Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this annual report, as well as the information presented under “Selected Consolidated Financial Data”. The statements in the following discussion and analysis regarding expectations about our future performance, liquidity and capital resources and any other non-historical statements in this discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those described under “Risk Factors” and “Forward-Looking Statements”
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elsewhere in this annual report. Our actual results could differ materially from those contained in or implied by any forward-looking statements.
Overview
We are the largest lifestyle retail chain devoted to western and work-related footwear, apparel and accessories in the U.S. As of March 27, 2021, we operated 273 stores in 36 states, as well as an e-commerce channel, consisting primarily of bootbarn.com, sheplers.com and countryoutfitter.com. Our stores feature a comprehensive assortment of brands and styles, coupled with attentive, knowledgeable store associates. 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. Many of the items that we offer are basics or necessities for our customers’ daily lives and typically represent enduring styles that are not meaningfully 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 three times 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.
For a discussion of factors that affect the comparability of our results of operations, see “Item 1—Business—Acquisitions.”
Growth Strategies and Outlook
Over the long-term we plan to continue to expand our business, increase our sales growth and profitability and enhance our competitive position by executing the following strategies:
● continuing omni-channel leadership;
● driving same store sales growth;
● building our private brand portfolio;
● expanding our store base;
● enhancing brand awareness; and
● increasing profitability.
Since the founding of Boot Barn in 1978, we have grown both organically and through successful strategic acquisitions of competing chains. We have rebranded and remerchandised the acquired chains under the Boot Barn banner, resulting in sales increases over their original concepts. We believe that our business model and scale provide us with competitive advantages that have contributed to our consistent financial performance, generating sufficient cash flow to support national growth.
The major global health pandemic caused by COVID-19 and resulting economic impacts have had and will continue to have an impact on our operations, future growth strategies and outlook. Our business and opportunities for growth depend on consumer discretionary spending, and as such, our results are particularly sensitive to economic conditions and consumer confidence. The extent to which COVID-19 impacts our operations will depend on future developments, which remain uncertain. For further discussion of the uncertainties and business risks associated with COVID-19, see Item 1A, Risk Factors.
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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 (“SG&A”) expenses, EBITDA, Adjusted EBITDA and Adjusted EBIT. See “Item 6, Selected Consolidated Financial Data” for our definition of EBITDA, Adjusted EBITDA and Adjusted EBIT, and for a reconciliation of our EBITDA, Adjusted EBITDA and Adjusted EBIT to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. See “EBITDA, Adjusted EBITDA and Adjusted EBIT” below for further discussion of why we present EBITDA, Adjusted EBITDA and Adjusted EBIT.
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 websites. 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 websites. Net sales also include shipping and handling fees for e-commerce shipments that have been delivered to our customers. 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 higher operating results than the other quarters of our fiscal year. In fiscal 2021, fiscal 2020 and fiscal 2019 we generated approximately 34%, 34% and 33% of our net sales during our third fiscal quarter, respectively. 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” 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:
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If the criteria described with respect to acquired stores 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. Beginning on their respective dates of acquisition, sales from the acquired Wood’s Boots stores, Lone Star stores, Drysdales stores and G.&L. Clothing store have been included in same store sales.
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. Sales as a result of an e-commerce asset acquisition, such as Country Outfitter, are excluded from same store sales until the 13th full fiscal month subsequent to the Company’s acquisition of such assets.
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;
● 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. We opened or acquired 15, 20, and 17 stores in fiscal 2021, 2020, and 2019. Included in these added stores are 15, 19, and 12 new stores in fiscal 2021, 2020, and 2019, and 0, 1, and 5 acquired stores in fiscal 2021, 2020, and 2019, respectively. We also closed one store, one store, and three stores in fiscal 2021, 2020, and 2019, respectively. We anticipate that a 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 annual report 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.
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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 have had, and are 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 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 (“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:
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 and increases resulting from growth in the number of our stores.
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EBITDA, Adjusted EBITDA and Adjusted EBIT
EBITDA, Adjusted EBITDA and Adjusted EBIT are important financial measures used by our management, board of directors and lenders to assess our operating performance. We use EBITDA, Adjusted EBITDA and Adjusted EBIT 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 certain non-cash expenses, such as stock-based compensation and the non-cash accrual for future award redemptions, and other costs and expenses that are not directly related to our operations, including loss on disposal of assets and contract termination costs, store impairment charges, gain/(loss) on adjustment of right-of-use assets and lease liabilities, and secondary offering costs. Similar to Adjusted EBITDA, Adjusted EBIT excludes the aforementioned adjustments while maintaining the impact of depreciation and amortization on our financial results. See “Item 6, Selected Consolidated Financial Data” for a reconciliation of our EBITDA, Adjusted EBITDA and Adjusted EBIT to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. Because EBITDA, Adjusted EBITDA and Adjusted EBIT facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use EBITDA, Adjusted EBITDA and Adjusted EBIT 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, Adjusted EBITDA and Adjusted EBIT 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, Adjusted EBITDA and Adjusted EBIT are measures not deemed to be in accordance with GAAP and are susceptible to varying calculations, our EBITDA, Adjusted EBITDA and Adjusted EBIT may not be comparable to similarly titled measures of other companies, including companies in our industry, because other companies may calculate EBITDA, Adjusted EBITDA and Adjusted EBIT in a different manner than we calculate these measures.
Fiscal Year
We operate on a fiscal calendar which 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 thirteen weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include thirteen weeks of operations and the fourth quarter includes fourteen weeks of operations. For ease of reference, we identify our fiscal years by reference to the calendar year in which the fiscal year ends.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales. The following discussion contains references to fiscal 2021, fiscal 2020, and
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fiscal 2019, which represent our fiscal years ended March 27, 2021, March 28, 2020 and March 30, 2019. Fiscal 2021, 2020 and 2019 were all 52-week periods.
Fiscal Year Ended
March 27, March 28, March 30,
Consolidated Statements of Operations Data:
Other income/(loss), net 366 (45) 5
Percentage of Net Sales(1):
Selling, general and administrative expenses 23.3 % 24.0 % 24.1 %
Income from operations 9.7 % 8.7 % 8.3 %
Interest expense 1.1 % 1.6 % 2.1 %
Other income/(loss), net — % — % — %
Income before income taxes 8.6 % 7.1 % 6.2 %
Income tax expense 2.0 % 1.5 % 1.2 %
(1) Percentages may not total 100% due to rounding.
Fiscal 2021 compared to Fiscal 2020
Net sales. Net sales in fiscal 2021 increased by $47.9 million, or 5.7%, to $893.5 million compared to $845.6 million in fiscal 2020. Consolidated same store sales increased 3.1%. Excluding the impact of the 23.6% increase in e-commerce same store sales, same store sales decreased by 1.1%. The decrease in retail store sales was primarily due to decreased traffic in our stores in the first half of our fiscal year that resulted from customers staying at home in response to the COVID-19 crisis and temporary store closures. Net sales increased primarily due to incremental sales from new stores opened over the past twelve months and the increase in same store sales during fiscal 2021.
Gross profit. Gross profit increased by $18.4 million, or 6.7%, to $294.9 million in fiscal 2021 from $276.5 million in fiscal 2020. As a percentage of net sales, gross profit was 33.0% and 32.7% for fiscal 2021 and fiscal 2020, respectively. Gross profit increased primarily due to higher sales and an increase in merchandise margin rate. As a percentage of net sales, consolidated gross profit increased primarily as a result of a 90 basis point increase in merchandise margin rate, partially offset by 60 basis points of deleverage in buying and occupancy costs. The higher merchandise margin was driven primarily by better full-price selling, lower shrink and increased exclusive brand penetration.
