Boot Barn Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2016 second quarter and first half, comprising the thirteen and twenty-six weeks ended September 26, 2015. Comparisons are to the periods ended September 27, 2014. Amounts are in millions unless stated otherwise.
Business context
Boot Barn operates western- and workwear-focused retail stores and e-commerce businesses. At quarter-end it had 201 stores in 29 states, including 20 Sheplers stores and two American Worker stores. The June 29, 2015 acquisition of Sheplers expanded the business and is a major factor in period-over-period comparisons.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Net sales | $129.7 | $86.4 | $225.7 | $168.9 |
| Gross profit | $35.9 | $27.8 | $66.7 | $54.6 |
| Gross margin | 27.7% | 32.1% | 29.5% | 32.4% |
| Operating income (loss) | $(0.4) | $4.4 | $4.4 | $9.8 |
| Net income (loss) | $(3.3) | $0.9 | $(1.1) | $2.4 |
| Adjusted EBITDA | $9.9 | $7.8 | $18.7 | $15.6 |
Quarterly sales increased 50.2%; first-half sales increased 33.7%. Growth reflected Sheplers, 25 new stores opened since the beginning of the third quarter of fiscal 2015, and core Boot Barn same-store sales growth of 1.6% for the quarter and 3.6% for the first half. The filing’s selected store data reports same-store growth of 0.1% and 2.4%, respectively; the measures have differing scope, so investors should consult the company’s definitions.
Margins contracted as the acquired Sheplers business had lower margins, store occupancy and depreciation costs increased, and integration and contract-termination costs affected results. SG&A was $36.3 million, or 28.0% of sales, in Q2, versus $23.4 million, or 27.1%, a year earlier. First-half SG&A was $61.3 million, or 27.2%, versus $44.9 million, or 26.6%. Quarterly interest expense rose to $5.0 million from $2.8 million, principally reflecting higher debt, higher rates and a debt-cost write-off.
Sheplers contributed $32.1 million of sales and a $4.5 million net loss after acquisition. First-half acquisition-related expenses were $0.9 million. Adjusted EBITDA includes substantial adjustments, including $5.4 million of acquisition integration and reorganization costs in Q2 and the first half; it is a non-GAAP measure and should be considered alongside GAAP results.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $4.4 million, versus negative $6.5 million a year earlier. Inventory increased $18.0 million in operating cash flow, reflecting business growth.
- Investing cash outflow was $166.2 million, including $146.5 million for the Sheplers acquisition and $19.7 million of property and equipment purchases.
- Financing cash inflow was $176.6 million, primarily from new borrowings. Cash ended at $7.5 million, up from $1.4 million at fiscal year-end.
- At September 26, 2015, the company had $69.0 million outstanding on its $125 million revolving facility and $199.5 million principal outstanding on its $200 million term loan. Total line-of-credit and debt obligations were $268.5 million; reported notes payable were net of issuance costs. The term loan’s weighted-average rate was 5.5%, and the revolver’s was 1.68%.
- Current assets were $206.9 million and current liabilities were $166.0 million. Inventory was $178.0 million. Capital lease and financing obligations totaled $8.9 million.
Management said cash from operations and available credit should cover working capital, anticipated capital expenditures and other expected cash needs for at least twelve months. It estimated fiscal 2016 capital expenditures of approximately $33 million, net of landlord allowances. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- The Sheplers acquisition was completed for stated purchase consideration of approximately $147 million, with preliminary acquisition-date net assets of $149.3 million after adjustments. Purchase-price allocation remained preliminary; recorded goodwill increased by $98.8 million from the acquisition and is not tax deductible.
- New financing replaced the prior facility with a $125 million asset-based revolver and a $200 million term loan. The company is more highly leveraged, and both facilities have variable rates. Management estimated that a 1 percentage-point rate change on quarter-end borrowings would affect annual interest by approximately $2.7 million.
- Management expects integration, rebranding, store and technology investment, and public-company costs to require additional spending. The filing provides no specific earnings or revenue guidance.
- Risks highlighted include failure to integrate Sheplers or achieve anticipated benefits, integration costs exceeding expected savings, operating complexity from the expanded business, variable-rate exposure, and restrictive covenants. Covenant breach could lead to default, accelerated repayment or foreclosure on collateral.
- Quarterly results are seasonal and may be affected by weather and holiday timing. The company said its fiscal third quarter has historically produced higher sales and disproportionately larger operating income.
- Management assessed disclosure controls as effective at a reasonable-assurance level; no material change in internal control over financial reporting was reported. Litigation was described as incidental, with management not expecting it to materially affect financial position, results or liquidity. The IRS notified the company it would audit fiscal 2015.
Important facts for investors to verify
- Whether Sheplers integration delivers expected sales, cost savings and synergies, and how its operating losses and lower margins evolve.
- Whether the sharp decline in gross margin and quarterly operating performance persists after integration and one-time costs.
- Debt levels, borrowing availability, interest-rate sensitivity and ongoing compliance with leverage and fixed-charge covenants.
- Inventory growth, cash conversion and the ability to fund planned capital expenditures while maintaining liquidity.
- Final Sheplers purchase-price allocation, including goodwill and intangible-asset values, and any subsequent measurement-period adjustments or impairment indicators.
- The reconciliation and nature of significant Adjusted EBITDA add-backs, particularly integration and reorganization costs.