Boot Barn Holdings, Inc. (BOOT) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this annual report. The statements in the following discussion and analysis regarding expectations about our future performance, liquidity and capital resources and any other non-historical statements in this discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those described under “Risk Factors” and “Forward-Looking Statements” elsewhere in this annual report. Our actual results could differ materially from those contained in or implied by any forward-looking statements.
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Overview
We are the largest lifestyle retail chain devoted to western and work-related footwear, apparel and accessories in the U.S. As of March 26, 2022, we operated 300 stores in 38 states, as well as an e-commerce channel, consisting primarily of bootbarn.com, sheplers.com and countryoutfitter.com. Our stores feature a comprehensive assortment of brands and styles, coupled with attentive, knowledgeable store associates. Our product offering is anchored by an extensive selection of western and work boots and is complemented by a wide assortment of coordinating apparel and accessories. Many of the items that we offer are basics or necessities for our customers’ daily lives and typically represent enduring styles that are not meaningfully impacted by changing fashion trends.
We strive to offer an authentic, one-stop shopping experience that fulfills the everyday lifestyle needs of our customers, and as a result, many of our customers make purchases in both the western and work wear sections of our stores. We target a broad and growing demographic, ranging from passionate western and country enthusiasts, to workers seeking dependable, high-quality footwear and clothing. Our broad geographic footprint, which comprises more than three times as many stores as our nearest direct competitor that sells primarily western and work wear, provides us with significant economies of scale, enhanced supplier relationships, the ability to recruit and retain high quality store associates and the ability to reinvest in our business at levels that we believe exceed those of our competition.
For a discussion of factors that affect the comparability of our results of operations, see “Item 1—Business—Acquisitions.”
Growth Strategies and Outlook
Over the long-term we plan to continue to expand our business, increase our sales growth and profitability and enhance our competitive position by executing the following strategies:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | continuing omni-channel leadership; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | driving same store sales growth; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | building our exclusive brand portfolio; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | expanding our store base; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | enhancing brand awareness; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | increasing profitability. |
Since the founding of Boot Barn in 1978, we have grown both organically and through successful strategic acquisitions of competing chains. We have rebranded and remerchandised the acquired chains under the Boot Barn banner, resulting in sales increases over their original concepts. We believe that our business model and scale provide us with competitive advantages that have contributed to our consistent financial performance, generating sufficient cash flow to support national growth.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators we use to evaluate the financial condition and operating performance of our business are net sales and gross profit. In addition, we also review other important metrics, such as same store sales, new store openings, and selling, general and administrative (“SG&A”) expenses, and operating income.
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Net sales
Net sales reflect revenue from the sale of our merchandise at retail locations, as well as sales of merchandise through our e-commerce websites. We recognize revenue upon the purchase of merchandise by customers at our stores and upon delivery of the product in the case of our e-commerce websites. Net sales also include shipping and handling fees for e-commerce shipments that have been delivered to our customers. Net sales are net of returns on sales during the period as well as an estimate of returns and award redemptions expected in the future stemming from current period sales. Revenue from the sale of gift cards is deferred until the gift cards are used to purchase merchandise.
Our business is moderately seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected by a number of factors including the timing of holidays and weather patterns. The third quarter of our fiscal year, which includes the Christmas shopping season, has historically produced higher sales and disproportionately higher operating results than the other quarters of our fiscal year. In fiscal 2022, fiscal 2021 and fiscal 2020 we generated approximately 33%, 34% and 34% of our net sales during our third fiscal quarter, respectively. In addition, neither the western nor the work component of our business has been meaningfully impacted by fashion trends or seasonality historically. We believe that many of our customers are driven primarily by utility and brand, and our best-selling styles.
Same store sales
The term “same store sales” generally refers to net sales from stores that have been open at least 13 full fiscal months as of the end of the current reporting period, although we include or exclude stores from our calculation of same store sales in accordance with the following additional criteria:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | stores that are closed for five or fewer consecutive days in any fiscal month are included in same store sales; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | stores that are closed temporarily, but for more than five consecutive days in any fiscal month, are excluded from same store sales beginning in the fiscal month in which the temporary closure begins (and for the comparable periods of the prior or subsequent fiscal periods for comparative purposes); until the first full month of operation once the store re-opens; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | stores that are closed temporarily and relocated within their respective trade areas are included in same store sales; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | stores that are permanently closed are excluded from same store sales beginning in the month preceding closure (and for the comparable periods of the prior or subsequent fiscal periods for comparative purposes); and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | acquired stores are added to same store sales beginning on the later of (a) the applicable acquisition date and (b) the first day of the first fiscal month after the store has been open for at least 13 full fiscal months regardless of whether the store has been operated under our management or predecessor management. |
If the criteria described with respect to acquired stores above are met, then all net sales of an acquired store, excluding those net sales before our acquisition of that store, are included for the period presented. However, when an acquired store is included for the period presented, the net sales of such acquired store for periods before its acquisition are included (to the extent relevant) for purposes of calculating “same stores sales growth” and illustrating the comparison between the applicable periods. Pre-acquisition net sales numbers are derived from the books and records of the acquired company, as prepared prior to the acquisition, and have not been independently verified by us. Beginning on their respective dates of acquisition, sales from the acquired Wood’s Boots stores, Lone Star stores, Drysdales stores and G.&L. Clothing store have been included in same store sales.