Selling, general and administrative expenses. SG&A expenses increased by $5.7 million, or 2.8%, to $208.6 million in fiscal 2021 from $202.8 million in fiscal 2020. As a percentage of net sales, SG&A expenses were 23.3% for fiscal 2021 compared to 24.0% for fiscal 2020. SG&A expenses increased primarily as a result of higher store labor and increased incentive-based compensation, partially offset by reduced marketing spend. SG&A expenses as a percentage of net sales decreased by 70 basis points primarily as a result of expense leverage on higher sales.
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Income from operations. Income from operations increased by $12.7 million, or 17.2%, to $86.3 million for fiscal 2021 from $73.7 million for fiscal 2020. As a percentage of net sales, income from operations was 9.7% and 8.7% for fiscal 2021 and fiscal 2020, respectively. The change in income from operations was attributable to the factors noted above.
Interest expense. Interest expense decreased by $3.9 million, or 29.1%, to $9.4 million in fiscal 2021 from $13.3 million in fiscal 2020. The decrease in interest expense was primarily the result of lower average interest rates associated with the debt as compared to fiscal 2020 and a lower average debt balance during the current year.
Income tax expense. Income tax expense was $17.9 million in fiscal 2021 compared to $12.4 million in fiscal 2020. Our effective tax rate was 23.1% and 20.5% for fiscal 2021 and fiscal 2020, respectively. The effective tax rate for fiscal 2021 is higher than fiscal 2020 primarily due to an increase in the disallowed executive compensation deduction, the reversal in fiscal 2020 of a prior-year valuation allowance, and a higher state tax rate in fiscal 2021 compared to fiscal 2020.
Net income. Net income increased by $11.4 million, or 23.9%, to $59.4 million in fiscal 2021 from net income of $47.9 million in fiscal 2020. The change in net income was attributable to the factors noted above.
Adjusted EBITDA and Adjusted EBIT. Adjusted EBITDA increased by $18.7 million, or 18.6%, to $119.3 million for fiscal 2021 from $100.6 million for fiscal 2020. Adjusted EBIT increased by $16.0 million, or 20.2%, to $95.1 million for fiscal 2021 from $79.2 million for fiscal 2020. The increase in Adjusted EBITDA and Adjusted EBIT was primarily a result of the year-over-year increase in income from operations driven by an increase in gross profit.
We have omitted discussion of our fiscal 2020 results where it would be redundant of information previously disclosed. For a comparison of our fiscal 2020 versus fiscal 2019 results, please see the discussion previously included in Part II, Item 7 of our fiscal 2020 Annual Report on Form 10-K filed with the SEC on May 22, 2020.
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, occupancy 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 fiscal 2021, primarily as a result of a $58.6 million decrease in cash paid for inventories year-over-year and a $44.9 million increase in cash provided by accounts payable and accrued expenses and other current liabilities in fiscal 2021 compared to fiscal 2020, due to the timing of payments.
As of the end of fiscal 2021, we did not have any material capital expenditure commitments. As of March 27, 2021, we had a total of $111.5 million of debt outstanding, including a zero balance drawn on our $165.0 million revolving credit facility. We had $165.0 million of remaining availability under our revolving credit facility and $73.1 million of cash on hand as of March 27, 2021. Our primary ongoing sources of liquidity include funds provided by operations and borrowings under our revolving credit facility. We expect our cash from operations will continue to be sufficient to support our operations and anticipated capital expenditures for the foreseeable future. We estimate that our capital expenditures in fiscal 2022 will be between$33.0 million to $36.0 million, net of landlord tenant allowances, and we anticipate that we will use cash flows from operations to fund these expenditures.
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Current Credit Facility
June 2015 Wells Fargo Revolver and Golub Term Loan
On June 29, 2015, we, as guarantor, and our wholly-owned primary operating subsidiary, Boot Barn, Inc., refinanced a previous Wells Fargo credit facility with the $125 million syndicated senior secured asset-based revolving credit facility for which Wells Fargo Bank, National Association (“June 2015 Wells Fargo Revolver”), is agent, and the $200 million syndicated senior secured term loan for which GCI Capital Markets LLC (“2015 Golub Term Loan”) is agent. The borrowing base of the June 2015 Wells Fargo Revolver is calculated on a monthly basis and is based on the amount of eligible credit card receivables, commercial accounts, inventory, and available reserves. Borrowings under the credit agreements were initially used to pay costs and expenses related to the Sheplers Acquisition and the closing of such credit agreements, and may be used for working capital and other general corporate purposes.
Borrowings under the June 2015 Wells Fargo Revolver bear interest at per annum rates equal to, at our option, either (i) LIBOR plus an applicable margin for LIBOR loans, or (ii) the base rate plus an applicable margin for base rate loans. The base rate is calculated as the highest of (a) the federal funds rate plus 0.5%, (b) the Wells Fargo prime rate and (c) one-month LIBOR plus 1.0%. The applicable margin is calculated based on a pricing grid that in each case is linked to quarterly average excess availability. For LIBOR loans, the applicable margin ranges from 1.00% to 1.25%, and for base rate loans it ranges from 0.00% to 0.25%. We also pay a commitment fee of 0.25% per annum of the actual daily amount of the unutilized revolving loans. The interest on the June 2015 Wells Fargo Revolver is payable in quarterly installments ending on the maturity date. On May 26, 2017, the Company entered into an amendment to the June 2015 Wells Fargo Revolver (the “2017 Wells Amendment”), increasing the aggregate revolving credit facility to $135.0 million and extending the maturity date to the earlier of May 26, 2022 or 90 days prior to the maturity of the 2015 Golub Term Loan, which was then scheduled to mature on June 29, 2021. On June 6, 2019, the Company entered into Amendment No. 3 to the Credit Agreement (the “2019 Wells Amendment”), further increasing the aggregate revolving credit facility to $165.0 million and extending the maturity date to the earlier of June 6, 2024 or 90 days prior to the maturity of the 2015 Golub Term Loan, which is currently scheduled to mature on June 29, 2023. The 2019 Wells Amendment further made changes to the 2015 Wells Fargo Revolver in connection with the transition away from LIBOR as the benchmark rate. The amount outstanding under the June 2015 Wells Fargo Revolver as of March 27, 2021 and March 28, 2020 was zero and $129.9 million, respectively. Total interest expense incurred in the fiscal year ended March 27, 2021 on the June 2015 Wells Fargo Revolver was $1.5 million and the weighted average interest rate for the fiscal year ended March 27, 2021 was 1.6%. Total interest expense incurred in the fiscal year ended March 28, 2020 on the June 2015 Wells Fargo Revolver was $3.1 million, and the weighted average interest rate for the fiscal year ended March 28, 2020 was 3.3%. Total interest expense incurred in the fiscal year ended March 30, 2019 on the June 2015 Wells Fargo Revolver was $1.8 million, and the weighted average interest rate for the fiscal year ended March 30, 2019 was 3.4%.
