Kristin Wolfe: I’ll start by saying we’re pleased with our margin performance this quarter. What really drove our year-over-year margin increase was on the gross margin line that increased 280 basis points more than offsetting any SG&A and product sourcing cost deleverage we incurred that we have largely expected in the quarter. The gross margin leverage was driven by a 150 basis point increase in merch margin and then a 130 basis point decrease in freight expense. And as Michael noted earlier, the buying environment is very favorable that really helped our markup, and that was the biggest driver in terms of our merch margin. In addition, we benefited from lower markdowns as well as the lower shortage accrual, as I described in the answer to your previous question.
The freight decline was driven by both lower ocean freight costs and lower domestic freight costs, including favorable fuel rates. Going forward, we expect freight savings to primarily come from the domestic freight line as we’ve largely anniversaried the decline in ocean freight at this point. The balance of the P&L, including product sourcing costs and adjusted SG&A was better than we expected as our operating teams manage expenses very tightly during the quarter.
John Kernan: I guess a follow-up for you, Kristin. Apart from the adjustments to the comp guidance in the second half, are there any other factors affecting the EBIT margin and the earnings guidance for the full year for fiscal ’23? And just on that note, it doesn’t look like the Q2 earnings beat flowed through to the full year guidance. Just helpful — it’d be helpful to understand your thinking here.
Kristin Wolfe: Let me talk you through the puts and takes. As Michael described, we believe it’s prudent to plan our back half sales at the plus 2% to plus 4% four year comp stack, this is aligned with our year-to-date trend. And then we know, of course, if the trend turns out to be stronger, we can effectively chase it. But this updated sales outlook results in a reduction in our fall sales and earnings plan. Full year total sales growth moderates from 12% to 14% to 11% to 12% and overall full year comp range narrows to 3% to 4% from 3% to 5%. The reason the low end full year comp of 3% is maintained versus our original guide, that’s really a function of rounding. The reduction in our second half sales and earnings plan offset the earnings beat we saw in Q2.
So as a result, after excluding the impact of the Bed Bath & Beyond lease acquisition costs as a result, we are essentially maintaining the low end of our original comp sales and EBIT margin plan and then tightening the range of our adjusted EPS guidance.
Operator: Alex Straton with Morgan Stanley, your line is open.
Alex Straton: I just quickly wanted to dig in on the brief comment you made on student loans. Can you just speak to how you’re thinking about the impact of student loan repayments on your consumer going forward? And then I have a follow-up.
Michael O’Sullivan: Frankly, it’s difficult to know what the net impact of student loan repayments will be. The way we’ve been thinking about it is that there’s a direct impact and indirect impact on us and frankly, they could offset each other. And what I mean by that is the direct impact is that obviously there is a subset of our customers who have student loans. And when the student loan repayments come back up in October, assuming that they will, then those customers will be affected. They’ll have less money in their pockets and that could impact their discretionary spending, including their spending at Burlington and net-net, that’s not a good thing. The indirect impact is that there’s a much broader population of shoppers who maybe don’t shop at Burlington today will also be affected by student loan repayments and maybe those shoppers will become more value oriented.
In my earlier remarks, I talked about the potential trade down shoppers in our stores. It’s possible that the end of the moratorium on student loan repayments could trigger more trade down activity and conversely, that would be a good thing. So the answer is we don’t know, it’s very difficult to predict what the overall impact will be. That said, I feel like we’ve planned our business and we’re managing our business, so I think we’re in a pretty good position to react to no matter what happens.
Alex Straton: Maybe Kristin, I think you mentioned freight as a benefit to the quarter briefly in the prior question. Can we just revisit that, maybe where does freight stand for you now, how we should think about that factor heading into the back half?
Kristin Wolfe: Yes, as we called out, we made good progress on freight as external freight rates have really moderated. By the end of this year, we would expect to recover about half of the freight delevers we’ve seen since 2019. Our teams have worked hard to renegotiate our freight contracts and take advantage of a softening freight market, both on ocean and domestic freight and our outlook does factor in more favorable domestic contracts that we’ve made. Of course, diesel fuel prices could move that number around, so we’ll see how that shakes out. Additionally, we are continuing to optimize our inbound and outbound transportation processes and are actively focused on several initiatives that drive transportation efficiency. Well, I’ll say, we don’t think we’ll get all the way back to 2019 freight as a percent of sales but there should be more opportunity to close that gap further beyond 2023.
Operator: Chuck Grom with Gordon Haskett, your line is open.
Chuck Grom: I was wonder if you guys could speak to real estate opportunities beyond 2023? I think you’re targeting 70 to 80 stores next year. And maybe a little bit of color on how much the enterprise can handle over the next couple of years, ’24 and into ’25. And then on near term follow-up would be just category color in the second quarter. I was wondering if you could talk about all the areas and particularly touch on the home business.
Michael O’Sullivan: Yes, as I said in the prepared remarks, we’re very pleased with the format that Bed Bath & Beyond [leases] that we’ve been able to acquire over the last few months. As you know over the last few years, we’ve been trying to get up to 100 net new stores a year. The 62 leases we’ve acquired from Bed Bath & Beyond, together with our existing pipeline of potential new store locations. So it gives us some — quite a lot of confidence that we’re going to be able to achieve that goal next year. Now as you’d expect, as you ramp up new store openings that puts pressure on things like our — well, our operating teams, you need to make sure that you have a bench of store managers and store associates. It also puts pressure on our delivery and distribution teams, you need to make sure that you can obviously deliver merchandise to those new stores.
