Burlington Stores, Inc. (NYSE:BURL) Q4 2023 Earnings Call Transcript

Burlington Stores, Inc. (NYSE:BURL) Q4 2023 Earnings Call Transcript March 7, 2024

Burlington Stores, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Krista and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Burlington Stores Fourth Quarter 2023 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. I would now like to turn the conference over to David Glick, Group Senior Vice President. David, you may begin your conference.

David Glick: Thank you, operator. And good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2023 fourth quarter operating results. Unless otherwise indicated, our discussion and results for the 2023 fourth quarter and full year are on a 13 or 52-week adjusted basis and exclude the impact of certain expenses associated with the acquisition of Bed Bath & Beyond leases. Our presenters today are Michael O’Sullivan, our Chief Executive Officer, and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our express permission. A replay of the call will be available until March 14, 2024.

We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company’s 10-K for fiscal 2022 and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis.

Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now here’s Michael.

Michael O’Sullivan: Thank you, David. Good morning, everyone. And thank you for joining us. I would like to cover four topics this morning. Firstly, I will discuss our fourth quarter results. Secondly, I will comment on our full-year 2023 results. Thirdly, I will talk about our guidance for the year ahead. And finally, I will offer some longer term commentary. Then, Kristin will provide some additional financial details. Okay. Let’s talk about our Q4 results. Comp store sales for the fourth quarter increased 2% on a 13-week basis. This was above our guidance of minus 2% to flat. I would like to peel back the onion a little and describe some important aspects of this fourth quarter comp performance. Firstly, we continue to see strong selling at our opening price points.

The lower income customer, the need a deal shopper, is responding well to these values. This is a very important customer for us. A year ago, this shopper was really struggling with a higher cost of living and with the loss of pandemic era benefits. This customer is still fragile. The cost of living is not declining. It is just going up less quickly. That said, this represents an improvement versus last year and it may have helped to underpin our comp in Q4. Secondly, what really drove our incremental comp growth in Q4 was the success of our strategies and businesses targeting trade downs or slightly higher income shoppers. These customers responded well with a higher mix of recognizable brands in our apparel and accessories businesses. These shoppers also grow very strong selling across our key holiday categories in gifting, accessories and home decor.

Frankly though, looking at the results of our peers, I am disappointed that we didn’t drive stronger comp growth with these shoppers. There is clearly a bigger opportunity. The implication is that we have to offer stronger and even more compelling values on the brands and styles that these trade down shoppers are looking for. The final point I would like to make about our Q4 results is that we saw strong selling on regular priced merchandise. In Q4, the merchandise in our stores turned faster and we ended up with less clearance inventory. Our comp selling on clearance merchandise was down double digits. If I strip this out from our overall Q4 comp growth, in other words, if we just look at comp sales growth on regular priced merchandise, it was up 4%.

This is very healthy. Later on, Kristin will talk about the impact that this strong regular price selling had on our merchandise margin. Wrapping up my comments on our Q4 comp performance, we are happy that we beat guidance, but more importantly we see some clear opportunities to drive even stronger performance. I would like to move off Q4 now. In fact, I would like to step back and provide a report card, if you will, for our full year 2023 performance. In 2023, our total sales grew by 10%. We believe that total sales is the best proxy indicator on what is happening with market share. This total sales growth was driven by 4% comp growth plus 80 net new store openings. As I look back on these numbers, candidly, we would have liked to have done more.

Let’s start with new stores. In 2023, we opened 80 net new stores, but our goal over the last couple of years has been to ramp up to 100 net new stores a year. We have rigorous standards for the quality of new store locations, and over the last couple of years, this has made it difficult to hit this 100 store run rate. That said, 2023 was a breakthrough year for our new store program. In the Bed Bath & Beyond bankruptcy process, we acquired a large number of very attractive new store locations, and we identified and are negotiating on many others with the landlords. These deals have significantly strengthened our new store pipeline, and as we will discuss later, we are confident that we will hit our goal of 100 net new stores in 2024. Okay, let me turn now to comp sales growth.

