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Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Burlington Stores fourth-quarter fiscal 2017 earnings conference call. [Operator’s instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to David Glick.

David GlickVice President Investor Relations

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s 2017 fourth fiscal quarter operating results. Our presenters today are Tom Kingsbury, our chairman and chief executive officer, and Mark Katz, chief financial officer and principal. Before I turn the call over to Tom, 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 22, 2018. 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.

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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 2016 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.

Finally, it should also be noted that unless otherwise indicated, the non-GAAP results we discuss today are reported on a 13-week and 52-week basis respectively. Moreover, our adjusted net income and adjusted earnings per share for both the fourth quarter and full fiscal year of 2017 exclude any estimated impact from the Tax Cuts and Jobs Act, which was enacted in December 2017. Any estimated impact triggered by the enactment of the Tax Cuts and Jobs Act on our financial results, including the impact or rate reduction, changes in the deductibility of certain items, as well as the revaluation of deferred-tax liabilities are reflected in our GAAP net income and GAAP EPS results.Now, here is Tom.

Tom KingsburyChairman and Chief Executive Officer

Thank you, David. Good morning, everyone. We are extremely pleased to report strong fourth-quarter results, driven by a robust 5.9% comparable-store sales increase, which is on top of a strong 4.6% increase in fiscal 2016. We passed several significant milestones in fiscal 2017, as we surpassed $6 billion in total sales, expanded our adjusted EBIT margin, or operating margin by 90 basis points to 8.6%, and achieved record-low aged inventory and record-high comparable-store inventory-turnover levels.

We remained focused on elevating our off-price operating model and expect our initiatives to enable us to continue our favorable momentum in fiscal 2018. Regarding the fourth quarter, on a 13-week basis, operating margin expanded by 50 basis points, a solid result driven by increased merchandise margin and SG&A leverage, which, combined with our overall strong sales increase of 10%, drove a 22% increase in adjusted earnings per share, significantly ahead of our guidance.Turning to highlights of the fourth quarter, all on a 13-week basis, this was our 20th consecutive quarter of positive comp-sales growth. Our comp-sales growth was driven primarily by an increase in traffic, our 12th quarterly traffic increase over the last 14 quarters. Inventory aged 91 days and older at year-end was down 26%, while comparable-store inventory turnover increased 10% during the fourth quarter.

We delivered a 20-basis-point expanse in gross margin while leveraging SG&A by 40 basis points, which drove a 50-basis-point increase in both adjusted EBITDA margin and operating margin, and adjusted earnings per share grew 22%. Our new-store performance is once again a highlight of our quarterly results. Our new and non-comp stores continued to outperform, contributing an incremental $79 million in sales in the fourth quarter. I want to remind everyone that this incremental-sales contribution was negatively impacted by approximately $25 million in lost sales from stores that were closed in the fourth quarter due to storm damage, as we anticipated.

Excluding that impact, new and non-comp stores contributed an incremental $104 million over the last year during the fourth quarter. These results underscore our confidence in our site selection and underwriting process as we increase the number of net new store openings in our smaller store format.Moving to category highlights, our top-performing businesses were all areas of home; beauty; men’s sportswear; ladies’ better sportswear; and men’s, kids’, and athletic shoes. It is important to note that we made great strides in the fourth quarter further de-weatherizing our business as non-cold-weather categories comped ahead of the chain average. Regarding geographic performance, the Southeast and Southwest performed above the chain average, while the Midwest posted a solid comparable-store sales results but was below the chain average.

Moreover, 26 out of 27 regions had a flat or positive comparable-store sales trend.Moving to inventory management, we’re pleased once again with how our merchandising team managed our receipt flow in inventory, as we ended the quarter with comp-store inventories down 7% on top of a 9% decline last year. The fourth-quarter comp-store inventory turnover improved a strong 10% on top of last year’s 13% improvement. Our merchandising and planning teams once again drove down our aged inventory levels, as inventory aged 91 days and older declined 26% as we focused on maintaining a fresh and exciting assortment for our customers. Pack-and-hold as a percent of our total inventory was 25% versus 23% a year ago, as we continued to capitalize on a favorable buying environment.

We see no change in the vibrancy of the marketplace for our buying teams and we are thrilled for the great assortment and amazing values that we continue to deliver to our customers. I am also pleased with the value that we continue to bring our shareholders as we repurchase approximately 458,000 shares of common stock during the fourth quarter for $52 million. At the end of the fourth quarter, we had $217 million remaining on the $300 million share-repurchase program authorized on August 16, 2017.Now, let me update you on our long-term strategic priorities, which continue to be focusing on driving comparable-store sales growth; expanding, modernizing, and optimizing our store fleet; and increasing our operating margins. First, with regard to driving comparable-store sales growth, our underlying strategies remain enhancing our assortments as we continue to improve our execution of the off-price model with particular focus on underpenetrated businesses, building our marketing initiatives to ensure we are continuing to engage both new and existing customers and improving the store experience for our customers.

