Burlington Stores Inc (BURL) 2005 Q4 法說會逐字稿

Thank you for standing by and welcome to the Burlington Coat Factory fourth-quarter and fiscal year net income and sales conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, August 23, 2005. Your speaker for today is Mr. Robert LaPenta, Vice President, Chief Accounting Officer and Treasurer.

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 implied or expressed will not be realized. I will first cover results of the fourth quarter ended May 28, 2005. Following these comments we will be available to answer questions.

Per-share results, during the three months ended May 28, 2005 net income was $0.34 per share compared with net income of $0.48 a share a year ago.

Sales, during the fourth quarter ended May 28, 2005 net sales were 756.9 million compared with sales of 678.1 million for the year's prior fourth quarter. Sales increased 11.6% for the quarter; comparative store sales increased 7.9% for the same period. Comparative store sales increased 13.9% in the month of March, were flat in the month of April, and increased 8.2% in May.

Other revenue, during the quarter other revenue was 6.8 million for this year and last year's fourth quarter.

Cost of sales, during the quarter cost of sales was 61.3% of sales compared with 59.1% for the same period last year. This increase was primarily the result of increases in markdown related expenses and a decrease in the adjustment from estimated shrink.

Selling and administrative expenses, during the quarter selling and administrative expenses increased 20 million to 253 (technical difficulty). Selling and administrative expenses in the quarter reflects the additional store expenses of stores not open in last year's fourth quarter. As a percentage of net sales selling and administrative expenses were 33.5% of sales compared with 34.8% for the same period last year.

Depreciation expense, during the fourth quarter depreciation expenses increased 1.9 million to 25.1 million compared with last year's fourth fiscal quarter. This increase in depreciation is due to increased levels of fixed assets related to stores opened, relocated and remodeled in fiscal years 2005 and to the new distribution center.

Interest expenses, during the fourth quarter interest expenses remained unchanged at 1.8 million compared with last year's fourth quarter.

Other income net, other income net of 5.6 million at May 28, 2005 decreased by 2.9 million from last year's balance of 8.5 million. This decrease was primarily due from the gain on the sale of properties of 3.3 million in last year's fourth quarter. Offsetting these were increases in investment income during this year's fourth quarter.

Income from continuing operations before provision for income taxes. Income from continuing operations before provision for income taxes was 24.7 million compared with 33.7 million for last year's fourth quarter, a $9 million decrease. This decrease was due to -- one, the adjustment from the estimated shrink percentage used during the first three quarters compared to the actual shrink based on the fiscal year-end physical inventories -- decreased $2 million in this quarter compared to last year's fourth quarter. Last year's fourth quarter benefited from the gain on the sale of two properties for 3.3 million and this year's fourth quarter had additional charges of 7.2 million. Offsetting these items was the improved profitability during the quarter from the increase in comparative store sales.

Income taxes, the income tax rate was 35.7% compared to 33.2% during the prior year. For the full year the effective tax rate was 38.4% compared with 37.1% last year. The increase in effective tax rate is (indiscernible) due to an increase in state taxes.

Balance sheet review. The following items all be rounded to the nearest million dollars.

Inventory, merchandise inventories at May 28, 2005 were 720.9 million, a 15.8% increase over last year's level of 622.5 million. Comparative store inventories were up 6.8% at May 28, 2005.

Book value, the Company's book value of the end of the current fourth quarter was 926.2 million or $20.73 per share compared with this time last year of 845.4 million or $18.96 per share.

During the year ended May 28, 2005 the Company opened nine Burlington Coat Factory stores, four freestanding MJM Designer Shoe stores, one Super Baby Depot store and converted the last Totally For Kids store into a Super Baby Depot store. An additional six Burlington Coat Factory stores were relocated during the 2005 fiscal year to locations within the same trading market. Two store locations previously operated as Decelle stores were converted to Cohoes Fashion stores. The Company closed two Burlington Coat Factory stores and one Luxury Linens store in this same fiscal year.

Available to answer questions are Monroe Milstein, Chairman of the Board President and Chief Executive Officer; Mark Nesci, Chief Operating Officer; Andrew Milstein, Executive Vice President and Executive Merchandise Manager; Stephen Milstein, Executive Vice President and General Merchandise Manager; Al Cuparelli (ph), Vice President of Store Operations; Bob Gratzky (ph), Vice President Real Estate and myself.