Borrowings under the 2015 Golub Term Loan bear interest at per annum rates equal to, at our option, either (a) LIBOR plus an applicable margin for LIBOR loans with a LIBOR floor of 1.0%, or (b) the base rate plus an applicable margin for base rate loans. The base rate is calculated as the greater of (i) the higher of (x) the prime rate and (y) the federal funds rate plus 0.5% and (ii) the sum of one-month LIBOR plus 1.00%. The applicable margin is 4.5% for LIBOR loans and 3.5% for base rate loans. The principal and interest on the 2015 Golub Term Loan is payable in quarterly installments ending on the maturity date, which was originally June 29, 2021 but is now June 29, 2023. Quarterly principal payments of $500,000 are due for each quarter; however, on June 2, 2017, the Company prepaid $10.0 million on the 2015 Golub Term Loan, which included all of the required quarterly principal payments until the maturity date of the loan. On May 15, 2018, the Company made an additional $10.0 million prepayment on the 2015 Golub Term Loan. On June 6, 2019, the Company entered into the Third Amendment to the 2015 Golub Term Loan (the “2019 Golub Amendment”) which extended the maturity date to June 29, 2023. At the time of the Third Amendment, the company also prepaid $65.0 million of the term loan facility, reducing the outstanding principal balance to $111.5 million. The 2019 Golub Amendment further made changes to the 2015 Golub Term Loan in connection with the transition away from LIBOR as the benchmark rate. Subsequent to March 27, 2021, on April 26, 2021, the Company made a $41.5 million voluntary prepayment on the term loan facility, reducing the outstanding principal balance to $70.0 million. Total interest expense incurred in the fiscal year ended March 27, 2021 on the 2015 Golub Term Loan was $6.3 million and the weighted average interest rate for the fiscal year ended March 27, 2021 was 5.7%. Total interest expense
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incurred in the fiscal year ended March 28, 2020 on the 2015 Golub Term Loan was $8.5 million, and the weighted average interest rate for the fiscal year ended March 28, 2020 was 6.8%. Total interest expense incurred in the fiscal year ended March 30, 2019 on the 2015 Golub Term Loan was $12.5 million, and the weighted average interest rate for the fiscal year ended March 30, 2019 was 7.0%.
All obligations under each of the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver are unconditionally guaranteed by us and each of our direct and indirect domestic subsidiaries (other than certain immaterial subsidiaries) which are not named as borrowers under the 2015 Golub Term Loan or the June 2015 Wells Fargo Revolver, as applicable.
The priority with respect to collateral under each of the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver is subject to the terms of an intercreditor agreement among the lenders under the 2015 Golub Term Loan and the June 2015 Wells Fargo Revolver.
Each of the June 2015 Wells Fargo Revolver and the 2015 Golub Term Loan contains customary provisions relating to mandatory prepayments, restricted payments, voluntary payments, affirmative and negative covenants, and events of default. In addition, the terms of the June 2015 Wells Fargo Revolver require the Company to maintain, on a consolidated basis, a Consolidated Fixed Charge Coverage Ratio of at least 1.00:1.00 during such times as a covenant trigger event shall exist. On May 26, 2017, the Company entered into an amendment to the 2015 Golub Term Loan (the “2017 Golub Amendment”). The 2017 Golub Amendment changed the maximum Consolidated Total Net Leverage Ratio requirements to 4.00:1.00 as of December 29, 2018 and for all subsequent periods. The June 2015 Wells Fargo Revolver and 2015 Golub Term Loan also require the Company to pay additional interest of 2.0% per annum upon triggering certain specified events of default set forth therein. For financial accounting purposes, the requirement for the Company to pay a higher interest rate upon an event of default is an embedded derivative. As of March 27, 2021, the fair value of these embedded derivatives was estimated and was not significant.
As of March 27, 2021, we were in compliance with the June 2015 Wells Fargo Revolver and the 2015 Golub Term Loan covenants.
Cash Position and Cash Flow
Cash and cash equivalents were $73.1 million as of March 27, 2021 compared to $69.6 million as of March 28, 2020.
The following table presents summary cash flow information for the periods indicated:
Fiscal Year Ended
March 27, March 28, March 30,
(In thousands)
Net cash provided by/(used in):
Operating activities
Cash provided by operating activities consists primarily of net income adjusted for non-cash items including depreciation, amortization and stock-based compensation, plus the effect on cash of changes during the year in our assets and liabilities.
Net cash provided by operating activities was $155.9 million for the fiscal year ended March 27, 2021. The significant components of cash flows provided by operating activities were net income of $59.4 million, the add-back of
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non-cash depreciation and amortization expense of $24.1 million, stock-based compensation expense of $7.2 million, and amortization of debt issuance fees and debt discount of $0.9 million.Inventories decreased $13.0 million as a result of a reduction in purchases due to the COVID-19 crisis. Accounts payable and accrued expenses and other current liabilities increased by $37.4 million due to the timing of payments.
Net cash provided by operating activities was $25.3 million for the fiscal year ended March 28, 2020. The significant components of cash flows provided by operating activities were net income of $47.9 million, the add-back of non-cash depreciation and amortization expense of $21.4 million, stock-based compensation expense of $4.9 million, and amortization of debt issuance fees and debt discount of $0.9 million. The above was partially offset by an increase in inventories of $45.6 million due to the growth of the company and other changes in working capital.
Investing activities
Cash used in investing activities consists primarily of purchases of property and equipment but also includes funds used to effect business combinations and asset acquisitions made by the Company.
Net cash used in investing activities was $28.4 million for fiscal 2021, which was primarily attributable to capital expenditures related to store construction, improvements to our e-commerce information technology infrastructure, and improvements to our distribution facilities.
Net cash used in investing activities was $40.2 million for fiscal 2020, which was primarily attributable to $37.2 million in capital expenditures related to store construction, improvements to our e-commerce information technology infrastructure, and improvements to our distribution facilities and $3.7 million for the acquisition of G.&L. Clothing.
Financing activities
Cash used in financing activities consists primarily of repayments on our term loan and credit facility.
Net cash used in financing activities was $123.9 million for fiscal 2021. We reduced our line of credit borrowings by $129.9 million and repaid $0.7 million on our debt and capital lease obligations during the period. We also received $7.4 million from the exercise of stock options.
Net cash used in financing activities was $67.8 million for fiscal 2020. We reduced our line of credit borrowings by $129.9 million and repaid $65.6 million on our debt and capital lease obligations during the period. We also received $5.2 million from the exercise of stock options.
Other obligations
Contractual obligations. We enter into long-term contractual obligations and commitments in the normal course of business, primarily non-cancelable finance and operating leases.
As of March 27, 2021, our contractual cash obligations over the next several periods are set forth below.
Payments Due by Period
Debt and line of credit 111,500 — 111,500 — —
Interest expense on debt 14,623 6,545 8,078 — —
Finance lease obligations primarily relate to the acquisition of two retail stores, two office buildings, one distribution center facility and land as part of the Sheplers Acquisition. During fiscal 2020, we amended the lease,
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extending the lease expiration through fiscal 2036. The remaining finance lease obligations relate to property and equipment leases that expire at various dates through fiscal 2024.
We lease our stores, facilities and certain other equipment under non-cancelable operating leases. These operating leases expire at various dates through fiscal 2034, and contain various provisions for rental adjustments, including, in certain cases, adjustments based on increases in the Consumer Price Index. They also generally contain renewal provisions for varying periods. Our future operating lease obligations would change if we were to exercise these renewal provisions or if we were willing to enter into additional operating leases.
Debt consists of $111.5 million outstanding under our 2015 Golub Term Loan and zero outstanding under our June 2015 Wells Fargo Revolver as of March 27, 2021. Our 2015 Golub Term Loan provides for regularly scheduled principal payments that began on September 25, 2015. On June 2, 2017, the Company prepaid $10.0 million on the 2015 Golub Term Loan, which included all of the required quarterly principal payments until the maturity date of the loan. On May 15, 2018 and June 6, 2019, the Company made additional prepayments on the 2015 Golub Term Loan of $10.0 million and $65.0 million, respectively. Payments with respect to the June 2015 Wells Fargo Revolver are due the earlier of June 6, 2024 or 90 days prior to the maturity of the 2015 Golub Term Loan, which is currently scheduled to mature on June 29, 2023.
