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Burlington Calls On Reserve Inventory to Chase Sales Trends

Burlington saw total revenue skyrocket 118 percent up to $2.22 billion, well ahead of the $1.01 billion it took in during the 2020 second quarter, and up 33.3 percent from 2019 numbers. The off-price retailer also released its third annual Corporate Social Responsibility Report earlier this week.

In a Nutshell: Burlington’s 2.0 strategy appears to be off to a hot start, with the retailer opening 16 stores that are 30,000 square feet or less during the first half of 2021. CEO Michael O’Sullivan said in an earnings call that the retailer was “very pleased with the initial rollout of our new, smaller store prototype,” and expects this shrunken format to become the main concept for the future. Typical Burlington stores traditionally span approximately 40,000 square feet.

The company still expects to open 100 new stores for the full year, while relocating or closing 25 stores, for a total of 75 net new stores.

Overall, second quarter comparable store sales increased 19 percent from 2019 levels, with the retailer not breaking out 2020 results due to extended store closures in the year-ago period.

Based on the stronger-than-expected sales results, Burlington raised its full-year comparable store sales growth outlook from 7 percent to 14 percent. For the second half, Burlington now expects this metric to jump from a previous outlook of flat growth to 10 percent. For the third quarter starting Aug. 1, to date sales are “running well ahead of this,” O’Sullivan said.

Merchandise inventories at Burlington were $828.2 million, up 36.3 percent from 2020 totals of $607.6 million. On a two-year basis, inventories improved 0.5 percent from $823.8 million.

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The Burlington 2.0 strategy is designed to run with leaner inventories, and to ensure a fresher assortment for the customer. In an example of this, comparable store inventories decreased 7 percent from the second quarter of 2019, offset by inventory from the addition of 101 net new stores over the past two years.

Reserve inventory, which includes all inventory that is being stored for release either later in the season or in a subsequent season, was 31 percent of total inventory at the end of the quarter, compared to 33 percent at the end of the second quarter of fiscal 2019. Despite the relative percentage decrease, Burlington is becoming more reliant on reserve inventory as it goes leaner.

“We have continued to significantly expand our use of reserve inventory as a tool to chase the sales trend. In fact, our reserve receipts during Q2 increased 86 percent [over 2019], while our reserve releases increased 64 percent,” O’Sullivan said. “In other words, there is a lot more movement in and out of reserve. In the second quarter, we were able to make some great opportunistic and strategic buys to put into reserve, but at the same time, we moved up the release of other goods from reserves to fuel our strong sales trend.”

Burlington chose to accelerate back-to-school receipts to ensure that global supply chain challenges, including higher freight costs, both international and domestic, did not impede its ability to take advantage of the period’s sales opportunity.

“Based on our experience and success so far this year, we are confident that despite these issues, we will be able to get timely receipt of the merchandise that we need to support our trends,” O’Sullivan said in the call. “But in doing this, we expect to incur significantly higher freight and supply chain expenses. We are anticipating some offsets to these higher expenses. In particular, continued markdown savings driven by faster inventory turns and leverage on other expenses if we achieve our sales plans. But overall, the higher logistics costs will put significant pressure on our operating margins.”

O’Sullivan believes that if the supply chain normalizes and freight rates come back down, there could be a “significant backlog” of merchandise that makes its way into the off-price channel.

Due to high freight rates and the heightened merchandise demand, product sourcing costs totaled $145.9 million. This figure doubles the $72.1 million in the second quarter of 2020, and is considerably ahead of the $82 million spent in the 2019 period. Product sourcing costs include the costs of processing goods through the supply chain and buying costs.

Burlington ended the second quarter with $1.88 billion in liquidity, comprised of $1.34 billion in unrestricted cash and $534 million in availability on its asset-based lending facility.

Ahead of the earnings report, Burlington released its 2020 Corporate Social Responsibility Report, which monitors the off-price retailer’s efforts across five pillars: associates, community, environment, supply chain and governance and ethics.

