BOOT -- 4th Quarter Earning Analysis

When BOOT last reported earnings, I wrote that next time I will be watching for “trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal. I will also be watching the change in A/R relative to sales.”

In that post I also stated that analysts (in BOOT’s case just one analyst) were underestimating the earnings power and I felt the company would report 45c per share in Q4 earnings.

BOOT reported Q4 earning on Januray 29^th of 38c per share which is up 8% YoY however below the 40c per share analyst estimate and my 45c per share estimate.

I am not going to waste time by regurgitating the earnings release which you can read yourself and will just state that the company blamed the unseasonably warm October and November for the 2% decline in outdoor footwear sales and the earnings miss.

The work market continued to chug along with 8% top line growth and both gross and SG&A margins improved on a YoY basis. The large inventory growth vs. sales was blamed entirely on the warm weather with the CEO stating on the conference call that BOOT is not going to take markdowns on this access inventory as its all basic, high turnover outdoor hunting products.

The CEO also hinted on the conference call that the decline in weather in the beginning of the first quarter is helping sell this access inventory. I believe the CEO’s is hinting that almost everything that was not sold in Oct/Nov is being sold in Dec/Jan. It was also announced that the company instituted a 3%-5% price increase across the board on its products in January.

Today, BOOT announced a special $1 per share dividend as well as its regular quarterly dividend to be paid March 18^th.

So, how attractive is the stock today? Here is how the numbers break down at ...

Market Value $89M
Cash on Hand $15M
Enterprise Value $74M

Estimated fcf over next 12 months $7.5M - $7.8M
Current Cash Yield 10% - 10.5%
Current Multiple 9.5x - 10x

If in fact the weather effected Q4 sales, than there should be another few million that will be dislodged from inventory and into cash in Q1 as sales catch up and that will lower the EV/free cash flow multiple to 9x – 9.5x.

At the time of the Q3 report I also wrote that “I think a fair price to pay is somewhere between $17.5 to $20. I am not wildly excited about paying 13x-15x forward cash earnings but would allocate new money to this tock since you do get a growing company with growing margins and a fortress balance sheet.”

I think the recent earnings miss is just a short term bump in the road and I am getting more excited about the long term capital appreciation prospect as the multiple falls below 10x. At this point, you get to buy a company with premium brands, fortress balance sheet with cash being returned to shareholders and you are paying a sub-10x cash flow multiple. Even if the next 12 -24 months are a little bumpy, in the long term BOOT shareholders will benefit from 8%-10% earnings growth as well as multiple expansion from the current sub-10x level.

In the next quarter I will be primarily looking for indication that the misstep in Q4 was due to weather rather than some broad negative trend. As always I will be looking for margin trends and changes in inventory and A/R relative to sales.

* 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.

Earnings estimates for BOOT going up .......

Looks like the only analyst that publishes on BOOT finally raised his/her estimates.

Full year 2007 EPS estimate increased to $1.17 from $1.12
Full year 2008 EPS estimate increased to $1.32 from $1.29

Based on my last post on BOOT, I think these are to conservative. One of the most often cited behavioral biases effecting equity investors (and analysts) is under-reaction to new information. One of the reasons I am bullish on BOOT is that I believe that after years of underperformance, investors are not changing their expectations fast enough and the market price does not fully reflect the strong earnings momentum that the company has enjoyed.

* 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.

Thoughts on BOOT article and furniture stocks

A nice article about BOOT from the The Oregonian. Thanks to joeletaxiiii from the yahoo message boards for the link.

The article briefly discusses how BOOT was able to engineer a turnaround over the last few years by getting out of low priced, low margin, commodity like businesses and re-focusing itself on producing super premium products and reinforcing its brand names.

While its nice to see this company get some ink, I discussed most of these points in my initial posting on BOOT. Still, this article did get me thinking about what other industries are prime candidates for reworking their business model and moving upmarket.

One industry and a number of publicly traded members of that industry that seem to be perfect for such a change are U.S. based residential furniture manufacturers. This industry has been decimated by foreign competitors that produce a much lower quality product but price it so cheap that it makes sense for the consumer to replace their shaky tables and squeaky sofas every few years rather than paying a premium for a higher quality product.

However, I believe there will always be a large opportunity for the higher end producers as everyone eventually gets older and wealthier and at some point you simply want to own a quality product that will last a lifetime and you are willing to pay a premium for it.

