Good day, everyone, and welcome to the Boot Barn Holdings Third Quarter Fiscal Year 2021 Earnings Call. As a reminder, this call is being recorded. Now, I'd like to turn the conference over to your host, Mr. Jim Watkins, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's third quarter fiscal 2021 earnings results. With me on today's call are Jim Conroy, President and Chief Executive Officer and Greg Hackman, Chief Operating Officer and Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Boot Barn's Web site at bootbarn.com. Shortly after we end this call, a recording of the call will be available for replay for 30 days on the Investor Relations section of the company's Web site. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. These forward-looking statements reflect Boot Barn's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Boot Barn's business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made during this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter fiscal 2021 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, Jim and good afternoon. Thank you, everyone for joining us. On today's call, I will discuss the highlights of our third quarter results, briefly walk you through each of our four strategic initiatives and then provide an update on current business. Following my remarks, Greg will review our financial performance in more detail and then we will open the call up for questions. We are extremely pleased with the strength of our third quarter results through what continues to be a difficult macro environment. During the third quarter, consolidated same store sales increased 4.6%, cycling a 6.7% increase in the year ago period. Same store sales in our physical locations returned to positive territory increasing 1.9% with growth driven by an increase in basket size, which more than offset the single digit decrease in transactions. Our e-commerce business remains strong during the quarter with sales up 16.3% over the same period last year. Importantly, our momentum accelerated as the quarter progressed with same store sales up 1.7% in October, 4.3% in November and up 6.2% in December. The sequential improvement each month was primarily driven by store comps improving from approximately flat in October to up 3.3% in December. We are extremely pleased with the return to positive comps in our brick and mortar stores particularly in light of the pandemic. From a margin perspective, our third quarter merchandise margin remained strong both in stores and online, resulting in consolidated merchandise margin expansion of 150 basis points during the quarter. The strength in merchandise margin was driven by better full price selling and reduced promotions. It is a testament to the ongoing strength of the brand that we can continue to grow top line sales without resorting to discounts or promotions to drive traffic. The combination of strong…

Thank you, Jim. Good afternoon, everyone. In the third quarter, net sales increased 6.5% to $302 million. The increase in net sales was primarily a result of the 4.6% increase in same store sales and the sales contribution from new stores opened over the past 12 months. Gross profit increased 10% to $106.8 million or 35.3% of sales compared to gross profit of $97 million or 34.2% of sales in the prior year period. The 120 basis point increase in gross profit rate resulted from a 150 basis point increase in merchandise margin rate, partially offset by 30 basis points of deleverage in buying and occupancy costs. Merchandise margin increased to 150 basis points primarily as a result of better full price selling and reduced promotions. Operating expense for the quarter was $65.2 million or 21.6% of sales compared to $62.1 million or 21.9% of sales in the prior year period. Operating expenses increased primarily as a result of additional costs to support higher sales and expenses from new stores. Operating expenses as a percent of net sales decreased by 30 basis points, primarily as a result of expense leverage on higher sales. Income from operations was $41.6 million or 13.8% of sales in the quarter compared to $35 million or 12.3% of sales in the prior year period. Income tax expense was $9.9 million in the quarter compared to $7 million in the prior year period, resulting in an effective income tax rate of 25.1% in the third quarter. Net income was $29.6 million or $1 per diluted share compared to net income of $24.8 million or $0.85 per diluted share in the prior year period. Turning to the balance sheet. Inventory decreased approximately 9% on a comp store basis compared to last year. On a consolidated basis, inventory decreased 10.7% to $246 million. This decrease was primarily driven by the reduction in comp store inventory and a decrease in inventory at our Fontana distribution center. As of December 26, 2020, we had a total of $111.5 million of debt outstanding related to our term loan. During the third quarter, we reduced our line of credit borrowings by approximately $130 million, resulting in zero drawn on our $165 million line of credit. We have $76 million in cash on hand at the end of the quarter and our net debt leverage ratio at the end of the quarter was 0.5. Given the continued lack of visibility into the business as a result of COVID-19, the company is not providing fourth quarter and full year of fiscal ‘21 guidance at this time. Now I'd like to turn the call back to Jim for some closing remarks.

Thank you, Greg. We’re extremely pleased with results of our third quarter and the underlying improvement we're seeing across the business. We believe we are well positioned for a solid finish to our fiscal year and are looking forward to continuing to drive same-store sales growth with return of a more normalized macro environment. I would like to express my personal appreciation to the more than 5,000 associates across the country who continue to show great dedication to both our Boot Barn family and our customers, and delivered an exceptional holiday quarter through a challenging environment. Now I would like to open up the call…

[Operator Instructions] And our first question is from Matthew Boss with JP Morgan.

