BOOT - NYSE

Good day, everyone, and welcome to the Boot Barn Holdings, Inc. First Quarter 2025 Earnings Call. As a reminder, this call is being recorded. Now I'd like to turn the conference over to your host, Mr. Mark Dedovesh, Senior Vice President, Investor Relations and Finance. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's first quarter fiscal 2025 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer; and Jim Watkins, Chief Financial Officer. A 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 during this call 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 2025 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 this call, I will review our first quarter fiscal '25 results, discuss the progress we have made across each of our 4 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 first quarter results and a solid start to our fiscal year. During the quarter, revenue increased by 10%, including consolidated same-store sales growth of 1.4%. Same-store sales in both the stores and e-commerce channels were positive, with stores comping up 0.8% and e-commerce up 6.7%. In terms of sequential improvement in same-store sales growth, it was encouraging to see the quarterly improvement that we experienced from Q3 into Q4 continue into the first quarter of fiscal '25. Consistent with our comments on our most recent earnings call, this sequential improvement was broad-based across virtually all major merchandise departments, both stores and e-commerce channels, and in all 4 regional geographies. It is also worth noting that this quarter's sales results were cycling 33 nights of performances of Taylor Swift's Eras Tour last year across the United States. While we have noted in the past that this tour had a negligible impact on our business, it is encouraging to see the strength in sales as we went up against the excitement from her tour last year. We believe our 10% revenue growth in the quarter outpaced the industry and has enabled us to continue to build on our recent market share gains. From a margin perspective, first quarter merchandise margin expanded 100 basis points driven by supply chain efficiencies. We were pleased to see such strong merchandise margin expansion, with exclusive brand penetration increasing slightly over last year. We believe this underscores our ability to expand margin beyond the benefit we typically experience from growing exclusive brands. The strength in sales and margin, combined with solid expense control, drove earnings per diluted share of $1.26 during the quarter compared to the high end of our guidance of $1 and versus the prior year EPS of $1.13. I'm extremely pleased with our start to the year as the team's execution continues to deliver both top and bottom line results. I will now spend some time discussing each of our 4 strategic initiatives. Let's begin with expanding our store base. We opened 11 stores in the first quarter, ending the period with 411 stores across 46 states. Our new store engine continues to meet our sales, earnings and payback expectations. As a reminder, we model new store performance at $3 million of revenue with a cash-on-cash return on capital of approximately 60% in the first year of operations. We believe our new store pipeline remains healthy, and we expect to open 60 new units this year, continuing to meet our commitment of 15% square footage growth annually. Given the ongoing success of our new store openings, we have confidence that we can open an additional 500 stores in the U.S. alone, more than doubling our current store count. Moving to our second initiative, driving same-store sales growth. First quarter consolidated same-store sales grew 1.4%, with retail store same-store sales growing 0.8%. We saw an increase in AUR, which drove a larger average transaction, which was partially offset by fewer average transactions on a comp store. While average transactions declined overall in the quarter, they showed sequential improvement throughout the quarter, inflecting to positive growth year-over-year in both May and June. It is encouraging to see the positive momentum in the business, particularly in June, where we posted positive same-store sales growth, cycling the strongest month of the quarter last year. From a merchandise category perspective, during the quarter, we saw sequential improvement across virtually every major product department led by men's Western boots and apparel, which comped positive mid-single digits. Ladies Western boots comped positive low single digits in the quarter, while Ladies Apparel saw a low single-digit decline in comp sales, which was a significant improvement from the fourth quarter of fiscal '24. Moving to our third initiative, strengthening our omnichannel leadership. In the first quarter, e-commerce same-store sales grew 6.7% partially driven by growth in paid demand as we continue to improve our online marketing capabilities. We were particularly encouraged by the performance of the bootbarn.com site, which posted sales growth of approximately 14% in the quarter, which further underscores the power of our integrated omnichannel strategy. From an operational standpoint, our omnichannel capabilities continue to benefit us, with over half of our online orders being fulfilled by the stores. Our ability to fulfill online orders with store inventory helps drive selling margin and we believe provides the customer with a better shopping experience and broader assortment of merchandise. Now to our fourth strategic initiative, merchandise margin expansion and exclusive brands. During the first quarter, we grew merchandise margin by 100 basis points. Exclusive brand penetration increased slightly over last year to 38.1%, wrapping an outsized 630 basis points of growth in the prior year period. We believe we have multiple opportunities for ongoing merchandise margin expansion, including growing exclusive brands; driving supply chain efficiencies; and leveraging buying economies of scale, which includes our vendor direct purchase program, where we take ownership overseas of full container loads of merchandise and then manage the complete inbound supply chain. We are confident that we can deliver long-term margin expansion through a combination of these measures. We continue to expect a greater than 100 basis point increase in merchandise margin for fiscal '25 driven by supply chain efficiencies, better buying economies of scale and growth in exclusive brand penetration of more than 100 basis points over the prior year. Turning to current business. On a quarter-to-date basis, we continue to generate positive growth in consolidated same-store sales. However, we did experience 2 weeks of challenging business in mid-July that drove negative comp sales. We believe this was a transitory event driven by multiple headwinds, including the hurricane in Houston, dangerously hot weather in our Western region and an unfavorable concert lineup as we cycled Morgan Wallen playing in 2 of our largest revenue markets last year. Since we emerged from that 2-week period, the consistent strength of the business returned, with our most recent 2 full weeks of consolidated same-store sales comping nicely positive at 6.5% and 2.6%, respectively, with growth coming from both channels. While we feel good about the current tone of the business, we remain cautious of our overall consumer sentiment and macro uncertainty, and we'll continue to manage our business prudently. I'd like to now turn the call over to Jim.

