What does the price of oil have to do with sales at Irvine-based Boot Barn Holdings Inc.?
A lot, apparently.
A barrel of crude trades for $42 these days, an uptick from $29 in January but a 70% cumulative drop in price over the last 18 months that triggered a slowdown in U.S. oil and gas production and cuts to the work forces at energy companies.
That matters especially to Boot Barn, a western and workwear retail chain that derives some 30% of its $522.8 million in revenue from Texas, North Dakota, Colorado and Wyoming, where the company has “faced increasing headwinds due to the softening of local economies dependent on oil and other commodities,” according to President and Chief Executive Jim Conroy.
Its products are “largely discretionary in nature,” and any reduction in consumer spending can have “an unfavorable impact on the company,” according to Mitch Kummetz, analyst with B. Riley & Co. LLC.
The retailer—which describes its customers as “western and country enthusiasts” and “workers seeking dependable, high-quality footwear and clothing”—went public in late 2014, offering some 5.7 million shares at $16 apiece. Oil was at $95 a barrel at the time, and the flame-resistant apparel that Boot Barn markets to oil rig workers was selling like hotcakes. Its shares rose steadily over the next nine months, peaking at $34.40 for a market value of about $850 million.
The company ranks No. 40 on this year’s Public Companies List (see page 10).
Boot Barn acquired Wichita, Kan.-based competitor Sheplers Inc. amid the strong run, shelling out $147 million, increasing its store count to about 200, adding a presence in three new states, and taking its total to 29. The deal also enabled the company to expand its e-commerce business, which the retailer anticipates will reach $94 million in fiscal 2016, up from $66 million last year and $8 million in 2012.
The price of oil, meanwhile, fell below $56 early last year, rose just above $60 in the spring, and then steadily declined to $29 by January, its lowest level since 2003. Several factors contributed to the decline, including a doubling of domestic production over the last decade, moves by foreign competitors to keep pace, a slowdown in China’s usually voracious manufacturing sector, and a lifting of U.S. sanctions against Iran and its return to the oil market.
Customers’ buying power in oil-dependent states also began to decline, but it didn’t trickle down to Boot Barn’s cash registers for a while.
“As oil prices began to fall, there was very much of a time lag before it started to impact our business,” Conroy said during an earnings call in February, adding that the company’s same-store sales were up 7% in the fourth quarter of fiscal 2015, which ended in March of last year. The following quarter the growth slowed to 5.6%, and then again to 1.6% in the second quarter of the retailer’s fiscal 2016. It reported a 2% decline in same-store sales for the third quarter of fiscal 2016, its most recent one.
“We have many core markets without commodity exposure, including Nevada, California and Arizona,” Conroy said, adding that while they “showed solid growth, we were not able to offset the macro pressures in other parts of the country.”
Boot Barn’s six stores in North Dakota were the first to post declines, he said. Some 24,377 people in the region worked in mining, quarrying, and oil and gas extraction via fracking in 2012, according to the state’s Labor Market Information Center. About 572 of them filed for unemployment benefits in February 2015. The latest data show a flood of 3,600 layoffs in the six months that ended Feb. 29, about 15% of the industry’s base of jobs.
Sales in Texas, one of Boot Barn’s strongholds with 47 stores, declined “pretty solidly” in the latest quarter after posting “a little bit better than flat” sales in the previous one, Conroy said.
Employers in the state’s oil and gas sectors have trimmed about 60,000 jobs over the past year, a 19.5% drop to about 232,000, according to Texas Workforce Commission.
Boot Barn is forging ahead with a strategy to battle the “external headwinds,” he said. It expanded its footwear into “performance work boots” that look a lot like “hiking boots” and broadened its work apparel assortment.
“The work apparel business has been driven for a while by flame-resistant product when the oil boom was growing, and with that as a headwind now, we’ve been bringing in a few other work apparel lines that are a little bit lower price point, (and) they typically don’t need to be flame resistant,” Conroy said. “We’ve seen some nice growth opportunities there.”
The company also is continuing its rollout of stores, sticking with a longstanding format of around 10,000 square feet per location. It opened five during the third quarter and has another four in the works. The retailer anticipates first-year sales at each new location to average $1.7 million.
Conroy said the company does not plan to close the underperforming ones, as “every single store in the chain … still contributes. So we’re not going to close stores that are making money to help manufacture a better comp.”
Oil prices are on the upswing in the past 60 days—from a Feb. 11 low of $30.75 to $41.66 on March 17. They dipped again on April 4 to $35.66 and were up again last week at $42.18.
Boot Barn’s stock, trading at about $8 as of last week, seems to follow the trend. It dipped to its lowest point Feb. 2, trading at $5.53, and then shot up to $11.40 on March 7. It was back down to $6.75 on April 8.
Its market value is at about $212 million.
