Boot Barn Holdings, Inc.: Form 10-Q for the period ended Dec 27, 2014

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Boot Barn Holdings, Inc. and Subsidiaries included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our final prospectus filed with the Securities and Exchange Commission, or SEC, on October 30, 2014. As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “company”, “Boot Barn”, “we”, “our” and “us” refer to Boot Barn Holdings, Inc. and its subsidiaries.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “seek”, “should”, “target”, “will”, “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. These forward-looking statements are subject to numerous risks and uncertainties, including the risks and uncertainties described under the section titled “Risk Factors” in our final prospectus filed with the SEC on October 30, 2014, those identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Boot Barn is the largest and fastest-growing lifestyle retail chain devoted to western and work-related footwear, apparel and accessories in the U.S. As of December 27, 2014, we operated 166 stores in 26 states, as well as a growing e-commerce website, bootbarn.com. 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. Our stores feature a comprehensive assortment of approximately 200 brands and more than 1,500 styles on average, coupled with attentive, knowledgeable store associates. Many of the items that we offer are basics or necessities for our customers’ daily lives and typically represent enduring styles that are not 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 twice 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.

Baskins Acquisition

On May 25, 2013, we acquired Baskins Acquisition Holdings, LLC, or Baskins, a western and work-related retail chain of 30 stores located in Texas and Louisiana. We refer to our acquisition of Baskins as the Baskins Acquisition. In connection with the Baskins Acquisition, we amended the Second Amended and Restated Revolving Credit and Security Agreement with PNC Bank, N.A., which we refer to as the revolving credit agreement, to increase the size of the facility to $60.0 million and entered into our Amended and Restated Term Loan and Security

Agreement with Golub Capital LLC, which we refer to as the term loan agreement. Upon the closing of the Baskins Acquisition, we used borrowings under our revolving credit facility and our term loan facility, to, among other things, pay the cash portion of the acquisition consideration, repay our then-existing term loan facility and mezzanine notes, including prepayment penalties, and pay fees and expenses incurred in connection with the Baskins Acquisition. Commencing on May 25, 2013, our consolidated financial statements and condensed consolidated financial statements include the financial position, results of operations and cash flows of Baskins. The purchase price has been allocated to assets acquired and liabilities assumed based on their fair values as of the closing date of the Baskins Acquisition, which has resulted in the recognition of goodwill.

Through the Baskins Acquisition, we entered the attractive Texas market, which is the number one market for western boots, apparel and accessories. All of the Baskins stores have been rebranded under the Boot Barn banner and have been merchandised to be consistent with our existing stores.

Reorganization

As of June 8, 2014, WW Top Investment Corporation held all of the outstanding shares of common stock of WW Holding Corporation, which held 95.0% of the outstanding shares of common stock of Boot Barn Holding Corporation. Boot Barn Holding Corporation held all of the outstanding shares of common stock of Boot Barn, Inc., which is our primary operating subsidiary. To simplify our organizational structure, we completed a reorganization on June 9, 2014, whereby WW Holding Corporation was merged with and into WW Top Investment Corporation and then Boot Barn Holding Corporation was merged with and into WW Top Investment Corporation. As a result of this reorganization, Boot Barn, Inc. became a direct wholly owned subsidiary of WW Top Investment Corporation, and the minority stockholders that formerly held 5.0% of Boot Barn Holding Corporation became holders of 5.0% of WW Top Investment Corporation. The legal name of WW Top Investment Corporation was subsequently changed to Boot Barn Holdings, Inc.

Amendment of Certificate of Incorporation

On October 19, 2014, our board of directors authorized the amendment of our certificate of incorporation to increase the number of shares that we are authorized to issue to 100,000,000 shares of common stock, par value $0.0001 per share. In addition, the amendment of the certificate of incorporation authorized us to issue 10,000,000 shares of preferred stock, par value $0.0001 per share, and effect a 25-for-1 stock split of our outstanding common stock. The amendment became effective on October 27, 2014. Accordingly, all common share and per share amounts in this Quarterly Report on Form 10-Q have been adjusted to reflect the increase in authorize shares and the 25-for-1 stock split as though it had occurred at the beginning of the initial period presented.