I think there is a big enough space between the low end and the super super high end parts of the market for some of the U.S. based manufacturers to dominate and produce a sufficient return on capital. A couple of names in this beaten down sector look interesting but require more work are FBN, ETH, and HOFT.


* 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.

NO ONE CARES ABOUT BOOT!

Here is a question ...if a company reports 30% YoY operating earnings per share growth and no one hears it, did it really happen?

When I last wrote about BOOT I stated that going forward I will be looking for:

“ trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal.”

I also stated that “if BOOT reports similar sales growth in the seasonally important 3^rd quarter than estimates will surely go up and the stock will have a strong up side move.”

By just about every measure, BOOT reported impressive numbers in their fiscal 3rd quarter. The stock was up as much as 4.5% midday but finished up 1.2% with only 9,100 shares trading hands .... no one cared!

Revenue came in up 12% and ahead of the company’s long term growth target of 8%. Work boots were above average with 20% YoY sales growth and recreational boots came in at slightly below average at 7%.

While the revenue growth is very nice, the real jem is continued margin improvement due to good inventory management. Gross margins came in at 40.1% and up 10bps YoY (the reported GMargins are 39.1% however this includes Dep&Amort expense). Operating expense grew slower than sales at 9.1% causing EBITDA margins to come in at 14.4% and up 70bps from last year’s Q3.

For Q3:3007, GAAP NI was $3.3M and up 30% YoY, eps came in at $0.52 (beating the single analyst estimate by 4c) and up 27% YoY. Operating EPS for the first nine months of 2007 is $0.77 up 28% YoY (actual eps in first nine month of 2006 was $0.67 however that includes a 7c tax benefit).

The balance sheet continues to be pristine with one small black mark. Cash is $4.7M with no debt. Inventory grew slower than sales. The one black mark is that A/R are up roughly 19% YoY vs. sales up 12% -- generally not considered a good sign but there is a lot of quarter-to-quarter noise in those numbers.

Revenue $36.87
GProfit 14.8 (reported GP includes effects of Dep, this number adds back dep)
SG&A 9.5
EBITDA $5.32

L9M EBITDA $8.51
L12M EBITDA $12.6

Q4 EPS estimate $0.45 (this is my estimate, analysts are currently at $0.39 but that is before the earnings announcement so I assume these will be increasing). To get here I assumed 10% revenue growth, small improvement in GMargin and EBITDA margins of 13.7% which is 75bps ahead of last years Q4.

2008 EBITDA Estimate $15.1
2008 EPS Estimate $1.35

So at this point you have BOOT trading at roughly $17.5 with 2008 estimated earnings of $1.35 which gives me a very reasonable forward multiple of 13x 2008 estimates. While all signs point to the company growing operating earnings 30% this year, this growth rate will slow down next year.

Assuming the positive upside momentum continues, I think a fair price to pay is somewhere between $17 to $20. I am not wildly excited paying 13x-15x forward cash earnings but would allocate new money to this stock since you do get a growing company, with premium brand names (ask any avid hunter about Danner boots) with growing margins, and a fortress balance sheet.

Going forward, I will be watching for trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal. I will also be watching the change in A/R relative to sales.

To answer my own question posted in the beginning of this entry.....It did happen and I hope no one hears it. Continued ignorance about BOOT increases the probability of the stock trading to or below my next buy point at roughly $17.

* 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.

BOOT -- 2nd Quarter Earning Analysis

When I last wrote about BOOT I stated that going forward I will be looking for:

“trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal”

BOOT reported on July 30th and while I am in danger of plagiarizing myself it looks like the quarter was mixed but with more positives than negatives.

The blow out was on the top line with total sales up 14.6% and substantially ahead of the 8% set by management as the de facto benchmark. Sales to the work market were up 6% and up 26% to the outdoor market with new products driving sales.

The only black mark was gross margin which came in at 39.2% and was down 60bps YoY due to an inventory write-down. SG&A margins came in better than last year at 33.3% of sales vs. 35.2% of sales in Q2:2006.

EBITDA was up 40% YoY with EPS up 36% when adjusted for an 8c tax related gain in Q2 last year. Looks like analysts don’t expect the strong YoY eps growth to continue in the last two quarter of the year which account for almost 75% of earnings. Despite two consecutive earnings beats analysts did not budge their 2007 estimates which are currently at $1.17 per share.

