Burlington Stores, Inc. (NYSE:BURL) Q3 2022 Earnings Call Transcript

Burlington Stores, Inc. (NYSE:BURL) Q3 2022 Earnings Call Transcript November 22, 2022

Burlington Stores, Inc. misses on earnings expectations. Reported EPS is $0.43 EPS, expectations were $0.52.

Operator: Good morning and welcome to Burlington Stores Third Quarter 2022 Earnings Call and Webcast. All participants are in a listen-only mode. After the speaker’s presentation we will conduct a question-and-answer session. . As a reminder this conference call is being recorded. I’d now like to turn the call over to David Glick, Group Senior Vice President, Treasurer and Investor Relations. Please go ahead Mr. Glick.

David Glick: Thank you, operator and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2022 third quarter operating results. 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 expressed permission. A replay of the call will be available until November 29, 2022. 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 2021 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.

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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 third quarter results; secondly, I will review our outlook for the fourth quarter; thirdly, I will talk about our 2023 outlook; and finally, I’ll offer some comments on the longer term. After that, I will hand over to Kristin to walk through the financial details. Then we will be happy to respond to any questions. Okay, let’s talk about our results. Comp store sales for the third quarter decreased 17%. This was on top of 16% comparable store sales growth last year. As we have done on previous calls, today, when we are describing our comp trend, we will use a three-year geometric stack.

This metric is defined in more detail in today’s press release. Our three-year geometric stack was minus 3% for the third quarter. This was within our guidance range but still a disappointing result. There were external headwinds that contributed to this comp performance. These headwinds are real and have affected our business all year but today, I do not plan to spend much time talking about these. As we said on our August call, despite these headwinds, as an off-price retailer, we should be able to drive stronger performance than this. If you look at the results reported this past week, clearly, we are an outlier within off-price. Again, this mirrors my comments from August, so I would like to spend some time talking about the actions that we have taken since then.

In off-price, the most important driver of sales is the value that we put in front of the customer. In August, I explained that we were aggressively reviewing the value and the mix in our assortment. There were numerous actions that came out of that review. Let me share some details on these. Number one, we had originally planned to raise retail prices and increased merchant margin in the back half of the year. In Q3, we pulled back on this. We reviewed our on order and we adjusted retail to sharpen the values on fresh receipts that flowed to stores in September and October. Number two, we also went through our existing inventory and went after slower-moving merchandise with more aggressive markdowns. By end of September, we have rolled these markdowns through all areas of the store, and we took further aggressive markdowns in October.

Number three, we raised liquidity in faster-moving businesses and focused this open to buy on great opportunistic deals. These buys began to show up in stores in early October. Number four, we used the liquidity that I just mentioned to drive up the mix of recognizable brands in our assortment. By mid-October, we achieved a much higher mix of these key brands in front of the customer compared to last year. Number five, in addition, we focused very heavily on expanding our mix of opening price points across our businesses. We know that we have many need-a-deal customers for whom these lower price points are very important. And number six, we accelerated releases of great values from reserve inventory. We pulled these releases forward from Q4 to Q3 and grew down reserve inventory from 52% of total inventory at the end of the second quarter to 31% of total inventory at the end of the third quarter.

During this period, we tightened and controlled expenses, but we reinvested these savings in the actions I have just described. Since early September, we have done a lot to sharpen our values, but as I acknowledged back in August, we should have done all of this sooner. In 2022, the consumers’ frame of reference for value shifted significantly versus last year. We should have responded more aggressively and more rapidly. With that said, let me talk now about the results we have seen from the actions we have taken. The main headline is that since mid-October, we have seen a pickup in our sales trend that has continued into November month to date. This is a short period of time, and of course, there are many important shopping days ahead of us.

But we believe that this improvement is attributable to the actions we have taken, and this pickup gives us some optimism going into Q4. In fact, let me move on to talk about Q4 guidance. Although we have made significant adjustments to sharpen our values and we have seen a pickup in our sales trends, we are maintaining the guidance for Q4 that we previewed on our August earnings call. We are mindful of the fact and 2022 has demonstrated that we are more exposed to some of the prevailing macro headwinds than many other retailers. These headwinds have not gone away. For these reasons, we are staying with the guidance that we issued in August. As a reminder, this guidance is based on a three-year geometric stack of minus 4% to minus 1%. We hope to do better, but we think it is prudent to maintain this guidance.

