Burlington Stores Inc (BURL) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory first-quarter fiscal 2006 results 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 Friday, October 7, 2005.

I would now like to turn the conference over to Bob LaPenta, Vice President, Chief Accounting Officer and Treasurer. Please go ahead.

Thank you, operator. Good morning.

Statements made in this 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 filing 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.

I will first cover results of the first quarter ended August 27, 2005. Following these comments, we will be available to answer questions.

Per-share results -- during the three months ended August 27th, 2005, net loss was $0.36 per share, compared with net loss of a year ago of $0.42 a share.

Sales -- during the first quarter ended August 27, 2005, net sales were 650.8 million compared with sales of 574.2 million for the prior year's first quarter. Sales increased 13.4% for the quarter. Comparative store sales increased 8.9% for the same period. Comparative store sales increased 13.2% in June, 7.5% in July, and 5.6% in August.

Other revenue -- during the quarter, other revenue was 7.3 million, compared with 6.4 million a year ago. This increase is primarily due to increases in rental income and service charges.

Cost of sales -- during the quarter, cost of sales was 65.4% of net sales, compared with 64.8% for the same period last year. This percentage increase was primarily the result of a 20 basis point decrease in initial mark-up, a 20 basis point increase in markdowns, a 10 basis point increase in shrink reserve, and a 10 basis point increase in freight compared to the first quarter of a year ago.

Selling and administrative expenses -- during the quarter, selling and administrative expenses increased 19 million to 234.7 million. The increase in selling and administrative expenses in the quarter reflects the additional store expenses of 12 stores not open at last year's first quarter. As a percentage of net sales, selling and administrative expenses were 36% of sales, compared with 37.5% for the same period last year.

Payroll-related expenses declined 1.4% of net sales and occupancy-related expenses declined 0.3% of net sales.

Depreciation expense -- during the first quarter, depreciation expenses increased 1.3 million to 22.6 million for the quarter, compared with last year's first fiscal quarter. This increase in depreciation is due to increased levels of fixed assets related to stores opened, relocated and remodeled in fiscal year 2005.

Interest expense -- during the first quarter, interest expense remained unchanged at 1.8 million compared with last year's first quarter.

Other income, net -- other income, net, of 0.1 million at August 27, 2005 decreased by 0.7 million from last year's balance of 0.8 million. This decrease was primarily due to higher losses on disposal of fixed assets. Increases in interest income partially offset these losses on disposal of assets.

Loss from continuing operations before income tax benefit -- losses from continuing operations before income tax benefit were 25.9 million, compared with 29.3 million for last year's first quarter, a $3.4 million increase in the loss. This decrease was primarily from increases in comparative store sales during the quarter.

Income taxes -- the income tax benefit was 10 million, compared with 11.9 million during the prior-year first quarter. The effective tax rate for the first quarter was 38.7% compared with 40.6% a year ago.

Balance sheet review -- these values are stated in rounded millions. Inventory -- merchandise inventories at August 27th, 2005 were 772 million, a 6.1% increase over last year's level of 727.8 million. Comparative store inventories were up 1.2% at August 27, 2005.

Book value -- the Company's book value at the end of the current first quarter is 910.2 million or $20.33 per share, compared with this time last year of 825 million or $18.48 per share.

During the first quarter of fiscal 2006, the Company relocated three Burlington Coat Factory stores to new locations within their existing trading markets. As of the end of the fiscal quarter, the Company had 362 stores in operation in 42 states.

Available now to answer questions are Mark Nesci, Chief Operating Officer, Andrew Milstein, Executive Vice President and Executive Merchandising Manager, Stephen Milstein, Executive Vice President and General Merchandising Manager, Al Cuccorelli, Vice President of Store Operations and Administration, Robert Grapski, Vice President of Real Estate, and myself. But first, Mark Nesci will read a brief statement.

Good morning.

As previously disclosed and announced at our last conference call, 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 advisor to assist in the process.

Monica, we are ready now for Q&A.

Thank you. (OPERATOR INSTRUCTIONS). Blaine Marder (ph) from Lowe & Partners Corporation.

My question is, first, on the inventory levels. Looking at your cash flow from your K, it's apparent inventories used almost $100 million of cash last fiscal year. I'm wondering how you feel about your current inventory levels. You were much lighter on buying in the first quarter this year than you were last year. How do you feel about your current inventory levels?

