Good day, ladies and gentlemen and welcome to the Boot Barn Holdings, Inc. Second Quarter 2022 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host. Mr. Jim Watkins, Senior Vice President of Finance and Investor Relations. Mr. Watkins, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us today to discuss Boot Barn's second quarter fiscal 2022 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 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 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 second quarter fiscal 2022 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'll review our second quarter fiscal '22 results, highlight each of our key strategic initiatives and 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. Consistent with our last earnings call and given the impact COVID had on our performance in fiscal '21, we believe that a comparison of our second quarter results to the same period two years ago, provides the most helpful view into our performance. Our business remained extremely strong during the second quarter. We saw broad-based growth online and in stores. Total sales growth on a two year basis was 67% with retail stores up 69% and e-commerce up 57%. I think it is important to begin with some additional color into the underlying strength of the business. First, a significant portion of the sales increase can be attributed to the addition of new customers added to the Boot Barn brand with only a small portion of the increase attributable to increased retail prices. Second, we've achieved this growth while dealing with a challenging supply chain where some of our vendors are not shipping us in full. Third, the growth is extremely broad-based with nearly every department in the company experiencing strong double-digit growth. And finally, the consistency of the business has been remarkable with 32 consecutive weeks of more than 55% growth in sales on a two year basis with every one of the 13 weeks in Q2, 60% or better. I must express my appreciation to the entire organization across each functional area and every store team that has contributed to this tremendous sales growth. The entire team continues to…

Thank you, Jim. Good afternoon, everyone. Compared to the two year ago period, net sales increased 67% to $313 million, driven by a consolidated same-store sales increase of 54%. Retail store same-store sales were up 53% and e-commerce same-store sales were up 57% versus two years ago. The increase in net sales was primarily a result of the increase in same-store sales and the incremental sales from new stores opened over the past 24 months. Gross profit increased 99% to $118 million or 37.8% of sales compared to gross profit of $59 million or 31.7% of sales in the two year ago period. The 610 basis point increase in gross profit rate resulted from a 320 basis point increase in merchandise margin rate and 290 basis points of leverage in buying and occupancy. The merchandise margin rate increase was primarily a result of better full-price selling and growth in exclusive brand penetration. Operating expense for the quarter was $68 million or 21.8% of sales compared to $46.4 million or 24.8% of sales in the two year ago period. Operating expense increased primarily as a result of higher store payroll and overhead, in addition to an increase in incentive-based compensation. Operating expense as a percentage of sales decreased by 300 basis points, primarily as a result of expense leverage on higher sales. Income from operations was $50 million or 16% of sales in the quarter compared to $13 million or 6.9% of sales in the two year ago period. Net income was $37.9 million or $1.25 per diluted share compared to $7.7 million or $0.26 per diluted share in the two year ago period. Excluding the $0.03 tax benefit in the current year and $0.02 tax benefit in the two year ago period, net income per diluted share in the current…

Thanks, Greg. I'm very pleased with the ongoing strength we have seen in the business through the first half of our fiscal year. The long-standing strategies we have in place continue to drive sales, give us a competitive advantage and have enabled us to both broaden and strengthen our customer base. This has been a year of tremendous execution by the team and the results are bearing that out. I look forward to continuing the momentum through the back half of the year. Now, I would like to open the call to take your questions. Shamali?

[Operator Instructions] And our first question is from Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks and congrats on another exceptional quarter.

Thanks, Matt.

So Jim, with 3Q to date holding the high 60s trend relative to two years ago. The stimulus largely behind, expansion of the total addressable market, is it larger basket? Or increased purchase frequency. I guess the question is, maybe is it all of the above? Or how best do you attribute this continued outsized strength that you're seeing?

