Burlington Stores Inc (BURL) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory's second-quarter sales and net income and December conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, January 5, 2006. I would now like to turn the conference over to Robert Bob 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.

I will first cover results of the second quarter ended November 26, 2005. Following these comments we will be available to answer questions.

First, share results. During the six months ended November 26, 2005, basic net income from continuing operations was $0.66 per share compared with basic net income from continuing operations of $0.54 a share. Basic net income from continuing operations for the current second quarter was $1.01 per share compared with $0.93 a share a year ago.

Sales. During the second quarter ended November 26, 2005, net sales were 945.4 million compared with sales of 872 million for the prior year's second quarter. Sales increased 8.4% for the quarter. Comparative store sales increased 5.3% for this same period. Comp store sales increased 2.8% in September, 7.5% in October and 5.6% in November.

Other revenue. During the quarter, other revenue was 8.5 million compared with 8 million a year ago. This increase is primarily due to increases in lease department, layaway and alteration fees and sublease income.

Cost of sales. During the quarter, cost of sales was 62.3% of net sales compared with 62% for the same period last year. This percentage increase was primarily the result of a 30 basis point decrease in initial markup in the quarter, a 20 basis point increase in markdowns and a 20 basis point decrease in our shrink provision.

Selling and administrative expenses. During the quarter, selling and administrative expenses increased 12.8 million to 264.7 million. The increase in selling and administrative expenses in the quarter reflects the additional store expenses of nine additional stores not open at last year's second quarter. As a percentage of net sales, selling and administrative expenses were 28% of sales compared with 28.9% for the same period last year.

Payroll and payroll-related expenses declined 45 basis points as a percentage of net sales. Advertising expenses declined 20 basis points as a percent of net sales and {trial} and entertainment expenses declined 15 basis points as a percent of net sales with the three primary classifications that generated this decrease in SG&A expense as a percent of sales.

Depreciation expense. During the first quarter, depreciation -- excuse me. During the second quarter, depreciation expenses decreased slightly to 22.4 million compared with last year's second quarter 22.8 million.

Interest expense. During the second quarter, interest expense decreased from 1.8 million to 1.4 million in the current quarter. This is the result of the prepayment of the $100 million in senior notes in November of this year.

Other income net. Other losses net of 2.6 million at November 26 decreased by 7.4 million from last year's other income of 4.8 million. This decrease was primarily due to increase in losses of disposable fixed assets of 0.7 million this year compared with 0.3 million last year. In addition, this year's second quarter was charged loss from the three stores damaged in the hurricane of 3.5 million. Last year's second quarter had recorded miscellaneous income of 3.9 million, which was related to the four leases that were rejected by Kmart. Partially offsetting these decreases in miscellaneous income was an increase in investment income in the second quarter of 0.7 million.

The only thing I want to just highlight about the $3.5 million loss that the Company recorded in the second quarter, the Company insures its inventory at selling price and its other fixed assets at replacement cost. It incurred two $1 million deductibles as a result of the two hurricanes; the one in New Orleans, the other one in southern Florida. The Company expects to realize proceeds in excess of the book value that it wrote off but because accounting requires us not to offset the deductible for future gains we have to report a loss this quarter and will report the subsequent gain in the quarter we have received the proceeds from the insurance company. But the net result of the hurricane losses the Company expects to be reimbursed in whole for the loss and actually anticipates reimbursements in excess of what the actual assets were that are being written off.

Losses from continuing operations before tax benefit. Losses from continuing operations before benefit of income tax was 74 million compared with 68.1 million for last year's second quarter, a $5.9 million increase. This increase was primarily the result of our increase in comparative store sales in the quarter.

Income taxes. The provision for income taxes was 28.6 million compared with 26.6 million during the prior year's second quarter. The effective tax rate for the quarter was 38.7% compared with last year's 39.1%.

Balance sheet review. The stated values are rounded to the nearest million dollars. Inventory. Merchandise inventories at November 26, 2005 were 899.8 million, a 1.9% increase over last year's level of 882.8 million. Comparative store inventories are up 0.6 of 1% at November 26, 2005.

