Burlington Stores Inc (BURL) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Coat Factory results for first quarter ended September 2, 2006. During today's 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 Tuesday, October 24, 2006. It is now my pleasure to turn the conference over to Mr. Robert LaPenta, Vice President, Chief Accounting Officer and Treasurer of Burlington Coat Factory. 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 and 10-Q equivalents.

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 first quarter ended September 2, 2006 and the date of this conference call.

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 quarter ended September 2, 2006.

Net sales -- during the current fiscal quarter net sales increased $6 million or 0.9% compared with the similar quarter last year. Comparative store sales decreased 0.7% during the quarter. Comparative store sales decreased 0.1% in June, 2.1% in July, and 0.1% in August. Stores opened during the first quarter of fiscal 2007 contributed $2.7 million in net sales for the first quarter of fiscal 2007. Stores opened during fiscal 2006 contributed $15.1 million in this year's net sales in their noncomparative periods.

Other revenues -- other revenue consists primarily of rental income from lease departments, sublease rental income and layaway and alteration charges. The increase of $0.1 million from the prior year's balance of $7.3 million was primarily due to an increase in rental income offset in part by decreases in alteration and service charges.

Cost of sales -- cost of sales increased $1.6 million for the three-month period ended September 2, 2006 compared with last year's quarter. The dollar increase in cost of sales was due to the increase in net sales during the quarter. Cost of sales as a percentage of net sales decreased to 65% in the fiscal 2007 three-month period from 65.4% in the fiscal 2006 three-month period. The 40 basis point decrease in costs of sales was primarily due to increases in initial margin.

Selling and administrative expense -- selling and administrative expenses increased $12.6 million or 5.4% from the fiscal 2006 three-month period to the fiscal 2007 three-month period. The increase in selling and administrative expenses was due primarily to expenses related to the merger transaction of $9.8 million and to an increase in the number of stores in operation this year compared with 2006. Selling and administrative expenses excluding the $9.8 million in transaction costs were 36.1% of sales compared with last year's quarter of 36.0%.

Depreciation expense -- depreciation expense amounted to $35 million in the three-month period ended September 2, 2006 compared with $22.6 million in the three-month period ended August 27, 2005. This increase of $12.4 million is attributable primarily to the step up in basis of the Company's fixed assets related to the merger transaction of approximately $416 million and the capital additions made subsequent to fiscal 2006 first quarter.

Amortization expense -- amortization expense was $10.9 million for the three months ended September 2, 2006 compared with zero for the similar period a year ago. 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 as a result of the merger.

Interest expense -- interest expense was $35.4 million in the current three-month period compared with $1.8 million a year ago. 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, gains and losses from sale of assets and other nonoperating miscellaneous items. In fiscal 2007 other income net increased $0.9 million to $1.0 million compared with fiscal 2006. The fiscal 2007 period benefited from the absence of losses of $1.5 million resulting from the write-off taken in the quarter ended August 27, 2005 of the book value of fixed assets of stores closed during the quarter. Interest income amounted to $0.9 million and $1.4 million for the three months ended September 2, 2006 and August 27, 2005 respectively.

Income taxes -- income tax benefit was $38.3 million for the three-month period ended September 2, 2006 and $10 million for the similar fiscal period last year. The effective tax rate for the first quarter of fiscal 2007 was 42.5% compared with 38.7% a year ago. The effective tax rate is based on the Company's forecasted annualized effective tax rates. The increase in this effective tax rate is primarily due to decreased work opportunity job credits in fiscal 2007.

Net loss -- net loss amounted to $51.8 million for the three-month period ended September 2, 2006 compared with $15.9 million for the comparative period last year. The increase in the net loss of $35.9 million is due primarily to additional interest, depreciation, amortization and selling, general and administrative expenses incurred as a result of the merger transaction.

During the first fiscal quarter of 2007 the Company opened five new Burlington Coat Factory stores and reopened two stores previously closed due to hurricanes Katrina and Wilma. Five Burlington Coat Factory stores were closed during the quarter. At September 2, 2006 the Company operated 367 stores in 42 states.