Initial Public Offering

On October 29, 2014, we commenced our initial public offering, or IPO, of 5,000,000 shares of our common stock. In addition, on October 31, 2014, the underwriters of the IPO exercised their option to purchase an additional 750,000 shares of common stock from us. As a result, 5,750,000 shares of common stock were issued and sold by us at a price of $16.00 per share.

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, selling, general and administrative expenses, EBITDA and Adjusted EBITDA. See the “Non-GAAP financial measures” and “Prospectus summary—Summary consolidated financial and other data” sections of our final prospectus filed with the SEC on October 30, 2014.

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 website. 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 website. Net sales also include shipping and handling fees for e-commerce shipments that have been delivered to the customer. Net sales are net of returns on sales during the period as well as an estimate of returns and award redemptions under our customer loyalty program 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 modestly 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 greater sales and disproportionally stronger operating results than the other quarters of our fiscal year. However, we believe that our sales throughout the year are more consistent than most other specialty retail chains. As a result of the dispersion of various western events throughout the year, we rely less on Christmas results than other specialty retail chains. 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

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:

• stores that are closed for five or fewer days in any fiscal month are included in same store sales;
• stores that are closed temporarily, but for more than five days in any fiscal month, are excluded from same store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens;
• stores that are closed temporarily and relocated within their respective trade areas are included in same store sales; stores that are permanently closed are excluded from same store sales beginning in the month preceding closure;
• and acquired stores are added to same store sales beginning on the later of (a) the first day of the first fiscal month following its 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 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 store, or acquired company in the case of Baskins and RCC Western Stores, Inc., or RCC, as prepared prior to the acquisition by the acquired store or acquired company and have not been independently verified by us.

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 and our provision for sales returns and future award redemptions from our sales in deriving net sales per store.

The term “same store sales growth” refers to the percentage change in our same store sales as compared to the prior comparable period. 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:

• national and regional economic trends;
• our ability to identify and respond effectively to regional consumer preferences;
• changes in our product mix;
• changes in pricing;
• competition;
• changes in the timing of promotional and advertising efforts;
• holidays or seasonal periods; and
• weather.

Opening new stores is an important part of our growth strategy and we anticipate that a significant 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 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 has had, and is 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.

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. As a result, data regarding our gross profit may not be comparable to similar data made available by other retailers.

Our gross profit is variable in nature and 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 private 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 expenses, or 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:

• *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.
• *Other operating expenses—*Other operating expenses include all operating costs, including those for advertising, marketing campaigns, operating supplies, utilities, and repairs and maintenance, as well as credit card fees and costs of third-party services.
• *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 that our SG&A expenses will increase in future periods due to our store growth strategy and, in part, due to additional legal, accounting, insurance and other expenses that we expect to incur as a result of being a public company. In addition, we expect that compliance with the Sarbanes-Oxley Act and related rules and regulations, as they become applicable, could result in significant incremental legal, accounting and other overhead costs.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are important financial measures used by our management, board of directors and lenders to assess our operating performance. We use EBITDA and Adjusted EBITDA as key performance measures because we believe that they facilitate operating performance comparisons from period to period by excluding potential differences primarily caused by the impact of non-cash or non-recurring expenses. Because EBITDA and Adjusted EBITDA facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use EBITDA and Adjusted EBITDA (or some variations thereof) for business planning purposes, in calculating covenant compliance for our credit facilities, in determining incentive compensation for members of our management and in evaluating acquisition opportunities. In addition, we believe that EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We define EBITDA as net income adjusted to exclude income tax expense, net interest expense and depreciation and intangible asset amortization. We define Adjusted EBITDA as EBITDA adjusted to exclude non-cash stock-based compensation, the non-cash accrual for future award redemptions, acquisition expenses, acquisition-related integration and reorganization costs, amortization of inventory fair value adjustment, loss on disposal of assets and other unusual or non-recurring expenses. We present these non-GAAP measures together below with a reconciliation of EBITDA and Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our use of EBITDA and Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:

• neither EBITDA nor Adjusted EBITDA reflects income tax expense or the cash requirements to pay our taxes;
• neither EBITDA nor Adjusted EBITDA reflects our cash expenditures for capital equipment, leasehold improvements or other contractual commitments;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects capital expenditure requirements for such replacements;
• neither EBITDA nor Adjusted EBITDA reflects the interest expense or the cash requirements necessary to service interest or principal payments under our credit facilities; and
• neither EBITDA nor Adjusted EBITDA reflects changes in, or cash requirements for, our working capital needs.

