Having risen 63% in the last year, the stock price of lifestyle retail chain Boot Barn (BOOT, Financial) could deliver further growth. It is putting in place a sound strategy that will see it invest in innovation, as well as the customer experience. This could strengthen its competitive advantage, as well as provide greater differentiation versus peers.
Although there are uncertainties facing the U.S. consumer outlook, an efficiency program could offset challenging operating conditions. Alongside this, store expansion and exclusive brands may improve the company’s financial outlook.
With strong profit growth forecast for fiscal 2020, the stock could offer continued outperformance of the S&P 500 over the long run.
Investing for growth
Boot Barn’s focus on innovation could improve its competitive position versus sector peers. For example, it is offering an endless aisle capability through its in-store tablets, while having a boot selector touchscreen device in store that enables customers to more easily find the boot they are looking for. They are able to use the touchscreen to filter store inventory by features such as style, brand and size. Customer engagement has improved as a result of the device, helping to increase conversion rates.
Investment in its store estate led to the opening of two new stores in the most recent quarter. This takes its total store count to 234. It remains committed to the goal of doubling its store count, while developing its national presence, through growing new units by 10% per year.
Alongside this, further acquisitions are expected to be made, such as those that have been successfully integrated in the last couple of years. They could provide the business with the opportunity to leverage higher average unit volumes, which could enable it to quickly enter new markets.
Strategy shift
The company is seeking to improve the customer experience through rolling out a variety of new features that complement its growing omnichannel presence. For example, its online outpost, where customers can order online and pick up in store, is proving popular. It is also rolling out the capacity for customers to shop online from inventory that is available in their local store. This is expected to increase traffic to stores, and offer cross-selling opportunities. Online returns can now also be made in store, which provides Boot Barn with the chance to protect sales through the offer of an exchange, rather than a refund.
Growth in the company’s exclusive brand segment could differentiate its offering from that of rivals. In the recent quarter, the penetration of its exclusive brand products increased to 16%, with customer responses to the shift being positive. Exclusive brands have helped to increase the company’s merchandise margin, while expanding the breadth of its offering.
Risks
Disappointing economic data could signal that more challenging operating conditions are ahead for the business. For example, U.S. consumer confidence in March declined for the fourth time in five months. It was hampered by weak first-quarter economic growth and slower jobs gains in February, where only 20,000 jobs were added. This was the smallest gain in a year, while forecasts suggest the weakest economic growth this quarter since 2016 is ahead. Alongside increasing gasoline prices, this indicates that spending levels among consumers may come under pressure in the near term.
Weaker operating conditions may be offset by Boot Barn’s focus on improving its efficiency. The company was able to increase its e-commerce operating margin by 360 basis points in the most recent quarter. More than half of this gain was driven by the elimination of unprofitable and low-margin items from its sites. Investments made in its fulfillment center also enhanced its profitability, while the increasing use of automation could do likewise over the medium term. Automation may also improve the customer experience through reducing picking times and cutting the time taken from order to delivery.
Outlook
In fiscal 2020, Boot Barn is forecast to grow earnings per share by 14%. Since it trades on a price-earningsratio of 22, this suggests that it may offer fair value for money.
With the company making changes to its strategy, it could be in a strong position to generate further growth. Investment in its exclusive brands and in the customer experience could improve its differentiation versus rivals. Similarly, increasing store numbers may lead to continued growth, while an efficiency program could offset potential weakness in the wider retail sector.
Even though the stock has comprehensively outperformed the S&P 500 in the last year, it could offer investment appeal over the long run.
