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Burlington Reports ‘Self-Inflicted’ Sales Miss After Inventory Plan ‘Backfired’

Burlington said product delays meant the off-price retailer didn’t carry enough clothes for shoppers to buy in the first quarter.

Total sales decreased 12 percent to $1.93 billion in the quarter on $16 million in net income and adjusted earnings per share (EPS) of 54 cents.

Despite missing consensus Wall Street estimates of $2.04 billion in sales and an adjusted EPS of 65 cents—along with guidance for another sales loss in the second quarter—Burlington stock jumped more than 11 percent in trading Thursday afternoon before ending up 8.75 percent.

In a Nutshell: CEO Michael O’Sullivan said in an earnings call that Burlington planned for a mid-teens comp decrease in the first quarter, but the company missed its target with an 18 percent decline.

O’Sullivan called the miss “largely self-inflicted,” indicating in-store inventory levels were too low and unbalanced in February and March.

“We had deliberately planned inventories down in Q1, but this backfired on us as we faced late deliveries and receipt churn early in the quarter,” O’Sullivan said. “In February, we experienced significant receipt delays. These created big gaps in our assortment, especially in our fastest-trending businesses. And these assortment gaps critically impacted our sales trend. In March, we moved quickly to take up receipt and inventory levels. By early April, our in-store inventories were back up and in line with last year.”

If inventories were at appropriate levels in the first quarter, comparable store sales performance could have been 6 points higher, he said.

Across the full business, merchandise inventories were $1.26 billion, a 64 percent increase from the $768 million a year ago. But comparable store inventories only increased 2 percent.

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Reserve inventory was 50 percent of total inventory at the end of quarter, compared to 35 percent at the end of the 2021 first quarter. This includes all pack-and-hold inventory that is being stored for release either later in the current season or in a future season.

With the poor quarter, Burlington raised inventory plans for the rest of the year so that in-store inventories will be in line to slightly higher than last year, according to O’Sullivan. But for the second quarter, the off-price seller is taking a more cautious approach.

“We still believe that we have room to increase terms, but we will not go after this opportunity until global shipping issues and delays normalize,” O’Sullivan said. “To be clear, inventory levels for the rest of this year are now planned to be in line to slightly above 2021, but this means they will still be well below historic levels.”

Gross margin rate as a percentage of net sales was 41 percent, down 230 basis points (2.3 percentage points) from the 43.3 percent rate in the 2021 first quarter. Freight expenses increased 150 basis points (1.5 percentage points) and merchandise margins decreased 80 basis points (0.8 percentage points).

Product sourcing costs were $157 million, up 11 percent from $141 million in last year’s first quarter. Product sourcing costs include both buying costs, as well as the costs to process goods through the supply chain.

Burlington expects more sales declines in the second quarter, with comparable store sales projected to fall between 13 and 15 percent. On a three-year basis, when compared to pre-Covid numbers, comparable store sales are projected to improve 1 to 3 percent.

Adjusted earnings per share (EPS) will fall in the range of 18 cents to 31 cents, which would be down from the 2021 second quarter’s $1.50 EPS and $1.94 adjusted EPS.

John Kernan, managing director and senior equity research analyst at Cowen, believes this guidance could prove to be conservative based on underlying economic conditions.

“If economic uncertainty worsens, shoppers could also begin to look to trade down from full-price retailers toward more enhanced value offerings,” Kernan wrote in a research note. “Burlington is already seeing weaker sales trends among its low-income shoppers, but it generally takes time to filter through to middle and upper-middle income cohorts.”

The off-price retailer also expanded its full-year outlook, expecting comparable store sales to decrease in the range of 6 percent to 9 percent for fiscal 2022. Adjusted EPS is anticipated to range between $6.00 to $7.00, as compared to last year’s $6.00 EPS and $8.41 adjusted EPS.

Cowen raised its full-year EPS expectations for Burlington from $6.96 to $7.43, with the firm expecting the retailer to lap easier freight and supply chain comparisons in the second half of the year.

The investment bank’s April research note said off-price retail “will have plenty of buying power as consumer demand tightens and consumer discretionary spend becomes more discerning.”

Burlington ended the first quarter with $1.23 billion in liquidity, comprised of $627 million in unrestricted cash and cash equivalents and $598 million in availability on its asset-based lending (ABL) facility.

The company ended the first quarter with $1.49 billion in total outstanding debt, including $949 million on its term loan, $508 million in convertible notes and no borrowings on the ABL facility.

Coinciding with Burlington’s earnings report, the retailer also announced that Kristin Wolfe has been appointed chief financial officer effective Aug. 1. Wolfe comes to Burlington from chief competitor Ross Stores, where she most recently served as senior vice president, corporate finance. Wolfe will replace John Crimmins, who will continue consulting Burlington through the end of February 2023 before his retirement.

Net Sales: Total sales decreased 12 percent to $1.93 billion, from $2.19 billion in the year-ago period. Comparable store sales decreased 18 percent compared to the first quarter of fiscal 2021.

For the quarter, comparable sales on a three-year basis were down 1 percent from 2019 pre-pandemic levels.

Emphasizing the improved inventory by April, O’Sullivan said three-year comp sales increased sequentially each month, from a 6 percent decrease in February, to a 2 percent dip in March, and finally a 5 percent improvement in April.

Net Earnings: Burlington’s net income totaled $16 million in the first quarter, or 24 cents per share. Net income plummeted from the year-ago quarter’s $171 million, when earnings were $2.51 per share.

Adjusted net income was $36 million, or 54 cents per share, versus $176 million, or $2.59 per share for the 2021 first quarter.

First-quarter adjusted EBITDA was $125 million, down from $293 million a year ago. Adjusted EBIT was $59 million.

CEO’s Take: Despite the inventory crunch, O’Sullivan emphasized a “sea change” in the availability of off-price merchandise as a tailwind for Burlington in the second half.

“We do not know if this has been driven by overproduction by vendors, a decline in the sales trend at other retailers, a sudden catch-up of supply or all of the above,” O’Sullivan said. “But whatever the reasons, the buying environment now is better than it has been for years. Our buyers are seeing great deals…If this buying environment persists, then we would expect our assortment to be more compelling with even stronger values. We expect that the buys we are making now could begin to have an impact in late summer.”