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Edited Transcript of BOOT earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q1 2020 Boot Barn Holdings Inc Earnings Call

Irvine Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Boot Barn Holdings Inc earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory V. Hackman

Boot Barn Holdings, Inc. - CFO & Secretary

* James G. Conroy

Boot Barn Holdings, Inc. - President, CEO & Director

* Jim Watkins

Boot Barn Holdings, Inc. - VP of IR

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Conference Call Participants

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* Dylan Douglas Carden

William Blair & Company L.L.C., Research Division - Analyst

* Janine M. Stichter

Jefferies LLC, Research Division - Equity Associate

* John Dygert Morris

D.A. Davidson & Co., Research Division - Research Analyst

* Jonathan Robert Komp

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Mitchel John Kummetz

Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Samuel Marc Poser

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Tom Nikic

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Tracy Jill Kogan

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Boot Barn Holdings Incorporated First Quarter 2020 Earnings Call. As a reminder, this call is being recorded. Now I'd like to turn the conference over to your host, Jim Watkins, Vice President, Investor Relations. Please go ahead, sir.

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Jim Watkins, Boot Barn Holdings, Inc. - VP of IR [2]

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

A copy of today's press release is available on the Investor Relations section of Boot Barn 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 reflects 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 2020 earnings release, as well as our filings with the SEC referenced in that disclaimer. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Jim Conroy, Boot Barn's President and Chief Executive Officer, Jim?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [3]

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Thank you, Jim, and good afternoon. Thank you for joining us. On today's call, I will set the highlights of our first quarter results as well as the progress we have been making on each of our 4 strategic initiatives. Greg will then review our financial performance in more detail and then we'll open the call up for your questions.

We are extremely pleased with our start to fiscal 2020 as first quarter results improved significantly on a year-over-year basis, despite cycling a very strong double-digit comp in the first quarter last year. Our consolidated same-store sales showed sequential acceleration with an increase of 9.4% in the quarter. Consistent with the past several quarters, we saw broad-based strength with virtually all geographies and product categories posting gains.

In terms of channels, our retail same-store sales increased 11.1% marking our 9th consecutive quarter of positive store comps at our retail locations. E-commerce sales increased 0.9% as we continue to focus on maximizing the EBIT dollar contribution of our digital business. The same-store sales 2-year stack in both our stores and online channels increased more than 20% for the second consecutive quarter. In conjunction with the strong revenue growth, we once again demonstrated significant merchandise margin expansion.

A clean inventory position drove more full-price selling in the quarter as we continued to minimize promotion and clearance events. This coupled with a significant expansion and exclusive brand penetration drove a 150 basis point increase in merchandise margin. We also saw healthy expense leverage in the quarter with an improvement of 90 basis points in our SG&A rate.

A combination of steams across the P&L drove significant year-over-year growth in both operating income and earnings per share. Excluding the impact of the tax benefit from the exercise of stock options in both years, we achieved a 63% increase in operating income and more than 100% increase in earnings per share relative to the first quarter of last year. Our sustained success is the result of strong execution and continued progress on each of our 4 strategic growth initiatives.

Let me review the first quarter highlights from each initiative beginning with driving same-store sales growth. Our 11.1% retail same-store sales growth was driven by strong performance across our merchandising, store operations and marketing functions. This sales growth was consistent across most of our geographies. We saw continued strength in our Texas business and have seen a healthy sequential increase in the rest of the country.

Same-store sales growth in Texas was slightly stronger than our chain average and has remained at a similar growth rate for the last 3 quarters. Our same-store sales growth in our retail stores has now been about 8% or higher for 7 consecutive quarters. From the merchandising perspective, all major product categories grew year-over-year with particular strength in work apparel, work boots, hats and ladies western apparel.

Driving these results was the continued expansion of our exclusive brands, inventory investment in key categories, and an improved assortment including new styles, broader size ranges and greater merchandise variety. We are also working to optimize our selling space on a store-by-store basis, including the expansion of work boot and work apparel categories in many stores to satisfy growing demand.

Shifting to operations, our stores team is performing at a very high level, as demonstrated by consistently strong comp growth and continual improvement in customer service scores. We have streamlined the operational aspects of store management by eliminating non-value added administrative tasks and in automating several reports.

We believe that these efficiencies coupled with improved store labor scheduling has refocused a considerable amount of time on service and selling, resulting in improved results. From a marketing perspective, we continue to utilize customer segmentation to customize our communication to each segment.

We believe that the combination of more tailored messaging, greatly improved brand creative, and the changes we have made to our media mix continue to both attract new customers and reengage lapsed customers. We continued to see increased customer count, driving more transaction and growth in same-store sales.

Moving to our second initiative, strengthening our omnichannel leadership, sales in our e-commerce channel grew approximately 1%, progressively improving each month during the quarter with the combined May and June same-store sales increasing approximately 6%. Consistent with our goal, we experienced healthy growth in both operating income dollars and EBIT margin rate as we've continue to focus on eliminating low-margin products and targeting a higher return on advertising for our online marketing spend.

A key component of our omnichannel strategy is utilizing our e-commerce platform to create an engaging visual experience inside our retail stores. We have been pleased with the reception of our rangefinder touch screens, which allow our customers to browse our in-store assortment in many of our stores. This is often used to help better understand what type of boot a customer is looking for with the goal of improved in-store conversion.

