Boot Barn Holdings, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended December 30, 2017. The comparable prior-year periods ended December 24, 2016. Amounts below are in millions of dollars unless otherwise noted. The filing is unaudited.
Business context
Boot Barn operates western and workwear specialty stores and e-commerce sites. At quarter-end it had 226 stores in 31 states, compared with 219 a year earlier, and three e-commerce sites. The third fiscal quarter is seasonally important because it includes the Christmas shopping season.
Financial performance
| Metric | 13 weeks ended Dec. 30, 2017 | Prior-year 13 weeks | 39 weeks ended Dec. 30, 2017 | Prior-year 39 weeks |
|---|---|---|---|---|
| Net sales | $224.7 | $199.4 | $507.2 | $466.8 |
| Gross profit | $71.9 | $63.4 | $155.0 | $140.6 |
| Gross margin | 32.0% | 31.8% | 30.6% | 30.1% |
| Operating income | $24.4 | $20.9 | $35.0 | $29.8 |
| Net income | $20.1 | $10.5 | $22.0 | $11.6 |
| Diluted EPS | $0.73 | $0.39 | $0.81 | $0.43 |
| Adjusted EBITDA | $29.3 | $26.2 | $49.3 | $45.1 |
- Quarterly sales rose 12.7%; same-store sales increased 5.2%. Year-to-date sales rose 8.6%, with same-store sales up 3.1%.
- Quarterly operating margin increased to 10.9% from 10.5%; year-to-date operating margin rose to 6.9% from 6.4%. SG&A was 21.2% of sales for the quarter and 23.7% year to date, broadly in line with prior-year ratios.
- Quarterly net income included a $6.8 million non-cash tax benefit from remeasuring deferred tax balances after the federal corporate tax rate reduction. The reported effective tax rates were 2.1% for the quarter and 7.1% year to date, versus 39.0% and 38.6% in the comparable periods. Net income growth therefore substantially reflects a tax benefit, not solely operating improvement.
- Adjusted EBITDA increased 11.9% for the quarter and 9.4% year to date; these are non-GAAP measures defined by the company.
Cash flow, liquidity and debt
- Year-to-date operating cash flow was $72.6, versus $68.2 in the prior-year period. Investing cash outflow was $18.0, primarily capital expenditures; financing cash outflow was $43.6, mainly debt and revolver repayments. Cash increased $11.1 to $19.1 from April 1, 2017.
- Cash and current assets were $19.1 and $245.3, respectively, at December 30. Current liabilities were $168.0; inventories were $207.5, up from $189.1 at fiscal year-end.
- Term-loan principal was $186.5 ($182.9 net carrying amount after unamortized fees and discount); revolver borrowings were zero, with a $135.0 facility. The company prepaid $10.0 of term debt in June and had repaid $33.3 of revolver borrowings year to date. Capital lease and financing obligations totaled approximately $7.9.
- Term-loan interest rate averaged 5.8% for the quarter; management estimated that a 1 percentage-point rate change on outstanding debt would affect annual interest by approximately $1.9. The company reported covenant compliance at quarter-end.
Material changes, outlook and risks
- Management attributed sales growth to same-store gains, seven stores opened over the prior 12 months, four Wood’s Boots stores acquired in September, and the Country Outfitter website acquired in February 2017. Prior-year quarterly comparison is affected by the prior fiscal year’s 53rd week, which shifted the week after Christmas into that prior-year third quarter.
- Gross-margin improvement reflected stronger merchandise margins—more full-price selling, less clearance and greater exclusive-brand penetration—and occupancy leverage. Higher freight and fulfillment-center labor costs partly offset gains; management cited temporary e-commerce fulfillment challenges during holiday demand.
- Hurricane Harvey damaged approximately $3.2 of inventory and property/equipment in Houston-area stores. The company reported $4.8 of insurance proceeds received and a $0.2 receivable; related charges and recoveries were recorded in SG&A.
- Management estimated FY2018 capital expenditures of $18–$19, including spending through the period and excluding $0.9 of hurricane-related capital expenditures, net of landlord allowances. It said operating cash flow and available credit should cover anticipated needs for at least 12 months. No earnings or sales guidance was provided in the supplied filing text.
- The company completed a $2.7 asset acquisition of Wood’s Boots, including inventory and four store locations; it accounted for the transaction as an asset acquisition, not a business combination.
- The company highlighted uncertainty around benefits from its new private-label credit-card program, including customer adoption, credit losses, provider-controlled terms, regulation and customer-data security. Other cited risks include variable interest rates and ordinary-course litigation; management did not expect pending legal matters to materially affect financial position, results or liquidity.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the one-time $6.8 million tax benefit, and what the final tax-accounting impact will be; the filing says the estimate remains preliminary.
- Comparable-sales trends and the effect of the prior-year 53rd week, acquired stores and e-commerce additions on reported growth.
- Whether holiday fulfillment issues and related freight and labor costs persist, and whether gross-margin improvements continue.
- Inventory growth, seasonal working-capital demands, planned capital expenditures and continued debt repayment; also monitor floating-rate exposure and covenant headroom.
- Actual economics, customer uptake, credit and data-security risks of the private-label card program.