For the full year 2023, we achieved comp growth of 4%. This was right in the middle of our original guidance range of 3% to 5%. But frankly, coming into 2023, we had hoped for better. There were external and internal factors that slowed us down in the first half of the year. Externally, our core low income shopper continued to struggle with lower government benefits and with the rising cost of living. We did see some growth in trade down traffic from want-a-deal higher-income customers, but in Q1 and Q2, this was not enough to offset weakness with our core low income shoppers. Internally, we had planned for a stronger trend at the start of the year. This hurt us because when the trend turned out to be weaker, we struggled to reposition ourselves.

In retrospect, it would have been better to have had a lower sales plan and more liquidity. The Q1 trend would still have been solved, but we could have better positioned ourselves for Q2. In any event, by the second half, we were able to get ourselves in shape and to build momentum, beating our sales plan for the full season. Okay, the final section of the 2023 report card is earnings. We were able to drive 130 basis points of operating margin expansion in 2023. This was ahead of our original guidance of 80 to 120 basis points. This helped to drive EPS growth of 46%, well ahead of guidance. In a few moments, Kristin will dissect these results, but the headline is, this was a high quality earnings beat, driven by stronger merchandise margins and faster-than-expected progress on our major expense initiatives in freight and supply chains.

So, wrapping up on the 2023 report card, yes, we would have liked to have done more, but overall, we are happy with our double-digit total sales growth, 80 net new stores, 4% comp sales growth, and 130 basis points of operating margin expansion. These results give us confidence in the long-range financial targets that we shared on our November call. Now, let’s move on to 2024 and talk about our guidance. Of course, we previewed this guidance in November. Back then, we described our forecast as being based on 2% comp growth and 50 basis points of margin expansion. Since then, we have built flexibility into the lower end of the range to give ourselves more room to chase. But to be clear, nothing has fundamentally changed in terms of our thinking on the 2024 outlook.

I would like to discuss each driver of this guidance, new stores, comp stores, and operating margin expansion. In 2024, we expect to open approximately 140 gross new stores. Stripping out relocation and closures, this should result in 100 net new stores. We anticipate approximately one-third of these will open in the spring and two-thirds in the fall. As discussed previously, new stores average about $7 million in volume in their first full year. These new store openings, together with our comp sales growth, should drive a total sales increase in the range of 9% to 11% this year. Moving on to comp sales. For the full year and for Q1, we are guiding to 0% to 2% comp growth. As discussed in November, there is plenty of uncertainty in the outlook for 2024, so it makes sense to be cautious.

As an off-price retailer, this allows us to manage our business and position ourselves to chase a stronger trend. As I described a moment ago, one of the lessons from the spring of 2023 is that we came into the year with too strong of a plan. When the trend turned out to be weaker, in some of our businesses, we were not liquid enough to react. It would have been better if we had had a lower plan and then chased. Moving on to margin. With our comp range of flat to 2%, we expect to be able to drive operating margin expansion of 10 basis points to 50 basis points. There are three drivers of this margin expansion. Higher merchant margin, lower freight expenses, and lower supply chain expenses. Kristin will talk more about these, but we feel good about the underlying plans we have in each of these areas.

Kristin will also explain that we expect this margin expansion to be slightly higher in Q1, 20 basis points to 60 basis points on a flat to 2% comp. Let me wrap up now with a few comments on our longer term outlook. In our November call, we discussed our expectations for the growth of our business over the next five years. We believe we can grow total sales to approximately $16 billion and operating income to about $1.6 billion over this period. We see three drivers of this growth. I will comment on each of these. New store openings and relocations – we expect to open about 100 net new stores a year, plus two to three dozen relocations of older, oversized, less productive stores. As I described a moment ago, we are well positioned for 2024.