Long-term debt. At November 26, 2005, long-term debt decreased by 101 million to 31.3 million compared with last year's balance of 132.3 million. This was primarily due to the prepayment of 100 million of the Company's senior notes on November 2, 2005. Book value. The Company's book value at the end of the current second quarter is 953.9 million or $21.30 per share compared with this time last year of 926.2 million or $20.75 per share.

During the six months ended November 26, 2005, the Company opened eight Burlington Coat Factory stores and three freestanding MJM designer shoe stores. An additional five Burlington Coat Factory stores were relocated during the six months ended November 26, 2005 to locations within the same trading market. Two Burlington Coat Factory stores and one Luxury Linens store were closed during the six-month period.

In addition, the Company has three Burlington Coat Factory stores that remain temporarily closed due to damage caused by Hurricanes Katrina and Hurricane Wilma. Two of these stores are located in New Orleans and the other store is located in southern Florida. The Company has not yet determined when these stores will reopen. During the remainder of the current fiscal year, the Company expects to open an additional Burlington Coat Factory store and relocate two more Burlington Coat Factory stores to new locations within the same trading market.

Available now 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 Cuccorelli, Vice President of Operations and Administration and myself. But first, Mark Nesci will read a brief statement.

Good morning, everyone. As previously disclosed, 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. Operator, we're ready to open up for Q&A.

(OPERATOR INSTRUCTIONS). Jeff Black, Lehman Brothers.

Good morning, guys. Good quarter. Congrats. Bob, did you give an inventory update? How do you feel about inventories at the end of the quarter and did we give an inventory number for quarter end?

Yes. The inventory number that I mentioned earlier was 899.8 million. But we ended the quarter -- (multiple speakers) -- Comp inventory was up 0.6 of 1%. We showed -- coats was down 4.5% at the end of November. Outerwear on a comp (technical difficulty) about 1.5% (multiple speakers) 2.5% (technical difficulty) sportswear was up about 2.8%. Accessories was the biggest category, up 11%. Shoes was up 7.5. Kids, which is our juvenile category, was up 3.6% and our linens division was down 10.

So it sounds like inventories are in pretty good shape. What are you seeing out there now? I know we have got a pretty big quarter that we're cycling in Q3. We have heard from some of the other guys today that business is pretty good on the top line. Do you feel good about being able to cycle last year with at least a modest improvement from an earnings per share basis?

We reported the -- with this press release we reported that our December comp sales were up 7.5%. So we had a very strong December. It continues to help us manage our inventory level and we -- December clearly is the biggest month of the quarter so we're optimistic.

On the gross margin, you mentioned the shrink reserve. Are we going to see the shrink reserve increase in the following couple of quarters in line with what we just saw?

No. What happened was we have been providing shrink at 2.3% (technical difficulty) in every month of the year and we will continue to provide shrink at 2.3% up through the month of May when we actually take our (technical difficulty) inventory (technical difficulty) tension that would cause us to change that. We will leave the estimate at 2.3%. Last year, we booked shrink at 2.5% through the first six months. Actually through the first three months we booked at 2.2 and then in the second quarter we increased it to 2.5. And that is what is causing the favorable variance currently. Last year's actual shrink came in at 2%. So we had an adjustment in the fourth quarter, a positive adjustment in the fourth.

And turning to SG&A on the payroll side, you mentioned here you are getting some decent leverage there. What are you doing in payroll that would lead to some good leverage or better than expected leverage for the balance of the year? Can you just give us an update on what is happening in that area?

Sure. Well in part, the leverage is we are getting the benefit of the stronger comp store sales. So that is helping us leverage because a certain portion of our payroll is fixed. But in terms of the store payrolls, Al Cuccorelli is here and he can give you a little bit of color around some of the initiatives and what we do here just to manage that process. Al?

Yes, this is Al Cuccorelli. We also had some {overlapping} that we were able to leverage on our management positions at the department manager level in some of our stores and that helped us in the cost factor on payrolls.

That's good. Thanks for all the color and good luck in the quarter.

(OPERATOR INSTRUCTIONS). Ben Strom, Variant Research.

