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Analyzing Boot Barn’s CEO Departure and Market Reactions
Market Reactions and Earnings Insights
In this podcast, Motley Fool analyst Jim Gillies and host Ricky Mulvey discuss:
- Why the market may be overreacting to Boot Barn‘s CEO departure.
- A niche grocer that’s seen its stock double in the past year.
- Finding growth at a reasonable price.
Additionally, Larry the Werewolf joins Ricky to examine Hershey and share his top three favorite candies for Halloween.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. For those interested in investing, visit our beginner’s guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Oct. 31, 2024.
Ricky Mulvey: We’re here to discuss a misunderstanding and an overreaction. No, we’re not playing tricks; you’re tuned into Motley Fool Money. I’m Ricky Mulvey, and I’m joined by expert podcaster Jim Gillies. Jim, how are you today?
Jim Gillies: I wouldn’t call myself expert, but I’m part of a large team.
Ricky Mulvey: We’ll add that to everyone’s email signatures.
Jim Gillies: Sounds great!
Ricky Mulvey: I wanted to reach out because we haven’t spoken in a while. It’s big Tech earnings Week. We had Meta and Microsoft reporting. But here we are talking about a boot retailer and airplane leasing companies. Why?
Jim Gillies: I’m not the world’s biggest tech aficionado, though I do have around 40% of my family’s investments in index funds. The Magnificent Seven have indeed driven the main index. However, I believe I can contribute more by focusing on smaller, less-known companies, which is why I suggested those tickers.
Ricky Mulvey: Perhaps a Halloween theme: obscure, spooky, misunderstood. Let’s go to Boot Barn, a Western retailer with over 400 stores, which reported solid Q2 earnings with a 5% same-store sales growth—good for a retailer in a recession. However, there’s a problem: the CEO, Jim Conroy, is leaving for Ross Stores. Jim, why do you seem skeptical?
Jim Gillies: I’m just observing your pun game. It’s strong.
Ricky Mulvey: Thank you! Now, to the facts, CEO Jim Conroy is heading for Ross Stores. The market is reacting with concern, impacting Boot Barn’s valuation, approximately $750 million of its $4 billion market cap post-announcement. What does this say about Mr. Conroy’s leadership impacting this drop?
Jim Gillies: For that drop in value to be justified, it assumes Conroy was the driving force behind their success over the last decade. However, I don’t believe that’s the case. Let’s look at the recent numbers: Boot Barn reported $426 million in sales, exceeding its guidance of $405 to $412 million. Operating profit was $40 million, far above the $33 to $36 million range they predicted. They also improved full-year guidance significantly for the second consecutive quarter, achieving nearly 5% same-store sales growth.
Jim Gillies: Despite such strong performance, their stock has dropped 22.5% since the report. One major reason for this could be cash flow, which turned negative for the quarter, primarily due to increased inventory. This rise was expected, as they need more stock after strong sales in previous quarters. While cash flow dips might alarm some, it should not have come as a surprise given their recent successes.
Jim Gillies: It’s also important to consider Conroy’s new compensation package at Ross Stores, which is significantly higher—about $25 million in year one and potentially $75 million over five years. This perhaps signals why he decided to leave Boot Barn for what appears to be a lucrative opportunity.
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Recent news surrounding Boot Barn’s leadership has sparked conversations about growth potential and strategy. The company’s CEO, who has been with Boot Barn for 12 years, is moving on to another opportunity that significantly increases his financial incentive. Having been instrumental in Boot Barn’s journey, it’s understandable he seeks a new challenge.
As an investor what matters is how the company will adapt to this change. Interestingly, many might struggle to recall the CEO’s name before recent discussions. Nonetheless, Boot Barn has shown consistent success in its market. Now, it has appointed its Chief Digital Officer as the interim CEO, which serves to maintain stability during this transition.
Ricky Mulvey: It’s worth noting Boot Barn’s impressive same-store sales growth rates. They have outperformed players like Dick’s Sporting Goods and Tractor Supply, the latter of which has seen declines. The discussion of growth at reasonable prices becomes pertinent here. Does Boot Barn fit this mold?
Jim Gillies: Absolutely. When I first recommended Boot Barn, the concept of growth at a reasonable price was at the forefront. Today, with 426 stores, they aim to expand to 900-1,000 locations by fiscal 2031. If they reach that target, it might lead to further revisions, potentially increasing estimates beyond this goal. The culture surrounding Boots Barn resonates across borders, especially in regions like Alberta and Latin America, where cowboy culture exists.
