Burlington Stores Inc (BURL) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal year 2006 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, this conference is being recorded Tuesday, October 3, 2006. I would now like to turn the conference over to Robert LaPenta, Vice President, Chief Accounting Officer. Please go ahead, sir.

Thank you. 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 10-K equivalent. 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.

After the formal presentation, there will be a question-and-answer period where we will answer questions from current and potential investors in the Company's bank debt and notes. It is the Company's policy not to answer questions regarding the future or any period between the end of the period which is the subject of today's conference -- that is the fiscal year ended June 3, 2006 and the date of this conference call.

On April 13, 2006 the agreement and plan of merger was consummated by Bain Capital Partners for a $2.1 billion merger with the Company being the surviving corporation in the merger. Although Burlington Coat Factory Warehouse Corporation continued as the same legal entity after the transaction, the Company's current year fiscal statements are presented for two periods, predecessor and successor which relate to the period preceding the merger transaction and the period succeeding the merger transaction respectively.

We have prepared our discussion of the results of operation by comparing the mathematical combination of these successor and predecessor periods for the 12-month period 53 week, ended June 3, 2006 to the 12-month period 52 week period, ended May 28, 2006. As a result of the merger, our assets and liabilities have been adjusted to their fair values as of April 13, 2006.

I will first cover results of the fiscal year ended June 3, 2006. Net sales. During the current fiscal year, net sales increased $267.6 million to $3.4 million, for a total of $3,438,813,000 billion compared with the prior year of $3,171,242,000 billion. Included in this increase was $51 million in net sales from the non-comparative 53rd week. Comparative store sales increased 4.3% for the year, with Burlington Coat Factory stores increasing 4.2%, MJM Designer Shoes stores, increasing 6.8%, and Cohoes stores increasing 0.2%.

New stores opened during fiscal 2006 contributed $72.5 million in net sales while stores opened in 2005 contributed $37.9 million in sales to this year's net sales in their non-comparative period.

Other revenue. Other revenue consists primarily of rental income from leased apartments, sublease rental income and layaway and alteration charges. The increase of $3.1 million from the prior year's balance of $28.6 million was primarily due to an increase in leased apartment rent income.

Cost of sales. Cost of sales increased $196.1 million for this fiscal year compared with last year's fiscal year. The dollar increase in cost of sales was due to the increase in net sales during fiscal 2006 and to an increase in cost of sales as a percentage of net sales from 62.7% in fiscal 2005 to 63.5% in fiscal 2006. This 80 basis point increase in cost of sales was due to a 30 basis point increase from freight, a result of fuel surcharges hitting up for the second half of our fiscal year due to the increased gasoline and oil prices, a 20 basis point increase in shrink, a 10 basis point increase in markdowns, and a 10 basis point decrease each in our initial and in our vendor chargebacks.

Selling and administrative expenses. Selling and administrative expenses were $1.519 billion for the fiscal year ended June 3, 2006 compared with $957.8 million for the 12-month period of a year ago. The increase in selling and administrative expenses was due primarily to expenditures related to the merger transaction of $14.6 million, an increase in the number of stores in operation this year compared with 2005, and increases in utility costs, advertising expenditures and employee benefits. Selling and administrative expenses, excluding the $14.6 million in transaction costs, were 30.1% of net sales compared with the last year of 30.2%.

Depreciation expense. For the fiscal year ended 2006 depreciation expense was $96.9 million compared with $89.9 million a year ago. This increase is attributable primarily to depreciation on capital additions related to the buildout of new stores, improvements, expansion and remodels over the past two years and to additional depreciation related to the step-up and basis of fixed assets resulting from the revaluation of assets in our purchase accounting adjustments.

Amortization expense. Amortization expense was $10.3 million for the 12 months ended June 3, 2006 compared with $0.1 million for the 12 months ended May 28, 2005. This increase in amortization is primarily due to $631.1 million in net favorable leases recorded as a purchase accounting adjustment and $71.4 million in deferred debt charges recorded all as a result of the merger transaction.