We are really comfortable with our current inventory levels. We feel they are in line with our sales and our sales projection.

Okay. Was there something you did differently last year? Were you more aggressive? I mean, were there special buys? I mean, why the high level of inventories last fiscal year?

Part of what we did last year, we were building code inventories earlier. We felt there were opportunities to acquire inventory at good value, and we went ahead and did much more prebuying. That's why, through the balance of the second, third and fourth quarter, we were carrying very high comp coat inventories. But coming out of the first quarter, our coat inventories are actually down over last year's first quarter. So, on a comp basis, this year versus last year, comp inventory is only running 1% ahead. We are comfortable with those levels and we believe that we are in a good position coming into the fall season.

Okay. So, this year, is it fair to say you'll use less capital in inventories than you did last year? Whereas last year you used 98 million, the year before or whatever was more like a $20 million type of ongoing run-rate?

Well, I think, to a certain extent, we are opportunistic, and if we see that there is an opportunity where there is a hot trend, like we did last year, we will be aggressive and we will probably go out and try to buy more inventory. You know, that has always been our nature here, but based on what we've seen so far, the goal is to keep inventory at or below last year's levels.

Okay, great. Then finally, on your strategic alternatives, if you guys cannot consummate a sales accompany (ph) to your satisfaction, might you consider other alternatives such as paying a one-time special dividend?

I'm sorry; we cannot comment on it at this point in time.

Thank you. (OPERATOR INSTRUCTIONS). Jeff Black from Lehman Brothers.

Good morning. I hope everyone is well. I wanted to talk, Bob, just a little bit about the distribution efficiencies you've been seeing. You know, how much of the merchandise is running through your distribution centers now? How much do you expect to be running through by the end of the year? What kind of opportunity do we really have this year on the SG&A line as a result of that initiative? Thanks.

Okay, currently we're still a little over 50% mix distribution and drop ship, and the goal is to increase that. We've talked about wanting to increase that. We are looking at adding an additional distribution facility on the West Coast later this fiscal year that will also give us the opportunity to be more efficient in how we ship goods to the stores throughout the country.

You know, the benefit to the bottom line is going to depend on -- in terms of SG&A, it's going to depend on the level of change in the mix that we can achieve, because we still need payroll at the store level to handle drop ships, and unless we can reduce that significantly, you can't alleviate that payroll. So, we are not there yet; we're not benefiting from the reduction in payroll at the store level, but that's the goal.

Bob, have you outlined what you think your opportunities are, longer-term, for operating margin improvement, you know, if in fact you get all of the things done that you think of possible? Let's say over the next three to five years? We are ending 2005 at what? A 4-and-change on the operating margin. How high do you think that could go if we get better efficiencies?

Well, again, it's goals and there are other factors that play into it, you know, economics conditions and certainly the strength of consumer confidence and retail sales all factor into it. Because all of these increases or all of these changes that you make without the comp-store increases aren't really going to drop to the bottom line. But you know the potential is there to drive the efficiency in lower SG&A costs. We've looked at other vehicles; we've looked at other software to try to improve gross margin with markdown, the way we administer markdowns. The potential is there to drive that number up, but at this point, we are still just rolling these things out. You know, we don't really have any history to really feel confident that we can give you hard numbers of what we think we could accomplish (indiscernible).

But it sounds like you are playing inventories pretty close to the vest, going forward, which I would think would benefit margins. But as you look category-by-category, just a couple of questions on how the business during the quarter trended from a category perspective.

Then secondly, how healthy -- as you look at your trends from, let's say August and into September and now in October, I mean, have we seen a deceleration, you know, in spending, you know, at the -- among the off-price customer? What's your take on all of that?

You want to know the trends? The first question was the categories -- (multiple speakers)

The first question is just category-by-category. You know, where did we see strength in the quarter? Where am I -- (multiple speakers)?

(multiple speakers) -- outerwear was hurt by a warm September. (indiscernible) were hurt by a warm September. We saw strength (indiscernible) across shoes and accessories, in those areas. Okay? So that's the first question.

The second question was -- I'm not sure what the second question was.

The second question is just how did the business unfold if you look at the past few months? Retailers had a dicey August. We didn't get a huge recovery in September. You know, is that the sort of thing you are finding? If you just looked at the September months as it unfolded, was there more strength in the beginning and weakness at the end, or vice versa?