Thank you, Jim. In the first quarter, net sales increased 10.3% to $423 million. The increase in net sales was the result of the incremental sales from new stores and the increase in consolidated same-store sales. The 1.4% increase in same-store sales is comprised of an increase in retail same-store sales of 0.8% and an increase in e-commerce same-store sales of 6.7%. Gross profit increased 10% to $157 million compared to gross profit of $142 million in the prior year period. Gross profit rate was flat at 37% when compared to the prior year period as a result of a 100 basis point increase in merchandise margin rate, offset by 100 basis points of deleverage in buying, occupancy and distribution center costs. The increase in merchandise margin rate was the result of supply chain efficiencies, while the deleverage in buying, occupancy and distribution center costs was driven primarily by the addition of new stores. Selling, general and administrative expenses for the quarter were $107 million or 25.2% of sales compared to $96 million or 24.9% of sales in the prior year period. SG&A as a percentage of net sales increased by 20 basis points primarily as a result of higher online marketing expenses and higher corporate general and administrative expenses, partially offset by lower store-related expenses. Income from operations was $50 million or 11.9% of sales in the quarter compared to $46 million or 12.1% of sales in the prior year period. Net income was $39 million or $1.26 per diluted share compared to $34 million or $1.13 per diluted share in the prior year period. Turning to the balance sheet. On a consolidated basis, inventory increased 11% over the prior year period to $627 million and increased approximately 6% on a same-store basis. We finished the quarter with $83 million in cash and 0 drawn on our $250 million revolving line of credit. Turning to our raised outlook for fiscal 2025. The supplemental financial presentation we released today lays out the low and high end of our guidance range for both the full year and the second quarter. I will be speaking to the high end of the range for both periods in my following remarks. As we look to the second quarter, we expect total sales at the high end of our guidance range to be $412 million. We expect consolidated same-store sales to increase 1.4% with a retail store same-store sales increase of 1% and an e-commerce same-store sales increase of 5%. We expect gross profit to be $146 million or approximately 35.4% of sales. Gross profit reflects an estimated 60 basis point increase in merchandise margin offset by 90 basis points of deleverage in buying, occupancy and distribution center costs. Our income from operations is expected to be $36 million or 8.7% of sales. We expect earnings per diluted share to be $0.87. As a result of our first quarter performance and our updated view for the remainder of the fiscal year, we're raising our full year guidance. For the full fiscal year, we now expect total sales, at the high end of our guidance range, to be $1.85 billion, representing growth of 11% over fiscal '24. This is a $50 million increase over our previous guide of $1.80 billion. We expect same-store sales to increase 1.2% with a retail store same-store sales increase of 0.7% and e-commerce same-store sales growth of 5.5%. This is an increase from our previous guidance of a consolidated same-store sales decline of 1.6%. We now expect gross profit to be $689 million or approximately 37.2% of sales. Gross profit continues to reflect an estimated 110 basis point increase in merchandise margin driven by supply chain efficiencies, better buying economies of scale and growth in exclusive brand penetration of 110 basis points. We expect the growth in exclusive brand penetration to be in the back half of the fiscal year given the outsized growth we experienced in the first half of fiscal '24. Our income from operations is expected to be $219 million or 11.9% of sales. We expect net income for fiscal '25 to be $165 million and earnings per diluted share to be $5.35, a $0.50 increase from our prior guidance of $4.85. We continue to expect our capital expenditures to be $120 million. For the remaining 9 months of the year, we expect our effective tax rate to be 26.3%. We remain committed to our plan to grow new units by 15%, adding a total of 60 new stores during the year. We anticipate opening roughly 25 stores in the first half of the year and 35 stores in the second half of the year. Now I'd like to turn the call back to Jim for some closing remarks.

Thank you, Jim. We are pleased that our business is achieving positive same-store sales growth. Our merchandise margin continues to grow and our inventory is well positioned with less markdown product as a percent of inventory than this time last year. As there seems to be substantial uncertainty in the market right now, particularly with weakening retail industry metrics and concern about the health of the consumer, we are even more pleased that we were able to exceed our first quarter guidance and raise our guidance for the balance of the year. I do want to thank the entire Boot Barn organization in the stores, distribution centers and store support center for their unwavering confidence in our 4 strategic initiatives and their continued focus on world-class execution. Now I would like to open the call to take your questions. Rocco?