In addition to retail store sales, same store sales also includes e-commerce sales, e-commerce shipping and handling revenue and actual retail store or e-commerce sales returns. We exclude gift card escheatment, provision for
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sales returns and future loyalty award redemptions from sales in our calculation of net sales per store. Sales as a result of an e-commerce asset acquisition, such as Country Outfitter, are excluded from same store sales until the 13th full fiscal month subsequent to the Company’s acquisition of such assets.
Measuring the change in year-over-year same store sales allows us to evaluate how our store base is performing. Numerous factors affect our same store sales, including:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | national and regional economic trends; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | our ability to identify and respond effectively to regional consumer preferences; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | changes in our product mix; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | changes in pricing; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | competition; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | changes in the timing of promotional and advertising efforts; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | holidays or seasonal periods; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | weather. |
Opening new stores is an important part of our growth strategy. We opened or acquired 28, 15, and 20 stores in fiscal 2022, 2021, and 2020, respectively. Included in these added stores are 28, 15, and 19 new stores in fiscal 2022, 2021, and 2020, and 0, 0, and 1 acquired stores in fiscal 2022, 2021, and 2020, respectively. We also closed one store in each of fiscal 2022, 2021, and 2020. We anticipate that a percentage of our net sales in the near future will come from stores not included in our same store sales calculation. Accordingly, same store sales are only one measure we use to assess the success of our business and growth strategy. Some of our competitors and other retailers may calculate “same” or “comparable” store sales differently than we do. As a result, data in this annual report regarding our same store sales may not be comparable to similar data made available by other retailers.
New store openings
New store openings reflect the number of stores, excluding acquired stores, that are opened during a particular reporting period. In connection with opening new stores, we incur pre-opening costs. Pre-opening costs consist of costs incurred prior to opening a new store and primarily consist of manager and other employee payroll, travel and training costs, marketing expenses, initial opening supplies and costs of transporting initial inventory and certain fixtures to store locations, as well as occupancy costs incurred from the time that we take possession of a store site to the opening of that store. Occupancy costs are included in cost of goods sold and the other pre-opening costs are included in SG&A expenses. All of these costs are expensed as incurred.
New stores often open with a period of high sales levels, which subsequently decrease to normalized sales volumes. In addition, we experience typical inefficiencies in the form of higher labor, advertising and other direct operating expenses, and as a result, store-level profit margins at our new stores are generally lower during the start-up period of operation. The number and timing of store openings have had, and are expected to continue to have, a significant impact on our results of operations. In assessing the performance of a new store, we review its actual sales against the sales that we projected that store to achieve at the time we initially approved its opening. We also review the actual number of stores opened in a fiscal year against the number of store openings that we included in our budget at the beginning of that fiscal year.
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Gross profit
Gross profit is equal to our net sales less our cost of goods sold. Cost of goods sold includes the cost of merchandise, obsolescence and shrinkage provisions, store and warehouse occupancy costs (including rent, depreciation and utilities), inbound and outbound freight, supplier allowances, occupancy-related taxes, compensation costs for merchandise purchasing and warehouse personnel, and other inventory acquisition-related costs. These costs are significant and can be expected to continue to increase as we grow. The components of our reported cost of goods sold may not be comparable to those of other retail companies, including our competitors.
Our gross profit generally follows changes in net sales. We regularly analyze the components of gross profit, as well as gross profit as a percentage of net sales. Specifically, we examine the initial markup on purchases, markdowns and reserves, shrinkage, buying costs, distribution costs and occupancy costs. Any inability to obtain acceptable levels of initial markups, or a significant increase in our use of markdowns or in inventory shrinkage, or a significant increase in freight and other inventory acquisition costs could have an adverse impact on our gross profit and results of operations.
Gross profit is also impacted by shifts in the proportion of sales of our exclusive brand products compared to third-party brand products, as well as by sales mix shifts within and between brands and between major product categories such as footwear, apparel or accessories.
Selling, general and administrative expenses
Our selling, general and administrative (“SG&A”) expenses are composed of labor and related expenses, other operating expenses, and general and administrative expenses not included in cost of goods sold. Specifically, our SG&A expenses include the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Labor and related expenses—Labor and related expenses include all store-level salaries and hourly labor costs, including salaries, wages, benefits and performance incentives, labor taxes and other indirect labor costs. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other operating expenses—Other operating expenses include all operating costs, including those for advertising, pay-per-click, marketing campaigns, operating supplies, utilities, and repairs and maintenance, as well as credit card fees and costs of third-party services. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | General and administrative expenses—General and administrative expenses comprise expenses associated with corporate and administrative functions that support the development and operations of our stores, including compensation and benefits, travel expenses, corporate occupancy costs, stock compensation costs, legal and professional fees, insurance and other related corporate costs. |
The components of our SG&A expenses may not be comparable to those of our competitors and other retailers. We expect our selling, general and administrative expenses will increase in future periods as a result of incremental share-based compensation, legal, accounting and other compliance-related expenses and increases resulting from growth in the number of our stores.