And also Ilyse Cohen, Vice President of Ladies Apparel and all shoes.

Okay, thank you, Andy. But first Mark Nesci will read a brief statement.

As previously disclosed in June, our Board of Directors is exploring possible strategic alternatives for the Company to enhance stockholder value. No decision has been made to engage in any transaction resulting from the Board's exploration of strategic alternatives and there can be no assurance that any transaction will occur. The Company has retained Goldman Sachs as its financial adviser to assist in this process. At this point we will open up for questions.

(OPERATOR INSTRUCTIONS). Jeff Black, Lehman Brothers.

Good afternoon. Can you speak a little broadly just about the thinking around the strategic alternatives you announced? How long might we expect this process to take and what's really on the table here? Are you looking at an outright sale? Are looking at some form of dividend creep and share buyback? Any color around that would be helpful. Then I have a follow-up.

Jeff, unfortunately -- this is Mark Nesci -- our attorneys have advised us that at this point the Company can really make no further disclosure concerning the matter.

All right, let's move on and talk about opportunities in the business. We implemented profit logic over the year, how much do you think that really over time can aid the gross margin line? And then turning to the expense side, how much upside is there and how much upside should we be thinking about available from improving the distribution efficiencies (technical difficulty)?

Jeff?

I'm here.

I think we must have had some technical difficulty. Let me start to say first -- let me break it down. Profit logic is being rolled down to sportswear and dresses this fall, so we have it --.

And children's.

And girls.

Yes, girls -- girls clothing.

But we haven't seen any benefit from it yet. The upside we believe is there in how we manage the markdown process, but it's yet to happen and we will go through a process where I'm sure there will be a learning curve on those departments and then we may have to regroup and re-evaluate what we want to do with the rest of the departments.

We will be running this, Jeff, redundant to our existing way of taking markdowns to make sure we can manage them accordingly. And it's a good 12 month roll out though -- 12 to 16 months.

(technical difficulty) this is Steve Milstein -- profit logic tells us that we will increase margin, but they can't tell us by how much (multiple speakers).

(indiscernible) which is if it's 35 and goes up 1% it's like 30 basis points, 35 basis points, Bob?

Yes.

So we'll see. A lot of people tell us when they're pitching a product, but we'll see what actually happens.

And on the distribution side, Bob, opportunities to put more -- I guess to increase throughput in the DCs now that that's been up and running for a year now?

We have -- for fiscal '05 roughly 53% of the merchandise was put through the distribution process. Our goal is to try to get to 80%. We built the second warehouse in Edgewater Park. We're looking at a third distribution site in California that if it goes through will come on board in the third quarter of '06 is what we're anticipating at this point in time. If we can get throughput to 80% we believe there will be efficiencies in store payroll that will impact SG&A going forward, and we also believe there will be freight benefits that will impact cost of sales.

In addition, we believe that this will give us the opportunity to manage the flow of merchandise differently from how we're doing it now with the drop ship operation. And we think that there can be potential for improvement in turnover and margin as well because of those efficiencies.

Okay, great. Thank you very much.

Blaine Marder, Loeb Partners.

Congratulations on a great year. Can you give me a sense of when I guess -- or maybe I'll show my history here -- of when you had a same-store sales increase to the level that you had in fiscal '05? When was the last time you did something like that?

When was the last time we had a 6.3% increase?

Or better for the full year.

For the full year -- it would have been -- I don't have that history in front of me of all the prior years, but it would be going back -- hold on one second, I do have it.

What I'm trying to get at is in fiscal '06 how are you positioned against that comparison, that hard comparison? Do you think where your inventory is, the way your product is laid out in the stores that you can generate an increase off of that base?

Yes, we believe we can.

We hope so, we hope so. Blaine, we're never sure of an increase or a decrease. There are so many other factors that go into it in retailing that you can't say because of systems or anything else that you do and it's going to be (technical difficulty). We're hoping the momentum will carry us forward; we don't want to make a prediction.

You sound like you're in a windstorm down there.

I guess AT&T is having problems or whatever Company we're using.

