Burlington Stores Inc (BURL) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory third-quarter sales and (inaudible) conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, April 13, 2005. I would now like to turn the conference over to Robert LaPenta Jr., Vice President, Chief Accounting Officer and Treasurer. Please go ahead, sir.

Thank you. Good morning. Statements made in the conference that are forward-looking involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following. Deviation of actual from projected sales and earnings; the Company's ability to maintain selling margins; general economic conditions; changes in projected store openings; weather patterns; the Company's ability to control costs and expenses, and other factors that may be described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized.

As previously disclosed in our Form 8-K dated April 4, 2005, the Company concluded, like many other retailers, that the previously issued financial statements for fiscal years May 29, 2004; May 31, 2003 and June 1, 2002, and for the two first quarters of this fiscal year 2005, should be restated as a result of a recent letter issued by the Securities and Exchange Commission regarding the application of Generally Accepted Accounting Principles for lease accounting. The restatement related to our computation of depreciation and amortization, straight line rent expense and the related deferred rent liability. Also, the Company concluded to reclassify its other income items including investment income, gains or losses on disposition of fixed assets and other miscellaneous income items under the caption, "Other Income Net," previously reported under the caption, "Other Revenue."

I will first cover results of the third quarter ended February 26, 2005. All financial information regarding the three and nine-month periods ended February 28, 2004 has been modified to reflect the restatement of the financial statements. Following these comments, we will be available to answer your questions.

First, share results. During the three months ended February 26, 2005, basic and diluted net income per share was $1.49 per share compared with basic and diluted net income of $0.81 per share a year ago. Net income for the three months ended February 26, 2005 included income from discontinued operations of 500,000 or $0.01 per share compared with net loss from discontinued operations of 1.6 million or $0.03 a share a year ago.

Net sales. During the third quarter ended February 26, 2005, net sales were 969.6 million compared with sales of 851 million for the prior year's third quarter. Sales increased 13.9% for the quarter. Comparative store sales within the quarter increased 8.4%. Comparative store sales increased 10.1% in December, 4.9% in January and 7.9% in February.

Other revenue. Other revenue now consists of rental income received from leased apartments, subleased rental income, layaway and alteration service charges and other miscellaneous items. During the current quarter, other revenue increased .8 million from last year's third quarter. This increase was primarily due to a $0.5 million increase in rental income.

Cost of sales. During the quarter, cost of sales was 63.1% of sales compared with 64.5% for the same period last year. This increase is primarily attributable to -- or I'm sorry, this decrease is primarily attributable to decreases in markdowns, higher initial margins, decreases in the Company's provision for inventory shrinkage, and decreases in sales discounts.

Selling and administrative expenses. During the quarter, selling and administrative expenses increased 11.4 million to 237.2 million. The increase in selling and administrative expenses in the quarter reflects the additional store expenses of six Burlington Coat Factory stores, three MJM Designer Shoe stores, two Cohoes Fashion stores and one Super Baby Depot store that were not open at the end of last year. And also the opening of the Edgewater Park distribution facility which added 2.7 million to selling and administrative expenses in this quarter. As a percentage of net sales, selling and administrative expenses were 24.5% of sales compared with 26.5% for the same period last year. This percentage decrease reflects decreases as a percent of sales in payroll, occupancy charges and advertising.

Depreciation expense. During the third quarter, depreciation expenses were 21.7 million compared with last year's third fiscal quarter of 21.5 million. This increase in depreciation is due to increased levels of fixed assets related to stores opened, relocated and remodeled in fiscal year 2004 and the first part of fiscal 2005.

Interest expense. During the third quarter, interest expense increased .2 million to 1.8 million compared with last year's third quarter of 1.6 million.

Other income net. This is now the new category that we have added to the expense category, and other income net consists of investment income, gains and losses on disposition of assets, and other non-recurring non-operating items. Other income net was 4.4 million at February 26, 2005 compared with 1.4 million for the comparative period a year ago. In the current third quarter, the Company realized a net gain on the disposition of property and equipment of 1.6 million compared with last year's third quarter which had a net loss on disposition of assets of 1.5 million.

Income taxes. The income tax rate was 39.2% compared to 38.5% during the prior year.

Balance sheet review. The following stated values are going to be in rounded million dollars.

Inventory. Merchandise inventories at February 26, 2005 were 727 million, a 19.5% increase over last year's level of 608 million. Same-store inventories were up 10.3%, including coat inventories which were up 18.1%.

