# Boot Barn Holdings, Inc.: Form 10-Q for the period ended Jun 27, 2015

- Company: [Boot Barn Holdings, Inc.](/companies/boot.md) (CIK 1610250)
- Form: 10-Q
- Filed: 2015-08-04
- Accepted by EDGAR: Aug 4, 2015, 17:04 ET
- Period: 2015-06-27
- Accession: 0001104659-15-055928
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1610250/000110465915055928/a15-13262_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1610250/000110465915055928/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-27.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-03-29 to 2015-06-27 | $96.0m | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2015-03-29 to 2015-06-27 | $65.2m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2015-03-29 to 2015-06-27 | $30.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-03-29 to 2015-06-27 | $25.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-03-29 to 2015-06-27 | $4.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-03-29 to 2015-06-27 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-03-29 to 2015-06-27 | $2.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-03-29 to 2015-06-27 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-03-29 to 2015-06-27 | $0.09 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-03-29 to 2015-06-27 | 26,973,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2015-03-29 to 2015-06-27 | $5.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2015-03-29 to 2015-06-27 | $7.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-06-27 | $12.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-06-27 | $161.9m | us-gaap:AssetsCurrent |
| Total assets | at 2015-06-27 | $347.8m | us-gaap:Assets |
| Current liabilities | at 2015-06-27 | $101.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-06-27 | $199.1m | us-gaap:Liabilities |
| Long-term debt | at 2015-06-27 | $101.6m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2015-06-27 | $148.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,499 characters.

*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 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on May 29, 2015. 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 Annual Report on Form 10-K filed with the SEC on May 29, 2015, 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 risks and uncertainties emerge from time to time and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks 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.

We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make. We undertake no obligation to publicly update or revise any forward- looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

### Overview

Management believes that 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 June 27, 2015, we operated 176 stores in 28 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.

### 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 (“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.

### Subsequent Event

On June 29, 2015, the Company completed the acquisition of Sheplers Inc. (“Sheplers”), a western lifestyle company with 25 retail locations across the United States and a significant e-commerce business, for a purchase price of $147.0 million (which included assumption of certain indebtedness), subject to customary adjustments.

### 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.

### 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 expected in the future stemming from current period sales. Revenue from the sale of gift cards is deferred until the gift cards are used to purchase merchandise.

Our business is moderately seasonal and as a result our revenues fluctuate from quarter to quarter. In addition, our revenues in any given quarter can be affected by a number of factors including the timing of holidays and weather patterns. The third quarter of our fiscal year, which includes the Christmas shopping season, has historically produced higher sales and disproportionately larger operating income 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 believe that our Christmas results are less impactful 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

The term “same store sales” 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 company, as prepared prior to the acquisition, 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, provision for sales returns and future loyalty award redemptions from sales in our calculation of net sales per store.

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 in this Quarterly Report on Form 10-Q 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.

Our gross profit generally follows changes in net sales. We regularly analyze the components of gross profit, as well as gross profit as a percentage of net sales. Specifically, we examine the initial markup on purchases, markdowns and reserves, shrinkage, buying costs, distribution costs and occupancy costs. Any inability to obtain acceptable levels of initial markups, or a significant increase in our use of markdowns or in inventory shrinkage, or a significant increase in freight and other inventory acquisition costs could have an adverse impact on our gross profit and results of operations.

Gross profit is also impacted by shifts in the proportion of sales of our private brand products compared to third-party brand products, as well as by sales mix changes within and between brands and between major product categories such as footwear, apparel or accessories.

### Selling, general and administrative expenses

Our selling, general and administrative (“SG&A”) expenses are composed of labor and related expenses, other operating expenses and general and administrative expenses not included in cost of goods sold. Specifically, our SG&A expenses include the following:

- *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 our selling, general and administrative expenses will increase in future periods as a result of incremental share-based compensation, legal, accounting and other compliance- related expenses associated with being a public company and increases resulting from growth in the number of our stores.

### 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 variations from period to period in tax positions, interest expense and depreciation and amortization, as well as, in the case of Adjusted EBITDA, excluding non-cash expenses, such as stock-based compensation and the non-cash accrual for future award redemptions, and unusual or non-recurring costs and expenses that are not directly related to our operations, including acquisition expenses, acquisition-related integration and Reorganization costs. See “Results of Operations” below for a reconciliation of our EBITDA and Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. 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. 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.