Now I would like to talk about how we are thinking about 2023 and our longer-term outlook. We previewed this on our call in August. As a reminder, coming into 2022, we were concerned about the headwinds and risks across retail, and it turns out that we were right. In contrast, we are optimistic about the outlook for 2023. This optimism is based on five factors. Firstly, we expect that the economy will continue to slow down. And as it does, we anticipate that there will be an even stronger consumer focus on value. Secondly, throughout 2022, there has been a huge imbalance between supply and demand with too much inventory across retail. This has driven much higher promotional activity, especially in mass channels. Put simply, in 2023, we expect a lower level of promotional activity, and this should help to recover our sales trend.

Thirdly, there is a very strong availability of great off-price merchandise. This has also been reported by our peers. By year-end, we think it is likely that we will have rebuilt our reserve inventory with great opportunistic buys. We also expect that the availability of great in-season merchandise will remain strong well into 2023. Fourthly, we have made mistakes this year that has hurt our sales trend. I realize we have to demonstrate this, but we do not intend to repeat these mistakes in 2023. Finally, we believe that the expense environment in 2023 is likely to improve very significantly versus this year, especially for contracted transportation rates. Those are the reasons why we were optimistic about 2023. In terms of risks, the main call out is a continuing concern about the lower-income customer.

As we have discussed before, we have more exposure to this customer than most other retailers. In 2022, the lower-income shopper has borne the brunt of the impact of inflation. As we look forward to 2023, we do not expect that this headwind will disappear, but we think that it should moderate if the level of inflation continues to fall. To sum up on 2023. We have to get through Q4, and we need to complete our budget process before we can offer guidance. But given what we know at this point, we are optimistic about the potential to drive some recovery in sales and margin next year. I’m going to finish up with some comments about the outlook beyond 2023. We remain very excited about the ability of off-price to continue to take market share over time.

We also remain confident in our ability to improve our execution of the off-price model and thereby, drive higher sales and margins. I realize that there are investors listening to this call who are thinking, well, that all sounds great, but given your results this year, why should we be confident in this longer-term outlook? Let me address that question. I’ll start by saying that we do not believe that any of the issues we have faced this year have been what you might call, structural. For example, there’s been no issue with getting access to great supply and great brands. In fact, I can’t recall a time when off-price supply has been better. Rather than a structural root cause, I think there have been two key drivers about poor performance this year.

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% 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.

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. I would now like to turn the call over to Kristin to provide more details on our Q3 results and our rest of year guidance.

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Kristin Wolfe: Thanks, Michael and good morning, everyone. Let me start with some additional financial details for the third quarter. Total sales in the quarter were down 11%, while comp sales were down 17%. As Michael mentioned, our three-year geometric comp stack was a negative 3%. Comp sales and adjusted EPS came within our guidance range. For Q3, our adjusted EPS was $0.43, which was within our guidance range of $0.36 to $0.66. The gross margin rate was 41.2%, a decrease of 20 basis points versus 2021’s third quarter rate of 41.4%. This was driven by a 90 basis point decline in merchandise margin, which was partially offset by a 70 basis point decrease in freight expense. The decline in merchandise margin was driven by the more aggressive markdowns that Michael referenced in order to sharpen our values.

Product sourcing costs were $178 million compared to $173 million in the third quarter of 2021, increasing 120 basis points as a percentage of sales. This deleverage was driven by buying and supply chain costs. Buying costs deleveraged on the 17% comp decline, while supply chain costs were higher than expected, primarily due to a pull forward of Q4 receipts and the higher mix of true closeout merchandise, which is more labor-intensive to process. Adjusted SG&A was $544 million versus $582 million in 2021, increasing 140 basis points as a percentage of sales. This was driven by the overall deleverage on the sales comp decline. Adjusted EBIT margin for the quarter was 2.7%, 340 basis points lower than the third quarter of 2021. Given where our comp store sales actualized within our guidance range, this margin decline is what we would have expected given our Q3 EBIT margin guidance for a decline of 260 to 360 basis points.

Relative to our Q3 2019 adjusted EBIT margin, 2022 third quarter adjusted EBIT margin declined by 520 basis points. Of this, 360 basis points is driven by supply chain and freight, with the balance driven by the deleverage on the lower comp sales. All of this resulted in diluted earnings per share of $0.26 versus $0.20 in Q3 of 2021. As a reminder, the prior year’s amount included a $1.22 per share impact from a loss on debt extinguishment charges. Adjusted diluted earnings per share were $0.43 versus $1.36 in the third quarter of 2021. At the end of the quarter, our in-store inventories were 8% above 2021 on a comp store basis, and our reserve inventory was 31% of our total inventory versus 30% last year. As Michael discussed, we aggressively flowed reserve inventory to stores during the month of October in order to be properly set with great values for the critical holiday selling season.