Interest expense. Interest expense increased to $22.7 million from $7.3 million for the 12 months ended June 3, 2006 compared with the 12 months ended May 28, 2005. This increase in interest expense is due to the additional debt the Company incurred in connection with the merger transaction.

Other income net. Other income net consists primarily of interest income, gained and losses from sale of assets and other non-operating miscellaneous items. In fiscal 2006, other income net decreased $6.2 million to $8.4 million, compared with fiscal 2005 of $14.6 million. For the current fiscal year, included in other income net, are $7.6 million in interest income, $1 million in gains from insurance recoveries and a $0.2 million in all other miscellaneous losses. The decrease during the year of $6.2 million was due in part to $2.7 million in losses on the sale of fixed assets in fiscal 2006 compared with $0.8 million in gains on sale of fixed assets last year and to settlement claim income this year of $0.6 million compared with $4.2 million a year ago. These decreases were offset in part by higher interest income during the current year.

Income taxes. Income tax expense was $46.8 million for the 12-month period ended June 3, 2006 compared with $66.2 million for the 12-month period last year. The effective tax rate for fiscal 2006 and fiscal 2005 were 41.1% and 38.4%, respectively. The effective tax rate in fiscal 2006 for the predecessor period of May 29, 2005 to April 12, 2006 was 37.5%. The effective tax benefit in fiscal 2006 for the successor period of April 13, 2006 to June 3, 2006 was 26.5%. The decrease in the beneficial rate was due to deal-related expenses in this period that are not deductible for tax purposes.

Net income. Net income decreased $37.9 million to $67.2 million for the 12-month period of fiscal 2006 from $105 million for the 12-month period 2005 fiscal period. As previously mentioned, this decrease is primarily attributable to additional deal-related expenditures, increases in depreciation from the step-up in basis of fixed assets, amortization of intangible assets recorded, an additional interest expense from the debt, all related to the merger.

During fiscal 2006 we opened nine Burlington Coat Factory Warehouse department stores and relocated seven Burlington Coat Factory Warehouse department stores to new locations within their trading areas. We also opened three MJM Designer Shoes stores during fiscal 2006. As of June 3, 2006 we operated 365 stores exclusive of the three stores temporarily closed due to Hurricanes Katrina and Wilma under the names Burlington Coat Factory, which was 338 stores, Cohoes Fashions, which was seven stores, MJM Designer Shoes stores which were 18 stores and Super Baby Depot stores which were two stores.

I will now turn the presentation over to Mark Nesci, our Chief Executive Officer who will announce our officers attending this teleconference and available to answer your questions.

Thank you, Bob. Good morning, everyone. Before we begin our question-and-answer period, I would like to introduce two recent additions to our management team, Liz Williams, our Chief Merchandising Officer, and Tom Fitzgerald, our new Chief Financial Officer. Liz Williams joined us this past June. She comes to us from Charming Shoppes, a women's apparel specialty retailer where she had been since 1995 and where she was President of the Fashion Bug division from 1999 to 2006. Liz has over 30 years of retailing experience. Prior to joining Charming Shoppes, Liz joined Macy's West in California as a trainee buyer from graduating UC at Berkeley. She remained at Macy's for 12 years working in the men's sportswear, home and youth divisions, and rose to the rank of Vice President, Divisional Merchandise Manager, children's.

After Macy's, Liz was the divisional merchandise manager at sports division for Dayton Hudson department stores, where she remained for three years as vice president and general manager women's sportswear division of Sears Roebuck where she remained for six years. Liz has responsibility over all of our merchandising and planning divisions. We look for Liz to refresh our buying and planning practices and strategies and to improve our sales reporting and market analysis as well as to provide overall leadership in merchandising and allocation operations as she had so prudently done so in the past.

It also gives me great pleasure to introduce our new Chief Financial Officer, Tom Fitzgerald who joined us only last week. So we have to be kind to him. Tom comes from Limited Brands where he has been since 2000 and was most recently the Chief Operating Officer of Bath and Body Works division. From 2000 to 2005, Tom was the Vice President of Finance and Chief Financial Officer of Bath and Body Works. Tom has over 22 years of financial and business experience, including 16 years at PepsiCo where he has worked in the areas of finance, marketing, business planning for various divisions including Pepsi-Cola Company, Pepsi-Cola Foods International, Frito-Lay in North America and Tropicana.