[Operator Instructions] Today's first question comes from Matthew Boss of JPMorgan.

Congrats on another nice quarter.

Thanks, Matt.

So Jim, maybe could you help break down the drivers behind the return to positive same-store sales here in the first quarter as you look across traffic, new customer acquisition, maybe basket components, and just your confidence in sustaining positive comps now moving forward as we think about the pre-pandemic algorithm you used to talk about, which was 3% to 5% same-store sales, but I think you've materially exceeded that pre-pandemic. So just kind of bridging first quarter return to positive comps, maybe what you're seeing in the second quarter and then thinking about going forward, any change in that top line same-store sales to algorithm as we think moving ahead.

Sure. Happy to do that. In terms of the components, it was great to see broad-based sequential improvement continue from Q3 to Q4, Q4 to Q1 and then throughout Q1. And that broad-based nature of it was across merchandise categories, geographies and channels. In terms of your specific question around the components of the retail store business, the first quarter started out with slightly negative transactions per store. But both in May and June, our average transactions per store were positive. And then when we finished up the quarter, we could reflect back and we saw a positive growth in the size of the basket itself driven mostly by AUR but a little help with an increase in UPTs. And we exited the quarter with transactions year-over-year increasing on an average store basis. In terms of the confidence going forward, I appreciate the embedded confidence in your question. We have exceeded our long-term algorithm of comps for a long period of time. And I think everybody was waiting to see, when we cycled that year of plus 53.7%, what would happen. And while we gave a little bit of that back, a couple of years after that, it now does seem that we're back to a pretty strongly predictable business, a little bit more visibility than we've had in the last couple of years. And again, nice to see sort of strength across the board, across merchandise categories and channels and geographies. So I'd say if we didn't have the backdrop of all the other macro uncertainty, I'd say our confidence would be pretty high. We are a student of the rest of the retail industry, and I know there's a lot of uneasiness out there around consumer confidence, upcoming elections, et cetera. So we're trying to remain a little bit prudent and cautious as to how we view the balance of the year.

Great. And then maybe just a follow-up on the margin side. So as we think about the bottom line outlook, maybe could you just elaborate on puts and takes in the second quarter gross margin and just overall flow-through rate, best to think about, is it 35% incremental margin on top line upside going forward in the model?

Yes, Matt, the 35% is still the flow-through number to use on the model, on the upside, as you look forward and if you model some beat on top of what we've guided there. As far as the gross margin goes, as we look at the second quarter, the merchandise margin, we're expecting to improve 60 basis points driven by supply chain efficiencies. And we expect more of the buying economies of scales to kick in to a larger degree in the second half of the year, exclusive brand penetration to be down a little bit in the second quarter before ramping up in the second half, and buying and occupancy is expected to delever by 90 basis points in the second quarter with the continued higher occupancy from new stores and the deleverage from negative same-store sales in the second quarter. And then as we look for the full year at the overall gross margin, we're expecting to see at the high end of the range a 40 basis point increase in gross margin.

And our next question today comes from Peter Keith of Piper Sandler.

Nice results here guys. As you've seen the sequential comp improvement, Jim, last quarter, you were talking about a few company-specific initiatives like bringing in lower price point products back into the mix, even shifting some of the ad spend, I think, to be maybe a little more bottom of funnel. Could you talk about how some of those company-specific initiatives played out? And are there still levers that you could pull?

Sure. You're exactly right. We were talking about two or three things that we're doing that were somewhat consistent with past practice but maybe with improved focus. So starting with the merchandising piece and from an assortment planning process, we really wanted to ensure that we had balance across a couple of dimensions. One is pricing, right? We wanted to get back in stock across good, better and best. And with a couple of years of successive increases in inflation, we did think we had vacated sort of some of that good price point range in a few different parts of the assortment. So we're able to kind of react relatively quickly, bringing in oftentimes third-party product to fill in the good price points. We also want to find the right balance between function and fashion. And I think we had gotten maybe a little bit off from a ladies boot assortment standpoint, meaning a little bit too much into fashion. And now I think we feel a little bit better about our balance between function and fashion, and that business has strengthened quite nicely. The other two pieces, one you mentioned was, from a marketing standpoint, we've been building a brand for the last 6 or 7 years and really focusing on elevating the aesthetic of the Boot Barn brand and candidly, hoping to elevate the entire visibility of the Western industry. But when comps started to get a little softer, we shifted gears slightly. We didn't really break price. We just wanted to focus more on call to action and generate what you described as bottom of the funnel, generate a little bit more immediate demand. And then finally, we leaned heavily on the field and tried to equip them with more opportunities to build the basket. So one of the victories, small victories, that we are seeing now is a return to positive growth in units per transaction, which had been eluding us for the last few quarters. So nothing more complicated than sort of those basic building blocks. But when you put all those together, and admittedly cycling some negative numbers, although last year's June is pretty strong, yes, I think that bodes well for the future for us.