EBITDA and Adjusted EBITDA should not be considered in isolation or as alternatives to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Given that EBITDA and Adjusted EBITDA are measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate EBITDA and Adjusted EBITDA in a different manner than we calculate these measures.

In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may or may not incur expenses similar to some of the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA does not imply that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider EBITDA and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results, and not rely on any single financial measure.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. A summary of our significant accounting policies is included in Note 2 to our consolidated financial statements included in our final prospectus filed with the SEC on October 30, 2014.

Certain of our accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of our consolidated financial statements and require significant, difficult or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our final prospectus filed with the SEC on October 30, 2014. As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in the Registration Statement.

Results of Operations

We operate on a fiscal calendar which results in a 52- or 53-week fiscal year ending on the Saturday closest to March 31. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations and the fourth quarter includes 14 weeks of operations. For ease of reference, we identify our fiscal years by reference to the calendar year in which the fiscal year ends.

The following table summarizes key components of our results of operations for the periods indicated, both in dollars (in thousands) and as a percentage of our net sales:

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The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:

(a) Represents non-cash compensation expenses related to stock options and restricted stock awards granted to certain of our employees and directors.

(b) Represents non-cash accrual for future award redemptions in connection with our customer loyalty program.

(c) Represents direct costs and fees related to the acquisition of Baskins, which we acquired in May 2013.

(d) Represents certain store integration, remerchandising and corporate consolidation costs incurred in connection with the integrations of Baskins, which we acquired in May 2013.

(e) Represents the amortization of purchase-accounting adjustments that increased the value of inventory acquired to its fair value.

(f) Represents loss on disposal of assets in connection with rebranding of RCC and Baskins stores, as well as other costs.

(g) Represents professional fees and expenses incurred in connection with other acquisition activity.

The following table presents store operating data for the periods indicated:

Thirteen Weeks Ended December 27, 2014 Compared to Thirteen Weeks Ended December 28, 2013

Net sales. Net sales increased $15.1 million, or 13.1%, to $130.5 million for the thirteen weeks ended December 27, 2014 from $115.4 million for the thirteen weeks ended December 28, 2013. The increase in net sales was due to an increase in same store sales of $8.0 million, or 7.2%, and partially due to contributions from 14 new stores opened between the fourth quarter of fiscal 2014 and the third quarter of fiscal 2015. The increase in same store sales was driven by an increase in transactions and a higher sales mix of boots and work-related merchandise.

Gross profit. Gross profit increased $6.5 million, or 16.3%, to $46.2 million for the thirteen weeks ended December 27, 2014 from $39.7 million for the thirteen weeks ended December 28, 2013. As a percentage of net sales, gross profit was 35.4% and 34.4% for the thirteen weeks ended December 27, 2014 and December 28, 2013, respectively. The thirteen weeks ended December 28, 2013 includes adjustments of $0.3 million related to amortization of the inventory fair value adjustment and $1.0 million related to remerchandising the Baskins stores, which were acquired in the first quarter of fiscal 2014. Merchandise margin increased during the thirteen weeks ended December 27, 2014, driven by private brands and boots, which are margin enhancing relative to apparel. This increase was offset by the higher occupancy rate of new stores that have not yet matured, and the associated depreciation of accelerating our new store growth plan, as well as an increase in procurement and distribution costs.