Tom has a bachelor's degree in finance from the University of Florida and an MBA degree in finance from Indiana University School of Business. Our team looks forward in working with Tom to improve and expand our finance and accounting capabilities as well as provide us with strategic planning experience. So, operator, we're ready to open up for Q&A and Tom, Liz, Bob and myself are here for questions.

(OPERATOR INSTRUCTIONS). Alexis Gold, UBS.

Just wanted to ask a few questions. I know you recently launched your ad campaign where you're advertising your new return policy. I realize it is very early, but can you give us a little bit of insight as to how customer response has been and whether or not you have seen any pickup with that with back-to-school?

Yes, sure. This is Mark Nesci. It has been extremely positive. We actually broke the ads on September 5, which is a national campaign on TV which was network TV. And it has been received extremely well. I can tell you we're getting numerous calls here about -- to the corporate office and e-mails as well. Our store people obviously are very excited and, to be frank with you, you know business has been good. The month of September, to be frank with you, it has been positive. And we are contributing certainly part of that to that -- the return initiative change that we made. And we look forward to a very good fall season right now. So the early signs are there. And the return rate, by the way, for those of you who might have recalled was around 5.5% of returns. That has increased slightly, not a lot, and we are seeing a healthy pickup right now. So we are very comfortable with it.

That's helpful. And in your financials, I wanted to confirm, I guess a couple of things. I think one of the things I saw was your bad debt expense was reduced by about $3 million during the year. And I just wondered did that benefit your EBITDA by $3 million? I just wanted to find out where that is captured actually in your income statement.

Yes, it did. It relates to bad check expense. And we had switched from paper check to electronic check and we have seen a continual decline in our bounce rate in our check experience. So it has been driven largely by that.

Okay. And just for us to have confidence going forward, I know you just gave us your adjusted EBITDA for the year-end period. Is it possible to get I guess the adjustments for your covenants and [debentures] in the non-cash straight-line rent express and non-cash amortization that I think that your ad back suggested EBITDA for the first few quarters of '06?

For the first few quarters?

Right. If we could get the August, November and February quarters, so that when we look out to '07 we know what adjusted EBITDA numbers we are COMPING against.

I think we've provided that to the bank agents, but if not, we will make sure that they have that. I mean predominately most of the adjustments fall in the fourth quarter. But there were some that fell in the third quarter, but predominately most of it is in the fourth quarter.

Thank you.

Christina Boni, Credit Suisse.

My first question is with respect to your freight costs. You saw those costs going up. What do you see? Obviously, gasoline has come down somewhat. But what can you do to offset those freight costs? Do you see any of that? And maybe you can give us an update in terms of your distribution center as well and how that is going in California.

Sure. Yes, the second half of the year saw pressure on freight costs coming from surcharges from our truckers due to the gas and oil price increases. One of our initiatives has been in the supply side to change the mix of goods that were dropshipped to Central. And we have begun that initiative. We are on track and we see -- the benefits we expected to get from that initiative, we see playing out as we had planned.

So we are optimistic about that. That has been a big part of our strategy to try to counter these increased fuel prices. And then what we have seen very recently is that fuel prices have started to come down again. So we can't control what is going to happen there, but just comparing to prior year numbers with the supply chain initiative that we have, we think we have a plan in place that will keep that in check for us.

And just second on the distribution center, could you give us a sense of how much is flowing through that distribution center, where you are and what kind of other benefits you will get from the distribution center?

Well, we actually are well ahead of a plan on the ramp-up as well as the initiative that Bob was speaking on. You know we are not at full capacity in the new San Bernardino facility, but we certainly are well ahead of our plan.

The ultimate was that we felt the original ramp-up was going to take much longer to get to the original goal that we had, which was roughly 70% through distribution and 30% dropship or in that range. We felt the ramp-up would take us probably up to a year to be able to do that. We really accomplished it much quicker than we had expected. And we did have some concerns about pushing too much through that building too fast and we did have a little bit of a ripple effect there.

