BOOT - Boot Barn: Valuation Is Still Too High

2023-08-28 06:08:35 ET

Summary

• Although Boot Barn’s sales growth has fallen dramatically from 2022 highs, we believe that this decline is cyclical and will not affect their business long-term.
• We believe that BOOT is financially capable of meeting its aggressive 900-store count target, which will greatly increase the retailer's top-line and national brand presence.
• New features such as their B Rewarded loyalty program and generative AI shopping assistant (Bandit) are set to increase customer retention.
• Valuation remains a key issue for Boot Barn.

Thesis

Boot Barn (BOOT) is a retailer that sells Western-style clothing and apparel that operates 361 locations across 44 US states. Following a stellar earnings report that beat both revenue and EPS estimates, Boot Barn's stock price jumped 13%, although it lost those gains in the weeks falling due to a broader market slump. Although we believe that Boot Barn is a strong player in the retail industry due to its outstanding new store growth and novel retention-boosting features, the company is overvalued.

Stagnating Same-Store Sales Compensated By New Features

In the past year, we have seen Boot Barn's sales growth falter from 2022 highs. Following the post-pandemic fueled consumer spending spree, Boot Barn's sales growth declined from 66.6% in 2022 to just 11.4% due to stagnating same-store sales. Boot Barn's same-store retail segment grew just 1.8%, while e-commerce shrunk more than 10%.

There have also been fears that Boot Barn's explosive growth in FY22 was simply a come-and-go fashion trend that quickly lost steam. However, a recent survey conducted by Boot Barn proves the opposite: results showed that 76% of Boot Barn customers purchased items because it was part of their everyday fashion, meaning that customer retention would be maintained as customers would come back.

We believe that Western wear is not a fashion fad but rather a long-term clothing genre that will continue to be popular with customers. With Boot Barn continuously releasing fresh new clothing styles from dozens of brands , we believe that it's unlikely that Boot Barn's products will fall out of style. This ensures, at the very least, the stability of same-store sales, and we doubt that it will decline for much longer.

Instead, we believe that struggling SSS was driven by a cyclical decline in fashion spending rather than a decline in Boot Barn itself. Broader economic fears of high-interest rates, inflation, and recession will subside within a few years, naturally causing an increase in consumer spending and boosting Boot Barn's sales. Once Boot Barn's business cycles out of this downturn, we believe that SSS growth will recover. While the decline in SSS is worrying at first, we believe that it's nothing more than a transitory cycle and do not believe that it indicates poor future growth.

Poised For Strong New Store Growth

Even as same-store sales struggle, Boot Barn New stores have been remarkably successful despite the tough macroeconomic environment. For FY2023, Boot Barn's store count grew 15%, which was its 6th consecutive year of double-digit growth. The company opened 45 new stores to 345 total, with their locations spanning across 44 different states. The company expects to accelerate store growth, with 52 more locations expected to open in 2024.

New store performance has also been stellar, with each individual location boasting $3.5 million in 1st year sales with a 75% ROI in 1.3 years. Boot Barn's high location growth and strong new store performance has kept their growth afloat, with a whopping 1150 bps positive impact on sales growth in 2023.

Even though all of Boot Barn's growth for 2023 was attributable to new locations, we don't mind this at all for multiple reasons. For one, we believe that same-store sales should recover in the future as stated before. Additionally, we are confident in management's competence in selecting locations, as new stores have shown to have performed very well per the graph above. We believe that this focus on location growth will yield results in the future, as it increases Boot Barn's national presence and allows the company to capture a greater portion of the Western clothing market.

Since new locations have become vital to Boot Barn's growth story, the company has set an aggressive target of 900 total locations as a long-term goal, and we believe that it has the financial position to do so. With 361 locations as of Q1, this implies that Boot Barn will need to open 539 new locations in order to meet the 900 store target. With a $1.4 million investment per store and assuming a location CAGR of 15% (same as previous 2 years), it will take ~6.5 years and $755 million to meet this target.

Despite only recording $17 million in cash on its balance sheet, the company has access to a $250 million revolving credit facility ,with just $26.2 million drawn. Boot Barn has also turned healthy profits, with a 14% operating margin and $89 million cash from operating activities. When you multiply $89 million in operating activities per year x 6.5 years, you get $579 million cash from operating activities alone. Combined with the company's cash and undrawn credit, this very conservative estimate predicts that the company will have generated liquidity of $820 million in 6.5 years, more than enough to meet their location growth targets.