The returns on investments for their stores are compelling; payback periods range from 1 to 1.4 years. Such rapid returns advocate for accelerated growth, as long as they maintain these metrics. Currently, Boot Barn trades at around 17 times operating profit and 23 times price-to-earnings ratio while projecting growth through fiscal 2031. With projected revenue increases in the low teens, it offers a good outlook on operating profit growth as well.
After the CEO’s departure, Boot Barn could either continue its expansion or pivot towards generating substantial cash flow, much like Home Depot did over the years. If the company can reach $350-$400 million in annual free cash flow while maintaining today’s enterprise value of $3.8 billion, it represents a promising opportunity for investors.
Ricky Mulvey: I’m reminded of the Cincinnati College Football coaches who often use the program as a steppingstone. Let’s now shift our focus to Sprouts Farmers Market, another company worth analyzing in terms of growth at a reasonable price. Sprouts has been compared to stores like Trader Joe’s and Whole Foods. Yet, their recent performance has been noteworthy.
Jim Gillies: I hold a favorable view of Sprouts. They have reported an impressive 14% sales increase and 8.5% same-store sales growth this quarter, alongside a 40% jump in earnings per share. New store openings were slower due to external factors, but overall, they remain a strong performer in the market. When first recommended, Sprouts was considered a best-in-class grocery operator with solid margins and growth rates, but it had been undervalued.
Today, Sprouts has shifted away from being viewed as a low-performing option. The stock has surged over 200% in the past year, further prompting dialogue about its valuation. Is Sprouts still a reasonable growth investment?
Jim Gillies: They remain a growth story, but I hesitated over the reasonable price aspect. Anticipating around 10% store growth, Sprouts has the potential to expand significantly within the US. Their management has shown fiscal responsibility, maintaining a strong cash flow position and actively reducing their share count since 2015. Although some operational concerns exist, the overall outlook remains positive.
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Evaluating Market Multiples: Are Current Prices Justified?
In the world of investing, it’s common to note how stock prices and valuations evolve. Currently, a company that once traded at modest multiples has now seen its valuation soar to levels reminiscent of past market leaders.
When I first recommended investing in this stock, it was trading at around six to seven times Zibda. Today, that figure has climbed to a shocking 21 times. Free cash flow metrics tell a similar story; this stock was previously valued at 13 to 16 times free cash flow, but it now commands an eye-watering 36 times. Even the price-to-earnings (PE) ratio has jumped from a range of 11-14 up to a staggering 43. Such valuations remind me of the heights Whole Foods reached in its heyday, stirring up questions about their fairness.
In the past, my discounted cash flow (DCF) analysis indicated this company was undervalued. Now, however, I find it challenging to place a fair value on the stock above the $75 to $80 range, while it is currently trading around $130. DCFs are known for their unpredictability, yet they provide helpful benchmarks. Personally, I appreciate this company and have time invested, having recommended it multiple times. Yet, I sense that management shares my concern regarding current stock prices, as they have shifted their strategy from aggressive buybacks to conserving capital. For instance, this quarter saw $156 million in free cash flow, of which only $25 million was utilized for stock buybacks, leaving a significant amount idling on the balance sheet. This indicates that they may feel their shares are expensive, and I find it difficult to disagree.
Ricky Mulvey: Let’s talk about your insights on AerCap next. I know you have a lot to share, but we might not have enough time today. For members of Motley Fool Services, where can they find your in-depth analysis on AerCap?
Jim Gillies: You can find my thoughts on AerCap featured prominently in Hidden Gems, Canada. I intend to elaborate further in next Friday’s column. To summarize briefly, AerCap appears to be undervalued. Under CEO Angus Kelly’s leadership, it trades at one time book value and approximately 8.5 times earnings, both conservative estimates for a company within its niche market. It’s positioned well in the aircraft leasing sector, and I think it deserves more attention from investors.
Ricky Mulvey: We covered big tech on Friday, including Apple, Amazon, Microsoft, and Meta. It was great to have you here. Happy Halloween!
Jim Gillies: Thank you! Happy Halloween!
Ricky Mulvey: Every Halloween, I chat with Asit Sharma about the candy industry. This year, however, Asit had to bow out last minute and sent his friend instead. So, I’m eager to introduce Larry the Werewolf. How’s it going today, Larry?
Larry the Werewolf: Thanks, Mr. Mulvey! I’m thrilled to be here. I had to suppress my excitement, even as I was cautioned against overdoing it in the studio. But here goes—Werewolves of London!