Congrats on the business acceleration. Jim on the sequential improvement across your three regions, any key lead indicators that you're focused on in the oil and gas markets and help us to think about competitive market share opportunity in your more mature markets given I know the backdrop is very fragmented?

Well, each of the three regions have improved sequentially quite nicely between Q2 and Q3 and then when we got into January, it's just been fantastic business across the country. The west has only been the lead since COVID began a year ago or so. The south, which does have Texas in it and has some connectivity to the oil markets, has started to get sequentially better in the third quarter and turned positive as we got into January. We're not [oil] [ph] experts by any stretch but it does seem that there seems to be a bit of a new emergence of that industry, the price of a barrel of oil is up about $10 versus a few months ago, employment and rig count seems to be improving. And we can see that in our business, that part of the business is getting a little bit better and again, January which might be obscured a bit by stimulus checks, essentially everything was strong. In terms of share, we continue to believe that our number one competitor in each of our markets where we have stores is an operator that has one or two stores, it's a mom and pop and just simply can't put together the assortment that we have, the level of inventory that we have, they can't compete against the national brands like we have. And I think we just continue to take share from the several 100 or more than 1,000 single store operators around the country. So while we know we have other competitors that are maybe secondary to our market or big competitors, online, et cetera and we do want to combat those guys and go up against the best. Frankly for us to be successful going forward, we just need to continue to execute on our current plan and take share from the market.

And then maybe just to follow up more from a bottom line perspective, on your comments around continued margin strength in January. Could you just elaborate on drivers of pricing power that you see from a merchandise margin perspective, and any impediments to driving similar or greater merchandise margin expansion in the fourth quarter? And then Greg, is 3:4 comps the best way to think about the leverage point for buying and occupancy within that gross margin?

On the first part around merchandise margin, if you think about the complexion of the business, we started the third quarter, our inventory was down about 10%, the business started to accelerate. As Greg mentioned, we ended the quarter with our inventory down about 9% on a comp store basis, and our January business was just extremely strong. So one of the things, one of the very few things that erodes merchandise margin is when we try to clear through clearance merchandise. And by virtue of the fact that our inventory is lean and our sales have accelerated, we will continue we believe to see margin expansion for the foreseeable future. Going forward, if you look multiple quarters going forward, we continue to look at areas within e-commerce to get more margin expansion. For example, can we improve the exclusive brand penetration online. We continue to look for ways to reduce supply chain costs little bit, be more efficient in our performance center or try to figure out ways to lower shipping costs, et cetera. So there's still opportunities for us to find margin improvements, merchandise margin or operating margin in both channels, stores and online. I wouldn't necessarily encourage you to model 150 basis points for the next several quarters, but it's not like we're out of ideas to find more margin rate. And then on the leverage question.

Matt, in terms of the leverage, we've typically guided. This year, we're not guiding of course. But we've typically guided roughly a 3.5% same store sales increase to get leverage out of buying and occupancy. In this specific quarter, we had 20 basis points roughly of de leverage in occupancy and 10 basis points in the buying line. The buying line was driven by higher bonus costs. We had a really phenomenal quarter and we had to include more bonus expense, both at the buyer line and also within operating expense. So we've got 30 basis points of leverage in operating expense and that's also had a headwind from incremental bonus expense. The 20 basis points of occupancy costs deleverage, I would attribute a portion of that to -- while we had strong comp growth of 4.6%, the total sales grew about 6.5% and that 6.5% would have been larger, for example, the National Finals Rodeo event would have been held in Las Vegas back in historical years, and it would have been attended by lots of people and we would have had higher Boots sales for example. So NFR went on but it went on in Fort Worth with reduced capacities. We had a smaller booth and so that negatively impacted the top line a bit. So we’ll hopefully give guidance next year and be able to update anything as it relates to leverage points but that's just a little bit more color around the deleverage.

And our next question is from Max Rakhlenko with Cowen & Company.

Congratulations on the nice quarter. So first, in your bootbarn.com business, how much of the growth would you attribute to new shoppers? And in your stores, despite the traffic decline, are you seeing new shopper growth there as well? And can you just touch on the strategies to get these new shoppers to become more loyal and productive shoppers for you over the longer term?