Selling, general and administrative expenses. SG&A expenses increased $1.7 million, or 6.4%, to $28.3 million for the thirteen weeks ended December 27, 2014 from $26.6 million for the thirteen weeks ended December 28, 2013. As a percentage of net sales, SG&A was 21.7% and 23.0% for the thirteen weeks ended December 27, 2014 and December 28, 2013, respectively. Labor and related expenses, operating expenses and general and administrative expenses all increased as a result of additional investment in our corporate organization to support our planned growth, as well as the addition of 14 new stores between the fourth quarter of fiscal 2014 and the third quarter of fiscal 2015. SG&A as a percentage of net sales decreased partially due to $1.2 million of integration-related expenses from the Baskins acquisition during the thirteen weeks ended December 28, 2013.

Income from operations. Income from operations increased $4.8 million, or 36.6%, to $17.9 million for the thirteen weeks ended December 27, 2014 from $13.1 million for the thirteen weeks ended December 28, 2013. As a percentage of net sales, income from operations was 13.7% and 11.3% for the thirteen weeks ended December 27, 2014 and December 28, 2013, respectively. The change in income from operations was attributable to the factors noted above.

Interest expense, net. Interest expense, net increased $1.9 million, or 86.1%, to $4.2 million for the thirteen weeks ended December 27, 2014 from $2.2 million for the thirteen weeks ended December 28, 2013. The increase in interest expense, net was primarily due to a pre-payment penalty of $0.6 million and accelerated amortization of deferred loan fees of $1.7 million in connection with our $81.9 million paydown of the Golub Loan balance during the thirteen weeks ended December 27, 2014.

Income tax expense. Income tax expense increased $0.8 million, or 18.3%, to $4.9 million for the thirteen weeks ended December 27, 2014 from $4.2 million for the thirteen weeks ended December 28, 2013. The increase in our income tax expense was primarily due to the $2.9 million increase in income before income taxes for the thirteen weeks ended December 27, 2014 as compared to the thirteen weeks ended December 28, 2013. Our effective tax rate was 36.0% and 38.4% for the thirteen weeks ended December 27, 2014 and December 28, 2013, respectively. The lower effective tax rate for the thirteen weeks ended December 27, 2014 compared to the thirteen weeks ended December 28, 2013 was due to discrete items recognized in the third quarter of fiscal 2015 relating to prior year true-up adjustments to income taxes payable and deferred tax assets and liabilities.

Net income. Net income increased $2.1 million, or 31.3%, to $8.8 million for the thirteen weeks ended December 27, 2014 from $6.7 million for the thirteen weeks ended December 28, 2013. The increase in net income was attributable to the factors noted above.

Adjusted EBITDA. Adjusted EBITDA increased $2.6 million, or 13.6%, to $21.6 million for the thirteen weeks ended December 27, 2014 from $19.0 million for the thirteen weeks ended December 28, 2013. The increase was primarily due to the increase in net income of $2.1 million for the thirteen weeks ended December 27, 2014 compared to the thirteen weeks ended December 28, 2013, as well as increases in income tax expense of $0.8 million, interest expense of $1.9 million, depreciation and amortization expense of $0.3 million, stock-based compensation expense of $0.2 million and the non-cash accrual for future award redemptions under our customer loyalty program of $0.2 million. These increases were offset by acquisition and acquisition-related expenses totaling $2.2 million and amortization of the inventory fair value adjustment of $0.3 million during the thirteen weeks ended December 28, 2013, while no such expenses were incurred during the thirteen weeks ended December 27, 2014. In addition, loss on disposal of fixed assets decreased by $0.5 million for the thirteen weeks ended December 27, 2014 compared to the thirteen weeks ended December 28, 2013.

Thirty-Nine Weeks Ended December 27, 2014 Compared to Thirty-Nine Weeks Ended December 28, 2013

Net sales. Net sales increased $42.0 million, or 16.3%, to $299.4 million for the thirty-nine weeks ended December 27, 2014 from $257.4 million for the thirty-nine weeks ended December 28, 2013. The increase in net sales was due to an increase in same store sales of $18.9 million, or 7.3%, and partially due to contributions from 14 new stores opened between the end of the fourth quarter of fiscal 2014 and the third quarter of fiscal 2015. Net sales also increased as a result of operating the Baskins stores for the entire thirty-nine week period this year compared to thirty-one weeks in the prior year. The increase in same store sales was driven by an increase in transactions and a higher mix of boots and work-related merchandise.