Okay. Good. The other thing I want to ask about was the Morgan Wallen sponsorship. I think this is your second year in a row of sponsoring his tour. It does seem to become one of the bigger tours of the summer. And I recall that part of the thesis around getting behind is you could broaden your customer demographic, perhaps a little bit of a younger customer base. And so 2 years in now, have you seen any results from that as maybe with your B Rewarded program or what customers are buying around some of those concert events?

Yes. So it's a very good question. We feel great about what we're doing with Morgan Wallen. Not to correct you, Peter, it hasn't quite been 2 years yet, but we are almost a year into it. We have seen, I think, some really great excitement associated with this tour and his impact on the business is massive when he goes in and out of a market. We've seen a really nice uptick in customer capture, and a good part of those customers are now leaning a little bit more female, a little bit younger and a little bit more in the category of fashion versus Western, which does fit nicely into the demographic of his fan base. So I think it's hard to specifically draw a causality between what we've done with him and what's happening in the customer database. But from what we expected to happen to what is happening, there's certainly some correlation there.

And our next question today comes from Steven

Congrats on the strong results.

Thank you.

I wanted to ask on the sales guidance change. So how should we think about how your expectations for the back half of the year have changed, just keeping in mind that third quarter compare looks like the easiest on a 1-year basis? So just help us think through some of those planning for the back half.

Sure. So when we guided at the beginning of the year, Steven, we used February, March and April's business to inform for the year. And then as you recall, we haircut the back half of the year, particularly in the third quarter for election disruption, a shortened holiday calendar and just some macro uncertainty for the entire back half of the year. As we got through the end of the quarter, the way we've updated our guide for the year is we expect Q2 same-store sales in the stores to look similar to Q1 at a plus 1%. And then as we get to the third quarter, we expect the store comps to be flat and then strengthen to about a plus 1% in the fourth quarter. And so that reflects a very similar haircut or reduction in sales from what the rollout of just looking at the July's business. And again, I should clarify, we did use the 4 weeks of July plus the 1 week of August. We looked at that 5 weeks of business to roll out the rest of the year. And then that's what we haircut from there in the third and fourth quarter. So a similar level of conservatism to anticipate some of the disruption that we're seeing or we could potentially see as we get into the third quarter, more of that reduction comes in the third than the fourth quarter. And then the online business as guided, e-com comps we've taken a similar approach, and we're expecting that to be at about a plus 5% for Q3, Q4 and then obviously in Q2 where we've provided that guidance.

Okay. That's helpful. The follow-up question I had was just the workwear side of the business, I guess that's still lagging. What do you think is happening there? Did you see any sequential improvement in the first quarter? And then how is that kind of trending thus far in 2Q?

Sure. It's nearly flat. So we wish it was positive, but it hasn't yet turned positive. The work boot business saw a nice improvement sequentially from Q3 into Q4 and then slight improvement from Q4 into Q1 and is pretty much in line with Q1 right now, so negative 1-ish. Work apparel, which is much smaller than work boots, is negative low single digits. We are making some changes to the assortment there and hope to get that back to a positive number in the next couple of quarters. Again, we'd rather those numbers be positive than negative. They're not massive drags on our overall comp right now though, so that's good. So hopefully, we'll get those turned around in the next couple of months.

And our next question today comes from Max Rakhlenko with TD Cowen.

Congrats, guys, on a nice quarter.

Thanks, Max.

So first, can you provide an update if the improvement trends that you're seeing are coming more from legacy shoppers or shoppers gained over the past few years? And then just bigger picture, what's your sense of how good of a job you've done maintaining and growing sort of that legacy or core Western shopper versus a shopper that may be in the aperture or too away from that more traditional shopper that you've had in the past?

It's hard to look at a short period of time and answer to that question. If we look over the last few years, we've seen growth in both legacy and in new. And over that period of time, the business has comped up on a multiyear basis, more than 50%. And if I think of it from that perspective, most of that was increased transactions. And what we had said when we were going through that was that half of those increased transactions were new customers. So when we look at the most recent quarter, we did increase trends and the size of the database by about 1.2 million people or about 16% versus the quarter last year. And when I look at the composition of where they're coming into the database, it's a pretty distributed split between Western and work. Fashion customers, our Just Country customer segment, are all growing sort of in relative proportions to our legacy customers, with a little bit more growth in some of the newer customer segments like fashion and country. So again, if I were to think about just the overall business, I think the health of our customer is we're seeing a reemergence of our legacy customer and adding new customers, and hopefully, that will bode well for the balance of this quarter and third and fourth quarter and materialize into nicely positive comps.

Got it. That's very helpful. And then you guys have done a really nice job of lowering your sourcing exposure from China, but it still remains somewhere between, it feels like, 35% to maybe 40%. So just curious if you could speak to any contingency plans and how you're thinking about sourcing if it were to look more likely the tariffs would increase.

