Boot Barn’s (NYSE:BOOT) 1Q25 results were very positive, with the company returning to comparable growth after challenging quarters in late FY24. Part of the results came from better digital advertising returns, but still, the trends are good. The company was able to maintain margins despite opening stores at 10% rates.

I continue to believe that Boot is one of the best retailers out there, with an interesting management team, great return on capital policies, and efficient operations. However, I still think the multiple on earnings is too high, absorbing most of the upside opportunity in case the company can continue growing and leaving too much risk in case comparables deteriorate. For that reason, I maintain my Hold rating on the stock.

Positive 1Q25

Return to positive comps: The most important metric in a retailer is probably comparable sales, because of how much it drives operational leverage. In the case of Boot, the metric was even more important because it worked as a proxy for the company’s fashion risk. With so much growth in the post-pandemic environment, I worried that the company might give back some of that growth as the more fashion-oriented customers moved to other styles besides Western. Same-store sales were very negative in 2H24, with close to-5% in 2Q24, -10% in 3Q24, and close to -6% in 4Q24.

Fortunately, the trend was reverted (at least partially) in 1Q25, posting comparables up 1.4%. This is a great step in maintaining profitability, and in evidencing that the company’s customers are not as fleeting as could have been expected from the previous explosive uptrend.

However, we also have to think that a swallow does not make a summer. This has been only one-quarter of positive comparables. Management was happy with the trend in 2Q25 so far, and guided for comps slightly down in Q2, up in Q3 and down in Q4. Another caveat is that e-commerce comped positively by 5.5% (vs. 1.2% for stores), helped by better ad spend returns. This tailwind could potentially revert.

Flat margins: The company posted flat operating margins, with gross margins increasing 100bps from merchandise but losing 100bps on overhead and SG&A/revenue flat as well. Interesting points are the flat gross margins despite bad comparables in 2H24, which point to a resilient pricing strategy, and also that the company’s SG&A/revenues are not growing despite the company expanding its square footage by 10% YoY.

Expansion plan maintained, guidance updated: The company confirmed that it plans to expand its store square footage by 15% per year, and that it is confident that it has whitespace to expand its store fleet from 400 today to 500 in the future. That is a lot of growth.

More into the mid term, the company guided FY25. The company expects sales to increase by 9/11%, with comps flat (negative 1% to up 1%). It also expects operating margins to be flat, close to 11.5%.

Great management: Every quarter, I cement my belief that Boot’s management is really good. This quarter, two signs have been the comments about ad spend and inventory management. On ad spend, management commented that they follow a strict return on ad spend bar, whereas if the ROAS is below a certain level, they will cut back on it to protect the company’s EBIT. On inventory, the company is now buying bigger volumes from some suppliers, in order to get volume discounts. However, management was careful to comment that this practice is only carried in low fashion-risk articles, like some types of work boots, in order to avoid stale inventories and clearance.

These comments lead me to believe the company’s management is looking at the right variables when managing the operation. They concentrate on profitability for the long term rather than growth (which could be fueled by margin-destroying ad spend) or short-term gross margin improvements (from bulk-buying fashion-risk items).

Valuation too optimistic

Despite my positive comments about the company, its management, and the fact that it has posted positive comps and is guiding for a flat comp year (after a challenging FY24 from a comp perspective), I still do not believe Boot is a Buy at these prices.

The reason is that a stock is the mix of a business, its prospects, and its price. If the price is too high (like Boot’s in my opinion), then it eats on the upside from the good business.

Today, Boot trades at a market cap of $4.1 billion and expects to generate $220 million in operating profits (in the upper range of its guidance). After no interest and taxes of 25%, that represents a net income of $165 million. This implies Boot trades at a P/E multiple of 25x or, conversely, an earnings yield of 4%.

In my opinion, for a good unlevered retailer like Boot a fair return should be at least 10%, potentially in the range of 12/15% to be more opportunistic. This implies that on top of the 4% earnings yield, we would need at least 6%, and potentially 8/10% of growth.

Can Boot deliver that kind of growth? Potentially yes, as the company plans to expand its store square footage by 15% per year, and I believe management could maintain margins on that expansion (although probably not improve them). However, the company also faces execution risk, fashion cycle risk, and macro risk (for example, from the more core customers working in mining, oil, and agriculture).

The price today implies that if Boot manages to grow, then we can only receive a fair return. If it doesn’t, then we are exposed to not obtaining a fair return or even to losses as the multiple accommodates slower-growing retailer multiples (which are in the realm of 8x to 12x in the current market).

This means that the stock is not an opportunity. It requires for things to go well for it to work. An opportunistic stock is one where things have to be normal for the stock to work, with some protection on the downside and opportunity on the upside.

For that reason, I maintain my Hold rating on Boot Barn.