Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on Boot Barn Holdings, Inc. (NYSE: BOOT)
NOTE TO EDITORS: The Following is an Investment Opinion Issued by Spruce Point Capital Management
Provides Evidence That Boot Barn’s CEO Has Modified His Educational Degree Claim and Fails to Disclose His Role at Gerald Stevens, Inc. a Bankrupt Specialty Retailer That Pursued a Similar National Expansion Strategy
Provides Evidence That Boot Barn’s Omnichannel Marketing, Ecommerce and Customer Growth is Slowing While it Pursues an Aggressive Large Store Retail Expansion with Declining New Store Unit Economics
Questions if Management Has Misportrayed its New Store Appearances with Evidence That Multiple New Stores Appear Nothing Like Images Presented to Investors
Provides Research to Clarify Potential Misperceptions About the Effect Taylor Swift, Beyoncé and the Yellowstone Drama Series May Have on Boot Barn’s Sales
Identifies at Least Seven Companies Associated with Executives and Board Chairs That Have Restated Financials
Sees 40% to 50% Long-Term Downside Risk to BOOT’s Share Price and Expects the Price to Underperform the Broader Retail Sector
May 08, 2024 09:00 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Boot This Stock From Your Portfolio” that outlines why we believe shares of Boot Barn Holdings, Inc. (NYSE: BOOT) ("Boot Barn" or the "Company") face up to 40% to 50% long-term downside risk, or $51.40 – $61.70 per share. Download and view the report by visiting www.SprucePointCap.com for additional information and exclusive updates.
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Spruce Point Report Overview
Based in Irvine, California, Boot Barn is a specialty retailer that sells western and work-related footwear, apparel and accessories in the U.S. The Company operates a total of 402 stores in 45 states with expansion plans of reaching 900 stores. Approximately 37% of revenues are from exclusive brands and approximately 10% of revenues are from ecommerce. As of year-end 2023, Boot Barn reported $1,704 million and $116 million of revenues and adjusted net income, respectively.
The concerns we outline in our report include:
- CEO and Director James Conroy has modified his educational degree claim and omits an important role from his biography to assess his leadership behavior and influence. We observe that Mr. Conroy modified his degree claim from “business management and marketing” to “business management and statistics.” These are very different disciplines, and we call on the CEO and Board to explain why the revision was made. We also express concerns that Mr. Conroy omits from his biography his role as SVP of Buying, Marketing & Supply Chain at Gerald Stevens, Inc. (Nasdaq: GIFT) from 1998 – 2001 which promoted a similar growth story to Boot Barn. Gerald Stevens claimed the potential to grow a national retail network up to 1,000 stores (ironically Boot Barn now claims it can grow to 900 stores) in the specialty floral and gift industry which it described as a highly fragmented industry similar to Boot Barn’s industry. The company filed for bankruptcy and one former director on record said that bad accounting resulted in numbers being 15%-20% overstated in several markets. The Company was founded by Steven Berrard, former Blockbuster CEO, where Mr. Conroy previously worked. We speculate that Mr. Conroy may have been loyal to Mr. Berrard and believed in his leadership abilities to join him at Gerald Stevens. Mr. Berrard was an executive with some notable successes, but also some very controversial and highly aggressive endeavors. Notably, after Mr. Berrard’s failure at Gerald Stevens he led Swisher Hygiene (Nasdaq: SWSH) as CEO from 2004 – 2010 where executives were later convicted of accounting fraud involving balance sheet capitalization of expenses and cookie jar accounting. Mr. Conroy later was COO, President and Co-CEO of Claire’s Stores, a specialty retailer of fashion accessories for young women and teens where he worked under CEO Eugene Kahn. Mr. Kahn was previously ousted as CEO of May Department Stores Co. where, among other things, he was criticized for issuing sales projections that repeatedly turned out to be overly aggressive. Mr. Kahn and Mr. Conroy both resigned from Claire’s Stores during a period it received multiple SEC comment letters questioning store performance evaluation and EBITDA, a metric that Boot Barn recently stopped providing.