Sure. Thanks, Max. You're right. The last year, we were able to lower our exposure to about 37%, 38% from China, and our on order is actually closer to 30% now or around 30%. So we do continue to derisk our exposure to China. We want to pull completely out of China because we have learned over the years that they make a nice product and it's quality and we can get it delivered on time, and that's important to us. But it is something that we continue to look at, the risk of moving out of China versus staying in China, and we'll continue to watch the news and see what happens with tariffs or increased tariffs. We did go through this once before when we had an increase in tariffs several years ago, and we're able to absorb those and manage through the increase in costs and continue to grow our merchandise margin despite the tariffs we filed last time. So while we don't love an increase in our cost of goods, it's something that we feel confident in managing through.

And our next question today comes from Dylan Carden with William Blair.

Curious if you're doing anything different in the online channel and kind of what you attribute that recovery to, if it's just simply easier comparisons. And just kind of looking historically, that penetration is kind of at the high teens. Is the right way to think about it, that's sort of the structural level it should be at? Or is this a different business where you're kind of maintaining the current level?

So the first question was around the inflection point of the online business. What was the second part of your question, Dylan?

Just curious, the penetration rate, if that should retrace back at historical levels. Or is it like a new normal?

I see. Well, let me take that part of the question. I think the penetration of our online business will hover around 9% or 10% for the foreseeable future not because I don't think our e-commerce business is going to grow nicely, we're guiding it for the balance of the year roughly plus 5%, it's doing a bit better than that now, but I think our stores will remain positively comp, even if it's low single digit, and we're adding new stores. So just the math of it, e-commerce would have to really accelerate to gain ground, to try to overtake the growth in both new store sales and low or mid-single-digit comps from the store base. In terms of what's changed in that business, we have done some things online, right? So all of the assortment changes we mentioned earlier around finding the right balance of price points between good, better and best, finding the right balance between function and fashion flowed right through to the online channel. We've set up some unique landing pages online where we've decluttered some pages that would have historically had both full price and clearance markdown items on the page and now we've sort of separated those out. We feel pretty good about the effectiveness of Google's PMax methodology or tool that is relatively new to us. I'd say, finally, we continue to manage the spend online somewhat algorithmically based on a fixed return on ad spend. And recently, we've just gotten more for that spend. We've been able to spend more dollars and achieve a profitable sales growth. So you put all of that together, coupled with cycling some negative numbers, to your point, and we feel good about the growth there. I think the single thing that may have inflected differently in the last couple of quarters was the effectiveness of the online pay-per-click spend, and that has added growth on top of a bit of growth.

I mean I was pitching a little bit in the question, have you loosened your standards for return? Or is it more that it's just naturally becoming more efficient?

We're like card counters, Dylan. The standard for return has always been almost exactly the same number. And when the cost-per-click comes down or the conversion goes up, you get more for that spend. So if we could dial in to, call it, 4 or 4.5 ROAS and spend 10% or 15% more and continue to maintain that number or higher, we would keep doing it. And conversely, there are quarters and there have been recent quarters where we pulled back on spend and gave up demand because we thought it was EBIT eroding or pretty much we're sure it was EBIT eroding. So that's really what's the math behind the spend on digital.

Our next question today comes from Jay Sole with UBS.

Jim, I see in the slide deck that there's, well, it looks like, a new exclusive brand in the new segment, the premium segment, and it's called Cody James Black 1978. Can you tell us about that a little bit? Like, what is that? Where is it going to be distributed? What's your plan for that category, that new Cody James sub-brand?

Sure. Happy to. It's an exciting piece of the business. I do want to be intellectually honest, it's not multiple points of same-store sales growth. So I don't want to overplay it. But it's an extension of Cody James. It is an elevated price point. It started with boots. And if you get into the different styles and silhouettes of boots, it tends to lean a little bit more exotic skin versus regular leather. And it tends to lean a little bit more roper style versus riding style. So that's just the silhouette of the toe and the heel. It's now in almost 100 stores, and we'll be adding it to more stores going forward. It's online, of course. There is an underlying trend in the industry where an age-old brand called Lucchese, which many people have heard of even outside the Western industry, had created a market and we felt like the market was bigger than what they were able to deliver. And now there's a few different companies out there that are going after that business. And this is sort of our take on it. We have a direct competitor in Texas called Cavender's that's going after this. Ariat is going after this. There's a few others. But it's a really nice elevated styling and elevated price point. And it's starting to extend a little bit into very high-end cowboy hats, and this is small and narrow, and some sport jackets at elevated price points. So if you think about it between casual and dress-up, it's sort of the dress-up part of the store.

So that's interesting. So it sort of has some lifestyle brand elements to it already, even though it sounds kind of new and elevated price points. I mean I'm just going to ask the question, how did the margins compare versus the rest of the exclusive brands portfolio given that elevated price point?

Yes, in line. It's a really great merchandise margin-accretive business to us. They're in line with our exclusive brands. And as you know, our exclusive brands outpace our third-party brands. So the more we can do with that, the better. It also adds newness to the stores and add some vibrancy. The store partners, store associates out there love it, of course, because they tend to be loyalists to our brand and to cowboy boots in general. So there's a lot of great qualitative factors to it, and it is additional business. Again, it's not 5 points of comp, but it's a nice additional business.