And if they are unable to find the specific item or size they need in the store, they are able to order it from our web tablet, which accesses our broader e-commerce assortment plus the entire selection for most of our major vendors directly. This technology enables our stores to fulfill nearly every customer's needs and have their item shipped to their house or to the store for pick up.

In addition, we have added alternative payment options to our websites, creating more flexibility for our customers. We are also expanding the versatility of our commercial accounts business by launching our business-to-business website, which we believe will be an advantage to Boot Barn in attracting and developing larger national commercial accounts, by showcasing the strong assortment of work boots and apparel available to their employees.

Now to our third strategic initiative, exclusive brands. During the first quarter, exclusive brands reached approximately 20% of total sales, an increase of nearly 500 basis points of penetration compared to the prior year period. We saw strong growth in both of our longstanding exclusive brands Cody James and Shyanne as well as continued success and increased penetration from our 4 other major proprietary brands.

Idyllwind and Moonshine Spirit continue to grow and are playing a key role in introducing new customers to Boot Barn. Hawx and Cody James Work had been very well received by our work customer and have exceeded our expectations. Our exclusive brands provide us with competitive differentiation and are margin enhancing by more than a 1,000 basis point versus national brands. We continue to believe that exclusive brands will complement the assortment provided by our vendor partners and we are pleased that we've been able to achieve ongoing sales growth while we transform our assortment.

Finally, our fourth initiative, expanding our store base. We opened 1 store during the first quarter, plan to open 8 stores during the current quarter and expect to open a total of 25 stores during the current fiscal year. We remain focused on augmenting our new store development with opportunistic tuck-in acquisitions that enable us to quickly enter a new market and will continue to target a 3-year payback or better on both new and acquired stores. As a reminder, all acquired stores or rebranded in relatively short order are integrated into our field operations structure and quickly becomes part of the Boot Barn marketing program.

And turning our attention to the current business, we are 4.5 weeks into our second fiscal quarter and our consolidated same-store sales growth is approximately 8% with stores, once again, outpacing the growth of e-commerce. Notably, we made a decision to eliminate a sales in July that have been part of our business every summer for more than 20 years. This multi-week sale traditionally offered customers either $20 or $50 off virtually every pair of boots in the store.

As we cycled last year's sale, we continued to see strong growth in same-store sales along with a material improvement in merchandise margin rate and dollars. The strength in the current business continues to be broad-based across most geographies and product categories. We continue to see strength in merchandise margin due to the elimination of the sale, the expansion of exclusive brands, and a reduction in clearance markdowns, given the health of our inventory.

And now I'd like to turn the call over to Greg Hackman.

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [4]

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Thank you, Jim. Good afternoon, everyone. In the first quarter, net sales increased 14.7% to $186 million. Sales growth was driven by a 9.4% increase in same-store sales, sales from new stores added over the past 12 months, and the sales contributions from acquired stores.

Gross profit increased 20.8% to $62.2 million or 33.5% of sales compared to gross profit of $51.4 million or 31.8% of sales in the prior year period. The 170 basis point increase in gross profit rate resulted from a 150 basis point increase in merchandise margin and 20 basis points of leverage in buying and occupancy costs. Merchandise margin rate increased as a result of better full-price selling and growth in exclusive brand penetration.

Operating expense for the quarter was $46.1 million or 24.8% of sales compared to $41.6 million or 25.7% of sales in the prior-year period. We leveraged operating expense by 90 basis points on higher sales.

Income from operations was $16.1 million or 8.6% of sales in the quarter compared to $9.8 million or 6.1% of sales in the prior year period. This represents 260 basis points of improvement in operating margin. Income tax expense was $2.4 million in the quarter based on an effective income tax rate of 20.1%. Income tax in the first quarter last year was a $1 million benefit, resulting from stock option exercises. We now expect our tax rate for the balance of the year to be 25.2%.

Net income was $9.7 million or $0.33 per diluted share compared to $6.8 million or $0.24 per diluted share in the prior year period. Net income in the current year period and prior-year period includes $0.01 and $0.09 per share of tax benefit respectively, from the exercise of stock options. Excluding this tax benefit, net income per diluted share in the current year period grew 113% to $0.32 compared to $0.15 in the prior year period.

Turning to the Balance Sheet, inventory increased 9% on a comp-store basis compared to last year, with approximately half of this increase supporting the investment in our work business Jim mentioned earlier. On a consolidated basis, inventory rose 24% to $254 million compared to a year ago. This increase was primarily driven by an increase in inventory at our Fontana distribution center to support our exclusive brands, inventory for new and acquired stores added over the past 12 months and merchandise being staged for the 8 stores scheduled to open over the next 8 weeks.

During the quarter, we amended our revolving credit facility and our term loan, extending the maturity date 2 years to June 2023. The amendment of our revolving credit facility increased our capacity by $30 million from $135 million to $165 million. In conjunction with these amendments, we prepaid $65 million of our term loan, reducing the term loan balance outstanding to $111.5 million. The prepayment of this loan is expected to save more than $1 million in interest expense in the current fiscal year.

As of June 29, 2019, we had a total of $188.5 million of debt outstanding, including $80 million drawn on our $165 million revolving credit facility and $23 million of cash on hand. Our net debt leverage ratio at the end of the quarter was 1.8.