Company book value. The Company's book value at the end of the third quarter was 910.4 million or $20.38 per share compared with this time last year of 845.4 million or $18.96 per share. During the nine-month period ended February 26, 2005, the Company opened six Burlington Coat Factory stores, three freestanding MJM Designer Shoe stores and one Super Baby Depot store. An additional four Burlington Coat factory stores were relocated during the current fiscal year, the locations within the same trading market.

Two store locations previously operated as Decelle stores were converted to Cohoes Fashion stores. The Company expects to open an additional three Burlington Coat Factory stores, one MJM Designer Shoe store, and one Super Baby Depot store during the remainder of the current fiscal year. In addition, two more locations are expected to be relocated to new locations within the same trading market.

We will now be available to answer your questions. Monroe Milstein, Chairman of the Board, President and Chief Executive Officer; Andrew Milstein, Executive Vice President and Executive Merchandise Manager; Stephen Milstein, Executive Vice President and General Merchandise Manager, and myself are available to answer questions. Nelson?

(OPERATOR INSTRUCTIONS). Blaine Marter (ph), Lobe Partners (ph).

Nice quarter. The inventory growth, can you just maybe go into a little bit why it grew so much faster than sales? Is this all for the new stores?

(multiple speakers) how much faster. I think the sales were up 8%, inventory was up 10%.

Well, it was a combination of a couple of things. One, Easter came two weeks earlier this year. So you are seeing a buildup in youth inventory, men's inventory, sportswear inventory, accessory and shoes because of the Easter season coming two weeks earlier. And you had a much stronger month of March. So you had to bring inventory in earlier for that. That is part of the reason.

I see.

Also, coat inventory are up. We took advantage of opportunities to be able to acquire more coat inventory. We have done this in the past when there is an opportunity to do this, and this is really preparing for next year's fall inventories as well.

I don't think inventory is up a lot more than sales. If you look at the comp store inventories, I think it was up only 10%, right? And the sales were up 8. And we had the early Easter, and we also had the colder --

The colder February.

The colder February. But I think we are (inaudible) where we had the extra inventory because it has gotten warmer, and we should be -- hopefully we should be able to capitalize on that.

We -- extremely -- the early last year Easter was at the end of March. A lot of the receipts at March 1st. This year, as Bob said, because of Easter falling the second week in April, a tremendous amount of goods were pushed from March deliveries to February deliveries and it changed the quarter. It looks bad on paper, but it works as far as bringing in sales. We've got to run our business not in some quarter to quarter, but (multiple speakers) look at the overall sales.

Right. Right. Just thought I would ask it. Now again I ask this I guess every quarter, you paid a special dividend which I guess went out this reporting period. That is like $25 million. But now you have like 20% of your market cap in cash. And I'm just wondering your thoughts there -- how you plan to deploy that?

Well, as before, exploring all alternatives, and one of them is to continue to give (inaudible) as special cash dividends. And if an opportunity for growth of payers, we will capitalize on it. We're in a very good position. We don't consider that a problem to having extra cash.

Okay. A lot of your peers are going private in those kind of transactions. Did you ever consider that?

We have looked at -- we haven't made any decision on that, except negative up to now.

Okay. Thanks. Thanks a lot.

Jody Cukerman (ph), Lehman Brothers.

Congratulations on a great quarter. I'm calling on behalf of Jeff Black. We had a couple of questions for you. Firstly, we were hoping you might be able to remind us of what you were facing in terms of comparisons for last year, especially on the gross margin side as we head into the fourth quarter of the year?

Last year -- I don't have the actual numbers, but we were up against Christmas, which was up 1/10 of 1%. January was up mid single, and February I think was up high single digits last year. So we were up against pretty good comps, and we still really had a lot of success against the numbers.

And what about heading into the fourth -- or your fourth quarter, the final quarter of the year? How about comparisons going forward?

Fourth quarter we were up against low single digit increases from a year ago. Again, with the shift into Easter, you are going to see much stronger sales comparison in the month of March, and you will give some of that back in April.

Okay. Also, looking out longer-term, what do you think is possible on the expense line? We've noticed that expenses have declined in the last four quarters due in part to better same-store sales, so we just wanted to ask what do you think is possible for '06 and beyond?

Anything is possible. We don't like to predict because we really find it inaccurate for us to make predictions. (multiple speakers) the fourth quarter is particularly a tough quarter to predict. There are certain expenses (technical difficulty) throughout the year that are based on the year before performance. One of those would be shrinkage. So that also might hard to predict what the earnings will be for the fourth quarter.

