The hit TV show Yellowstone came out in 2018. And since then, shares of retailer Boot Barn (BOOT 3.57%) have crushed the market average, up 268% over the last five years compared to just a 56% return for the S&P 500.
Some attribute Boot Barn's success to the show's popularity, calling it the Yellowstone effect: a resurgence in the popularity of Western programming and apparel. It may have no official affiliation with Yellowstone, but Boot Barn specializes in Western apparel.
However, I believe that investors should look past the Yellowstone effect when explaining the success of Boot Barn stock. I see three big reasons this has been a good investment. And in this article, I'll share why it can be a winning investment over the next five years.
Why Boot Barn stock crushed the market
Before looking at Boot Barn's potential, it can be helpful to clearly identify what's worked for this investment in the past. Here are the three factors I've found.
- Revenue growth. In its fiscal 2018 (ended March 31, 2018), Boot Barn had net sales of $678 million. The company will likely report complete financial results for its fiscal 2023 later this month, and management believes it will have net sales of $1.67 billion to $1.68 billion for the year. That's around a 147% increase in just five years -- impressive.
- Margin expansion. Boot Barn is getting more profitable as it grows. In 2018, its gross margin was 30.7% and its operating margin was 6.8%. By comparison, through the first three quarters of its fiscal 2023, its gross margin was 36.9% and its operating margin was 13.7% -- significant improvements. And it means that profit growth is outpacing revenue growth.
- Higher valuation. The stock was ridiculously cheap just five years ago. In May 2018, it had a price-to-sales (P/S) valuation of about 0.8, which was odd considering net sales in fiscal 2018 were up 7.6% compared to fiscal 2017. Moreover, the company was profitable back then -- normally a company that is growing and profitable wouldn't trade so cheaply. Nowadays, Boot Barn stock still trades at an inexpensive P/S of 1.4. But that's roughly a 75% increase to its valuation in the last five years, which boosted gains for shareholders.
All of these things are up for Boot Barn stock and contributed to its market-crushing gains.
BOOT data by YCharts. TTM = trailing 12 months.
Will Boot Barn stock crush the market from here?
If Boot Barn stock beats the market over the next five years, I believe revenue growth will play an outsized part. And management does expect to grow substantially. It's targeting 900 locations by early 2031, and at the current rate that the company is opening new stores, it could have around 600 locations in five years, compared to about 340 today.
Boot Barn's same-store sales are up 1.8% through the first three quarters of its fiscal 2023 compared to the same period of fiscal 2022. If sales per existing location can keep growing over the next five years, coupled with new store openings, the retailer's revenue in fiscal 2028 could be about double its revenue in fiscal 2023.
Some might scoff at the thought of Boot Barn growing that much over the next five years. After all, if sales are being driven by the Yellowstone effect, then the company's growth seems faddish and susceptible to a correction when consumer tastes change.
Not so fast. Consider that Boot Barn increased its store count from just 117 locations in fiscal 2013 to 226 by fiscal 2018, which was before Yellowstone came out. And same-store sales were up in each of those years, except for fiscal 2016, when they were down a paltry 0.1%.
This directly contradicts the notion that Boot Barn's success is recent, due to a TV show. And it lends credibility to the belief that the chain can successfully grow from here.
In reality, its popularity is being driven by sales of its exclusive brands. Over 32% of sales during the last 12 months came from brands that can only be purchased at Boot Barn, up from just 13.5% of sales back in fiscal 2018. And these exclusive brands have much higher profit margins for the company, which is improving its bottom line.
I believe a P/S between 1 and 2 is fair for Boot Barn stock, and so I don't believe its valuation will increase much, if at all. However, if the company can double sales and if exclusive brands further improve its profitability, then this could indeed be a stock that handily beats the market yet again over the next five years.
