Description

Pitching BOOT as an opportunistic, high-beta short characterized by elevated expectations and fragile sentiment set against fundamentals that appear poised to decelerate in the face of difficult comps and slowing cyclical end markets. BOOT can be characterized as a generally well-run, niche retailer (+MSD-HSD ROIC, mid-teens flowthrough despite +HSD SSS) facing tough comps and peaking unit productivity/margins while trading at the high end of trailing two-year NTM valuation ranges. Sentiment is fragile given perceived niche market opportunity, cyclicality (historical oil & gas proxy; SSS highly correlated to oil & gas employment) and heavy Texas and California exposure (~25% and ~20% of footprint, respectively). Thus, stock's volatile - bottoming at ~$6 in 2017 post oil-price downdraft and -50% to ~$16 in 4Q 2018 before doubling back to current levels. Sell-side ratings dispersion is bullish and 11% short interest down from mid-20s last year prior to 4Q collapse.

BOOT trades at 11x 2019 (Mar20) EBITDA vs trailing two-year NTM range 6-11x (9x avg) and 20x EPS vs 8-21x (14x avg). Recent fundamental momentum and current valuation-insensitive market dynamics should be respected but anything >$35 essentially represents blue-sky valuation and every EBITDA turn is ~$3.50/share. Fair value appears ~$20/share (avg multiples, no-growth existing store base FCF) with price likely to undershoot on any disappointment, macro growth scare or perceived slowing in oil & gas/agricultural economy. 

Catalysts include SSS miss against tough SSS comps, any indications of increasing promo activity on heavy full-price laps and continued evidence of slowing relevant macro data points. Latter includes 1/ decelerating mining/logging employment indicators for TX and US overall (July +3.6% in TX and weakest reading since early-2017 vs 2Q +6.6%; July +2.5% in US vs 2Q +4.0%); 2/ SpendTrend for Workwear/Uniforms +4.7% through mid-August vs +8.1% in July and +2.3% in June; and 3/ weaker U.S. construction employment with July +2.8% vs 2Q +3.2%. Unit growth has also missed in each of last two years (+3% and +6%, respectively) and another shortfall vs guide of +25 (including tuck-ins) vs just a single opening in F1Q could matter.

Primary risk is continued strong fundamental momentum at/above high bar needed to assuage fragile sentiment in the face of slowing macro dynamics and challenging SSS/full-price sales comps. Scarcity also consideration given headwinds plaguing mall-based retailers against current market structure including increasing influence of price-insensitive buyers. Market’s highly fragmented so additional tuck-ins a risk but consensus units +10% this year will almost certainly require additional acquisitions to be met (last month BOOT acquired G&L Clothing, western/workwear store in Des Moines, Iowa and while terms were not disclosed its last nine acquisitions averaged ~$1.2 million/store). Potential as a takeover target appears low.

BOOT is a $1.1B EV omni-channel western/work wear retailer and play on increasing popularity of country music/pickups/rodeos (70% work wear/30% Western). Growth algorithm is +HSD-10% units (50% penetrated), modest leverage on >+2.5-3.0% SSS and e-commerce/private-label penetration, and mid-teens EPS on de-leveraging (1.7x net leverage). Strengths include dominant positioning in highly fragmented niche category with majority of volume typically sold at full price and lower fashion risk than most apparel companies. Mgmt sees path to 10% op margins (vs 8.3% in F19) on sales flowthrough, continued exclusive private-label penetration and e-commerce penetration off low base. BOOT was a 2014 JOBS Act IPO at $16/share with sponsors completely out at May 2018 secondary at $23.50/share.

Recent results have been solid. Clean F1Q beat/raise on broad-based sales strength was enough to best high bar and assuage fragile sentiment for now but not unanticipated w/ stock +90% YTD and trading at high end of historical valuation range. Execution remains solid including notable merchandising, F1Q flow through was better than expected and 2Q bottom-line guide appears conservative (didn't run annual July sale so line of sight on further GM improvement). But this name is all about SSS which did decelerate to +8% F2QTD from estimated +11% in 2H F1Q (+7.5% in 1H of quarter vs F1Q +9.4%). Also expect lagging impact of softening oil/ag indicators to increasingly become visible (downplayed by mgmt on call).

Tariff impact has been relatively modest given pricing power and ability to push back some of the pressure upstream on suppliers. Half of products are imported from China and 25% from Mexico. But BOOT only controls sourcing on the ~20% of mix that is exclusive brands which can be shifted quickly.

Historical share-price correlation with Brent crude diverged beginning in late 2018 and has persisted through 2019 potentially on momentum-driven valuation dynamics or perhaps complacency given stable results of late.

Risks

Continued SSS momentum ahead of expectations 

Scarcity/Market structure

Headline tariff relief

Tuck ins 

Catalysts  

SSS miss

Evidence of heavier promo activity 

Continued Oil & Gas employment weakness

Unit-growth shortfall

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.

Catalyst

SSS miss

Evidence of heavier promo activity 

Continued Oil & Gas employment weakness

Unit-growth shortfall