### 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 of our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on May 29, 2015.

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 Annual Report on Form 10-K filed with the SEC on May 29, 2015. As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in the Annual Report on Form 10-K.

### Results of Operations

We operate on a fiscal calendar that results in a 52- or 53-week fiscal year ending on the last Saturday of March unless April 1st is a Saturday, in which case the fiscal year ends on April 1st. In a 52-week fiscal year, each quarter includes 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:

*(in thousands)*

| Consolidated Statements of Operations Data: | Thirteen weeks ended June 27, 2015 | June 28, 2014 |
| --- | ---: | ---: |
| Net sales | $96,000 | $82,497 |
| Cost of goods sold | 65,221 | 55,607 |
| Gross profit | 30,779 | 26,890 |
| Operating expenses: |  |  |
| Selling, general and administrative expenses | 25,053 | 21,497 |
| Acquisition-related expenses | 891 | — |
| Total operating expenses | 25,944 | 21,497 |
| Income from operations | 4,835 | 5,393 |
| Interest expense, net | 791 | 2,757 |
| Other income, net | — | 18 |
| Income before income taxes | 4,044 | 2,654 |
| Income tax expense | 1,773 | 1,241 |
| Net income | 2,271 | 1,413 |
| **Percentage of Net Sales:** |  |  |
| Net sales | 100.0% | 100.0% |
| Cost of goods sold | 67.9% | 67.4% |
| Gross profit | 32.1% | 32.6% |
| Operating expenses: |  |  |
| Selling, general and administrative expenses | 26.1% | 26.1% |
| Acquisition-related expenses | 0.9% | — |
| Total operating expenses | 27.0% | 26.1% |
| Income from operations | 5.1% | 6.5% |
| Interest expense, net | 0.8% | 3.3% |
| Other income, net | — | — |
| Income before income taxes | 4.3% | 3.2% |
| Income tax expense | 1.8% | 1.5% |
| Net income | 2.5% | 1.7% |

25

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:

*(in thousands)*

| EBITDA Reconciliation: | Thirteen weeks ended June 27, 2015 | June 28, 2014 |
| --- | ---: | ---: |
| Net income | $2,271 | $1,413 |
| Income tax expense | 1,773 | 1,241 |
| Interest expense, net | 791 | 2,757 |
| Depreciation and intangible asset amortization | 2,637 | 2,058 |
| EBITDA | 7,472 | 7,469 |
| Non-cash stock-based compensation(a) | 653 | 442 |
| Non-cash accrual for future award redemptions(b) | (248) | (184) |
| Acquisition-related expenses(c) | 891 | — |
| Loss on disposal of assets | 11 | 62 |
| Adjusted EBITDA | $8,779 | $7,789 |

(a) Represents non-cash compensation expenses related to stock options, restricted stock awards and restricted stock units 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 planned acquisition of Sheplers, which we announced on June 1, 2015.

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

| Selected Store Data (unaudited): | Thirteen weeks ended June 27, 2015 | June 28, 2014 |
| --- | ---: | ---: |
| Same Store Sales growth | 5.6% | 7.7% |
| Stores operating at end of period | 176 | 155 |
| Total retail store square footage, end of period (in thousands) | 1,889 | 1,676 |
| Average store square footage, end of period | 10,731 | 10,811 |
| Average net sales per store (in thousands) | $521 | $511 |

### Thirteen Weeks Ended June 27, 2015 Compared to Thirteen Weeks Ended June 28, 2014

***Net sales.*** Net sales increased $13.5 million, or 16.4%, to $96.0 million for the thirteen weeks ended June 27, 2015 from $82.5 million for the thirteen weeks ended June 28, 2014. The increase in net sales was the result of contributions from a net of 21 new stores opened between the beginning of the second quarter of fiscal 2015 and the end of the first quarter of fiscal 2016, and an increase in same store sales of $4.6 million, or 5.6%.