We have since solved that and we are looking forward to a good season and getting a lot of capacity through that building. But the ramp-up happened in an expeditious manner and it actually is improving dramatically, obviously lowering the freight cost.

And finally you did release your first-quarter comps. And you also just commented on fall as well. Maybe you can just give us a sense of what you're seeing with the consumer, any changes obviously reductions in gasoline is helping, but maybe any comments you can make on what you're seeing the environment to be?

It's actually been quite positive. The fall goods are selling quite well, as a matter of fact, much earlier than usual. We are getting some nice returns on things like short wool coats, sweaters. Boots have done very well and, as you know, we are certainly a strong coat company.

Susan Jansen, Lehman Brothers.

I note that you were undergoing a host of new systems implementation, including warehouse management, markdowns, returns and transportation management. I was hoping you could give us an update on how each of those implementations is proceeding right now?

Sure. I mean in the WMS, the Warehouse Management Systems, we are still analyzing some alternatives and there are lots of tweaks. And we certainly are looking forward to Tom who has joined us obviously this week to participate in that strategic planning process.

And as far as the markdown optimization, it's still working. It is still in the test [probe]. We are not ready to roll it out to all the divisions at this point. And there is a lot of data, a lot of history that we needed to load. And we did not feel comfortable going through the season, this fall season, of loading all that data, with all the changes that we were making as a result of the planning and allocation needs that we had, along with Liz joining the Company, that we wanted to make sure that we did this in a meaningful way but yet a measured one.

So I would say that between price optimization we will still continue to receive some of those benefits in the areas that are using it. But before we expand that, it probably will be the spring season of this coming year.

And then for Liz, can you just comment on what you think about the quality of the inventory at this point in time? Are you fully set for fall? Do you have anything to clear out? Where do you sort of fit in that basis?

You know actually we are ahead of our fall inventory currently today. I think we are in good shape, and we are -- certainly our aged goods are less than a year ago, so I think we are moving towards a good target.

Excellent. Thank you very much.

[Marianne Manzolillo, Angelo Gordon.]

You state that in fiscal '07 you planned to open two new stores. I was wondering if you could comment on the cost of opening the two stores.

No, the plan was more for 20 or 30.

Twenty stores.

I'm sorry. So that is the plan for fiscal '07?

Yes.

Right.

I think our long-term expectation is to open roughly 20 stores a year, any given year may be, plus or minus a couple, and we certainly see '07 in that range.

Opening 20 new stores. So could you comment on the cost of the 20 new stores?

We don't expect the cost to differ materially from what we have seen in prior years. It is typically -- a buildout is $2 million to $2.5 million a store. And we see that in a very similar spend pattern for '07.

Great. And then also you state numerous times that of your policy of purchasing preseason merchandise versus in-season merchandise. Could you comment a little bit on the prices of that merchandise? Has that been fluctuating at all? And also perhaps your percentages of preseason verses in-season purchases has been fluctuating at all?

Not that I can see.

And then as far as the price differential between the preseason and in-season purchases?

I think the only caveat I guess would be that when you describe preseason as -- there is something we do in the industry called SMU, Special Makeups, or cuttings they refer to in the industry. In those opportunities where we are doing more cuttings, we tend to get a better or more aggressive price. So there are some incentives for us to do some of these cuttings on what we call more staple or product that we feel is very safe and reliable and something from the vendors that we have good experience with. So in that particular case there had been some tweaking that Liz and I have been looking at, along with the other divisionals to talk about how we can do some more of these cuttings to support possibly some margin enhancement.

And you are -- your ability to procure this merchandise is similar as in the past and there is not a shortage of this type of merchandise.

No, no shortage of merchandise. There are lots of goods in the marketplace, I can tell you. And being in retail myself for over 30 years, it has always been there and it looks like it will continue to be there as far as I can see. But there is no shortage at this point in time.

[Maura Connor], Citigroup.