And our next question today comes from Janine Stichter with BTIG.

I was hoping you could elaborate a bit on some of the other gross margin drivers that you spoke to. I'm particularly interested in the supply chain efficiencies, exactly what you're doing there and then expanding vendor direct. Maybe just elaborate on that and then kind of speak to what inning you're in with these efficiencies?

Sure. So as far as the gross margin drivers, starting with the supply chain efficiencies, the team has done a really nice job in renegotiating rates with shipping and freight and logistics providers. And so that's the bulk of what we're seeing in the supply chain efficiencies are just better rates with our supply chain partners. We've then also created some efficiencies in our distribution centers. We've got the Kansas City distribution center up and running, and it's doing really well. It allows us to eliminate storage sites for inbound freight, which was costing us some money. We've also begun to rework how we get product from the distribution centers to our stores and our shipping packages that are fuller, saving us shipping costs and some corrugate savings. And so it's part of our broader initiative of looking at all of our vendor relationships and seeing how we can do things more efficiently, bid things out and just be smarter with how we're moving product around the country as we continue to grow stores. And as I mentioned on the last call, I believe, about 2/3 of the gross margin improvement that we're expecting to see for the year is coming from the supply chain efficiencies, and that's running pretty steady throughout the year. We're in the early innings of those supply chain efficiencies. The bulk of the step-up is really going to be in this year. As we get into next year, we'll continue to look for opportunities, but I'm not expecting that to be in the magnitude of what we're seeing this year. And then as far as vendor economies of scale, it's working to get bulk purchases. We're taking possession of full container loads of product from some of our bigger vendors and getting a discount there, and so continuing to work with them as we've grown our business with our vendors and making sure that we're getting the appropriate pricing. As partners, both of us are seeing really nice growth as we open stores and expand across the country, making sure that the pricing keeps up with the growth as we're both able to see some economies of scale there. And I think that helps us to see some better markup. And as the product we're purchasing at better pricing works into the inventory, we're expecting to see those economies of scale really come in the second half of the year. And I do want to add, Janine, that that's with both our third-party vendors and also our exclusive brand vendors and our team working at the pricing on our exclusive brands.

Great. And then maybe just a follow-up on the exclusive brand side, you talked about the expansion accelerating in the back half of the year. Is that contingent upon the women's business, starting to show more improvement? I know that women's kind of over-indexes to exclusive brands -- or exclusive brands over-indexes to women's, I should say.

Yes, that's a part of it, Janine. It's not the entirety of it. It's really, as we cycle the greater than 600 basis point expansion from a year ago in the first half of the year, and as Jim mentioned, getting some of the really nice product from our third-party vendors into the stores in the first half and some excitement there and having that product available quickly, it's really just been readjusting the assortment in the stores. And we can see what's on order on some of the exclusive brand stuff and when that's planning to come in the stores as we get into fall and get ready for holiday. We can see and project the exclusive brand penetration growth reaccelerating as we get to that second half.

And our next question today comes from Jonathan Komp with Baird.

Wanted to just ask how you're viewing the resiliency of the positive comp trends given all the focus on the economy? And then maybe related, it looked like the inventory per store stepped up to 6% growth. Does that imply that your planning scenarios where there could be upside to the comp guidance? Or how should we read the inventory?

Sure. On the first part, on resiliency, we're looking at this with cautious optimism. If we look at the business over the last 14 weeks, 11 of them have been positive comps. We called out the two sort of transitory events in July that we think were one-offs. So that gives us some confidence that the business is back to positive comps. And as we turn into September a few weeks away, September was a somewhat negative comp month last year. So again, if there's any hesitancy in our voice, we just don't want to be overly optimistic and be surprised because there is certainly a lot of macro noise out there. In terms of the inventory position, inventory is up 6% on an average store basis. Just as a reminder, last year in this quarter, it was down 9% on an average store basis. So I wouldn't necessarily read all that much into that. I guess if we're being completely honest, there is some optimism as we go into the fall that we would want to fuel a growing sales trend, and we'll have the product to do that. We haven't, however, taken unnecessary risk, so we just haven't extended ourselves to the point where, if the business doesn't materialize, we're going to wind up with significantly deteriorating margins, in our view. So you can take that as perhaps a subtle signal that we might believe a little bit more bullishly in the future of the business than what we've guided. But there's a few other things going on.

And I would just add to that, our philosophy around inventory management, it continues to be the same, unchanged from prior years. Last year, our total inventory remained relatively flat despite opening 55 new stores and filling those stores and growing exclusive brands. And so I think we've spent the last year managing our inventory extremely well and getting ready for this upcoming fall where we can, as Jim mentioned, get the right inventory in the stores and improve our inventory position. Our markdowns as a percent of total inventory are below what they were a year ago, and so it really just us bringing new freshness into the stores as it relates to inventory.