Sure, great question. We always want to acknowledge that there's some external factor at play. I think our business has been exceptionally strong. But in fairness, other retailers are posting pretty good growth as well. I think we are outsized growth. And I think the incremental piece of our growth is mostly the increase in customer count. I think we're executing across the board over a number of things or our conversion in the stores is good. Our basket is up a bit but the vast majority of the 67% growth versus two years ago is a result of increased customer count. And I think the good news is it really does appear that this is a step function change up. If you go back two earnings calls, we thought maybe it was the March stimulus, to your point, that's in the rearview mirror now. In our first quarter call, we thought maybe it was just a result of pent-up demand. Candidly, now after 32 consecutive weeks of this business, it's hard to say that it's transitory. And the growth has been so broad-based that it just -- it's kind of exhilarating to be honest. So as we look forward, I think we're extremely well positioned for the holiday. I think we'll be well positioned as we turn the calendar into our fourth quarter. We will cycle a very strong January and a very strong end of March. But by and large, the rest of the time period that we're up against for the balance of the five months of the year is slightly positive numbers other than those two surges.

And maybe a follow-up on the bottom line. Is there a best way to think about a sustainable margin for this business over time? Or I believe you've cited low to mid-teens operating margins as a potential target in the past. So maybe another way to ask it is, other than maybe the fixed cost outsized leverage that you've seen tied to the top line, is there any margin gains that you believe you need to give back? Or anything that's more transitory on that front that you would cite?

Matt, it's Greg. The only things I would point to would be we continue to want to invest in store labor to make sure we're servicing the customer properly. We did a nice job. We increased our -- I'll say it differently, if I think about Q1 where we had 17.5% EBIT rate and Q2 was a 16% EBIT rate, the EBIT rate came down 150 basis points. 90 of that basis points was in the stores organization between payroll and variable costs, etcetera. And we spent a little bit more on marketing. But just coming back to answer your question, I do think that, that low to mid-teens is a reasonable place for us to land. Again, ending this quarter at 16% and investing some in some SG&A places, again, labor, maybe marketing, we should be able to do that. And we've got a freight headwind right now that we view as transitory but it's real. In Q1, freight was 40% -- 40 bps higher than the two year ago period and Q2 was 90 basis points higher. So that will come back to us at some point.

Congrats, again.

And our next question is from Steven Zaccone with Citigroup. Please proceed with your question.

Hey, thanks for taking my question. Congrats to Greg and Jim on the appointment, well deserved. I wanted to focus a little bit more on the new customer strength you've seen. I guess, Jim, could you explain if there's a specific area of the business you've seen that customer come to? I guess, like when you look at them, where were they shopping before? And now that you've seen this growth in the customer count, like how are you focused on retaining these customers?

Sure, very good question. I would go all the way back to April 2020 was sort of the first decision that we took was to stay open and be there for our customer as an essential retailer. And we were able to do that because we carried a fair amount of work boots and flame resistant work apparel for the oil industry, etcetera. And that decision enabled us to not only take care of our current customers, keep the stores teams in place, the store managers, etcetera but candidly, most of our competition is mom-and-pop Western-only retailers. So those guys, for the most part, closed down during the beginning of the pandemic. And we were able to take care of not only our customers but certainly picked up share from those players, those competitors. I'd say the second thing is, we have continually, for the last three or four years, expressed our desire to expand the brand's reach. And it could be as simple as looking at some of our marketing materials from five years ago versus today. five years ago, we were squarely focused on a rancher Western customer and each successive year, we've expanded the aperture a bit to be more inclusive. The Just Country initiative was part of that. And that came at a perfect time when customers from all sorts of retail channels and some mainstream retailers we're looking to dress more casually and we had what we would call casual Western product but hit a pretty broad swath of the U.S. population. I'd say the next piece of it is we really aggressively secured product. We went from playing defense to playing offense almost overnight in August of 2020. And long-term purchase orders, secured or exclusive brands, etcetera. And that just enabled us to take care of kind of any customer that walked through the store. So circling back to the specifics of your question, I think we've taken share from the industry. I think we've added customers that are more casual Western customers. I think we probably dipped into some mainstream retailers because we were available and present from a marketing standpoint and had product on the shelves. And then finally and I do want to ensure that everybody recognizes this is a small piece. We're seeing a bit of a fashion trend in ladies Western boots and ladies Western apparel. We called that out a couple of quarters ago as a whisper and now it's turning into more of a roar. But it's -- I think, you couple all those things together, most of the things I've just described, we would contend, are here to stay. And we don't really expect to be forfeiting those customers back to the retailers where they had shopped previously.