***Gross profit.*** Gross profit increased $3.9 million, or 14.5%, to $30.8 million for the thirteen weeks ended June 27, 2015 from $26.9 million for the thirteen weeks ended June 28, 2014. As a percentage of net sales, gross profit was 32.1% and 32.6% for the thirteen weeks ended June 27, 2015 and June 28, 2014, respectively. Merchandise margin increased during the thirteen weeks ended June 27, 2015, driven by increased penetration in private brands, improved markup across the chain, and an improvement in e-commerce margin. This increase was offset by increases in store occupancy costs and depreciation expense associated with new store openings compared to the prior year period.

***Selling, general and administrative expenses.*** SG&A expenses increased $3.6 million, or 16.5%, to $25.1 million for the thirteen weeks ended June 27, 2015 from $21.5 million for the thirteen weeks ended June 28, 2014. As a percentage of net sales, SG&A was 26.1% for both the thirteen weeks ended June 27, 2015 and June 27, 2014. The increase is mostly due to store labor, store operating expenses and increased corporate payroll that supports our increase in store count, and the expenses associated with being a public company.

***Acquisition-related expenses.*** Acquisition-related expenses for the thirteen weeks ended June 27, 2015 were $0.9 million, which relate to the acquisition of Sheplers Inc. See Note 10, Subsequent Events, to our unaudited financial statements included in this Quarterly Report, for further discussion of the Sheplers’ acquisition.

***Income from operations.*** Income from operations decreased $0.6 million, or 10.4%, to $4.8 million for the thirteen weeks ended June 27, 2015 from $5.4 million for the thirteen weeks ended June 28, 2014. As a percentage of net sales, income from operations was 5.1% and 6.5% for the thirteen weeks ended June 27, 2015 and June 28, 2014, respectively. The change in income from operations was attributable to the factors noted above.

***Interest expense, net.*** Interest expense, net, decreased $2.0 million, or 71.3%, to $0.8 million for the thirteen weeks ended June 27, 2015 from $2.8 million for the thirteen weeks ended June 28, 2014. The decrease in interest expense, net was primarily because of lower outstanding debt balance and lower interest rates for the thirteen weeks ended June 27, 2015 compared to the thirteen weeks ended June 28, 2014.

***Income tax expense.*** Income tax expense increased $0.5 million, or 42.9%, to $1.8 million for the thirteen weeks ended June 27, 2015 from $1.2 million for the thirteen weeks ended June 28, 2014. The increase in our income tax expense results from the $1.4 million increase in income before income taxes for the thirteen weeks ended June 27, 2015 as compared to the thirteen weeks ended June 28, 2014. Our effective tax rate was 43.8% and 46.8% for the thirteen weeks ended June 27, 2015 and June 28, 2014, respectively. The lower effective tax rate for the thirteen weeks ended June 27, 2015 compared to the thirteen weeks ended June 28, 2014 was due to discrete items recognized, including a state tax credit.

***Net income.*** Net income increased $0.9 million, or 60.7%, to $2.3 million for the thirteen weeks ended June 27, 2015 from $1.4 million for the thirteen weeks ended June 28, 2014. The increase in net income was attributable to the factors noted above.

***Adjusted EBITDA.*** Adjusted EBITDA increased $1.0 million, or 12.7%, to $8.8 million for the thirteen weeks ended June 27, 2015 from $7.8 million for the thirteen weeks ended June 28, 2014. The increase was primarily a result of the increase in net income of $0.9 million for the thirteen weeks ended June 27, 2015 compared to the thirteen weeks ended June 28, 2014, as well as increases in income tax expense of $0.5 million, depreciation and amortization expense of $0.6 million, stock-based compensation expense of $0.2 million and acquisition-related expenses of $0.9 million incurred in the thirteen weeks ended June 27, 2015. These increases were offset by a decrease in interest expense of $2.0 million, higher non-cash accrual for future award redemptions under our customer loyalty program of $0.1 million and decreased loss on disposal of fixed assets of $0.1 million for the thirteen weeks ended June 27, 2015 compared to the thirteen weeks ended June 28, 2014.

### Liquidity and Capital Resources

We rely on cash flows from operating activities and our credit facility as our primary sources of liquidity. Our primary cash needs are for inventories, operating expenses, 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 credit facilities 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.