Interest expense on debt consists of scheduled interest payments under our 2015 Golub Term Loan and June 2015 Wells Fargo Revolver. The interest expense relating to our 2015 Golub Term Loan was calculated using a 5.5% interest rate applied to the term loan balance of $111.5 million as of March 27, 2021 and for each period thereafter. The interest rate used represents the interest rate on the 2015 Golub Term Loan on the last day of fiscal 2021.The interest expense relating to our June 2015 Wells Fargo Revolver was determined using an interest rate of 0.25% applied to the unutilized portion of the $165.0 million revolving line of credit on March 27, 2021, the last day of the fiscal year.
Off-balance sheet arrangements. We are not a party to any off-balance sheet arrangements, except for purchase obligations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, our actual results will inevitably differ from our estimates.
We believe that the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are re-evaluated on an ongoing basis and adjustments are made when facts and circumstances dictate a change.
The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical results for the periods presented in our financial statements have not been materially impacted by such variances. Our accounting policies are more fully described in Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Management has discussed the development and selection of these critical accounting policies and estimates with our board of directors.
We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, inventories, goodwill, intangible and long-lived assets, leases, stock-based compensation and income taxes, which are more fully described below.
Revenue recognition
Sales are recognized at the time of purchase by customers at our retail store locations. Sales are recorded net of taxes collected from customers. Transfer of control takes place at the point at which the customer receives and pays for
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the merchandise at the register. For e-commerce sales, revenue is recognized when control transfers to the customer, which generally occurs upon delivery of the product. On average, customers receive goods within approximately five days of being ordered. The estimate of the transit times for these shipments is based on shipping terms and historical delivery times. Shipping and handling fees billed to customers for online sales are included in net sales and the related shipping and handling costs are classified as cost of goods sold in the consolidated statements of operations.
We reserve for projected merchandise returns based upon historical experience and various other assumptions that we believe to be reasonable. Customers can return merchandise purchased in-store within 30 days of the original purchase date, return merchandise purchased at bootbarn.com and countryoutfitter.com within 60 days of the original purchase date, and return sheplers.com merchandise within 90 days of the original purchase date. Merchandise returns are often resalable merchandise and the purchase price is generally refunded by issuing the same tender used in the original purchase. Merchandise exchanges of the same product and price are not considered merchandise returns and, therefore, are not included in the population when calculating our sales returns reserve. We record the impact of adjustments to our sales returns reserve quarterly within total net sales. Should the returns rate as a percentage of net sales significantly change in future periods, it could have a material impact on our results of operations.
We maintain a customer loyalty program at the stores and bootbarn.com. Under the program, customers accumulate points based on purchase activity. For customers to maintain their active point balance, they must make a qualifying purchase of merchandise at least once in a 365-day period. Once a loyalty program member achieves a certain point level, the member earns awards that may be redeemed for credits on merchandise purchases. To redeem awards, the member must make a qualifying purchase of merchandise within 60 days of the date the award was granted. Unredeemed awards and accumulated partial points are accrued as unearned revenue until redemption or expiration and, upon redemption and expiration, as an adjustment to net sales using the relative standalone selling price method. If actual redemptions ultimately differ from accrued redemption levels, or if we further modify the terms of the program in a way that affects expected redemption value and levels, we could record adjustments to the unearned revenue accrual, which would affect net sales.
We recognize the sales from gift cards, gift certificates and store credits as they are redeemed for merchandise. Prior to redemption, we maintain an unearned revenue liability for gift cards, gift certificates and store credits until we are released from such liability, including potential obligations arising under state escheatment laws. Our gift cards, gift certificates and store credits do not have expiration dates, and unredeemed gift cards, gift certificates and store credits are subject to state escheatment laws. Amounts remaining after escheatment are recognized in net sales in the period escheatment occurs and the liability is considered to be extinguished.
Leases
Operating and finance lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. Related operating and finance lease right-of-use assets are recognized based on the initial present value of the fixed lease payments, reduced by cash payments received from landlords as lease incentives, plus any prepaid rent and other direct costs from executing the leases. Amortization of both operating and finance lease right-of-use assets is performed on a straight-line basis and recorded as part of rent expense in selling, general and administrative expenses on the consolidated statements of operations. The interest expense amortization component of the finance lease liabilities is recorded within interest expense on the consolidated statements of operations.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are recognized as lease expense as they are incurred.
Inventories
Inventories, which consist primarily of general consumer merchandise held for sale, are valued at the lower of cost or net realizable value. Cost is determined using the weighted-average cost method (which approximates the first-in, first-out method) and includes the cost of merchandise and import related costs, including freight, duty and agent commissions.
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During each accounting period, we record adjustments to our inventories, which are reflected in cost of goods sold, if the cost of specific inventory items on hand exceeds the amount that we expect to realize from the ultimate sale or disposal of the inventory. A periodic review of inventory is performed in order to determine if inventory is properly stated at the lower of cost or net realizable value. This adjustment calculation requires us to make assumptions and estimates, which are based on factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and the value and nature of merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if appropriate.
To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross profit, operating income and the carrying value of inventories.
We also record an inventory shrinkage reserve calculated as a percentage of net sales for estimated merchandise losses for the period between the last physical inventory count and the balance sheet date. These estimates are based on historical percentages and can be affected by changes in merchandise mix and changes in shrinkage trends. We perform periodic physical inventory counts for our entire chain of stores and our distribution center and adjust the inventory shrinkage reserve accordingly. If actual physical inventory losses differ significantly from the estimate, our results of operations could be adversely impacted. The inventory shrinkage reserve reduces the value of total inventory and is a component of inventories on the consolidated balance sheets.
Goodwill, intangible and long-lived assets
Goodwill and indefinite-lived intangible assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Intangible assets with indefinite lives include the Boot Barn trademark that was acquired as part of the recapitalization with Freeman Spogli & Co. on December 12, 2011, the Sheplers trademark acquired as part of the Sheplers Acquisition, the cost to register the Boot Barn trademark in Hong Kong, and the www.countryoutfitter.com website trademark we acquired as part of our asset acquisition in February of fiscal 2017. We test goodwill and indefinite-lived intangible assets for impairment at least annually on the first day of the fourth quarter or more frequently if indicators of impairment exist, in accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 350, Goodwill and Other. This guidance provides us the option to first assess qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. We monitor and review our segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments. Our retail stores and e-commerce websites represent two operating segments. Given the similar qualitative and economic characteristics of the two operating segments, our retail stores and e-commerce websites were aggregated into one reporting segment in accordance with guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”). As a result of this, our operations represent two reporting units, retail stores and e-commerce, for the purpose of our goodwill impairment analysis.
If, based on a review of qualitative factors it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to compare the fair value of the reporting unit with its carrying amount. We evaluate the fair value of the reporting unit by using market-based analysis to review market capitalization and by reviewing a discounted cash flow analysis using management’s assumptions. We determine the fair value of our reporting unit using the income approach and market approach to valuation, as well as other generally accepted valuation methodologies. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we recognize an impairment loss equal to the difference between the carrying amount and the estimated fair value of the reporting unit.
Definite-lived intangible assets and long-lived assets. Definite-lived intangible assets consist of certain trademarks and customer lists. Definite-lived intangible assets are recorded at their fair value as of the acquisition date with amortization computed utilizing the straight-line method over the assets’ estimated useful lives, with the exception
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of customer lists, which are amortized based on the estimated attrition rate. The period of amortization for customer lists is five years and for definite-lived trademarks is three years.
