Burlington Stores, Inc. Q2 2025 Transcript
Speaker 1: Hello, and welcome to Burlington Stores Incorporated Second Quarter 2024
Earnings Webcast and Conference Call. Please note that everyone has joined on mute to avoid
any background noise. You will have the opportunity to ask questions to our presenters later
on during the Q and A session. Thank you. I'd now like to turn the call over to David Glick,
Group Senior Vice President, Treasurer and Investor Relations.
Speaker 1: Please go ahead.
Speaker 2: Thank you, operator, and good morning, everyone. We appreciate everyone's
participation in today's conference call to discuss Burlington's fiscal 2024 Second Quarter
operating results. Unless otherwise indicated, our discussion of results for the 2024 Q2 exclude
the impact of certain expenses associated with the acquisition of Bed Bath and Beyond leases.
Our presenters today are Michael O'Sullivan, our Chief Executive Officer and Kristin Wolf, our
EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform
listeners that this call may not be transcribed, recorded or broadcast without our expressed
permission.
Speaker 2: A replay of the call will be available until September 5, 2024. We take no
responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our
remarks and the Q and A that follows are copyrighted today by Burlington Stores. Remarks
made on this call concerning future expectations, events, strategies, objectives, trends or
projected financial results are subject to certain risks and uncertainties. Actual results may
differ materially from those that are projected in such forward looking statements.
Speaker 2: Such risks and uncertainties include those that are described in the company's 10
ks for fiscal 2020 3 and in other filings with the SEC, all of which are expressly incorporated
herein by reference. Please note that the financial results and expectations we discuss today
are on a continuing operations basis. Reconciliations of the non GAAP measures we discuss
today to GAAP measures are included in today's press release. Now here's Michael.
Speaker 3: Thank you, David. Good morning, everyone, and thank you for joining us. On this
morning's call, we would like to discuss our Q2 results and our guidance for the rest of the
year. Then we will be happy to respond to your questions. Okay.
Speaker 3: Let's talk about our Q2 results. I'm going to start with total sales growth. Our total
sales in Q2 grew by 13% compared to the Q2 of 2023. That was on top of 9% total sales growth
versus the Q2 of 2022. New stores are a key driver of this growth.
Speaker 3: In Q2, we added 36 net new stores and ended the quarter with 10 57 locations. The
other driver of top line sales is comp sales growth. Comp store sales for the Q2 increased 5%
versus our guidance of flat to 2%. This 5% comp sales growth was on top of last year's Q2
comp increase of up 4%. Let me move on now to profitability.
Speaker 3: In the Q2, we expanded our operating margin by 160 basis points versus last year's
Q2. In a moment, Kristin will provide more details. But for now, let me call out the 2 primary
drivers of this expansion. Firstly, our gross margin increased by 110 basis points. This was
driven by faster inventory turns and lower markdowns.
Speaker 3: Secondly, we achieved 60 basis points of leverage in supply chain driven by faster
than expected progress in our supply chain efficiency initiatives. As Kristen will explain, our
well ahead of plan sales growth plus healthy margin expansion drove very strong earnings
growth in the 2nd quarter. Now I would like to take a few moments to editorialize on our Q2
performance. Again, I will start with total sales. Of course, we are very happy with 13% total
sales growth on top of 9% total sales growth last year.
Speaker 3: This means that on a compound basis, our business is 24% bigger now than it was
2 years ago. Given the volatility and uncertainty of the last couple of years, we are very pleased
with this growth. In Q2, we opened 36 net new stores and we also relocated 4 of our older
oversized locations. This means that for the fiscal year to date, we've opened 50 net new stores
plus 15 relocations. And for the year as a whole, we're on track to open 100 net new stores plus
approximately 30 relocations.
Speaker 3: As discussed in the past, on average, we expect our new stores to run at about
$7,000,000 in sales in their 1st full year. I am pleased to say that our new stores are running
ahead of this benchmark. We were also pleased with our positive 5% comp growth in Q2. Keep
in mind that as we open new stores, there is some cannibalization headwind on comp stores.
Our positive 5% comp sales increase in the Q2 was despite this headwind.
Speaker 3: Another point to make as I dissect this 5% growth, we continue to see very strong
performance in full price selling. Our merchants are focused on offering really sharp value out
of the gate at the initial ticketed price. This is driving faster turns and lower markdowns. This
means that there is less inventory making it to the clearance rack. Our comp on clearance sales
was down double digits in Q2.
Speaker 3: Meanwhile, our comp on full price selling was positive 7%. This was the driver of
our 110 basis points of gross margin expansion in the 2nd quarter. Stepping back a little, I was
pleased with our execution in Q2. We have made a lot of changes and improvements to our
business over the last few years in merchandising and in operations. We are still in the early
innings of many of these programs.