Great, that's very helpful. Then just shifting to merchandise margin. On a two year basis, the second quarter was stronger than what you saw in the first quarter. So I guess, just how should we think about the back half of the year from a merchandise margin perspective?

Steve, good question, it's Greg. We did see a little bit of expansion in merchandise margin, to your point. It was about 100 basis points higher than Q1. I'd say a small piece of that was we put some price changes into effect in Q1. Those price changes "held" and they helped the business and the merchandise margin rate. And we got a bigger benefit of that in Q2. So how you think about it for the back half, I mean, we continue to try to be less promotional. And certainly, in today's environment, where people are struggling to get products, we don't see any reason to meaningfully discount even in the holiday period where we're fighting for share of wallet. We're going to be less promotional than we were in the prior year. So, I would expect us to continue to make inroads on expanding merchandise margin. The caveat here is freight expense, right? We just -- that's a headwind for everybody. Frankly, I'm happy to have the headwind because it means we're getting the merchandise. But we saw a 50 basis point increase from Q1 to Q2. And I don't know if that grows by another 50 points in Q3 or not. I don't have a lot of visibility into that. But that will be the one thing that will hurt markup or margin rate a little bit. So not trying to be too vague. We're not giving specific guidance but I do feel good about the growth from Q1 to Q2 and would continue us again to be paring back on promotions.

And our next question is from Max Rakhlenko with Cowen and Company. Please proceed with your question.

Great, thanks a lot. And congrats on the nice quarter and congrats to Jim on the promotion. So the first question is on the exclusive brand side, curious if the way that the last several quarters have played out has impacted your long-term outlook for the opportunity set and if it makes sense to accelerate growth, given your ability to control the supply chain and also the really nice customer receptivity?

Great question, Max. I think it probably has just accelerated our growth and emboldened us a little bit. We still believe that we will continue to be a house of brands. We have tremendously strong relationships with our vendor partners. And our exclusive brands will continue to grow, I'm sure. But we don't envision a world where exclusive brands become 75% of our business. And we still want to offer the customer an assortment of brands, both ours and third-party brands. But one of the things that happened and it was a good market test, not one we intended to do but some of the brands had difficulty securing products or shipping product. And some of them also were passing through freight expenses or freight charges that were more than what our exclusive brands was experiencing. So when you take those two factors, less availability of the national brands and a relatively higher price point, given the fact that they're passing along the freight expense to us and you couple that with our exclusive brands group that we're able to share the product and frankly did a better job of managing the freight expense, it made our exclusive brands more available and perhaps more price competitive. And to your point, the customer receptivity has been extremely, extremely strong. So, I don't think we intend to grow it -- grow that part of our business by more than our kind of typical three points a year once we get to a normalized playing field but it certainly had kind of accelerated a couple of years into one based on the dynamics I just described.

Got it, that's very helpful. And can you just discuss the competitive landscape? Just anecdotally, are your peers able to work through some of their own supply chain issues? Or are they having a lot of difficulties putting products on the shelves? And has this led to some easy wins as your competitors probably aren't feeling it more than you guys are? And then just as a follow-up, does this just embolden you a little bit more ahead of holiday? Or how do you think that, that could play out?