Does the Company own its own trucking network, or does it outsource? I understand that there is a fuel surcharge. And I was just wondering how that worked into your income statement?

No, we outsource it. It's what we call LTM, that's -- it's LTM, less than a truckload. And there's a network of different truckers that we have arrangements and contracts with, which are negotiated regularly.

So the Company does not own any trucks or any fleet or anything like that?

Correct.

No.

Jeff Kobylarz, Stone Harbor Investment.

Your coat sales, they were down from -- they're down about 13% from fiscal '05 to fiscal '06. Can you explain why it is down that much?

You are talking --?

Are you referring to 11% -- percentage of sales?

Yes, it was -- let's see 13.7% of sales the previous year. Then it was 11%.

Okay. As a percentage of sales, they were down because we have had some other businesses grow significantly above the total. Particularly shoes has been really excelling in some of our other sportswear areas, and they have actually taken over a larger percentage of the Company's sales.

And I will tell you that's a very good sign. As a retailer who has been dominating coats for many, many years and has the name of the Burlington Coat Factory, we're obviously considered to be a huge advantage that, as a percentage of sales, we don't believe we are losing market share of coats. But the fact that we're such diversified retailer today and we have the lay of the land in geographic across country that we can open up stores, it really balances the downside. So it is really a plus for the management team that we have been able to diversify the product so much.

And the coat sales for September have actually risen significantly. We have been very pleased with them overall.

I believe if it's cold and stays cold for the winter. As history has told us, we have normally a very extremely good coat season, so we are hoping for the same this year.

And Mark, you mentioned you talked about 70% internally fulfilling your stories and I think 10-K said you were 56% in '06 and so are you going to be at 70% this year?

We hope to be. We are on plan right now. There may be some deviation as we get into the season of coats. When we are in season, we often look to dropship more goods because we are buying goods that are fresh in the marketplace and we want to get them -- we don't want them through a distribution cycle. We want to go directly to our stores where we can put them out for sale. So there may be a slight deviation but all in all I would say we are on plan right now.

And can you say what the EBITDA was from the 53rd week?

It was about $5.3 million.

(OPERATOR INSTRUCTIONS). William [Ruder], Bank of America Securities.

When you guys talk about the move to dropshipping and the expense savings there, is this going to affect your freight and your gross margins, or are these expenses that are in your SG&A?

No, freight is in our cost of sales.

Okay. So this is an opportunity to expand your gross margins going forward, right?

It is an opportunity to reduce freight as a percent of sales, yes.

Is there any way to quantify what you think this opportunity could mean on an annual basis and maybe when we could try and get there?

Well, it's a moving target only because in part, this is offsetting the fuel increases that we saw in the second half of last year. So to the extent these fuel prices continue to rise or drop, it is really a moving target. But overall we expect the initiative to help us contain freight cost and keep them in line with where they have been historically in the Company.

I understand the moving target. But if you compare it to the time of the deal, when the deal was done and where you were at kind of 50-50 dropship, do you know is there any way to quantify it relative to that kind of base case?

I've only got a week here, Bill, but we have quantified it. I think we still have a lot of kinks to work out and make sure we are tracking the way we want it. It's still pretty early. So we would rather kind of under-promise and over-deliver on that. But I think Bob summed it up in terms of what net effect we are looking for. We will share more with you as we track actual.

And then with the 20 stores you guys are planning this year, do you have any sense for whether these might be MJM Shoe stores where you guys had some pretty strong comps last year or Burlington or any sense of that breakdown?

These are all Burlington.

All Burlington.

All Burlington. Eleven of those have already opened for this fall season, by the way.

And then with CapEx for fiscal year '07, can you guys provide us an estimate of what that might be?

Gross CapEx for the year is going to be around $90 million.

Then finally in terms of Baby Depot, do you guys have any plans for growth there in the Super Baby Depot concept?

No, actually we are quite pleased and happy that our baby business adds to the internal growth of the store for the other divisions and we see that the benefit for cross-shopping that it's better suited in our stores. It could be broken out conceivably. We did have a few of these, but we are not going to push it at this point. And we feel that having the mix of the product in our existing store under one roof helps cross-shopping amongst all the other divisions.

