Boot Barn Holdings, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended December 24, 2016, compared with periods ended December 26, 2015. Fiscal 2017 is a 53-week year ending April 1, 2017. Financial statements are unaudited; amounts below are in millions unless noted.
Business context
Boot Barn sells western and work footwear, apparel, and accessories through retail stores and e-commerce. It operated 219 stores in 31 states at quarter-end, compared with 206 stores a year earlier. Management describes the business as moderately seasonal, with the third quarter typically benefiting from holiday shopping. The company reports one operating segment.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | 39 weeks FY2017 | 39 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $199.4 | $193.8 | $466.8 | $419.6 |
| Gross profit | $63.4 | $64.2 | $140.6 | $130.8 |
| Gross margin | 31.8% | 33.1% | 30.1% | 31.2% |
| Operating income | $20.9 | $20.2 | $29.8 | $24.6 |
| Net income | $10.5 | $9.9 | $11.6 | $8.9 |
| Diluted EPS | $0.39 | $0.37 | $0.43 | $0.33 |
| Adjusted EBITDA | $26.2 | $28.8 | $45.1 | $47.5 |
Q3 sales grew 2.9%, supported by 14 new stores and same-store sales growth of 0.2%. For the 39-week period, sales rose 11.3%; growth reflected nine months of Sheplers sales versus six months in the prior-year comparison, 14 new stores, and same-store sales growth of 0.7%. Same-store sales comparisons include e-commerce.
Despite higher sales, gross margin contracted. Management attributed the Q3 decline primarily to higher store occupancy, a larger e-commerce sales mix, increased freight costs, holiday-promotion redemptions, and higher shrink. For the 39 weeks, the lower-margin Sheplers contribution and higher e-commerce mix also weighed on margin. Q3 SG&A fell to $42.5 million from $44.0 million; for the 39 weeks it rose to $110.8 million from $105.3 million, while declining as a percentage of sales. Net interest expense was $3.6 million in Q3 and $10.8 million year to date; year-to-date interest increased 16.1% from the prior period.
Adjusted EBITDA is a non-GAAP measure. It declined 9.0% in Q3 and 5.1% for the 39 weeks. Management cited lower gross profit and higher operating costs, including the longer period of Sheplers operations in the year-to-date comparison.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $31.2 million at December 24, 2016, versus $7.2 million at March 26, 2016.
- For the 39 weeks, operating cash flow was $68.2 million, compared with $55.7 million; capital expenditures were $17.7 million. The company used $26.5 million in financing cash flow, including a $25.8 million net reduction in revolver borrowings.
- Cash generation included a $40.5 million combined increase in accounts payable, accrued expenses and other current liabilities, and other liabilities, primarily attributed to payment timing. Inventory increased $3.7 million.
- At quarter-end, borrowings were $23.0 million on the $125 million Wells Fargo revolver and $197.0 million on the Golub term loan. Capital lease and financing obligations totaled about $8.4 million. The term loan carries a 5.5% weighted-average rate for Q3; the revolver’s rate was 2.0%.
- The term loan’s maximum net leverage covenant was 4.50:1.00 at December 24, 2016, stepping down to 4.25:1.00 on April 1, 2017 and 4.00:1.00 on September 30, 2017. The company reported compliance with its debt covenants at quarter-end.
- Management said operating cash flow and available credit were expected to cover working capital, planned capital expenditures, and other anticipated cash needs for at least the next 12 months. The company estimated FY2017 capital expenditures of $17–$18 million, net of landlord allowances.
Outlook, risks, and unusual items
- No formal sales or earnings guidance was provided. Management noted plans for new stores, store remodeling, and continued e-commerce and IT investment; these plans are expected to increase capital expenditures.
- A 1 percentage-point change in interest rates on quarter-end debt would affect annual interest expense by approximately $2.2 million. Liquidity needs are seasonal, with inventory requirements generally rising ahead of the holiday quarter.
- Two employees filed a California wage-and-hour class action in April 2016. The company intends to defend it and recorded an estimated probable loss that management said was not material; it could not reasonably estimate the loss, and additional charges could be material.
- Management reported no goodwill, intangible-asset, or long-lived-asset impairment indicators at quarter-end. It also said there were no material changes to the risk factors in its latest annual report.
- The year-over-year results are affected by the Sheplers acquisition and integration: the 39-week sales comparison includes different lengths of Sheplers operations, while prior-year results included integration, acquisition, and other costs that were not incurred in the current period.
Important facts for investors to verify
- Whether same-store sales and new-store growth can offset continued gross-margin pressure, particularly from e-commerce mix, freight, occupancy, shrink, and promotional activity.
- How much of operating cash flow reflects sustainable earnings versus timing-related increases in payables and accrued liabilities.
- Revolver availability under its borrowing base and the company’s capacity to meet progressively tighter term-loan leverage limits.
- Whether the $17–$18 million capital expenditure estimate and management’s 12-month liquidity assessment remain appropriate as expansion and technology spending continue.
- Developments in the California wage-and-hour litigation and any resulting costs beyond the recorded immaterial reserve.