One of the names we have traded in the specialty retail space for gains is Boot Barn Holdings, Inc. (NYSE:BOOT). That said, now we are waiting for a pullback. The company just reported earnings, and while the initial reaction was negative, shares are about flat. In this column, we discuss the company and the just-reported fiscal Q3 earnings and why we think a neutral rating makes sense here. We would be bullish on a retracement into the low $90s based on the growth and valuation combination here. Let us discuss.
What is Boot Barn all about?
This company has been around for over 40 years. Boot Barn is the biggest and fastest-growing western and workwear retailer in the United States. And they are starting to expand and have a considerable runway for growth. They now have exactly 400 stores in 44 states after opening 18 new ones in the quarter. The company, of course, also sells many products online in addition to its brick and mortar locations.
Boot Barn offers a wide variety of cowboy boots, work boots, western wear, workwear, western-inspired fashion, and outdoor gear. The company sells its own branded Boot Barn items along with other popular brands like Wrangler, Carhartt, Justin Boots and more. They also have services, like in-person boot fitting services, and some of the company’s stores also provide hat shaping and cleaning services. The company is set to expand, with a potential more than doubling of its stores long-term. There is also international potential.
The company is growing, but slowly. In the just-reported quarter, we saw a sales decline, actually. We think a neutral makes sense here. Let us discuss.
Boot Barn Fiscal Q4 revenues and comparable sales
We saw sales decline, but sales surpassed consensus estimates by $3.42 million. Net sales were down 8.7% compared to the comparable year-ago period to $388.5 million. Net sales still decreased 2.2% when adjusting for a 14th week in the year-ago period.
Now, here is the thing. In retail, the number one metric we watch is same-store (or comparable-store) sales. We have a red flag here, which really has us questioning why the stock is valued where it is, given sales are down. Same-store sales decreased 5.9% compared to the prior-year period.
The company is quick to point out that it has cycled 55% same-store sales growth on a 3-year stack basis, but the fact is, sales are down from last year and that is a negative. The 5.9% decrease in same-store sales stemmed from same-store sales falling 5.7% in brick and mortar stores, and a 6.7% drop off in online sales.
Mixed margins at Boot Barn
Now, not only were comps down in mid-single digits, but the earnings power on those sales has also declined, at least from a gross margin perspective. Merchandise margins, however, expanded. Gross profit overall was $139.4 million, or 35.9% of net sales, compared to $155.8 million, or 36.6% of net sales a year ago. So this margin and gross profit decline was a result of lower sales but was offset by merchandise margin expansion. Most notably, there were 230 basis points of deleverage in buying, occupancy and distribution center costs. There were 160 basis points in merchandise margin expansion, and that came from better freight costs and supply chain efficiency.
Boot Barn earnings power
So we saw declining comparable sales, lower top-line revenue, and softening gross margin. Despite lower sales, we saw an increase in selling, general and administrative expenses. Bad combination in our estimation. These expenses were up to $101.2 million, or 26.1% of net sales, compared to $93.1 million, or 21.9% of net sales, a year ago. There were higher marketing expenses, and more incentive-based compensation expenses.
Factoring in other operating expenses, we saw Boot Barn’s income from operations fall dramatically by $24.5 million to $38.2 million, or 9.8% of net sales, compared to $62.7 million, or 14.7% of net sales a year ago. And oddly, earnings were better than expected despite the drop-off. Net income was $29.4 million, or $0.96 per share, compared to net income of $46.4 million, or $1.53 per share a year ago, besting estimates by $0.07.
Looking ahead to Boot Barn’s fiscal 2025
First, we want to point out that the company has a respectable balance sheet with $76 million in cash and a $250 million revolver with nothing drawn on it. Valuation-wise, we are at about 23X FWD, which is relatively rich for the declining growth right now. The market is keeping shares elevated in our opinion as it looks forward to the expansion of stores. In the coming year, another 60 stores are planned to be opened, increasing the store base by 15%. Sales should return to growth here, with guidance being $1.76 to $1.8 billion, or 6-8% growth. However, there is a big question mark on comparable sales. They were guided to decline 1.6-3.6% in physical stores and may decline 0.5% or grow 2.0% in management’s view for online sales.
That is a wide view. Margins should be in the high 36% range, but net income of $140-$149 million will translate to $4.55 to $4.85 in EPS. Unfortunately, this is well below the $5.16 consensus. Based on these metrics, we believe a better time to buy Boot Barn Holdings, Inc. would be $90-$92 per share, which would be a market comparable to 19X FWD. Don’t overpay.
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