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Bear Of The Day: Boot Barn (BOOT)

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Boot Barn (BOOT - Free Report) was actually a healthy growing company coming into this pandemic-driven economic slowdown, but this natural disaster triggered a rude awakening for this working-class retailer. BOOT shares have plummeted over 60% for 2020 thus far, as investors price out this stocks potential.

The stock had driven up over 500% since Q4 of 2017 as the company runway of growth kept extending, but unfortunately, it looks like the company may have overextended itself. Analysts have been decreasing their EPS estimates in both the near and long-term, pushing BOOT into a Zacks Rank #5 (Strong Sell).

The Pandemic’s Impact

Just to be entirely transparent off the bat, I am not recommending that you bet against shares of BOOT, I am merely saying these shares may still be in trouble, despite losing most of their value from January.

Boot Barn is retail that sells functional workwear to those in working-class jobs such as construction, manufacturing, oil & gas, electric/plumbing, and agriculture. These are the industries that are seeing some of the most significant employment cutbacks.

This enterprise has a considerable strategic presence in key oil regions around the US, and the massive hit that this industry has taken is going to ripple into Boot Barn’s financials.

Loss of employment and job uncertainty is going to substantially hamper demand for Boot Barn products. It will be years before these industries reach full employment again (if they ever do), and I suspect that this will strain demand for Boot Barn in the coming years.

Boot Barn had been aggressively expanding its western presence with an increasing number of big-box brick-and-mortar storefronts averaging 11,000 square feet. The company currently operates 264 stores in 33 states, representing a 50% storefront increase in the past 5 years. I think they may have overextended themselves. The overhead from its enormous storefronts may be Boot Barn’s undoing.

Financial Situation 

The business’s paper-thin margins, combined with massive inventory levels, is quite concerning to me. Boot Barn will likely be forced to sell its products at a sizable discount to clear some of its inventory. This will weigh heavily on its already tight margins. I suspect we will see some negative EPS results in the coming quarters.

The company had, in the past, been able to rely on its cash flows to support operations, but I do not believe that this will be possible in the coming quarters. As of December 31st, 2019, Boot Barn had $45 million in cash and will likely need to dig into its revolving lines of credit to maintain operations.

Glimpse of Hope

Boot Barn has a small ecommerce presence (making up just over 15% of its sales), unlike a lot of its cohorts. Boot Barn stores are largely located in rural areas, which are expected to see an increase in brick-and-mortar foot-traffic more quickly than non-rural regions. These two silver-linings could be this retailer’s saving grace, but uncertainty remains high, and I would still stay away from BOOT shares.

Key Takeaways

This unprecedented global pandemic has been able to turn a seemingly healthy growing company on its head. There is still hope for this rural retailer, but it is up to management to navigate these murky economic waters. For now, I would keep my distance from these shares until we get more color on management’s strategy to get through this highly uncertain period.

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