Speaker 3: And to be clear, we have a long way to go in terms of achieving full potential off
price execution. But we are gaining traction and making some good progress. The other point
to make is that over the past 18 months, the external environment has become more favorable.
2 years ago, our core low income customer was under severe economic pressure from the
higher cost of living. Since then, it feels as if two things have happened.
Speaker 3: As inflation has moderated, the situation for lower income shoppers has somewhat
improved. In parallel, economic pressure and uncertainty has spread and broadened well
beyond lower income shoppers. There is now greater focus on value across demographic
groups and income bands. This greater focus on value is helping our business. The factors
that I have just described provide some grounds for optimism for the back half of the year.
Speaker 3: But as we've discussed before, our playbook is to manage our business cautiously
and be ready to chase. We are maintaining guidance of 0% to 2% comp growth for Q3 and for
Q4. Let me comment on each quarter separately. For Q3, there are a couple of reasons to be
cautious in planning and guiding comp sales. Last year, we ran 6% comp growth in the 3rd
quarter.
Speaker 3: This was our strongest quarter of the year. Another point to make, and we have
discussed this before, comp sales in the first half of Q3 are driven by back to school trends, but
comp sales in the latter half depend critically on the weather. As a company that used to be
known as Burlington Coat Factory, the weather in late September through October can have a
huge impact on our Q3 comp growth. If the weather in Q3 is unseasonably warm, it will
suppress our comp trend. We hope that our flat to 2% comp guidance in Q3 will turn out to be
conservative.
Speaker 3: If the trend is stronger, then we will chase it. For Q4, we are also maintaining our flat
to 2% comp guidance. Over the next couple of months, we will monitor the trend and get an
early read on the fall season. Depending on this read, we may revisit and adjust our Q4 plan.
We will talk more about this on our Q3 call in November.
Speaker 3: Again, as an off price retailer, our playbook is to wait, read the trend and then chase.
Now I would like to turn the call over to Kristin to share more details on our Q2 results and our
outlook for the rest of the year. Kristin?
Speaker 4: Thank you, Michael, and good morning, everyone. Let me start with our Q2 results.
Total sales grew 13% and comp sales grew 5%, both well above the high end of our 2nd quarter
guidance. Our adjusted EBIT margin expanded 160 basis points versus last year. The drivers of
this margin expansion were higher gross margin, higher than planned supply chain savings
and leverage on above planned comp sales.
Speaker 4: Let me walk through the details. The gross margin rate for the 2nd quarter was
42.8%, an increase of 110 basis points versus last year. This was driven by a 90 basis point
increase in merchandise margin due to strong regular price selling, which generated faster
inventory turn and lower markdowns. Freight expenses leveraged 20 basis points, primarily
due to lower freight rates and cost savings initiatives. Product sourcing costs were
$192,000,000 versus $183,000,000,000 in the Q2 of 2023, decreasing 60 basis points as a
percentage of sales.
Speaker 4: This was entirely driven by supply chain expense leverage from continued progress
on our distributions and our productivity initiatives. Adjusted SG and A costs in the Q2 were 10
basis points higher than last year, driven by planned higher investments in store payroll. Q2
adjusted EBIT margin was 4.8%, 160 basis points above last year. We had guided to 30 basis
points to 60 basis points of improvement. Our adjusted earnings per share in Q2 was $1.24
This was a 98% increase over last year and was well above the high end of our guidance range
of $0.83 to $0.93 dollars These results and the guidance that we provided exclude
approximately $3,000,000 of pre tax expenses associated with the Bed Bath and Beyond leases.
Speaker 4: At the end of the quarter, our comparable store inventories were up 4% above 2023.
Our reserve inventory was 41% of our total inventory. We are very happy with the quality of the
merchandise and the values that we have in reserve. During the quarter, we repurchased
$61,000,000 in common stock. At the end of Q2, we had $380,000,000 remaining on our share
repurchase authorization that expires in August of 2025.
Speaker 4: Now I will turn to our outlook for the full fiscal year as well as for the Q3 and Q4 of
fiscal 2024. Based on our strong performance in the Q2, we are increasing our full year fiscal
2024 guidance for comp sales, total sales, adjusted EBIT margin and adjusted earnings per
share as follows. Comparable store sales are now expected to increase 2% to 3% with total
sales to increase 9% to 10% for the full year 2024. This revised full year guidance factors in our
year to date comp store sales as well as our guidance for comparable store sales to increase
0% to 2% for the balance of fiscal 2024. We now expect our full year adjusted EBIT margin to
increase by 50 basis points to 70 basis points.
