Boot Barn Holdings, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended September 29, 2018, compared with the corresponding periods ended September 30, 2017. Amounts below are in millions unless otherwise noted.
Business context
Boot Barn sells western and work footwear, apparel and accessories through retail stores and e-commerce. At quarter-end it operated 232 stores in 31 states, versus 222 stores a year earlier, and maintained three primary e-commerce sites. The company described its business as moderately seasonal, with the Christmas-season third quarter historically producing higher sales and a disproportionate share of operating income.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $168.1 | $143.1 | $330.1 | $282.5 |
| Gross profit / margin | $50.9 / 30.3% | $41.7 / 29.1% | $102.4 / 31.0% | $83.1 / 29.4% |
| Operating income / margin | $8.7 / 5.2% | $5.6 / 3.9% | $18.5 / 5.6% | $10.6 / 3.7% |
| Net income | $4.5 | $1.1 | $11.3 | $1.9 |
| Diluted EPS | $0.16 | $0.04 | $0.39 | $0.07 |
| Adjusted EBITDA | $14.3 | $10.3 | $29.6 | $20.0 |
- Sales rose 17.5% in the quarter and 16.9% in the first half. Same-store sales increased 11.3% and 11.4%, respectively.
- Management attributed improved gross margin to stronger merchandise margins—supported by more full-price sales and higher exclusive-brand penetration—and lower buying and occupancy costs.
- SG&A rose 17.1% in the quarter and 15.6% in the first half, but declined as a share of sales to 25.1% and 25.4%, respectively. Drivers included store growth, Idyllwind marketing and a mid-year physical inventory.
- First-half net income benefited from a $1.0 million income-tax benefit; the filing attributes the much lower effective tax rate primarily to a $3.6 million benefit associated with stock-option exercises and restricted-stock vesting, as well as federal tax reform.
Cash flow, debt and liquidity
- First-half operating cash flow was $17.3 million, versus cash used of $0.7 million a year earlier. Inventory growth and acquired inventory used cash; accounts payable increases partly offset this.
- Investing cash outflow was $19.4 million, including $15.0 million of capital expenditures and $4.4 million for the Lone Star acquisition. Financing provided $2.5 million, including $8.0 million from stock-option exercises.
- Cash was $9.4 million at September 29, 2018. Current assets were $264.0 million, including $230.1 million of inventory, and current liabilities were $169.1 million.
- Debt principal outstanding was $202.6 million: $26.1 million under the revolving facility and $176.5 million under the term loan. The term loan’s net carrying value was $173.7 million. The company also reported $7.6 million of capital-lease and financing obligations.
- The company prepaid $10.0 million of term-loan principal in May 2018. It reported compliance with debt covenants. Revolver availability is subject to a borrowing base, so unused capacity cannot be determined clearly from the filing text.
- Management said operating cash flow and available credit were expected to meet working-capital, capital-expenditure and other anticipated cash needs for at least the next 12 months. FY2019 capital expenditures were estimated at $23–$25 million, net of landlord allowances.
Changes, outlook and risks
- Sales growth reflected strong comparable-store performance, new stores, and contributions from acquired Wood’s Boots, Lone Star and Drysdales locations. Lone Star (three Texas stores) was acquired in April for $4.4 million; Drysdales (two Oklahoma stores) was acquired in July for $3.8 million.
- Interest expense increased year over year, which management attributed mainly to higher borrowing rates, partly offset by lower debt balances. A 1 percentage-point change in rates on quarter-end debt would affect annual interest expense by approximately $2.0 million.
- The company changed its segment analysis: retail stores and e-commerce are now separate operating segments but are aggregated into one reportable segment. They are separate reporting units for goodwill impairment testing.
- Management reported a $0.3 million first-half long-lived asset impairment charge related to stores, but no identified indicators of goodwill or intangible-asset impairment.
- The filing provided no earnings or sales guidance. Management noted that results are seasonal and not necessarily indicative of the full fiscal year.
- A material risk newly highlighted in this filing is potential sales-tax collection obligations following the U.S. Supreme Court’s Wayfair decision, including possible back taxes, penalties, interest, added administrative costs and competitive effects. Other forward-looking statements remain subject to risks described in the company’s annual report.
- The company expects the upcoming lease-accounting standard to materially increase reported long-term assets and liabilities; it planned adoption in the first quarter of fiscal 2020. The filing also reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the 11% same-store-sales growth and improved merchandise margins are sustainable, and how much growth came from acquisitions and newly opened stores.
- Whether first-half earnings growth is representative of operating performance, given the $3.6 million tax benefit related to equity awards and the lower effective tax rate.
- Inventory levels, seasonal working-capital needs, and the company’s ability to fund planned capital expenditures while servicing variable-rate debt.
- Debt covenant headroom, borrowing-base availability under the revolver, and sensitivity to further interest-rate increases.
- The potential financial and administrative impact of state sales-tax collection requirements after Wayfair, and the balance-sheet effects of adopting lease accounting.