- Spruce Point is equally concerned by the leadership chosen to support and oversee CEO Conroy. Multiple executives and Board members are associated with financial restatements and scandals, including:
- CFO and Secretary Jim Watkins who previously served as Corporate Controller and Principal Accounting Officer at Mindspeed Technologies, Inc. (Nasdaq: MSPD). During his tenure at Mindspeed, the company issued a financial restatement involving the overstatement of operating cash flow.
- Chief Retail Officer Michael Love who served as Boot Barn’s SVP of Stores (2018-22), SVP of Marketing and Merchandise Planning (2017-18), and VP of Merchandise Planning (2014-17). According to his biography, Mr. Love was VP Divisional Planning Manager at Kohl’s Corp. (NYSE: KSS) from 2008-2010. Notably, in 2011 Kohl’s audit committee concluded there were errors in lease accounting and that the financial statements could no longer be relied upon. Kohl’s financial statements were restated back to 2008 which is when Mr. Love joined Kohl’s. Mr. Love later worked at Claire’s Stores under CEO Conroy’s tenure.
- Director Anne MacDonald who currently sits on Boot Barn’s Audit Committee. Ms. MacDonald joined the Board of Catalina Marketing Corp. (NYSE: POS) in February 2001 and was on the audit committee. On June 30, 2003, Catalina announced it would delay its 10-K due to revenue recognition issues and the company ultimately restated its financial results back to 2001 and commenced restructuring. Ms. MacDonald departed from Catalina’s Board in August 2004.
- Peter Starrett has served on Boot Barn’s Board since 2011 and as Chairman since 2012. From May-November 2012, Mr. Starrett served as Boot Barn’s interim CEO. Mr. Starrett’s biography fails to disclose that he served on both the Boards of AFC Enterprises (Nasdaq: AFCE) from 1998-2005 and The Pantry (Nasdaq: PTRY) from 1999-2006 during the periods when financial restatements occurred at both companies. The SEC opened a formal investigation into Pantry’s restatement. Mr. Starrett also joined the Board of Pacific Sunwear of California, Inc. (Nasdaq: PSUN) in 2003. In February 2005, it issued a non-reliance warning on its financials and restated results after determining that its accounting practices related to leases and landlord incentives were incorrect.
- Audit Chair Brenda Morris was SVP of Torrid Holdings Inc (NYSE: CURV), which was spun out of Hot Topic, Inc. as a separate public company. Her official Boot Barn biography doesn’t adequately disclose this position. Her LinkedIn biography references a successful completed carve out including two years of audited financials and quarter reviews. She also claimed to be a business partner for the CFO responsible for recruiting a new VP Controller and Director of FP&A among others. When it filed its IPO registration statement in 2020, Torrid disclosed a material weakness and revision to its financials dating back to 2016, a period that appears to encompass her tenure at Torrid. She also serves as Independent Director and Audit Chairman of Xponential Fitness (Nasdaq: XPOF) since 2019. On June 27, 2023 Fuzzy Panda Research issued a report entitled “Xponential Fitness (XPOF) – “Abusive Franchisor That Is A House of Cards” which alleged that the Founder & CEO Anthony Geisler has a history of misleading investors and business partners and is hiding that many of XPOF’s brands and franchisees are struggling.
- Boot Barn’s aggressive physical store expansion is an outlier among industry peers as it appears to be obfuscating increased competitive pressures. The Company claims that it is a leader in the market, with an increasing total addressable market (TAM) and blue-sky potential to grow its physical retail footprint nationally and increase the average square footage of its typical store. In May 2022, Boot Barn claimed its TAM could double to $40 billion and its store count could expand from 500 to 900. Boot Barn’s stores average 10,800 selling square feet but it now suggests stores can be up to 14,000 square feet. Notable direct competitors are owned and operated by family and private equity backers, and even Warren Buffet’s Berkshire Hathaway is invested in Justin Brands. We believe that if expanding the physical footprint were as lucrative and attractive as the Company claims, competitors would simply mimic the Company’s aggressive strategy. However, that does not appear to be the case and instead Boot Barn is an outlier in its belief that aggressive large store format growth is a viable strategy.