Looking further out, we anticipate some lumpiness in the number of openings year to year. But, overall, we feel good about our longer term pipeline and the likely availability of attractive new store locations over the next few years. Secondly, comp sales growth. There are good reasons to be cautious in how we plan and manage our business in the short term, especially the year ahead. But over the next five years, we believe we can achieve average comp growth in the mid-single-digits. We think the external environment over the next few years is likely to be favorable for off price, and we are excited about the initiatives we have been pursuing to improve our own execution of the model. Thirdly, margins. We believe we can grow our operating margins to 10% in the next five years from a combination of leverage on higher sales and cost savings opportunities that are unrelated to sales.

We made good progress in 2023, and we are confident in our plans for 2024. At this point, I would like to ask Kristin to share additional financial details on Q4 and on our first quarter 2024 and full year guidance.

Kristin Wolfe: Thank you, Michael. And good morning, everyone. I will start with some additional details on the fourth quarter. Please note that the following discussion of fourth quarter financial results will be on a 13-week non-GAAP basis, unless otherwise indicated. Total sales growth in the quarter was 9%. This was higher than our guidance of 5% to 7%, driven by higher comp store sales. Our comp sales growth in Q4 was 2%, which was above our guidance of minus 2% to flat. In addition, the 53rd week added $138 million in total sales to this result, bringing our Q4 total sales increase on a 14-week basis to approximately 14%. The gross margin rate for the fourth quarter was 42 .6%, an increase of 190 basis points versus last year.

This was driven by a 140 basis point increase in merchandise margins, mostly driven by lower markdowns, as well as a 50 basis point decrease in freight expense. Product sourcing costs were 20 basis points lower than last year. This was driven by supply chain leverage of 40 basis points, as we’ve made progress on our distribution center productivity initiatives. This supply chain leverage was partially offset by higher incentive compensation. Adjusted SG&A costs in Q4 were 100 basis points higher than last year, which included 20 basis points of deleverage attributable to expenses related to the acquired Bed Bath & Beyond leases. Excluding Bed Bath & Beyond leases, adjusted SG&A deleverage was 80 basis points, driven primarily by higher incentive comp accruals and investments in store payroll.

Q4 adjusted EBIT margin was 11.1%, 110 basis points higher than last year, compared with guidance of 0 to 40 basis points. Again, this excludes Bed Bath & Beyond costs worth 20 basis points. Our adjusted EPS in Q4 was $3.69. This was well above the high end of our range of $3.10 to $3.25. This result and the guidance range exclude approximately $6 million of pre-tax expenses associated with the Bed Bath & Beyond stores that were acquired last fall. On a 14-week basis, our adjusted EPS was $3.72, again excluding $6 million of pre-tax expenses associated with the Bed Bath & Beyond stores. At the end of the quarter, our comparable store inventories were 5% below 2022, while our reserve inventory was 39% of our total inventory versus 48% last year.

We are very happy with the quality of the merchandise and the values that we have in reserve. We ended the quarter in a very strong liquidity position, with approximately $1.6 billion in total liquidity, which consisted of $925 million in cash and $709 million in availability in our ABL. We had no borrowings outstanding at the end of the quarter on our ABL. During the quarter, we repurchased $103 million in common stock, bringing our annual share repurchases to $232 million. At the end of the fourth quarter, we had $500 million remaining on our share repurchase authorization that expires in 2025. In Q4, we opened 30 net new stores, bringing our store count at the end of the quarter to 1,007 stores. This included 39 new store openings, 4 relocations, and 5 closings.

For the full year, we opened 104 new stores, while relocating 13 stores and closing 11 stores, adding 80 net new stores to our fleet. I will now move on to discuss our full-year 2023 results. Please note that the following discussion of fiscal 2023 financial results will be on a 52-week non-GAAP basis, unless otherwise indicated. In addition, the full year results I will share exclude the impact of approximately $18 million in expenses related to the acquired Bed Bath & Beyond leases. In fiscal 2023, total sales increased 10% and comp store sales increased 4%. Our operating margin for the full year expanded by 130 basis points. Merchandise margin increased by 110 basis points, while freight improved by 90 basis points, which more than offset 40 basis points of deleverage in SG&A and 20 basis points of deleverage in product sourcing costs.

