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Ricky Mulvey: Perhaps some Halloween theme. Obscure, spooky, misunderstood. Let's go to the Barn. Western retailer called Boot Barn with more than 400 stores announced, pretty solid quarter two earnings, 5% same store sales growth. That's not bad for a retailer in this recession. However, we got a problem, and that is that the horse has left the barn, CEO, Jim Conroy. Jim why are you shaking your head? That was good one. That was one of my better ones. I got more.

Jim Gillies: That's good. Okay. Good to do.

Ricky Mulvey: CEO Jim Conroy is leaving for the greener pastures of Ross Stores. The discount retailer seems to be better. Chief Digital Officer John Haysen stepping in his place. Mr. Market says that this swap is worth about 750 million of Boot Barns roughly $4 billion market cap. Let's start with assuming that the market is right, because usually the market can be wrong, but usually the market's right. What needs to be true about Mr. Conroy's leadership for this drop to be worth it?

Jim Gillies: I'm going to see if I can on the fly, come up with some horse and Western puns like yourself. It assumes that he is the show pony. That he is the reason for their success over the past decade. I do not hold to that. I'm going to give you what they just reported. I'm going to give you more detail here. For the quarter, they did 426 million in sales, their guidance, which was raised by the Wala, but their guidance was for 405 to 412 million. They did 40 million in operating profit. Guidance was for 330-36 million. Same store sales of almost 5%.

Jim Gillies: The guidance was originally negative half a percent to maybe 1.4, so they pretty much tripled that. Earnings per share of $0.95, guidance was for 81-87 cents. Operating profit margin 9.4%, guidance was from 8.2-8.7%. They bumped their full year guidance substantially, which is the second time in two quarters of their fiscal year, so 100% of the time so far. They bumped their guidance. This was a great quarter, and yet since reporting that, the stock is down 22.5%. You've identified the one reason why I think the market is reacting this way. Again, I think the market's wrong. But I will do another reason. Go ahead.

Ricky Mulvey: The market is reacting poorly, and yet you say nay.

Jim Gillies: [laughs] I can't top that, Ricky. I'm going to let you.

Ricky Mulvey: I'm doing a boot retailer earnings. I got to work to get the listener's attention. Keep going man.

Jim Gillies: I even tried to get you to do contour brands, which is Jeans and which would have done that.

Ricky Mulvey: Have you ever recorded with yourself? This is going to take 15 minutes.

Jim Gillies: At least. The other reason why I think Boot Barn probably sold off a little bit is because in spite of all that excellence I've just talked about, cash flow took a bit of a step backwards. Cash flow is actually negative for the quarter. Now, this is entirely attributable to a sharp uptick in inventory, which I think will reverse in coming quarters and I think it should be expected. Because they've had two excellent quarters so far in this fiscal year, and they've really substantially raised their guidance. They sell boots. They need more inventory. They spent it in this quarter for future quarters. I think that should have been seen entirely as predictable.

But I understand why the market might have gone like, that cash will positive. The second one of course, is if you talked about is Jim Conroy leaving? Put yourself in his shoes, though. They rained -- they being Ross Stores where he's going -- they rained money on him. The comp package is going to be about 25 million in Year 1. Assuming Ross Stores stock price doesn't move, it's going to be about 75 million over the next five years. His pay last year at Boot Barn. It was very generous. It was about 7 million, but 5 million of that was restricted stock and performance based stock units, which will surely be forfeited because he's walking out the door. He's going for a 4.5 million dollar company before the earnings release came out, to a company ten times that size. He's in his mid 50s. I think this is just a case that he wants a bigger challenge.

He's been there for, I think, 12 years at Boot Barn. Are we going to begrudge him this big fat payday and a bigger challenge? Again, I'm going to quote you, I say nay. I would like to think most companies I follow and first off, how many people show of hands, how many people could have named Boot Barn's CEO before that news story came out. I'm an owner. I've recommended the company. I'm not sure I could have, without a little bit of thinking, remembered his name.

I like to think that most companies that have had the success that Boot Barn has had, quarter in, quarter out, year in year out. I like to think there's a bit of a bench strength, and I like the fact that the gentleman who's responsible for as I think he's chief digital officer. I like that that they're giving it to him, frankly. For now. It's interim tags, I should put that correct?

Ricky Mulvey: We know very little about this cat. We'll see what happens. Couple comps I want to point out. Boot Barn, making more in same store sales than Dick's Sporting Goods, which is a market favorite, and also Tractor Supply, which plays in a similarish but different space. Tractor Supply actually having negative same store sales growth. One of the themes we're going to hit with another company later is growth at a reasonable price, something you like to focus on. Does Boot Barn count is growth at a reasonable price?