Okay. Will you repeat -- (multiple speakers)

-- initiatives on the expense side that we want to continue. We have started very aggressively trying to manage expenses from the payroll side and from various other sides, and some of the initiatives we are hopeful will continue. But as Monroe says, you really cannot predict it. And as a percent of sales, a lot of it depends on what type of comp store sales growth you get. You know that really contributed significantly to the drop as a percentage because more than half the expenses are fixed in nature. So when those comp store sales grow like they did this quarter as percent of sales, that number is going to come down.

Right. And lastly, I know you said the increase in comp store sales was due in part to colder temperatures through fall and winter, can you just talk about how you benefited from that because a lot of our other retailers obviously that was a hindrance to them. Could you just expand upon that a little bit?

The big thing (technical difficulty)-- that these things are not realize is the difference is we are the dress-up store, and we get affected greatly by Easter sales. We are number one of all all price people in men's suits, we are number one in the country in boy suits, and dress-up garments for --

Girl dresses and also ladies' suits too we are very strong.

So we are unique. Easter still is a very important sales period for us. One of the best of the year.

I think we also because you know on an annual basis 60 to 70% of our total volume was outerwear, but obviously in the winter it is a bigger percentage. It helps bring traffic into our store when it is cold, and there is a lot of traffic, a lot of outerwear sales. Other departments benefit from that foot traffic that comes into the store.

It was a very good Christmas holiday season. I think the economic climate just seemed to get better for us. I cannot really speak to our competition. But we saw it in our traffic and in our numbers it just seemed to be a much better climate this fall and winter.

Okay and do you have any info on traffic numbers?

No, we don't. I can't -- I don't have anything that I can share with you. (multiple speakers)

We have nothing that is scientific. But unscientifically in personal observation and interviews, I find we're getting a large increase from stores such as Bergdorf Goodman, Nordstrom's, Lord & Taylor. We are getting more and more better customers who are there to see the depth of better goods that we have. We're probably the largest seller of designer brand names in the country.

Okay. All right. Thank you very much.

(OPERATOR INSTRUCTIONS). Jeremy Roth (ph), Jefferies Asset Management.

Great quarter. I was just wondering if you could talk a little bit about your outlook for the fourth quarter, maybe where you see opportunities inside certain merchandise classifications and what you have been seeing so far? Thanks.

In sportswear what has been good this season is the bohemian look with kind of peasant shirts and color has been very good. White has been excellent and aqua and pink is still strong. You know it's another year where we had I think a lot of fashion on stripes.

Do you feel your inventory is currently positioned where you would like it to be for the strengths that you are seeing in the fourth quarter?

The inventory is never 100% where we would like it, but I am certainly not unhappy with the consistency of the inventory.

We continue to see tremendous opportunities. The biggest problem is we have opportunities, off-price opportunities which often we take in above our inventory plan because we feel they will give us greater gross margin and bring customers to the stores because bargains of name brand and designer merchandise is what keeps customers coming back. So sometimes we will go over plan because we feel that the opportunities are too great, and what we will lose on stock term, we will pick up on gross margin and increased customer satisfaction.

Got you. Great. And then as well, I was wondering if you could comment a little bit about the impact the shrinkage had on the gross margin for the third quarter and if you see more opportunity there going forward? And what -- maybe any initiatives perhaps I have missed that you are doing to help that out?

Well, shrinkage is an ongoing concern. And you know it is something you have to watch closely constantly, and the moment you stop watching, that is when you will see it store to rise on you.

We had very very successful results a year ago. We were below 2% in shrinkage results, and as a result of that, we brought down the estimate that we book through the first 11 months of this year compared to last year. So every quarter, every month has gotten the benefit of that reduction.

You know we won't know it until the end of the year and we take a chainwide physical inventory. We will calculate what our actual shrinkage is for fiscal 2005. And if there is any over/under accrual as a result of that, that will be reflected in the fourth quarter. Last year's fourth quarter benefited from a big pickup because we are very conservative on what we book. So we brought that estimate down a little bit this year. The goal is to be really as accurate as we can in booking that expense throughout the year.

Great. And then one more. I'm just wondering if in the fourth quarter we should look for an increase in compensation expense? And also what, if any, the increase was in the fourth quarter of last year for that expense?

Compensation expense? (multiple speakers)

Bonus expense I guess.