Turning to our outlook for fiscal 2020, we have updated our guidance and now expect same-store sales to increase approximately 6% and earnings per share to be in the range of $1.57 to $1.65 based on an estimated weighted average diluted share count of 29.4 million shares for the full fiscal year. This compares to our previous guidance of $1.42 to $1.50 per share.

Our income from operations is now expected to be between $75.4 million and $78.6 million. We expect net income for fiscal 2020 to be between $46.2 million and $48.5 million. Interest expense is now expected to be approximately $14.2 million. As we look at the second quarter, we expect same-store sales to increase approximately 7% and net income per diluted share to be in the range of $0.17 to $0.19 per share.

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

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [5]

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Thanks, Greg. We are very excited about our first quarter results and the positive momentum that has continued into the current quarter. We are confident in our ability to drive same-store sales, strengthen our omnichannel experience, grow exclusive brands and continue to expand our national footprint through new unit growth. I would like to thank the thousands of associates in the stores, distribution center, call center and [return] office for their hard work and dedication to growing the Boot Barn business.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Matthew Boss from JPMorgan.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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Jim. So, with 21% gross profit dollar growth actually on top of 24% expansion a year ago, maybe can you speak to how you're managing the balance today, between the top line growth and bottom line profitability? And how does your position as the western wear industry leader factor into the process, do you think?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [3]

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Sure. Well, if we look at the 2 channels separately, right. On the store side, a combination of more foot price selling, right. We've eliminated our anniversary sale in this quarter. We've been eliminating promotional period over the last several months, as you well know. Our inventory is extremely clean. So we're not clearing as much goods -- and we've grown exclusive brand. So we've been improving merchandise margin significantly on our store side and on our e-commerce side. But in the store side, the other thing that's been helping us, of course, is the higher than modeled, if you will, same-store sales growth is giving us some really nice leverage on occupancy. So on the store side, we're getting -- fortunately, and we feel great about this, we're getting significant topline sales growth from the same-store sales perspective, improving our merchandise margin, getting occupancy leverage, and that's all just driving right to operating income or EBIT on the storage side. On the e-commerce side, you know we've been very explicit about focusing on growing operating income and EBIT margin rate for our e-commerce business. And in the most recent quarter, we saw that grow strongly again. It's a little unusual to have the stores business growing so much stronger than our e-commerce business. But when we look at the EBIT improvement, we actually are quite pleased with that strategy and are glad we're continuing to follow through with it. So, in terms of the final part of your question regarding being the leader in the industry, I think the way we view Boot Barn is we're truly a lifestyle brand. We have a massive addressable market and extremely loyal customer. They're looking for the authentic provider boots and apparel both in Western and work both on men's and the ladies' side of the business. And we're their go-to place. I think that coupled with the fact that we have proactively been trying to attract more customers outside the core western in core work part of our business and we seem to be getting some results there as well. So now we're just -- we're extremely pleased with the business. We can point to a number of things that we have underway that seem to be providing really nice growth top line and bottom line, and we feel great about the start to the second quarter and the fact that we were able to cycle our anniversary sale and not repeated this year, and we kind of rolled right through it, and now behind us and we'll see how the rest of the quarter unfolds, but sales growth continues to be strong. And when you're not discounting the boots by $20 or $50, our merchandise margin rate was, of course, significantly higher.

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Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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Great. And then just a follow-up on gross margin with the less promotional stance so far quarter-to-date as you cited. How best to think about second quarter merchandise margin expansion opportunity maybe relative to the 150 basis points in the first quarter? And I guess how is the best way to think about sizing up the merchandise margin opportunity in the back half of the year?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [5]

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Yeah, I would -- I guess the way I would -- Matt, it's Greg of course. I guess the way I'd think about it is, it likely will expand beyond the 150 basis points given the sale was a 2-week sale last year, so it wasn't a month long, so it wasn't a third of the year, but it was 12% or 13% of the quarter, if you will. And so it will be above the 150 basis points, but we haven't given much guidance beyond that. I guess when you model out the guidance that we've provided and you think about leverage points, most of the margin expansion or the earnings expansion are going to come at the merchandise margin line. And then if you think about the rest of the year, this past quarter, we grew exclusive brands by about 500 basis points and we're pleased with that. And so there is no reason for us to think that that's going to temper down if you will. So merchandise margin for the year now could look ongoing outside of Q2 to be 50 basis points of improvement in Q3 and Q4.

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Operator [6]

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Our next question will come from Peter Keith from Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [7]

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Hey, good afternoon, guys. It's actually Bobby Friedner on for Peter. Really nice quarter. I just want to follow up on the merchandise margin, specifically, on your e-com profitability initiatives. Maybe any way to frame up how these initiatives are impacting EBIT margin? And then -- and also how we should think about the tail of e-com profitability benefits as you start to lap it come fiscal Q3?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [8]

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Well Bobby, it's Greg. We'll start to lap it or we've already started to lap it. We did the work and made those reductions largely in the April and part of May quarter or month of Q1. So in Q2, we'll be up against that profitability initiatives. If you think about e-com, it's roughly 17% of our business on the year and so the improvements we're making are certainly flowing through to the consolidated margin expansion. But it's, to a lesser degree, given just the penetration of the e-commerce business. We haven't really quantified what that gap looks like, but needless to say, it could be 20 basis points or 30 basis points or 40 basis points of improvement at the consolidated line by improving that profile.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [9]

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And just one more if I can on the comp guidance maybe, seems that trend remained very robust. Full year guidance though would seem to imply a drop-off in the back half of the year. Is that mainly just a function of conservatism or is there anything else we should be aware of?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [10]

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Yes Bobby, Greg again. That tends to be how we look at it is, you know 1 quarter out. We certainly feel pretty good about how the year has unfolded so far. As Jim mentioned, wrapping the anniversary sale from last year. And quarter-to-date, being at a plus 8, we feel pretty good about the business. But we haven't really changed how we had originally planned the back half of the year. So we're raising our guidance mainly based on the Q1 beat with also folding in the change in the revolver balance and paying down the term loan and we did bump our Q2 same-store sales expectation a bit.