Sure. So the first question on competitors, if you accept the fact that our single biggest competitor is a mom-and-pop, typically with one location, presumably, they have zero exclusive brands. So they are completely at the mercy of national brands. And the national brands, I mean, they're working hard also to manage their business and to grow their business. But some of them got caught up in Vietnam more than we did. Some of them had distribution centers, supply chain bottlenecks, etcetera. So, if you walk into a mom-and-pop Western retail store across the country, they're not going to be any better than kind of our worst national brands. Where if you walk into a Boot Barn store, the holes that may have otherwise been there have been filled by our own brands. So it certainly plays out that we will take candidly another step forward versus the overall Western industry. We do have one regional chain in our business that you know well, I know, called Cavender's. They have some exclusive brands, not nearly to the levels that we have. They probably got a little bit more priority from the national vendors but we probably also took a step forward versus them. And once again, I say this consistently, they are a very good company and very good operators. So I wouldn't count them out. On the -- looking forward from a holiday standpoint, there is certainly a bullish thesis here. I'm not signaling that the business is going to get better than 67%. I mean we would love to have any kind of really strong double-digit growth for the balance of this quarter. But the thing that really has emboldened us, I think are a few things. One, our competitive positioning against the mom-and-pops, the point you've made.…

Congrats, guys.

And our next question is from Janine Stichter with Jefferies. Please proceed with your questions.

Hi, everyone. Congrats on all the momentum. I just want to dig into the comments on limiting outbound freight by using your store network. Can you talk about what penetration BOPIS is currently? And then maybe I'm wondering what kind of attachment rates you're seeing if you can quantify that? When someone comes in to pick up an order, do you think that, that's also contributing to better conversion?

Sure. I just need to expand the question slightly. When we talk about fulfilling orders from our stores, BOPIS is a piece of it. But we're also shipping the product from our stores to -- directly to the customer. They're acting as a mini e-commerce fulfillment center. And candidly, that second piece is much bigger than BOPIS. So BOPIS is low single digits, in-store fulfillment or shipping from a store is 20-plus percent of the outbound e-commerce orders at least that don't have to come from our fulfillment center; so it's considerable. It gives us the ability to -- a few things have happened, right? We can -- we've seen an immediate uptick in our exclusive brand penetration online because we have more ample inventory of exclusive brands in the stores. We're also able to work through some of our clearance product. We don't have a lot of it but we can use this to work through some of our clearance product. And we're pretty excited about what the future might hold for this of do we bring broader, more exciting higher price point product into the stores that otherwise might not turn fast enough to make the cut. But we can put it on the shelf and if it turns too slow, we'll use our e-commerce channel to work through it. So there are some really strategic benefits of doing this and doing it so well. You also asked a question around the attachment rate. This might be too much information but we see attachment rate on two different things, right? We see attachment rate on BOPIS. We also have customers that come in to the store to buy product that was shipped to the store from our DC on their online order. And in both cases, we're seeing a healthy attachment rate, maybe one in four, one in five customers are picking up another item. The exciting thing about that is we're -- while I love both of our channels equally, we're exposing a lot of our e-commerce and digital customers to the store and we just always feel better when they're in the store. We're more competitive. We can take -- we can give them world-class customer service, that customer tends to be more loyal. So we like the fact that we can get our digital customers to experience sort of both channels. I think I've covered both of your questions, maybe in a -- perhaps in a very long-winded way.

No, it was great. And then I just want to clarify on the inbound freight, I think you said 90 basis points in Q2 versus two years ago. Is that purely related to the exclusive brands? And have you absorbed any of the incremental freight from your third-party brands?

I would characterize it as it's largely exclusive brands. There's probably some element of container purchases and other things where we see -- we absorb that inbound freight. Typically, though, inbound freight, where the merchandise goes to the vendor's distribution center in the U.S. and then it ships to our store, that tends to wind up in cost of goods as opposed to freight. But we do make some container buys where we take on that freight expense and have some inbound impact.

And our next question is from Jonathan Komp with Baird.

Yes, thank you. Can I ask more of a near-term question to try to get away from some of the comparisons year-over-year? But when I look at the third quarter, typically, sales have been 50% or more higher than the second quarter and you've typically had a peak operating margin significantly. So any factors to call out that would make us think differently on a sequential or seasonal basis this year?