Gross profit. Gross profit increased $15.1 million, or 17.6%, to $100.8 million for the thirty-nine weeks ended December 27, 2014 from $85.7 million for the thirty-nine weeks ended December 28, 2013. As a percentage of net sales, gross profit was 33.7% and 33.3% for the thirty-nine weeks ended December 27, 2014 and December 28, 2013, respectively. The increase in gross profit as a percentage of net sales was due to increases in merchandise margin resulting from a mix shift towards higher margin footwear and private brand products and the benefits of remerchandising the Baskins stores in fiscal 2013, partially offset by increases in store occupancy costs and depreciation, increases in procurement and warehouse distribution costs and the elimination of non-recurring expenses in the prior year period. The thirty-nine weeks ended December 28, 2013 includes adjustments of $0.9 million related to amortization of the inventory fair value adjustment and $1.2 million related to remerchandising the Baskins stores.

Selling, general and administrative expenses. SG&A expenses increased $3.9 million, or 5.6%, to $73.2 million for the thirty-nine weeks ended December 27, 2014 from $69.3 million for the thirty-nine weeks ended December 28, 2013. As a percentage of net sales, SG&A was 24.4% and 26.9% for the thirty-nine weeks ended December 27, 2014 and December 28, 2013, respectively. Labor and related expenses, operating expenses and general and administrative expenses all increased as a result of additional investment in our corporate organization to support our planned growth, as well as the addition of 14 new stores between the fourth quarter of fiscal 2014 and the third quarter of fiscal 2015. In addition, during the thirty-nine weeks ended December 27, 2014, SG&A included $0.9 million of non-recurring expenses related to a potential acquisition that we chose not to pursue. SG&A as a percentage of net sales decreased partially due to $3.4 million of integration-related expenses from the Baskins acquisition during the thirty-nine weeks ended December 28, 2013.

Acquisition-related expenses. Acquisition-related expenses for the thirty-nine weeks ended December 28, 2013 were $0.7 million, which related to the Baskins Acquisition. There were no acquisition-related expenses during the thirty-nine weeks ended December 27, 2014.

Income from operations. Income from operations increased $11.9 million, or 75.9%, to $27.6 million for the thirty-nine weeks ended December 27, 2014 from $15.7 million for the thirty-nine weeks ended December 28, 2013. As a percentage of net sales, income from operations was 9.2% and 6.1% for the thirty-nine weeks ended December 27, 2014 and December 28, 2013, respectively. The increase in income from operations was attributable to the factors noted above.

Interest expense, net. Interest expense, net increased $0.2 million, or 2.4%, to $9.8 million for the thirty-nine weeks ended December 27, 2014 from $9.5 million for the thirty-nine weeks ended December 28, 2013. The increase in interest expense, net was due to increased borrowings on the Golub Loan and PNC Line of Credit in the first quarter of fiscal 2015, which was primarily used to pay the $41.3 million of dividends and payments in respect of vested options during the first quarter of fiscal 2015. The increase in interest expense during the first two quarters of fiscal 2015 was partially offset by lower interest expense in the third quarter of fiscal 2015 resulting from the pay down of the Golub Loan using the proceeds from our IPO. In connection with the pay down of the Golub loan during the third quarter of fiscal 2015, we also incurred pre-payment penalties and wrote off of deferred loan costs totaling $2.3 million, which was recorded to interest expense.

Income tax expense. Income tax expense increased $4.4 million, or 179.1%, to $6.8 million for the thirty-nine weeks ended December 27, 2014 from $2.4 million for the thirty-nine weeks ended December 28, 2013. Our effective tax rate was 37.9% and 39.2% for the thirty-nine weeks ended December 27, 2014 and December 28, 2013, respectively. The lower effective tax rate for the thirty-nine weeks ended December 27, 2014 compared to the thirty-nine weeks ended December 28, 2013 was due to discrete items recognized in the first and third quarters of fiscal 2015 relating to prior year true-up adjustments to income taxes payable and deferred tax assets and liabilities.