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Operator [11]

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Next we'll go to Jonathan Komp with Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Yeah, hi, thanks guys. I wanted to ask your take a little bit on the environment and maybe first, Jim, the comment about stores outside of Texas accelerating maybe what you would attribute that to? And then also, more on a prospective basis, within Texas, any thoughts on kind of the environment and sustainability there, especially with a few of the macro level oil indicators softening a bit. Just curious to hear your take?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [13]

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Sure. Look, you know, as a company we try to have a quiet confidence and modesty about it. But candidly, I think our results are the result of good execution right, where the employment is strong right now, but it's not really any stronger than it was last year. The oil environment is relatively strong this year. it's [marginally] stronger than it was last year. So our business has grown in almost 10% comp and 100% earnings, and I can't really point to anything in the external marketplace that's that different than last year, other than the things that we're doing internally. So I hate to be so immodest about it, but I feel obligated to give credit to the team that's driving this business forward. In terms of sustainability, last year, we comped up plus 10%. We just comped up plus 9.4$. we've run about plus 8% for 10 years. So I think it's very sustainable. And frankly, I'm not -- I think the connectivity to the price of a barrel of oil at this point has become a little bit overblown, because I think when I look at the price of a barrel of oil and our recent results, the oil is the same as last year or actually down a little bit and our results are up. So I think that correlation, I think, has continued on longer than it's actually been a reality for the business. So we're excited about the business. We're excited about the quarter. We're excited about the current quarter. The Texas business continues to be strong. It's pretty much in line with the most recent 2 quarters and the rest of the country continues to improve. So kind of firing on all cylinders.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Okay, great. And then maybe a follow-up on the e-commerce. You might have touched on some of this already, but just curious when you look at kind of the May-June run rate if that's more how you think of the top line trajectory going forward or kind of what growth rate you might settle in and what you might be baking in for the balance of the year here?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [15]

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Yes. So Jon, Greg, of course, and the e-com business, in the first quarter was flattish which kind of was what we thought or maybe even a little bit better as we are in Q2 and have a plus 8% the stores have outperformed the e-com, so you can deduce that the e-com business is mid-single-digit and as we've looked forward for the year, we expect the business to be mid-to-high single-digit. Again, we're going to continue to evaluate the business and the profitability of the business. The Boot Barn e-com business continues to be very strong. The Sheplers business has been a little bit tougher. And as you may recall, the Sheplers business is driven more by pay-per-click, advertising, and pay-per-click advertising cost has gone up, and so we've moderated our spend and that has a topline implication. From a profitability perspective, it doesn't change. It helps the rate if you will, because we're giving up sales that may have been lower margin. So we're going to continue to grow the e-commerce business in a profitable way.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Okay, great. And then just last one from me. Greg, following up on kind of the second half margin outlook. I think you mentioned most of the expansion will be merchandise margin rate. So just curious on the buyers and occupancy piece of that. Are you kind of implying flattish expense there on the kind of implied 4%-ish comp in the back half? Just wanted to get your sense as the unit growth ramps up, how you're thinking about that?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [17]

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That's right. Jon, roughly about a 4.5% comp will leverage occupancy and buying cost. So we'll get a little bit of leverage in the plus 6% for the year.

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Operator [18]

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Next, we'll take a question from Oliver Chen with Cowen and Company.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [19]

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Hi, great results. Regarding the primary driver, the better than expected comp, what are your thoughts on how that manifested in the lens of perhaps new versus existing customers or thoughts around where your product assortment most outperformed? Our other question was just about optimization of selling space, and as you brought in private label. What are your thoughts on the magnitude of that impact in timing and how that will manifest into the numbers?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [20]

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And thanks, Oliver. I would say there was 2 drivers -- there was multiple drivers, but 2 big drivers were, of course same-store sales, the point you called out that we were higher than the guide, and I guess higher than what the Street had us. But the other piece of it was merchandise margin rate and that's a pretty significant driver of the earnings and EPS growth that we experienced and the beat that we just announced. On the same-store sales piece, it's extremely healthy same-store sales growth, once again transactions or the average transactions per store was the bigger piece of it. We did see some growth in the size of the basket as well. More on the AUR side than on the UPT side. But it's nice to see more transactions. We saw a nice pickup in the number of customers on a comp store basis consistent with the most recent quarters. So from a same-store sales perspective, again, we feel very good about the health of that growth. From a category standpoint, a couple of categories that have been growing for several quarters in a row now have continued to grow strongly, and again, virtually every category was ahead. Work boots and work apparel were the biggest drivers. Hats so that cowboy hats, small caps et cetera was also very strong, consistent with prior quarters. Ladies western apparel was strong. The other thing that's nice to see is, I think you were to really pick apart the wording, over the last couple of quarters we've seen growth in Ladies Western boots, which had been a drag on the business for several quarters in a row prior to Q4, and that business went ahead in Q4 and that business went ahead in Q1, the quarter that we just announced. So that was a nice additional enhancement to our overall comp. From a selling space perspective, what we're starting to see is that there is a pretty strong disparity between the sales productivity and the margin dollars per square foot across categories, particularly in some of our higher volume smaller footprint stores. So it's as simple as moving or downsizing some departments like accessories or home and expanding work apparel and work boots and we're just arbitraging the space. We're getting a higher sales productivity, higher margin rate, higher margin dollars per foot, when we take -- when we minimize some departments and expand others. So that's what's going on from a selling square footage perspective and we've got some of that behind us and couple of dozen stores left to go in terms of continuing to expand the space and inventory dedicated to the work side of the business. Does that help?