There won't be any (multiple speakers)

-- the CEO did not take any increase.

Okay.

There aren't going to be any substantial increases in the fourth quarter this year. Typically that is not when we -- our increases usually take effect in January -- the first week of February.

February.

So they would have already been affected.

Great. Well, good work. Thanks a lot. Appreciate it.

Peter Sirus (ph), Willow Capital (ph).

I don't know quite how to -- this is a strange question I'm going to ask you. Over the last bunch of years leaving aside weather and leaving aside you know whether it is a good coat season or a bad coat season, it looks to me like there is some -- that non-coat business has gotten better. You guys are doing a better job managing your business than you were five or six years ago.

And I'm curious you know from the non-coat guys -- I guess that leaves you out, Monroe -- what do you think the three things that you are doing better now than you were doing three years ago are? Well, you can answer, Monroe, if you want.

Well, I'm going to -- from the numbers side, I will take a crack at it. I'm sure the merchants will have their own comments. But from the numbers side, I know we have managed that business more by the numbers. And by that I mean I know in terms of allocations and certain inventory levels that we have planned -- have all been driven by the numbers.

You cannot ever really take the merchandise piece of it away because I really think that is what makes us successful and that is what makes us unique, is that we have professional buyers that know their areas, and when they see an opportunity to buy merchandise or they think we should have something, whether we have a plan or we don't have a plan, they will use their instincts to merchandise their departments that way.

But from the top down, I think we have really tried to financially plan out inventory levels, different gross margin objectives that we wanted to achieve, and we have tried to stick to that plan. And I think it has been working.

I think over the years you have seen that outerwear as a percent of our business has come down because there has been growth in these other areas. I think the shoe department was a big addition over the last five or six years that certainly helped capitalize on the traffic that we already had. It was added sales that we have achieved. And now we have spun this whole concept off into a separate freestanding store concept that we continue to add stores in.

So I agree with that. I think they have gotten better. I know from the numbers side we just really have sort of struck some initiatives and some goals that we want to achieve and it is just a matter of execution.

And as my father said before that, we are -- and he has done an unscientific survey of a few customers that we are getting in better customers -- we have raised the average retail in sportswear and shoes where really there has been deflation in those products. So I think we have traded up the customer. We have added classes of better separates. All the separates now have better separate class, and we have increased to better the department tremendously in the last three years. So I think that really has a lot to do with it. And actually if you adjust the deflation that has been in clothing, we have really increased our retail quite a bit.

Let me just follow-up and ask this, because it does look to me as I go into the stores like you know you've done something that is very hard, which is you actually have upgraded. As you start to see the, you know, like for example, the Federated/May company merger which in the end is going to be store closings, extra space available, does given where your current position is, does something like that work to your advantage?

It can work to our advantage -- this is Stephen -- and I think we will look at each location on an individual basis. But obviously if there's a lot of real estate out there, there should be opportunities. Without a doubt, there should. And it could help. I want to say that I believe a lot of the new stores that we opened over the last three years have also contributed to our success as well. We have had a lot of successful new stores. I mean it is an all around fine-tuning of the Company, the marketing.

The director was changed two years ago, and he has brought in a higher level of advertising which we feel is driving in a better customer. The merchants have been on top of the fashion cycle, and as Bob said, they jumped right into the hot items, and that has been very important for our success. And our operations have been lean and mean. And so when things pull back, we always have a lean operation whether the bad fashion cycles.

You know, you cannot predict the future, but I remember when (inaudible) Federated, he needed money and Macy's needed money, they were price warring each other, and we got -- we lost some of our competitive advantage.

Now in most towns there's going to be one department store. There's really not going to be -- there is going to be no reason for them to price war each other. Not that we've had it for the last few years anyway, but I think that will help us in a downtime when we don't have them fighting each other and we don't get squeezed.

The other thing that might help us is that we might pick up some talent.

I mean but going back to your comment about the one store, I mean there are going to be a lot of markets that go -- what has been (technical difficulty)-- (multiple speakers)

Particularly in the Northeast, you're right.

In the Northeast in your sweet spot, there has been -- there are going to be a lot of markets where you are going from two competitors to one competitor.

(multiple speakers) very true, yes.

That will help us because Federated -- you know Federated/May Company will not be fighting each other and price warring each other --

In those markets, yes --

And that should help our competitive advantage.

