Boot Barn Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the thirteen weeks ended June 30, 2018, compared with the thirteen weeks ended July 1, 2017. Boot Barn sells western and work footwear, apparel and accessories through stores and e-commerce. At quarter-end it operated 230 stores in 31 states and three e-commerce sites, versus 220 stores a year earlier. Results are seasonal; management says the third fiscal quarter, which includes the Christmas season, has historically generated higher sales and operating income.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $162.0 million | $139.4 million |
| Gross profit / margin | $51.4 million / 31.8% | $41.4 million / 29.7% |
| SG&A / percent of sales | $41.6 million / 25.7% | $36.5 million / 26.2% |
| Operating income / margin | $9.8 million / 6.1% | $4.9 million / 3.5% |
| Net income | $6.8 million | $0.8 million |
| Diluted EPS | $0.24 | $0.03 |
| Adjusted EBITDA | $15.3 million | $9.6 million |
| Adjusted EBIT | $10.9 million | $5.5 million |
Same-store sales increased 11.6%, versus 1.3% a year earlier. E-commerce represented 16% of net sales, compared with 15%; footwear remained 53% of sales. Gross margin improved 2.1 percentage points, which management attributed mainly to a 1.4-point increase in merchandise margin from more full-price sales and greater exclusive-brand penetration, and a 0.7-point reduction in buying and occupancy costs. SG&A rose in dollars but declined as a share of sales due to leverage on higher sales.
Net cash provided by operations was $5.5 million, versus $14.3 million used a year earlier. The filing attributes substantial working-capital movements to timing: inventory fell $8.9 million and accounts payable and accrued liabilities fell by a combined $14.2 million. Investing used $11.5 million, including $7.1 million of capital expenditures and $4.4 million for the Lone Star acquisition. Financing provided $4.3 million; the company drew $9.7 million on its revolver, repaid $10.1 million on debt and leases, and received $5.0 million from option exercises. Cash declined $1.6 million to $7.4 million.
Debt, liquidity and balance sheet
At June 30, 2018, revolving-credit borrowings were $30.7 million and term-loan principal was $176.5 million; capital lease and financing obligations totaled $7.7 million. Cash was $7.4 million. The term loan carries a 6.8% weighted-average rate for the quarter and the revolver 3.1%; both have variable rates. Management estimates a 1.0% rate change would affect annual interest by approximately $2.1 million. The company made a $10.0 million term-loan prepayment in May. It reported compliance with debt covenants at quarter-end.
Management believes operating cash flow and available credit will cover working capital, anticipated capital spending and other needs for at least the next 12 months. Fiscal 2019 capital expenditures are estimated at $21–$23 million, including amounts spent in the quarter, net of landlord allowances. Revolver availability is subject to its borrowing base; the filing does not provide a clear available-draw figure.
Material changes, outlook, risks and unusual items
- Sales grew 16.2%, supported by 11.6% same-store growth and additional stores, including acquired locations. Operating income nearly doubled year over year.
- Net income benefited from a $1.0 million income-tax benefit, including a $2.5 million tax benefit associated with stock-option exercises and restricted-stock vesting. Tax reform lowering the federal corporate rate also contributed. The reported effective tax rate was (18.0%), versus 39.4% a year earlier.
- Adjusted EBITDA includes add-backs for a $0.2 million store impairment and $0.2 million of secondary-offering costs, as well as stock compensation and other specified items. These non-GAAP measures may not be comparable with other companies’ measures.
- Boot Barn acquired Lone Star Western & Casual, which had three Texas stores, for $4.4 million in April; $2.8 million of goodwill was recorded. After quarter-end, it acquired certain assets of Drysdales, a two-store Oklahoma retailer, using cash on hand.
- The company adopted the new revenue-recognition standard in April; it reported no change to the timing or amount of revenue recognized. It expects the forthcoming lease standard to materially increase reported long-term assets and liabilities, and plans adoption in fiscal 2020.
- Management cited risks including seasonality, weather, competition, merchandise margins and variable interest rates. The filing also highlights possible sales-tax collection obligations for online sales, including developments related to South Dakota v. Wayfair. Management said pending litigation is not expected to materially affect financial position, results or liquidity; a wage-and-hour settlement had been accrued and was described as immaterial.
Important facts for investors to verify
- Whether the 11.6% same-store sales increase and stronger merchandise margins persist, and how acquired and newly opened stores contribute to future growth.
- How much of the earnings improvement is recurring, given the tax benefit and the specified Adjusted EBITDA add-backs.
- Cash conversion and working-capital trends, especially the effects of payment timing and inventory changes on operating cash flow.
- Debt levels, borrowing-base availability, covenant headroom and exposure to variable interest rates.
- Delivery of the $21–$23 million fiscal 2019 capital-spending plan and integration/performance of the Lone Star and Drysdales acquisitions.
- Potential sales-tax obligations and the balance-sheet effects of adopting the lease-accounting standard.