In reality, we think that the Company is struggling, not only because its customers’ incomes are strapped and from greater competition, but also from poor positioning in omnichannel marketing and potential brand confusion and identity loss. The Company recently claimed a “dominant position” in the industry but now says it has an “industry leading position” while listing new competitors such as Amazon. Boot Barn also ceased disclosing active customer counts. Therefore, we don’t believe it is fair for the Company to claim leadership in anything at all. In fact, the Company has said it doesn’t want to go head-to-head with these broader competitors, but we believe it has no choice since it is not optional. In fact, we find that Boot Barn recently placed at least three new stores next to Tractor Supply, a growing specialty retailer which offers a variety of western boots and workwear apparel. Boot Barn is also having to fend off growing competition from some of the brands it sells in-store which are expanding their direct-to-consumer strategy. For example, Ariat, which the Company no longer discloses as its largest selling brand, recently opened a flagship store in Las Vegas and sells direct through its website.
We have also identified multiple areas where Boot Barn either lacks a competitive edge or the ability to attract customers in an increasingly promotional omnichannel selling environment. As a McKinsey consultant expressed, “Haphazard efforts at omnichannel can destroy value” and “Offering a compelling omnichannel experience used to be the bleeding edge of retail. Now it’s a requirement for survival.” We believe the evidence of Boot Barn’s challenges is plainly seen in its growing days of inventory outstanding. Our channel checks reveal racks and shelves fully stocked, and price discounting both during the 2023 holiday season and intensifying months afterward into May. Price discounting is counter to Boot Barn’s claims of a “full-price selling philosophy”. The last Annual Report modified the Critical Audit Matter language that emphasized management’s judgement estimating future selling prices. At the end of FY21, the Company stopped providing detail on its sales mix of Western styles (~2/3) vs. Work and Other (~1/3). Boot Barn has since replaced this breakout with Fashion (11%) vs. Functional (89%). In addition, it has spun the narrative that its sales are less exposed to retail fashion cycles and aging inventory because 89% of its sales are functional and insulated from fashion risk. We think this may be a convenient narrative to deflect underlying problems. Boot Barn also sources approximately 50% of its products from China and there are some customers that think this is inauthentic for a Company whose vision is to, “Offer a piece of the American spirit”.
- Spruce Point has several concerns with Boot Barn’s new store economics, pictorial representations of stores and anomalous capital spending. The Company has significantly reduced sales guidance for new stores from $4M to $3M+ in just two years. In August 2023, management set the paradigm for new store economics at $3.5M which was reduced to $3.3M in November and then yet again to $3.0M+ in January 2024. We believe that the trajectory of new store cohorts is signaling that the store base is rapidly saturating. Boot Barn may find it difficult to attract repeat customers after new store opening celebrations or the new stores are in more suburban locations that are more susceptible to fashion risk. Wall Street often focuses on same store sales which does not incorporate the rapidly reduced expectations of new stores. Further, we are also perplexed by the physical look of Boot Barn’s stores. As part of selling investors on its growth strategy, the Company provided investors with an image of what its new stores look like in multiple investor presentations from 2017–2021 on the slide entitled “Compelling Store Economics”. The pictures show a red veneered store with a white “Boot Barn Western Wear” sign prominently above the entrance. Then in 2022 it showed a “Legacy store” looking nothing like the store images promoted from 2017–2021 and an “Updated Design”. We checked 19 new store images since late 2023 and we have grave concerns that none of the stores look like the “Updated Design”. In fact, practically every store looks different! These store images fly in the face of most retail practices to achieve brand consistency to foster brand loyalty. When analyzing store locations, we were guided by CEO Conroy’s statement that “with very few exceptions” Boot Barn seeks locations near home improvement chains or sporting goods stores. We analyzed recent store openings and found that at least three stores were very close to Tractor Supply which is a growing competitor. While approximately 80% were near home improvement and sporting goods stores, many were not in the same shopping complex and still required driving to the other location. At least five new stores were also close to the discount retailers such as Ross Dress For Less, Burlington Stores and T.J. Maxx which focus on women that are treasure hunting for value whereas Boot Barn’s customers skew towards men. Boot Barn’s COO (and former CFO) Greg Hackman announced his retirement on March 31, 2023 and a few months later the Company reported abnormal capital expenditures (“capex”). The Company’s Q4'23 capex of $41.5 million was ~$30 million above the high end of guidance. Executive bonuses are tied to operating income (EBIT) and there is potential that additional costs were capitalized to trigger incentives to management.