Long-lived assets consist of leasehold improvements, machinery and equipment, furniture and fixtures, software and vehicles. Long-lived assets are subject to depreciation and amortization. We assess potential impairment of our definite-lived intangible assets and long-lived assets whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. Factors that are considered important that could trigger an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, with such estimated fair values determined using the best information available and in accordance with FASB ASC Topic 820, Fair Value Measurements (“ASC 820”).
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected by additional impairment charges.
Stock-based compensation
We account for employee stock options, restricted stock awards, restricted stock units and performance share units in accordance with relevant authoritative literature. Stock options are granted with exercise prices equal to or greater than the market value, as reported on the New York Stock Exchange (or on any other national securities exchange on which our common stock is then listed) on the date of grant as authorized by our board of directors. Stock options granted have vesting provisions of either four or five years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. We have selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. We have considered the retirement and forfeiture provisions of the options and utilized the simplified method to estimate the expected life of the options. We base the risk-free interest rate on the yield of a zero-coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Stock volatility for each grant is measured using the weighted average of historical daily price changes of our stock and our competitors’ common stock over the most recent period equal to the expected option term of the awards. In determining the appropriateness of the public entities included in the volatility assumption, we considered a number of factors, including the entity’s life cycle stage, growth profile, size, financial leverage and products offered. The fair value of stock options granted with both service and market vesting conditions is estimated using a Monte Carlo simulation model. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered. Forfeitures are recognized as incurred.
The fair value of our restricted stock awards, restricted stock units and performance share units is the closing price of our common stock on the grant date.
Income taxes
We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are attributable to differences between financial statement and income tax reporting. Deferred tax assets, net of any valuation allowances, represent the future tax return consequences of those differences and for operating loss and tax credit carryforwards, which will be deductible when the assets are recovered. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We
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consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
We account for uncertain tax positions in accordance with ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Such changes in recognition or measurement might result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying statement of operations. See Note 13 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our tax disclosures.
Recent Accounting Pronouncements
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies some of its guidance around reference rate reform activities as global market participants undertake efforts to transition from using or referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates to using or referencing alternative reference rates. The amendments in this ASU if elected by an entity, are effective immediately. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company does not expect the revised standard to have an impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The amendments in ASU 2017-04 are effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. The standard became effective for the Company beginning March 29, 2020, the first day of its fiscal 2021 year. The revised standard did not have a material impact on the consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest rate risk
We are subject to interest rate risk in connection with borrowings under our credit facilities, which bear interest at variable rates. As of March 27, 2021, we had a zero balance drawn under our revolving credit facility and $111.5 million under our term loan facility. The impact of a 1.0% rate change on the outstanding balance as of March 27, 2021 would be approximately $1.1 million.
Foreign exchange rate risk
We currently purchase all of our merchandise through domestic and international suppliers on a U.S. dollar-denominated basis. We do not hedge using any derivative instruments and historically have not been impacted by changes in exchange rates.
Impact of inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe that the effects of inflation, if any, on our results of operations and financial condition have been immaterial.
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Item 8. Consolidated Financial Statements and Supplementary Data
Boot Barn Holdings, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 60
Consolidated Balance Sheets as of March 27, 2021 and March 28, 2020 62
Notes to Consolidated Financial Statements 66
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REPORTOFINDEPENDENTREGISTERED PUBLICACCOUNTING FIRM
To the shareholders and the Board of Directors of
Boot Barn Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Boot Barn Holdings, Inc. and subsidiaries (the "Company") as of March 27, 2021 and March 28, 2020, the related consolidated statements of operations, stockholders' equity, and cash flows, for each of the three years in the period ended March 27, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 27, 2021 and March 28, 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 27, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 27, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 13, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that is material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventories – Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company’s inventories consist primarily of purchased merchandise and are valued at the lower of cost or net realizable value. Cost is determined using the weighted-average cost method (which approximates the first-in, first-out method) and includes the cost of merchandise and import related costs, including freight, duty and agent commissions. A
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periodic review of inventory is performed in order to determine if inventory is properly stated at the lower of cost or net realizable value. This adjustment calculation requires the Company to make assumptions and estimates, which are based on factors such as average selling cycle and seasonality of merchandise, the historical rate at which merchandise has sold below cost during the average selling cycle, and the value and nature of merchandise currently priced below original cost. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if appropriate.
Given the judgments made by management to estimate the net realizable value of inventory, such as estimating foreseeable demand, auditing the adjustment to inventory for obsolescence involved a higher degree of auditor judgment and the involvement of more senior members of the engagement team in executing, supervising, and reviewing the results of the procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of inventories included the following, among others:
/s/ Deloitte & Touche LLP
Costa Mesa, California
May 13, 2021
We have served as the Company's auditor since 2012.
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Boot Barn Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
March 27, March 28,
Assets
Current assets:
Prepaid expenses and other current assets 12,777 14,284
Liabilities and stockholders’ equity
Current liabilities:
Line of credit $ — $ 129,900
Accrued expenses and other current liabilities 77,615 52,612
Short-term lease liabilities 39,400 34,779
Long-term portion of notes payable, net 109,781 109,022
Commitments and contingencies (Note 10)
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 933,581 $ 924,711
The accompanying notes are an integral part of these consolidated financial statements.
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Boot Barn Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
Fiscal Year Ended
March 27, March 28, March 30,
Other income/(loss), net 366 (45) 5
Earnings per share:
Weighted average shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
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Boot Barn Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
Additional
Common Stock Paid-In Retained Treasury Shares
Shares Amount Capital Earnings Shares Amount Total
Net income — — — 39,022 — — 39,022
Net income — — — 47,949 — — 47,949
Net income — — — 59,386 — — 59,386
The accompanying notes are an integral part of these consolidated financial statements.
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Boot Barn Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Fiscal Year Ended
March 27, March 28, March 30,
Cash flows from operating activities
Amortization of intangible assets 89 172 646
Amortization of right-of-use assets 34,231 31,091 —
Amortization of debt issuance fees and debt discount 884 946 1,235
Loss on disposal of property and equipment 87 417 23
Damaged asset write-off — — 312
Store impairment charges 384 191 455
Accretion of above market leases — — (28)
Prepaid expenses and other current assets 1,382 (2,351) 4,179
Accrued expenses and other current liabilities 25,003 6,310 6,882
Cash flows from investing activities
Purchases of property and equipment (28,424) (37,195) (27,525)
Insurance recoveries for property and equipment — 717 184
Acquisition of business, net of cash acquired — (3,688) (4,424)
Net cash used in investing activities $ (28,424) $ (40,166) $ (31,765)
Cash flows from financing activities
Repayments on debt and finance lease obligations (667) (65,553) (10,554)
Debt issuance fees paid — (1,221) —
Proceeds from the exercise of stock options 7,408 5,204 8,137
Net increase in cash and cash equivalents 3,585 52,949 7,598
Cash and cash equivalents, beginning of period 69,563 16,614 9,016
Supplemental disclosures of cash flow information:
Supplemental disclosure of non-cash activities:
Unpaid purchases of property and equipment $ 2,642 $ 6,066 $ 1,877
Equipment acquired through capital lease $ — $ — $ 171
The accompanying notes are an integral part of these consolidated financial statements.
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Boot Barn Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Business Operations
Boot Barn Holdings, Inc. (the “Company”) was formed on November 17, 2011, and is incorporated in the State of Delaware. The equity of the Company consists of 100,000,000 authorized shares and 29,251,626 and 28,809,620 outstanding shares of common stock as of March 27, 2021 and March 28, 2020, respectively. The shares of common stock have voting rights of one vote per share.