On the bootbarn.com, it's hard to give a specific number. We believe it's about a third of the growth coming from new customers online. From a stores perspective, while transactions on a comp store basis were negative in the third quarter, we continue to see them improving over the last several months. We feel pretty confident that we can anchor that right back to what's going on with COVID. And then while we didn't say this specifically, when we got into January, clearly, transactions on a comp store basis, our proxy for traffic, was up and frankly, up significantly as a component of the plus 20% comp in the store. On the last piece, we have a very methodical, deliberate, spelled out process when someone enters our customer database, our B Rewarded loyalty program. Based on how they've entered, either they've entered in-store or online based on the product that they purchased, whether it's work, or western, or just country, or Wonder West, they get a series of e-mails that are specific for that person or maybe that small segment over the course of a few weeks that really gets them introduced to Boot Barn. Not only highlighting the area that they were first interested in but also giving them a taste of the rest of the product and the assortment that we carry. We believe this is really working for us. More than half, in fact, the vast majority of our sales, particularly in store, are connected to a loyalty number, a B Rewarded member, and that's part of the reason why we feel that the customer continues to be very loyal to us. They accumulate points. There's points then get converted into what amount for a modest merchandise discount and then they come back in and make another purchase and accumulate more points. So that's a program that's been in place for several years now. But the uptake by the customer is by one of the things that differentiates us from a lot of other retailers that have attempted the same thing.

And then on the EBIT margin pre-COVID, I believe 10% was the medium term target that you discussed, where we stand today with e-com being much more profitable than before. How are you thinking about what the profitability profile of the company could look like over the next few years? Thank you.

You're right, we had signaled the 10% as kind of the near term target. And longer term, I think we had pointed out companies like Ulta that sell both branded and exclusive brands. And I believe their profitability profile is 13% or 14%, I believe, and we think that that could be a reasonable proxy for what we might be able to achieve.

And our next question is from Jonathan Komp with Baird.

Maybe a bit of a follow-up. Maybe you touched on this a little bit already but if I look back early during fiscal 2016 and 2017 when comps were challenged, coming out of that period you had two years of very outsized earnings growth. And I'm wondering just directionally, as you look forward today, some of the puts and takes of why that may or may not be kind of a good framework to judge what you might be able to produce going forward. Just kind of any high level thoughts.

Well, I think we're positioned well to grow on top of the COVID quarters, of course. Unfortunately, in Q1 last year with top line sales eroding so much and stores being closed, et cetera, we'll get what will look like very outsized earnings growth. We do always want to anchor people back to our long term algorithm, which calls for 20% EPS growth. Arithmetically, we'll do more than that presumably in our next fiscal year, just considering we're cycling in the first and second quarter less strength in the earnings line.I think one of the things we're really encouraged by is the business seems to be recovering and January seems to be very strong. And many of the things that we thought could provide future growth haven't kicked in yet. So oil, while improving, it's still a drain. The oil markets are still a bit of a drain on our comp. COVID is still impacting country music concerts and rodeos. While we feel good about our inventory, we'd love to get a little bit more product through the supply chain. We haven't yet cycled the sheplers.com chain. So that's been a drain on top line. So we think there's plenty of places where we can get ongoing top line growth, which of course, we expect to drop that down to bottom line.I'd say the last thing is coming out of this, and this is not necessarily the way we want to gain share, if I'm honest. But we believe we've been able to weather the pandemic better, if not much better than many of our competitors that have one or two stores. So we believe there has been and will continue to be either some shakeout or some ongoing weakness from those players. And that gives us the opportunity to frankly just continue a trend that had been going on for several years, which is us taking more share. So perhaps a long winded answer to your question, but that's the way we're thinking about it.

And maybe just a follow-up, would you be content to really executing the plan back to 10% plus unit growth, and so I assume kind of deleveraging the balance sheet going forward? Or would there be any other alternative investments, either operational internally or M&A that you'd look at? Just how are you thinking about the strategies going forward.

I think for the foreseeable future, our strategy is going to be relentless focus on execution, continue to do what we're doing, open up stores that pay back in less than three years. Maybe there's some upside to the 10%, continue to develop great exclusive brands, march forward with our omni channel initiatives, work with our segmentation and with marketing and merchandising to bring the Boot Barn experience to life and drive same store sales. Perhaps over the next couple of years, there will be some acquisition that comes our way that we'll take a look at. But I would say for the foreseeable future, we're just going to put heads down and continue to execute like we have been. And we really don't need to do anything in an outsized way, anything more than we've been able to do, if you can ex out COVID for the last few years for us to continue to drive EPS growth. And so it's perhaps a boring and not super sexy story, but it's also one that we believe has a fairly strong road map and low beta.