I bought a tiny 1.5% position in BOOT in the Best Ideas Marketocracy portfolio at $17.13 and at current prices of roughly $20 per share I am not compelled to add more or to sell. While I am very glad to see the stock continue to surprise on the upside I think the shares are fairly valued and don’t provide much margin of safety. If the stock pulls back to $17 per share I will add another 1% to the Best Ideas portfolio and hope that the momentum of the first two quarter carries into the third quarter.

If BOOT reports similar sales growth in the seasonally important 3rd quarter than estimates will surely go up and the stock will have a strong up side move.

Going forward, I will be watching for trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal.


* 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.

BOOT -- “Final Thoughts”

Just to recap, BOOT has really turned around their operations over the last 4 years and has seen substantial margin improvement. However, the company continues to have operating margins below the industry medians even after the increase in recent years.

My favorite way to look at valuation for small cap turnaround stocks is
1) ATTEMPT to calculate a price that a larger public competitor would be willing to pay
2) ATTEMPT to calculate a price that I would be willing to pay for the business

I find this to be a good exercise for those stocks that have publicly traded peer groups. This allows me to calculate a rough buy and sell price, but that’s the smaller benefit. The bigger benefit is that it clearly highlights discreptencies between what I think is the right price and what the market thinks is the right price for a group of similar stocks.

I am going to spend a lot of time talking about what BOOT would be worth as an acquisition candidate. However, I want to reiterate that ITS HIGHLY UNLIKELY THAT BOOT WILL BE ACQUIRED.

Why would the CEO agree to sell the company when his family owns half the shares and the board is made up of his father’s friends? While the current management has added a lot of value since they took over in 2000, the fact remains that “shareholder accountability” is nothing more than lip services. The CEO knows that the board will keep paying him a million bucks a year even if BOOT’s operating performance continues to lag the industry.

Enough with the background noise ……. Is this stock going into the Best Ideas Portfolio or is it getting trashed into the Watch List Portfolio?

Using the peer group that I described earlier we can calculate that sales growth for the last 3 years has been 9.7% annually and EBITDA margins were 13.5%. If we make a very naïve assumption that the group will grow at that rate for the next 3 years and maintain the same margins than the industry is trading at following forward valuations

P/FWD 2007 EBITDA …… 9.48x
P/FWD 2008 EBITDA …… 8.65x
P/FWD 2009 EBITDA …… 7.89x

If we assume sales growth of 8% for BOOT over the next 3 years and its takes 3 years for the acquirer to get BOOT’s EBITDA to industry median levels than the valuation looks something like this:

P/FWD 2007 EBITDA …… 8.07x
P/FWD 2008 EBITDA …… 6.83x
P/FWD 2009 EBITDA …… 5.83x

You are looking at discounts of 25% to 35% to industry levels. To get in line with industry valuations that stock would have to be trading at $23 to $21.5 per share. Haircutting that price by 30% to provide for a margin of safety I get a peer group derived buy price of $16 to $15 per share -- which is a bit lower than the current price of $17.10 per share.

So far so good …….But what would I be willing to pay for BOOT?

Since I don’t have $100+ million I will have to borrow the entire sum. Let’s say I can borrow at 7% (I think most of the peer group I use would be rated A to BBB+ so they would be issuing 10 year paper at roughly Treasury yield + 100bps which gets us to about 6.15% but lets be conservative).

Using the same forward 3 year assumptions as under the peer group analysis, I calculate that I can pay $31 per share for BOOT and if my assumptions are correct I will still break even after 3 years. The $31 target price implies 80% total return and 22% annualized over next 3 years. I think the $31 share price is the highest possible price BOOT can be trading at over the next 3 years.

But I don’t want to just break even, I want to earn a satisfactory rate of return. For me to get a 10% rate of return on this investment I would have to pay no more than $20 per share to acquire BOOT. Haircutting that price by 30% to provide for a margin of safety I get a buy price of $14 per share -- which is almost 20% lower than the current price of $17.10 per share.

Its pretty clear that I don’t think that BOOT is wildly under or over valued. I think the stock is trading roughly in line or at a discount to where others in the industry are trading. Unfortunately, it’s not trading low enough to provide me with a large enough margin of safety to initiate a position at this time. I will be adding the stock to the Watch List portfolio and will be waiting for new data or a lower share price.

