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Burlington CEO Warns of ‘Very Unpredictable’ 2022

Burlington Inc. is kicking up the pace of new store openings with a smaller prototype, even though CEO Michael O’Sullivan expects an “unpredictable” year ahead.

In a Nutshell: “We think that 2022 is going to be very unpredictable. That said, we believe it could provide the ideal setup for our business,” O’Sullivan told analysts in a conference call on Tuesday, citing macroeconomic concerns, increasing competition and prolonged inflation.

“We believe that in inflationary periods, consumers trade down, not up. In an environment of rising prices, we think shoppers will be even more attracted to the great value that we offer. Our business is a third bigger now than it was in 2019,” O’Sullivan said. Leaner inventories in the full-price channel have driven up prices. While there is uncertainty whether the higher prices can be sustained, Burlington may have the opportunity to capture additional market share, and even raise prices, he said. A return to a traditional promotional cadence in full-price retails could trigger another wave of consolidation among marginally profitable players in that sector.

“It’s going to take some time to see how this plays out. But in either scenario, we think that the long-term implications for Burlington are very favorable,” O’Sullivan said.

Burlington is focused on flexibility. The new stores are “performing extremely well,” particularly the smaller store prototype, O’Sullivan said. And now the company has decided to accelerate its new store opening program, with 120 slated for 2022, or 90 net new stores after closings and relocations. “Beyond 2022, we now expect to open 130 to 150 new stores each year. About 30 of these will be relocations of older stores to newer, smaller prototype locations. So overall, from 2023 onwards, we expect to open 100 to 120 net new stores each year,” he said.

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O’Sullivan doesn’t know if issues with global supply chains will ease in 2022, but Burlington will plan the business conservatively and “be ready to chase.”

The company said freight and supply chain headwinds pressured margins in the quarter. The gross margin rate slipped slightly to 41.4 percent from 42.4 percent in the same 2019 quarter. While merchandise margins rose 80 basis points, that was offset by a 180 basis point increase in freight expense in the quarter. In addition, product sourcing costs were $1.73 million in the quarter, versus $90 million in the same 2019 period, which included costs of processing goods through its supply chain and buying costs.

Net Sales: Total revenue for the quarter ended Oct. 30 rose 38 percent to $2.30 billion from $1.67 billion, and was up 29 percent from $1.78 billion on a two-year basis. Revenue included a 38 percent increase in net sales to $2.3 billion from $1.66 billion last year, and up 30 percent from $1.77 billion in the same 2019 pre-pandemic quarter. Comparable store sales rose 16 percent.

Inventories were $1.06 billion at the end of the quarter, up from $1.00 billion at the end of the same 2019 quarter. Comparable store inventories fell 24 percent, offset by inventory from the addition of 106 net new stores since the third quarter of Fiscal 2019. Reserve inventory was 30 percent of total inventory at the end of the quarter, versus 21 percent in the same comparable 2019 period.

For the nine months, total revenue spiked 93 percent to $6.71 billion from $3.48 billion, and was up 32 percent from $5.08 billion on a two-year stacked basis. Revenue include a net sales gain of 93 percent to $6.70 billion from $3.47 billion, and up 32 percent from $5.06 billion in the same 2019 pre-pandemic quarter.

Earnings: Net income rose 70 percent to $13.6 million, or 20 cents a diluted share, from $8.0 million, or 12 cents a year ago. When compared with the 2019 quarter, net income fell 86 percent from $96.5 million, or $1.44 a diluted share. Adjusted diluted earnings per share were $1.36 for the quarter.

Burlington declined to provide guidance for the the fiscal year ending Jan. 29, 2022, due to the ongoing Covid pandemic. It plans to open 101 new stores, and relocate or close 24 doors, for a total of 77 net new locations in Fiscal 2021.

For the nine months, net income was $287.2 million, or $4.21 a diluted share, against a net loss of $372.5 million, or $5.66, a year ago. Compared with the same 2019 period, net income rose 11 percent from $258.8 million, or $3.84 a diluted share.

CEO’s Take: “Our playbook is to plan and manage our business, so we can aggressively chase the very significant sales, margin and supply opportunities that we believe might emerge,” O’Sullivan said.