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [21]

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Yes, it was really helpful. And on private label, you mentioned broadening it. It sounds like you're really pleased with momentum you made across your unique brands. What have you learned so far and how do you manage the risk of the inventory and fashion changes as you continue to dive deeper into private label?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [22]

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So, great question. So we're very pleased, right, we've been growing exclusive brands by about 2.5 points each year for the last several years and we've just downshifted to about 5 points in the most recent quarter coming after the fourth quarter, which was also quite strong. So we're quite pleased, pleasantly surprised by the fact that we're able to expand the exclusive brand assortment. From a stores perspective, it's turning every bit as fast as the rest of the vendors and rest of the brands in the store. So, which is a great testament to an exclusive brand business and the exclusive brand team that's putting our product together, particularly given that some of those brands are new. From an inventory investment standpoint and a fashion risk standpoint, I don't think the risk in our business and in our assortment has really changed all that much based on the increased penetration in exclusive brands and there is a couple of reasons for that. The biggest one is we're seeing some really nice expansion in exclusive brands on the work side of our business, on the men's western side of our business., and of course we feel great about Idyllwind by Miranda Lambert and Moonshine Spirit, which could be considered a little bit more fashionable. But the -- most of the growth is coming from categories that have virtually no markdown risk. So whether that product's in the store or is in our distribution center waiting to replenish the stores, we see very little fashion risk in the vast majority of any of our inventory and certainly our exclusive brands inventory. So any major of an uptick in fashion risk is also more than extinguished by the merchandise margin rate improvement that we get. So I would not add that to our list of worries. It's not on a list of things that keep me up at night at all.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [23]

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Okay, great. And our last question is about your relationship with Amazon and thinking about maximizing digital profitability and also thinking about the customer base they offer. So what are your latest thoughts on your partnership and guardrails around how you can benefit from that relationship?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [24]

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Amazon -- well we view Amazon as another selling channel of course but also a way to get eyeballs on some of our associate brands. So it's a pretty small part of our business, if I'm honest, given the rev share piece that Amazon take, it's not a tremendously profitable part of our business or of anybody's business. But we do view it as a way to get our brands in front of more people, and I think we're pleased with it, but we don't intend to double down on it either. We're very happy that our stores business continues to grow and our bootbarn.com business continues to grow and our focus is really on those 2 channels.

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Operator [25]

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Our next question will come from Janine Stichter with Jeffries.

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Janine M. Stichter, Jefferies LLC, Research Division - Equity Associate [26]

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Interested on going back to the private brand penetration. You mentioned up about 500 basis points this quarter, which I think was the strongest growth in a while. But has this changed how you're thinking about the ultimate long-term penetration. I think you've talked about getting to 20% that you say will be there I think this year. So, how you're thinking bigger picture just in terms of what it could represent for the whole mix.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [27]

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We've have been really pleased with the receptivity of the new brands Idyllwind, Hawx, Cody James Work and the receptivity of our performance boots on the western side. So we're excited about that. Having said that, we always remind ourselves and want to remind investors that 80% today of our business is built on third-party vendor partners and they truly are partners and helping us grow this business. So we're -- we like the fact that we've gotten to 20%. I think there's definitely upside to the 20% and we could get to 25% or 30% over time. What we don't think and we haven't models and we're not planning to get exclusive brands through 50%, 60%, 70% of our business, and the model that we have at Boot Barn is to provide our customers with a broad assortment, a selection of brands and that's how the business has grown over several years and we want to continue to do that. I mean we've said that we like the fact that we can get some competitive differentiation, some margin enhancement, build some excitement with new products with our own brands. So I think big picture about 20%, might be 30% a few years from now, but I don't think it'll be 50%.

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Janine M. Stichter, Jefferies LLC, Research Division - Equity Associate [28]

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Okay, great. And then, I was hoping you could speak to the opportunity in women's a little bit. I think you said it's something like 50% of your traffic, but only a quarter of your sales. So what kind of growth do you see from the female consumer, especially as you grow lines like the Miranda Lambert collection?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [29]

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So we see real nice growth in ladies apparel. A portion of that growth, I think, is due to the fact that we've segmented off of our customers into not only working western, but we've added this fashion segment called Wonder West and some of our growth is due to that segment, the marketing associated with that segment, which is bringing in net new customers. The uptick in the ladies boots business, which is early and not super-significant just yet is important also I think because it has been at least a couple of 3-years where that business has been flat or down. So it's nice to see that business starting to grow a little bit. I think we'll continue to shade more male than female in terms of business, partly because the female shopper tends to buy more for the male shopper than the male shopper buys for the female shopper and partly because the men's boots tend to be a higher price point than ladies boots. But with that said, it's nice to have another growth lever at our disposal. We've been relying a lot on outsized growth in work apparel and work boots and if we can get -- stat to get or continued like outsized growth in ladies western apparel and start to really ramp up ladies western boots, it will just bode well for the future.