The Company operates specialty retail stores that sell western and work boots and related apparel and accessories. The Company operates retail locations throughout the U.S. and sells its merchandise via the Internet. The Company operated a total of 273 stores in 36 states as of March 27, 2021, 259 stores in 35 states as of March 28, 2020 and 240 stores in 33 states as of March 30, 2019.As of the fiscal year ending March 27, 2021, all stores operate under the Boot Barn name, with the exception of two stores which operate under the “American Worker” name.
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. Since first being reported, COVID-19 spread to numerous countries around the world, including the U.S., resulting in the World Health Organization declaring the outbreak a global pandemic on March 11, 2020. COVID-19 has had and will continue to have a significant impact on economic conditions and consumer confidence. There remains significant uncertainty around the duration and impact of the COVID-19 pandemic on the U.S. economy and consumer confidence. These and other effects make it more challenging for us to estimate the future performance of our business, particularly over the near-to-medium term.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), include the accounts of the Company and each of its subsidiaries, including Boot Barn Holdings, Inc., Boot Barn, Inc., RCC Western Stores, Inc. (“RCC”), Baskins Acquisition Holdings, LLC (“Baskins”), Sheplers, Inc. and Sheplers Holding Corporation (collectively with Sheplers, Inc. “Sheplers”). All intercompany accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation. The vast majority of the Company’s identifiable assets are in the United States.
Fiscal Year
The Company reports its results of operations and cash flows on a 52- or 53-week basis, and its fiscal year ends on the last Saturday of March unless April 1st is a Saturday, in which case the fiscal year ends on April 1st. The years ended March 27, 2021 (“fiscal 2021”), March 28, 2020 (“fiscal 2020”) and March 30, 2019 (“fiscal 2019”) each consisted of 52 weeks.
Comprehensive Income
The Company does not have any components of other comprehensive income recorded within its consolidated financial statements and, therefore, does not separately present a statement of comprehensive income in its consolidated financial statements.
Segment Reporting
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes
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have occurred that would impact its reportable segments. The Company’s retail stores and e-commerce websites represent two operating segments. Given the similar qualitative and economic characteristics of the two operating segments, the Company’s retail stores and e-commerce websites are aggregated into one reporting segment in accordance with guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”). Further, the Company’s operations represent two reporting units, retail stores and e-commerce, for the purpose of its goodwill impairment analysis.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Among the significant estimates affecting the Company’s consolidated financial statements are those relating to revenue recognition, lease accounting, inventories, goodwill, intangible and long-lived assets, stock-based compensation and income taxes. Management regularly evaluates its estimates and assumptions based upon historical experience and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, the Company’s future results of operations may be affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents also include receivables from credit card sales. The carrying amounts of cash and cash equivalents represent their fair values.
Accounts Receivable
The Company’s accounts receivable consists of amounts due from commercial customers for merchandise sold, as well as receivables from suppliers under co-operative arrangements. The Company’s allowance for doubtful accounts was $0.3 million and $0.1 million in fiscal 2021 and fiscal 2020, respectively.
Inventories
Inventory consists primarily of purchased merchandise and is valued at the lower of cost or net realizable value. Cost is determined using the weighted-average cost method (which approximates the first-in, first-out method) and includes the cost of merchandise and import related costs, including freight, duty and agent commissions. The Company assesses the recoverability of inventory through a periodic review of historical usage and present demand. When the inventory on hand exceeds the foreseeable demand, the value of inventory that, at the time of the review, is not expected to be sold is written down to its estimated net realizable value.
Debt Issuance Costs and Debt Discounts
Debt issuance costs are capitalized and amortized to interest expense over the terms of the applicable loan agreements using the effective interest method. Those costs related to the issuance of debt are presented as a reduction to the principal amount of the debt. Debt issuance costs incurred with the issuance of revolving credit lines are included in prepaid expenses and other current assets.
Debt discounts arise when transaction fees are paid to the lending institution. Debt discounts are recorded as a reduction to the principal amount of the debt. Amortization of debt discounts is recorded as an increase to the net principal amount of the debt and as a charge to interest expense over the term of the applicable loan agreement using the effective interest method.
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Property and Equipment, net
Property and equipment consists of leasehold improvements, machinery and equipment, furniture and fixtures, software and vehicles. Property and equipment is subject to depreciation and is recorded at cost less accumulated depreciation. Expenditures for major remodels and improvements are capitalized while minor replacements, maintenance and repairs that do not improve or extend the life of such assets are charged to expense. Gains or losses on disposal of fixed assets, when applicable, are reflected in operations. Depreciation is computed using the straight-line method over the estimated useful lives, ranging from five to ten years. Machinery and equipment is depreciated over five years. Furniture and fixtures are depreciated over seven years. Software and vehicles are depreciated over five years. Leasehold improvements are depreciated over the shorter of the terms of the leases or ten years.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill is recorded as the difference between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Goodwill is tested for impairment at least annually as of the first day of the fourth fiscal quarter or more frequently if indicators of impairment exist, in accordance with the provisions of ASC Topic 350, Goodwill and Other. This guidance provides the option to first assess qualitative factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
GAAP has established guidance for reporting information about a company’s operating segments, including disclosures related to a company’s products and services, geographic areas and major customers. The Company monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact its reportable segments, as well as the Company’s reporting units. As previously stated above, the Company’s operations represent two reporting units, retail stores and e-commerce, for the purpose of its goodwill impairment analysis.
If, based on a review of qualitative factors it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to compare the fair value of the reporting unit with its carrying amount. We evaluate the fair value of the reporting unit by using market-based analysis to review market capitalization and by reviewing a discounted cash flow analysis using management’s assumptions. We determine the fair value of our reporting unit using the income approach and market approach to valuation, as well as other generally accepted valuation methodologies. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we recognize an impairment loss equal to the difference between the carrying amount and the estimated fair value of the reporting unit. The Company concluded that there was no impairment of goodwill during fiscal 2021, 2020, or 2019.
Intangible assets with indefinite lives, which include the Boot Barn, Sheplers and Country Outfitter trademarks, are not amortized but instead are measured for impairment at least annually, or when events indicate that impairment may exist. The Company calculates impairment as the excess of the carrying value of indefinite-lived intangible assets over their estimated fair value. If the carrying value exceeds the estimate of fair value, an impairment charge is recorded. The Company concluded there was no impairment of intangible assets with indefinite lives during fiscal 2021, 2020, or 2019.
Definite-Lived Intangible Assets
Definite-lived intangible assets consist of certain trademarks and customer lists. Definite-lived intangible assets are amortized utilizing the straight-line method over the assets’ estimated useful lives, with the exception of customer lists, which are amortized based on the estimated attrition rate. The period of amortization for customer lists and definite-lived trademarks is five years and three years, respectively.
Long-Lived Assets
Long-lived assets consist of property and equipment and definite-lived intangible assets. The Company assesses potential impairment of its long-lived assets whenever events or changes in circumstances indicate that an asset or asset
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group’s carrying value may not be recoverable. Factors that are considered important that could trigger an impairment review include a current period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that demonstrates continuing losses or insufficient income associated with the use of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value, and the estimated fair value of the assets, with such estimated fair values determined using the best information available and in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 820, Fair Value Measurements. During fiscal 2021, the Company recorded asset impairment charges of $0.7 million related to its stores. These long-lived asset impairment charges relate to right-of-use assets and property, plant and equipment associated with the Company’s stores. During fiscal 2020, the Company recorded an asset impairment charge of $0.2 million related to one of its stores. During fiscal 2019, the Company recorded asset impairment charges of less than $0.5 million related to three of its stores. The fair values of these locations were calculated based on the projected discounted cash flows at a similar rate that would be used by market participants in valuing these assets or prices of similar assets.