Jim Gillies: It does. When I actually recommended the name in the first place, it was with a GRP growth of a reasonable price thesis. They have 426 stores. I think they had somewhere in the 300 stores when I first wrecked them, and they've got a pretty good layout of what they're looking for in new stores. They think they can get to 900-1,000 stores in America by fiscal 2031. We're in fiscal 2025 right now. At that point, I think one of two things can happen. One, they'll say, if we can do 1,000 stores, we can do 1,300. But as well, I think the concept works beyond the borders of your fine country. Have you been to Alberta or Saskatchewan? There's Well, I don't recommend them in February, but there's one or two Cowboys up there. Latin American Cowboy culture is a thing.

I think there's a lot of legs here and if you look at the cash on cash returns for their stores, the payback periods on a cash on cash basis is like in the 1-1.4 years. When you have that return, and that very short payback period, it arguably makes sense to grow as fast as possible as long as you can retain those metrics. That's number 1. Today, though, they're trading for about 17 times operating profit, 23 times PE, but they're going to continue probably through at least fiscal 31. We're talking about growing the top line low teens, operating profit, mid teens, probably, because you pick up operating leverage as you grow, list you should, and they have. I think one of two things can possibly happen. I've already talked about, once we get past their 10 year expansion process.

As I mentioned, they could decide to continue growing, and I think there are opportunities for that, or they could flip the chain to what I call cash cow mode. Where they're still putting more stores, and all the cash has been going and investing in new stores, suddenly starts falling to the free cash flow line. Home Depot has been a fantastic example of those over the years. At that point, I think this company does 350-$400 million a year in free cash flow and you're buying it today for 3.8 billion, including full enterprise value. I think we're going to get past the CEO defection. I can't blame Conroy, here's $75 million and you don't have to come to work every day. Who among us wouldn't take that. Again, I think this is an opportunity and I'll leave it at that.

Ricky Mulvey: I'm going to make one reference. I don't think you'll get is a Canadian, but Cincinnati College Football. It's a stepping stone, where there were a lot of coaches that would go to Cincinnati for a few years, and then they move on to a bigger and better opportunity. The fans were always upset about it. Shout at Luke Fickle, shot at Brian Kelly. Anyway, I'm going to make an audible here speaking of football.

We're going to Sprouts Farmers Market because this is another growth at a reasonable price question mark. Sprouts Farmers Market is a company you followed for a while. This is one where my Lynch in senses have betrayed me because I went to one. It's not quite Trader Joe's, not quite whole feuds in my view. I haven't been back. I'm wrong. A lot of people love it and that's why their comp sales growth is up 8% Placer AI measures the foot traffic. That's not just pricing. They say the foot traffic is matching up with that. Earnings per share for a grocery store, Jim, earnings per share up more than 40, 40% from the prior year, e commerce sales up more than a third. Now, that's 15% of the business for this niche grocery store. Highlights from the quarter. Why am I wrong about this company?

Jim Gillies: You're not wrong about this company. I've recommended this company twice and Hidden Gem's Canada. I love this company. You're absolutely not wrong or at least, you're not wrong in praising and bringing up the things that have done really well. Yeah, sales up, 14%, comp sales. Same store sales, 8.5% in this quarter, as you mentioned, EPS up 40. New store openings were a little light, but that's because they had two stores in the pathway of Hurricane Milton, so we understand why they didn't open those. But they have just been crushing it for the better part of three years now. Like I said, we've got them on the scorecard twice at like 24, $25, and I think, 33. We have just been enjoying this one.

Again, like we talked about Boot Barn, this was a growth at a reasonable price thesis. But with the added benefit at the time we recommended it, and I feel this is where we're going to segue through here, when we recommended it, the way I termed it was a best in class in their industry, best in class, grocery store, trading with multiples and best in class, meaning in terms of margins, earnings, growth, cash generation, what they were doing with that cash generation. It was a best in class operator, trading with a worst in class valuation. Part of the success that this company has had is because it's no longer being treated as a worst in class operator. It's best in class operator now, which it should be.

Ricky Mulvey: Maybe some of the analysts had a similar experience to me, and we've all been wrong about it. The stocks up more than 200% over the past year. We talked about Boot Barn. You made the case that a 10 times cash flow for the future. This seems like an opportunity here. Let's talk about sprouts. Let's bring this theme rough to Sprouts. Is Sprouts still growth at a reasonable price with all of this boost in the valuation of Sprouts Farmers market?