As our fourth-quarter results demonstrate, we’re making significant progress, increasing our underpenetrated growth categories, particularly home and beauty. These growth opportunities will allow us to continue to de-weather our business, building a long-term sustainable foundation for Burlington. Before we update our initiatives regarding these growth categories, I wanted to spend a few minutes on the progress we made in the fourth quarter, growing the gift category across home, men’s, women’s, and kids, a key de-weathering growth strategy that will continue into 2018 and beyond. We believe our strong sales increase in gifts in the fourth quarter helped drive traffic and conversion, and was a significant contributor to our sales increase in the fourth quarter.

We still see incremental opportunity in gifts as we refine our assortments and merchandising strategies. We view this opportunity as a key contributor not only to drive two of our key strategic growth businesses, home and beauty, but our assortments in gifts will continue to drive growth that spans the entire store across men’s, women’s, kids, and accessories.With regard to home, we made substantial progress in 2017 as we increased the home category to 13.9% of our annual sales versus 12.4% in 2016, an increase of 150 basis points. Home still represents our largest category growth opportunity, as there remains a substantial gap between our penetration of our peers who are north of 20%. Specifically, we have more opportunity to expand the presence of highly recognizable national brands at home and still see several key underdeveloped categories we have targeted for growth in 2018.

Our beauty business had another very strong quarter and we expect this category to be a key growth opportunity for many years. We’ll continue to broaden the number of brands and designer and prestige fragrances, expand existing categories and beauty accessories, and chase trends while elevating our assortments in cosmetics and skin care. In addition, beauty was a key element to our fourth-quarter gift strategy and helped drive strong sales increases in this key underdeveloped growth category. Ladies’ apparel remains a significant opportunity, as our penetration of 23.3% at the end of 2017 still remains well below our peer group at approximately 30%.

While our penetration in overall ladies’ apparel did drop 110 basis points in 2017 versus 2016, we continue to get strong growth in the largest component of ladies’ apparel, which is missy sportswear. Strength and better and active sportswear helped drive a slight increase in missy sportswear penetration in 2017 versus 2016, though this growth was offset by a drop in penetration in some of our more developed heritage ladies’ apparel categories, such as dresses, suits, juniors, and intimates. We are highly focused on stimulating growth in these other areas of ladies’ apparel and we feel we are well-positioned for improvement in 2018, as well as continued growth in missy sportswear and ladies’ apparel in total. We continue to add to the quality of our vendor base.

While we finished 2017 at a similar number of vendors as last year, we added approximately 1,200 new vendors to the mix as we continue to edit out less meaningful brands. We carry approximately 5,000 brands and expect that number to increase over time. In 2017, our branded-unit receipt penetration increased over 200 basis points while our better-and-best unit receipt penetration increased over 300 basis points versus the prior year. In terms of product availability, the buying environment remains very attractive and we would characterize product availability as very strong.On the marketing front, our holiday advertising strategy built on the success of our testimonial campaign and featured our own customers shopping and finding great values in our stores.

In particular, our focus on gifts across the store, was very effective and portrayed Burlington as a gift destination and helped drive our success in that category. We continue to get positive feedback from our customers regarding our campaign and our research indicates very strong scores on both ad recall and brand recognition. Our store experience continues to be an important initiative for us. We’re on track to get the significant majority of our stores to our brand standard over the next five years.

We made significant progress in 2017 modernizing our store fleet, remodeling 34 stores in addition to opening 48 gross new stores, adding 82 stores to our brand standard. Our customers have responded very positively to the improvements we’ve made to our store base, including our increasingly smaller store footprint. This has manifested itself in our customer service scores, which have increased significantly since we began tracking in 2008. We are committed to investing capital to continually improve our store portfolio and plan to remodel another 34 stores in 2018.The second growth initiative continues to be expanding our store fleet.

We opened 37 net new stores in 2017, averaging 45,000 square feet. We are a national retailer that operates in 45 states plus Puerto Rico, yet we only operated 629 stores at year-end. Most mature, national, off-mall retailers operate with well over 1,000 stores, far more than our current footprint. Given the strong performance we’ve experienced in our new stores and the real-estate opportunities that continue to be presented to us, we expect to open 35 to 40 net new stores in 2018, which includes 16 gross new stores, averaging 43,000 square feet, along with 20 to 25 store relocations and closings.

While the number of net new stores is similar to 2017, we’re increasing the number of gross new store openings by 12 stores. This acceleration will translate to another 94 stores added to our brand standard, including 60 new stores and 34 remodels. This means that in just two years, 2017 and 2018 combined, we will have added 176 stores to our brand standard. Looking out five years, at the current rate of new store openings and remodels, we would expect a significant majority of our stores to be in our brand standard.

Moreover, we remain confident in our ability to expand to 1,000 stores over the long term.We also remain focused on our third growth priority, continuing to deliver operating-margin expansion. Over the last five years, we expanded our operating margins by 370 basis points, an average of approximately 75 basis points per year. While we are very pleased with this progress, there is still significant opportunity versus our peer group. Going forward, we will continue to execute the same game plan that we have deployed over the last five years, driving total sales increases to leverage fixed costs, optimizing markdowns, remaining disciplined with inventory management, and maintaining an active profit-improvement culture across all SG&A areas.Before I turn the call over to Mark, I want to take a moment to discuss our approach to 2018 planning.