Speaker 4: This is up from our most recent guidance for an increase of 40 to 60 basis points
and up from our original guidance for an increase of 10 to 50 basis points. This updated margin
outlook now translates to an adjusted earnings per share range of $7.66 to $7.96 up from our
most recent guidance of $7.35 to $7.75 and up from our original guidance of $7 to $7.60
Included in this updated guidance is an expected ocean freight headwind of approximately
$0.10 impacting the back half of the year, which reflects the rapid increase in ocean container
rates since we last updated our guidance in late May. For the Q3, we are guiding to a comp
store sales growth of flat to plus 2% and a total sales increase of 10% to 12%. This would result
in operating margin expansion of up 60 basis points to up 80 basis points versus Q3 of 2023.
This translates to earnings per share guidance for the Q3 of $1.45 to 1 $0.55 We do not expect
any incremental expenses associated with the leases we acquired from Bed Bath and Beyond
last year.
Speaker 4: For the Q4 of fiscal 2024, this outlook implies comp store sales growth of flat to plus
2%, total sales to increase 5% to 7%, EBIT margins to range from a decrease of 80 basis points
to a decrease of 50 basis points and earnings per share in the range of $3.55 to $3.75 Please
keep in mind that the 53rd week shift has a significant negative impact on Q4 in terms of total
sales, adjusted EBIT and adjusted earnings per share. I will now turn the call back over to
Michael.
Speaker 3: Thank you, Kristin. Let me recap 4 key points that we've discussed this morning.
Firstly, we are pleased with our sales growth in Q2, 13% total sales growth for the quarter, 5%
comp sales growth for the quarter. Secondly, we are happy with our Q2 margin and earnings
results. These were driven by higher merchandise margins from very strong regular price
selling, faster turns and lower markdowns and also driven by faster than expected progress on
our supply chain initiatives.
Speaker 3: Thirdly, we are maintaining our flat to 2% comp guidance for the 3rd and 4th
quarters. We recognize that given our recent trend, there may be upside in the back half. If the
underlying trend is stronger, then we will chase it. Finally, we are raising and updating our full
year earnings guidance to reflect our strong ahead of plan second quarter results. With that, I
would now like to turn the call over for your questions.
Speaker 1: Hello, everyone. We are now opening the floor for question and answer session.
Thank you. I'd now like to call over Matthew Boss from JPMorgan. Your line is now open.
Speaker 5: Thanks and congrats on a really nice quarter.
Speaker 6: Thanks, Matt.
Speaker 5: So Michael, maybe to kick off, near term, could you speak to back to school sales
trends, maybe just the overall importance to your business? Or how best to think about the
impact of back to school, what it maybe had on results as you exited the Q2? And anything you
can share on August trends, I think would be great.
Speaker 3: Well, good morning, Matt. Thank you for the question. Back to school selling is very
important to our business at this time of year. In fact, maybe it would be helpful if I define what
back to school really means for us. At Burlington, back to school categories of course include
kids apparel, accessories and footwear, but they also include juniors and young men's.
Speaker 3: There are other specific categories within the footwear business. And in addition,
there are other areas of the store, especially in accessories and in home where we go after
back to school and back to campus opportunities. I should also call out that as a company, we
index much higher with younger shoppers and young families than many of our competitors.
So the businesses that I've just listed represent a relatively high penetration of our store.
Anyway, that all adds up to saying that back to school is a very important business driver for
us.
Speaker 3: In terms of timing, back to school as an event really starts in early July and then
continues through early September. And of course, the timing depends on the region. Now as
an aside, I would say that as part of merchandising 2.0, we have gotten much better planning
and managing the timing of back to school receipt flows based on the specific timing of back to
school in different regions. Anyway, to answer your question, we were very pleased with our
back to school trends in July. Comp sales growth for the categories that I described a moment
ago were stronger than for the rest of the chain.
Speaker 3: And that helped to support our overall sales trend as we closed out the quarter in
July. On the last part of your question, how are things going in August? Our back to school
categories have continued to perform well. I would say, obviously, we're 3.5 weeks in at this
point. We're happy with our overall trend.
Speaker 3: We've made a solid start to Q3. But with that said, let me add just one note of
caution. Back to school will wind down pretty soon. So although we're happy with how the
quarter started out, it would be unwise just to extrapolate off that solid start.
Speaker 5: That's great color. And then maybe just to follow-up, Michael, on your mix of Better
Brands initiative. So you called out earlier this year the potential to increase the mix of Better
Brands as a comp driver. Was this a key driver in 2nd quarter comps? Or how should we think
about this as a potential comp driver in the second half of the year?
Speaker 3: Well, again, thanks for the question, Matt. Yes, as we described earlier this year, we
do see an opportunity to increase our mix of better brands. And actually, we see an opportunity
more generally to elevate our assortments. We've been shifting in that direction for a while now
and we've seen good selling on those better brands and we've seen good selling at higher price
points. We believe that increasing the mix of better brands accomplishes 2 things.
Speaker 3: Firstly, those brands themselves drive increased trade down traffic to our stores.
Trade down shoppers are looking for better, more recognizable brands. Secondly though, those
brands also help to validate and reinforce the whole store. Even if a shopper does not buy the
specific item, the fact that they see the brand reinforces the off price value proposition. It
provides a halo, if you like, to our business.