Thank you. Nice quarter. I'm going to have to ask you to repeat what you're saying with the shrink. I'm having a little hard time hearing you. It sounds like there is some breathing going on into the phone. You said last year 2Q '05 was 2% was the shrink rate you were using or can you just go through all those numbers again?

Sure. We are providing shrink at 2.3% of sales this year. We have done that from the beginning of the year. And unless something happens that would cause us to change that, that is the plan would be to continue to record shrink at 2.3% of sales until the last month of the year when we take our physical inventories.

Last year, we provided shrink at a higher percentage. We provided shrink at initially a 2.2 but then we adjusted it up to 2.5%. So the difference in the shrink adjustment now is 20 basis points. The estimated shrink that was being booked last year at 2.5 compared to the estimated shrink we're booking this year at 2.3. The actual shrink for last year at the end of the year when we took our physical inventories was roughly 2%. So we did -- the actual shrink did come in below what we were booking shrink all year long and that adjustment was made in the fourth quarter. So we looked at a three to five-year average of our shrink results and that is why we brought the number down this year and what we are providing each month.

Okay, great. Where are we with the implementation of markdown optimization? Did that have any sort of impact in the later months here? And I know it's just with two categories, maybe you could just give a little color on that?

I think we're still evaluating the results right now. I mean the impact in the second quarter was that it pushed more markdowns up into the second quarter. We pushed approximately 5 million more markdowns in the sportswear area and a million more markdowns in the girls youth area for the classifications that we're testing in and now we're going to evaluate at the end of the season if we can see the benefits from the process.

It's hard to evaluate by itself because there are many factors. (indiscernible) everything changes from year to year (indiscernible) evaluation.

So it is more of a one to two, three quarters is when you start to really see the results and if it is having a positive impact?

Yes. It's a couple of quarters but as we said we are crunching a lot of numbers right now going through the analysis to make sure that we understand what is happening with it.

The miscellaneous losses is about 3.5 million. When are you going to get reimbursement for that? Did you say?

We don't know for sure but we hope we will get it before the end of the year.

Is there any kind of -- with the three store that are closed, are you still paying -- is there still like payroll associated with that store? Is there a rough estimate to EPS with those stores being closed for this quarter?

No, there is no operating expenses with the stores while they are closed.

There is some overlapping payroll where some of the management team (multiple speakers) at the management level that we put into other stores to retain them. We did take those stores out of comp numbers by the way. Those three stores are out of comps.

Did you say one additional BCF --one additional Burlington store for the rest of '06 and two relocations?

That's correct.

What is the plan for '07 now? How many leases are secure?

Well, we are still working them. The real estate market has been a little sluggish for us as we have stated prior. So it has been a little bit more difficult for us to find availability of what we consider to be locations that we want to do. Based on the {ICSE} show (indiscernible) that took place this year in New York, we tend to be much more optimistic. We are currently working a good dozen deals that we are on right now with the prospect of having 15 to 20 of them might be available to us. But that is our plan (indiscernible).

15 to 20 seems realistic for '07?

Well I mean 15 is the goal but if the marketplace is opening up the way we think it might be then we certainly want to push it further.

How about MJMs? Does that include MJM or is that separate?

No, that's separate.

I mean how many --?

We have five additional MJMs that we're planning right now but again, we are looking to push that up as well.

And I guess what -- the distribution center in California, what is the status of that? Are you guys still planning to build one out there or lease one or --?

We already leased it. It's underway. The material handling equipment is going in. That won't be open and operating till probably sometime in April.

Okay, April. Is there any just -- I know you can't talk about the process per se, can you give any assurance to shareholders that pursuing the sales, management is still able to spend adequate time with the business and I guess if you could just, with some of the executive management, what percent of time is being allocated to operations at this point?

We really can't comment on that but I can assure you that we're managing and running the business but we really can't comment on the aspect itself.

Okay. Thanks a lot. Great quarter.

(OPERATOR INSTRUCTIONS).

Okay. If there aren't any other questions, thank you and if you think of anything later, you can call us here at the corporate office. Thank you very much.

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