Our liquidity is moderately seasonal. Our cash requirements generally increase in our third fiscal quarter as we incur additional marketing expenses and increase our inventory in advance of the Christmas shopping season. Our cash flows from operations increased in the thirteen weeks ended June 27, 2015 as compared to the thirteen weeks ended June 28, 2014, primarily as a result of a decrease in prepaid and other assets in the current year compared to an increase in prepaid and other assets in the prior year.

Although we did not have any material capital expenditure commitments as of the thirteen weeks ended June 27, 2015, we are planning to continue to open new stores, remodel and refurbish our existing stores at a greater rate than we have typically done in the past, remodel and rebrand stores acquired in the Sheplers acquisition, consolidate our warehouses and a portion of our current distribution center into our new distribution center, and make improvements to our information technology infrastructure, which will result in increased capital expenditures. We estimate that our capital expenditures in fiscal 2016 will be approximately $31.0 million, net of landlord tenant allowances, and we anticipate that we will use cash flows from operations to fund these expenditures.

#### Revolving Credit Facility (PNC Bank, N.A.)

On December 11, 2011, we obtained a collateral-based revolving line of credit with PNC Bank, N.A. (the “PNC Line of Credit”), which we amended on August 31, 2012 and May 31, 2013. The PNC Line of Credit included a $5.0 million sub-limit for letters of credit. On April 15, 2014, we amended the PNC Line of Credit to increase the borrowing capacity from $60.0 million to up to $70.0 million. The available borrowing under the PNC Line of Credit was based on the collective value of eligible inventory and credit card receivables multiplied by specific advance rates. Total interest expense incurred on the PNC Line of Credit for the thirteen weeks ended June 28, 2014 was $0.3 million. On February 23, 2015, proceeds from the February 2015 Wells Fargo Credit Facility (as defined below) were used to pay the entire $50.8 million outstanding balance of the PNC Line of Credit.

#### Term Loan Due May 2019 (Golub Capital LLC)

We entered into a loan and security agreement with Golub Capital LLC on May 31, 2013, as amended by the first amendment to term loan and security agreement dated September 23, 2013 (the “2013 Golub Loan”). On April 14, 2014, we entered into an amended and restated term loan and security agreement for the 2013 Golub Loan. The amended and restated loan and security agreement increased the borrowings on the 2013 Golub Loan from $99.2 million to $130.0 million, with the proceeds used to fund a portion of the $41.3 million dividend to stockholders and cash payment to holders of vested options that was paid in April 2014. See Note 5, “Stock-Based Compensation” to our unaudited financial statements included in this Quarterly Report. On November 5, 2014, we amended the 2013 Golub Loan to reduce the applicable LIBOR Floor from 1.25% to 1.00% which changed the current interest rate from 7.00% to 6.75%. Total interest expense incurred on the Golub Loan was $2.2 million for the thirteen weeks ended June 28, 2014.

On November 5, 2014, we used $81.9 million of the net proceeds from the IPO to repay a portion of the principal balance on the 2013 Golub Loan. We incurred a pre-payment penalty of $0.6 million and accelerated amortization of deferred loan fees of $1.7 million, which was recorded to interest expense.

On February 23, 2015, proceeds from the February 2015 Wells Fargo Credit Facility were used to pay the entire $47.3 million outstanding balance of the 2013 Golub Loan. We incurred prepayment penalties of $1.1 million to the lenders under our prior credit facilities. Total deferred loan fees from the PNC Line of Credit and the 2013 Golub Loan of $1.4 million were written off to interest expense.

#### $150 Million Credit Facility (Wells Fargo Bank, N.A.)

On February 23, 2015, we entered into a new credit facility with Wells Fargo Bank, N.A. (“February 2015 Wells Fargo Credit Facility”). The February 2015 Wells Fargo Credit Facility consists of a $75.0 million revolving credit facility, including a $5.0 million sub-limit for letters of credit, and a $75.0 million term loan, and also provides us with the ability to incur additional incremental term loans of up to $50.0 million, provided that certain conditions are met, including compliance with certain covenants. Proceeds from the February 2015 Wells Fargo Credit Facility were used to pay off outstanding debt. The February 2015 Wells Fargo Credit Facility is to be used for working capital, capital expenditures, permitted acquisitions and other general corporate purposes.

