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Burlington CEO: We’re the ‘Smallest, Least Productive and Least Profitable’ Off-Price Retailer

Burlington CEO Michael O’Sullivan isn’t happy with the off-price retailer’s 6 percent fourth-quarter comp growth but said the company is “well ahead of our peers.”

In a Nutshell: Though the chief executive touted 2021 as a “record-breaking year” for the South Jersey company, investors reacted to Burlington’s significant earnings miss by sending shares down nearly 13 percent to $203.07 Thursday. Shares were trading around $187.89 mid-day on Friday.

O’Sullivan told Wall Street analysts in a conference call Thursday that Burlington’s “top-line sales growth of 28 percent and comp sales growth of 15 percent” put the retailer “well ahead of our major competitors.”

“We demonstrated a remarkable ability to chase sales and respond to consumer trends, and we made huge progress on our Burlington 2.0 strategic objectives,” he added, referencing a plan hatched prior to Covid that focused on flexibility to seize supply opportunities.

“Ordinarily we would be happy with 6 percent comp growth in Q4 but compared to the rest of 2021 this was a slowdown in our trend,” O’Sullivan said. “This slowdown was partially driven by lower traffic to our stores, due to a number of external factors, and partially driven by the late delivery of some critical receipts in December,” which Burlington has already course corrected.

O’Sullivan believes “huge disruption across retail” in the coming years could lead to additional industrywide “restructuring” with market share shifting from department stores and mall-based shops to the growing off-price sector.

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“We believe that the most important and powerful trend driving this restructuring is the consumer need for value. There is a growing segment of shoppers who care, above all else, about value,” O’Sullivan said, pointing to last year’s potent cocktail of stimulus checks, healthy savings and limited product supply as driving up prices.

“In fact, given the rise in general price inflation, together with growing economic uncertainty, we suspect that over the next couple of years, the consumer need for value will be more important than ever,” O’Sullivan added. “And the long-term trend of market share moving to the off-price channel will, if anything, accelerate.”

Burlington, according to O’Sullivan, has “a significant and unique opportunity to drive the growth of our top line sales and earnings over time,” given that data shows it’s “by far the smallest, least productive and least profitable of the major off-price retailers.”

The company’s 28 percent total sales growth in 2021 and 15 percent higher comps versus 2019 “demonstrated our ability to chase,” he said, and translates to “$1.2 billion of incremental sales.” Burlington accomplished this with 20 percent less comp store inventory and drove fast turns and 1.5 percent higher merchant margin, he added. Like others in retail, Burlington is focusing on “more productive and more profitable” smaller-footprint formats, O’Sullivan said.

Higher merchandise margins helped offset rising supply chain costs. “We believe that some of these high upgrade and supply chain costs will go away over time, but some will remain. We know that we have other opportunities in our P&L, [and] we also believe that we have potential to take up prices,” O’Sullivan said.

He went on to say that Burlington has “room to raise prices” while “still offer[ing] great value to shoppers.” The company has already begun tinkering with tickets and “will get more aggressive in the coming quarters,” O’Sullivan said.

Net Sales: Total revenue for the three months ended Jan 29 rose 14.3 percent to $2.61 billion from $2.28 billion, which included a 14.2 percent gain in net sales to $2.60 billion from $2.28 billion. Comparable sales rose 6 percent when compared with the same quarter of Fiscal 2019.

Merchandise inventories were $1.02 billion versus $777 million in Fiscal 2019. Comparable store inventories fell 30 percent and reserve inventory was 50 percent of total inventory at the end of Fiscal 2021 versus 33 percent at the end of Fiscal 2019.

For the year, total revenue jumped 63 percent to $9.32 billion from $5.76 billion in 2020, which included a 61.8 percent increase in net sales to $9.31 billion from $5.75 billion.

Earnings: Net income declined 22.0 percent to $121.6 million, or $1.80 a diluted share, from $156 million, or $2.33, in the year-ago quarter. Adjusted diluted earnings per share (EPS) was $2.53.

Wall Street expected adjusted diluted EPS of $3.25 on revenue of $2.78 billion.

Burlington isn’t providing sales or earnings guidance for the Fiscal 2022 year ending on Jan. 28, 2023. Capital expenditures, net of landlord allowances, are expected at $725 million for the year. Burlington plans to open 90 net new stores.

For the year, Burlington posted net income of $408.8 million, or $6.00 a diluted share, against a net loss of $216.5 million, or $3.28, in 2020.

CEO’s Take: “We think the outlook for retail spending in 2022 is extremely unpredictable especially as we lap government stimulus programs, and as general price inflation begins to bite. This kind of unpredictability has, in the past, tended to favor off-price,” O’Sullivan said. “In 2022 we will plan our business conservatively but then be ready to chase and take advantage of opportunities.”