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Operator [30]

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Next, we'll take a question from Paul Lejuez with Citi.

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Tracy Jill Kogan, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

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Thanks. It's Tracy filling in for Paul. My question is about the new customers you're attracting. You talked about attracting some outside of your core working western customer. I'm wondering if you have a sense of how you're performing with the millennial customer and if you're targeting your marketing at all to try to capture that customer?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [32]

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So we're getting nice growth in all customers, but really nice growth in work and some nice growth in the fashion customer. And we do use different marketing channels and a different media mix for each of our customer segments. So on the millennial side, we've been really accelerating our activity, and to some degree, our spend on social media, Instagram mostly, and we've seen some really nice results there. I think the millennial customer is continuing to find us more and more. With that said, and we certainly want to nurture that business, our core customer is 44 years old and we don't want to take our eye off the ball for the core western and core work customer that has been extremely loyal to us, is comfortable in our store, is comfortable with our marketing and is the vast majority of our top and bottom line at the moment. So I would say we're nurturing that business, if you'd think about the millennial piece, but it's still the smaller portion of our overall revenue base.

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Operator [33]

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Next, we'll take a question from Dylan Carden with William Blair.

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Dylan Douglas Carden, William Blair & Company L.L.C., Research Division - Analyst [34]

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Yeah, hi, thank you. Just curious if there's any sort of, if you could give us a sense of timing around the B2B platform when that goes live and sort of what to expect, how much of that is flowing through your assumptions at this point for the year?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [35]

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So, on the second part of it is we haven't attributed any outsized sales growth to that part of the business, so it will be part of our overall B2B business or commercial accounts business, which is a low single-digit portion of our sales base today. I think the way we're thinking about it is, we wanted to get that launched and it will be launched this quarter, in order to help our sales team, our special account sales team, land accounts, so they can go after bigger accounts, they can go after accounts that required an electronic means of selling and keeping track of what they're clearly buying and wearing, but we haven't really assigned a massive sales growth to that portion of the business.

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Dylan Douglas Carden, William Blair & Company L.L.C., Research Division - Analyst [36]

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Right. And then I'm just curious on sort of the removal of the promotion in July. I think I have read that you should have done that before recently. What's the opportunity sort of go forward over the next year or so to kind of keep on scaling back some of your promotions. And do the new system, some of the new omni applications that you've added sort of allow you to be a little more targeted in your promotional activity and sort of what's driving that?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [37]

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Sure. well we often quoted about 85% of our store-based business is conducted at full price, and we're now north of that number. Taking away this anniversary sale was somewhat of an aggressive move. We're quite pleased with the result of it. We do have a couple of other things throughout the year that we're going to continue to look at and tweak and we view and either shorten or eliminate etc. But with the exception of Thanksgiving, Black Friday, Cyber Monday and maybe Doorbusters around Christmas. So we don't have a lot of sale periods remaining. We have a couple of things on promotion from time to time, but we don't have a pattern to sale left on the calendar, actually. So we think there's still some opportunity to build merchandise margin with exclusive brands. We think there'll be fewer clearance markdowns with our inventories very, very healthy and clean and we've been very targeted where we are using our clearance sales now really only going after individual stores that are heavy. But in terms of big sales, unless we start to take a very aggressive stand to eliminate sales around the holidays, there is not a lot of other sales left on the calendar.

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Operator [38]

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Our next question will come from John Morris with DA Davidson.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [39]

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We talked a little bit and you talked a little bit about some of the new stores, new areas that you've gone into, for example, you've gone into some new regions I think lately, wondering maybe if you want to takes some of those and talk about how you're tracking relative to the history of entering new markets and doing so on a unit performance basis.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [40]

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Sure, the new store model that we quote of 3-year payback, $1.7 million of annual sales, it is really the model that we use for new markets, so essentially brand new market. So if we were to open a new store in Texas or a new store in California, we would likely exceed those numbers. As we look at the new markets that we've been entering that $1.7 million topline roughly 3-year payback or better, that still holds, and we feel good about it. One of our most recent new states was the state of North Carolina and North Carolina has played out very well from a payback standpoint and that gave us sort of confidence to continue to go north and to Virginia Beach later this year.

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [41]

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We've got 2 other Virginia openings later this year Ashland, Virginia and Roanoke.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [42]

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Right. So we feel good about the expansion in brand new markets and that's important for us because we do believe that we can take a 240 store chain up to 450 or 500 stores, and in order to do that we're going to need to expand in the Mid-Atlantic states and up into the Northeast. So all I can infer now seems that that will be something that we can continue to do successfully.