That's really helpful. And then just one follow-up, Jim Watkins, on the Q2 guidance. It looks like the high end, you're projecting similar comps as you saw in Q1, but you're embedding a greater operating margin deleverage. So could you maybe just talk through some of the puts and takes as we think about the operating margin performance quarter-over-quarter or unique factors in Q2?

Sure. As you know well, John, Q2 typically had similar sales volume as the first quarter as we've seen in the last several years, higher expenses. Last year, we saw first quarter was $1.13, I believe, and earnings per share in the second quarter was $0.90, and so a similar flow-through from what we've seen in the past. Q1, I must also add, had really nice flow through. Back to Matt's earlier question, around flow-through for the rest of the year on the upside, we saw a really nice flow-through in Q1 as we were able to get even better supply chain efficiencies and control some of the expenses. And so we're just not planning that in the second quarter. We also have additional expenses in the second quarter, such as store manager conference, higher utilities as we're running the air conditioning in our stores more, more DC labor that impacts the operating margin as we ramp up the receipts for the holiday quarter. And so that's typically what we're seeing in the second quarter that's creating a little bit more of that deleverage as we get into the second.

And our next question today comes from Jeremy Hamblin with Craig-Hallum Capital Group.

Congrats on the momentum in the business. I wanted to get into just understanding what you're seeing in terms of kind of your various income cohorts. There's a lot of noise out there in terms of typically, when you start to see a little economic softening, that you see kind of premium household outperform. But that hasn't necessarily been the case here over the last few months. I wanted to get a sense for what you are seeing, if there's any discrepancies across your various income cohorts. You noted that, I think, work boots are still a bit of a laggard. But what are you seeing kind of internally in your metrics to kind of help us understand where your business is?

Great question and certainly one that, as we follow other companies, has been spoken to. So we were sort of well prepared to answer this one. The quick answer is, while the hypothesis is out there and it certainly makes sense, we haven't seen it with our customer cohorts. We haven't seen material differences between the more lower-income and higher-income customers. We were trying to develop some reasons for that. One might be we do sell more functional product, so regardless of what's happening in the economy, most of our product has a functional purpose behind it and is going to be purchased regardless. And the second piece is, while we've seen unemployment go up a little bit over the last few months and that has spooked the market a bit, when you peel back the unemployment numbers, the unemployment is really not hitting the sectors where we operate in, right? So the higher unemployment numbers were in the information sector, the restaurants and hotels and retail and wholesale, et cetera. But when you look at agriculture, mining, oil and gas, construction, manufacturing, those unemployment numbers are just not as bad. So in an effort to try to provide some color commentary as to why that's happened, that's all we can come up with. But we haven't seen that natural phenomenon that you'd expect where perhaps a higher-income customer does better. We haven't seen it.

Got it. And then just another question here on kind of your new unit kind of projections over coming years. As you look beyond FY '25, I wanted to get a sense. You got a map on Slide 5 here of your national footprint. How are you thinking about on the go-forward continuing the pace of growth that you've been at in terms of kind of getting into new markets versus infilling into existing markets in terms of kind of percentage of split that we should expect beyond FY '25?

Sure. What we used to say it was 2/3 new markets and 1/3 existing markets, and then we wound up, after looking back a couple of years later, we had more "existing markets." I think as we look at new store openings in the next 12 or 24 months, I would say half of them are filling in markets and half of them are in pretty much brand-new markets, not necessarily new states. There aren't that many states left to go into. But we are opening up stores in cities that don't have a store within an hour or 2. Syracuse, New York is an example. We have a few stores in Upstate, in Central New York, but nothing really close to Syracuse. We would count that as a new market. And then we've also been filling in big states like Texas and California. We haven't seen any notable cannibalization, but we do count those as existing markets.

Got it. Syracuse is a great place to operate. I'm sure you'll do well there, and good luck the rest of this year.

Very good. Thank you, Jeremy.

And our next question comes from Corey Tarlowe with Jefferies.

I just wanted to ask about, in light of all the macro volatility that we've seen, are you seeing your competitors behave any differently?

On the margins, I'd say nothing certainly nothing we would follow and emulate. I would say we've seen a little bit more promotional activity in some categories of business and in some secondary competitors, some of the farm and ranch players, as they're trying to find some catalysts for sales growth. The mom-and-pops are probably being a little bit more promotional. We don't track 400 markets of mom-and-pops anyway, but that would have no impact on us. And then the single competitor that's really in our space, a company called Cavender's based in Texas, one of the things we like about them, they're a very formidable competitor, they're great operators and they tend to operate like we do, mostly full price, much less promotional than typical retailers. I can't say they've really changed much at all, maybe slightly, but they are fundamentally still at full price. They're just like us. They're mostly full price, an occasional promotion here or there, occasionally clearing markdown product. But we haven't seen a race to the bottom, not for sure. So we're not terribly worried at this point about following a discounting competitor and having the a sliced price nor do I think we would ever really do that.

Got it. That's very helpful. And then just on the women's business, could you talk a little bit more about what you're seeing on the apparel side and maybe a little bit on the boot side as well? It sounds like you're seeing a little bit of maybe unevenness or a little choppiness in the trends. I think it was apparel that you highlighted. Can you just talk a little bit about what you're seeing generally in the category?

