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Burlington CEO Sees ‘Disruption and Dislocation’ Ahead

Burlington Stores leaned on aggressive markdowns and sharper pricing to report a fourth-quarter earnings beat.

In a Nutshell: The off-price retailer shelved plans to raise prices while optimizing the price of what it had on hand and slashing aging merchandise to “drive faster turns on existing inventory,” Burlington CEO Michael O’Sullivan told investors during a conference call Thursday.

Getting smart with opening prices improved customer conversion and average transaction size. Burlington brought in more inventory to support better-performing categories.

“Shoppers responded to our sharper values, expanded opening price points and great branded buys,” O’Sullivan said.

The moves are an about-face from most of last year when Burlington made several damaging mistakes that dinged its financial performance. Not only did it start 2022 without enough inventory to meet demand in a move that “backfired on us,” but it also ended up raising prices when inflation and promotions were reaching their peak. Burlington also stumbled by failing to tweak the price hikes until much later in the calendar year and not adapting to the sudden shift in shopper trends that forced even Walmart and Target to slashes billions of dollars in orders.

Like its off-price competitors, O’Sullivan noted a “very strong” fourth-quarter product supply offering “some incredible buys especially on branded merchandise,” some of which Burlington will pack and hold as future reserves.

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Foot traffic is also trending higher, the CEO said. He believes retail will sort through its collective inventory glut this year, which will likely cancel out the industrywide markdowns that were the story of the past few months. Plus, an economic slowdown would likely drive many consumers to seek out Burlington’s value-oriented deals, O’Sullivan said, especially from middle- and higher-income shoppers.

The company is keeping an eye on what happens with the lowest-income customer, however.

“There are other factors that could hurt this customer, such as a rise in unemployment and the ending of expanded SNAP benefits,” he said.

Falling freight rates are good news for Burlington’s bottom line, though “it is difficult to predict how significant an impact this might have over the full year,” O’Sullivan said.

Burlington plans to open 90 to 100 new stores this year and relocate others, for 70 to 80 total net new locations.

“This is lower than we would like and reflects the current lack of high quality, real estate locations as well as supply issues within the construction industry,” O’Sullivan said.

A “wave of consolidation in bricks-and-mortar retail” over the next few years should give Burlington prime new locations, he added.

Burlington is looking at opening 500 to 600 net new stores from the five years starting in 2024. Chief financial officer Kristin Wolfe said the retailer’s 34 net new stores in the fourth quarter helped the company close 2022 with 927 doors.

“I think as things normalize, we may get back to traditional retail consolidation,” O’Sullivan said. “Many of our most productive locations were formerly Circuit City or Toys “R” Us or Sports Authority, or Linens ‘n things.”

“We’ve definitely leaned in to the main principles of off-price—more so than we ever had in the past. [W]e’re turning inventory much faster. We’re chasing sales much more aggressively, we’re controlling liquidity much more tightly [and] we’re buying opportunistically,” he said.

Since O’Sullivan joined the company, it was reconfigured systems better suited for a department store to match the demands of the off-price channel.

“We’ve been developing a lot of those off price tools, reports, capabilities, and we’re rolling out many of those,” he said, adding that “there’s a dividend that’s yet to come in terms of the investment we’ve made in merchandising. I feel like we should be able to drive sales growth and margin growth over the next few years.”

Net Sales: Total revenue for the three months ended Jan. 28 rose 5 percent to $2.74 billion from $2.61 billion in the year-ago quarter, which included a net sales increase of 5 percent to $2.74 billion from $2.60 billion a year ago. The balance of revenue was from other income that slipped to $5.2 million from $5.5 million.

“Comp growth in both December and January was positive, with January stronger than December,” O’Sullivan said.

Inventories were $1.18 billion versus $1.02 billion a year ago. Comparable store inventories rose 32 percent, while reserve inventory was up 48 percent of total inventory.

For the year, total revenue fell 7 percent to $8.70 billion from $9.32 billion a year ago. Net sales for the year fell 7 percent to $8.68 billion from $9.31 billion.

Earnings: Net income for the quarter spiked up 52 percent to $185.2 million, or $2.83 a diluted share, from $121.6 million, or $1.80, in the year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) was $2.96.

Wall Street expected adjusted diluted EPS of $2.73 on revenue of $2.6 billion.

For the first quarter, Burlington guided total sales to rise 12 percent to 14 percent, with comparable store sales up 5 percent to 7 percent. Adjusted EPS was guided to the range of 85 cents to 95 cents.

For the year, total sales was guided to the range of up 12 percent to 14 percent, with comparable store sales up 3 percent to 5 percent. Adjusted EPS is expected at between $5.50 to $6.00.

For the full year, net income was down 44 percent to $230.1 million, or $3.49 a diluted share, from $408.8 million, or $6.00, a year ago.

CEO’s Take: “Our number one priority in 2023 is to drive sales,” O’Sullivan told investors. “We anticipate that the next few years will see significant disruption and dislocation across retail. We are pushing forward with the transformation of Burlington into a stronger off-price retailer and this should help us to take advantage of the opportunities this disruption may present.”