US Retail Expansion Will Open Promising Future Markets

Key Takeaways

• Aggressive store expansion may raise capital expenditures and occupancy costs, potentially impacting net margins and revenue growth sustainability.
  
• Supply chain efficiencies improve merchandise margins but may face sustainability challenges, while potential tariff issues with Mexico could affect profitability.
  
• Aggressive expansion and tariff exposure could squeeze margins, while maturing brand strategies and product challenges may limit future sales and profit growth.

Catalysts

Operates specialty retail stores in the United States and internationally.

• Boot Barn's aggressive store expansion strategy, with plans to open 60 new stores this fiscal year and a long-term goal to double its U.S. store count, could increase capital expenditures and lead to temporary occupancy cost pressures, potentially affecting net margins.
  
• While the company experienced a strong 8.6% same-store sales growth in the third quarter, driven primarily by increased transactions, the sustainability of comping on such a high base might be challenging, potentially moderating the topline revenue growth.
  
• Exclusive brand penetration, a key driver for merchandise margin expansion, has shown significant improvement, but future expansion may yield diminishing returns, which could lead to lower-than-expected gross margin improvements.
  
• Although supply chain efficiencies and better buying economies of scale have enhanced merchandise margins this year, these may be difficult to sustain at current levels, potentially limiting further margin expansion and impacting earnings.
  
• External factors, such as potential tariff issues with Mexico (a critical supplier for leather-sold cowboy boots), could lead to increased cost pressures if concessions cannot be secured or increased costs need to be passed onto consumers, potentially affecting overall profitability.

Boot Barn Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Boot Barn Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Boot Barn Holdings's revenue will grow by 13.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.4% today to 7.6% in 3 years time.
• The bearish analysts expect earnings to reach $205.2 million (and earnings per share of $6.7) by about May 2028, up from $172.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the US Specialty Retail industry at 15.3x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Boot Barn Holdings Future Earnings Per Share Growth

Risks

• The company's aggressive store expansion strategy, aiming for 15% new unit growth annually, may lead to higher occupancy costs and potential cannibalization of sales among nearby locations, impacting net margins.
  
• Although supply chain efficiencies have been beneficial, there is uncertainty about maintaining these efficiencies at the same levels in the future, which could affect merchandise margins and gross profit.
  
• The company faces exposure to potential tariffs with 25% of its products sourced from Mexico and 30% from China. Increases in tariffs could lead to higher costs that may not be entirely passed onto consumers, impacting net income.
  
• Heightened focus on exclusive brand penetration and economies of scale may not continue to yield similar benefits as they mature, potentially limiting future merchandise margin improvements.
  
• Despite current momentum in Western merchandise categories, challenges such as softer performance in work boots could stabilize or decline, affecting future same-store sales growth which is a key driver of revenue.

Valuation

• The assumed bearish price target for Boot Barn Holdings is $128.77, which represents one standard deviation below the consensus price target of $161.93. This valuation is based on what can be assumed as the expectations of Boot Barn Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $209.0, and the most bearish reporting a price target of just $100.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $205.2 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $113.49, the bearish analyst price target of $128.77 is 11.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.