In the third quarter, we opened 16 net new stores, bringing our store count at the end of the quarter to 893 stores. This included 28 new store openings, 10 relocations, and two closings. In the fourth quarter, we plan to open an additional 39 new stores and to relocate five stores. As a result, we should end the year with 927 stores, this translates to 87 net new store openings this year. Now let me turn to our outlook for Q4. As Michael mentioned, we are maintaining our outlook for the fourth quarter, which is based on a negative 4% to negative 1% three-year geometric comp stack. This translates to a one-year comp decline of 9% to 6%. This range should lead to a Q4 adjusted EBIT margin of flat to up 70 basis points versus 2021 and to fourth quarter adjusted EPS of $2.45 and to $2.75.

For the full year fiscal 2022, this implies a one-year comp range of negative 15% to negative 14%. Based on this range, our adjusted EBIT margin is expected to decline by 400 to 370 basis points. Given our actual third quarter results and Q4 guidance, this translates to an updated adjusted EPS outlook for fiscal 2022 of $3.77 to $4.07. I will now turn the call back to Michael.

Michael O’Sullivan: Thanks, Kristin. Let me summarize the key points that we have discussed. In August, we took a step back to challenge and reset the values and mix in our assortment. We made significant changes. We believe that these drove the improvement in our trend towards the end of the quarter. Despite these changes and the improvement in the trend, we are cautious. 2022 has shown that we are more exposed to the prevailing macro headwinds than many other retailers. So despite the recent improvement, we are maintaining our previously issued guidance for Q4. Looking ahead to 2023, there are several reasons why we are optimistic about the outlook. We need to get through Q4 before we offer guidance, but we believe we should be able to drive some recovery in sales and margin in 2023.

Lastly, as we look further out, we remain confident in the prospects for the off-price model and in our ability to drive improved execution of that model over time. With that, I would now like to turn the call over to your questions.

Q&A Session

Operator: . Our first question comes from Matthew Boss from J.P. Morgan. Please go ahead. Your line is open.

Matthew Boss: Great, thanks. So Michael, maybe to dig further in on the long-term, so clearly, 2022 has not gone according to plan, and there’s been a pretty major setback in terms of financial performance. So how best to think about your ability to get back on track and the potential and timing to achieve some of the longer-term financial targets that you laid out last year?

Michael O’Sullivan: Well, good morning Matt. Thanks for the question. I think that the way that you phrased it is exactly right. 2022 has been a major setback in terms of hitting our longer-term financial targets. But let me explain why I believe that we can get back on track and what we need to do to get there. Firstly, the reason why I believe we can get back on track is because nothing fundamental or structural has changed. That’s kind of what I was getting at in the prepared remarks. There really been two key drivers of our performance this year. Firstly, macro headwinds, which have been significant, but I don’t see those as being permanent. They’re just part of the economic cycle. And secondly, our own mistakes, driven by poor execution.

So the long-term opportunity, in my view, has not changed but let me talk about what we need to do to get back on track as we go after that opportunity. The number one, the number one priority is sales. We have to drive sales. The only way to do that in our business is to continue to improve our ability to deliver value to the customer. I realize 2022 has not been a good advisement for our ability to do that, but we’ll learn from the mistakes that we’ve made this year. The other aspect of getting back on track to our longer-term financial targets is to drive earnings as well as sales. If you look at the deleverage in our operating margin this year versus 2019, it comes from two sources; expense deleverage on lower sales and higher freight and supply chain costs.

As I just said, our number one priority as we get into 2023 and beyond is to drive sales. If we can do that, then we can drive leverage. But we’re also very focused on driving down freight and supply chain expenses as rates and as external conditions start to normalize. It’s too early to put a more specific time frame on it, but I believe that we can get back to our 2019 margins within the next few years. In addition, as we’ve talked about before, there are longer-term initiatives that should help us to deliver an even stronger margin over time for example, the rollout of our smaller, more profitable new store prototype. I guess, let me finish up by saying, we’ve deliberately not provided a formal update to the longer-term financial model that we shared last year.

I’m still very confident in our ability to achieve those longer-term financial targets but frankly, for an update to that model to have any credibility, we have to get through 2023 first. We really have to demonstrate improved performance and execution.

Matthew Boss: Great, and then maybe a follow-up on new store openings. So it looks like you’re on track to open 87 net new stores this year. That’s a bit shy of your original target of 90. Could you just provide any additional color on that and should we interpret this as a slowdown?