And our next question is from Tom Nikic with Wells Fargo.

So I'd like to ask about the private brands business. So I think you said that for the full year it should grow something like 200 basis points penetration, which will get you up into the kind of the mid-20s, I guess. How should we think about that on a longer term basis. Are we still thinking 200 basis points of penetration a year, like what ceiling that you see for that business? Any color around the private brands would be helpful. Thanks.

Yes, you're right in recounting the numbers. When we had our call in May of 2020, we actually had expected exclusive brands to be even more challenged. And purely based on the fact that out of abundance of course caution, we really held back the supply chain, we deferred orders or canceled orders. And then when it started to appear that COVID, while very detrimental to the environment -- I mean, to the economy and to the country, that our business started to build back. We turned that supply chain back on. So while we thought we'd see zero growth, we got about 2 points of penetration growth, which was better than we expected.As we lay out our fiscal 2022 guidance, which I don't intend to do right now. I think it's safe to say we'll expect to see in keeping with past years, 2 or 2.5 points of penetration going forward. We have plenty of opportunities for us to continue to grow. That might get us to 25%, 26%, being mindful of the fact that we continue to want to have a variety of brands for our customers. We have some extremely strong vendor partners that have helped us grow our business and continue to help us grow our business. So the ceiling -- we'll hit the ceiling at some point. I don't think we're there yet. But I don't expect Groupon to have 50%, 60% exclusive brands in the foreseeable future.

And our next question is from Peter Keith with Piper Sandler.

It's Bobby Friedner on for Peter Keith. Just looking at January trends, why do you think stimulus impact has led to reversal in channel strengths with retail stores accelerating and e-com decelerating? And are there any indications that retail store comps will remain positive once stimulus benefits were out?

So it's an excellent question. A portion of it, for sure, is the sheplers.com business last January was even more highly promotional and we’re cycling that. So the sheplers.com business is more of a drag on our e-commerce business in January than it was in the third quarter. Bootbarn.com is kind of in line with the third quarter. So in the third quarter, I think we called out a 37% growth. So we're in line with that in January. I don't have an easy answer as to why we think it's more being flushed through the stores. In April when stimulus last hit, a lot of our stores were closed, people weren't comfortable being shopping and being outside. The whole COVID thing was new. And so I think e-coms got the benefit of that because people were at home, they had this money to spend and they wanted to spend it. This time around, they're more comfortable in a store environment. And so they're going to where they prefer to shop [Multiple Speakers] and I agree with Greg. And then the last part of your question is, it's very hard to strip out the impact of stimulus payments. So we have to use our intuition to try to understand or estimate what the underlying growth is. But if you look at the five months leading up to January, we've seen a steady ramp of sequential improvement. The tail end of December prior to stimulus was very solid. And then when we got into January, the business just got extremely strong in terms of its duration. I think stimulus tends to be very relatively short-lived, six weeks, maybe. So I would say over the next couple or three weeks, we'll start to see a slowdown or if not a slowdown, less outsized growth, I would, I guess, is how I would characterize it.And then just as a reminder, in our fiscal fourth quarter when we get to the tail end of March, we'll start to cycle very soft numbers because that's when COVID really started to impact our top line kind of mid March last year.

Just maybe separately on advertising and marketing. How much of a benefit for lower ad expenses in calendar 2020? And do you anticipate this becoming more of a headwind this year as the ad market gets more competitive and the consumer appears to be strengthening?

I think that's a small piece of the pie for us, right? There's so much of our marketing is -- the dynamic you're speaking to is most prevalent in television, and that's a very small part of our marketing. So all of our direct mail will be roughly the same cost as last year. And yes, we're still saying catalogsto homes. Radio, I don't think we'll have a big change in CPM. Paper click is, have been seen -- you’ve seen ups and downs. I'm not sure we had a particularly inexpensive cost per click in the third quarter anyway. So I just don't think that's going to be a big impact as it relates to Boot Barn. I'd be shocked if it's a headwind that whatever be big enough to or meaningful enough that has to call out to the public markets.

And our next question is from Janine Stichter with Jefferies.

I wanted to ask a little bit about the units per transaction, the accessories trend. Is there anything particularly going on there that you could elaborate on? Is it merchandising? Is it a change in product trend. Is it the change in how you're compensating your store associates? Just any additional color you could provide there would be helpful.