Fiscal Year
We operate on a fiscal calendar which results in a 52- or 53-week fiscal year ending on the last Saturday of March unless April 1st is a Saturday, in which case the fiscal year ends on April 1st. In a 52-week fiscal year, each quarter includes thirteen weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include thirteen weeks of operations and the fourth quarter includes fourteen weeks of operations. For ease of reference, we identify our fiscal years by reference to the calendar year in which the fiscal year ends.
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Results of Operations
The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales. The following discussion contains references to fiscal 2022, fiscal 2021, and fiscal 2020, which represent our fiscal years ended March 26, 2022, March 27, 2021 and March 28, 2020. Fiscal 2022, 2021 and 2020 were all 52-week periods.
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year Ended | ||||||||
| | | March 26, | March 27, | March 28, | ||||||
| (dollars in thousands) | 2022 | | 2021 | | 2020 | |||||
| Consolidated Statements of Operations Data: | | | | | | | | | | |
| Net sales | | $ | 1,488,256 | | $ | 893,491 | | $ | 845,575 | |
| Cost of goods sold | | 913,183 | | 598,612 | | 569,084 | | |||
| Gross profit | | 575,073 | | 294,879 | | 276,491 | | |||
| Selling, general and administrative expenses | | 316,735 | | 208,553 | | 202,823 | | |||
| Income from operations | | 258,338 | | 86,326 | | 73,668 | | |||
| Interest expense | | 5,780 | | 9,442 | | 13,310 | | |||
| Other income/(loss), net | | | 35 | | | 366 | | | (45) | |
| Income before income taxes | | 252,593 | | 77,250 | | 60,313 | | |||
| Income tax expense | | 60,143 | | 17,864 | | 12,364 | | |||
| Net income | | $ | 192,450 | | $ | 59,386 | | $ | 47,949 | |
| | | | | | | | | | | |
| Percentage of Net Sales(1): | | | | | | | | | | |
| Net sales | | 100.0 | % | 100.0 | % | 100.0 | % | |||
| Cost of goods sold | | 61.4 | % | 67.0 | % | 67.3 | % | |||
| Gross profit | | 38.6 | % | 33.0 | % | 32.7 | % | |||
| Selling, general and administrative expenses | | 21.3 | % | 23.3 | % | 24.0 | % | |||
| Income from operations | | 17.4 | % | 9.7 | % | 8.7 | % | |||
| Interest expense | | 0.4 | % | 1.1 | % | 1.6 | % | |||
| Other income/(loss), net | | | — | % | | — | % | | — | % |
| Income before income taxes | | 17.0 | % | 8.6 | % | 7.1 | % | |||
| Income tax expense | | 4.0 | % | 2.0 | % | 1.5 | % | |||
| Net income | | 12.9 | % | 6.6 | % | 5.7 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Percentages may not total 100% due to rounding. |
Fiscal 2022 compared to Fiscal 2021
Net sales. Net sales in fiscal 2022 increased by $594.8 million, or 66.6%, to $1.488 billion compared to $893.5 million in fiscal 2021. Consolidated same store sales increased 53.7%. Excluding the impact of the 38.7% increase in e-commerce same store sales, same store sales increased by 57.2%. Net sales increased primarily due to the increase in same store sales during fiscal 2022, the incremental sales from new stores opened over the past twelve months, and the sales contribution from temporarily closed stores that were excluded from the comp base. Net sales in the prior year were adversely impacted by decreases in retail store sales resulting from decreased traffic in our stores from customers staying at home in response to the COVID-19 crisis and temporary store closures.
Gross profit. Gross profit increased by $280.2 million, or 95.0%, to $575.1 million in fiscal 2022 from $294.9 million in fiscal 2021. As a percentage of net sales, gross profit was 38.6% and 33.0% for fiscal 2022 and fiscal 2021, respectively. Gross profit increased primarily due to higher sales and an increase in merchandise margin rate. As a percentage of net sales, consolidated gross profit increased primarily as a result of 290 basis points of leverage in buying and occupancy costs and a 270 basis point increase in merchandise margin rate. The higher merchandise margin was driven primarily by better full-price selling and increased exclusive brand penetration.
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Selling, general and administrative expenses. SG&A expenses increased by $108.2 million, or 51.9%, to $316.7 million in fiscal 2022 from $208.6 million in fiscal 2021. As a percentage of net sales, SG&A expenses were 21.3% for fiscal 2022 compared to 23.3% for fiscal 2021. SG&A expenses increased primarily as a result of higher store payroll and overhead and increased marketing expenses in the current-year period compared to the prior-year period. SG&A expenses as a percentage of net sales decreased by approximately 210 basis points primarily as a result of expense leverage on higher sales.