And what kind of same-store sales increase would you need to get some margin leverage in fiscal '06 or some sort of estimate of that?

To get the leverage on the SG&A?

The SG&A and maybe even the gross margin in terms of what kind of same-store sales lift would you need and expect margin expansion?

Low to mid single digit comp store increases will give us the benefit of leveraging because I would say close to half of our SG&A expenses are fixed in nature. So the 3 to 5% range will certainly start to contribute to positive leveraging so that SG&A as a percent of sales can start to come down against the level we're seeing it at this year.

In terms of gross margin, it's really a function of the sales plan and the buying plan that you put together and how close you meet that plan. There's always a certain level of markdowns that you anticipate and plan for and if you beat that plan then there's a chance you'll take less markdowns. If you don't there's a good chance you'll have to take more mark downs.

Okay. And in this fourth quarter just completed, what was the issue with the markdowns? It seems like even if you back out the shrink versus the prior year you still had down gross margin. It's just a mix issue or what was the issue in the fourth quarter?

We did take more markdowns as a percent of sales. I think we wanted to be aggressive and take markdowns up front where we anticipated we would have to take them. But we are -- a process that we go through that's ongoing and it's really just a function of looking at the inventory and where we want to have inventory then at a period in time. Stephen or Andy, do you want to add anything to what I said?

I'll just add that we had -- in ladies apparel we had a lot of trends that hit mid fall season and midspring season and we were chasing those trends. They were hot, there were a lot of Bohemian skirts, embellished things that were great and we did take some markdowns on things that we brought in earlier that weren't so great to make room for the hot trends which we maximized.

There's also been an effort to come out cleaner at the end of the summer season so that we can go into the fall with more current -- or just bring in the fall merchandise early.

And you feel comfortable with that -- where you are now with where the inventories are?

Yes.

Thank you very much.

(OPERATOR INSTRUCTIONS). Brian Lombardi, Belton (ph).

I heard my name but I hear a lot of static. All right, it went away. I was wondering about your 10-K. You had some Sarbanes-Oxley issues get straightened out and it's been delayed. Is that ready yet?

The 10-K will be filed this Friday. We requested a 15 day extension primarily because of the Sarbanes-Oxley process that was involved this year with the year end close. Essentially the change in the process that's different from prior years is the Company would work on their 10-K in conjunction with the outside auditors and give it to them piecemeal as it was completed. That process -- you're not allowed to have that process anymore; you have to complete the 10-K and then give it to the auditors.

And any changes after that are considered mistakes so that's why you can't -- you have to go through this whole process first in its entirety before you give it to them and we needed more time this year so that when we completed our 10-K there wouldn't be any additional changes to it once the auditors had it. The auditors do have it now, they're going through their review process and all of the things they normally do before it's filed and we expect that to happen without any problems and it will be filed on Friday.

I'm sure you know you're not the only company to have issues with due process, but I'm sure practice will make perfect.

We'll make changes to the process so that it doesn't happen this way going forward. Some of it is staffing issues that we'll change here and some of it is just the process itself has to change.

I heard a number given for owner’s equity. Do you have the other balance sheet line items figured out?

Yes. We typically don't release the balance sheet with the press release, but what is it that you wanted?

I guess the last balance sheet I've got had quite a bit of cash and short-term investments on it. I was wondering, were those hedges?

Cash at year-end was 47.9 million, investments were 134.7 million.

Okay, and debt?

Debt was -- long-term debt was 132.3 million which includes two capital leases that we capitalized.

Okay. All right. I heard that you're not really at liberty to discuss the progress of the situation pursuant of strategic alternatives; can you tell us a little bit more about the through process that I guess led you to seek Goldman's help?

No.

We really can't discuss it.

Okay, very good. Thanks.

Peter Syrus (ph), Gorilla (ph) Capital.

I'm curious about the impact of the Federated name merger. I know it's early, but you guys have been around a long time. So do you have any views on -- both in terms of competitive position and real estate?

Peter, this is Bob Gratzky. About ten days ago we got the first list (ph) from them which constitutes a total of 62 stores where they mostly had two stores in the same mall. And I think that's just the first list. So I think there's going to be ample opportunity for us to capitalize on that situation going forward.

It's fair to say we're looking forward to it and there is quite a bit of what we deem to be good real estate in that portfolio that would be advantageous for us.

