Boot Barn Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended December 29, 2018; comparisons are to the periods ended December 30, 2017. Fiscal 2019 ends March 30, 2019. Financial amounts below are in millions unless noted.
Business context
Boot Barn sells western and work footwear, apparel, and accessories through stores and e-commerce. At quarter-end it operated 234 stores in 31 states, versus 226 stores a year earlier, and three e-commerce sites. The company acquired Lone Star Western & Casual (three Texas stores) and Drysdales assets (two Oklahoma stores) during the period. Management describes the third quarter, which includes Christmas, as historically seasonally strong.
Financial performance
| Metric | Thirteen weeks 2018 | Thirteen weeks 2017 | Thirty-nine weeks 2018 | Thirty-nine weeks 2017 |
|---|---|---|---|---|
| Net sales | $254.0 | $224.7 | $584.1 | $507.2 |
| Gross profit / margin | $85.7 / 33.7% | $71.9 / 32.0% | $188.0 / 32.2% | $155.0 / 30.6% |
| Operating income / margin | $29.3 / 11.5% | $24.4 / 10.9% | $47.8 / 8.2% | $35.0 / 6.9% |
| Net income | $19.0 | $20.1 | $30.3 | $22.0 |
| Diluted EPS | $0.66 | $0.73 | $1.05 | $0.81 |
| Adjusted EBITDA (non-GAAP) | $35.5 | $29.3 | $65.1 | $49.3 |
Quarterly sales rose 13.0%, with same-store sales growth of 9.2%; year-to-date sales rose 15.2%, with same-store sales growth of 10.4%. Management attributed growth to same-store sales, acquired stores, and stores opened over the prior 12 months. Gross margin improved as a result of stronger merchandise margins—associated with more full-price selling and exclusive-brand growth—and lower buying and occupancy costs. SG&A grew faster than sales in the quarter and slightly faster year to date, reflecting support for growth and higher incentive compensation.
Quarterly net income declined despite higher operating income, primarily because the prior-year quarter included a $6.8 million tax benefit from revaluing deferred taxes after U.S. tax reform. The reported effective tax rate was 24.8% versus 2.1% in the quarter; year to date it was 14.7% versus 7.1%. Year-to-date net income increased, while interest expense also rose, primarily due to higher borrowing rates, partly offset by lower debt.
Cash flow, debt, and liquidity
- For the thirty-nine weeks, operating cash flow was $91.6, investing cash outflow was $26.2, and financing cash outflow was $23.8; cash increased $41.6 to $50.6 at December 29, 2018.
- Operating cash flow included substantial increases in accounts payable and accrued liabilities, which management attributed to payment timing. Inventory increased $11.9, reflecting company growth and the Drysdales purchase.
- Investing outflows included $21.8 of capital expenditures and $4.4 for Lone Star. Financing included a $21.0 reduction in revolver borrowings, $10.4 of debt and lease repayments, and $8.0 of proceeds from stock-option exercises.
- There were no revolver borrowings at quarter-end, compared with $21.0 at March 31, 2018. Term-loan principal was $176.5 gross and $174.0 net of unamortized issuance costs and discount; the loan matures in 2021. Capital lease and financing obligations totaled $7.4.
- The company reported compliance with debt covenants and said cash from operations and available credit should meet anticipated needs for at least 12 months. Fiscal 2019 capital expenditures were estimated at $24–$26, including spending already incurred, net of landlord allowances.
Outlook, risks, and notable items
- No earnings or sales forecast was provided. Management expects continued store openings, store refurbishment, and investment in e-commerce and IT; the stated capital-expenditure estimate is the principal quantified outlook item.
- Management identifies seasonality, weather, consumer preferences, competition, merchandise mix, markdowns, shrinkage, and freight and occupancy costs as factors that can affect results. New and acquired stores may carry start-up inefficiencies.
- Variable-rate debt creates interest-rate exposure: a 1 percentage-point rate change on quarter-end debt would change annual interest expense by approximately $1.8.
- The filing highlights potential sales-tax collection obligations following the Supreme Court’s Wayfair decision, including possible past taxes, penalties, interest, administrative burden, and sales impacts.
- The company recorded $0.5 of long-lived asset impairment charges for three stores year to date, including $0.2 in the quarter; it reported no goodwill or intangible-asset impairment indicators. Management said pending litigation was not expected to materially affect financial position, results, or liquidity.
- Adoption of the revenue-recognition standard did not change the timing or amount of reported revenue. The company expected the lease standard, planned for adoption in fiscal 2020, to materially increase reported long-term assets and liabilities as operating leases are recognized on the balance sheet.
Important facts for investors to verify
- Whether strong same-store sales and gross-margin gains persist, and how much growth comes from comparable stores versus openings and acquisitions.
- How much operating cash flow reflects sustainable earnings versus payment timing in accounts payable and accrued liabilities.
- Debt repayment capacity and sensitivity to variable interest rates, covenant headroom, and the 2021 term-loan maturity.
- The drivers and sustainability of the sharp year-over-year tax-rate differences, especially the prior-year tax-reform benefit.
- Execution and returns on store expansion, acquired locations, and planned capital spending; also assess lease-related balance-sheet changes upon adoption of the new standard.
- Potential exposure from state sales-tax collection requirements and any developments in legal or other contingencies.