Well, there was strength I think in the end of September, but you know, we don't reveal, give out our monthly numbers. You can see certainly what happened in August, and I would say that September was on plan.

But it's not unusual for us, as you know, when the cold weather comes through, it certainly accelerates our business. As you see, if you take a look at the weather map of current, the cold weather certainly has come across the Midwest and all the way as far south as El Paso and Dallas. That felt like somebody turning the faucet on instantly, so there is things that are starting to pick up as a result of the cold weather coming through.

You feel like you have enough inventory in the outerwear area to take advantage of it with a decent comp here?

Absolutely.

We have been doing this for a long time.

Yes, absolutely outerwear and have plenty of it. We're ready to buy more, to the extent it accelerates beyond the plan.

Like you said, we have more coming in. We have scheduled deliveries coming in through November.

Okay, great. That's it for me.

(inaudible) inventory like in August, the off-season.

We have a constant flow. As we sell it, we replenish.

I got it. Thanks, guys.

Ben Strom from Variant Research.

First, could we just start off with can you explain the rationale for buying back the debt? I guess that's the most (indiscernible) come from cash in operations, you said, and just why you guys decided to do that?

Yes, Ben, just looking out, we don't need see the need to have this money in the foreseeable future and we have the opportunity to prepay the notes at no penalty, so we went ahead and gave notice to the noteholders.

Okay. I mean, was it precipitated by the advisor or I mean, is there -- I mean -- (multiple speakers)?

To the extent that we have large enough -- you know, we are anticipating large enough cash reserves, you know, to pay off the debt, and enough to support the ongoing business operations, we felt it prudent to pay it off.

Okay. Can you elaborate on just kind of the lease situation right now, kind of how the leases are stratified? Just within the next few years, how many you expect to expire and kind of what the deal flow is right now?

well, I will talk about just the leases expiring. I think we only had three or four that we were looking at over the next twelve months that were expiring, but typically we look to renegotiate those expiring leases and replace them with new lease arrangements.

At what kind of cost differential does that normally take place? I mean, you guys are normally around $4 a square foot, is that right, that you look at? 4 to 5? I mean, is there -- (multiple speakers)?

In that general vicinity, yes.

So it's more along the same lines of costs that you normally renegotiate for?

Yes. (multiple speakers).

There's been no changes in that over the last year or so?

No, I mean the strategy has remained the same. I mean, if you're asking whether of renegotiated leases of that all the leases that are expiring, could there be some further increase, the answer is yes. There could be. But our strategy hasn't changed. But we are still in that realm of that $4 to $5 range. We make exceptions; if the location is such that we feel it's more prudent, then we will attempt to pay more for it. We do do that.

Okay, great. Just, you know, you guys are doing a great job; it's a really good quarter. If you were looking at this from a buyer's perspective, just what would be the top five areas? Or when you guys just sit down in the boardroom and where are the top five areas of operations that you guys feel like there's the biggest room for improvement in, that you're working hardest on? I know the DCs, you are making a lot of progress there, and a number of different areas. Where would you put your top three or five areas that there's still room for?

Well, there's always -- we feel like there's always room for improvement no matter what level we are at. The way we look at our business, we are constantly looking at, one, merchandising opportunities or a way to grow the gross margin but still continue to give the consumer value in that process. You know, we are always looking at operating expenses and how can we be more efficient; we're looking at our distribution capabilities and what's a more efficient way to handle that; we're looking at store operations and how can we improve that maintaining a customer-friendly atmosphere. But, how can that improve?

Last year, we had the opportunity to change one of our payment types -- check. We accepted paper checks; we converted that to electronic and there was a substantial reduction in fees associated with that. You know, it's ongoing. You constantly look at all of the areas and you are constantly striving to make them better and to gain efficiencies.

Yes, on the merchandise side, they would have continued to try to increase the average ticket.

(inaudible) increase sales (indiscernible) I think you have to increase the average ticket of the merchandise.

Are there any initiatives kind of in-place trying to do that? It seems like the IMU has fallen a little bit. What are you guys kind of --?

We've had strategies for the last two years where we've (inaudible) better and better, and we've been successful and we're going to continue that, try to increase that.

The other thing, as merchandising (indiscernible) we are going to try to get more through the Web (inaudible) drop ship.