Income from operations. Income from operations increased by $172.0 million, or 199.3%, to $258.3 million for fiscal 2022 from $86.3 million for fiscal 2021. As a percentage of net sales, income from operations was 17.4% and 9.7% for fiscal 2022 and fiscal 2021, respectively. The change in income from operations was attributable to the factors noted above.
Interest expense. Interest expense decreased by $3.7 million, or 38.8%, to $5.8 million in fiscal 2022 from $9.4 million in fiscal 2021. Interest expense in fiscal 2022 includes the write off of $1.4 million in debt issuance costs and debt discount associated with the $111.5 million prepayment on the 2015 Golub Term Loan. Excluding the write off, interest expense was $4.4 million for fiscal 2022 compared to $9.4 million in fiscal 2021. The decrease in interest expense was primarily the result of a lower debt balance in the current-year period compared to the prior-year period.
Income tax expense. Income tax expense was $60.1 million in fiscal 2022 compared to $17.9 million in fiscal 2021. Our effective tax rate was 23.8% and 23.1% for fiscal 2022 and fiscal 2021, respectively. The effective tax rate for fiscal 2022 is higher than fiscal 2021 primarily due to a lower tax benefit from income tax accounting for share-based compensation as a percentage of taxable income in the current year, compared to the prior-year period.
Net income. Net income increased by $133.1 million, or 224.1%, to $192.5 million in fiscal 2022 from net income of $59.4 million in fiscal 2021. The change in net income was attributable to the factors noted above.
We have omitted discussion of our fiscal 2021 results where it would be redundant of information previously disclosed. For a comparison of our fiscal 2021 versus fiscal 2020 results, please see the discussion previously included in Part II, Item 7 of our fiscal 2021 Annual Report on Form 10-K filed with the SEC on May 13, 2021.
Store Operating Data
The following table presents store operating data for the periods indicated:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year Ended(1) | ||||||||
| | | | | | | | ||||
| | | March 26, | | March 27, | | March 28, | | |||
| | | 2022 | | 2021 | | 2020 | | |||
| Selected Store Data (unaudited): | | | | | | | | | | |
| Same Store Sales growth | | 53.7 | % | 3.1 | % | 5.0 | % | |||
| Stores operating at end of period | | 300 | | 273 | | 259 | | |||
| Total retail store square footage, end of period (in thousands) | | 3,194 | | 2,854 | | 2,722 | | |||
| Average store square footage, end of period | | 10,648 | | 10,455 | | 10,508 | | |||
| Average net sales per store (in thousands)(1) | | $ | 4,194 | | $ | 2,602 | | $ | 2,684 | |
| Column 1 | Column 2 |
|---|---|
| (1) | Average net sales per store is calculated by dividing net sales for the applicable period by the number of stores operating at the end of the period. For the purpose of calculating net sales per store, e-commerce sales and certain other revenues are excluded from net sales. |
Liquidity and Capital Resources
We rely on cash flows from operating activities and our credit facility as our primary sources of liquidity. Our primary cash needs are for inventories, operating expenses, occupancy expenses, capital expenditures associated with opening new stores and remodeling or refurbishing existing stores, improvements to our distribution facilities, marketing
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and information technology expenditures, debt service and taxes. We have also used cash for acquisitions, the subsequent rebranding and integration of the stores acquired in those acquisitions and costs to consolidate the corporate offices. In addition to cash and cash equivalents, the most significant components of our working capital are accounts receivable, inventories, accounts payable and accrued expenses and other current liabilities. We believe that cash flows from operating activities and the availability of cash under our credit facility will be sufficient to cover working capital requirements, anticipated capital expenditures and other anticipated cash needs for at least the next 12 months.
Our liquidity is moderately seasonal. Our cash requirements generally increase in our third fiscal quarter as we incur additional marketing expenses and increase our inventory in advance of the Christmas shopping season. Our cash flows from operations decreased in fiscal 2022 when compared to cash flows from operations in fiscal 2021, primarily as a result of a $211.5 million increase in cash paid for inventories year-over-year and a $26.0 million increase in cash paid for prepaid expenses and other current assets. These increases were partially offset by a $33.4 million increase in cash provided by accounts payable and accrued expenses and other current liabilities in fiscal 2022 compared to fiscal 2021, due to the timing of payments.
As of the end of fiscal 2022, we did not have any material capital expenditure commitments. As of March 26, 2022, we had $28.5 million drawn on our $180.0 million revolving credit facility. We had $151.5 million of remaining availability under our revolving credit facility and $20.7 million of cash on hand as of March 26, 2022. Our primary ongoing sources of liquidity include funds provided by operations and borrowings under our revolving credit facility. We expect our cash from operations will continue to be sufficient to support our operations and anticipated capital expenditures for the foreseeable future. We estimate that our capital expenditures in fiscal 2023 will be approximately $87.0 million, net of landlord tenant allowances, and we anticipate that we will use cash flows from operations to fund these expenditures.
