Burlington Stores Inc (BURL) 2006 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Burlington Coat Factory third quarter earnings 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, today's conference is being recorded Friday, April 7, 2006. (OPERATOR INSTRUCTIONS). It's now my pleasure to turn the conference over to Mr. Bob LaPenta, Chief accounting officer.

Thank you, Elizabeth. Good afternoon. 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 filings with 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 third quarter ended February 25, 2006. Following these comments, we will be available to answer your questions.

Per-share results. During the three months ended February 25, 2006, basic and diluted net income from continuing operations was $1.30 per share compared with basic and diluted net income from continuing operations of $1.48 a share a year ago. Sales during the third quarter ended February 25, 2006, were 1.237 billion, compared with net sales of 968.1 million for the prior year's third quarter. Sales increased 5.7% for the quarter. Comparative store sales increased 3.5% for this same period. Comparative store sales increased 7.5% in December, decreased 3.6% in January and increased 0.7% in February.

Other revenue. During the quarter, other revenue was 8.4 million compared with 7.5 million a year ago. This increase is primarily due to increases in leased apartment rent, layaways and alteration fees and sublease income.

Cost of sales. During the quarter, cost of sales was 63.4% of net sales compared with 63.1% for the same period last year. This 30 basis point increase in cost of sales was primarily the result of an increase in freight charges in the quarter. In part, offsetting freight charges were markdowns. Markdowns as a percent of sales declined from 12.8% of sales to 11.6% of sales for the quarter. In total, for the quarter in cost of goods sold, freight increased cost of sales by 0.09%, the lower markdowns percentage reduced the cost of sales by 0.07% and change in shrink reduced the cost of sales percentage by 0.1%. The combination of those three totaled the 30 basis point increase in cost of sales.

Selling and administrative expenses. During the quarter, selling and administrative expenses increased 30.7 million to 267.6 million. The increase in selling and administrative expenses in the quarter reflects in part the additional store expenses of 10 additional stores not opened at last year’s third quarter. As a percentage of net sales, selling and administrative expenses were 26.1% of sales compared with 24.5% for the same period last year. Occupancy expenses were up within the third quarter 0.02% as a percent of sales primarily due to higher utility charges. Payroll and related expenses were up 0.03% of sales due to increases in employee benefits. Advertising expenses were up 0.04% due to the the shift in the Easter season and to the timing of certain insert costs.

In addition, there were 2 million in expenses primarily in professional fees which were transaction costs related to this pending merger of the Company that are considered not to be there are going forward.

Depreciation expense. During the third quarter, depreciation expense increased to 22.9 million compared to last year's third quarter of 20.6 million.

Interest expense. During the third quarter, interest expense decreased from 1.8 million a year ago to 700,000 in this current third quarter.

Other income net. Other income net of 3.6 million at February 26 -- I'm sorry -- February 25, 2006, increased by 200,000 from last year's other income net of 3.4 million. The Company had in the current quarter 500,000 in loss due to retirement of fixed assets compared with gains on sales of fixed assets in last year's third quarter of 1.6 million.

In addition, the Company had investment income of 3.1 million and other nonrecurring income of 1 million compared with last year's third quarter investment income of 1.7 million and nonrecurring income of 0.1 million.

Income from continuing operations before provision from income tax. The Company had 95.1 million compared with 108.8 million for last year’s third quarter, a $13.7 million decrease.

Income taxes. The provision for income taxes were 36.8 million compared with 42.7 million during the prior year third quarter. The effective tax rate for the quarter was 38.7%, compared with 39.2% a year ago.

Balance sheet review. The stated values will be rounded to the nearest million dollars.

Merchandise inventory. Merchandise inventory at February 25, 2006 were 709.8 million, a $17.3 million decrease over last year's level of 727.1 million. Comparative store inventories were down 3% at February 25, 2006, primarily due to a 10% decline in linen inventory and a 7% decline in coat inventory.

Long-term debt. At February 25, 2006, long-term debt decreased by 100.9 million to 31.6 million compared with last year's balance of 132.5 million at the end of the prior year quarters. This was primarily due to the repayment of 100 million of the Company's senior notes in November of 2005.

Book value. The Company's book value at the end of the current third quarter is 1.012 billion, or $22.60 per-share compared with this time last year of 910.4 million, or $20.38 per share.

During the nine months ended February 25, 2006, 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 first nine months of the current fiscal year to locations within the same trading market. Two Burlington Coat Factory stores and two Luxury Linen stores were closed during the first nine months of the current fiscal year.

The Company also has three Burlington Coat Factory stores that remain temporarily closed due to damage caused by hurricanes Katrina and 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.

Available to answer questions are, besides myself, Mark Nesci, Chief Operating Officer. But first, Mark Nesci will read a brief statement.

