BOOT - Boot Barn: Solid Fundamentals But A Bit Pricey

2023-07-23 08:50:32 ET

Summary

• Boot Barn Holdings' share price has significantly outperformed the broader market and consumer discretionary sector this year, attracting investor attention.
• The company's financial performance is positively impacted by improving consumer confidence and moderating inflation levels, justifying the share price increase.
• Despite selling at a premium compared to the consumer discretionary sector median, the stock remains attractively priced compared to the company's own five-year averages.
• We currently rate the firm's stock as "hold".

Boot Barn Holdings, Inc. (BOOT), a lifestyle retail chain, operates specialty retail stores in the United States. The company’s specialty retail stores offer western and work-related footwear, apparel, and accessories for men, women, and kids.

Boot Barn has gained the attention of many investors this year, as the firm's share price has significantly outperformed the broader market and also the consumer discretionary sector, year-to-date.

In today's article, we are going to be focusing on whether this outperformance is justified and whether it can remain sustainable in the coming quarters. To do so, we will be discussing the macroeconomic environment, primarily indicators that are concerning the consumer and its spending behaviour. Later, we will also look at some company specific metrics, mainly the ones that can be helpful to gauge the profitability and the efficiency of the company.

Macroeconomic environment

As BOOT is a lifestyle retail chain, it is operating in the consumer discretionary sector and within that in the apparel retail industry. The items that they are selling are non-essential, discretionary items, so we have to understand, which macroeconomic factors can have an impact on the demand for such goods and therefore on the financial performance of the company.

Consumer confidence

Consumer confidence gauges how optimistic or pessimistic the people are about their financial outlook and about the overall state of the economy. Higher readings indicate that people are less uncertain about their prospects going forward, and may indicate that they are more willing to spend larger sums on non-essential items. The chart below displays how the consumer confidence in the United States has developed over the past 12 months.

The improvement is clear. In our opinion, this may lead to an increasing demand for BOOT's products and eventually lead to better financial performance.

Important to note that during the past years, despite the challenging macroeconomic environment, BOOT has managed to achieve substantial growth. But we have to understand, where this growth is coming from. In most Q4s, we could see same store sales growth as wells as growth due to opening new stores. However, in the past quarter there was actually a decline in same store sales, which could be a result of a softer demand due to the state of the consumer. On the other hand, we believe that due to the improving consumer confidence reading, the revenue and EPS growth may return to its longer term trend.

Returning to the longer-term may take some time, though. According to the firm's estimates in FY2024, the average store volume is likely to remain about in line with the 2023 and 2022 figures.

The following chart shows the firm's detailed expectations for the following year.

Inflation

While consumer confidence is impacting BOOT's business from the demand side, inflation plays a more important role on the cost side. Elevated inflation levels normally result in elevated costs, which the firms may not always be able to fully pass over to their customers.

However, with inflation moderating in the past months, the company's financial performance may improve in the coming months. Declining costs can have a positive impact on the development of the margins and therefore on the bottomline results of the company. As shown on the table above, the firm is expecting a merchandise margin expansion of as much as 150 bps, including a 100 bps expansion driven by the freight tailwind.

All in all, from a macroeconomic perspective, we believe that the stock price increase this year was justified due to the improving outlook for the coming quarters.

Company specific factors

Profitability

We have already talked a bit about the profitability of the firm in the previous section, pointing out the expectations for the margin development in the near term.

Let us take a look of how the company's profitability has developed over time. The following chart shows how the firm's margins, including net profit margin, operating margin and gross profit margin, have improved over the past 5 years. We are definitely pleased to see the meaningful improvement across all metrics.

Looking ahead, we believe that with the improving macroeconomic environment, BOOT will be able to maintain or even expand its margins in the near term, just as the firm's management expects.

Efficiency

Asset utilization or asset turnover can be used to gauge a firm's efficiency. It is defined as the ratio between revenue and total assets.

While profitability has exhibited a clear improvement over time, the firm's efficiency has been quite volatile and has not shown any improvement over the past five years.

If we look at the long term trend of revenue growth in comparison with total asset growth, we can see that the two more or less align. This is the reason why efficiency has not improved. In general, this is not a bad sign. Having relatively stable efficiency over time can demonstrate that despite the growing asset base, the firm is still able to operate efficiently.

At this point, we normally like to take a look at the accounts receivable, just to see whether there is any indication for potential manipulation of the sales figures. If accounts receivable increase at a much faster rate than revenues, it might be a signal that the firm has started selling more on credit or has changed revenue recognition policies, just to maintain revenue growth. As the following chart shows, this is fortunately not the case for BOOT.

Conclusion

Since the beginning of the year, the macroeconomic environment has improved, as indicated by the higher consumer confidence readings and the lower inflation levels. These developments can have a positive impact on BOOT's financial performance in the coming quarters and may justify the share price increase seen year-to-date.

The firm's profitability metrics also show a consistent improvement over time, and we believe that this trend may be sustained due to the improving macroeconomic environment. The firm's efficiency has fluctuated in the past five years, but there is no sign of long term deterioration.

According to a set of traditional price multiples, BOOT's stock is selling now at a premium compared to the consumer discretionary sector median. On the other hand, the stock remains to be attractively priced compared to the company's own 5Y averages.

Due to the current valuation, we rate the stock as "hold". We would like to see the impacts of the positive macro changes materialising before we could assign the stock a "buy" rating.

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