Current Credit Facility
June 2015 Wells Fargo Revolver
On June 29, 2015, we, as guarantor, and our wholly-owned primary operating subsidiary, Boot Barn, Inc., refinanced a previous Wells Fargo credit facility with the $125 million syndicated senior secured asset-based revolving credit facility for which Wells Fargo Bank, National Association (“June 2015 Wells Fargo Revolver”), is agent, and the $200 million syndicated senior secured term loan for which GCI Capital Markets LLC (“2015 Golub Term Loan”) was agent.
The borrowing base of the June 2015 Wells Fargo Revolver is calculated on a monthly basis and is based on the amount of eligible credit card receivables, commercial accounts, inventory, and available reserves.
Borrowings under the June 2015 Wells Fargo Revolver bear interest at per annum rates equal to, at our option, either (i) LIBOR plus an applicable margin for LIBOR loans, or (ii) the base rate plus an applicable margin for base rate loans. The base rate is calculated as the highest of (a) the federal funds rate plus 0.5%, (b) the Wells Fargo prime rate and (c) one-month LIBOR plus 1.0%. The applicable margin is calculated based on a pricing grid that in each case is linked to quarterly average excess availability. For LIBOR loans, the applicable margin ranges from 1.00% to 1.25%, and for base rate loans it ranges from 0.00% to 0.25%. We also pay a commitment fee of 0.25% per annum of the actual daily amount of the unutilized revolving loans. The interest on the June 2015 Wells Fargo Revolver is payable in quarterly installments ending on the maturity date. On May 26, 2017, the Company entered into an amendment to the June 2015 Wells Fargo Revolver (the “2017 Wells Amendment”), increasing the aggregate revolving credit facility to $135.0 million and extending the maturity date to the earlier of May 26, 2022 or 90 days prior to the maturity of the 2015 Golub Term Loan, which was then scheduled to mature on June 29, 2021. On June 6, 2019, the Company entered into Amendment No. 3 to the Credit Agreement (the “2019 Wells Amendment”), further increasing the aggregate revolving credit facility to $165.0 million and extending the maturity date to June 6, 2024. The 2019 Wells Amendment further made changes to the 2015 Wells Fargo Revolver in connection with the transition away from LIBOR as the benchmark rate. On July 26, 2021, the Company entered into an amendment (the “2021 Wells Amendment”) increasing the aggregate revolving credit facility to $180.0 million. The amount outstanding under the June 2015 Wells Fargo Revolver as of March 26, 2022 was $28.5 million. As of March 27, 2021 the amount outstanding was zero. Total interest expense
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incurred in fiscal 2022 on the June 2015 Wells Fargo Revolver was $0.7 million, and the weighted average interest rate for fiscal 2022 was 3.4%. Total interest expense incurred in fiscal 2021 on the June 2015 Wells Fargo Revolver was $1.5 million, and the weighted average interest rate for fiscal 2021 was 1.6%. Total interest expense incurred in fiscal 2020 on the June 2015 Wells Fargo Revolver was $3.1 million, and the weighted average interest rate for fiscal 2020 was 3.3%.
During fiscal 2022, the Company repaid the remaining $111.5 million outstanding principal under the 2015 Golub Term Loan and terminated the agreement. Total interest expense incurred in fiscal 2022 on the 2015 Golub Term Loan was $2.5 million, and the weighted average interest rate for fiscal 2022 was 5.5%. Total interest expense incurred in fiscal 2021 on the 2015 Golub Term Loan was $6.3 million, and the weighted average interest rate for fiscal 2021 was 5.7%. Total interest expense incurred in fiscal 2020 on the 2015 Golub Term Loan was $8.5 million, and the weighted average interest rate for fiscal 2020 was 6.8%.
All obligations under the June 2015 Wells Fargo Revolver are unconditionally guaranteed by the Company and each of its direct and indirect domestic subsidiaries (other than certain immaterial subsidiaries) which are not named as borrowers under the June 2015 Wells Fargo Revolver.
The June 2015 Wells Fargo Revolver contains customary provisions relating to mandatory prepayments, restricted payments, voluntary payments, affirmative and negative covenants, and events of default, and requires the Company to maintain, on a consolidated basis, a Consolidated Fixed Charge Coverage Ratio of at least 1.00:1.00 during such times as a covenant trigger event shall exist. The June 2015 Wells Fargo Revolver also requires the Company to pay additional interest of 2.0% per annum upon triggering certain specified events of default set forth therein. For financial accounting purposes, the requirement for the Company to pay a higher interest rate upon an event of default is an embedded derivative. As of March 26, 2022, the fair value of this embedded derivative was estimated and was not significant.
As of March 26, 2022, we were in compliance with the June 2015 Wells Fargo Revolver covenant.
Cash Position and Cash Flow
Cash and cash equivalents were $20.7 million as of March 26, 2022 compared to $73.1 million as of March 27, 2021.