Jim Gillies: It's still growth. I'm struggling with reasonable price. I will admit. I expect 10% store growth for the foreseeable future. There is lots of real estate for them to grow in the US, plus, I think the concept will work beyond your borders. I don't see any worries on the growth side of things. The problem is, as mentioned, when I wrecked this thing, both times, valuation, look, stock trading at 30 bucks. Their value is 45 and management they had more cash than debt. They were tremendously cash flow positive. Management were aggressively buying back their own shares. Share count is in fact down more than a third since 2015. They've also paid off all their debt.

I don't count operating leases as debt because, I don't like to capitalize operating expenses. I admit there's a certain amount of anchoring here. I will admit to that. But, when I look and see what I recommended when it was trading at six and seven times Zibda, now trading for 21 times Zibda. When I recommended it was trading at 13 or 16 times free cash flow. Now it's trading at 36 times free cash flow. I was trading at 11-14 times with the PE, now it's trading at a 43 PE. These present multiples are as high, if not higher than whole foods back in the day. I'm not sure it's deserved.

And I also run a discounted cash flow for this company in the past. It was tremendously undervalued. Today, I'm struggling to get a fair value calculation above 75- 80 range thing. It's trading at I think about 130. Look, DCFs are guaranteed to be wrong, but they are useful sign posts. Again, I love this company. I own this company. I've obviously, I've invested in it because I've recommended it twice. I love what it's done for our members. But I think management might be agreeing with me, they're a little hot because as I mentioned, they were aggressively buying back their own stock, and usually any money they weren't spending on opening stores, they were buying back shares. This quarter, they did 156 million in free cash flow. They spent just 25 million on buybacks. Rest is just gathering dust on the balance sheet. Which is nice. But, I think it indicates management here are going, we're a little pricey, and I can't disagree with them.

Ricky Mulvey: Follow the money and see where it goes. I know you have a bunch of notes on AerCap. I don't think we have time for it, but for members of Motley Fool Services, where can they find your thoughts on AerCap?

Jim Gillies: My thoughts on AerCap can be found easily in Hidden Gem's, Canada. I will be discussing them in more detail, probably in next Friday's column, spoiler. I will simply say about AerCap, this is a cheap business run by the best in the business. That would be CEO Angus Kelly, trading for one time book value and about 8.5 times earnings, both of which are understated based on what they do. They are an aircraft LASSO that is in the sweet spot for their industry. Aside from the growth at reasonable price stories, we just talked about, I'll just leave you with this. I think AerCap is undervalue today, and I don't know that I own enough of it.

Ricky Mulvey: Are you mad you didn't get big tech talk? We got that on Friday with Apple, Amazon, Microsoft, Meta, Jim Gillies. Thanks for being here. Happy Halloween, man.

Jim Gillies: Happy Halloween to you, too.

Ricky Mulvey: Alright, every year, I check in on the Candy industry with Asit Sharma on Halloween. This year, though, he canceled on me at the last minute and sent someone else instead. Every year, Asit Sharma, I check in on some candy companies. This year, though, Asit is unavailable, and he has brought in his buddy, Larry the Werewolf. Larry, how are you doing, man?

Larry the Werewolf: I'm doing great. Thank you very much, Mr. Mulvey. This is indeed an honor. It's a privilege and I'm so excited so much so that I just have to do this, although your producer told me not to because it would blow out the levels in the mike. But here we go. Werewolves of London.

Ricky Mulvey: I can feel more people tuning in right now. Larry, werewolves are known for a lot of things, usually around fool moons. I've heard the how. Do you do stock analysis?

Larry the Werewolf: I do do some stock analysis. I do securities analysis. I've been working on this for quite a while. I had this she wolf girlfriend who said, Larry, you'd be better working on your own insecurities analysis. You'd make more money, but I got rid of her.

Ricky Mulvey: I don't know if I'm sorry or if I'm happy to hear that. But I am ready, speaking of being ready to move on to this discussion about Hershey, because on Friday's show, Dylan, Jaymo and Ron talked about the supply side, the cocoa shortage. I'm hoping we can get more to the demand side. I don't know. Is Asit your roommate, just your friend? How does that work?

Larry the Werewolf: He's a friend, and you know how this whole werewolf thing works. We don't get around much, we transform and usually people keep us undercover, but I met Asit years ago at the very end of a day on Halloween in a grocery store. I didn't scare anyone because everyone thought I was in costume. We struck up this conversation by the Max Candy bars. He was just such a great guy and he got me interested in investing, and, since then, It's just been this great fun relationship. I've learned a lot, and I'm just so eager to spread my own investing knowledge here as we talk on, Mr. Mulvey.