Stock-Based Compensation
Stock-based compensation is accounted for under FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). The Company accounts for all stock-based compensation transactions using a fair-value method and recognizes the fair value of each award as an expense over the service period. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires a number of estimates, including the expected option term, the expected volatility in the price of the Company’s common stock, the risk-free rate of interest and the dividend yield on the Company’s common stock. The fair value of stock options granted with both service and market vesting conditions is estimated using a Monte Carlo simulation model. The fair value of the Company’s restricted stock awards, restricted stock units and performance share units is the closing price of the Company’s common stock on the grant date. The consolidated financial statements include amounts that are based on the Company’s best estimates and judgments. The Company classifies compensation expense related to these awards in the consolidated statements of operations based on the department to which the recipient reports.
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. Transfer of control takes place at the point at which the customer receives and pays for the merchandise at the register. E-commerce sales are recorded when control transfers to the customer, which generally occurs upon delivery of the product. Shipping and handling revenues are included in total net sales. Shipping costs incurred by the Company are included as cost of goods sold. Sales taxes that are collected in connection with revenue transactions are withheld and remitted to the respective taxing authorities. As such, these taxes are excluded from revenue.
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Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions, estimated future award redemption and other promotions. The sales returns reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages. The total reserve for returns was $2.8 million, $1.6 million, and $1.8 million as of fiscal 2021, 2020, and 2019, respectively and is recorded in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. The Company accounts for the asset and liability separately on a gross basis. The following table provides a reconciliation of the activity related to the Company’s sales returns reserve:
Sales Returns Reserve Fiscal Year Ended
March 27, March 28, March 30,
The Company maintains a customer loyalty program. Under the program, customers accumulate points based on purchase activity. For customers to maintain their active point balance, they must make a qualifying purchase of merchandise at least once in a 365-day period. Once a loyalty program member achieves a certain point level, the member earns awards that may be redeemed for credits on merchandise purchases. To redeem awards, the member must make a qualifying purchase of merchandise within 60 days of the date the award was granted. Unredeemed awards and accumulated partial points are accrued as unearned revenue until redemption or expiration and, upon redemption and expiration, as an adjustment to net sales using the relative standalone selling price method. The unearned revenue for this program is recorded in accrued expenses and other current liabilities on the consolidated balance sheets and was $2.5 million, $2.1 million, and $1.9 million as of March 27, 2021, March 28, 2020, and March 30, 2019, respectively. The following table provides a reconciliation of the activity related to the Company’s customer loyalty program:
Customer Loyalty Program Fiscal Year Ended
March 27, March 28, March 30,
Current year award redemptions (6,525) (6,328) (5,202)
Proceeds from the sale of gift cards are deferred until the customers use the cards to acquire merchandise. Gift cards, gift certificates and store credits do not have expiration dates, and unredeemed gift cards, gift certificates and store credits are subject to state escheatment laws. Amounts remaining after escheatment are recognized in net sales in the period escheatment occurs and the liability is considered to be extinguished. The Company defers recognition of a layaway sale and its related profit to the accounting period when the customer receives the layaway merchandise. Income from the redemption of gift cards, gift card breakage, and the sale of layaway merchandise is included in net sales. The following table provides a reconciliation of the activity related to the Company’s gift card program:
Gift Card Program Fiscal Year Ended
March 27, March 28, March 30,
Current year breakage (840) (549) (832)
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Disaggregated Revenue
The Company disaggregates net sales into the following major merchandise categories:
Fiscal Year Ended
Hats, accessories and other 15% 15% 14%
The Company also disaggregates net sales between stores and e-commerce:
Fiscal Year Ended
Cost of Goods Sold
Cost of goods sold includes the cost of merchandise, obsolescence and shrink 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.
Store Opening Costs
Store 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 store opening costs are included in selling, general and administrative (“SG&A”) expenses. All of these costs are expensed as incurred.
Advertising Costs
Certain advertising costs, including pay-per-click, direct mail, television and radio promotions, event sponsorship, in-store photographs and other promotional advertising are expensed when the marketing campaign commences. The Company had prepaid advertising costs of $0.8 millionand $0.2 million as of March 27, 2021 and March 28, 2020, respectively. All other advertising costs are expensed as incurred. The Company recognized $24.1 million, $28.0 million, and $27.7 million in advertising costs during fiscal 2021, 2020, and 2019, respectively.
Leases
Prior to the adoption of ASU No. 2016-02, Leases (“ASC 842”), the Company recognized rent expense for operating leases on a straight‐line basis (including the effect of reduced or free rent and rent escalations) over the lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight‐line basis was recognized as an adjustment to deferred rent in the consolidated balance sheets. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives were recorded as deferred rent and amortized using the straight‐line method over the lease term as an offset to rent expense. Contingent rent, determined based on a percentage of sales in excess of specified levels, was recognized as rent expense when the achievement of the specified sales that triggers the contingent rent was probable.
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Subsequent to the adoption of ASC 842 on March 31, 2019, the first day of fiscal 2020, operating and finance lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company's incremental borrowing rates for its population of leases. As a result of the adoption of the new accounting standard, the Company elected transition-related practical expedients as accounting policies which allowed it to not reassess, as of the adoption date, (1) whether any expired or existing contracts are or contain leases, (2) the classification of any expired or existing leases, and (3) if previously capitalized initial direct costs qualify for capitalization under ASC 842. The Company elected the practical expedient option to not separate lease and non-lease components for all of its leases, and also elected the short-term lease recognition exemption that keeps leases with an initial term of 12 months or less excluded from balance sheet capitalization. This results in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Related operating and finance lease right-of-use assets are recognized based on the initial present value of the fixed lease payments, reduced by cash payments received from landlords as lease incentives, plus any prepaid rent and other direct costs from executing the leases. Amortization of both operating and finance lease right-of-use assets is performed on a straight-line basis and recorded as part of rent expense in cost of goods sold and selling, general and administrative expenses on the consolidated statements of operations. The interest expense amortization component of the finance lease liabilities is recorded within interest expense on the consolidated statements of operations.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Variable lease payments are recognized as lease expense as they are incurred.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires the asset and liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are attributable to differences between financial statement and income tax reporting. Deferred tax assets, net of any valuation allowances, represent the future tax return consequences of those differences and for operating loss and tax credit carryforwards, which will be deductible when the assets are recovered. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The Company accounts for uncertain tax positions in accordance with ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Such changes in recognition or measurement might result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations. Accrued interest and penalties, if incurred, are included within accrued expenses and other current liabilities in the consolidated balance sheets. There were no accrued interest or penalties for the fiscal years ended March 27, 2021 or March 28, 2020.
Per Share Information
Basic earnings per share is computed by dividing net income by the weighted average number of outstanding shares of common stock. In computing diluted earnings per share, the weighted average number of common shares outstanding is adjusted to reflect the effect of potentially dilutive securities such as stock options and restricted stock. In accordance with ASC 718, the Company utilizes the treasury stock method to compute the dilutive effect of stock options, restricted stock awards, restricted stock units and performance share units.
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Fair Value of Certain Financial Assets and Liabilities
The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures, (“ASC 820”) which requires disclosure of the estimated fair value of certain assets and liabilities defined by the guidance as financial instruments. The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and debt. ASC 820 defines the fair value of financial instruments as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
Cash and cash equivalents, accounts receivable and accounts payable are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified as Level 2 or Level 3 even though there may be certain significant inputs that are readily observable. The Company believes that the recorded values of its financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or duration.