Jon, as I think about the business in Q3, we're very pleased with how October looks a lot like Q2, for example. I don't see really any reason that November would be much different than that. The trick to me is what happens in December, gift giving, shift to e-commerce, all those things. But directionally, from my perspective, there's -- I wouldn't think of it much different other than that's a really big month, December, to grow 67%. But Jim, I don't know if you've got other thoughts but...

No, I agree with it. And then the operating margin piece.

Yes. No. Operating margin will be -- should be better, of course, given even a higher sales volume.

Yes, that's really helpful. And then maybe at a big picture, when you think into fiscal '23, are you planning the business to give back earnings or EPS? Or how should we think about holding on to what you're gaining this year?

Jon, we're not guiding Q3. I can't guide next year. But I think Jim touched on it in his prepared remarks that we're extremely happy that for seven straight months, our business has been incredibly consistent. So -- and then he talked about the fact that if you strip out fashion, we dropped eight points or something from a plus 68% to a plus 60%, right? So there may be a little bit of macro tailwind that we lose. I would also say there are some things that probably are in our favor like rodeos and concerts. So I don't -- I'm going to -- I should probably turn this over to Jim Watkins but I won't do that to him on his first call as appointee. I don't think we would plan or expect to see any significant step back on the business. We will obviously learn a lot more, as Jim said, in January and March as we go up against the stimulus and can rewrap those numbers.

Yes, excellent. And one more just quick one on the exclusive brands. It looks like to us, you're set to maybe develop or launch a bunch of new brands. Is there anything you're willing to talk about there?

Sure. Happy to provide a little bit of color. I think two different things have happened. One, we have more explicitly overlaid some new brands back to our customer segmentation. So we have a couple of brands that will come out that are going for more of this casual Western or we're calling country customer. That's the bigger change. The second change is, we have refined some of the tried and true brands; Cody James and Shyanne. And we've created another sort of Western ranch wear brand. And it would be difficult to walk everybody through telephonically what they look like. The next time we're together with the benefit of visuals, we can kind of shine some light on this. But it's exciting. We've got some new players backing exclusive brands, hopefully taking us to even a whole another level. And that group continues to deliver and the expansion of the brand portfolio, I think, should, at their minimum, maintain our growth and circling all the way back to an earlier question, it might accelerate it a little bit from our typical three points a year.

And are those fiscal '22 or fiscal '23 initiatives?

I'd say fiscal '23. In fairness, some of that product will hit the store before the end of this fiscal year but it's not going to be a meaningful amount of business until we get into sort of Q1 of fiscal '23.

Our next question is from Sam Poser with Williams Trading. Please proceed with your question.

Hey, thanks guys for taking my question. And Jim, congratulations on the new gig. What -- I just have a list, so I'm just going to go through it and then we can deal with it. What are the Top 5 brands? What percent of your product is coming from the -- from -- not from Asia, more from the Americas? What is your loyalty member percent and how is that growing? Is Sheplers now a tailwind? And what percent of digital sales are the stores involved with?

You were right in signaling that you have a list, Sam. So let me see if I can tick through these. Top 5 brands, we do disclose this in the 10-K. So internally, our top three exclusive brands are Cody James, Shyanne and Idyllwind. Our two national branded partners that are also in the Top 5, number one -- our number one brand is Ariat. The other one is Wrangler. So that rounds out the Top 5 brands. In terms of sourcing and geographies of sourcing, these are broad brush strokes. Roughly half of our product comes from China. Roughly 25% of our product comes from Mexico. The balance of the 25% is rest of world with a small portion 10-ish percent from the Americas?

U.S., yes. U.S. is 10%.