Sure. I mean, it still seems like there's a lot of closeout deals out there that other off-price guys are talking to. Are you guys seeing any inflation on the cost side from your perspective? Is that where you're losing a little bit of mark-up, just buying it or is it just at the consumer level?

I haven't seen it in the market yet but, you know, over the last maybe ten years or at least five years, there's been tremendous deflation in clothing, for the clothing market, and I hear a lot of retailers complaining about that but maybe they will be celebrating if prices go up. I (inaudible).

The one area in gross margin that's seeing deflationary pressure is freight costs. Because of the rise in fuel costs, we see freight costs have just recently been bumped 20, 30% and we may continue to see more of that. Purchases represents between 4 and 5% of our -- freight represents about 4 or 5% of our purchase costs. We decided not to pass that onto the consumer at this point in time for the first fiscal quarter. That accounted for 10 of the 50 basis points reduction in gross margin. The balance of that reduction in gross margin really came from -- 20 of those basis points came from a reduction in the initials, but it wasn't a change in corporate strategy; it was just a change in the mix. Because we had bought so much outerwear earlier in fiscal 2005, we had significantly less receipts and significantly less purchases of outerwear in the first quarter. Outerwear has a very, very low initial; it's one of the lowest departments. So when you reduce the mix by that 50 to $60 million in outerwear, it had the overall effect of dropping the average by 20 basis points. But there's no strategy in any area to go product-by-product and try to lower that initial market or raise that initial market down. The markdowns are just a function of us trying to stay current and fresh and identifying -- we are vigilant in trying to identify where we need to take markdowns quickly so that we can keep inventories in line with our plan. You know, that's not necessarily a trend; it's just the result of what happened in the first quarter.

Okay. Just the last question and then I will get back in queue. The distribution center in California, can you just talk about some of those plans there? You have two in the Northeast right now. Is that correct? Any plans you might have for to continue operating those?

We continue to operate all of them, and the California DC was designed and built with the understanding that we have a significant amount of imports that obviously land on the West Coast. Currently, those imports were either being (indiscernible) across the country or literally shipped around to the East Coast, depending on the nature of the shipment. Obviously, it was economic and beneficial to us to have such a building. We have a third-party relationship out there and it was actually processing a lot of our freight. We got to the volume -- the volume got to the point where it made economic sense that we no longer needed the third party. It was -- we could do it economically ourselves. The bulk of all that freight, including a lot of the Baby Depot product, which is furniture and what they call metals and woods in the industry, that product is all going to land. We're going to be warehousing a significant amount of those inventories in the West Coast and replenishing to the stores as needed. So we think there's going to be, from a logistical point of view and a freight point of view, there will be significant savings.

Great. Thanks a lot.

Sam Poser from Mosaic Research.

I'm fairly new to this story, but I just have a couple of questions about your procurement of merchandise and to follow up on the earlier caller there. In the categories, where are you seeing improvements in content? I've visited quite a few of your stores and, compared to your competitors, it looks like you have sort of an edge on what you're getting. If you could just talk a little bit about that.

Well, you mean where have we been upgrading? I'm not quite sure what you're looking at.

You know, where are you finding differences from the previous year in categories and so on and so forth -- improvement in content and so on?

Well, we're always looking to improve our content. I think, in our men's and children's area, there have been more and more brands offered to us as well as in sportswear and shoes.

You know, as the years go by and as Burlington becomes bigger and bigger in a bigger market for us and as there are less and less players in the marketplace with which we compete for goods, it's made those opportunities greater. So, I can't really specifically say this or that, but it's been a general trend for us to have more and more brand names in the store.

I guess another example that would be in our shoe department, you know, when we first started out carrying ladies' and men's, we had a little tougher time getting some of the men's labels. Things like that have come on strongly for us. Likewise, we really weren't that large in children's shoes, so the children's shoes program has been expanded dramatically. Those are the kinds of things that we constantly do during our merchandising strategies.

Great. Then I just want to clarify what you said about the outerwear. This year, you did -- you got less outerwear this year, or more early?

(multiple speakers) -- quarter, our receipts the in the summer quarter were lower. Now, I want to say that we did actually buy some big purchases in January, February and March of this year, where we made some advantageous buys either with manufacturers or directly with factories and bought off-season production. So, the merchandise was there, but instead of coming in in the first quarter, it came in in the third and the fourth quarter of last year.

