By Tonya Garcia, MarketWatch
If the oil price war heats up, Boot Barn Holdings Inc. could feel the consequences.
Analysts at both JPMorgan and Baird say there are macroeconomic headwinds from the oil and gas sector that could hurt the cowboy boot retailer. JPMorgan has downgraded Boot Barn to neutral from overweight as a result.
“Boot Barn has significant oil/gas region exposure (~35% of store base) and is susceptible to macro volatility,” analysts say.
JPMorgan notes that Boot Barn’s /zigman2/quotes/208050749/composite BOOT +10.33% same-store sales have declined in Texas, which accounts for about 25% of the store base, to the positive high-single digits in the first half of fiscal 2020 from the positive midteens in fiscal 2019.
Moreover, JPMorgan highlights VF Corp. /zigman2/quotes/206706147/composite VFC +4.14% decision to consider strategic alternatives for its occupational work brands, which includes Red Kap. Other brands in the VF Corp. portfolio include Dickies and Timberland, which are not included in the review.
JPMorgan notes that work wear accounts for 28% of Boot Barn sales, and work wear sales turned negative in the fourth quarter.
JPMorgan cut Boot Barn’s price target to $32 from $47.
Baird analysts note that the fundamentals at Boot Barn are favorable, but the retailer’s fortunes are tied to the ups and downs of crude oil. Boot Barn stock has fallen 54.5% for the year to date while crude oil is down 43.7% for the period.
“[W]e highlight that in the low-$30s per barrel, crude oil is well below the estimated levels for Texas firms to achieve break-even for new oil wells ($48-to-$54 per barrel),” analysts wrote. “As such, any sustained period at current levels could fuel fears of bankruptcies/layoffs and negative impact for Boot Barn’s one-third of locations exposed to oil/gas producing areas.”
Looking ahead there are “less favorable recent macro indicators” that Baird calls out, including national employment in mining and logging and Texas rig counts.
“While we hold a favorable view of the long-run opportunity as one of the few specialty retailers growing units in the positive-double digits with differentiated positioning, and we view current levels as reasonable for patient investors, sentiment is likely to remain low until investors gain confidence in forward estimates,” analysts led by Jonathan Komp wrote.
Baird rates Boot Barn stock neutral and nearly halved its price target, to $24 from $46.
Oil stocks and companies in the exploration and production (E&P) sector took a big hit in Monday trading after Russia refused to get behind OPEC’s production proposal, which sparked fears of an oil price war and sending oil futures plummeting to the biggest one-day percentage decline since the Gulf War in January 1991.
Cowen analysts said in a Friday note that they walked away from a meeting with Boot Barn executives with a more positive outlook despite the headwinds the company faces.
“We think the company is much better operationally positioned today than it was during the last extended oil downturn, despite Texas being approximately 22% of store base during both periods,” analysts said.
“We expect the retailer to continue to open doors, achieve positive, albeit lower than recent trends comps, and expand merchandise margins on private brand growth.”
Cowen rates Boot Barn stock outperform with a $25 price target, down from $50 previously.