As with prior years, we work hard to balance CAPEX and incremental OPEX investments in our business with continuing to deliver expansion in operating margin. As you know, our business model generates substantial cash flow. Accordingly, we are pleased to announce the following CAPEX and incremental OPEX and investment in 2018 to drive sales growth, improve our infrastructure, and give back to our associates. No.

1, our company’s highest annual gross CAPEX spend of over $300 million, which will include 60 new stores, 34 remodels, another $34 million of spending in our supply chain, and $11.5 million to complete the renovations of our corporate headquarters. No. 2, incremental hourly wages up $13 million on top of three prior years of similar increases. No.

3, 10% increase in our merchandising team headcount. And No. 4, an increase in employer contributions to our medical costs to keep employee costs flat for the second straight year. Overall, we believe we are taking a balanced approach with investments in the business while simultaneously expanding operating margins.Now, I’d like to turn the call over to Mark to review our financial performance and outlook in more details.

Mark?

Mark KatzChief Financial Officer

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the fourth quarter by recording our 20th consecutive quarter of positive comparable-store sales. In addition, we achieved strong contribution from new stores and expansion in adjusted EBIT margin, which combined, delivered a 22% increase in adjusted earnings per share on a 13-week basis.

Next, I will turn to a review of the income statement. Please note that the following discussion of fourth-quarter financial results will be on a 13-week non-GAAP basis unless otherwise indicated. For the purposes of this discussion, we have excluded from adjusted net income and adjusted earnings per share any estimated impact on our fourth-quarter results triggered by 2017 tax reform. In the fourth quarter, total sales increased 10% and comparable-store sales increased 5.9% on top of last year’s strong 4.6% increase.

In addition, the 53rd week added $82 million in total sales to this result, bringing our Q4 total sales increase on a 14-week basis to 14.9%. In the quarter, our comparable-store sales performance was driven primarily by an increase in traffic, while conversion, average unit retail, and units per transaction were all up versus last year. It is worth noting that as anticipated, the eight storm-damaged stores that were closed for the entire quarter reduced new and non-comp sales by approximately $25 million. As of the end of February, these eight stores were still closed.

As of now, we anticipate one of these stores reopening by the end of Q1, with the balance by the end of Q3. Gross margin rate was 42%, an increase of 20 basis points versus last year, driven by higher IMU and a slightly lower markdown rate, which more than offset a higher shortage rate. We took physical inventories in approximately 350 stores in January and our shortage results came in as we had guided, resulting in a 20-basis-point negative impact versus last year. Remember that inventory shortage represented 65 basis points of gross margin, good news in last year’s fourth quarter.

Therefore, excluding the impact of shortage, gross margin increased 40 basis points in the fourth quarter of 2017 versus a 15-basis-point increase in the fourth quarter of 2016. Product-sourcing costs, which were included in SG&A and include the cost of processing goods through our supply chain and buying costs, were flat to last year as a percentage of net sales. We are once again very pleased with the continued productivity improvements in our supply chain and we will continue to focus on additional productivity gains in 2018. SG&A exclusive of product-sourcing costs was 22.8%, 40 basis points lower than last year as a percentage of sales.

These results were driven by leverage in occupancy, business insurance, and marketing, which more than offset de-leverage in incentive-compensation and stock-compensation expense. Other income and other revenue was $9 million, 10 basis points lower as a percentage of sales versus last year. Adjusted EBITDA increased 14% or $35 million, to $290 million. Sales growth, gross margin improvement, and SG&A leverage led to a 50-basis-point expansion in rate for the quarter.

Depreciation and amortization expense exclusive of net favorable lease amortization increased $4 million, to $45 million, and interest expense increased $1 million, to $14 million. The effective tax rate prior to the estimated impact of 2017 tax reform and the change in accounting for share-based compensation was 36.6% for the fourth quarter. The change in accounting for share-based compensation reduced the rate for the quarter by 180 basis points. The changes in rate and deductions resulting from 2017 tax reform reduced the fourth-quarter rate by an additional 100 basis points.

Finally, 2017 tax reform triggered a one-time estimated revaluation of the company’s deferred taxes, which created a $93 million, or 41.8%, benefit that was recognized during the fourth quarter. All of these changes resulted in a GAAP tax benefit of 8% and an adjusted tax benefit of 5.9%. Combined, this resulted in adjusted net income of $151 million, a 19% increase versus last year. As a reminder, this adjusted net income result includes the change in accounting for share-based compensation but excludes the benefits of 2017 tax reform.

We continue to return value to our shareholders through our share-repurchase program. During the quarter we purchased approximately 458,000 shares of stock for $52 million. At the end of the fourth quarter, we had $217 million remaining on our $300 million share-repurchase authorization that was approved this past August. All of this resulted in earnings per share on a 14-week basis of $3.47 versus $1.77 last year.

Note that this 14-week result includes $0.04 in earnings per share for the 53rd week. Adjusted earnings per share on a 13-week basis excluding the estimated impact of 2017 tax reform was $2.17 versus $1.78 last year. The $2.17-per-share result represents the $0.15 beat versus our top-end guidance….