Small-Cap Outperformer in the Retail Sector

In a market that remains overvalued relative to historical levels after spending time near DotComBubble-like valuations in Q4 2021, finding large safety margins can be difficult, despite the near 30% correction in the S&P-500 (SPY).

This is because this correction has occurred from extremely lofty valuation levels, meaning we may need an abnormally large correction to reset valuations to attractive levels.

The result is that despite the depth of this correction, it’s not particularly easy to find growth stocks with large safety margins.

However, while large-cap growth and some tech stocks remain overvalued when factoring in higher discount rates (Federal Reserve’s aggressive policy), small-cap growth is the cheapest it’s been in years, making it a fertile hunting ground for new ideas.

Some investors might prefer to shy away from buying when there’s blood in the streets on small-cap names due to their higher beta.

Still, I believe as long as one is buying great businesses at a great price and being patient for stabilization in the share price, this strategy can outperform.

This stock is in the Retail Sector and was one of the top performers in 2021, with a 184% return on the back of 220% annual EPS growth. Let’s take a closer look below.

A Small-Cap Retailer On Sale

Boot Barn (BOOT) is a $1.67BB retail company in the United States that sells various Western & work-related apparel, shoes, and accessories.

The company was founded over 30 years ago in Orange County, CA, and is now the nation’s largest Western and Work retailer, with nearly 350 stores across over 40 states.

However, the company is confident that it can grow to over 900 stores in new and legacy markets, with it currently concentrated in just a few states: California, Texas, Colorado, and Nevada.

The company is considered a discretionary retailer since it sells apparel, a highly discretionary item for consumers.

However, the major distinction between Boot Barn and its peers is that over 60% of its business is functional vs. fashion, referring to work boots, men’s apparel, ladies’ performance boots, and men’s boots, as well as work accessories.

So, while some brands are seeing a massive pullback in demand with zero reasons to enter a store outside of a wardrobe refresh from a fashion standpoint, Boot Barn benefits from being more insulated, with core customers that shop here for functional apparel, footwear, and accessories.

This should help it weather the recessionary storm better than other brands, and the company has pointed out in the past that it has weathered downturns relatively well.

Besides, Boot Barn has incredible economics (1.4-year payback on new store openings) and is seeing limited margin compression as its higher-margin private label brands see higher penetration.

Hence, while some brands are pulling back on new store openings and battening down the hatches, Boot Barn continues to open stores at a rapid pace (10 stores opened last quarter).

The reason? It hopes to gain market share, especially from smaller independents that don’t have the private label benefit or financial strength to survive a tough couple of years.

Unfortunately, the stock has come under pressure recently, and it fell another 8% after reporting its fiscal Q2 2023 results last month. This was related to more lukewarm guidance than expected, with the company taking FY2023 sales guidance lower to $1.65BB – $1.67BB and same-store sales of (-) 1.0% to 0.50% for the year.

While this is disappointing, these results are much better than what we’re seeing from other retailers.

Plus, Boot Barn is in the favorable position of not having to dump excess inventory with significant promotions due to much of its inventory being functional vs. seasonal.

Hence, I see this 50% correction in this high-quality growth story as overdone and believe it’s setting up a buying opportunity.

The Fundamental Case

From a valuation standpoint, BOOT has rarely ever been more attractive and is currently sitting at just ~9.7x FY2023 earnings estimates, a massive discount to its historical multiple of 20.5x earnings.

On a PEG basis, this translates to a valuation of just 0.81, with an estimated 12% annual EPS growth rate going forward (post-2022).

This makes BOOT highly attractive vs. its historical multiple and its peers, especially when some names like Lululemon (LULU) with lower unit growth are trading at PEG ratios north of 2.20.

The Technical Picture

While Boot Barn may not stand out from a technical standpoint, given that it lies beneath all of its key weekly moving averages (20-week, 40-week) and is making lower highs, it is pulling back to a very important level: its 200-week moving average.

This level provided strong support during the stock’s 50% correction in 2019 and would also have provided strong support in Q1 2020 if not for the extreme liquidity dry-up that led to an additional 15%in the market in a violent manner.

See the Full Technical Analysis Report for BOOT

In addition, while Boot Barn’s updated FY2023 guidance was lukewarm, the stock has since recouped most of its post-earnings report losses, suggesting that much of the weakness was already priced into the stock.

So, with the earnings report out of the way, BOOT sitting on a major support level and making higher lows over the past week, I believe that the stock could outperform its peer group over the next few months, and would expect the $51.00 level to provide a floor for the stock.

The Bottom Line

Based on BOOT’s FY202 annual EPS estimates of $5.76 and a conservative earnings multiple of 13.5, given its industry-leading unit growth, strong store economics, and near-flawless execution to date, I see a fair value for the stock of $77.80.

This translates to a 39% upside from current levels, but these estimates could be conservative given the team’s history of over-delivering on promises.

Hence, I rank BOOT as an Outperformer, and I expect any further weakness in the stock to provide a buying opportunity.

Disclosure: I am long BOOT

The above analysis of Boot Barn (BOOT) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Is Boot Barn (BOOT) A Buy or Sell?

Based on MarketClub’s technical analysis tools, Boot Barn (BOOT) is showing short-term strength. However, look for the longer-term bearish trend to resume. As always, continue to monitor the trend score and set stops.

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