Net income. Net income increased $7.4 million, or 195.1%, to $11.1 million for the thirty-nine weeks ended December 27, 2014 from $3.8 million for the thirty-nine weeks ended December 28, 2013. The increase in net income was attributable to the factors noted above.

Adjusted EBITDA. Adjusted EBITDA increased $7.0 million, or 23.4%, to $37.1 million for the thirty-nine weeks ended December 27, 2014 from $30.1 million for the thirty-nine weeks ended December 28, 2013. The increase was primarily due to net income of $11.1 million for the thirty-nine weeks ended December 27, 2014 compared to a net income of $3.8 million for the thirty-nine weeks ended December 28, 2013, as well as increases in income tax expense of $4.4 million, interest expense of $0.2 million, depreciation and intangible asset amortization of $0.7 million and stock-based compensation expense of $0.6 million. We also incurred $0.9 million of non-recurring expenses during the thirty-nine weeks ended December 27, 2014 related to a potential acquisition that we chose not to pursue. These increases were offset by acquisition and acquisition-related expenses totaling $5.2 million and amortization of the inventory fair value adjustment of $0.9 million during the thirty-nine weeks ended December 28, 2013, while no such expenses were incurred during the thirty-nine weeks ended December 27, 2014. In addition, there were decreases in the non-cash accrual for future award redemptions under our customer loyalty program of $0.2 million and loss on disposal of fixed assets of $0.7 million for thirty-nine weeks ended December 27, 2014 compared to the thirty-nine weeks ended December 28, 2013.

Liquidity and Capital Resources

We rely on cash flows from operating activities and our revolving credit facility as our primary sources of liquidity. Our primary cash needs have been for inventories, operating expenses, capital expenditures associated with opening new stores and remodeling or refurbishing existing stores, improvements to our distribution facilities, marketing 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 revolving credit facility or other financing arrangements will be sufficient to cover working capital requirements, anticipated capital expenditures and other anticipated cash needs for at least the next 12 months.

As of December 27, 2014, the terms of our revolving credit facility were set forth in the revolving credit agreement, as amended, and the terms of our term loan facility were set forth in the term loan agreement, as amended. Our primary operating subsidiary, Boot Barn, Inc., is the borrower under both of our credit facilities.

The revolving credit agreement currently provides for a $70.0 million revolving credit facility, including a $5.0 million sub-limit for letters of credit. Subject to certain terms and conditions, PNC Bank, N.A. is committed to increase the facility by an additional $10.0 million at our request. Borrowings under the revolving credit agreement are subject to a borrowing base tied to specified percentages of eligible inventory and credit card receivables. Interest on borrowings is payable, at our election, at a rate based on an alternative base rate (the rate equal to the highest of (1) PNC’s publicly announced commercial lending rate, (2) the daily federal funds open rate plus 0.50% or (3) the LIBOR rate for a period of one month plus 1.00%) or LIBOR (for one, two, three or six month periods at our election), plus applicable margins of 0.75% or 1.00% for alternative base rate loans and 1.75% or 2.00% for LIBOR advances, in each case determined by reference to availability under the borrowing base formula. In addition, we pay a commitment fee on the unused portion of the revolving credit facility equal to (1) 0.375% if our average utilization of the revolving facility over the preceding calendar quarter was equal to or less than 60% of borrowing base availability or (2) 0.25% if average utilization exceeded 60% of borrowing base availability. The revolving credit agreement matures on May 31, 2018. As of December 27, 2014, a total of $32.0 million was outstanding under the revolving credit agreement and there was $38.0 million of unused availability under the borrowing base formula. Average outstanding borrowings during the thirty-nine weeks ended December 27, 2014 were $48.1 million.