Interest on borrowings under the February 2015 Wells Fargo Credit Facility is payable, at our election, at a rate equal to, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin, or (ii) a base rate plus an applicable margin. The base rate is calculated as the highest of (1) the Federal Funds Rate plus 0.50%, (2) the prime rate publicly announced by the Administrative Agent and (3) LIBOR plus 1.0%. The applicable margin is calculated based on a pricing grid that in each case will be linked to a consolidated total lease adjusted net leverage ratio. For LIBOR loans, the applicable margin is in the range of 2.00% to 2.75%, and for base rate loans it is between 1.00% and 1.75%. Total interest expense incurred in the thirteen weeks ended June 27, 2015 on the February 2015 Wells Fargo Credit Facility was $0.8 million and the weighted average interest rate at June 27, 2015 was 4.09%. In addition, we pay a commitment fee on the average daily unused portion of the revolving credit commitment under the February 2015 Wells Fargo Credit Facility, which will range between 0.25% and 0.40%, and was 0.30% during the thirteen weeks ended June 27, 2015. The February 2015 Wells Fargo Credit Facility also requires us to pay additional interest of 2% per annum upon triggering certain events which are not clearly and closely related to the February 2015 Wells Fargo Credit Facility. For financial accounting purposes, this requirement for us to pay a higher interest rate in the event of default is an embedded derivative. As of June 27, 2015, the fair value of these embedded derivatives was estimated and was not significant.

The February 2015 Wells Fargo Credit Facility requires principal payments in respect of the term loan on a quarterly basis, which commenced on June 26, 2015. The required principal payments are $468,750 for that first fiscal quarter and each of the three following fiscal quarters, $937,500 for each of the next four fiscal quarters, $1,406,250 for each of the following four fiscal quarters, and $1,875,000 for each subsequent fiscal quarter, with the remaining balance due on the maturity date of February 23, 2020, as well as certain mandatory prepayments. Outstanding borrowings as of June 27, 2015 consisted of $74.5 million of term loan and $27.1 million of revolving credit facility. There was approximately $47.9 million of unused availability under the revolving portion of our new credit facility.

The obligations of Boot Barn, Inc. under the February 2015 Wells Fargo Credit Facility are guaranteed by us and by each of our subsidiaries. All obligations of Boot Barn, Inc. and the guarantors under the February 2015 Wells Fargo Credit Facility are secured by a lien on all of the assets, including equity interests, of Boot Barn, Inc. and the guarantors.

The February 2015 Wells Fargo Credit Facility contains a number of covenants that restrict, among other things and subject to certain exceptions, our ability to: (1) incur additional indebtedness; (2) create liens on property; (3) engage in mergers, consolidations and other fundamental changes; (4) dispose of assets; (5) make investments, loans or advances; (6) make certain acquisitions; (7) engage in certain transactions with affiliates; (8) declare or pay dividends on, or repurchase, our stock; and (9) change lines of business or fiscal year. In addition, the February 2015 Wells Fargo Credit Facility prohibits us from exceeding specified consolidated total lease adjusted net leverage ratios and requires us to maintain a specified consolidated fixed charge coverage ratio during each specified measurement period. The February 2015 Wells Fargo Credit Facility also contains customary events of default, including a customary default triggered by a “Change in Control” as defined in the February 2015 Wells Fargo Credit facility. We were in compliance with all of its financial and non-financial covenants as of June 27, 2015. The February 2015 Wells Fargo Credit Facility limits our aggregate dividend payments to $5.0 million for the term of the February 2015 Wells Fargo Credit Facility in the event that our leverage ratio exceeds a specified leverage ratio.

We incurred approximately $0.6 million of loan fees related to the issuance of the February 2015 Wells Fargo Credit Facility, which were deferred and are being amortized to interest expense using the effective interest method over the term of the loan through February 23, 2020. The remaining balance of deferred loan fees as of June 27, 2015 is $0.5 million, and is included in prepaid expenses and other current assets (current portion) and other assets (long-term portion) on the condensed consolidated balance sheets.

On June 29, 2015, subsequent to the end of the fiscal quarter, we repaid all outstanding borrowings under the February 2015 Wells Fargo Credit Facility and terminated such facility in connection with the refinancing discussed in Note 10 “Subsequent Events” to our unaudited financial statements included in this Quarterly Report.