It's a very good question. And once again, if any of them are listening, kudos to the field team for driving basket size through more units per transaction. One of the things that happened ironically is in a COVID environment, we had to provide stores with sufficient labor to take care of customers in a safe way. So ironically, we wound up perhaps with more hours than we otherwise would have scheduled, which could have given the stores the opportunity to take better care of customers, et cetera. I think we -- and Mike Love, our Head of stores, really put a focus on building the basket and calling out growth in ABT, and we've got reporting on that. But I think it also just becomes part of the mantra.I think if I'm really honest, what makes it even more compelling is one of the things that tends to drive more units per transaction, and they're not -- we don't do them that often. But we do run clearance sales that are buy one get one-off or get one free, you get a 50% off. And given the fact that we didn't have that much clearance in December or even for the quarter, they were able to grow UPT despite not having that tailwind. So I think I could really attribute it to the stores team mostly and certainly, the merchandising team. We have a great buyer of belts and as we're selling more denim, we're selling more belts. As the boots business started to improve, we started to sell more boot care. But at the end of the day, it's the sales associates in the field that were really encouraging customers to build the basket and increase their gift giving, et cetera.

And then you mentioned on the labor, putting more hours in the store than you might have otherwise just for COVID precautions. As we think about maybe some of the needs of some of those precautions wearing off in the back half of the year. Do you highlighting the success of this maybe choose to keep those hours on, or how do you think about flexing store labor and as we no longer need the COVID precautions?

Janine, it's a great point, and it's probably almost an match between me and Jim later. I don't think we'll overstaff the stores once some of these COVID requirements unwind. It is great and the stores team did a fantastic job of, again, building a basket, as Jim described. We do think the way we've managed the store labor historically has worked extraordinarily well for us. I think when we held the Q2 call, we said that we were going to invest in marketing and labor, so that we'd be ready if the customer came. And that bet paid off. But I'm not sure outside of the holiday period that we need to overstaff the stores like we did in holiday, when it's just a little bit more difficult to manage the traffic.

And our next question is from Sam Poser with Williams Trading.

First of all, I'd like to know just given how strong the e-commerce business has become and especially -- I mean, the Boot Barn e-commerce business has become. What have you learned from that business that's going to help inform how you assort the stores and better engage your customers at store level?

Well, we're constantly feeding learnings between the two channels. The bootbarn.com has an assortment that's much broader than what's in the store. So when we start to see something emerging on the online business, we'll funnel that in and start to bring that part of the assortment into story. So it is a good way to get testing on many more styles, even more brands, et cetera. So we'll see, for example, as we start new businesses off, like hiking boots, we'll start to see what's selling online and use that as a bellwether to determine what to bring into the stores, where we should invest in key items and really bring the best of what we see online to the store channel. I must tell you, though, we also see things going the opposite direction. We see things that emerge in the stores that we can make a bigger deal out of and tell story with online, and will go the opposite way as well. Yes the emergent margin teams are very well integrated across channels.

I'm more speaking towards like being able to identify certain styles, there might be an existing style that during the crisis where more people were shopping online, where you said, oh, in this particular location or group of stores, the customer is telling us they want this but we don't have that in the stores. And it's more on the basics, like to be able to not find the new products, new ideas, that's one thing. But more to make sort of your core business more efficient through specifically the learnings this year where there seem to be a shift more towards online, given that very strong double-digit results, especially in the third quarter in your e-com -- in bootbarn.com.

There's been place, I'll give you a more media example that's more basic merchandise related. We saw lace-up work boots start to sell in markets that were pull-on work boot markets. And that's a place where we started to build out the assortment in store and started to see some real growth. So I think it's a very good question. We absolutely use the e-commerce channel on a market-by-market basis to help inform and to identify breaking trends.

And then lastly, you talked about in your press release and in your conversation about sales by month this past quarter, and then you also talked about January. Can you tell us last year, what the comp was, brick-and-mortar and digital, by month for January, February and March?

We can. Let me give you more of a conceptual sense. And we want to be a little bit hedged here because we don't want people modeling plus one year or a two year stack or whatever. But our January business, of the three months last year in Q4, our January business was the strongest. February was slightly less than January. And then March, COVID tell off the table. We also had a shift in a rodeo et cetera, et cetera. But the upshot of it all is January was the strongest month last year fourth quarter, and I think it was roughly a plus 5. But again, I think you have to take that with a grain of salt. You have to kind of think about the stimulus checks. And it would be much too aggressive for us to say, therefore, we expect a 25% two year stacked comp in February, that's not what we're expecting. Once again, March gets more complicated because the beginning of March is strong saw, in the second part of March fell off the table because stores were closed and COVID hit, et cetera.