This year, you are receiving it right now, and that's brought your inventory -- that's brought your margins?

(multiple speakers) -- receiving more in-season as well, but it was just an aberration in the flow. It will be -- it's there in time for the season, but if a comparable inventory is down 1%, as Bob stated, but it's just a question of the flow, whether it came in first quarter of this year or third or fourth quarter of fiscal last year.

Are you seeing a better response so far this year to the fall goods or comparing the same times, 2005 over 2004?

Well, on the hot item, we are seeing very good response. However, in outerwear and coats, the warm weather -- the warmest in the Northeast anyway was the warmest in September on record -- we did see outerwear suffer. So, when it is hot, people do not shop for coats; it's very simple.

Right. How about in boots? You mentioned your footwear in the boot business. I mean we've been hearing around that the book business overall is pretty good. Have you seen the same kind of reaction there as the weather stayed warm?

No, boots were good. Actually, boots were our trend. We were selling cowboy boots all summer. Boots are a fashion item right now. That has nothing to do with the weather.

Women will wear boots if it's 80 degrees out.

People were wearing boots and as you noticed it, but I saw a lot of women wearing boots this summer (indiscernible). The Chairman just joined us.

Can you hear me?

Yes, we can.

(indiscernible). I'm in the new store.

You are on the conference call. Stay where you are; everyone can hear you.

I'm sorry. You can continue.

Thank you very much for your help.

John (inaudible) from Principal (ph) Global Investments.

Good morning. Could you give us an idea of what capital spending will be this year and possibly break that down in terms of new stores versus remodeled/relocations, and how many new stores you might be adding?

Sure. CapEx for fiscal '06 is approximately 87 to 90 million. We're looking at, for new store -- we have new stores -- for Burlington about 17 million; MJM Shoes another 1.1 million; relocations of Burlington stores, approximately 10 million; expansions of approximately 9 million; and another 3 million for store remodels. So you can see the biggest chunk of it really goes for store openings, relos and remodels. We also have about 16 million scheduled for warehouse improvements and the bulk of that is going to be the new distribution facility in California. There's another 12 million that's been scheduled for various MIS projects, and that's the bulk of it.

How many net new stores?

For the entire fiscal year, ten new Burlington stores.

That's what's currently completed. We are actively working on others as we speak, though. There's current done deals, and there are three MJMs that are also done.

Anticipated closings?

None of the closings. (multiple speakers) -- there was 15 in total; 5 of them are were relocations, which we will be closing, so a net 10. So a net 10 BCFs 3 additional MJMs that are completed.

Okay. Then on the new distribution facility in California, is that going to be owned or leased?

That's going to be leased.

How large a facility?

It's about 450,000 feet.

So that will be handling a lot of the goods coming in from the Far East, and then it will be servicing and shipping that merchandise as far east as the East Coast?

Yes. Actually, it's not just goods from the Far East; we also have quite a large vendor base that is on the West coast based out of the West Coast. That currently we ship into the East Coast, or we drop ship in to each individual store. Those manufacturers also will be directed to ship the goods into the West Coast distribution center, then we ship.

Then in terms of just shipping on an ongoing basis out of that facility, how far east would it ship to stores?

Well, again, it depends on the product mix. If it's baby furniture, you know, sometimes we have -- it's less expensive for us to take the goods there and still ship it to the East Coast, so it really depends on the commodity. That's not the same with ready-to-wear, though, so it's really depending on the merchandise mix.

So initially, you're not going to be using that facility to its full extent. Over what timeframe would we expect to see you move up the utilization of that facility?

I mean, the goal is to have it up and running by fall of next year. We're going to open it in the spring. We would hope to start seeing some of the benefit in the fall season.

Thank you very much, gentlemen.

A follow-up from Jeff Black from Lehman Brothers.

I guess a question for Bob -- can you shed some light on targets for sales and/or margins for Q2, and/or the year, whichever you want to share?

(BIG SIGH). Well, that's hard to answer. We plan for increases, but they are subject to economic conditions and weather conditions, and we can be affected one way or the other by all of these things. But you know, we are planning for increases, but you know, we have to -- it will be a challenge to accomplish it.

I got it. Thanks.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation.

Okay. If there's no further questions, thank you, everybody, for participating in the conference call. You are welcome to call us if you have any additional questions that you can think of later. Thank you, Monica.

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.