Q1 2025 Earnings Summary
- Positive same-store sales trends and cautious optimism: The company is experiencing positive same-store sales growth, with 11 out of the last 14 weeks showing positive comps. Despite two transitory weeks in July due to external factors, the business has returned to positive trends, and management is cautiously optimistic about future sales.
- Improved inventory position indicating expected growth: Inventory per store increased by 6%, suggesting the company is preparing for anticipated sales growth in the fall. Management hinted at being more bullish about the future business than what they've guided, indicating confidence in upcoming performance.
- Continued expansion into new markets with strong performance: The company plans to open 60 new stores in fiscal 2025, entering both new markets and filling in existing ones without notable cannibalization. This demonstrates confidence in their expansion strategy and potential for future growth.
- Underperformance in the workwear segment: The company reported negative same-store sales growth in their workwear segment, with work boots down approximately 1% and work apparel down low single digits. Management noted that while they're making changes to the assortment, it could take a couple of quarters to return to positive growth.
- Significant sourcing exposure to China increasing tariff risk: Despite efforts to reduce reliance, the company still sources approximately 30% to 37% of its products from China. Management acknowledged potential risks from increased tariffs, which could impact cost of goods and merchandise margins.
- Dependence on underperforming women's business for exclusive brand growth: Growth in exclusive brand penetration, a key driver for merchandise margin expansion, is partly contingent upon improvement in the women's business, which has been underperforming.
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Sales Guidance and Outlook
Q: How have your expectations for the back half changed?
A: We expect Q2 same-store sales to be similar to Q1 at +1%, anticipate flat comps in Q3, and strengthen to +1% in Q4. This reflects a conservative approach due to potential disruptions like election uncertainty and macro factors. -
Gross Margin and Flow-Through Rate
Q: Can you elaborate on Q2 gross margin and flow-through rate?
A: We maintain a 35% flow-through rate on top-line upside. For Q2, merchandise margin is expected to improve 60 basis points driven by supply chain efficiencies. Buying and occupancy expenses are expected to deleverage by 90 basis points due to new store occupancy and negative same-store sales. -
Supply Chain Efficiencies
Q: What are the supply chain efficiencies driving margin improvement?
A: We've renegotiated rates with shipping and logistics providers, optimized our distribution centers, and improved product flow to stores. About two-thirds of our gross margin improvement this year comes from these efficiencies, primarily impacting the second half. -
China Sourcing Exposure
Q: How are you addressing China sourcing amid tariff risks?
A: We've reduced China sourcing to about 30% on order, down from 37%-38% last year. We continue to de-risk but will maintain some production in China due to quality and reliability. We've managed tariff impacts before and are confident in navigating potential increases. -
Sustainability of Positive Comps
Q: How confident are you in sustaining positive same-store sales?
A: We saw broad-based improvement across categories, geographies, and channels. Transactions per store turned positive in May and June, and we exited Q1 with increasing transactions year-over-year. Despite macro uncertainty, we're cautiously optimistic about continued positive comps. -
Exclusive Brands Expansion
Q: Is exclusive brand growth tied to women's business improvement?
A: Partially. While women's categories are important, we're adjusting assortments and expect exclusive brand penetration to accelerate in the second half as new products arrive for fall and holiday seasons. -
Online Sales Recovery
Q: What's driving the recovery in online sales?
A: We've improved our online assortment, optimized landing pages, and enhanced digital marketing efficiency, particularly with Google's PMax tool. Online penetration will likely remain around 9%-10% as store growth continues. -
Q2 Operating Margin Deleverage
Q: Why is greater operating margin deleverage projected in Q2?
A: Q2 expenses are higher due to events like the store manager conference, increased utilities, and ramping up distribution center labor for holiday inventory. We're not expecting the same level of supply chain efficiency gains as in Q1, leading to more deleverage despite similar comps. -
Workwear Segment Performance
Q: What's happening with the lagging workwear segment?
A: Work boots are slightly negative at around -1%, and work apparel is down low single digits. We're making assortment changes and aim to return to positive growth in the next couple of quarters. -
Customer Demographics Growth
Q: Are improvements coming from legacy or new customers?
A: Growth is from both. Our customer database grew by 1.2 million or 16% over last year, with balanced growth across Western, work, and fashion segments. We're seeing a reemergence of legacy customers while adding new ones. -
Impact of Morgan Wallen Sponsorship
Q: How has the Morgan Wallen sponsorship impacted business?
A: The sponsorship has generated significant excitement and customer capture, attracting more female, younger, and fashion-oriented customers. While causality is hard to pinpoint, there's a positive correlation with our expectations. -
Competitor Behavior Amid Macros
Q: Are competitors behaving differently amid macro volatility?
A: Some secondary competitors are slightly more promotional, but our main competitor remains mostly full price. We haven't seen significant changes that would prompt us to alter our pricing strategy. -
Income Cohort Performance
Q: Are you seeing discrepancies across income cohorts?
A: No significant differences. Our functional products are needed across income levels, and unemployment hasn't significantly affected sectors we serve like agriculture and construction. -
New Store Expansion Strategy
Q: How are you approaching new markets versus infill?
A: Over the next 12-24 months, about 50% of new stores will be in existing markets and 50% in new markets. We're opening in cities without nearby stores and expanding in states like Texas and California. -
Cody James Black 1978 Launch
Q: Tell us about the new premium brand, Cody James Black 1978.
A: It's an extension of Cody James at elevated price points, starting with boots featuring exotic skins and roper styles. Margins are in line with our exclusive brands, and it's in nearly 100 stores, adding newness and catering to demand for premium Western wear.