And our next question is from Paul Lejuez with Citi.

Two questions. One, on the competitive landscape, I'm curious what you're seeing from a promotional perspective. Are you able to be less promotional as you have been because your competitors have also been less promotional. Have you been able to get less promotional despite the competition being promotional, curious if there's any difference by region there? And also, just curious, big picture, how you're thinking about where to grow, your store base is now more confident in terms of your ability to grow that 10% per year. And curious if it's more of a push or a pull kind of system in a sense, do you know where you want to be and then you pursue that region as opposed to kind of landlords reaching out to you and then assessing if it makes sense and just how that might have changed as a result of the pandemic. Thanks.

On the first piece, I don't think the promotional posture within our industry has changed all that much. And candidly, regardless of what happens within the industry, we like to put a great assortment out there at a very fair price with excellent service and nice stores and a great in-store experience and just choose not to run significant promotions, discounts, sales, et cetera, regardless of what our competitors are doing, bearing in mind that in most of our markets, our biggest competitor has one store. We do have one regional chain. They're based in Houston. It's a very formidable competitor. We actually have a lot of respect for what they do. And they tend not to be very promotional. So I think it's just good for the industry.On the store expansion piece between push and pull, I would say it's a push. We look at the map of where our current stores are, how our field teams organized, where we see competitors either places where there may not be enough stores or places where there might be competitors that we can take on. And we then look for real estate.Given what's going on in the world of retail, finding a 10,000 or 11,000 or 12,000 square foot freestanding retail store has proven to be relatively straightforward. But we have a strategy as to where we want to go and what the road map looks like. And of course, that twists and turns a little bit. But fundamentally, we want to follow the path that we've set out.

And our next question is from Rick Nelson with Stephens.

Jim, you talked about the gap between online sales and margin in the stores. Can you discuss where we are with that gap, and is there anything that would prohibit online EBIT margins from matching those stores?

We've made really good progress over probably the last two years, and we're probably in the fifth or maybe the sixth inning in terms of continued opportunity. The places that are just a little bit harder to get at that caused that disconnect a bit is, first, the exclusive brand penetration is less online. When a customer goes into our store, they can touch and feel the existed brands and they tend to select our merchandise when given an opportunity to look at the quality and the make of the product. So it's less online and that's a harder story to tell online than it is in the store, number one. Number two, if you just think about the components of the P&L, outbound shipping or e-com shipping is expensive. And all of our boots ship for free. And if you spend more than $75, I think, you get free shipping. So that's expensive, of course. We've done some things to try to reduce that cost, whether it's using USPS as an alternative to UPS or whether it's encouraging customers to buy online and pick it up in the store, or perhaps even shipping purchases from our stores versus Wichita, have all helped that freight and will continue to help that outbound freight cost. But those are kind of the two structural things that are just a little bit more difficult to overcome.

And to just push into Just Country, I assume it's more apparel than footwear driven if you could size up the opportunity and where apparel margins as said versus footwear margins?

Well, taking the second part of your question, our footwear margins tend to outpace our apparel margins across virtually the whole store, men's or ladies, worker, western. With that said, the just country initiative does absolutely include footwear. So while we might be selling some more casual apparel, more outdoor, soft shell jackets, et cetera, we're also augmenting the assortment and building inventories in more and more stores for hiking boots and casual footwear, et cetera, drivers moccasins. So I think the composition -- and I doubt we'll ever try to present this separately, but the composition of the Just Country part of the business between footwear and apparel will likely resemble the whole store, kind of 2:1 in favor of footwear.

And our next question is from Mitch Kummetz with Pivotal Research.

I've got a couple. So first question, I was hoping you guys could provide a little more color on the trajectory of your south region. So it's been your worst performing region, but you also mentioned it was the one that improved the most sequentially. So if we think of the delta between the south and the overall business. I mean, has the delta gone from like minus 800 basis points to like minus 5% to now you're like down 100, or can you just give us a little color on kind of how that's improved on a relative basis?

Mitch, I'm afraid. I'm looking at Jim, I'm afraid we can't help you with that. Don't have anything out there that framed up that delta target. So at this point, I don't think we're going to -- we do that color.

Let me ask about the south a different way, and then I do have another question. When you think about that business on a go-forward basis, given the improvement that you're seeing, like when is the easiest comp on the south on a relative basis? I mean, does that happen by like the first quarter of '22? Or I'm just trying to understand how much easier those comparisons get for that region?