This is Andy Milstein. Competitively -- and I guess it's too early to say for sure, but I'm hoping it will be good for us because I'm hoping there will be even less price warring between May and Federated and our prices will even be more attractive to consumers.

Let me ask this question, and I don't mean this in a snide way because I guess I've been around a long time with you guys and 5,10 years ago I asked the question why did you guys go private. I'm going to ask a slightly different question now. If all of a sudden there would be advantageous real estate that you could take advantage of but not a lot of other people can take advantage of because of sort of your unique positioning and if the competitive market may suddenly get better wouldn't this be a good time to start accelerating store openings and spending more capital instead of going private?

Certainly if opportunities like that present themselves, there are ways to raise the capital that you need to raise if there are good opportunities. I don't know that this necessarily would limit our ability to grow or to take advantage of opportunities going forward.

But it would look -- leaving aside whether you're private or public or anything, it would look to you guys like there could be a sweet spot in the near future where you might have opportunities you haven't had in a while?

It's possible, you're very right, but it you can't count on it and it may or may not happen.

I understand that, Monroe. I appreciate it.

The last year with the new philosophy of people like Lambert (ph) there was actually less property available this past year. So each year is different and the present management is prepared to go on managing the Company and keep on growing it and we'll see what happens with the other thing later on. At this point all our plans are made both ways we'll be able to continue to grow the Company if opportunities appear.

It does look attractive, you're right. But the only thing I would say to you that was somewhat of a correction where I think you said is that it's unique for us or only for us. I mean, we're not suggesting that other players wouldn't have a need or an interest in that real estate as well obviously.

Well, Mark, let me just say -- there are always other players, but the reality is that in sort of average malls, not upscale malls where somebody like Nordstrom's is there, there are not a lot of department stores looking to grow. You don't see Dillard's or somebody like that, Saks looking to take more stores. And other people in the off price space don't move into shopping malls because they have slightly smaller formats . So that if I were a mall developer, and I've been a mall developer, I'd have your phone number on my Rolodex.

Yes, we are told (ph) frequently and, as you know, we are associated with every major landlord in this country virtually and we're in constant contact with them regularly. And the answer to your question is you're right, we are unique to the extent and it does fit us. And I just didn't want to suggest that there are other retailers today that are seeking to do two level stores at the two level -- even in a single level mall such as Target has become more aggressive in those types of locations. But having said that, we are agreeing with you that we do fit that niche and it's something that we will (indiscernible).

Great, thank you.

Brian Lombardi, Belton.

I just had a follow-up question on the balance sheet items. It looks like you guys had 72 million in cash last quarter and 173 in investments and then I guess the numbers that I just heard -- those two together are 62 lower. Inventories really didn't move so I was wondering where it went.

Inventory is up and typically in our operating cycle we will peak in cash position at the end of Christmas -- January, February is when we're the most cash rich. So you'll see the highest cash balance at the end of our third fiscal quarter.

Yes, I got it wrong. Inventory as of February was 727 and then I thought I heard 720, but maybe I heard incorrectly.

That's correct, 720 million.

Down from 727?

Yes.

So if that's down then where did the cash go?

The cash is you're paying Accounts Payable, you're paying for a lot of that inventory.

So payables went down by roughly 60?

I don't have the third quarter matched against it, but I could do that for you and show you where it is. The other thing is in three days when we put the K out you'll see the cash-flow statement for the whole year and you can see all the sources and uses of cash from continuing operation the way they're broken out and then the other activities and financing activities of the Company. So it's all broken out for you and if there's anything that after looking at that you don't feel is adequately explained I'd be more than happy to try to explain it to you.

But essentially the operating cycle of the Company peaks usually after Christmas and into the January and February months in terms of cash position. And then that cash starts to decline as we go through the spring and there's a little bit of a mini buildup as we go through the Easter season depending on when that falls and that will continue to decline until September, early October is usually our low point in cash position and then it starts to reverse itself and cash grows again from that point as we get into our fall selling season and start to sell down and make the profits in the second and third quarter.

Okay, thank you.

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.

I would just like to thank everybody for participating in the conference call and if there are any other questions you can call me at the main number here at Burlington. Thank you very much.

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