Boot Barn Holdings, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018 (52 weeks), compared with fiscal 2017 ended April 1, 2017 (53 weeks). Although the request identifies “2017 Q4,” this filing is the FY2018 annual report; it includes unaudited quarterly results.
Business context
Boot Barn is a U.S. specialty retailer of western- and work-related footwear, apparel and accessories. At March 31, 2018, it operated 226 stores in 31 states and three e-commerce sites. It opened five stores and acquired four Wood’s Boots stores during the year. E-commerce represented 17.3% of consolidated sales, down from 18.4% in fiscal 2017.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $677.9 million | $629.8 million |
| Same-store sales growth | 5.2% | 0.3% |
| Gross profit / margin | $207.9 million / 30.7% | $189.9 million / 30.1% |
| Operating income / margin | $46.3 million / 6.8% | $37.8 million / 6.0% |
| Net income | $28.9 million | $14.2 million |
| Diluted earnings per share | $1.05 | $0.53 |
| Adjusted EBITDA | $66.0 million | $59.2 million |
| Net cash from operating activities | $44.2 million | $41.2 million |
| Capital expenditures | $24.4 million | $22.3 million |
Cash and cash equivalents were $9.0 million, versus $8.0 million a year earlier. Working capital was $102.1 million under the company’s stated definition. Gross debt and revolver borrowings totaled $207.5 million; balance-sheet debt, net of unamortized issuance costs and discounts, was $204.2 million. The company reported $186.5 million outstanding on its term loan and $21.0 million on its revolving facility. Operating lease expense was $43.3 million; disclosed future operating lease payments totaled $195.7 million.
Changes and drivers versus prior year
- Sales increased 7.6%, supported by 5.2% same-store sales growth, new and acquired stores, and Country Outfitter sales. Growth was partly offset by the prior year’s additional 53rd week, so reported annual growth is not fully like-for-like.
- Gross margin improved 0.6 percentage points, primarily from a 50-basis-point increase in merchandise margin.
- SG&A rose 6.3% in dollars but declined to 23.8% of sales from 24.1%, reflecting expense leverage. FY2018 included a $1.6 million net gain from hurricane-related insurance settlements; FY2017 included $1.2 million of store impairment charges.
- Net income increased substantially, in part because income tax expense fell to $2.3 million from $8.9 million. The FY2018 effective tax rate was 7.4%, including a $7.0 million non-cash benefit from revaluing deferred taxes after U.S. tax reform and a $1.8 million benefit from stock award activity.
- Operating cash flow increased to $44.2 million, while inventory rose $24.6 million year over year. The company used $19.7 million in financing cash flow, including reductions in revolver borrowings and debt repayments.
Outlook, risks and unusual items
- Management planned 23 new store openings or acquisitions in fiscal 2019 and estimated fiscal 2019 capital expenditures of $21 million to $23 million, net of landlord allowances. It believes the domestic store base could ultimately double and targets roughly 10% annual store-base growth over the next several years; these are plans and estimates, not guaranteed results.
- Management stated that operating cash flows and available credit were expected to cover working capital, planned capital expenditures and other anticipated needs for at least 12 months. The company was in compliance with its debt covenants at year-end.
- Debt bears variable interest rates. The company estimated that a 1 percentage-point rate change on year-end borrowings would affect annual interest by approximately $2.1 million. Debt agreements impose financial tests and operating restrictions.
- Principal risks include consumer spending and regional economic exposure, competition and e-commerce execution, supplier concentration, imported merchandise and potential tariffs, inventory management, store expansion, labor costs, cybersecurity and systems dependence, and weather or natural disasters. Hurricane Harvey damaged inventory and property; the company recorded a $1.6 million net insurance-related gain for fiscal 2018.
- Lease commitments are significant, and 30 store leases were scheduled to reach termination in fiscal 2019 without automatic extension options. The company expects the forthcoming lease-accounting standard to materially increase reported assets and liabilities.
- A California wage-and-hour class action was settled for an amount described as immaterial and accrued at year-end. The company reported no material liability for its other described indemnifications and commitments.
- Goodwill was $193.1 million and intangible assets were $63.4 million. No goodwill or indefinite-lived intangible impairment was reported for fiscal 2018; a small impairment charge related to two stores was recorded.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company qualified as an emerging growth company.
Important facts for investors to verify
- Separate underlying operating improvement from the effects of the 53rd prior-year week, store additions, hurricane insurance proceeds and tax-reform benefits.
- Review the sustainability of same-store sales growth, merchandise margin gains and the decline in e-commerce’s share of sales.
- Assess inventory growth, cash conversion, planned store investment and the returns and payback of new locations.
- Confirm debt balances, interest-rate exposure, covenant headroom, repayment terms and the impact of lease obligations on liquidity.
- Monitor whether the provisional tax-reform accounting changes and whether future tax rates normalize above fiscal 2018’s unusually low effective rate.
- Evaluate exposure to supplier concentration, tariffs, regional economic conditions, store lease expirations and execution of the fiscal 2019 expansion plan.