Q2 2025 Earnings Summary
- Strong sales growth across all categories and regions, with positive same-store sales growth indicating robust demand and market share gains. The company reported that every major merchandise department had positive same-store sales growth, and every region of the country had positive same-store sales growth. Additionally, they are outperforming competitors and taking market share, as competitors experienced a minus 9% in footwear and apparel while the company is experiencing growth.
- Effective merchandising and inventory management has led to improved sales, including in previously underperforming categories. Adjustments to the ladies' assortment have resulted in improved sales, with the ladies' business now comprising almost 23% of total sales, up from 18% before the pandemic. The company feels great about inventory heading into the holiday season, having grown inventory intentionally and noting that markdowns as a percentage of inventory are down from a year ago.
- Margin expansion driven by supply chain efficiencies, better buying economies of scale, and increased exclusive brand penetration. The company expects merchandise margin to improve by 100 basis points in the third quarter, with half coming from supply chain efficiencies and 40 basis points from better buying economies of scale, including increased exclusive brand penetration of 200 basis points. This indicates operational improvements contributing to profitability.
- CEO Departure Leading to Leadership Uncertainty: The CEO, Jim Conroy, announced his resignation to pursue an opportunity as CEO of Ross Stores, effective November 22. This sudden leadership change may lead to uncertainty in strategic direction and execution.
- Continued Exposure to China Tariff Risks: Despite efforts to reduce reliance, approximately 30% of exclusive brand products are still sourced from China. Any potential tariffs or supply chain disruptions could negatively impact product cost and availability.
- Decrease in Exclusive Brand Penetration: In the recent quarter, exclusive brand penetration decreased by 50 basis points, contrasting with a significant growth of 620 basis points in the prior year. This slowdown may challenge the company's goal of merchandise margin expansion driven by exclusive brands.
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Sales and Comp Growth
Q: Can you elaborate on the inflection in comps and October trends?
A: We experienced broad-based sequential improvement across categories and regions in Q2, with every major merchandise department showing positive same-store sales growth. October is in line with the second quarter, starting with a solid +5% comp in October. We feel great about our inventory positioning and are looking forward to a strong third quarter. -
Margin Expansion Outlook
Q: What are the drivers of merchandise margin expansion in the Q3 outlook?
A: We expect merchandise margin to improve by 100 basis points in the third quarter. Over half of this gain comes from supply chain efficiencies we've seen in recent quarters, and about 40 basis points from better buying economies of scale, including expectations of exclusive brand penetration improving by 200 basis points. We anticipate similar trends continuing into the fourth quarter. -
Leadership Transition
Q: Is there any change in strategy with the leadership transition?
A: The decision to step down was personal, and our strategy remains consistent. We've had the same four strategies for 12 years with the same senior team, which has performed well. We expect continuity in our approach, with John potentially leading the company forward. -
Exposure to China and Tariff Risks
Q: What's your exposure to China, and thoughts on tariff risks?
A: We've reduced our exclusive brand sourcing from China from over 50% to about 37% last fiscal year, and currently have approximately 30% on order coming from China. We've de-risked our exposure while maintaining the benefits of staying in China, and we don't plan to move completely out regardless of tariff situations. -
Market Share Gains
Q: Where are you gaining market share most strongly?
A: We believe we're taking market share, particularly in ladies' western boots, which outperformed the company average. Our balanced product mix and active connections with country music stars enhance our brand resonance, differentiating us from competitors who focus solely on functional products. -
Impact of the Election on Sales
Q: What's the expected impact of the upcoming election on sales?
A: Historically, elections can distract customers, potentially impacting comps by a couple of points. The period of impact is typically from now until the election. We'll monitor over the next few weeks to see how significant this distraction might be. -
Guidance Assumptions and Holiday Factors
Q: Could you walk through assumptions in the comp guidance and holiday swing factors?
A: We projected sales by rolling forward recent months and applying historical seasonality, then adjusted our guidance to account for potential election impacts and the shortened holiday period. We also considered macroeconomic uncertainties in Q4. Sales could vary depending on customer sentiment and distractions like the election. -
Promotional Activity Expectations
Q: What are your projections for promotional activity this holiday season?
A: We observe similar promotional levels across competitors, with perhaps a slight increase. We'll maintain our everyday low price model with few and light promotions, consistent with last year. We haven't planned any increases in discounts or promotional activities. -
Transaction Growth Drivers
Q: What's driving the upside in comps—transactions or basket size?
A: The primary driver has been transactions, which turned positive in Q2 for the first time in eight quarters, increasing by about 2%. Basket size also grew by 2%, with both average unit retail and units per transaction up. All four components of store transactions improved. -
Exclusive Brand Penetration
Q: How did exclusive brand penetration change this year versus last year?
A: In the quarter, exclusive brand penetration was down 50 basis points, compared to a 620 basis point increase last year. For the full year, we expect an increase of 110 basis points, with the next two quarters each up about 200 basis points. Growth is driven by categories like exclusive brand denim and improvements in the ladies' business.