Sure. The boots business has really progressed nicely. It was significantly negative in the third quarter. And we've been calling out now it's gotten progressively better and was positive in the first quarter. It's very nicely positive in August. Given some of the events in July, both ladies businesses had a tough time because they're more discretionary and less functional. But the ladies boots business, we believe, is back to flat or nicely positive comps depending on what trend line I want to look at. The most recent trend line is very nicely positive. In terms of Western apparel, we've seen the denim business improve. So denim has gotten sequentially better and is positive in the month of August, in the middle of, that's 10 days, but that was great to see. The balance of the ladies Western business is still maybe low or mid-single-digit negative. We've seen some bright spots. Dresses has been a bright spot, and I think we'll get that business back to flat to positive over the next couple of quarters based on the sequential improvement that we've seen. So that's how I'd summarize it for you.

And our next question today comes from Sam Poser with Williams Trading.

I have two questions. Your digital business is improving along with your store comps. Do you have any measurement on how many people like utilize your app or your website and then come into the store. Like, how much is digital? Just how much does it address an average sale? Like, you're doing 10% of your business purely through e-commerce. But how much do you think digital is acting as an advertising tool or a shopping tool for them then to come to the stores?

I would say it's probably 20% of our store customers find digital as a catalyst to get into the store. In our big legacy markets, California, now we put Texas in there, customers know where we are, the stores are familiar. In some of the newer markets, we are using the digital channel to create awareness. We're using social to create awareness. We do some geo-targeted marketing in those markets to make customers aware of new stores opening in their market. So I think on balance, it's maybe 20% of our customers that start their journey from a digital standpoint.

Is that an opportunity to both drive digital and more in-store engagement? Is that something that you would step on in a sense?

It might be. I mean, that's something that I think we've made some nice progress on recently, but we probably have more opportunities to improve.

And then secondly, you talked about basically buying containers overseas and then taking possession in Asia and bringing goods across yourself. How much closer does that bring on, let's say, those items? I mean, what is that margin differential there versus exclusive brands? I would assume it's closer to 1,000 basis point.

Yes. It's not as good as the 1,000 basis points that we get. It does vary a little bit vendor to vendor and quantities that we're purchasing. But you're right, Sam, it's not as good as buying an exclusive brand. But it is margin accretive and helpful to the profiles.

And does that work by saying, okay, I'll bring in my container of initial orders to fill a store and then let Ariat or whoever replenish me from them, so you get the initial shot with a big discount and then your fill-in orders would come more as needed? Is that just a general way to think about it?

Yes. So that's part of it. The other part of it, though, is when we commit to container loads of product, in an effort to mitigate fashion or markdown risk, we're really only doing that in categories or on styles that will be in the line for multiple quarters, if not multiple years. So we have some great work boot styles from Ariat. Ariat is a great vendor partner of ours. So the Ariat WorkHog has been in our line for years, and that's a style that we buy in vendor direct quantities. Similarly, there are some Western styles, typically more on the men's side, but not always, where we can buy container load. So part of it is filling new store and fixture fill. But more of it, in terms of just volume, is looking at commodity, very low markdown risk product, and taking it off the vendor's hands earlier. And then we have some costs that we have to add to it. So we don't capture all of that additional markup because we have to bring it to our DC and put it away and then take it and ship it, et cetera. So the discount has to more than offset that. Otherwise, we wouldn't do it.

Our next question today comes from John Lawrence of Baraboo Growth.

Just quickly, I noticed in a couple of weeks, you've got a marketing promotion. It combines the concert with the Cowboys game, all that kind of stuff. Can you talk a little bit about the strategy and what you're seeing from that response, I know we're a couple of weeks out, but just the response and the reach that maybe Morgan and the Cowboys have to Dallas?

Yes. So without divulging too much, I guess, competitive information, that strategy is a customer capture strategy, right? We want people to engage with us, sign up for the sweepstakes, start to track us, et cetera. And while we certainly get some business out of it, we think, because people go to the site, it's, more than anything, we're trying to build our customer database. And this goes back to Sam's question earlier of perhaps we then bring on a new customer, they enter the Boot Barn brand through the digital channel, even if it's just a sweepstakes like that, and then they learn more about the brand and become omnichannel shoppers. So it was quite impactful, but I wouldn't necessarily say we saw it in same-store sales. We saw it in the number of customers that were captured in our database.

And just to follow that, Jim, I would assume that's not just regional. It's fairly a national play as well?

Correct. I hesitate to pick a team on a public call, but they are American teams. So one of the reasons we went with it. The second reason, I guess, they are the Cowboys after all. And then Morgan Wallen, of course, has somewhat of a national reach.

And this concludes our question-and-answer session. I'd like to turn the conference back over to the Boot Barn team for any closing remarks.

Well, thank you, everyone, for joining the call today. Apologies that we ran a bit long. We look forward to speaking with you all on our second quarter earnings call. Take care.