### Cash Position and Cash Flow

Cash and cash equivalents were $12.9 million as of June 27, 2015 compared to $1.4 million as of March 28, 2015.

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

*(In thousands)*

| Net cash provided by (used in): | Thirteen weeks ended June 27, 2015 | June 28, 2014 |
| --- | ---: | ---: |
| Operating activities | $5,238 | $(669) |
| Investing activities | (7,085) | (1,803) |
| Financing activities | 13,319 | 2,469 |
| Net increase (decrease) in cash | $11,472 | $(3) |

### Operating Activities

Net cash provided by operating activities was $5.2 million for the thirteen weeks ended June 27, 2015. The significant components of cash flows provided by operating activities were net income of $2.3 million, the add-back of non-cash depreciation and amortization expense of $2.6 million, stock-based compensation expense of $0.7 million, an increase in deferred taxes of $0.2 million and the excess tax benefit related to the exercise of stock options of $2.1 million. Accounts payable and accrued expenses and other current liabilities increased by $3.7 million due to the timing of payments and growth of the company. Prepaid expenses and other current assets decreased by $3.1 million primarily due to the timing of prepaid rent. Other liabilities increased by $1.2 million due to landlord tenant allowance for the opening of new stores. The above was offset by an increase in inventories of $7.1 million due to the growth of the company.

Net cash used in operating activities was $0.7 million for the thirteen weeks ended June 28, 2014. The significant components of cash flows used in operating activities were net income of $1.4 million, the add-back of non-cash depreciation and amortization expense of $2.1 million, stock-based compensation expense of $0.4 million, amortization of deferred loan fees of $0.2 million and an increase in deferred taxes of $0.4 million. Accounts payable and accrued expenses and other current liabilities increased by a total of $4.3 million compared to the prior year period. The above was offset by an increase in inventories of $7.6 million and an increase of prepaid expenses and other current assets of $1.9 million due to the growth of the Company.

### Investing Activities

Net cash used in investing activities was $7.1 million for the thirteen weeks ended June 27, 2015, which represents purchases of property and equipment during the period.

Net cash used in investing activities was $1.8 million for the thirteen weeks ended June 28, 2014, which represents purchases of property and equipment during the period.

### Financing Activities

Net cash provided by financing activities was $13.3 million for the thirteen weeks ended June 27, 2015. Net proceeds from drawings on our revolving credit facility totaled $10.9 million. We received $1.2 million from the exercise of stock options, and $2.1 million excess tax benefit from the exercise of those options.

Net cash provided by financing activities was $2.5 million for the thirteen weeks ended June 28, 2014. On April 17, 2014 we paid a pro rata cash dividend of approximately $39.9 million in the aggregate to record holders of the outstanding shares of our common stock as of the record date of April 14, 2014. We also made a payment to holders of our outstanding vested stock options with exercise prices below the value of our common stock, for an aggregate payment to those option holders of approximately $1.4 million. The dividend and other payments were funded entirely from additional borrowings under our credit facilities.

During the thirteen weeks ended June 28, 2014, we obtained $30.8 million of additional financing under our term loan facility and had net borrowings of $14.0 million under our revolving credit facility. The new debt was used to fund the dividend to stockholders and related payment to option holders described above.

### Contractual Obligations

During the thirteen weeks ended June 27, 2015, there were 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 Annual Report on Form 10-K filed with the SEC on May 29, 2015, other than those which occur in the normal course of business. For information on the impact of the Sheplers acquisition and related debt refinancing, see “Subsequent Event” in the notes to the unaudited financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

### 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.

## Market risk

As filed, 635 characters.

We are subject to interest rate risk in connection with borrowings under our credit facilities, which bear interest at variable rates. As of June 27, 2015, we had $27.1 million in outstanding borrowings under our revolving credit facility and $74.5 million under our term loan facility. The impact of a 1.0% rate change on the outstanding balance as of June 27, 2015 would be approximately $1.0 million.

As of June 27, 2015, there were no other material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our Annual Report on Form 10-K filed with the SEC on May 29, 2015.

## Controls and procedures

As filed, 2,259 characters.

### 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 June 27, 2015. 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 June 27, 2015, 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 June 27, 2015, 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.

## Risk factors

As filed, 7,824 characters.

