past six weeks to move through some of that inventory that we thought we needed to. So we're not holding off on taking action where we need to. We frankly feel great about the inventory levels in those two categories. And again, where we think we're a little bit high is Work Boots, Men's Western boots that have a rubber sole, so very functional in nature. So again, I continue to feel good about the level of inventory and the health of that inventory.

So just as a follow-up then, extrapolating to -- thinking about the next few quarters here as things probably normalize a little bit. You've got 100 basis points of drag projected in your FY23 guidance for gross margins. Is it pretty fair to assume that you think, as you look forward to the following year, that there's no reason why you wouldn't be in the 36% to 38% range again on gross margins?

We haven't -- I mean I'm looking at Jim Watkins. We haven't put guidance out there, but I think that's fair to think that way.

I think that's right, Jeremy. I want to just circle back to the earlier point and add to Greg's answer. When COVID first emerged and store sales fell 50%, 60% or something, you would have thought -- we sort of pressure-tested a model, where you have -- inventory for your sales growth. And we had literally one quarter of a very modest decline in merchandise margin, less than a point. Other than that, for 5, 6 years in a row now, we have -- we've never called out a margin problem. So I recognize that this question continues to come up. We continue to total a lot of inventory. That inventory has helped really drive incredibly strong sales growth. So the bet has been paying off. And I don't expect us to come out any time soon with any material margin erosion based on markdowns.

Our next question comes from the line of Mitch Kummetz from Seaport Research.

Yes, thanks for taking my questions. First off, I was just hoping you could reconcile the comp guidance a little bit for Q2. So for -- I'm sorry, for Q3. So quarter-to-date, you're running minus 1.3%. And for the quarter, you're seeing minus 3% to minus 5%. I guess first off, I'm curious within that minus 1.3%, is there some sequential deterioration in that number that your kind of extrapolating going forward over the balance of the quarter? Or is the difference between the quarter-to-date and the quarter guide more like a function of a tougher compare over the balance of the quarter? Can you just address that, please?

Yes. No, you're talking about whether within October, the four weeks of October, there's anything sequential, no. Really, what it is, Mitch, is if you break it into two pieces, the e-commerce piece, we're continuing to extrapolate the e-commerce sales that we've seen in October for the balance of the year and minus high-teens. I think we're minus 17% for October and extrapolating that out for the rest of the year. And as it comes to the stores, the stores are seeing nice growth with a plus 1.7% in the month of October. And we're guiding Q3 and Q4 minus 2% to flat. And so there is some -- we do have tougher comps in November and December. But really, there's some conservatism that we've got planned into that guide there.

Okay. And then just a real quick follow-up, and I might be splitting here, but you're saying you're extrapolating the high to the minus high-teens on e-commerce over the balance of the quarter? Does e-commerce become bigger? Is it a higher penetration over the balance of the quarter versus October? Is that part of why you would see a more difficult comp in November, December than October?

Yes. Well, the more difficult comp is really talking about the store sales, I guess. But the e-commerce as a percent of sales for the third quarter is about 14%. So it's higher than an average quarter and it's going to be about 12% for the year. For October, it is a lower portion of the quarter than November, December.

Okay. And then I guess just a second question, just maybe a little bit of a housekeeping. Jim Watkins, you mentioned that one of the changes in the guidance on the top line was some construction permitting delays. Is there any way to quantify that impact on the guide? And correct me if I'm wrong, I think you're still opening the same number of stores for the year. It's just that some of the stores are maybe coming online later?

Yes. No, that's right. From a sales standpoint, yes, it's $6-ish million for the half of the year.

Our next question comes from the line of Jay Sole from UBS.

Great. Thank you so much. I have just two short questions. The first one is, Jim, I think you spoke to this. But sort of if you could maybe just explain it one more time. You're seeing the pressure on the online business. But why is it not impacting the stores? Why has the store trend still been pretty consistent? And then secondly, on the deleverage on buying occupancy, maybe is it possible to break down that 100 basis points? Is it more of the distribution center costs? Is it the buying occupancy? And if you can maybe relate what the leverage point is on the comp? I mean the comp was 4% in the stores and 2.5% overall. What kind of comps do you need going forward to not have deleverage on buying occupancy and distribution centers?

