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Burlington CEO: Target, Walmart Markdowns ‘Squeezed’ Our Value Proposition

Burlington slashed its sales and earnings forecast for the full year after a rough second quarter that saw the off-price retailer’s total sales drop 10 percent to $1.98 billion on net income of $12 million.

The performance comes after top competitors in the off-price space including TJX and Ross Stores saw sales declines of 2 percent and 5 percent respectively. And like those rivals, Burlington is now fighting off growing competition from mass merchants and other retailers as an overabundance of inventory has caused a spike in promotional activity.

In a Nutshell: On a call with Wall Street analysts, CEO Michael O’Sullivan pointed to two major factors for the disappointing second quarter. For one, higher promotional activity stemmed from the massive imbalance between inventory levels and sales across retail. Plus, significant economic pressure weighed on Burlington’s core low-to-moderate-income customer.

Approximately 40 percent of the money spent at Burlington comes from shoppers with $50,000-and-lower household incomes, O’Sullivan said.

O’Sullivan referred to the glut of inventory from Q1 into Q2 as a “tidal wave,” illustrating that retailers across the industry are aggressively clearing it with markdowns to keep pace and make way for holiday.

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“[T]he key reason [people] shop our stores is that we offer better value than other retailers. In Q2, this value differentiation was squeezed,” O’Sullivan said. “Our customers are, as I described earlier, heavily focused on value. They have a lot of options about where to spend their limited funds and they cross shop heavily looking for the best deals. For our customers, the top for shopping destination for apparel and footwear is Walmart, followed by Target. The current level of promotional activity will not last forever. But while it does, it will create a very significant headwind for us.”

As such, Burlington has significantly cut its 2022 guidance, now expecting comparable store sales to fall in the range of 13 percent to 15 percent. This is down from the initial expectations of a 6 percent to 9 percent comparable sales decline.

Adjusted earnings per share (EPS) is now anticipated to range between $3.70 and $4.30, as compared to $6.00 on a report basis and $8.41 on an adjusted basis last year. Burlington’s original projections in May had 2022 adjusted EPS falling in the range of $6.00 to $7.00.

And instead of adjusted EBIT margin falling 130 to 200 basis points (1.3 to 2 percentage points) in 2022 as first forecast, these margins are now expected to fall 360 to 410 basis points (3.6 to 4.1 percentage points).

A total of 90 net new stores are still expected for the full year.

“We need to challenge every hanger in our assortment and make sure we are offering the best value,” O’Sullivan said. “During this time, we will tightly control buying and liquidity, carefully manage inventories and aggressively pursue opportunities to drive down expenses. But, the net effect of all this is that we expect our results for the full year to be well below our normal expectations and well below what we believe we can accomplish over the next couple of years.”

He also noted that Burlington has been keeping an eye on freight rates, which have shown “early signs” of easing. The retailer also anticipates a softening of the labor market, which could ease pressure on wage rates.

For the third quarter, Burlington expects comparable store sales to decrease between 15 percent and 18 percent, with adjusted earnings per share (EPS) in the range of 36 cents to 66 cents, as compared to 20 cents on a report basis and $1.36 on an adjusted basis last year. Adjusted EBIT margin is expected to dip 360 to 260 basis points (3.6 to 2.6 percentage points) to last year.

Merchandise inventories were $1.27 billion at the end of the second quarter, a 53 percent increase from the $828 million as of July 31, 2021. Comparable store inventories decreased 5 percent.

Reserve inventory was 52 percent of total inventory at the end of the second quarter, compared to 31 percent in the year-ago period. Reserve inventory is largely composed of merchandise that is purchased opportunistically and will be sent to stores in future months or seasons.

Gross margin as a percentage of net sales was 38.9 percent, a decrease of 320 basis points (3.2 percentage points) from the 42.2 percent margin in the 2021 second quarter. Freight expenses increased 110 basis points (1.1 percentage points) as a percentage of net sales and merchandise margins decreased 210 basis points (2.1 percentage points).

Product sourcing costs, which are included in selling, general and administrative expenses (SG&A), were $157.2 million, up from $145.9 million in the second quarter of fiscal 2021. Product sourcing costs include the costs of processing goods through the supply chain and buying costs.  

Burlington ended the second quarter with $1.3 billion in liquidity, comprised of $455 million in unrestricted cash and $843 million in availability on its asset-based lending (ABL) facility. The company ended the period with $1.49 billion in outstanding total debt, including $946 million on its term loan facility, $508 million in debt that can be converted to shares, and no borrowings left on the ABL facility.  

During the second quarter, the off-price retailer increased the size of its ABL facility from $650 million to $900 million, while maintaining the loan’s maturity in December 2026. 

Net Sales: Total sales at Burlington decreased 10 percent to $1.98 billion, down from $2.21 billion in the second quarter of 2021.

Comparable store sales decreased 17 percent compared to the prior-year period.

Net Earnings: Net income in the second quarter was $12 million, or 18 cents per share, vs. $102.6 million, or $1.50 per share, in the year-ago period. Adjusted net income was $22.9 million, or 35 cents per share in the quarter, down from $133.1 million in 2021 adjusted net income, or $1.94 per share in the prior-year quarter.

Adjusted EBITDA was $110.6 million in the 2022 second quarter, a decrease from the $245.7 million in the 2021 quarter, a decrease of 550 basis points (5.5 percentage points) as a percentage of sales. Adjusted EBIT was $42.6 million, a decrease of 610 basis points (6.1 percentage points) as a percentage of sales.  

CEO’s Take: “We believe the inventory overhang across the retail industry is likely to clear over the next several months. We expect that by early 2023, once this overhang has cleared, promotional activity will have declined significantly,” O’Sullivan said. “We anticipate that the supply environment will tighten somewhat. Many vendors have been hurt by the current imbalance and they are likely to pull back but with weak consumer demand, we think there will still be plenty of merchandise supply for the off-price channel. We also expect to carry attractive reserve inventory into 2023.”