Boot Barn Holdings, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended September 24, 2016. Fiscal 2017 is a 53-week year. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Boot Barn operates western- and work-lifestyle retail stores and e-commerce sites. It had 212 stores in 29 states at quarter-end, versus 201 stores a year earlier. The company described its business as moderately seasonal, with its third fiscal quarter historically generating higher sales and operating income.
Financial performance
| Metric | 13 weeks ended Sep. 24, 2016 | Prior-year 13 weeks | 26 weeks ended Sep. 24, 2016 | Prior-year 26 weeks |
|---|---|---|---|---|
| Net sales | $134.0 | $129.7 | $267.4 | $225.7 |
| Gross profit / margin | $36.4 / 27.2% | $35.9 / 27.7% | $77.2 / 28.9% | $66.7 / 29.5% |
| Operating income (loss) | $4.4 | $(0.4) | $8.9 | $4.4 |
| Net income (loss) | $0.5 | $(3.3) | $1.1 | $(1.1) |
| Adjusted EBITDA | $9.5 | $9.9 | $18.9 | $18.7 |
Quarterly diluted EPS was $0.02, compared with a loss of $0.13 per share; first-half diluted EPS was $0.04, compared with a loss of $0.04. First-half net sales growth included six months of Sheplers sales versus three months in the prior-year period. Same-store sales increased 1.8% for the quarter and 1.1% for the half-year.
For the 26 weeks, operating cash flow was $6.7 million, versus cash used of $4.4 million a year earlier. Capital expenditures were $10.5 million; investing cash outflow totaled $10.5 million. Cash increased to $11.1 million from $7.2 million at fiscal year-end. Inventory was $190.8 million, up from $176.3 million at March 26, 2016.
At September 24, 2016, borrowings included $57.0 million on the revolving credit facility and $197.5 million of term-loan principal; capital-lease and financing obligations were $8.5 million. The term loan’s net carrying value was $193.1 million after unamortized costs and discount. The company reported compliance with its debt covenants. A 1 percentage-point change in interest rates would affect annual interest expense by approximately $2.5 million.
Material changes and management commentary
- Quarterly sales rose 3.3%; management attributed growth to new stores and same-store sales, partly offset by eight store closures over the preceding 15 months.
- Quarterly gross margin declined 0.5 percentage point. Management cited higher occupancy and depreciation costs from new and rebranded stores, and an 80-basis-point decline in merchandise margin associated with loyalty redemptions, shrink, and aged-inventory provisions.
- Quarterly SG&A fell 11.8%, reflecting the absence of prior-year acquisition integration and asset-disposal costs, improved expense control, and a benefit from legal and contract settlements. The filing does not quantify the settlement benefit.
- First-half gross margin declined 0.6 percentage point, which management attributed primarily to the greater proportion of lower-margin Sheplers sales. First-half interest expense increased 24.5%, reflecting more time with higher debt and interest rates, partly offset by prior-year debt-cost write-offs.
- Adjusted EBITDA was down 4.2% for the quarter but up 1.0% for the half-year. It includes specified adjustments and is a non-GAAP measure.
Outlook, risks, and contingencies
- Management expected operating cash flows and available credit to cover working capital, anticipated capital spending, and other cash needs for at least the next 12 months.
- Fiscal 2017 capital expenditures were estimated at approximately $13–$15 million, net of landlord tenant allowances. The filing provides no sales or earnings guidance.
- Variable-rate debt creates interest-rate exposure; the term-loan leverage covenant tightens over time, with the maximum ratio stepping down to 4.00:1.00 from September 30, 2017.
- A California wage-and-hour class action filed in April 2016 seeks unspecified damages and penalties. The company intends to defend it; management said the loss could not be reasonably estimated, recorded a non-material probable-loss amount, and cautioned that additional charges could be material.
- Management reported no material changes to previously disclosed risk factors, no identified indicators of goodwill or intangible-asset impairment, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- How comparable-store sales, store openings, and closures affect underlying growth, separate from the Sheplers acquisition comparison.
- Whether gross-margin pressure from merchandise costs, shrink, loyalty redemptions, and store occupancy continues.
- Inventory levels and seasonal cash requirements, alongside actual capital spending versus the $13–$15 million estimate.
- Debt balances, variable-rate exposure, and headroom under the tightening leverage covenant.
- Developments in the California class action and the amount, if any, of future legal or settlement charges.