Speaker 3: So in the coming months, you will see a higher mix of better brands in our runs.
And that said, I don't want to overstate this opportunity. I see this as an evolution rather than a
revolution. Our brands have always been important to us, but our merchants understand that
brands are really just one reference point the customer uses to assess value. Quality, fashion
and price are also important.
Speaker 3: And depending on the category, their relative importance can vary a lot. For
example, brands are very important in sportswear, but much less important in juniors where
the latest styles and fashions are critical. Another point to make is our merchants are very
good at building the assortment who offer great value across price points. And it's critical in
doing that, it's critical to manage brands within the context of our good, better, best assortment
strategy. One last point to make on this, better brands carry a lower markup.
Speaker 3: As we increase the mix, it puts pressure on gross margin. Now that impact is built
into our guidance and it hasn't changed since our last call. As Kristen mentioned earlier, we are
making a small adjustment to our gross margin guidance for the back half, but that adjustment
is related to higher ocean freight rates rather than the mix of better brands.
Speaker 5: Best of luck. Congrats again.
Speaker 3: Thank you, Matt.
Speaker 1: Our next question comes from Ike Boruchow from Wells Fargo. Your line is now
open.
Speaker 6: Hey, good morning, everyone. Actually, I have two questions for Kristen. Kristen,
first question is on the supply chain. It's encouraging to see another quarter of supply chain
leverage in the P and L. Can you maybe walk us through some of the drivers of that leverage?
Speaker 6: Specifically what kinds of operational improvements have you made? And then I
think one of your peers has actually talked about more automation and technology in their DCs.
Just curious, have these types of initiatives also been part of your program? Would love for
some more color there.
Speaker 4: Hi Ike. Sure. Good morning. We continue to be pleased by the faster than expected
progress we're making in driving productivity gains and cost savings in supply chain. As we
shared in the prepared remarks, supply chain leveraged 60 basis points in Q2 and this was
despite the start up of a new distribution center in the Q2 and the receipt shift that we talked
about from Q1 into Q2, we referenced this on last quarter's call.
Speaker 4: We do have a number of productivity initiatives. These are more within the four wall
process improvements that streamline our DC operations, touches, reduce steps, reduce time
to process and ultimately save labor dollars in the DC. And we're harvesting these savings a
little bit faster than we'd originally planned. On previous calls, we had described supply chain
productivity improvement as driving potentially 100 basis points of the 400 basis points of
margin improvement, we laid out last year in our long range model. And we'll see how the rest
of this year plays out, but expect supply chain to continue to drive leverage in the back half.
Speaker 4: And again, to the second part of your question, longer term, probably beyond the
long range model we've laid out, we do have an opportunity to drive incremental leverage as we
modernize our supply chain with new, larger, much more automated DCs that we expect to
open. As I mentioned, we recently opened a new DC this year and we have another much larger
DC under construction, which we expect to open in 2026. And with these new DCs, we have an
opportunity to design these DCs for off price and with much, much more automation. So as we
expand this additional capacity, there also may be an opportunity to go back and look at
modernizing some of our existing legacy DC network as well. But again, the benefits of this are
longer term, not necessarily baked into the long range model that we shared.
Speaker 4: So the CapEx to support these new DC investments is embedded in our long range
model. I think you said you had a follow-up for me as well?
Speaker 6: Yes. I was going to switch over to freight, if that's okay. Just elaborate the second
half ocean freight headwinds, I think you called out in the prepared remarks. What's driving it?
How long, how impactfully negative will that be?
Speaker 6: And I guess how does this impact domestic freight, if at all? Because I know you
talked about ocean. And can you still kind of lever domestic freight in the 3rd Q4? Is that
changing as well?
Speaker 4: Great. Thanks for the question. It's a very good question. So as I mentioned, we
factored in about $0.10 of higher ocean freight in our back half guidance. And this ocean freight
negatively impacts merchandise margin.
Speaker 4: And so on ocean freight, we do have contracted capacity at favorable ocean freight
rates, but the spot market rate, as you know, increased significantly since we reported in Q1 in
May. And we do have some exposure to the spot market even though the majority of our
containers are contracted. So we're hopeful this ocean freight, the spot market is a transitory
pressure point and we're starting to see ocean freight spot rates come down modestly. But of
course, there are always risks here, and this is difficult to predict. And turning to the second
part of your question on domestic freight.
Speaker 4: On the other hand, domestic freight continues to be a source of modest leverage.
We saw domestic freight leverage in Q2 as we negotiated favorable rates. Diesel fuel rate has
also been slightly favorable here. So on domestic rate, we expect to continue to see modest
leverage in the back half of the year on that.
Speaker 6: Got it. Thanks so much.
Speaker 4: Thanks, Mike.