The retailer noted its major environmental accomplishments in the CSR Report, having reduced its Scope 1 and 2 greenhouse gas (GHG) emissions per operating square foot by 44 percent and per dollar of sales revenue by 38 percent since 2016.

Last year, Burlington installed a rooftop solar array at its recently opened California distribution center, with the 4.594-megawatt (MW) array going live last month. The solar panels are expected to produce approximately 7,685,000 kilowatt-hours (KWh) of electricity annually—the equivalent of taking more than 1,000 cars off the road for a year.

Additionally, Burlington highlighted its new prototype store, which is expected to enable leaner inventory, reduced resources and lower energy consumption. The stores include 100 percent LED lighting, high-efficiency HVAC equipment and Energy Management Systems (EMS). The EMS remotely monitor and control lighting and HVAC to optimize occupant comfort and maximize energy efficiency. The retailer has deployed new construction commissioning for all of its new stores to ensure the buildings have been build to Burlington prototype design specifications.

Burlington said that 94 percent of its long-haul transportation service providers are participants in the Environmental Protection Agency’s (EPA) SmartWay Transport Partnership. The program helps companies and organizations achieve their freight supply chain sustainability goals by providing credible, no cost tools, data and standards for measuring, benchmarking and improving environmental performance.

In the report, the retailer also highlighted its workplace accomplishments, particularly when it comes to diversity, equity and inclusion (DEI). According to Burlington’s 2020 Corporate Associate Engagement Survey, 91 percent of associates believe the retailer makes it easy for people from diverse backgrounds to fit in and be accepted.

Burlington is ranked on Fortune’s Best Workplaces for Women list for the fourth consecutive year. Seventy-five percent of the off-price business’s workforce now self-identifies as female, and 76 percent self-identify as a person of color.

The retailer also published and implemented a Diversity Action Plan, including a $1 million donation to organizations dedicated to advancing social justice and racial equality. In April, Burlington hired its first-ever senior vice president, inclusion and diversity, Mecca Mitchell.

Net Sales: Second-quarter total revenue soared 118 percent to $2.22 billion, from $1.01 billion in the year-ago period. On a two-year basis, revenue jumped 33.3 percent from the $1.66 billion generated in the 2019 second quarter.

Comparable store sales increased 19 percent from 2019 levels. Burlington did not break out comparable store sales on a year-over-year basis.

Net Earnings: Net income for Burlington came in at $102.5 million, or $1.50 per share, well ahead of the net loss of $46.8 million in the 2020 second quarter, or a loss of 71 cents per share. On a two-year basis, net income was $84.6 million, or $1.26 per share for the second quarter of fiscal 2019.

Adjusted net income was $133.1 million in the quarter, or $1.94 per share, a swing from an adjusted loss of $37.2 million, or a 56-cent-per-share loss in the year-ago period. Adjusted net income was $91 million, or $1.36 per share for the 2019 second quarter.

Adjusted EBITDA increased 44 percent from the second quarter of 2019 to $246 million, an increase of 80 basis points (0.80 percentage points) as a percentage of sales. Adjusted EBIT increased 55 percent on a two-year basis to $183 million, an increase of 110 basis points (1.1 percentage points) as a percentage of sales. In 2020, adjusted EBITDA saw an $8.8 million loss, while adjusted EBIT saw a $63.2 million.

CEO’s Take: O’Sullivan said “it is possible 2022 will be a very difficult and turbulent year across the retail industry,” which would benefit off-price and accelerate Burlington’s ability to take more share. He stated two reasons for this:

“In 2021, every retailer has benefited from significant one-time items that have driven much higher sales levels than they otherwise would have achieved. When retailers anniversary those items in 2022, comps could turn negative mathematically, and that seems very likely,” O’Sullivan said. “Secondly, in 2021, that surge in sales was accompanied by global supply chain constraints and very lean inventory levels, which means that many retailers have seen just a remarkable recovery and margins. Scroll forward to 2022, if consumer demand does fall, and it’s likely that those supply chain constraints are going to ease. You could see an increase in the flow of merchandise into the country, at the very time that comp sales trends turn negative.”