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Boot Barn: A Retail Play for the Reopening of the Economy

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GuruFocus.com
·6 min read
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Business activities in the United States are beginning to return to normalcy. Investors, therefore, are focusing on the companies that could quickly gain traction with the revival of the economy.

While many investors are actively searching for these opportunities in well-known companies, there are a few lesser-known names that could provide stellar returns in the coming months. Boot Barn Holdings, Inc. (NYSE:BOOT) is one such company, in my view. Macro-economic headwinds have resulted in a 55% decline in the stock price this past year, and this creates an attractive margin of safety.


Company profile

Boot Barn is a lifestyle retail chain that operates in 252 locations in the U.S., with a footprint in 33 states. The company has two distinct product categories.

  1. Western wear segment (70% of revenue)

  2. Work & other segment (30% of revenue)



Leading up to the current economic downturn, the company reported revenue growth in 11 consecutive quarters, which is an indication of strong momentum coming into 2020. However, the nationwide lockdown led to a decline in sales in the first three months of the year, which was partially offset by the sale of items such as work boots to essential workers. According to data from company filings, Boot Barn was able to keep approximately 200 stores operational thanks to the approvals the company obtained from local municipalities.

The oil market recovery

The record plunge in oil prices led to a decline in oil drilling activities in the U.S. This was not good news for Boot Barn, as the company generates approximately 30% of its revenue by selling work boots and other workwear that are primarily used in the oil exploration industry. Since the beginning of the year, the number of active crude oil rigs in the U.S. has declined dramatically:

Source: Trading Economics/Baker Hughes

The United States, China and many European nations are coming out of the lockdown, and business activities are gaining momentum. This improving outlook sent crude oil prices higher since reaching a record bottom on April 20.

Source: GuruFocus

According to the U.S. Energy Information Administration, crude inventories are still rising, but there are early signs of recovery in the demand for energy sources. On May 27, Price Futures Group senior analyst Phil Flynn told CNBC, "Even though we got the big increase in crude supplies, there's optimism in the numbers because of the uptick in refinery runs and because of the uptick in gasoline demand."

The demand for oil in China, which bottomed in February, has steadily recovered since the two-month-long lockdown ended in mid-April. Rystad Energy projects the demand to hit the levels seen in 2019 by the fourth quarter of this year, which is another promising sign for the energy industry.

Source: Rystad Energy

The outlook for the oil industry leads to optimism regarding the expected performance of Boot Barn. According to data from Eikon, Boot Barn shares had a correlation of over 0.75 with WTI crude oil in 2019, which indicates a strong positive relationship between the two securities.

Competitive advantages

The company is a niche player in the western wear market in the U.S. and has strong competitive advantages. For instance, the company had approximately triple the store count of Cavender's, its closest rival, at the end of the first quarter. According to data from company filings, most of its competitors are small, family-owned businesses that operate a few regional stores. Boot Barn has two distinct advantages over these small players: scale and online presence.

Source: Company presentation

The company recently ramped up spending on strengthening its e-commerce channels. This is already reaping rewards as online shopping has become the go-to option for American consumers.

Another strength of Boot Barn is the private brands the company has developed over the years. Exclusive brand names such as Cody James, Moon Shine Spirit, Shyanne and Idyllwind contributed to 20% of total revenue for the 12 months ended on May 20. The company has pricing power over these products, which helps expand operating margins.

The leading position of Boot Barn in the U.S. western wear market and its competitive advantages will likely help the company recover sooner than its peers.

Liquidity position

Investing in a retailer during a crisis is a complicated task, and many things could go wrong. An evaluation of the financial health of a company is paramount to making prudent investment decisions.

Boot Barn has partnered with vendors and landlords to defer payments in a bid to preserve cash. The approval of these requests indicates the strong relationship of the company with its business partners. Below are some of the additional measures taken by the company to improve its liquidity position. These were disclosed during an analyst call on May 20.:

  1. Increased the available draw on short-term credit facilities

  2. Announced a reduction in capital expenditures until business activities return to normal

  3. The opening of new stores was delayed indefinitely

  4. The salaries of the management and the board of directors were decreased



Collectively, all these initiatives aim to help Boot Barn remain solvent through the end of this crisis to resume its local and international expansion. The company had $69 million in cash in hand at the end of March, which should be sufficient to cover operating expenditures for at least a couple of quarters even if the company brings in no revenue.

Takeaway

Oil prices and U.S. equity markets plummeted in the second half of 2018, and Boot Barn shares followed suit. However, the recovery of energy prices sent shares skyrocketing in the first half of 2019, delivering more than 150% in capital gains to investors who were prudent enough to identify the opportunity when the stock price was falling.

Source: GuruFocus

The set up seems to be similar this time around. The energy market is likely to strengthen in the coming months, and the resumption in global manufacturing activities will create robust demand for crude oil. The OPEC+ alliance is meeting on June 9 to determine the fate of supply cuts, and the oil cartel is likely to continue with the proposed production cuts to stabilize the market. This is good news for Boot Barn.

On the other hand, the western wear segment of the company is poised to gain momentum along with the reopening of the American economy. As the undisputed leader in this market, Boot Barn is in a strong position to turn these difficult conditions into an opportunity to expand its market share even further.

Disclosure: I own shares of Boot Barn.

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This article first appeared on GuruFocus.