And we -- as it turns out, we were fortunate that we have a very small exposure -- certainly our exclusive brands have a very small exposure to Vietnam. And that most of our vendors have a small exposure to Vietnam. We did have a couple that had some difficulty there with the unfortunate pandemic breakout there. In terms of loyalty, we typically say that the vast majority of our sales go through our rewards program, call it 2/3 of our sales, we can connect to a customer. That customer would have a B Rewarded number. We typically get some combination of e-mail, phone number, home address. And those customers, as you would expect, are better customers, they shop across both channels more than a typical customer. Their average basket is higher, their frequency is higher, etcetera, etcetera. So that loyalty and that our ability to understand all of their RFM and now like their analytics and to speak to them in the language that they want to hear from us in is meaningful, right. So -- and to tie it back to our desire to expand careful to leverage our loyalty customer database, so we weren't sending hard core work mailers or e-mails to a younger female fashion Western customer or vice versa, right? So the segmentation and the CRM work hand-in-hand which is why the loyalty is so important to us. Is Sheplers a tailwind? Sheplers is positive but it's not quite as positive as the rest of the company. So I guess it's a "drag" on this plus 67% but we're certainly not worried about that. What we don't...

Let me rephrase that one, if I may. Is it a tailwind in that it's no longer going to be margin dilutive? Are you cleared through the lapping the promotional?

Okay, great question. It is no longer margin dilutive. I mean -- and if it is, it's minor basis points. It used to be significant and I appreciate you calling it out and frankly giving us a platform to discuss it. The e-commerce team has completely extinguished, I might be overstating it sorry but nearly extinguished the promotional stance that Sheplers has had in the past. And it's almost in line with bootbarn.com. Frankly, there are a couple -- there are sometimes when it's every bit as margin accretive as bootbarn.com, it's much more positive from a margin perspective than it has been historically. And then, in terms of the percent of our digital sales where the stores are involved. The quick answer is 50%. That might be slightly too high but -- because we have roughly one-fourth of our digital sales that are shipped from a store and slightly less than 45% of our digital sales that are shipped to the store for pickup. So it's call it 45% but it's significant. And we're lucky in a way that our stores are very capable in including shipping and packing products because, as you know, Sam, much of our product, most of our product goes directly from a vendor to a store. So there's a there's a highly capable back room in the store. So when we rolled out these initiatives, it took literally a few days, not months of training and rearranging back rooms, etcetera. It was sort of very smooth rollout of some of these initiatives. So they're involved. And when I described the -- what piece of our digital sales go through our stores, we typically think of it from a bootbarn.com perspective. So if you counted everything, it would be a little bit less than that, including Kepler and Marketplace on Amazon, etcetera.

Thank you very much. Continue the success.

And our next question is from Dylan Carden with William Blair. Please proceed with your question.

Hey, thanks a lot. Just curious to what you attribute sort of the outperformance of recently opened stores, particularly those stores maybe in newer geographies? I know the overall business is kind of ripping and roaring but it seems like these openings are even kind of above and beyond internal expectations. And then kind of as part of that question, how you're thinking about the assortment in new markets and maybe that's an opportunity to kind of speak to the new prototype store that you're trialing out there in California?