This model assumes a worst-case scenario where Boot Barn's revenues, margins, and liquidity options don't increase during the entire 6.5 year period. Even so, it shows that Boot Barn will theoretically still have enough cash to open locations. With a fairly long time-frame to achieve this goal, we believe that Boot Barn will be able to meet this aggressive growth target given current liquidity options and future cash flows.

New Features To Boost Sales

Boot Barn has been rolling out new features that improve attributes such as customer retention, bag size, and personalization, and two of them stood out to us.

B Rewarded Loyalty Program: Boot Barn's loyalty program has been continuing to gain traction with customers, with the company reporting 7.5 million active members in Q1 . This represents growth of 23% from 6.1 million active members in Q1 2023. This loyalty program has shown to boost customer loyalty and increased purchase size, improving the company's top-line. We believe that this proves that Boot Barn can still easily attract quality, high-spending customers even as sales growth has struggled in 2023.

AI Shopping Experience: Boot Barn has recently begun integrating generative AI technology (called Bandit) into their in-store shopping experience, which comes in the form of touchscreen customer guidance, a machine learning-driven recommendation engine, and conversational interactions using ChatGPT, which has the potential to bring substantial benefits to the company.

By equipping all stores with AI tools, Boot Barn can greatly enhance their customer experience. Personalized assistance provided by the touchscreen kiosks and AI chatbots empowers customers to make better-informed purchase decisions, leading to increased customer satisfaction and loyalty. Moreover, the integration of AI technology into handheld devices for store team members enables them to access deep product analysis, allowing them to offer a more tailored and efficient customer service. This enhanced, AI-driven customer experience will set Boot Barn apart from its competitors, potentially attracting more customers and driving sales.

We believe that both of these shopping features will increase Boot Barn's customer interest, retention, and personalization, resulting in a higher-quality customer base that generates higher revenues.

Valuation

We used Graham's and Peter Lynch's Fair Value models on Boot Barn. For these valuation models, we assumed that Boot Barn can maintain a relatively low EBITDA, EPS, and revenue growth metrics through the current downcycle, which were based on consensus earnings estimates. We think that Boot Barn will have the capability to achieve this moderate earnings growth as the company's new growth store accelerates, compensating for declining same-store sales. When we input these metrics into our valuation models, both indicate that Boot Barn is heavily overvalued, with Graham's and Peter Lynch's valuation indicating a 34% and 26% downside respectively. We believe that this is most likely due to high-growth expectations still being priced in, which could mean that Boot Barn is priced for perfection. For these reasons, we believe that Boot Barn is overvalued from an absolute standpoint.

When comparing Boot Barn to competitors, while they aren't nearly as bad as the independent valuation, the company doesn't stand out in any particular metric. Although earnings growth is relatively good, Lululemon beats Boot Barn out in both EPS and revenue growth. ROE, margins, and D/E were all average, while EV/EBITDA and P/E were both fairly low at 12.68 and 18.73. Our view is that while comparative valuation is fair, its absolute valuation is too high to justify an investment. With these 3 valuation models in mind, we believe that Boot Barn is overvalued.

Risks

If Boot Barn adds 900 new stores, cannibalization could be a significant danger. Rapid extension could lead to new stores competing for the same customer base as existing locations, resulting in decreased sales and profitability for the overall chain. Additionally, with the evolving retail landscape and the rise of e-commerce, attracting enough customers to support each new store may prove challenging. If Boot Barn isn't careful with planning and location placement, the company could face overextension and cannibalization, which could lead to poor new store performance and future store closures.

An additional risk in Boot Barn's business stems from competition in the western and work utility retail industry. The sector's fragmentation, consisting of numerous regional players independent specialty stores, drives competition based on product quality, brand recognition, pricing, customer service, and consumer demand alignment. The expansion of the company's e-commerce footprint intensifies rivalry with online retailers and traditional competitors, while competition with farm supply stores and mass merchants could compel price and mass merchants could compel price adjustments. Larger mass merchants and online retailers possess greater resources and marketing capabilities, potentially enabling them to outpace Boot Barn's offerings and adopt more aggressive pricing strategies, putting the company at a competitive disadvantage. Moreover, non-exclusive supplier relationships and a lack of exclusive rights to in-store elements undermine differentiation efforts, further raising the risk of losing competitive advantages. If competitors replicate or enhance in-store experience or product offerings, Boot Barn's competitive position and overall business could be negatively impacted, potentially affecting financial performance.

Conclusion

We believe that Boot Barn is a great long-term growth play as the company continues to expand its presence across the US through rapid store expansions. New features like Bandit and B Rewarded will also continue to boost customer retention. However, since Boot Barn is rather expensive at current prices, we currently rate them as a Hold, and we will only consider a long position if their valuation improves.

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