Let’s now move to 2024 guidance. I will compare 2024 guidance to 2023 results on a 52-week basis. Also, this 2024 guidance excludes an anticipated $9 million in expenses associated with the acquired Bed Bath & Beyond leases. $8 million of these expenses are expected in the first quarter and $1 million in the second quarter. For the 2024 fiscal year, we expect total sales growth in the range of 9% to 11%. We expect comp store sales to increase in the range of 0% to 2% for fiscal 2024, and our adjusted EBIT margin to increase 10 to 50 basis points versus last year. We expect higher merchandise margins, as well as freight and supply chain leverage to be the primary margin drivers in fiscal 2024. Keep in mind that we will be reporting comparable store sales in fiscal 2024 on a shifted basis, lining up the comparable weeks in fiscal 2023.

Capital expenditures, net of landlord allowances, are expected to be approximately $750 million in fiscal 2024. This results in adjusted earnings per share guidance in the range of $7 to $7.60, an expected increase of 12% to 22%. For the first quarter of 2024, we expect total sales growth in the range of 9% to 11%. Comp store sales are assumed to increase between 0% and 2%. We are expecting adjusted EBIT margin to increase in the range of 20 to 60 basis points over the first quarter of 2023, which result in an adjusted EPS outlook in the range of $0.95 to $1.10 in the first quarter. Again, we expect merchandise margin scrapes and supply chain leverage to be the primary drivers of this anticipated margin improvement. I will now turn the call back to Michael.

Michael O’Sullivan : Thank you, Kristin. Let me summarize the key points that we have discussed. We are happy that we beat our comp guidance for the fourth quarter. But the more important takeaway from the quarter is that we have the opportunity to drive even stronger performance, especially by delivering stronger and more compelling value to trade down shoppers. Stepping back and looking at 2023 as a whole, we would have liked to have done more. But, overall, we are happy with our double-digit total sales growth, 80 net new stores, 4% comp growth, and 130 basis points of margin expansion. As we look ahead to 2024, there is plenty of uncertainty, and we see good reasons to be cautious. We are guiding 9% to 11% total sales growth, driven by 100 net new stores and 0% to 2% comp growth.

With this sales growth, we anticipate margin expansion of 10 basis points to 50 basis points. Lastly, we are very excited about the long-term prospects for our business. As we discussed in November, we think that, over the next five years, we can grow sales to $16 billion and drive our operating earnings to approximately $1.6 billion. With that, I would now like to turn the call over to your questions.

Operator: [Operator Instructions]. Your first question comes from the line of Matthew Boss from J.P. Morgan.

See also 15 Highest Quality Cheeses in America and 25 US Cities with the Most Breweries Per Capita.

Q&A Session

Matthew Boss: Congrats on a really nice quarter. Michael, maybe to start off, could you elaborate on the rationale behind your 2024 comp sales guidance and just how we should think about this guidance in relation to your long-term target, which calls for mid-single digit comps on average over the next five years?

Michael O’Sullivan: It’s a good question. Let me start by putting 2024 into context with the last three years. If I go back to 2021, our trend was extraordinarily strong, stronger than peers, fueled by the impact of pandemic era benefits on our poor, lower income shoppers. Then in 2022, we came back down to earth with a bump as those shoppers were crushed by lower benefits and by big increases in their cost of living. Now those issues continue to bleed into the first half of 2023. So here we are, what to expect in 2024? I’m going to whisper this, but we think it’s possible that 2024 could be the first full normal year since I joined Burlington in 2019. And that’s kind of how we approached guidance for 2020. In normal times, before the pandemic, we would likely have planned a low single-digit comp and then been ready to chase.