So COVID was an equal opportunity [depressed] in terms of sales and impacted all of our regions in week 60, which is the middle week of March, if you will, and everybody was down significantly in comp. So the first full quarter of really tough business will be the Q1 quarter that you called out. And COVID negatively impacted West Texas, first from a COVID concern but then obviously, the follow on was global economy shut down and we saw a reduction in WTI and rigs drying up, if you will, or pulled off-line. So that's what caused the south to be disproportionately impacted. So long story short, you nailed it in terms of it will be Q1 where we'll see outsized negative business in the south compared to some improvement in the north and the west. If you recall, April and May were difficult months for us and then in June, kind of the west and the north improved a bit and the south was still a bit there.

And then my last question, I know the absence of rodeos and festivals and concerts has been a negative for your business. I'm just wondering what visibility do you have in terms of some of those things coming back online. I know Houston has been pushed back from March to May and hopefully, it happens in May. And I guess, maybe start with Houston. So for the fourth quarter, you're going to have zero days of the Houston rodeo this year versus last year. But then in May, hopefully, you'll have 20 versus zero. I mean, can you maybe just address how you think about -- I believe that's the most important rodeo for you guys. And I'm just curious if that's material to the fourth quarter? And then what visibility, if any, do you have on some of these things coming back online?

I don't think the lack of Houston Rodeo in March this year is going to be that impactful to our business. Of course, we'd love to have the rodeo held. But the reality is, as Jim has described, we're going to have phenomenal numbers in March because there's some sales happening. Even if it's not from Houston Rodeo, there will still be normal sales as opposed to COVID impacted sales in March. One thing we don't know about on Houston Rodeo is that they've talked about keeping the kid events at the normal timing. Now that may have changed or may change. So there may be some Houston Rodeo business in March but again, it's not going to be meaningful to the quarter in any way. And it will be interesting to see what happens in May when they hold the rodeo given vaccine rollout, et cetera, et cetera, if we'll have a full fledged rodeo with the concert or not. I mean, those are the things that are hard for us to predict. I don't think we've seen anybody announcing a concert tour this year yet. So we'll see.

Is that business typically several million dollars for you guys? Or --

What we've said, I think, in the past is on the year, it's a low single digit piece of our business. So we're going to call it 2% or 3%. It ebbs and flows in different parts of the year. I think Greg is right, though. We absolutely want, for a variety of reasons, we want that business to come back, we want those events come back online, et cetera. The noise of it, though, I think it's completely subsumed in a much bigger noise of COVID and wrapping COVID numbers. So while we might have a little bit of a pressure point in margin and more help in May, cycling the numbers that we're cycling, they're just so soft given what happened in the very beginning of COVID that I think it will be very hard to understand what's going on with the rodeo piece of it.

And our next question is from Jeremy Hamblin from Craig-Hallum.

And I'll add my congratulations on the business momentum and strong execution. I wanted to revisit something you mentioned, Greg, on the potential for longer-term EBIT margins. And the prospects for not just 10% EBIT margins but something closer to 13% or 14%. Could you give us a sense of that extra 300 to 400 basis points? The drivers or the components of that, is that coming from product margins? Is it coming from SG&A leverage? I don't know how clearly, you've thought about it, though, in detail of how we get from 10% to 13%, to 14%. I'm just wondering if you could give us a sense for where those drivers are going to come from?

I haven't put pencil to paper and mapped this out over the next number of years, but you've touched on the things that would be important. Continuing to expand merchandise margins is something that we want to continue to do, whether it's more exclusive brand penetration or better margins on the exclusive brands. It's the continued philosophy around full price selling, less promotions. We talked about the fact that we're in a cleaner inventory position and so maintaining that is important, of course. I think getting leverage out of the occupancy line is important and we'll get some leverage we believe, for sure, in operating expense as we grow the store base. So it's all the things kind of that you talked about.

And then a follow-up on that. In terms of thinking about store counts and so forth, I think you mentioned this not that long ago but in terms of thinking about your opportunity. How much do you think it may have expanded given the kind of current conditions of some of maybe your weakened competitors, the mom and pop type stores. Is it something where maybe it's not that you're doubling your store base but tripling your store base. Can you give a sense of magnitude on where you think it's evolved to?