Ricky Mulvey: The last time I spoke with Asit around Halloween, we talked about Hershey and at that point, it was a top dog and its biggest questions almost were about it's move into snacking. Now it's got the Cocoa questions. It's also got more, I would say, weight loss drugs questions, people becoming more concerned about those ultra processed foods of which Hershey makes a lot. Since it's moved into snacking over the past year, have we gotten the diversification that was promised? What's the state of Hershey right now in 2024?

Larry the Werewolf: Yell. This is a little surprising, Mr. Mulvey. I mean, Hershey's Management talked this big game about diversifying into snacks. They have this North American confectionery unit now and the North America Salty Snacks Unit, which is, of course, from buying those snack brands like Amplify. But if you look at the numbers, they've lost some share in both confectionery and in Salty Snacks. What does this tell us? Probably that they didn't know a lot about snacks when they bought these businesses, or they knew a lot about snacks, but have yet to bring the innovation to the fore, the new SKUs that customers want to grab off the shelves.

Ricky Mulvey: The question I'm most excited to ask you. This is one I've been looking forward to to get an answer from you, Larry. What are your top three favorite Halloween Candies?

Larry the Werewolf: I have made a list. I have written it down, Mr. Mulvey. The first that I want to talk about, I'm going to let you in on a little secret here.

Ricky Mulvey: We really I'm not really looking for a secret. I'm looking for, like, this is a fun way to end the segment just like quickly, what are your top three favorite Halloween candies?

Larry the Werewolf: Fine, then. The first is Dog treats.

Ricky Mulvey: That's not a candy.

Larry the Werewolf: So delicious. In fact, the greeny brand, peanut butter, flavored pill pockets, which you can get off chewey in a value pack are delicious.

Ricky Mulvey: That's Okay. Is there anything we can swap that in with because that's a dog treat. We're thinking we just talked about chocolate. There's some easy options in there. You could look for gummies, nerds gummy clusters. That's a big one. That's hot in the streets.

Larry the Werewolf: Another chance to try again. Sure. How about frozen blood pops? As you know two main classes of scary types around Halloween, vampires and werewolves. I have many vampire friends. We become polarized. I like to reach across the aisle. Keep a cooler frozen blood pops for little vampire children in the neighborhood. Because look, at the end of the day, we have something in common. We all want to scare the hell out of humans. So frozen blood pops.

Ricky Mulvey: There's things with sugar cocoa. I'm trying to get your mind work in your sugar cocoa. Maybe like a lollipop, some taffy. You can really go to a lot of places with this. What you got?

Larry the Werewolf: I got for my number three and most favorite treat of all is HALLS Mentho-Lyptus, Triple Action lozenges, because wear wolves have terrible breath and you get a two for one, Mr. Mulvey. You can sweeten your breath, and you can soothe that throat that is so sore from tallying full time.

Ricky Mulvey: You are so close, you got to something that I think has sugar in it. But we're not there yet. What is just literally dude? I'm sorry, not dude werewolf. Just one Halloween candy that you like to eat.

Larry the Werewolf: Silken tofu. Mr. Mulby. I cut it up into little squares and put toothpicks in them. I put him out on the porch for the kids.

Ricky Mulvey: That savory. We were eating sweet, and you went savory.

Larry the Werewolf: So great. It could put a little bit of teriyaki sauce on them. If you like the sweet to solve the equation, you can do that.

Ricky Mulvey: I'm looking like dark chocolate Reese cups, Nerds Gummy Clusters, Tony's Dark Milk Chocolate, Pretzel Tofu. I'm giving you the answers. Just literally pick one.

Larry the Werewolf: Nerds.

Ricky Mulvey: Larry the Werewolf will appreciate you breaking down the stock. Maybe one of these years, you or anyone in your household will give me a favorite Halloween treat.

As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against. Buy or sell stock basis solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Asit Sharma has positions in Amazon, Hershey, and Microsoft. Jim Gillies has positions in AerCap, Amazon, Apple, Boot Barn, and Sprouts Farmers Market. Ricky Mulvey has positions in Hershey, Home Depot, and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Apple, Hershey, Home Depot, Meta Platforms, and Microsoft. The Motley Fool recommends AerCap, Boot Barn, Sprouts Farmers Market, and Tractor Supply and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Are Boot Barn Investors Missing the Big Picture? was originally published by The Motley Fool