Good afternoon, everyone. As previously announced, the Company has entered into an agreement and plan of merger with an affiliate of Bain Capital Partners LLC pursuant to which the Company will be acquired with a cash consideration of 45.50 per share. The stockholders' meeting for the adoption of the [Bain] merger is scheduled for Monday April 10, 2006. The company will have no further comments about the pending transaction in its earnings release conference.

Operator, you can open it up for Q&A.

(OPERATOR INSTRUCTIONS). Alexis Gold, UBS.

Good afternoon. This is actually [Jeremy Love]. I was hoping to ask a couple of questions about store openings. I realize you're looking to expand about 20 stores per year and I wanted to know if there's any particular geographic focus. Also, have all of these stores been identified and will they have the same flexible lease terms as your current leases?

Yes, this is Mark Nesci. We are identifying certain markets that we have had stellar results and we feel is good growth opportunities for the Company. I will tell you, Florida is a market that we are looking at actively. Texas we are presently very active in. Southern California we continue to the active end. Most of the southern states for us have performed new extremely well and will continue to do so. We do intend to have the deals structured the way we always structure them. So far, we have been seeing deals coming in very similar and we have done (indiscernible) a large group of stores which we are presently negotiating on in the state of Texas right now.

All right. And as a bit housekeeping, can you identify the rent expense for the last quarter?

Rent expense for the quarter?

Sure.

Rent expense for the quarter was 33.9 million.

One final question. What is drawn on the revolver as of Q3, '06?

There's no cash draw on the revolver. There is some usage for letter of credit. But we have not drawn down on the revolver at all this year.

Adam [Muskow], CRT Capital Group, LLC.

I just have a quick question, which is -- do you have a credit card business (technical difficulty)

We have a small private-label credit card business with our Cohoe's chain. But Cohoe's is a very small part of the consolidated Company. The Burlington stores do not have a credit card, private-label credit card business.

Would you consider starting one?

We have considered -- we are keeping the options open. We are looking at some. There is some interest. We really are looking to draw a customer loyalty program and we have considered using a private credit card in conjunction with a loyalty program [as well have been meaning] to do that.

Scott [Grabeen], [Sing Sing] Capital Management.

Hi, just looking at your most recent quarter. If we add back $2.5 million of deal cost, we're seeing EBITDA of approximately 118 million, and this is not including the other income add-back of 3.6 million. So, if you will correct me if I'm wrong, are those numbers that I should be working with?

Yes, that is correct. You are excluding other income?

Yes.

And adding back to deal costs?

Correct.

Yes, so you are in around 118 million, that is correct.

Great. So I guess my question -- based on the guidance that you gave in your roadshow, there was a range of EBITDA quarter, 118 to 128. And it looks like you kind of came in just sort of at the low end of that range. I guess my question in light of the quarter was already sort of in the books. I'm just wondering why you sort of grazed at the lower end of that range. I guess on a going-forward basis, could0 we expect to see the magnitude of those EBITDA declines kind of on a going-forward basis of around sort of 8%, excluding the other income?

Right. The roadshow was a two-week period of time and the results were not known when we started the roadshow and that is why we used the range. We felt confident that the results would end up within that range. And I think towards the latter part of that roadshow, we were giving guidance that we felt the number was going to come in at the low end of that range. So I don't know when we saw you in the roadshow, but that would be probably why there was some ambiguity around that.

We don't give forward-looking statements in terms of projecting what we think revenue and expenses will be. We're not going to really change that policy right now. But, you know, we do recognize that there was an impact in this quarter as a result of freight increases that we saw impact cost of goods sold. It's really being driven by these fuel surcharges that are coming from carriers.

We do have some initiatives underway that we have talked about in the roadshow with shifting our mix of merchandise away from drop, ship it into central distribution. And we think those initiatives, there will be freight savings as a result of those and we're looking for those types of initiatives to help us contain costs going forward. But you know, more specific guidance than that, we really can't give it to you.

I guess if I could just ask one sort of spinoff of that question then. Could we expect then the magnitude of the impact that you have what at the freight this quarter -- can we perhaps, based on your initiatives, be pretty confident that those differences will diminish throughout the remaining quarters over to, say, the next four quarters? Or does that seem like I'm in the right ballpark?

We believe that some of the initiatives that we have underway will help us control freight expense. And that's one of the things we felt that we have been very good at doing is controlling costs as we're seeing cost increases come through throughout our history, and we do feel we have some initiatives that will help us deal with this issue.

I will add some to that. We are accelerating some of those initiatives as a result of several of the increases that have been passed from the carriers. As well as utility charges, that's also the place where we're seeing the impact, which is primarily driven from the fuel and gas. So, we are accelerating and we are in contact with many of our vendors, which -- it's good for them, by the way, not just for us. They would just assume shift to the distribution center as opposed to as many drop-ships as well. It's easier for them as well.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Jeff Kobylarz, Stone Harbor.

Hi, good afternoon. Thanks for having this call. Can you say how much of your product in the third quarter, how much of it was sent to the stores by drop-ship versus processed through your DC?