Speaker 7: Our next question comes from the line of Lorraine Hutchinson with Bank of
America. Your line is open.
Speaker 4: Thank you. Good morning. Michael, can you elaborate on what you're seeing in
terms of the health of the consumer? You talked previously about the potential for trade down
traffic in your stores. Is that what's driving your comp?
Speaker 4: And any other callouts in terms of consumer behavior?
Speaker 3: Good morning, Lorraine. Good to hear from you. Thank you for the question. On our
last call back in May, I think I described the external situation and the health of the consumer as
being hard to read. At the time, it felt like there were conflicting data, some positive, some
negative on discretionary spending trends.
Speaker 3: I would say in the last few months, it feels to us that the situation has become a lot
clearer. In our view, there are really two things going on. Firstly, the economic pressure and
uncertainty that was felt by lower income shoppers starting 2 years ago has spread to other
income bands and other demographic groups. And it feels like that has driven much greater
focus on value across the board. And I think that recent earnings reports from other retailers
are all pointing in the same direction.
Speaker 3: Retailers that are offering the best value are winning and driving comp sales. So I
think a big part of what we're seeing is that value conscious customer is trading down into our
stores. The second thing that's going on is that the pressure on the lower income customer
hasn't gone away, but it feels to us like it may have moderated. That low income shopper is still
very fragile, but as inflation has come down, I think their situation has improved somewhat. We
see evidence of that in our own data.
Speaker 3: So 2 years ago, our comp sales trend for stores for our stores that are in lower
income trade areas was below the rest of the chain. Now those stores are we watch them very
closely. They're very important to us. We have a lot of stores in lower income trade areas and
they tend to be relatively high volume. So when they're not comping well, we pay a lot of
attention.
Speaker 3: This year, their trend has improved and it's actually running in line with the chain,
so up mid single digit comp in Q2. And that data point suggests to us that the lower income
customer is at least starting to recover. So let me recap and also add a note of caution. To
recap, we're seeing some positive signs for our business with consumers in general being
more focused on value and the lower income shopper in particular starting to recover from the
spike of inflation in 20222023. But my own caution is that there are a lot of factors and risks
that could affect consumer behavior in the back half of twenty twenty four and into next year.
Speaker 3: So to sum up, we feel good about our business, but it makes sense to be a little
cautious.
Speaker 4: Thanks. And Michael, my follow-up question is about the Q2. Just curious if there
were any unusual tailwinds to the comp trends that might not carry over into the fall?
Speaker 3: Yes, it's a good question. I think the only thing like that that I would point to was
weather in Q2. I know the rule among retailers is that we only mention weather when it's
unfavorable. But I'm going to violate that rule and say that I think that weather probably helped
most apparel retailers in Q2. In May June, temperatures across the United States come up than
last year.
Speaker 3: And I suspect that most apparel retailers benefited from that in their seasonal
businesses, especially in categories like shorts, short sleeve tops, sandals and swimwear. I
would estimate this strong seasonal performance was worth 1 to 2 points of comp to us for the
quarter. And again, to be clear, that benefit cannot have been unique to us. It must have
affected other retailers as well. So your question was about specific drivers that might not carry
over to the fall season.
Speaker 3: Apart from weather, there were no other factors or tailwinds that I would describe
that way. There were no other factors or tailwinds that were unique to the Q2. Now of course, it
is possible that the weather will be favorable in the fall if temperatures are unseasonably cold.
But I guess other than the Farmers' Almanac, we have no visibility into that at this point.
Speaker 4: Thank you.
Speaker 6: Thanks, Maureen.
Speaker 7: Next question comes from the line of John Kernan with TD Cowen. Your line is
open.
Speaker 8: Good morning. Congrats on the momentum. Couple of questions here. Kristen, first
one on your back half earnings guidance, looks like there's margin improvement year over year
in Q3, quite a bit of it, but margin deterioration in Q4 year over year. Can you walk us through
the factors that are driving this?
Speaker 8: I would assume the 53rd week has an impact, but how do we think about gross
margin and SG and A profile in Q3 and Q4?
Speaker 4: Good morning, John. Thanks for the question. It's a very good question. I'm glad
you asked. There are really 4 primary factors that impact our back half margin outlook.
Speaker 4: So I'll kind of dissect each of these. 1st, as you alluded to, Q3 and Q4 have very
different total sales growth plans due to the way the 53rd week calendar impacts as well as the
timing of new store openings this year as compared to last year. So let me clarify the 53rd
week. I'm not referring to the extra week, but actually how the calendar shifts. So we're about 1
week ahead of last year when comparing the quarters year over year.