Although market quotes for the fair value of the outstanding debt arrangements discussed in Note 8 “Revolving credit facilities and long-term debt” are not readily available, the Company believes its carrying value approximates fair value due to the variable interest rates, which are Level 2 inputs. There were no material financial assets or liabilities requiring fair value measurements as of March 27, 2021 on a recurring basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents. At times, such amounts held at banks may be in excess of Federal Deposit Insurance Corporation insurance limits, and the Company mitigates such risk by utilizing multiple banks.
Supplier Concentration Risk
The Company purchases merchandise inventories from several hundred suppliers worldwide. Sales of products from the Company’s three largest suppliers totaled approximately 33% of net sales in fiscal 2021, 36% of net sales in fiscal 2020, and approximately 39% of net sales in fiscal 2019.
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Recent Accounting Pronouncements
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which clarifies some of its guidance around reference rate reform activities as global market participants undertake efforts to transition from using or referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates to using or referencing alternative reference rates. The amendments in this ASU if elected by an entity, are effective immediately. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. The Company does not expect the revised standard to have an impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2019. The standard became effective for the Company beginning March 29, 2020, the first day of its fiscal 2021 year. The revised standard did not have a material impact on the consolidated financial statements.
3. Asset Acquisitions and Business Combinations
Asset Acquisitions
Drysdales, Inc.
On July 3, 2018, Boot Barn, Inc. completed the acquisition of assets from Drysdales, Inc. (“Drysdales”), a retailer with two stores in Tulsa, Oklahoma. As part of the transaction, Boot Barn, Inc. purchased the inventory, entered into new leases with the stores’ landlord, offered employment to the Drysdales team at both store locations and assumed certain customer credits. The primary reason for the acquisition of Drysdales was to furtherexpand the Company’s retail operations in Oklahoma. The cash consideration paid was $3.8 million.
In allocating the purchase price, the Company recorded all assets acquired and liabilities assumed at fair value. As the acquisition did not meet the definition of a business combination under FASB ASC Topic 805, Business Combinations, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets.
The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including quoted market prices and estimates made by management. The inventory was valued using the comparative sales method and the customer credits were valued using the cost approach. Based on the fair value analysis of the net assets acquired and liabilities assumed, the inventory was valued at $4.2 million, and the customer credits were valued at $0.4 million.
Wood’s Boots
On September 11, 2017, Boot Barn, Inc., a wholly owned subsidiary of the Company, completed the acquisition of assets from Wood’s Boots, a four-store family-owned retailer with stores in Midland and Odessa, Texas. As part of the transaction, Boot Barn, Inc. purchased the inventory, entered into new leases with the stores’ landlord, offered employment to the Wood’s Boots team at all four store locations and assumed certain customer credits. The cash consideration paid was $2.7 million.
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In allocating the purchase price, the Company recorded all assets acquired and liabilities assumed at fair value. As the acquisition did not meet the definition of a business combination under FASB ASC Topic 805, Business Combinations, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets.
The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including quoted market prices and estimates made by management. The inventory was valued using the comparative sales method. Based on the fair value analysis of the net assets acquired and liabilities assumed, the inventory was valued at $2.8 million, and the customer credits were valued at less than $0.1 million.
Business Combinations
G.&L. Clothing, Inc.
On August 26, 2019, Boot Barn, Inc. completed the acquisition of G.&L. Clothing, Inc. (“G.&L. Clothing”), an individually-owned retailer operating one store in Des Moines, Iowa. As part of the transaction, Boot Barn, Inc. purchased the inventory, entered into new leases with the store’s landlord and offered employment to the G.&L. Clothing team. The primary reason for the acquisition of G.&L. Clothing was to further expand the Company’s retail operations in Iowa. The cash consideration paid for the acquisition was $3.7 million.
In allocating the purchase price, the Company recorded all assets acquired and liabilities assumed at fair value. The total fair value of consideration transferred for the acquisition was allocated to the net tangible and intangible assets based upon their estimated fair values as of the date of the acquisition of G.&L. Clothing. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. The goodwill and intangible assets are deductible for income tax purposes.
The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including quoted market prices and estimates made by management. The inventory was valued using the comparative sales method. Property and equipment, net, customer list and merchandise credits and other current liabilities were valued under either the cost or income approach. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
(in thousands) At August 26, 2019
Assets acquired:
Property & equipment, net 64
Customer list 345
Right-of-use asset, net 1,946
Total assets acquired $ 6,360
Liabilities assumed:
Merchandise credits and other current liabilities $ 169
Short-term lease liability 129
Long-term lease liability 2,374
Total liabilities assumed 2,672
Net assets acquired $ 3,688
Lone Star Western & Casual LLC
On April 24, 2018, Boot Barn, Inc. completed the acquisition of Lone Star Western & Casual LLC (“Lone Star”), an individually owned retail company with three stores in Waxahachie, Corsicana and Athens, Texas. As part of
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the transaction, Boot Barn, Inc. purchased the inventory, entered into new leases with the stores’ landlord and offered employment to the Lone Star team at all three store locations. The primary reason for the acquisition of Lone Star was to furtherexpand the Company’s retail operations in Texas. The cash consideration paid for the acquisition was $4.4 million.
In allocating the purchase price, the Company recorded all assets acquired and liabilities assumed at fair value. The total fair value of consideration transferred for the acquisition was allocated to the net tangible and intangible assets based upon their estimated fair values as of the date of the acquisition of Lone Star. The excess of the purchase price over the net tangible and intangible assets was recorded as goodwill. The goodwill and intangible assets are deductible for income tax purposes.
The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including quoted market prices and estimates made by management. The inventory was valued using the comparative sales method.Property and equipment, net, below and above-market leases and customer credits were valued under either the cost or income approach. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date based on the purchase price allocation:
(in thousands)
Assets acquired:
Property & equipment, net 42
Below-market lease 92
Total assets acquired $ 4,769
Liabilities assumed:
Other liability - merchandise credits $ 69
Above-market lease 276
Total liabilities assumed 345
Net Assets acquired $ 4,424
The change in the carrying amount of goodwill is as follows (in thousands):
Goodwill as a result of the G.&L. Clothing Inc. Acquisition 1,644
Activity —
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4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
March 27, March 28,
Prepaid advertising $ 831 $ 239
Income tax receivable — 5,172
Debt issuance costs 251 376
Prepaid merchandise 7,482 5,446
Total prepaid expenses and other current assets $ 12,777 $ 14,284
5. Property and Equipment, Net
Property and equipment, net, consisted of the following (in thousands):
March 27, March 28,
Land $ — $ —
Buildings — —
Construction in progress 5,364 9,738
Less: Accumulated depreciation (76,100) (62,129)
Depreciation expense was $24.1 million, $21.2 million, and $18.3 million for fiscal years 2021, 2020, and 2019, respectively. Beginning in fiscal 2021, as a result of the adoption of ASC 842, amortization related to assets under finance leases is included in cost of goods sold rather than depreciation expense (see Note 11 “Leases”). Additionally, as a result of the adoption of ASC 842, land and buildings that were previously classified as property and equipment, net, were reclassified to finance lease right-of-use assets beginning in fiscal 2020.
6. Intangible Assets, Net
Net intangible assets consisted of the following:
Gross Weighted
Carrying Accumulated Average
Amount Amortization Net Useful Life
(in thousands, except for weighted average useful life)
Trademarks—definite lived 15 (15) — 3.0
Total definite lived 360 (152) 208
Trademarks—indefinite lived 60,677 — 60,677
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Gross Weighted
Carrying Accumulated Average
Amount Amortization Net Useful Life
(in thousands, except for weighted average useful life)
Below-market leases — — — —
Trademarks—definite lived 15 (9) 6 3.0
Total definite lived 360 (63) 297
Trademarks—indefinite lived 60,677 — 60,677