There was significantly more in the third quarter because it's in season, and we typically, when we buy goods in season that are at-once or where timing is very significant because we want to get those goods into the store, we will drop-ship. That's one of the advantages we feel that we have over our competitors. Whereas goods up-front that are bought for the upcoming spring season, those would have flown through the distribution center.

Do you have a percentage how much was drop-shipped?

It would have been probably -- I don't have the exact percentage in front of me, but it was greater than the chain average 50-50. It would have been greater than 50% drop-shipped in the third quarter.

And is the -- [a] quarter, is it back to the Company average?

Well, there's initiatives underway to try to redirect more through the distribution centers. So we believe that that average is going to change. That's one of our initiatives, and that the goal is to get it to 70%/30% mix.

But that's after the California DC opens?

No, that's only a part of it. We had capacity with the new Edgewater Park facility that we built two years ago to expand the ability to drop-ship more -- or just centrally ship more goods. California warehouse will just help us benefit from the West Coast shipments.

And that distribution center in San Bernardino you are referring to has been accelerated. It should be open by the end of this month.

Okay. And on the roadshow, you talked about 30 million of cost savings from opening up that San Bernardino DC? Can you chunk out how much -- or break down that 30 million of cost savings, where it comes from?

It was more than -- the 30 million savings was the entire initiative of moving from the 50/50 current mix to 70/30 mix. A portion of that is going to come from California and a larger portion is just coming from this shift of shipping goods through the distribution center.

Last year's fourth quarter was 38.7% gross margin, and that was your highest gross margin all of last year. And why is it -- and it's a seasonally slower revenue quarter. Why is that gross margin so high last year in the fourth quarter?

You have -- we take physical inventories in the fourth quarter and we book an estimated shrink expense through the first nine months of the year, and then we reconcile physical inventories to book inventory. And any gain from that estimate that we use gets reflected in the fourth quarter. For the past several years, we have had gain when we've reconciled our book inventories through our physical inventories.

You are considering cash returns in some stores. Can you comment, what kind of sales increase do you need to justify going to cash returns to make it a positive economic decision?

Again, this is, it's really hard to give you specific numbers around this initiative, because we haven't done this. It's our plan to try to evaluate and test this first before we roll it out. Although we do feel that it will have a positive effect on top line growth. But really, it's -- we can't really give you specific information about what we think it will do because it's really not known at this point.

I will tell you, we are presently underway with a market research firm to do some analysis first and try to decipher exactly what the customer is perceiving in different sections of the country. Although we anecdotally firmly believe in the business, this is a huge upside. There's no secret that for years, we have operated with this policy successfully. But I can't tell you how many times we hear literally every day that people shop us sparingly because we don't give such a policy where they can get their cash back.

And by the way, to the extent that we do change it, we do have a policy today that says you can get your cash back and you have to return it within 14 days with the receipt, and we will give you a store value card. We're not going to change that 14-day period for the return because we don't want the product liability coming back much later. But we're going to keep that -- in fact, all we intend to do is give them the cash refund to the charge card credit within the 14-day period. And we do believe it's a huge, a huge top line story. But as Bob has mentioned, there's no way to really project what it could be.

What your returns now for just store credit?

Roughly, it's 5.5% of sales.

Okay. Do you know what the industry average is for -- ?

It varies by different sectors -- specialty stores, department stores. But as a rule of thumb, I would say it would not be unusual to be in the high-single-digits for larger department store concepts. And specialty stores sometimes can be a little higher.

Last question. You said your inventory for coats was down 7%. So you ended I guess pretty clean in coats.

Yes, and it just reflects that we're starting to change the pattern of how we're going to buy and source our coats. We're really trying to look at what are the right inventory levels that we want to start carrying based on the volume of business that we do. And obviously, we don't sell a lot of winter coats going into the spring and summer months. So we're going to by design bring these inventories down.

I would also add to that, there is another initiative that is underway already to re-allot square footages in some of the stores, especially in the southern markets where we do have fabulous volume stores. In some of those markets, our Company average is about 12% from the coat business today because we've diversified the products so well over the years. But in the South, it would not be unusual for some of the stores to get down to the 5% range -- 4, 5, 6% range. So in those cases, we still have a lot of -- relatively the same amount of square footage we had up in the North and we're quite -- where our business is much more stellar in coats. So we want to re-allot that, and we want to bring those inventories specifically down in those markets.

Helen [Iskovitz], Lord Abbott.

Just a quick question. You are going to be working to lower your working capital and lower your inventory. Could you discuss any changes that that might mean for your markdowns and your markdown policy?

In terms of markdowns policy, I don't think there will be a change. But markdowns, it could impact markdowns as a percent of sales because if you carry small inventory levels, there could be some opportunity where you have less inventory risk. But still generally, it's going to be a function of what you plan, what your sales plan is and if you meet that sales plan. That's really the driver of markdowns as a percent of what your sales are going to be.

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

If there aren't any other questions, we thank you and that will be all.

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.