Boot Barn Holdings, Inc. — Q1 Fiscal 2018 Form 10-Q
Business and period: Specialty retailer of western and work footwear, apparel, and accessories, operating stores and e-commerce channels. The 13-week quarter ended July 1, 2017; comparisons are with the 13 weeks ended June 25, 2016. Boot Barn operated 220 stores in 31 states at quarter-end, versus 210 a year earlier.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $139.4 million | $133.4 million |
| Gross profit / margin | $41.4 million / 29.7% | $40.8 million / 30.5% |
| SG&A / sales | $36.5 million / 26.2% | $36.3 million / 27.2% |
| Operating income / margin | $4.9 million / 3.5% | $4.5 million / 3.3% |
| Net income / diluted EPS | $0.8 million / $0.03 | $0.6 million / $0.02 |
| Adjusted EBITDA | $9.6 million | $9.4 million |
Sales rose 4.5%, supported by 11 store openings over the prior 12 months, 1.3% same-store sales growth, and Country Outfitter website sales. Gross profit increased 1.6%, but gross margin fell 0.8 percentage point, primarily due to higher buying and occupancy costs. SG&A grew only 0.4%; its share of sales declined as corporate payroll and overhead costs fell relative to revenue. Net income improved, though the effective tax rate increased to 39.4% from 29.9%, reflecting prior-year discrete tax benefits and comparatively lower prior-year pretax income.
Cash flow, debt, and liquidity
- Operating cash flow was negative $14.3 million, compared with negative $7.7 million. The company attributed the outflow principally to a $17.0 million decrease in accounts payable and accrued liabilities due to payment timing, and a $3.2 million inventory increase.
- Investing cash outflow was $5.3 million, mainly for store construction, e-commerce and IT, and distribution-facility improvements. Financing cash inflow was $18.8 million, including $29.5 million of net revolver borrowings and $10.1 million of debt and lease repayments. Cash ended at $7.3 million, down from $8.0 million at April 1, 2017.
- At July 1, the revolver balance was $62.8 million and gross term-loan principal was $186.5 million; the term loan’s net carrying value was $182.4 million. The company also reported $7.7 million of capital lease obligations on the balance sheet. The revolver facility was increased to $135 million and its maturity extended under a May 2017 amendment. A $10 million term-loan prepayment was made in June.
- Management stated that operating cash flow and credit-facility availability should cover working capital, anticipated capital expenditures, and other cash needs for at least 12 months. The company estimated fiscal 2018 capital expenditures of $15 million to $17 million, net of landlord allowances. It reported compliance with debt covenants at quarter-end.
Outlook, risks, and notable items
- No earnings or sales guidance was provided. Management expects to continue opening stores and investing in existing stores, e-commerce, and IT. The business is seasonal, with historically higher sales and operating income in the third fiscal quarter.
- Variable-rate debt creates interest-rate exposure: management estimated that a 1 percentage-point rate change would affect annual interest expense by approximately $2.5 million, based on quarter-end debt.
- The company plans to launch a private-label credit card program and cautioned that expected benefits are uncertain. Risks include customer credit and payment behavior, provider terms and revenue share, regulation, and customer-data security.
- A California wage-and-hour class-action settlement was reached for an amount described as immaterial and accrued as of April 1, 2017. Management said other pending or threatened litigation was not expected to materially affect financial position, results, or liquidity.
- Management identified no goodwill, intangible, or long-lived-asset impairment indicators. The filing noted that the forthcoming lease standard is expected to materially increase reported assets and liabilities; revenue-recognition adoption may affect gift-card breakage, loyalty benefits, and e-commerce revenue timing.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether same-store sales growth and new-store performance persist, and how much growth comes from Country Outfitter and other e-commerce sales.
- Whether gross-margin pressure from buying and occupancy costs continues, and whether SG&A leverage can be sustained.
- Working-capital trends, particularly inventory growth and payment timing, given the larger quarterly operating cash outflow and reliance on revolver borrowings.
- Debt covenant headroom and exposure to variable rates, including the scheduled step-down in maximum leverage limits.
- Actual fiscal 2018 capital spending and the private-label card program’s results, economics, and customer-data protections.