Speaker 4: Now for comp store sales, we adjust for this and we line up the week, but for total
sales growth, there's an impact on sales and earnings in the quarter. So this 53rd week shift
means that in Q4, we lose a high volume week in November, and we gain or pick up a low
volume week in January. So this translates into lower total sales growth in Q4 versus last year,
resulting in guidance for the Q4 for total sales to grow 5% to 7%. Now for the Q3, we're guiding
10% to 12% total sales increase. Q3 is actually boosted by the 53rd week calendar shift and
also benefits from an increased number of new store openings in the Q3 of this year relative to
last year.
Speaker 4: So that difference in total sales growth driven by the calendar shift and new store
opening timing really impacts the expansion and the leverage in Q3 favorably and then
unfavorably in the Q4. That's really the primary difference between Q3 and Q4. But as I
mentioned, I said there were 4 factors. The other 3 are headwinds to the fall, so headwinds to
the back half. First, our back half comp guidance is a conservative flat to plus 2%.
Speaker 4: This is below, obviously, our year to date comp trend provides less leverage on
fixed expenses. And then secondly, in the back half, on the gross margin side, we do not
expect to see the same benefit from lower clearance levels like we saw in the first half of this
year. This means we have a lot less merchandise margin expansion opportunity in the back half
relative to the first half of this year. And then lastly, the higher ocean freight that we detailed in
the prepared remarks and in the earlier question, that's about $0.10 or $9,000,000 of pre tax.
That represents about 20 basis points of merch margin headwind in the back half.
Speaker 4: And I want to add that the only change to our previous back half guidance is that
$0.10 negative impact from Ocean Freight. So those are really the key factors impacting Q3 and
Q4 margin guidance.
Speaker 8: Got it. That's very helpful for the model. David or Kristen, just as it relates to the
balance sheet cash flow and share repurchases, you've given guidance for CapEx to be
elevated in the next few years. I'm assuming around the 7% of sales levels you fund the unit
growth. But how should we think about share repurchases and potential impact on the balance
sheet?
Speaker 8: What's the optimal level of cash in the balance sheet?
Speaker 2: I'll take that, John. Thanks for the question. We're still working through our budget
for next year. So it's a little early to be sharing specifics on that. But philosophically, our goal is
to return capital to shareholders on a consistent and opportunistic basis through buybacks.
Speaker 2: And I think outside of the pandemic years, we have a pretty consistent track record
of doing so. And as we've shared with you all previously, the 1st few years of the 5 year plan
that we shared, does have elevated CapEx at about 7% of sales. As you know, this year we're
guiding to $750,000,000 in CapEx. It's still early, but I think you should probably anticipate in
that 7% ballpark of sales next year for CapEx. And then toward the back half of the last three
years of that 5 year plan, CapEx should average in the mid single digit range as a percent of
sales.
Speaker 2: And just kind of as a reminder, why we're stepping up CapEx this year and next
year, we're opening up a lot more stores. We're at net 80 in 2023 and this year's net 100. Also,
we have more closures and relos, so the gross number of new stores is higher than prior years.
In addition, Kristen referenced this in an earlier answer to a question. We signed a lease on a
2,000,000 square foot DC in the Southeast, that's 2x our largest existing DC.
Speaker 2: And the CapEx required for that building will peak this year and next year. And we
have included in that agreement a purchase option next year for the land and the buildings. We
view our DCs as strategic infrastructure that we want to have more control relative to leasing.
So we've included in that sort of high level outlook for CapEx next year, we've assumed that we
would exercise the option to purchase the land and buildings for that DC in the Southeast. And
also as
Speaker 9: Kristen mentioned earlier, those are much larger
Speaker 2: and more automated DCs. Earlier, those are much larger and more automated DCs,
and therefore, require more capital investment. So I know that's a long prelude to actually
answering your question. We think our conservative leverage ratios and cash flows and kind of
a similar liquidity, you asked about cash, a similar liquidity levels we've had ending the last few
years. We feel very comfortable with that.
Speaker 2: We also feel like we have sufficient cash flow to not only invest in our growth, but to
return capital to shareholders in the form of buybacks. And I think you should probably expect
kind of a similar pace next year to the pace that you've seen in 2023 2024.
Speaker 8: Got it. That makes sense. Thank you.
Speaker 7: Next question comes from the line of Brooke Roche with Goldman Sachs. Your line
is open.
Speaker 4: Good morning and thank you for taking our question. Michael, can you speak to the
performance trends that you saw by merchandise category in the second quarter?
Speaker 3: Sure. Well, good morning, Brooks. On category performance, the strength I would
say was fairly broad based across the quarter. Our comp growth in both apparel and in home
was in line with the overall change, so mid single digit. Other than that, the only other call outs
were that we saw strong sales trends in our seasonal classifications.
Speaker 3: I kind of referenced that earlier when I was talking about the weather. We also saw
strong sales trends in our back to school business in July. And then again, throughout the
quarter, we saw strong sales trends in beauty and in accessories.
