Burlington Stores, Inc. had a rough third quarter, with total sales tumbling 11 percent year-over-year to $2.036 billion. Comparable store sales dropped 17 percent compared to the third quarter of fiscal 2021.
In a Nutshell: The New Jersey-based off-price retailer reported product sourcing costs, which are included in selling, general and administrative (SG&A) expenses, were $178 million, up from $173 million in the third quarter of fiscal 2021. Product sourcing costs include the costs of processing goods through its supply chain and buying costs, the Ross rival said.
“From a gross margin standpoint, we came in about where we expected,” chief financial officer Kristin Wolfe said. “Merchandise margin was down 90 basis points and freight lower by 70 basis points, came in largely in line with what we were expecting. SG&A did come in lower than we had planned due to strong expense control . . . We did incur higher-than-expected supply chain costs.”
Merchandise inventories were $1.445 billion versus $1.060 billion at the end of the third quarter of fiscal 2021, a 36 percent increase, while comparable store inventories increased 8 percent. Reserve inventory was 31 percent of total inventory at the end of the third quarter of fiscal 2022 compared to 30 percent at the end of the third quarter of fiscal 2021. Reserve inventory is primarily composed packaway merchandise that will be sent to stores in the coming months or next season.
The company ended the third quarter of fiscal 2022 with $1.279 billion in liquidity, comprised of $429 million in unrestricted cash and $850 million in availability on its asset-based loan (ABL) facility. Burlington ended the third quarter with $1.478 billion in total outstanding debt, including $949 million on its term loan facility, $508 in convertible notes, and no borrowings on the ABL facility.
During the third quarter of fiscal 2022, the company repurchased 370,599 shares of its common stock under its share repurchase program for $51 million. At the end of the third quarter of fiscal 2022, it had $399 million remaining on its current share repurchase program authorization.
For the full fiscal year 2022, the company now expects comparable store sales to decrease in the range of down 15 percent to down 14 percent for fiscal 2022, versus the 15 increase during fiscal 2021; this translates to a 1 percent to 2 percent comp sales decline versus fiscal 2019. Capital expenditures, net of landlord allowances, are expected to be approximately $510 million. Burlington aims to open 87, as opposed to the previous 90 net new stores before the end of fiscal 2022, expecting to end this year with 927 stores. The long-term target is still 2,000 stores.
“While we acknowledge that there are risks and uncertainties, we think the outlook for 2023 is very positive. We anticipate that the economic and competitive environment could set up very well for off-price,” CEO Michael O’Sullivan said. “We also recognize that we will be lapping our own execution mistakes and under-performance from 2022. Based on these factors, we believe that we can start to drive significant sales, margin and earnings recovery next year. So, to sum up, we are excited about the prospects for off-price and despite our disappointing performance this year, we are confident in our ability to drive improved execution and significant sales and margin recovery over the next few years.”
Net Sales: Total sales decreased 11 percent compared to the third quarter of fiscal 2021 when total sales increased 30 percent and comparable store sales rose 16 percent. The gross margin rate as a percentage of net sales was 41.2 percent, versus 41.4 percent for the third quarter of fiscal 2021, a decrease of 20 basis points. Merchandise margins decreased 90 basis points, partially offset by a 70 basis point improvement in freight expense.
Net Earnings: Net income was $17 million, or $0.26 per share, versus $14 million, or $0.20 per share, for the third quarter of fiscal 2021. The prior year’s amount includes an $86 million loss on debt extinguishment charge or $1.22 per share.
Adjusted net income was $28 million, or $0.43 per share, versus $93 million, or $1.36 per share, for the third quarter of fiscal 2021. Net income decreased 84 percent compared to the same period in fiscal 2021 to $45 million, or $0.68 per share, versus $4.21 per share in the prior period.
Adjusted EBIT decreased 72 percent, or $404 million, compared to the first nine months of fiscal 2021, to $157 million, a decrease of 570 basis points as a percentage of sales. Adjusted net income of $87 million decreased 78 percent versus the prior period, while adjusted EBIT was $1.32 versus $5.89 in the previous year period, a decrease of 78 percent.
CEO’s Take: “In Q3 we achieved sales and earnings that were within our guidance range, but we are not happy with this performance. As we said on our August earnings call, as an off-price retailer we should be able to perform better in this environment despite the significant macro headwinds. Recent results from other off-price retailers reinforce this view,” O’Sullivan said.
“Rather than a structural root cause, I think there have been two key drivers about poor performance this year,” he continued. “Firstly, the macro headwinds have been real, especially the impact of inflation on the lower-income customer. This has hurt us more than most other retailers. But this is not a permanent structural change, rather it is temporary and driven by the economic cycle. This impact will recede over time. I would describe the second key driver of our poor performance as being developmental. In the last few years, we have been transitioning to become more off-price. For example, we have been investing in our buying capabilities. By the end of this year, our buying team will be almost 50 percent larger than it was in 2019. It is important to note that much of this investment is now behind us. This pace of growth has already naturally slowed. The focus going forward will be on how to take greater advantage of this improved buying capability to drive sales and margin growth.”