Zubin Kapadia, JPMorgan.

It's actually Carla Casella from J.P. Morgan. I was wondering on the -- your new stores that you are opening. How are you seeing the real estate market? Any trouble -- are you having any trouble getting additional sites and how far in advance do you normally have to contract to get a site?

No, actually we are seeing just the opposite. We are seeing it loosening up. It was rather tight for us for the past few years and the pipeline seems to be growing disproportionately and there are lots of opportunities.

So we are quite aggressive. We are beefing up the support end of our real estate division here to make sure that the pipeline stays fluid and that we can find locations that we are targeting, which is a little bit of a change from the historical performances where we really were predominately optimistic-driven. Not that we are not opportunistic-driven today, but to the extent that we are targeting markets in a better uniform array, I think it should result in better new stores' performances; at least that is our goal.

And how far in advance do usually have to contract to get them?

It depends. I mean we are already out two years on some boxes. We would never have been out two years in prior years. And the opportunistic deals, I mean I can't tell you that they don't still come along. I mean we're working right now for this coming spring and, although we have four done deals that are signed and executed, we have four more that we are still working on that could conceivably still be brought into the spring season. So it really depends on the nature of the real estate, whether it is existing and the nature of the remodel. There is just a lot of factors that go into deciding whether how fast we can get them from conception to opening.

And then on the other end of the spectrum on closures, any stores that are losing money or that are slated for potential closure in the next year or two?

Well, what we do have planned is our Cohoes division. We operate seven stores in the Cohoes division. Four of those will be converted to BCF, to Burlington's, and the other three will be shut down. So those are the only three have planned right now.

Do you have any others that are unprofitable?

Well, the majority of all our stores generate a formal profit. There may be a small amount. And when I say small, it is probably under 6, 7, 10 stores. But those are stores that are in the midst of lots of different workouts right now. Some are being relocated or in the process of being negotiated to be relocated. But there is no additional planned closings other than the Cohoes stores for this year right now.

Maura Connor, Citigroup.

Could you give us a range of on your coat pricing what the lowest price of a coat is and the top price of a coat as well as the average price, just to get a sense of what consumer you are appealing to?

They start at $19.99 and they go to $299. We obviously have some that go to $599. But the average is a high of $299. And the middle price is about $79.99.

Jeff Kobylarz, Stone Harbor Investments.

Just curious about your working capital. Your inventory was down year-over-year $13 million. Your Accounts Payable was up $54 million. Can you maintain that kind of payables to inventory ratio?

We believe that's sustainable.

And then about your markdown optimization software, the K says that you are going to be rolling in the men's, youth, shoes and linens. Is that now put off until the spring category?

It has been put off to the spring and we may be tweaking a little bit more in the youth division, but overall it has been put off till the spring.

Can you give your comments about how it's done in the women's sportswear area?

Overall, I think it has helped people see their markdowns and understand what they need to take by region of the country. We started it last October. So it is a little hard to read because in the fall season, it didn't have a complete fall. And in the spring season they had some issues with how they had put in some of their requirements. So I am not going to tell you that we know too much today.

I mean I think it is safe to say that the utilization of the software from when the family was here, we're altering the results of it. And I think they didn't really use the system as sufficiently as we could have. So that is what we are trying to get streamlined online. But the big advantage really is the concept of taking a regional markdown as opposed to national which we had always done historically. So when something didn't sell well, we took it across the whole country as opposed to where we needed to take it. So that should show improvement and that is why we are looking forward to the rollout hopefully next spring.

I have used the system in the past and we did change some of the requirements going into fall. So I think we will get good utilization going this fall.

And then your August quarter, when are you going to report that?

We are reporting that to the bank's internal numbers today, and we will be reporting to the noteholders 45 days.

So is that like in three weeks?

October 17, I believe.

Mr. LaPenta, there are no further questions at this time. I will now turn the call back to you.

Okay. Thank you very much for your participation. That concludes our conference call for today.

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