It should help in California as well. (multiple speakers)

Also, in terms of your vendor relationship -- and I'm sorry for belaboring this point -- but now all of a sudden your vendors are -- you know they are looking at one 5000 pound go-rilla (ph), not gorilla, and it seems to me that that plays to your benefit, too.

I don't know how that is going to play out exactly. I know my vendors are concerned about it.

And it may or may not be helpful. And, Peter, one of the things that has happened since the new genius that came on Sears, is that prices for disposal of real estate has gotten much higher. So it could work either way. It is not a slamdunk.

Dan Strong (ph), Variance Research (ph).

Just had a quick question on the progress of the centralized warehouse management system that you guys were working on this year and where that is right now?

This coming fall we expect to see increases in freight going through that distribution center, and if the facility matures, we get more and more throughput and more advantage. Earlier when we spoke about opportunities to try to drive expenses down, we were hopeful that this is one of those projects that we think will help us continue to do that into the future.

So about how far through are we?

Well, it is up -- I mean it is live. It is a 650,000 square foot facility. We have lots of capacity in that building, but we are -- that is fully mainstream now, and we have incorporated that into the distribution process here.

We continuo, though, to add better programming and logistical analysis to get things running even faster and smoother. We are embarking on that project as we speak.

Great. What percent of merchandise purchase do you think will be EDI at the end of the year? Roughly. And what kind of incremental, if any, change from prior year?

EDI? I would guess probably at least two-thirds of our purchasers are EDI now. (multiple speakers)

We have been moving very rapidly this year in particular of getting our major vendors on EDI who have not been, and I think, Bob, your analysis could be correct. But I don't have that number. If you want an exact number, you can call us later, and we will get an exact number.

It has been snowballing.

Okay. Great. Thanks a lot, guys.

Sherman Chow (ph), Apollo Asset Management (ph).

The question is regarding your future CapEx plans. I noticed that in '02 and '03 your CapEx were much larger than the last couple of years. So can you review for me what your CapEx plans might be for this year, as well as the coming fiscal year and how the complexion of the CapEx may be different going forward than what has been in the past?

CapEx will come in a little over 100 million this year. It was higher in the previous years because one, it included the construction of the new distribution facility, which was a $30 million facility. We also rolled out all new register systems in the stores, and that was a $15 million venture. And we put in a completely separate data center in the new distribution so that we had duel data centers in the event of a catastrophic event. If one data center was affected, we could now just flip a switch and completely change processing to the second center and not miss any downtime or relatively little downtime. That was another $10 to $12 million in additional computer equipment that went into the new center.

So in part that is why CapEx will be less this year, and although '0 has not been finalized yet, but the mindset is that it will probably be comparable to '05. And the other is the number of stores that we can open. We were opening over 20 stores a year, and if we don't open as many stores, the CapEx number will come down also because of that.

So as you think about your plans for '06, is the 20 a year number likely to be met or exceeded or --?

It is a goal. But because we are so opportunistic in how we negotiate and get our lease locations, it may not always be achievable.

And then on the depreciation and depletion side, that number should continue to move up I would think to more approximate your CapEx numbers, especially with all of your old projects coming on. So what do your D&A look d like for '05 and '06?

You're right. It is going to grow. It will probably grow by a couple of million dollars over this year for future years as we continue to add 100 million in fixed assets a year.

I also wanted to ask about the nature of the competition. Who do you really consider to be your primary competition?

The department stores.

Okay.

We have competition from -- there is no one exactly quite like us. Babies R Us competes with us in our juvenile furniture department. And in the coat department, we think we are sort of unique, and nobody has our coat marketshare, our coat department that comes close to us. We also feel that TJX and Ross we share customers with them as well.

So we feel that we are a hybrid. We have a lot of upfront merchandise. We also have off-priced merchandise. We feel we have a unique position in the marketplace. We have the dress-up component. We have the Strong Men suit department, the children's -- the girls' dresses, the ladies' suits. We have a lot of unique market positions, and we think that is a good place to be today in the world of where everyone is trying to differentiate themselves.

I think my brother is right. We're trying to have the same merchandise as the department stores but at the prices of our off-price competitors.

One last question. There were some questions about your provisioning for shrinkage and what not. At what base have you been provisioning at so far this year?

This year we provided a 2.5.

2.5, okay. Thank you very much.

Mr. LaPenta, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Nelson, we cannot hear you.

He said you should finish, Bob.

Okay. Well, if there are no further questions, thank you very much.

Thank you, everyone.

If you think of anything you want to call the office, we will be available to answer questions. Thank you and have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.