You want me to first, so on the stores versus e-commerce piece, there are surprisingly a small amount of overlap between a store customer and e-commerce customer. It's certainly less than half of our customer base adjustable channels. So we have a sort of a different set of competitors online than we do in our stores. And our stores customer is just very loyal to us. They're part of our Be Rewarded program. They've shopped with us typically for a long time. And we continue to ensure that the in-store environment and experience is just second to none. So I think our storage business continues to get growth on top of just incredibly strong growth last year and, frankly, for the last decade. But with e-commerce and everyone has the ability to open up a site and sell a pair of boots. The brands can sell a pair of boots or a pair of jeans online directly, of course. And they do -- fortunately, for our industry, most of the business, most of the market is conducted and transacted inside a store. So while our competitive set is more complicated and it's very easy to change the URL on your browser to buy from somebody else, we have a really, really strong position on the other 85% to 90% of the market, which happens in the stores. Do you want to take that second part of the question?

Yes. So on the 100 basis points of occupancy deleverage on the full year, Jay, you have to look to maybe three things. The first being the new store openings this year being 40 versus 28 last year put some pressure on that line item. The second is related to costs from the DC labor. We talked last year about increased wages a year ago but in fall heading into the holiday that we increased pay rates. So first half of this year, we're up incurring those higher costs compared to a period where we didn't have those costs. And then the third, the thing that -- we just got live our Kansas City distribution center. We're now paying rent on that, and we're ramping up the operating cost there. So for the back half of the year, that's something that will put some pressure when compared to the prior year. As far as leverage points for buying and occupancy, we didn't guide that this year. When we started the year and we had put out a 4.8% same store sales growth, we had planned about 40 basis points of buying and occupancy deleverage. And so you can kind of use that to anchor into what it would have been this year. Again, we -- at the start of the year, we look at this as more of a reset year and to provide those leverage points. As we get to next year, my thinking now is that we would provide that going forward.

Our next question comes from the line of John Lawrence from Benchmark.

Right. Thanks guys. Appreciate your time. Jim, would you comment a little bit -- you talked about it the last couple of quarters. But your comments about the new stores. I mean anything that -- I know you went through it, the lack of, sort of cannibalization and some of the new markets. Are those trends just continuing when you go to a new market? You mentioned Delaware and some of those that -- these stores are coming out of the ground, just much faster than you thought. Can you just talk about that briefly, please?

Yes, I'd love to. The story is exactly the same, and it is as good a story as you could imagine. We continue to open up stores in all parts of the country. So we just opened up a brand-new store in California. Its budget was probably $2 million. It's probably going to do $6 million. We've opened up a store -- a few stores in Delaware, Pennsylvania, New Jersey. Now again, their budget was probably $1.8 million or $2 million, depending on the store, and they are running at $3.5 or more million each. So rather than pay back in three years, we're paying back in, call it, 18 months. We haven't seen any material cannibalization as we've opened up and added to different markets. Phoenix, Arizona is a perfect example. We used to have four stores there and now we have eight stores. Those four stores used to do $10 million. The eight stores now do like $40 million. And we haven't seen a deterioration of same store sales there. So as we look forward, the downside risk of opening up the store is quite low. We have 321 stores and every single one of them is EBIT positive at the moment. So we'll continue to open up stores. We'll open the next 300 stores. They'll do $3.5 million each. That will be $1 billion. So people will ask us 100 million questions around what our comp is in October. But I can tell you that the next $1 billion of sales is sort of right in front of us if we can just continue to execute on our new store openings. So I appreciate the question because it sort of puts the focus on where it should be, which is this is a new unit growth retailer. And we've sort of proven that we can grow from the 86-store chain that it was when I got here to 321 today and on our way to 900.

So just not to belabor the point, but looking at that and that tremendous store growth. And part of the reason you selected those sites is because of the e-commerce business, correct?

It's one factor of many factors, if I'm honest. I think -- and we do use it. We use multiple inputs, though, in a giant retail model, population, employment levels, income levels, psychographic information, et cetera, et cetera, et cetera.

But could it just simply be part of that is that you switch that customer maybe from a little bit of a direct customer to a store customer in some of those markets?

It's a fair hypothesis, but what we have seen is when we put a store in a new market, the e-commerce business goes up and not down. The other thing I would tell you one store -- we just happen to look at the site. The one store in Delaware will do more than the entire e-commerce business in Delaware. So the notion that e-commerce can impact retail store locations or you can trade customers, we talk about all the time. I just don't buy into it. And the data that at least I have access to would dismiss it as a hypothesis. Ryan, I think that was the question.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the conference to Mr. Jim Conroy for closing comments. Please go ahead.

Thank you, everyone. I appreciate you joining the call today. We look forward to speaking with you on our third quarter earnings call. Take care.