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Burlington’s Going Big by Going Small

Despite higher sourcing costs, Burlington Stores Inc.’s fourth-quarter performance topped expectation, and it has big plans for more—but smaller-stores.

In a Nutshell: The off-price chain plans to operate 2,000 stores, up from the 1,000-store goal it set during its 2013 IPO. The company cited the success it has had with smaller store formats—part of its Burlington 2.0 strategy—as a factor in plans to grow its fleet, which stood at 761 stores at the end of Q4.

This year, Burlington plans to open 100 new stores and close or relocate 25, it revealed Thursday as it reported fourth-quarter earnings. The company managed to offset product sourcing costs, including Covid-19-related expenses, which helped exceed Wall Street’s expectations.

Merchandise sourcing costs, part of its selling, general and administrative expenses, jumped 61 percent to $143 million in Q4, up from $89 million in the same year-ago period. “Product sourcing costs include the costs of processing goods through our supply chain and buying costs. The increase was driven primarily by higher supply chain costs, due to higher wages and Covid-19 related costs,” it said. In addition, Burlington noted disruption throughout its global supply chain.

“We saw comparable store sales improve sequentially as the quarter progressed, starting with a double digit decline in November, improving to flat in December, and then accelerating to double digit growth in January. I was pleased with how we navigated this trend, and utilized core Burlington 2.0 strategies—chasing sales, buying opportunistically and operating with leaner inventories,” CEO Michael O’Sullivan said in a statement. “Looking ahead, the retail environment is likely to remain unpredictable for some time. We are planning 2021 comparable store sales conservatively but will manage liquidity to chase sales if the trend is stronger.”

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In a conference call Thursday, O’Sullivan said 2021 is “very difficult to forecast,” noting how continuing unemployment weighs against vaccine rollouts and an expected new round of stimulus spending.

O’Sullivan said most new Burlington stores will feature the smaller-footprint format of 25,000 square feet, which offers lower occupancy costs and higher operating margins. “The smaller prototype also provides important strategic benefits, increasing the pool of potential real estate stores and providing the opportunity to open profitable stores in more locations around the United States,” he said.

November’s unseasonably warm weather depressed sales, since Burlington is known for its selection of outerwear, O’Sullivan said.

Leaner in-store inventory, using reserve inventory to bring in goods when needed, is working well for the company, O’Sullivan noted.

“Our in-store inventory turns increased 27 percent on a comparable basis for [the fourth quarter], evidence that our strategy is working,” he said. Strong performance was primarily driven by the successful execution of the company’s strategy, which included managing liquidity, chasing sales, buying opportunistically and getting fresh goods to the sales floor as fast as possible. “As we move into 2021, we will continue to look for ways to define and improve our execution of these key strategies,” he said.

Net Sales: For the quarter ended Jan. 30, 2021, total revenue rose 3 percent to $2.28 billion from $2.21 billion, which included a 4 percent increase in net sales to $2.28 billion from $2.20 billion. Comparable store sales were flat versus the year-ago quarter. For the quarter, comps were down 10 percent in November due to unfavorable weather, improving to flat in December and up 17 percent in January as weather normalized and the government mailed stimulus checks, Burlington said.

Inventories were down 5 percent to $741 million at the end of the quarter. Comparable in-store inventories fell 16 percent, driven by the off-pricer’s strategy of operating with leaner in-store assortments. Reserve inventory, merchandise being stored for later in the season or a subsequent selling period, was 38 percent of total inventory at the end of the quarter versus 33 percent in the prior-year’s comparable period.

The gross margin rate was 42.5 percent, versus last year’s rate of 42.1 percent, helped by lower markdowns, which in turn more than offset a 70-basis-point increase in freight costs.

For the year, total revenue declined by 21 percent to $5.76 billion from $7.29 billion, which included a net sales decrease of 21 percent to $5.75 billion from $7.26 billion.

Earnings: For the three months, net income fell 24 percent to $156.0 million, or $2.33 a diluted share, from $206.3 million, or $3.08, in the same year-ago quarter. On an adjusted basis, diluted earnings per share was $2.44.

Wall Street analysts were expecting adjusted diluted earnings per share of $2.12 on revenue of $2.08 billion.

The company declined to provide guidance for the year, but said capital expenditures, net of landlord allowances, are expected to be $470 million.

Net losses for the year reached $216.5 million, or $3.28 a diluted share, against net income of $465.1 million, or $6.91, for the prior year.

CEO’s Take: Addressing the strategy to reach 2,000 stores, O’Sullivan said, “This new target takes account of the significant market share opportunity that we see ahead of us, and of the improvements we are making in our business with Burlington 2.0, in particular the significant reduction in inventory levels and the smaller store footprint that this enables.”