So on the new stores success, I think a few different things. We opened up the stores, some of them right in the height of COVID emerging. And frankly, we're quite nervous when we open them. Paradoxically, we may have had the advantage that we were opening a brand new retail store and a lot of stores weren't available to shop at all, Western or otherwise, right? So if someone needed a pair jeans or a shirt or perhaps a pair of boots, we had a brand-new store in their backyard and the local mall and many of the other regional players were just closed. Again, regardless of whether they were Western players or not. The second thing is we have been finding the pump in terms of bringing the brand to a more national level. And we have -- we want to continue to invest in doing that. But we have shifted some of our marketing more to national radio versus spot market, local city radio. We do more social media than we've done in the past. So our brand is out there and we sponsor an awful lot of events that have national presence even though they might not be in Pennsylvania or Ohio, etcetera. But the finals of the rodeo season in Las Vegas and we're a big sponsor and our name is reasonably well known. In terms of the assortment there, the quick answer is our new stores are selling by category very much in line with sort of the company average, if you will. So if I looked at sales by merchandise classification for our stores in Pennsylvania, Ohio, Virginia and then compare that to Colorado and Arizona, it would look very similar. There was a hypothesis early on that once we got into the Northeast, we would have to flip the concept to be two-third work, one-third Western. That turned out to be just not right. We're selling every bit as much cowboy boots men's and ladies, cowboy hats as we are in much of the rest of the country. So these stores are off to an incredibly strong start. The three year payback will be an easy hurdle for them to get over. And we feel great about the upcoming pipeline. And one of the things that all of this leads back to is we have a new head of real estate that started ironically in, I think, February of 2020. So his first order of business wasn't opening up stores but it was managing rent expense and landlords and then he quickly pivoted to looking for new locations. And many of these stores that are opening with one year paybacks are thanks to him and that team. So go ahead, Charlie. There's your shout out.

Okay. And nothing it's too early days on the prototype at this point?

So on the prototype, it's funny. We try to avoid the word prototype because we then expect to get 1,000 questions on how the new prototype is doing.

Apologies. Sorry to that, guys.

The -- I would say the new stores on Katella here in Orange County, California, it is sort of a logical progression of where the brand has been evolving. So if you were to look at our marketing materials, our social media presence, if you get our mailers and then you walk into some of our stores, you'd realize that our print media and our digital media has gotten elevated more quickly than we were able to elevate the in-store experience across 281 stores now, I guess. But the new store brings in some of those elements. It's more of an organic feel. It's -- there's much less signage and it's just much more open and more comfortable shopping experience. But the -- from an economic standpoint, from a payback standpoint, I think it will be every bit as good as the three year model or better. That particular store is doing extremely well. So if you really want to know how that one off, N equals one sample size is doing, the answer is it's in the cover of the ball.

And our next question is from Jay Sole with UBS. Please proceed with your question.

Great. Thank you so much. Jim, I'm interested in just the business being so steady over the last three months and six months. Specifically, maybe can you tell us a little bit about traffic into the store? Presumably, traffic is up a lot with a lot of new customers. Or is that really not the case? I mean you're just seeing really high conversion plus some price. And have you seen the traffic trend change over the last few months even as the total sales have been steady?

So great question. One caveat but -- we've been able to answer this in the past and I'll give you a more direct answer in a second. We don't have traffic counters in the store. So we can intuit what's happening a few other ways, how many customers enter the database, we know if the basket size has grown or not, etcetera. So the -- coming back to giving you a real answer, recognizing the fact that we don't have specific traffic counters, 80-plus percent of the growth we're experiencing is from new customers coming into the brand. The basket's up on a two year basis, I think it's up 7% or something. So that's helped a little bit. We might have higher conversion, we might have more frequency but the vast majority of the increase in sales is new customers. And of course, we want that experience to be great. We want it to be -- you want those customers to be air quotes, sticky customers. And that's one of the reasons why we feel great about the fact that we have an in-stock position that I think is better than most of our competition.

Got it. And then, maybe one more for me. Jim, you did mention rodeos a moment ago. Just where are we in the reopening like phase? I mean are all the group big events, are they all happening? Have we totally lapped all that stuff from last year? Are there any COVID costs that were in the SG&A last year that are not in there this year? Do you feel like really everything is sort of back to normal from a reopening standpoint at this point?

I can take the second part of that question first. The COVID expense while we had some was de minimis and we never really spiked it out when it was happening quite that much.

And we've been talking about our P&L on a two year basis anyway. So that wouldn't have COVID in the two year period.