The following table presents summary cash flow information for the periods indicated:
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal Year Ended | ||||||||
| | | March 26, | March 27, | March 28, | ||||||
| | | 2022 | | 2021 | | 2020 | ||||
| | | (In thousands) | ||||||||
| Net cash provided by/(used in): | | | | | | | | | | |
| Operating activities | | $ | 88,864 | | $ | 155,922 | | $ | 25,317 | |
| Investing activities | | (60,443) | | (28,424) | | | (40,166) | | ||
| Financing activities | | (80,895) | | (123,913) | | | 67,798 | | ||
| Net (decrease)/increase in cash | | $ | (52,474) | | $ | 3,585 | | $ | 52,949 | |
Operating activities
Cash provided by operating activities consists primarily of net income adjusted for non-cash items including depreciation, amortization and stock-based compensation, plus the effect on cash of changes during the year in our assets and liabilities.
Net cash provided by operating activities was $88.9 million for the fiscal year ended March 26, 2022. The significant components of cash flows provided by operating activities were net income of $192.5 million, the add-back of non-cash depreciation and amortization expense of $27.4 million, stock-based compensation expense of $9.5 million, and amortization of debt issuance fees and debt discount of $1.9 million. Inventories increased $198.5 million as a result
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of an increase in purchases. Accounts payable and accrued expenses and other current liabilities increased by $70.7 million due to the timing of payments.
Net cash provided by operating activities was $155.9 million for the fiscal year ended March 27, 2021. The significant components of cash flows provided by operating activities were net income of $59.4 million, the add-back of non-cash depreciation and amortization expense of $24.1 million, stock-based compensation expense of $7.2 million, and amortization of debt issuance fees and debt discount of $0.9 million. Inventories decreased $13.0 million as a result of a reduction in purchases due to the COVID-19 crisis. Accounts payable and accrued expenses and other current liabilities increased by $37.4 million due to the timing of payments.
Investing activities
Cash used in investing activities consists primarily of purchases of property and equipment but also includes funds used to effect business combinations and asset acquisitions made by the Company.
Net cash used in investing activities was $60.4 million for fiscal 2022, which was primarily attributable to capital expenditures related to store construction, improvements to our e-commerce information technology infrastructure, and improvements to our distribution facilities.
Net cash used in investing activities was $28.4 million for fiscal 2021, which was primarily attributable to capital expenditures related to store construction, improvements to our e-commerce information technology infrastructure, and improvements to our distribution facilities.
Financing activities
Cash used in financing activities consists primarily of repayments on our term loan and credit facility.
Net cash used in financing activities was $80.9 million for fiscal 2022. We increased our line of credit borrowings by $28.5 million and repaid $112.3 million on our debt and capital lease obligations during the period. We also received $5.8 million from the exercise of stock options.
Net cash used in financing activities was $123.9 million for fiscal 2021. We reduced our line of credit borrowings by $129.9 million and repaid $0.7 million on our debt and capital lease obligations during the period. We also received $7.4 million from the exercise of stock options.
Other obligations
Contractual obligations. We enter into long-term contractual obligations and commitments in the normal course of business, primarily non-cancelable finance and operating leases.
As of March 26, 2022, our contractual cash obligations over the next several periods are set forth below.
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Payments Due by Period | | |||||||||||||
| (In thousands) | | Total | | Less Than 1 Year | | 1 - 2 Years | | 3 - 5 Years | | More Than 5 Years | | |||||
| Finance lease obligations | | $ | 22,285 | | $ | 1,560 | | $ | 3,059 | | $ | 4,771 | | $ | 12,895 | |
| Operating lease obligations | | | 304,842 | | | 47,404 | | | 100,896 | | | 96,389 | | | 60,153 | |
| Debt and line of credit | | | 28,549 | | | — | | | 28,549 | | | — | | | — | |
| Interest expense on debt | | | 3,021 | | | 1,378 | | | 1,643 | | | — | | | — | |
| Total | | $ | 358,697 | | $ | 50,342 | | $ | 134,147 | | $ | 101,160 | | $ | 73,048 | |
Finance lease obligations primarily relate to the acquisition of two retail stores, two office buildings, one distribution center facility and land as part of the Sheplers Acquisition. During fiscal 2020, we amended the lease,
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extending the lease expiration through fiscal 2036. The remaining finance lease obligations relate to property and equipment leases that expire at various dates through fiscal 2024.
We lease our stores, facilities and certain other equipment under non-cancelable operating leases. These operating leases expire at various dates through fiscal 2034, and contain various provisions for rental adjustments, including, in certain cases, adjustments based on increases in the Consumer Price Index. They also generally contain renewal provisions for varying periods. Our future operating lease obligations would change if we were to exercise these renewal provisions or if we were willing to enter into additional operating leases.
Debt consists of $28.5 million outstanding under our June 2015 Wells Fargo Revolver as of March 26, 2022. Payments with respect to the June 2015 Wells Fargo Revolver are due June 6, 2024. During fiscal 2022, the Company repaid the remaining $111.5 million of outstanding principal under the 2015 Golub Term Loan and terminated the agreement.