The term loan agreement currently provides for a $130.0 million term loan that matures on May 31, 2019, and bears interest, at our election, at a base rate (the rate equal to the greater of (1) the higher of the “prime rate” as published by the Wall Street Journal or the overnight Federal Funds Rate plus 0.50% and (2) the one month LIBOR rate (but not less than 1.25%) plus 1.00% or at LIBOR for a period of one, two, three, six or, if available to all lenders, nine or 12 months, at our election (with a floor of 1.25%), plus applicable margins of 4.75% for base rate advances and 5.75% for LIBOR advances. The term loan agreement requires principal payments of $0.3 million per fiscal quarter, with the remaining balance due at maturity, as well as certain mandatory prepayments at the lender’s discretion, including a specified portion of annual “excess cash flow”, as defined in the term loan agreement.

The revolving credit agreement and the term loan agreement were amended in April 2014 to, among other things, permit the payment of a dividend to our stockholders in that month and to increase the amount of borrowings permitted under each of those agreements. An additional $30.8 million provided under the amendment to the term loan agreement was used to fund a portion of the dividend paid to our stockholders in the first quarter of fiscal 2015.

On November 5, 2014, we entered into amendments to the revolving credit facility and the term loan agreement. These amendments each (a) permit certain add-backs to the definition of “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization) relating to expenses incurred in connection with our recently consummated IPO and the preparation of the Amendments, (b) revise the “Change of Control” definition and the covenant restricting certain equity issuances to be more customary for a publicly traded company, (c) delete the equity cure provisions, and (d) change the financial statement deliverable requirements, and timing, to align with the SEC disclosure requirements. In addition, the amendment to the term loan agreement reduced the applicable LIBOR Floor to 1.00% and deleted Board observation rights of the lenders in the term loan agreement.

On November 5, 2014, we used the net proceeds from our IPO to repay $81.9 million of the term loan’s principal balance. Amounts repaid will no longer be available for future borrowings under the term loan agreement. As of December 27, 2014, the outstanding balance of the term loan facility was $47.4 million, resulting in principal payments of the term loan balance being reduced to $0.1 million per fiscal quarter.

The obligations of Boot Barn, Inc. under the revolving credit agreement and the term loan agreement are guaranteed by Boot Barn Holdings, Inc. and each of its current and future domestic subsidiaries. All obligations of Boot Barn, Inc. and the guarantors under the revolving credit agreement and the term loan agreement are secured by a lien on all of the assets (subject to customary exclusions) of Boot Barn, Inc. and the guarantors (including equity interests), provided that under the terms of a customary intercreditor agreement, the revolving credit agreement has a senior lien in our accounts receivable, inventory and certain other current assets and the term loan agreement has a senior lien in all of our other assets.

Our credit facilities contain a number of covenants that restrict, among other things and subject to certain exceptions, our ability to:

• incur additional indebtedness;
• create liens on assets;
• engage in mergers or consolidations;
• sell assets;
• make investments, loans or advances;
• make certain acquisitions;
• engage in certain transactions with affiliates;
• authorize or pay dividends; and
• change our line of business or fiscal year.

In addition, the term loan agreement requires us to maintain a specified minimum interest coverage ratio and not to exceed a specified maximum total leverage ratio during each specified measurement period. The term loan agreement also limits the amount we can spend on capital expenditures per year. Under the revolving credit agreement, we will become subject to a minimum fixed charge coverage ratio if our “excess availability” falls below specified floor levels. As of December 27, 2014, our excess availability exceeded the triggers specified in the revolving credit agreement and we were in compliance with the financial covenants in the term loan agreement. The revolving credit agreement and term loan agreement contain customary events of default, including a change of control. As of December 27, 2014, we were in compliance with all of our debt covenants.

Although we did not have any material capital expenditure commitments as of the end of fiscal 2014, we are planning to open new stores, remodel and refurbish our existing stores at a greater rate than we have typically done in the past, and make improvements to our information technology infrastructure, which will result in increased capital expenditures. We estimate that our capital expenditures in fiscal 2015 will be between approximately $14.0 million and $15.0 million (of which $9.6 million has been spent through December 27, 2014), and we anticipate that we will use cash flows from operations to fund these expenditures.

Cash and cash equivalents were $3.6 million as of December 27, 2014 compared to $1.1 million as of March 29, 2014.