Speaker 4: Great. And then as a follow-up, Kristen, can you elaborate on the drivers of the
comp growth? How did trends fair by geography? And what trends did you see regarding
traffic and basket? Sure.
Speaker 4: Good morning, Brooke. From a geographic or regional perspective, the comp
strength was really broad based. All regions comped positively. Looking at the top performing
regions that was the Southwest and the Northeast in the quarter. And then you asked about the
drivers of comp growth.
Speaker 4: Q2 comp was entirely driven by higher transactions as both higher traffic and
conversion both were higher. Our average basket was flattish, slightly higher AUR offset by
slightly lower units per transaction. Great. Thanks so much. I'll pass it on.
Speaker 4: Thanks, Brooks.
Speaker 7: Our next question comes from the line of Alex Treiton with Morgan Stanley. Your line
is open.
Speaker 10: Perfect. Thanks so much for taking the question. I've got one for Michael and then
one for Kristen. So maybe just for Michael, I think other retailers have talked about attracting
younger shoppers. And I think in a prior answer where you mentioned that Burlington over
indexes to this demo compared to peers.
Speaker 10: So maybe can you elaborate like what tells you that? And can you talk about this
opportunity generally as well as what you guys are doing to successfully attract the shopper?
Speaker 3: Well, good morning, Alex. Thanks for the question. Yes, Burlington, we've always
had a stronger position with younger customers and young families, stronger than most of our
competitors. And we see that in our customer research. We also see it in our mix of
businesses.
Speaker 3: And I would say we regard younger shoppers and young families a core customer
group for us. When you walk into our stores, you can kind of see it physically. We have a
stronger presentation, I would say, and certainly a greater penetration of juniors, young men's,
kids apparel, kids accessories, kids footwear, again, than most of our competitors. Moving on
to the part of your question about what are we doing to attract those customers. Well, even
though that customer segment is a strength for us, we absolutely do not take them for granted.
Speaker 3: We know that young shoppers and young families are really going to be important
to us, as we drive growth over the next several years. And we also know they are financially
stretched, so they need value. Our merchants are very focused on providing great value for
those customers, offering a combination of fashion, quality, brands at great prices within a
good better best assortment. I also I talked earlier about the strength that we've seen in back to
school and back to campus businesses in the last couple of months. So overall, I feel pretty
good about the success we're having and about the strong trends that we're seeing with our
customer group.
Speaker 10: Great. That's super helpful. Maybe for Kristen, super helpful comments in an
earlier question on the puts and takes on the back half broadly by major line items. I'm just
wondering how has that changed or has anything changed meaningfully compared to your
view 3 months ago? It seems like sales hasn't, but maybe back half EPS is a little bit lower.
Speaker 10: So just trying to understand those dynamics and what's driving that? Thanks a lot.
Speaker 4: Good morning, Alex. Yes, thank you. So kind of to answer the last question first, the
only thing that's changed in our back half guidance is the additional ocean freight headwind
that we spoke to. But it's worth reinforcing that 53rd week and the higher sales increase in Q3
versus Q4 really drives a lot more leverage on SG and A and fixed costs in the Q3 versus the
Q4. So there's a big difference there.
Speaker 4: Gross margin is a more difficult comparison in the fall versus the spring. Again, this
has not changed from 3 months ago, but we do not have the same opportunity with lower
clearance levels that we saw in spring. And then what has changed is the ocean freight
headwind. If I just going down the P and L in the back half, we do expect some modest leverage
in supply chain continued in the back half, probably more in Q3 than in Q4. And given the flat
to 2% comp guidance, we'll have some slight deleverage in SG and A and depreciation there
from that.
Speaker 10: Thanks a lot. Good luck, guys.
Speaker 4: Thanks, Alex. Thanks.
Speaker 7: Next question comes from the line of Adrienne Yih with Barclays. Your line is open.
Speaker 9: Great. Thank you very much. Really nicely and well done. So congratulations to
everybody at the team at the firm. Kristen, I guess my question is twofold on inventory.
Speaker 9: So I'm going to ask comp inventories are up for the first time in say 4 consecutive
quarters. So relative to the forward comp guidance, can you just kind of reconcile the up 4%
comp inventory against the comp guidance for the Q3? But on the other hand, the total sales
are up 13%. So it looks like you're actually a little light on inventory. So can you just help us
kind of think about those 2 different pieces of it?
Speaker 9: And then secondly, I guess also for Kristen, 202527 convertible notes are now in the
money. Can you help us with the accounting treatment of these and the dilutive impact on
EPS? Thank you.
Speaker 4: Great. Good morning, Adrienne. Appreciate the question. I'll start with inventory. So
you kind of in your question tied it to the comp growth.