Interest expense on debt consists of scheduled interest payments under our June 2015 Wells Fargo Revolver. The interest expense relating to our June 2015 Wells Fargo Revolver was determined using an interest rate of 3.50% applied to the revolving line of credit balance of $28.5 million on March 26, 2022, the last day of the fiscal year. The interest rate used represents the weighted average interest rate on the June 2015 Wells Fargo Revolver on the last day of fiscal 2022. Additional interest expense relating to our June 2015 Wells Fargo Revolver was determined using an interest rate of 0.25% applied to the unutilized portion of the $180.0 million revolving line of credit on March 26, 2022, the last day of the fiscal year.
Off-balance sheet arrangements. We are not a party to any off-balance sheet arrangements, except for purchase obligations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, our actual results will inevitably differ from our estimates.
We believe that the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are re-evaluated on an ongoing basis and adjustments are made when facts and circumstances dictate a change.
The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in our financial statements have not been materially impacted by such variances. Our accounting policies are more fully described in Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Management has discussed the development and selection of these critical accounting policies and estimates with our board of directors.
We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, inventories, goodwill, intangible and long-lived assets, leases, stock-based compensation and income taxes, which are more fully described below.
Revenue recognition
Sales are recognized at the time of purchase by customers at our retail store locations. Sales are recorded net of taxes collected from customers. Transfer of control takes place at the point at which the customer receives and pays for the merchandise at the register. For e-commerce sales, revenue is recognized when control transfers to the customer, which generally occurs upon delivery of the product. On average, customers receive goods within approximately five days of being ordered. The estimate of the transit times for these shipments is based on shipping terms and historical
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delivery times. Shipping and handling fees billed to customers for online sales are included in net sales and the related shipping and handling costs are classified as cost of goods sold in the consolidated statements of operations.
We reserve for projected merchandise returns based upon historical experience and various other assumptions that we believe to be reasonable. Customers can return merchandise purchased in-store within 30 days of the original purchase date, return merchandise purchased at bootbarn.com and countryoutfitter.com within 60 days of the original purchase date, and return sheplers.com merchandise within 90 days of the original purchase date. Merchandise returns are often resalable merchandise and the purchase price is generally refunded by issuing the same tender used in the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are not included in the population when calculating our sales returns reserve. We record the impact of adjustments to our sales returns reserve quarterly within total net sales. Should the returns rate as a percentage of net sales significantly change in future periods, it could have a material impact on our results of operations.
We maintain a customer loyalty program at the stores and bootbarn.com. Under the program, customers accumulate points based on purchase activity. For customers to maintain their active point balance, they must make a qualifying purchase of merchandise at least once in a 365-day period. Once a loyalty program member achieves a certain point level, the member earns awards that may be redeemed for credits on merchandise purchases. To redeem awards, the member must make a qualifying purchase of merchandise within 60 days of the date the award was granted. Unredeemed awards and accumulated partial points are accrued as unearned revenue until redemption or expiration and, upon redemption and expiration, as an adjustment to net sales using the relative standalone selling price method. If actual redemptions ultimately differ from accrued redemption levels, or if we further modify the terms of the program in a way that affects expected redemption value and levels, we could record adjustments to the unearned revenue accrual, which would affect net sales.
We recognize the sales from gift cards, gift certificates and store credits as they are redeemed for merchandise. Prior to redemption, we maintain an unearned revenue liability for gift cards, gift certificates and store credits until we are released from such liability, including potential obligations arising under state escheatment laws. Our gift cards, gift certificates and store credits do not have expiration dates, and unredeemed gift cards, gift certificates and store credits are subject to state escheatment laws. Amounts remaining after escheatment are recognized in net sales in the period escheatment occurs and the liability is considered to be extinguished.
Leases
Operating and finance lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. The Company does not separate lease and non-lease components for all of its leases, and leases with an initial term of 12 months or less are excluded from balance sheet capitalization. Related operating and finance lease right-of-use assets are recognized based on the initial present value of the fixed lease payments, reduced by cash payments received from landlords as lease incentives, plus any prepaid rent and other direct costs from executing the leases. Amortization of both operating and finance lease right-of-use assets is performed on a straight-line basis and recorded as part of rent expense in cost of goods sold and selling, general and administrative expenses on the consolidated statements of operations. The majority of total lease costs is recorded as part of cost of goods sold, with the balance recorded in selling, general and administrative expenses on the consolidated statements of operations. The interest expense amortization component of the finance lease liabilities is recorded within interest expense on the consolidated statements of operations.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are recognized as lease expense as they are incurred.
Inventories
Inventories, which consist primarily of general consumer merchandise held for sale, are valued at the lower of cost or net realizable value. Cost is determined using the weighted-average cost method (which approximates the first-in, first-out method) and includes the cost of merchandise and import related costs, including freight, duty and agent commissions.