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John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [43]

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And Jim, I mean, any change in product performance as you land on some of those markets like North Carolina and Virginia Beach compared to say core markets in Texas, differences in performance by product or classification or do you think at all about tailoring the assortment even differently at all there. I'm wondering about that?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [44]

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Sure, great question. We absolutely tailor our assortment by region of the country. So I hesitate to say store by store but the North Carolina assortment is different than the Texas assortment, which is different than the California assortment. The one thing I would point out though is when you look at the business in North Carolina for example in Virginia Beach. I think the natural inclination of most investors and the most East Coast investors are, well those stores must shade massively to work and not sell cowboy boots and cowboy hats. That is not what we've seen at all. The percentage of the business between western and work, it's pretty consistent, where our western outpaces and outsells work across the entire country and it as true in North Carolina as it is in Texas. Now as you said that the toe profile of the western boot is different, some markets prefer laced up work boots others prefer a pull-on work boots, some markets need flame resistant work apparel, others don't. So we do goes market by market to make sure that we're bringing the right assortment to that local market but we are still, first and foremost, a western store and work is still about a third of the business.

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Operator [45]

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Next we'll go to Tom Nikic from Wells Fargo.

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Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [46]

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I wanted to ask Greg, it seems like given your commentary around merchandise margin and how we should think about it for Q2 and the back half, it would seem that there would be a lot of upside to your EPS guidance unless there was an offset on the SG&A line. And I'm just kind of wondering are you sort of reinvesting some of the upside that you're seeing on the comp and on the merchandise margin side in SG&A, and so where are those buckets of investment going?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [47]

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Yes. So, Tom, what we did was we updated our guidance for the Q1 beat and for the Q2 slight uptick in same-store sales expectations that -- I tried to give some color around what's going to happen in Q2 from a merchandise margin perspective and that's certainly reflected in our EPS number. When I talk about 500 basis points of expansion in private brands for the back half of the year and how that ripples through the 50 basis points, we haven't updated for those kinds of results, right. So we've left our back half guidance, if you will, original guidance impact. So you can flow that through your model and figure out what you think it is, but we haven't come out with specific guidance about the back half that reflects the penetration going up 500 basis points from what we might have thought would be 300 basis points or 400 basis points. As a reminder, in Q4, our exclusive brand penetration was roughly 400 basis points of increase.

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Operator [48]

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Our next question comes from Samuel Poser with Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [49]

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Good afternoon and thank you for taking my question. I want to just follow-up on Tom's question. Last year you grew your SG&A at around 15%, it only grew at 11% in the first quarter year-over-year. I mean how should we think about -- how are you thinking about that on a full year basis for growth? Was the growth fell in back (inaudible) or is 11%...?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [50]

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Yes. Sam, it's Greg, of course, and I think the way we talked about operating expense in the -- on our Q4 call when we talked about guidance was, in terms of leverage points, but also in terms of overall growth. I think we thought that SG&A would grow roughly at a 8% annual pace or something like that. I don't have those notes in front of me, but we also talk about it in terms of leverage points and we expect to get leverage in SG&A at roughly 1.5%.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [51]

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But there was nothing in the first quarter that we...

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [52]

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That hasn't changed. So that hasn't changed. So I mean you said that you would anticipate to get, you know 50 basis points of merchandise margin improvement in the back half of the year now, and you said that earlier in the call and you've raised the full-year numbers. So you'll get some leveraged or flattish on the other side and if you hit those comp -- if you hit the comp plan, you'll get leverage every quarter on the SG&A as well. So it's adding up to significantly more than what you guided?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [53]

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All I can tell you, Sam, is we've updated our guidance based on our Q1 beat and our Q2 updated same-store sales, which is what's driving the original guidance of a plus 5 to be a plus 6.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [54]

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Thank you. And then a couple other questions. Number one, on the work business -- well on the work business, how much do you think your work business [excelled] from the -- say the Sears bankruptcy and from some people that are -- that plays there that are a little bit sort of struggling a bit at this time. And how much of that growth do you think will be helped by that?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [55]

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I think we're probably picking up share on the work side by the difficulties in some of the companies that you called out. I'm not sure if it's any different than the western side there, right. There is no big national western store brand that everybody on this call would know, but the western retailer and there is hundreds of them around the country and many of them are struggling and we're taking share from them as well. So I think the our worth apparel business and our work boots business, undoubtedly is gaining share from people forfeiting share, but it's been strong for so long that I -- and we have such a good team on that part of our business right now, that I can't really attribute the growth just to the demise of somebody like Sears. I would go a little further to say, while we are undoubtedly getting some customers, they are at different price points than we are at. So if you think of good, better, best, they are good or value price point and we are better or best price point. So perhaps there is some overlap, but it's not like that customer has just traded at Sears work boot for a $189 work boot from one of our brands.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [56]

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Thank you. I have 2 more real quick. Number one, in the comp book, did you see any variance between, we'll use Texas where you said you outperform from the stores that you rolled up from other people, Sheplers and the others versus stores that you've built yourself? And secondly, given the strength of work and the strength of women's western, are you seeing improvement in your denim business as well both men's and women?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [57]

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Sure. On the first part, in terms of how newly acquired and integrated businesses are doing; Sheplers is several years in our rearview mirror, but we looked at the work boots business in West Texas or we looked at the Lone Star business. Both of those businesses were mature when we acquire them, but have had pretty significant same-store sales growth after we brought in our team, changed the merchandising, added our assortment. Integrated them from a field operation standpoint. Started using the Boot Barn brands in our marketing. So those businesses have comped higher and in some cases, significantly higher, than the chain average. So when we look at making a tuck-in acquisition, we always wanted to at least model it to be 3-year payback or better. But as soon as we start to see 20% plus comps in those stores that 3-year payback gets better, of course. The other thing we look at, Sam, is we can look at customer service scores in the newly acquired businesses and they've been every bit as good, and in fact in many cases, tracking better even than the legacy Boot Barn store. So we feel quite good about the model that we have in place where we can add tuck-in acquisitions to augment just our kind of normal new store development, and with the tuck-ins we can get 3-year paybacks and oftentimes better once they're assimilated into the business.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [58]

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Thank you. And then on the denim?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [59]

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Yeah, the denim business has been strong in ladies, western. And the men's western side has been sort of in line with the rest of the business. So they're got pretty strong. Thanks, Sam.