In terms of events, they've ramped up. I wouldn't say they're at on the 90% now. So we're getting the "benefit" from that now. With that said, we still haven't had some of the bigger events throughout the year in our numbers but for two years ago. So I'll give you two of the bigger examples. The finals of the rodeo season in Las Vegas in December didn't happen last year. I guess it did but it was much smaller and it was moved out of Vegas and it was just a much different deal. The second one, even bigger, is the rodeo season in Texas during February and March, essentially didn't happen this year. There's some exceptions to that. But the biggest one in Houston didn't happen at all. The others were much more minimized. So as we look forward, I would say we have the benefit. And it might be a tailwind, of course, we might have some headwinds also but we'll have some tailwind from new events from now through December which is the finals, through the first quarter which is Texas rodeo. And we've been into the spring where we had Stagecoach and some of the music festivals that didn't happen this year. So we're trying not to assign too great a value of that and get people too far ahead of their skis. But it's -- that's all in the future for us.

Got it, okay. And then maybe one more just because inflation is such a big topic. You talked about some of the freight and shipping. But as far as just cost inflation next year when you're placing orders for inventory. What are you hearing from vendors in terms of how much costs are going to go up across the board for the national brands and the categories like boots and things like that?

We've seen quite a varied response from vendors. Some have passed along every dollar of increase that they're seeing. Others have shared it with us. Our exclusive brands, candidly, has done probably the best job of managing inflationary pressures on raw materials and on freight. So with all of that said, we tend to pass along cost increases with a markup. So it really won't impact our margin rate. So the next question is, will it impact negatively sales velocity? Well, if it made us uniquely less competitive, it might. I don't think it does make us uniquely less competitive. So I think most of the industry passes along price increase. And frankly, I think customers come to Boot Barn for the overall experience and if the boot has gone up by $5 as long as it's in stock and we have authoritative customer service taking care of them, we're still going to get the sale.

Sample size, we've got some price change or price increases in the first quarter. We passed those along with the markup, as you've described and we haven't seen a real change in the demand but for maybe a 2-week period right after the price change.

And our next question is from Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Thank you. And I'll add my congratulations on the exceptional performance. I wanted to ask about your clearance sales and the impressive expansion of your gross margins and your merch margins. Can you give us a sense of how much your sales that are on clearance have changed versus last year and versus two years ago? Is it a 800 basis point change in the total sales that are on clearance? Can you give us a sense of how much of that has changed both versus last year and then versus two years ago?

If I look -- Jeremy, it's Greg. If I look at compared to last year and I don't have the two year information handy in front of me but the level of clearance is half or maybe even a little bit more than it was last year. Having said that, the clearance and markdown inventories are relatively a small portion of our overall business historically. And so it's even more -- it's even lower this year but that's not driving that -- the margin improvement. It's more driven by being a bit less promotional, more exclusive brand selling. And while we want to continue to manage our clearance down, that's not the main driver of what's going on here.

Okay. And then, following up on the exclusive brands and how well you've handled supply chain issues out there, it sounds like your relative value perception of your exclusive brands has improved significantly in your customers' eyes and maybe that's part of why you're taking some share. How do you think about heading into next year where you do have a lot of national brands that have taken some meaningful price increases in some cases? Is this something where you see the momentum in these brands, your customers responding really well and you maybe don't take much price simply because you have that much momentum? Or how are you thinking about price for your exclusive brands moving forward?

It's a very good question and touches on one of the more strategic pieces of the business of should we hold pat on our exclusive brand pricing? We tend to kind of treat all of the brands the same. If we see an increase in price in our own brand or a third-party brand, we would typically change the retail price to accommodate that. One of the things that will be important to see is, in some cases, our vendors have passed along a transitory freight charge. And so we're going to expect that to go away and maybe that -- then those prices come back down. From an exclusive brand standpoint, I think we will keep them in lockstep with their markup expectations and if the cost to make increases, we'll have -- we'll pass those through to the retail of the product itself. That has been less of an issue in exclusive brands than our national brands. So again, hats off to the exclusive brand team and the sourcing folks that are working on that.

All right. Well, thank you, everyone, for joining the call today and we look forward to speaking with you on our third quarter earnings call. Take care.

Thank you.

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