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During each accounting period, we record adjustments to our inventories, which are reflected in cost of goods sold, if the cost of specific inventory items on hand exceeds the amount that we expect to realize from the ultimate sale or disposal of the inventory. A periodic review of inventory is performed in order to determine if inventory is properly stated at the lower of cost or net realizable value. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and the value and nature of merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if appropriate.
To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross profit, operating income and the carrying value of inventories.
We also record an inventory shrinkage reserve calculated as a percentage of net sales for estimated merchandise losses for the period between the last physical inventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mix and changes in shrinkage trends. We perform periodic physical inventory counts for our entire chain of stores and our distribution center and adjust the inventory shrinkage reserve accordingly. If actual physical inventory losses differ significantly from the estimate, our results of operations could be adversely impacted. The inventory shrinkage reserve reduces the value of total inventory and is a component of inventories on the consolidated balance sheets.
Goodwill, intangible and long-lived assets
Goodwill and indefinite-lived intangible assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Intangible assets with indefinite lives include the Boot Barn trademark that was acquired as part of the recapitalization with Freeman Spogli & Co. on December 12, 2011, the Sheplers trademark acquired as part of the Sheplers Acquisition, the cost to register the Boot Barn trademark in Hong Kong, and the www.countryoutfitter.com website trademark we acquired as part of our asset acquisition in February of fiscal 2017. We test goodwill and indefinite-lived intangible assets for impairment at least annually on the first day of the fourth quarter or more frequently if indicators of impairment exist, in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 350, Goodwill and Other. This guidance provides us the option to first assess qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. Our retail stores and e-commerce websites represent two operating segments. Given the similar qualitative and economic characteristics of the two operating segments, our retail stores and e-commerce websites were aggregated into one reporting segment in accordance with guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”). As a result of this, our operations represent two reporting units, retail stores and e-commerce, for the purpose of our goodwill impairment analysis.
If, based on a review of qualitative factors it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to compare the fair value of the reporting unit with its carrying amount. We evaluate the fair value of the reporting unit by using market-based analysis to review market capitalization and by reviewing a discounted cash flow analysis using management’s assumptions. We determine the fair value of our reporting unit using the income approach and market approach to valuation, as well as other generally accepted valuation methodologies. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we recognize an impairment loss equal to the difference between the carrying amount and the estimated fair value of the reporting unit.
Definite-lived intangible assets and long-lived assets. Definite-lived intangible assets consist of certain trademarks and customer lists. Definite-lived intangible assets are recorded at their fair value as of the acquisition date with amortization computed utilizing the straight-line method over the assets’ estimated useful lives, with the exception
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of customer lists, which are amortized based on the estimated attrition rate. The period of amortization for customer lists is five years and for definite-lived trademarks is three years.
Long-lived assets consist of leasehold improvements, machinery and equipment, furniture and fixtures, software and vehicles. Long-lived assets are subject to depreciation and amortization. We assess potential impairment of our definite-lived intangible assets and long-lived assets whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. Factors that are considered important that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, with such estimated fair values determined using the best information available and in accordance with FASB ASC Topic 820, Fair Value Measurements (“ASC 820”).
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected by additional impairment charges.
Stock-based compensation
We account for employee stock options, restricted stock awards, restricted stock units and performance share units in accordance with relevant authoritative literature. Stock options are granted with exercise prices equal to or greater than the market value, as reported on the New York Stock Exchange (or on any other national securities exchange on which our common stock is then listed) on the date of grant as authorized by our board of directors. Stock options granted have vesting provisions of either four or five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. We have selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. We have considered the retirement and forfeiture provisions of the options and utilized the simplified method to estimate the expected life of the options. We base the risk-free interest rate on the yield of a zero-coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Stock volatility for each grant is measured using the weighted average of historical daily price changes of our stock and our competitors’ common stock over the most recent period equal to the expected option term of the awards. In determining the appropriateness of the public entities included in the volatility assumption, we considered a number of factors, including the entity’s life cycle stage, growth profile, size, financial leverage and products offered. The fair value of stock options granted with both service and market vesting conditions is estimated using a Monte Carlo simulation model. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered. Forfeitures are recognized as incurred.
The fair value of our restricted stock awards, restricted stock units and performance share units is the closing price of our common stock on the grant date.
Income taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are attributable to differences between financial statement and income tax reporting. Deferred tax assets, net of any valuation allowances, represent the future tax return consequences of those differences and for operating loss and tax credit carryforwards, which will be deductible when the assets are recovered. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We
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consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
We account for uncertain tax positions in accordance with ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Such changes in recognition or measurement might result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying statement of operations. See Note 13 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our tax disclosures.
Recent Accounting Pronouncements
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies some of its guidance around reference rate reform activities as global market participants undertake efforts to transition from using or referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates to using or referencing alternative reference rates. The amendments in this ASU if elected by an entity, are effective immediately. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company does not expect the revised standard to have an impact on its consolidated financial statements.