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, including the rists set forth below, as well as the risks contained in the section “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on May 29, 2015.

***We may not be able to successfully integrate Sheplers’ business and realize the anticipated benefits of the Sheplers acquisition.***

The Sheplers acquisition involves the integration of a western lifestyle company operating 25 retail stores and an industry-leading e-commerce business that previously operated independently. We will be required to devote significant management attention and resources to integrating the business practices and operations of Sheplers into our own business practices and operations. Potential difficulties that we may encounter as part of the integration process include the following:

- the inability to successfully integrate the Sheplers business in a manner that permits us to achieve the full synergies anticipated to result from the Sheplers acquisition in a timely manner or at all;
- complexities associated with managing the Sheplers business, including the challenge of integrating complex systems, technology, networks and other assets in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies;
- integrating the Sheplers workforce while maintaining focus on providing consistent, high quality customer service;
- an adverse impact on sales at the Sheplers stores as we rebrand them under the Boot Barn banner, change the store assortment and clear aged and discontinued brands and merchandise; and
- potential unknown liabilities and unforeseen increased expenses associated with the Sheplers acquisition (related to, among other things, environmental matters and regulatory compliance), including capital expenditures and one-time cash costs to integrate the Sheplers business.

Any of the foregoing could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies of ours or of Sheplers and our ability to achieve the anticipated benefits of the Sheplers acquisition or could reduce our combined earnings or otherwise adversely affect our business and financial results.

***Our future results will suffer if we do not effectively manage our expanded operations following the completion of the acquisition.***

As a result of the Sheplers acquisition, the size of our business will increase significantly beyond the current size of either our existing business or the Sheplers business. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Sheplers business.

***We may incur substantial expenses related to the Sheplers acquisition and the integration of the Sheplers business.***

We expect to incur substantial expenses in connection with the Sheplers Acquisition and the integration of the Sheplers business. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue management, marketing and benefits. We also anticipate substantial capital expenditures in connection with the rebranding of the Sheplers stores under the Boot Barn banner. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings. These integration expenses may result in our taking significant charges against earnings, and the amount and timing of such charges are uncertain at present.

***Our borrowings under the new credit facilities are at variable rates, exposing us to interest rate risk.***

The new credit facilities we entered into in connection with the Sheplers Acquisition provide for variable interest rates. As a result, if interest rates increase, our debt service obligations under the new credit facilities could increase even though the amount borrowed remained the same, which would adversely impact our net income.

### We are more highly leveraged than we were prior to the Sheplers acquisition.

In connection with the Sheplers acquisition, we refinanced our existing credit facilities, as well as Sheplers’ existing credit facilities, with a new $200.0 million term loan credit facility and an up to $125.0 million revolving credit facility. As a result, our consolidated indebtedness is greater than our indebtedness prior to the Sheplers acquisition. This will have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing any borrowing costs.

***Our new credit facilities contain restrictions and limitations that could significantly impact our ability to operate our business.***

Our new credit facilities that we entered into in connection with the Sheplers acquisition contain covenants that, among other things, may, under certain circumstances, place limitations on the dollar amounts paid or other actions relating to:

- payments in respect of, or redemptions or acquisitions of, debt or equity issued by Boot Barn or its subsidiaries, including the payment of dividends on our common stock;
- incurring additional indebtedness;
- incurring guarantee obligations;
- paying dividends;
- creating liens on assets;
- entering into sale and leaseback transactions;
- making investments, loans or advances;
- entering into hedging transactions;
- engaging in mergers, consolidations or sales of all or substantially all of their respective assets; and
- engaging in certain transactions with affiliates.

In addition, the Company will be required satisfy certain financial ratios as set forth in these agreements.

Our ability to satisfy these financial ratios will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these ratios in future periods will also depend on our ability to successfully implement our overall business strategy and realize contemplated synergies.

Various risks, uncertainties and events beyond our control could affect our ability to comply with the covenants contained in our new credit facilities. Failure to comply with any of these covenants could result in a default under our new credit facilities and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.

Filed Aug 4, 2015.
Source: SEC EDGAR, the filing index for accession 0001104659-15-055928. Last ingested by Listed: Oct 29, 2026, 05:14 ET. No prices; not investment advice.