Going forward, I will be watching for trends in gross margins and SG&A as % of sales and if revenue is trending above or below the 8% level set by management as the goal.


* 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.

BOOT -- “Da Bears”

The one sentence bearish case for BOOT is that outside shareholders are second class citizens without any power to effect changes, that the company is a below average operator, and that the combination of these two factors demands a discounted valuation.

The Schneider family owns roughly 42% of the outstanding shares so the CEO Joseph Schneider can prevent any takeover or management change no matter how bad things get operationally. Also, the entire board of directors except 1 member is pre-March 2005 meaning that they are all buddy’s of the CEO’s late father who died in 2005 but held on to the Chairman’s title until his last days.

Concentrated ownership controlled by one family (in this case they were not the founding family but George Schneider led the management buyout in 1982) does not generally bode well for unlocking the maximum shareholder value. While the current management has certainly done a good job turning the company around, in cases where the CEO has the board under his thumb one always has to wonder how much more could have been done and will be done in the future.

While the compensation structure detailed in the latest proxy is by no means egregious, a few less noticeable details support the point made above. For example, looking over the last two annual proxy statements it looks like the CEO’s total compensation doubled in 2006 versus the previous year. The increase in total comp was almost entirely due to increase in incentive compensation. So, what? After all, the company had a good year.

The interesting thing is that the increased incentive was achieved by changing how calculations are made to decide if management met their goals. The change in calculation was small (revenue growth became 40% of goal vs. 50% the previous year) but it was enough to ensure a higher payout. Also, management is only taking a small part of their total compensation in the form of options or restricted equity. They can basically take the money now as opposed to taking stock linked compensation and only get rewarded if shareholders get rewarded.

The second part of the bearish case is that BOOT is a below average operator in the industry. Measured by both gross and ebitda margins, BOOT is below the industry medians. Also, the company has less revenue, less EBITDA, and virtually identical book value as it did 9 years ago (this is as far as I have data). It’s true that the company has most recently consolidated its business and walked away from less profitable revenue, but the point is that the company has been a below average operator in the industry.

Considering the fact that BOOT is a less efficient operator than its peers combined with a CEO who knows he will keep his job even if he lags the industry, its no wonder that BOOT is trading at a discount valuation to the group. On top off all that, BOOT gets almost all its sales in the U.S. and is highly depended on both U.S. consumer spending and domestic economic growth.


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.

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.

BOOT – First Look

Initially attracted to the stock for the following reasons
-strong operational improvement from quarter to quarter
-strong momentum in the form of rising earnings estimates, positive price momentum, and earnings surprises
-hidden assets in the form of NOL
-premium brands trading at discount valuation

Currently:
Share Price: $17.2
Market Value: $108M
Enterprise Value: $98M
Investment Type: Long term holding

LaCrosse Footwear (BOOT) has been making boots for over a hundred years. In 1994 the company acquired Danner, Inc an its line up of premium leather boots. Currently the company’s revenue is almost evenly split between the work and outdoor market. The LaCrosse branded boots are sold at lower price points while the Danner boots have a strong brand name and sell at a substantial premium.

Fast forwarding to the most recent past, BOOT has undergone a substantial turnaround and has drastically improved margins. Over the last 5 years the company jettisoned a substantial number of businesses (PVC boots, children boots, mass market apparel, etc.) and has concentrated on its highest margin products.

The turnaround has been pronounced ……

Looking at the 2002 annual report, a year in which the stock hit $1 per share, the company reported 22% decline in sales due to both weakening economy and discontinuation of several business lines and retail outlets. Gross margins were reported at 26.8% (which was actually a 270 bps improvement from the previous year) and EBITDA was a negative $4 million. In 2002 and 2001 the company relocated its headquarters and most of the remaining U.S. manufacturing to Portland, Oregon and shut down a number of plants in Wisconsin (the company was originally founded as a rubber shoe manufacturer based in Wisconsin).

What a difference 4 years makes …..

Looking over the latest 10K, BOOT reported gross margins of 39.2% and EBITDA of positive $8.84 million. Also, based on the latest filling the company manufactures 80% of its products (by sales dollars) outside of the U.S. and has re-positioned itself into a designer and innovator rather than a sub par manufacturer.

* 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.