BOOT -- “Da Bulls”

The one sentence bullish case for BOOT is that the company has undergone a series transformation and has become solidly positive, it still has room for improvement, and it currently sports one of the lowest valuations among its competitors.

Even though I found some prominent warts on this management teams face and will discuss them in the bearish post, its hard not to commend them for the turnaround they have engineered over the last 4 years. Looking at the year end results for 2002, a year in which sales were down 22% and the stock hit an all time low of around $1.70, EBITDA was $2.14 or 2.2% of Sales and pre-one time charges EPS was negative 36c per share.

Since 2002, the level of gross profit and EBITDA has increased in every year. Also, gross margin and EBITDA margin increased in every year compared to the year before. Gross Margin increase by almost 1100bps while EBITDA margin has increased by 800bps. Further more, the company has been able to maintain the level of working capital virtually unchanged since the end of 2002 but it now generates more than 5x EBITDA and net income.

The median Gross Margin for shoes manufacturers (this EXCLUDES retailers like Payless) over the last 12 months is 43% v. 41% for BOOT. The 200bps difference in margins is HUGE for an industry with median EBITDA margin 12.6%. If BOOT can close the gap and it has been making strides in that direction every year since 2002, this will add somewhere between $5M - $6M to after tax net income or $0.80 - $0.95 per share. This would nearly double net income.

Its hard to say if the company will be able to continue to increase gross margin at the same pace. On average, BOOT has added 270bps to gross margin in each of the last 3 years, but that number declined last year and will be harder to maintain as the easy fruit is always picked first. Still, in the fiscal first quarter reported in May 2007 gross margin was up over 100bps relative to the same quarter in 2006 but it’s the last two quarters that are important due to seasonality inherent in the business.

Of course, “below industry margin with a lot of room for improvement” can be rephrased as “inefficient operator,” more on this in the next post ……

Despite the strong price move in the stock recently, BOOT still trades at discounts to the industry medians based on sales, ebitda, and book value. On average, BOOT trades at a 25% discount to the industry despite reporting better sales and ebitda growth than many of its competitors. I am not getting into a detailed valuation discussion at this point as I plan to discuss it in my concluding post on BOOT.

Companies used to calculate industry median valuations and margins: KSWS, WEYS, TBL, RCKY, WWW, DECK, SKX, SHOO

Companies excluded from median valuations despite industry participation: HLYS, CROX, NKE


* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.