Ricky Mulvey: Definitely a unique introduction, Larry! Werewolves are famous for nighttime escapades. Do you also dabble in stock analysis?
Larry the Werewolf: Absolutely! I’ve been analyzing securities for some time now. A previous relationship even nudged me toward focusing on investments, but I moved on from that.
Ricky Mulvey: Let’s pivot to Hershey. Last time I spoke with Asit, we discussed its dominance in the market. Now, with issues like cocoa shortages and the rise in popularity of weight-loss drugs affecting consumer habits, how is Hershey positioned for 2024?
Larry the Werewolf: It’s curious, Mr. Mulvey. Hershey’s management had ambitious plans for diversifying into snacks but hasn’t gained significant market share in either the confectionery or salty snack segments since those acquisitions. This lack of performance suggests either a misunderstanding of the snack market or insufficient innovation to attract consumers. Their strategy may need re-evaluation.
Ricky Mulvey: What’s on your mind regarding Halloween treats? I’m eager to hear your top three favorite candies!
Larry the Werewolf: I have a list ready to share, Mr. Mulvey. I can’t wait to unveil my top choice!
Ricky Mulvey: Perfect! But let’s focus on traditional candies, if you could. What are your top three favorites?
Larry the Werewolf: Alright then! First on my list is… dog treats!
Ricky Mulvey: Not quite a candy, Larry! Let’s steer the conversation back to more conventional options. How about some chocolate or gummies?
Larry the Werewolf: Let’s try again! How about frozen blood pops? In the spirit of vampires and werewolves, they can add a festive touch to Halloween celebrations!
Ricky Mulvey: Interesting choice, but we’re aiming for classic Halloween candies here. Let’s see if you can diversify your selection!
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Halloween Treats: Larry the Werewolf’s Top Picks
Ricky Mulvey: What’s your number three favorite Halloween candy? Think of something sugary—you could go for lollipops or taffy! What do you have in mind?
Larry the Werewolf: For my number three, my absolute favorite is HALLS Mentho-Lyptus Triple Action lozenges. You see, werewolves tend to have bad breath, and with these, you get a two-for-one deal. Not only do you freshen your breath, but you can also ease that sore throat from howling all night!
Ricky Mulvey: You’re getting warmer, but we still need to find something that’s strictly a candy. What’s one Halloween treat you enjoy?
Larry the Werewolf: How about silken tofu, Mr. Mulvey? I chop it into little squares and stick toothpicks in them. I place them on the porch for the kids to grab.
Ricky Mulvey: That’s savory! We were looking for something sweet but went in a different direction.
Larry the Werewolf: It’s great! If you want, you can drizzle a little teriyaki sauce on them. That would satisfy that sweet tooth!
Ricky Mulvey: I’m thinking of dark chocolate Reese Cups, Nerds Gummy Clusters, and Tony’s Dark Milk Chocolate Pretzel Tofu. You’re close—just pick one!
Larry the Werewolf: I choose Nerds.
Ricky Mulvey: Appreciate your input, Larry. Maybe next time, you or someone in your family might share a favorite Halloween treat as well!
As always, listeners should note that the guests on the program may have personal interests in the stocks they discuss. The Motley Fool may also make formal recommendations. Any investment decisions should be made based solely on personal research. All personal finance content adheres to Motley Fool editorial standards, independent of any advertising influences. The Motley Fool only endorses products it would recommend to friends. I’m Ricky Mulvey. Thanks for tuning in, and we’ll see you again tomorrow.
John Mackey, the former CEO of Whole Foods Market, part of Amazon, serves on The Motley Fool’s board of directors. Randi Zuckerberg, former Facebook market development chief and the sister of Meta Platforms CEO Mark Zuckerberg, is also a board member. Asit Sharma holds investments in Amazon, Hershey, and Microsoft. Jim Gillies has positions in AerCap, Amazon, Apple, Boot Barn, and Sprouts Farmers Market. Ricky Mulvey holds stakes in Hershey, Home Depot, and Meta Platforms. The Motley Fool has interests in and recommends Amazon, Apple, Hershey, Home Depot, Meta Platforms, and Microsoft. Additionally, The Motley Fool recommends AerCap, Boot Barn, Sprouts Farmers Market, and Tractor Supply, along with specific options on Microsoft. For more details, please refer to The Motley Fool’s disclosure policy.
The views expressed in this article are solely those of the author and do not necessarily represent those of Nasdaq, Inc.
