Burlington Stores Inc. bested Wall Street’s expectations for the fourth quarter, but offered guidance below analysts’ estimates for 2020 because of a strategic initiative to plan more conservatively, fine-tune expense structure and add improvements in operational flexibility.
In a Nutshell: Company CEO Michael O’Sullivan said fourth-quarter results were “driven by a solid 3.9 percent comparable store sales increase.”
In a conference call to Wall Street analysts, O’Sullivan said components of the operational structure, such as flexibility of supply chain and vendor partnerships “are in very good shape and provide a strong platform for continued growth.” However, he also said the off-pricer could be even better at what it does, and to that end, the company has outlined a new set of strategies to get there.
The strategies are part of a five-bucket plan, which includes: controlling sales and taking greater advantage of in-season opportunistic buys; investing in merchandising capabilities; operating with leaner inventories; improving operations flexibility; and challenging expenses so there’s tighter expense control alongside operating with a lower comp-growth assumption.
“We have too much inventory in our stores and have already begun to reduce these inventory levels. Our goal is to make every hanger count,” O’Sullivan said. “Going forward, we will be carrying much less inventory and within the racks the customer will find a higher mix of fresh receipts and great merchandise values. This should lead to higher sales, faster churns and lower markdowns.”
Addressing investors, the CEO also made a point to note that improving operational flexibility when executing the off-price model has meant watching the sales trend and shifting the assortment based on what the customer wants, and according to O’Sullivan, Burlington’s stores and supply chain teams have responded well to the challenge.
“For supply chain, this means absorbing sudden changes in the forecast and getting merchandise to the floor as fast as possible,” he said. “For stores, it means flexing up or flexing down individual departments based on receipt flow and trend. In 2020, we will be looking at ways to make our key operational processes even more nimble and effective.”
The new initiatives will bring model benefits in 2020, with a great impact in 2021 and then “more momentum in 2022,” according to O’Sullivan.
For now, the CEO doesn’t see any impact from the coronavirus because the company doesn’t have any overseas operations and “we directly import very little” of the merchandise that’s sold.
Net Sales: For the three months ended Feb. 1, total revenue rose 10.5 percent to $2.21 billion from $2.0 billion. Included in revenue was a 10.5 increase in net sales to $2.20 billion from $1.99 billion. Comparable store sales rose 3.9 percent in the quarter.
Comparable store inventory fell 15 percent in the quarter, and there was also a decrease in pack and hold inventory, which was 26 percent of total inventory at the end of fiscal 2019 versus 30 percent at the end of Fiscal 2018.
Burlington’s gross margin rate rose 20 basis points to 42.1 percent. “Merchandise margin increase 40 basis points, which was partially offset by an increase in freight costs,” the company noted, adding that product sourcing costs in the quarter, the costs of processing goods through its supply chain and buying costs, were flat as a percentage of sales.
Earnings: Net income for the quarter rose 11.9 percent to $206.3 million, or $3.08 a diluted share, from $184.4 million, or $2.70, in the same year-ago period. On an adjusted basis, diluted earnings per share were $3.25. Wall Street was expecting adjusted diluted earnings per share of $3.23 on revenue of $2.2 billion.
For fiscal 2020, ending Jan. 30. 2021, Burlington is forecasting total sales to rise between 8 percent to 9 percent, on top of a 9 percent gain in 2019. Comparable store sales guidance is in the range of up 1 percent to 2 percent. Adjusted EPS is expected at between $7.97 to $8.12. Wall Street was forecasting adjusted EPS at $8.29 for the year.
For the first quarter, Burlington expects a sales increase in the range of 8 percent to 9 percent, on top of a 7 percent gain in the same year-ago period. The off-price retailer also expects comparable store sales to rise between 1 percent to 2 percent. Adjusted EPS guidance is in the range of $1.29 to $1.34.
CEO’s Take: “Our inventory management made further progress during the fourth quarter, as our comparable store inventory decreased 15 percent, putting us in a very opportunistic inventory position as we enter Fiscal 2020,” O’Sullivan said.
The off-price model, according to the CEO, is advantaged when compared with other retail formats, particularly when it comes to absorbing the downside.
“There will be times when the external sales trend will weaken…The difference with off-price is if we can carefully control our liquidity and tightly manage our inventory and expenses and plan our comp sales somewhat conservatively, then we’ll be in a better position to absorb and recover from any downturn in sales,” he said.