Of course, we don’t know if the trend in 2024 will be stronger or weaker. There is plenty of economic uncertainty, interest rates, inflation, gas prices, as well as political and geopolitical risks even. But by planning 0% to 2% comp, we’re positioning ourselves to react, I think, to an appropriate range of outcomes. If the trend is weaker than 2%, we can pull back and absorb it. If it’s stronger than 2%, then we know we could chase it. I should add, in Q4, as we’ve just reported, we grew 2% comp versus last year, so that gives us some confidence that our 2024 guidance is reasonable. The key part of your question was about our longer-term outlook, so let me try and reconcile our 2024 guidance to a longer range target of mid-single-digit comp growth.

In the years leading up to the pandemic, although we might have planned low-single-digit comp, the intent was always to chase above that. And measured over multiple years, our comp indeed averaged 3% to 4%. But we think that, as the after effects of the pandemic continue to recede, that’s the right baseline for our longer term model. We believe all the underlying consumer, competitive and structural factors that drove that growth still exist. But, in addition, we know that we’ve taken significant actions to improve our own execution of the off-price model. And as those actions gain traction, we expect to outperform that 3% to 4% baseline. So, if I pull all this together, for the 12 months ahead, for 2024, our plan is based on low-single-digit comp growth with the potential to chase.

In future years, I should add, it will likely take a similar approach, and I expect in some years, we’ll chase and beat that number. In other years, we won’t. But we believe over an extended period, a five-year period, we will be able to achieve average annual comp growth in the mid-single-digits.

Matthew Boss: Kristin, maybe to follow up on the 2024 margin guide, could you just walk us through some of the puts and takes in this year’s guidance and, maybe more specifically, could walk through the drivers of leverage on a flat to 2% comp for this year?

Kristin Wolfe: The margin drivers for 2024 are consistent with what we shared on the November call. That’s higher merchandise margin and savings and freight and in supply chain. And these three margin drives are not dependent on sales, which is why we believe we can increase our EBIT margin on a flat to 2% comp by 10 to 50 basis points. So let me go through each of these quickly. I’ll start with merchandise margin. We continue to make good progress here, as evidenced by the 110 basis point increase in merchandise margin in fiscal 2023. We continue to believe we can turn faster and drive lower markdown. And as in 2024, we’re entering with clearance levels down meaningfully versus last year, and our inventory levels and assortments are well-transitioned, are fresh, and with great values.

Secondly, on freight, freight continues to be a tailwind for us, particularly in the first half of 2024. We’re benefiting from lower contracted domestic rates and remain largely covered with our contracts on ocean freight rates. And finally, we’re making good progress on supply chain expenses, as evidenced by the 40 basis points of leverage we drove in the fourth quarter. I would say these are the three line items that are the primary drivers of leverage in 2024. There are two offsets that we’re planning for in 2024 that I want to mention. One is SG&A. We do expect some modest deleverage in SG&A due to continued investment in store payroll, which we really didn’t step up into the back half of 2023. In addition, we’d expect some deleverage on a 0% to 2% comp in SG&A, given that range.

And the second offset is in depreciation. We’re planning for some modest deleverage in depreciation, given the step-up in CapEx we’re planning for this year.

Operator: Your next question comes from the line of Ike Boruchow from Wells Fargo.

Ike Boruchow: Congrats on the quarter. Kristin, I guess first for you, you guys ended up with really nice margins in the fourth quarter and the full year. I guess how much of the upside do you consider to be one-time in any way? In other words, how much of this upside would stick on a go-forward P&L? And I have a follow-up for Michael.

Kristin Wolfe: We didn’t provide line item guidance for the fourth quarter, so let me provide some color. The first thing I would say is there were not any, what I would consider, one-time benefits. In fact, we faced a margin headwind given the higher accrued incentive comp expense versus the fourth quarter of 2022. So when I look at our Q4 margin, I feel good about the quality of the upside. Starting with gross margin, that increased 190 basis points. Freight came in largely as we had expected at 50 basis points lower, but the 140 basis point increase in merchandise margin was very healthy and better than we planned. As Michael highlighted in his prepared remarks, strong regular price selling did help drive lower markdowns than in turn a higher merchandise margin.