https://www.barrons.com/articles/boot-barn-stock-small-cap-buy-584af9b
There are plenty of pitfalls when it comes to mixing form and function, but the latest wave of “Westerncore” sweeping the U.S. looks to have staying power.
The scramble for shearling-collar coats and snap-button shirts, brought on by the success of TV shows like Yellowstone, is one more feather in the cap of Western-wear retailer Boot Barn Holdings (ticker: BOOT). But it’s worth noting that cowboy chic has cycled in and out of fashion over the decades, and Boot Barn has done just fine. That’s because it caters to an increasing number of shoppers who are less concerned with trends, as well as others simply trying to look the part.
As the meteoric rise of Tractor Supply (TSCO) has shown in recent years, investors overlook more rural-themed retailers at their own risk.
“Right now, Boot Barn is one of the most attractive names in retail,” says David Swank, co-manager of the Hood River Small-Cap Growth fund (HRSRX), who notes that the company is finding success in the Northeast, a previously untapped geographic region for the brand.
Boot Barn is the undisputed leader in the fragmented $40 billion Western and workwear specialty retail space. It operates more than three times the number of stores as its closest rival, and its lead over competitors has only expanded in recent years, as the pandemic forced smaller operations out of business at the same time the retailer expanded its store base. Boot Barn now has 333 stores, up from 293 in the prior year, and plans to open a total of 43 in its fiscal 2023, which ends on April 1.
The chain’s stores have gotten more profitable, says Gary Bradshaw, a portfolio manager at Hodges Capital Management. Ten years ago, a new 10,000-square-foot location would generate $1.7 million of revenue in its first year, and would have paid for itself in three. Now, a 12,000-square-foot shop does $3.5 million in business and pays back in 1.4 years, helped by factors like better merchandising and store locations that have helped it appeal to a broader audience.
Those numbers have allowed Boot Barn to bulk up without increasing its net debt, which is less than 0.1 times the past 12 months earnings before interest, taxes, depreciation, and amortization, or Ebitda.
“Store economics continue to grow,” says Bradshaw. “It is one of the best growth stories in retail.”
Boot Barn’s exclusive brands, which carry higher margins than national ones, have increasingly become a bigger part of its business, accounting for just over a third of sales last quarter. That has helped boost gross margins, which climbed to 38.6% in fiscal 2022, up from just over 32% before the pandemic.
That profitability was on display when Boot Barn reported fiscal third-quarter results in January, a period that spanned nearly the entire holiday shopping season. Comparable sales were stronger than expected, and management noted that its declining inventory levels meant it didn’t have to rely on hefty discounts, helping to bolster the stock even as its earnings per share came in a bit light.
Boot Barn tweaked its fiscal-2023 bottom-line and gross-margin guidance lower, to a range of $5.51 to $5.60 per share and about 36.6%, respectively, as higher freight costs offset stronger product margins, although those headwinds look somewhat temporary. The market seemed to think so: Boot Barn stock jumped 17.6% after the release.
J.P. Morgan Securities analyst Matthew Boss raised his price target to $100 from $94 following the results, which would mark a 24% climb from the recent $80.60. He believes that the company’s momentum will allow it to keep same-store sales growing in the low- to mid-single digit range, helping Boot Barn return to 20% EPS growth by the second half of 2024.
Although the stock has fallen back from its postearnings rally, it’s still up nearly 30% so far in 2023, easily outpacing the broader market and its fellow retailers. It looks anything but pricey, however. Boot Barn shares trade at just 13 times 12-month forward earnings, well below that of other fast-growing retailers like Dollar General (DG) and Ulta Beauty ULTA (ULTA) which trade around 19 and 21 times, respectively. “It still trades at a value multiple for a growth story,” says Bradshaw.
A multiple of 20 times consensus calendar-2023 estimates of $5.89 a share would put Boot Barn at $118, almost 50% higher than its current levels. That isn’t as aggressive as it sounds. Its five-year average forward valuation has been closer to 19 times, and just getting back to that level equates to nearly $112.
The stock doesn’t need a higher multiple to keep rising, however. Analysts expect earnings to grow by nearly 9% in fiscal 2024, so Boot Barn shares should do just fine without the multiple expansion. And even those numbers might be too conservative.
“Current Street estimates could actually be low in the near and longer term as Boot Barn benefits from the continuing shift to a more country aesthetic and its strong pipeline of new stores,” Swank says. “The stock should work from here based on fundamentals alone and without multiple expansion.”
In other words, giddyup.
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