We are further emboldened by our success of stores opened in Ohio and Pennsylvania, and how strong those opened, again, kind of in a COVID environment. In addition to that, the stores we've opened in California that we would have thought might cannibalize an existing store and really had no impact, gives us confidence that the 500 number we put out there is, I'm going to use the word, conservative. We haven't started to update our store count potential work. We're going to do that, of course, but it's a little bit tone deaf probably today to come out and tell you that we think that 500 is really 600 or something like that, just given COVID. What we have learned is our customer -- in the COVID environment, what we have learned is our customer does enjoy shopping in our stores. The penetration of e-commerce to total sales is roughly in line with what it was last year in Q3. And that tells us that our customer wants to shop stores. So we have a lot of confidence in building more stores. And I guess, I'd say, stay tuned in terms of what that opportunity is.

Yes. No doubt interesting and somewhat unique given the trends that you're seeing. Last thing I wanted to ask, again, coming back to some of the mom and pop type competition. Have you been approached or are you getting approached with greater frequency now as we're in 2021? And perhaps their businesses are recovering to some degree, maybe not the same magnitude as yours. But wanted to get a sense for whether or not some of the mom and pops that might be hurting might not have as much of a long term horizon as Boot Barn. Are they approaching you about potentially doing deals? Are you getting increase in inbound calls about potentially acquiring some of these stores? And if so, how do we think about funding on the capital side of the equation. If you have maybe some really good opportunities to consolidate geographies, maybe even geographies that you're not currently in? Any color you can share on that would be helpful. Thanks so much.

Jeremy, I'd say there's probably more inbound calls over the last 90 days than there were pre-COVID but it's not game-changing numbers, and I think we've talked about this before. We've acquired a one store company a couple of years ago, we acquired a two store chain called Drysdales that did the volume of say five Boot Barn stores. But historically, we've tried to buy operators -- we bought a chain of three stores and four stores and before that, we bought 25 store chains. And Jim touched on this that there's one regional guy out there that's pretty big and we respect a lot. But there's not a lot of folks in between them calendars and a four store chain or a three store chain. So I'd say the numbers are up but I wouldn't say they're all of interest to us. We would kind of be interested more in a three or four store chains.And then in terms of capital structure, et cetera, I mean, I think I talked about the fact that our term loan is $112 million. We've got nothing drawn on the ABL, and we have $76 million of cash. So I think we've got the wherewithal to probably fund just about any acquisition that we would have interest in, in our industry.

And our next question is from Jay Sole with UBS.

A question, just as everybody is watching the pace of vaccine rollouts, does it change your view of how you're thinking about buying inventory for the first quarter of next fiscal year or the second quarter?

Not really. Right now, we're chasing product to get back in stock as quickly as we can. Last year at this time, we were a little heavy. Now we're probably a little light. And perhaps we want to get to that just right position going forward. We want to have a full assortment, the full size runs for boots and denim and caveats, work and western, et cetera. And if vaccines and the COVID environment improves greatly, we'll be ready. And if it takes longer, we'll just turn our inventory a little slower. We don't really run the risk of bringing in a whole bit of inventory having something turn south on us and then having a bunch of markdowns. So we'll build back the assortments that we feel are a little light. We'll add to some of the businesses that we're trying to expand. Some of those are within the country initiative. And we are certainly looking forward, playing which is much more enjoyable, playing offense than playing defense. And I think we'll be very well positioned going into the new fiscal year with some more work to do over the next couple of months to shore up a few select departments that are still probably a little light.

Maybe if I could ask 1 more. Just a lot of talk over the holiday season about freight cost pressures and port issues. How do you see that impacting the business as we go forward? Do you think the freight cost pressures will recede a little bit? Do you see the port issues impacting the business, or will those get easier, what's your thought?

It's certainly something that is impacting us. There's a bunch of ships out in the water outside of Long Beach and Los Angeles ports, the dock workers are being affected by COVID or infected by COVID, and therefore, harder for them to work. I think the governor is trying to get them vaccinated quicker but there's a strain, certainly in getting those ships unloaded in our inventory that we can sell. And to your point on freight costs, we're seeing that as well that with the shortage of equipment and again, reduced productivity perhaps of the ports that our freight costs would probably be a pressure point for us over the next, I don't know, three months or six months. But I think it will take a bit of time for this to work its way through.

We were able to offset a lot of the freight issues that other retailers called out during the holiday quarter, fortunately. And so a lot of people called out UPS surcharges and issues of getting product delivery. And some gratitude going to the supply chain and the folks in Wichita that run the direct piece of our fulfillment. But we just were able to avoid a big uptick in the freight charges, and we'll see what happens going forward.

And we have reached the end of the question and answer session. And I'll now turn the call over to Jim Conroy for closing remarks.

Very good. Well, thank you, everyone, for joining today's call. We look forward to speaking with you all on our fourth quarter earnings call. Take care.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.