- We believe Taylor Swift, Beyoncé, and the Yellowstone TV series’ effects on sales are potentially misunderstood. Boot Barn has downplayed any uplift in sales from Taylor Swift’s 2023 concert tour, though our on-the-ground research indicates there may have been a one-time benefit. The Company has said that Morgan Wallen, George Strait and Garth Brooks are names that drive its business. We analyzed data from 229 concerts in 2022 and 2023 to assess if there is a correlation between the Company’s store traffic and concert attendance. The data suggests to us that Taylor Swift created an uplift to traffic and sales. Aggregate store attendance which should be benefiting from annual store growth of ~15% vs 2023 softened significantly last August (Taylor Swift's last U.S. date was August 9th) and remained negative throughout the holiday season. Spruce Point called multiple stores near Taylor Swift concert venues and asked if they had seen demand for boots and apparel increase when she was in town. 10 out of 15 stores that were called reported consumer interest and demand. If we are right, we expect the Taylor Swift benefits from 2023 to become headwinds to comps in H2 2024.
Spruce Point believes that analysts are stretching for reasons to promote Boot Barn with the most recent example being Beyoncé’s new Cowboy Carter album / “Texas Hold ‘Em” single. Unfortunately, we find that consumer interest is quickly fading. By simply searching Google for information about where to buy products related to Beyoncé, Cowboy Carter, western wear and boots, we were directed to plenty of information but none that recommended Boot Barn. In fact, Beyoncé’s only known western brand preference we can identify is with Stetson, which has reported that multiple styles of hats had sold out in February. We supplemented our research by calling over 40 stores in late April / early May, and many store attendants said we were the first to inquire about Beyoncé-related items. Boot Barn has no firm partnership and is trying to roll-out a Texas Hold ‘Em line to piggyback on Beyoncé. However, the current product assortment looks nothing like the western clothing and apparel that has been photographed on Beyoncé. In our view, Boot Barn is already late to the party and is unlikely to materially benefit from the celebrity effect.
Spruce Point also believes the surge in viewership of the Yellowstone drama series has served as a tailwind for Boot Barn's sales, a phenomenon that looks to have peaked. We estimate the notable influence of the popular TV show on Boot Barn's performance has been a significant factor in recent sales growth. Although, the Company's own proprietary survey indicated that only 4% of customer responses cited Yellowstone as a reason for wearing their products, Yellowstone has likely had both direct and indirect impacts to customer buying preference which was likely far greater than the 4% captured in its survey. Regardless, the Yellowstone boost has likely reached its peak as the series will end in 2024 with the remaining episodes of Season 5 airing at the end of 2024.
- We estimate 40%–50% downside risk to Boot Barn’s share price. We believe that the Company’s YTD share price appreciation, +40% vs. +2.5% for the S&P Retail ETF (XRT), is reflecting false hope that the worst of its negative results are over and Beyoncé’s western themed album will stimulate sales. We have the opposite view and believe that Boot Barn is poorly positioned in an increasingly saturated western retail environment while being exposed to an increasing amount of fashion risk, having to implement more increasing price discounts, and facing negative operating leverage from new stores with declining unit economics. Our channel checks from calling over 40 stores suggest that Boot Barn missed the early buzz from Beyoncé’s album release and has seen little consumer interest. While the majority of analysts are bullish, the average consensus price target is $105.82 per share, implying just 2.9% upside relative to the current price. We believe Boot Barn’s valuation inappropriately reflects the valuation of a fast growing, high-quality specialty retailer and lifestyle brand. We think its valuation should be closer to shoe retailers and with a discount for its high financial restatement risk, poor governance, and dependency on brick-and-mortar sales. We believe the market is overly optimistic in forecasting CY 2025 revenue and EBITDA growth of 13% and 18%, respectively. Given that the Company’s 1.7x and 11.3x 2025E sales and EBITDA multiple are now above its historical trading range, we see a greater risk of multiple contraction and earnings disappointment. We estimate Boot Barn’s share price has 40% - 50% downside risk to $51.40 - $61.70 per share and expect the share price to underperform the broader retail sector.