Speaker 4: I'm going to muddy the water even a bit more because at the end of Q2, comp store
inventories were up 4% versus last year. Again, that's a point in time snapshot that's a little bit
deceiving. 1st, that 53rd week calendar shift changes the comparison point. So once you adjust
for this, it reduces that 4% increase in comp store inventory down to a 2% increase. And then
secondly, if I look at the quarter, Q2 as a whole, on average, during the quarter, comp store
inventories were down 5% to 6 percent across stores across the 2nd quarter.
Speaker 4: So the reason for that point in time difference versus the average is that we were
really building our July back to school receipts versus last year and really trying to drive back
to school readiness. So that was kind of the driver of that increase as opposed to the sales
trend. We're still seeing we saw a much faster turn in Q2, so opportunity with leaner inventory
levels. And over the medium term, we still think there's opportunity to manage store
inventories lower and to continue to drive a faster turn. But given the progress we've made so
far on that front, the pacing is much more modest.
Speaker 4: And then on the converts, I'm going to turn it over to David or Daniel.
Speaker 2: Daniel, why don't you take that one?
Speaker 11: Yes. Hey, Adrian, it's Daniel. So on the converts, we use the if convert method of
accounting. And that means that we assume the principal is paid in cash and that any amount
above par is settled in stock. So from a quarter to quarter share count perspective, if the
converts are in the money, which both the 25s and 27s are, as a reminder, the strike on the 25s
is 220 and the strike on our 2027s is 206 will include any dilution in the share count.
Speaker 11: So to answer your question, for the Q2, the converts added about 163,000 shares
to our diluted share count. So just to round out my answer, so obviously the 2025s mature in
April next year, at which point in time we'll net share settle, meaning that we'll pay the 100 and
$36,000,000 principal in cash and then we'll issue any additional shares to cover the premium if
there is one. So as David mentioned earlier, we've been consistently buying back stock. So
we'd expect to continue to do so and be able to mitigate any potential dilution at that time. I
mean, you'll know, for example, this quarter we repurchased about 270,000 shares.
Speaker 11: So we more than offset the dilution from the converts.
Speaker 9: Fantastic. Very helpful. Thank you very much.
Speaker 7: Our next question comes from the line of Dana Telsey with Telsey Group. Your line
is open.
Speaker 12: Hi. Good morning, everyone, and nice to see the results. I have one for Michael and
Kristen. Michael, how do you think about the potential for international expansion and what the
opportunity could look like? And then Kristen in terms of labor availability and wage rates,
what are you seeing there along with the investment that you've been making in store payroll
relative to deleverage?
Speaker 12: Thank you.
Speaker 3: Good morning, Dana. Thank you for the question. So on international expansion, I
guess let me start by saying that I believe that the off price retail model has huge potential and
application in a number of overseas markets. My belief is that everyone everywhere in every
country loves the deal, loves a great deal. So I think it makes a lot of sense for our larger off
price peers to expand their international footprint.
Speaker 3: They have the know how and the resources to go after those overseas
opportunities. And if and when those competitors run out of expansion opportunities in the
United States, they can use those overseas investments to drive continued growth and
shareholder value. So that makes sense. But the reality is that we at Burlington, would say are
in a very, very different boat. We barely have 1,000 stores in the United States.
Speaker 3: Our peers have 2 to 3 times that number. So we still have huge potential to expand
right here in the USA. So for us, that's job number 1, job number 2 and job number 3. One day,
maybe it will make sense for us to divert resources to an international opportunity. But right
now, and I would say for the foreseeable future, our complete focus and our resources have to
be on the full potential and driving the full potential of our core U.
Speaker 3: S. Business.
Speaker 4: Great. And then Dana, on your second question around store labor and wage rates
as well as investments in store payroll. So first on wage rates, we've certainly absorbed
meaningful wage rate increases over the last few years, particularly in D. C. But also in stores.
Speaker 4: In terms of distribution centers, we're comfortable with where we are. They're
located in very competitive labor markets for D. C. Workers in New Jersey and California, and
our wages are appropriate and competitive. And for stores, our philosophy has been and
remains to be to approach wages on a market by market basis.
Speaker 4: So we build in incremental dollars, obviously, to cover legislative wage increases,
but also competitive wage increases in select markets. And this is how we address this. And
then on the investment in terms of store payroll, you may recall that in the Q3 of 2023, we made
a deliberate investment in store payroll to improve service levels and improve store conditions.
We're pleased with that investment and those results as we've seen improvement in customer
service scores. So from a financial impact standpoint, we'll have fully lapped this investment in
the Q3.
Speaker 12: Thank you.
Speaker 4: Thanks, Dana.
Speaker 7: That concludes the question and answer session. Mr. O'Sullivan, I turn the call back
over to
Speaker 3: you. Thank you. Let me close by thanking everyone on this call for your interest in
Burlington Stores. We look forward to talking to you again in November to discuss our Q3 2024
fiscal results. Thank you for your time today and please enjoy the holiday weekend.
Speaker 7: Ladies and gentlemen, this concludes today's conference call. You may now
disconnect.