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Operator [60]

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Our next question will come from Mitch Kummetz from Pivotal Research.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [61]

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Yeah, thanks for taking my questions. Still have a few. But on the private label penetration, you mentioned it was up 500 basis points from last year. Can you say how much of that was from the businesses that you've introduced in the last 12 months you know Hawx, Idyllwind and Cody James Work?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [62]

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I can't, off the top of my head -- I would get 2 of the 5 point, but I'm missing...

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [63]

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-- I think that's right. I don't have that stat handy either but that's directionally, it makes sense.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [64]

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I think that's right. I don't have that stat handy either but that's directionally, it makes sense. They're all doing well and we're pleased with it, but Cody James is still by far the biggest and Shyanne is still second. So even though those new brands are new and exciting and I think have lots of future potential ahead of them, you know Cody James and Shyanne still are the biggest of the 5 brands or 6 brands.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [65]

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And is this kind of a maturity ramp on new private label businesses because you'll certainly lap the introduction of those. But I would imagine that in month 13, it's a lot bigger than in month 1, as they continue to grow. Is that a reasonable way to think about it?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [66]

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I think that's fair. When we launched the new brands, we try to find the balance. So we want a nice big splash of new product in most cases, actually I think every case a dedicated fixture, a broad assortment enough to support decent selling. But we also have a bit of a hedge saying if this doesn't work, let's make sure we are not kind of over-extended. So fortunately, they've all been working and they all have opportunities to the point that you're making to expand within their current brand. So as an example, Idyllwind by Miranda Lambert, we started that brand with more leather-soled bottoms that aren't broad square toe and have slowly been introducing performance sole or rubber sole bottoms and with the kind of a broader square toe, more of a core western customer and we've seen nice receptivity there. So -- and I could go through each or we can go through each of the brands and demonstrate how they can get broader. I'll give you one other example. Today, neither Hawx nor Cody James Work has FR or flame-resistant apparel and if we look at our work apparel business, that's about half of our business that's flame resistant. So once we have gotten the brands to be received well by the customers, and I think we can check that box, we'll be introducing FR product in the FR stores and you can think a lot of that is Texas, but it's lot of other places around the country as well and can expand the growth of those brands as well. So I think you're right. I mean I think there is a ramp up in a new brand and all of the new introductions, I think, have very logical next steps, where we can continue to build that business.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [67]

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Got it and then there is anything in the pipeline in terms of a new private label brand for the balance of the year or are you guys pretty set with what you've introduced?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [68]

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We're pretty much set with what we've introduced last year, and I know you know this Mitch, you track us extremely well. We launched 3 new brands and that was a lot. And we had our step-up for that. We had it working into our marketing. We had it "sleeve then into the stores" And while we're always sort of enticed to, "Hey, let's do another brand." Right now, I think we're better served in nurturing and growing and building on the early success of the brands that are in place. Of course, someday in the future we'll announce, "Hey we're launching X, Y and Z brand." But right now, we're going to turn our attention to kind of growing and building on what's been working with the 3 new launches.

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [69]

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Got it. And then last question, I know you're focusing on EBITA within the e-com business. I don't think -- I don't know if you said or you will say, what was the -- what's the EBIT margin contribution in the quarter from doing that. And then Greg, I thought you said something about 20 basis points or 30 basis points. I didn't know if that was a comment around kind of the annual benefit from the EBIT focus on e-com. Could you just maybe help me out with that?

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Gregory V. Hackman, Boot Barn Holdings, Inc. - CFO & Secretary [70]

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That's what I was answering is that the work we're doing could add 20 basis points or 30 basis points of improvement to the consolidated EBIT margin. right. Its penetration of total business...

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Mitchel John Kummetz, Pivotal Research Group LLC - Senior Analyst of Footwear, Apparel Vendors and Retailers [71]

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Okay, and when does that anniversary?

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [72]

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So the work really was completed in May of last year. So we anniversaried it in the first quarter. But we continue to look at the profitability, I mean, when we sit down with the Head of our e-commerce business and his team, we constantly talk about, what kind of return on ad spend are we getting and what kind of -- what are the things that we're doing to drive merchandise margin and what's the next step, right. I think the biggest steps we made were was last year, but we'll continue to tweak it, like we do with the retail stores in terms of promotions.

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Operator [73]

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That does conclude our question-and-answer session for today. I'd like to turn the call back to Jim Conroy for closing remarks.

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James G. Conroy, Boot Barn Holdings, Inc. - President, CEO & Director [74]

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Great. Thank you, everyone, for joining the call today. We look forward to speaking with you all on our second quarter earnings call. Take care.

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Operator [75]

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That does conclude our conference for today. Thank you for your participation.