Skip to main content

Burlington Capitalized on Sales Trends, But Warned on Supply Chain Costs

Burlington Stores Inc. saw first quarter sales boosted by federal stimulus checks, but it wasn’t so optimistic about ongoing supply chain costs, including freight expenses, through 2021.

In a Nutshell: Burlington had a very good quarter, showing that it could garner sales gains even after ditching e-commerce a year ago.

BMO Capital Markets retail analyst Simeon Siegel noted that Burlington’s material sales and margin beat “stands out” and that even without e-commerce, “two-year revenue [at] 35 percent growth lies well above the broader group’s +13 percent median,” referring to TJX and Ross.

Because of volatility in Fiscal 2020 results, Burlington is comparing its performance to 2019.

CEO Michael O’Sullivan said stimulus checks, vaccinations and pent-up consumer demand helped improve traffic and shopper spending.

“We were able to chase the very strong trend and maximize our share of this sales opportunity through strong execution of our Burlington 2.0 strategies,” he said.

In a Wall Street conference call Thursday, O’Sullivan said the 20 percent comparable store sales gain over 2019 included sales up mid-single digits in mid-March, and then it “really took off for the balance” of Q1, averaging over 30 percent, with the biggest surge coming in late March and then moderating through April. Despite cooling after the March spike, sales have held up overall, he said.

“In terms of category and regional performance, our sprint in the first quarter was broad based, all our major merchandise categories outperformed their plans and coastal sales in all regions of the country. We’re well ahead of our expectations,” he said.

Related Stories

Lower markdowns and faster inventory turns drove higher merchandise margins.

“We were able to find great merchandise values to flow to stores,” O’Sullivan said, which helped sales trends while keeping comp store inventory levels down 19 percent.

This was deliberate and consistent with our stated strategy of running our business with much leaner in-store inventory levels,” with comparable turns rising 59 percent, O’Sullivan said. “Looking ahead, we are planning average comp store inventories to be down significantly throughout the year,” which “means that we will manage our receipt flow and our store inventories” tocapitalize on the sales opportunities as we see them.”

O’Sullivan said reserve inventory rose to 75 percent of the total. Burlington made “heavy use” of reserves to chase sales trends. While buyers made some opportunistic and strategic buys to pack away, the off-price chain also expedited releasing some reserve spring inventory to replenish stores in April. “Our merchants have gotten very skilled at using reserve this way,” he said.

Burlington tightly controlled liquidity, so buyers going to market were able to act on great deals.

Supply chain challenges due to logistics, global and domestic transportation networks “continue to be a mess,” he said, citing “huge volatility and delays in receipt flow” driving higher costs. The planning, distribution and logistics team anticipated that higher costs and worked around the issues, which translated to getting fresh receipts to stores as needed.

However, supply chain issues haven’t gone away, and “over the last few months, they have deteriorated,” O’Sullivan said. “We now believe that these issues will be with use for at least the balance of the year, and they will put some pressure on our margin recovery.”

John Crimmins, chief financial officer, told analysts that Burlington expects more “severe expense pressure from freight and supply chain costs,” which will impact operating margins. 

Specifically, we expect the operating margin to be down, 70 to 80 basis points in the second quarter,” he said.

“The demand for ocean freight is far exceeding supply right now, and it’s significantly driven up freight rates. At Burlington, we don’t directly import a lot of merchandise ourselves. But the problem is that a lot of what we sell is imported, not by us but by our vendors,” Crimmins said.

Plus, congestion in domestic freight affects both the speed moving merchandise and also increases costs.

Higher wages are affecting Burlington’s distribution facilities, Crimmins said. Starting last summer, the company raised wages and wage incentives to retain workers. 

Burlington hasn’t seen any “real structural change” around external freight rates, which are driven by out-of-balance supply and demand, Crimmins said. Over time, those expenses should correct. “We just don’t see that happening in 2021,” he said.

Crimmins expect Burlington will continue to grapple with higher wages. “That said, we do have a pretty good track record of finding offsets to these types of costs, their process changes, automation, or other productivity improvements,” he said. We already have a number of initiatives underway, and we would expect to be able to at least partially offset these higher wage costs over time, but it will take a little time.”

Second-quarter margins will be impacted by expense timing, he said. Because Burlington used reserve inventory to chase sales demand in Q1, the team will work on replenishing this stockpile in Q2, which in turn will drive up quarterly expenses including related freight costs.

Burlington said it ended the quarter with $2.08 billion in liquidity, which includes $1.53 billion in unrestricted cash and $549 million available on its asset-based lending facility.

In the quarter, Burlington plans to redeem the full $300 million outstanding principal amount of its 6.25 percent senior secured notes due 2025 and expects to post a pre-tax debt extinguishment charge of $30 million in the second quarter of Fiscal 2021.

The retailer signed a lease to double the square footage connected to its New York City buying office, O’Sullivan said, last year relocating its West Coast buying office to a “substantially bigger space.”

Net Sales: Total revenue for the three months ended May 1 jumped to $2.19 billion from $801.5 million in the year ago period. Included in revenue were net sales of $2.19 billion versus $798.0 million in the year-ago quarter. The balance was classified as “other revenue.” On a pre-pandemic basis, total revenue rose 34 percent to $2.19 billion from $1.63 billion in the first quarter of Fiscal 2019, while comparable store sales rose 20 percent using the same period comparisons.

The gross margin rate in the quarter was 43.4 percent, up from 41.0 percent in the first quarter of Fiscal 2019. Merchandise inventories in the quarter were down to $768 million versus $896 million at the end of the first quarter of Fiscal 2019. Comparable store inventories fell 19 percent. Reserve inventory was 35 percent of total inventory, up slightly from 34 percent at the end of the first quarter of Fiscal 2019.

Earnings: Net income swung to the black to $171.0 million, or $2.51 a diluted share, against a net loss of $333.7 million, or $5.09, in the year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) was $2.59. Using a pre-pandemic comparison, net income gained 120 percent to $171.0 million, or $2.51 a diluted share, from $77.8 million, or $1.15, in the same 2019 quarter.

Wall Street was expecting adjusted diluted EPS of 83 cents on revenue of $1.77 billion.

Burlington said it wasn’t providing sales of earnings guidance for Fiscal 2021.

However, Burlington expects to open 100 new stores, while relocating or closing 25, giving it 75 net new stores for the fiscal year. It expects capital expenditures net of landlord allowances at about $470 million.

CEO’s Take: “The second quarter is off to a good start, but the go-forward sales trend remains very difficult to predict. Meanwhile, expense headwinds in supply chain and freight have continued to deteriorate, and these are likely to weigh on our operating margin throughout the balance of the year,” O’Sullivan said.