Cash Flow Analysis

The following table presents summary cash flow information for the periods indicated (in thousands):

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $20.6 million for the thirty-nine weeks ended December 27, 2014. The significant components of cash flows provided by operating activities were net income of $11.1 million, the add-back of non-cash depreciation and amortization expense of $6.4 million, stock-based compensation expense of $1.5 million, amortization of deferred loan fees of $2.2 million and an increase in deferred taxes of $0.6 million. Accounts payable and accrued expenses and other current liabilities increased by $18.1 million due to the timing of payments and growth of the company. Prepaid expenses and other current assets decreased by $1.2 million primarily due to higher prepaid rent at the end of fiscal 2014, and other liabilities increased by $1.1 million due to the opening of new stores. The above was offset by increases in accounts receivable of $2.3 million and inventories of $19.2 million due to the growth of the company.

Net cash provided by operating activities was $18.4 million for the thirty-nine weeks ended December 28, 2013. The significant components of cash flows provided by operating activities were net income of $3.8 million, the add-back of non-cash depreciation and amortization expense of $5.8 million, amortization of deferred loan fees of $2.4 million, stock-based compensation expense of $0.9 million, amortization of the inventory fair value adjustment of $0.9 million, loss on disposal of fixed assets of $0.8 million and an increase in deferred taxes of $0.3 million. Accounts payable and accrued expenses and other current assets increase by $17.6 million due to the timing of payments and growth of the company. The above was offset by increases in account receivable of $1.2 million and inventories of $13.0 million due to the growth of the company.

Net Cash Used in Investing Activities

Net cash used in investing activities was $9.6 million for the thirty-nine weeks ended December 27, 2014, which represents purchases of property and equipment during the period.

Net cash used in investing activities was $23.8 million for the thirty-nine weeks ended December 28, 2013, which was primarily due to $14.0 million related to the purchase of Baskins. Purchases of property and equipment totaled $9.7 million and we purchased trademark rights totaling $0.2 million during the period.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $8.5 million for the thirty-nine weeks ended December 27, 2014. We received $82.2 million of net proceeds from our IPO in the third quarter of fiscal 2015, and used $81.9 million of the proceeds to repay a portion of the principal balance on the Golub Loan. During the first quarter of fiscal 2015, we increased our loan borrowings by $30.8 million and our line of credit borrowings by $3.4 million, primarily to pay $41.3 million of dividends and payments in respect of vested options during the first quarter of fiscal 2015. We paid $0.8 million of debt issuance fees related to these borrowings.

Net cash provided by financing activities was $6.6 million for the thirty-nine weeks ended December 28, 2013. We borrowed $100.0 million under the Golub Loan, and used these funds to pay off our $69.5 million of existing debt and acquire Baskins (including repayment of $20.1 million of Baskins’ debt). We paid $3.4 million of debt issuance fees relating to these borrowings.

Contractual Obligations

There have been no significant changes to our contractual obligations described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our final prospectus filed with the SEC on October 30, 2014, other than those which occur in the normal course of business.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, except for operating leases and purchase obligations.

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.

We are subject to interest rate risk in connection with borrowings under our revolving credit facility and our term loan facility, which bear interest at variable rates. As of December 27, 2014, we had $32.0 million in outstanding borrowings under our revolving credit facility and $47.4 million under our term loan facility. On January 30, 2012, we entered into an interest rate cap transaction pursuant to which we will receive from the counterparty to that transaction an amount equal to a notional principal amount of $5.0 million multiplied by any amount by which LIBOR exceeds 3.0% in periods prior to February 1, 2015. We do not currently engage in any other interest rate hedging activity and have no plans to do so in the foreseeable future. Based on the amounts outstanding under our revolving credit facility and term loan facility as of December 27, 2014, a hypothetical change in the respective blended interest rates applicable to these facilities of 1.0% would result in a change in interest expense of $0.8 million, disregarding the LIBOR floor of 1.00% under our term loan facility.

As of December 27, 2014, there were no other material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our final prospectus filed with the SEC on October 30, 2014.

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 27, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 27, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 27, 2014, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, prospects, operating results or cash flows. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our final prospectus filed with the SEC on October 30, 2014. There have been no material changes to our risk factors as previously disclosed in our final prospectus.