We will now be available to answer questions. Other officers here attending the conference who also are available to answer your questions are Mark Nesci, our Chief Executive Officer; Tom Fitzgerald, our Chief Financial Officer; and Liz Williams, our Chief Merchandising Officer. Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS). Grant Jordan, Wachovia Securities.

Thanks for taking the questions. A couple things. First, comparing the 10-Q to the 10-K, looking at the CapEx budget, it looks like that's come down from like 99.5 to 54.8 for fiscal '07. Am I looking at that correctly?

Yes, you are. For fiscal 2007 we are netting against a CapEx budget a significant amount of landlord contributions that we're going to be receiving. So we're projecting close to a $100 million gross spend in CapEx, but anticipating getting close to $50 million back from landlords primarily for the new store buildouts and the relocations. So in the first quarter we spent $11.2 million in CapEx for new store growth, most of that we'll be getting back in the second quarter from the landlords.

Okay. Second question on the $9.8 million charge in SG&A, can you just maybe give us a little more color on that? I would have thought that any charges related to the merger would have been in the fourth quarter.

There was a significant amount in the fourth quarter. There continue to be some transaction costs that we spend primarily in legal. We still have the class-action lawsuit that hasn't been finalized yet; it should be finalized shortly. And we would expect the legal expenses to stop after that. But it also includes other expenses that are part of selling, general and administrative that are a result of the merger transaction such as we reset the straight line rent computation and there's a non-cash rent charge that's now being included in occupancy charges as a result of the merger transaction. There are certain stock option expense that's being recorded, certain retention bonuses that are being recorded as a result of the merger transaction.

So on the statement of cash flows, if I'm already adding back non-cash stock comp and non-cash rent which was like 2.2 and 2.5 in the quarter, that's also included in that $9.8 million charge you talked about?

That's correct.

Okay. And then finally, just more of a bigger picture question on the inventory. Some of the store managers that we've talked to feel like maybe you guys have over the past couple of months tried to improve the quality of the merchandise coming into the stores. Maybe you can talk about if that is part of the strategy and how that's going?

Yes, we are definitely working on improving the age of the inventory and actually the quality and trying to buy more current and to stay current and that's working very well.

Okay, great. Thank you.

William [Reuter], Banc of America Securities.

Just a couple quick questions. With regard to gross margin expansion that we saw in this quarter, the 10-Q noted that it was kind of an increase in additional margins. Was this simply less discounting or was it an issue of mix? Of if you could speak a little more in terms of gross margin and to kind of how it shook out?

Most of it's from markups actually and the improvement of markup and that's just through stronger negotiations in the marketplace.

Okay. Broadly define -- and I don't know if you can comment on this -- but can you comment at all on how gross margins on coats compared to the rest of the products in your stores?

Coats has always had a strong gross margin and continues to.

Okay, so relative to other products -- I mean qualitatively, is it directionally more or less or --?

It depends on the category. There are several examples in other divisions where we get similar margins in certain classifications, both in sportswear, men's and children's. But coats has always been a very stable and a very strong margin driver for us and it continues to be so.

Historically it continues this year, has been a little bit better than the rest of the apparel category in total and continues to have that same profile this year.

Okay, that's useful. And then one more. Could you talk to us a little more about the timing of the rollout of the markdown management system across some of your other categories like men and youth that I think we're going to see sometime in '07 or maybe '08? I'm not sure.

Yes, we're starting an additional rollout. All of youth actually in February and part of men's and we're adding women's as well to that. That should help us for -- by store regional markdowns to actually be taking markdowns in categories that sell differently in parts of the country.

All right, thanks a lot, guys.

Alexis Gold, UBS.

Good morning. Is it possible to give us any sense for how coat sales are shaping up? I know it's early in the season, but if you could give us an idea as to how things are trending versus last year that would be helpful?

I can tell you this, when it gets cold we sell a lot of coats. So we do a lot of planning for cold weather, we'll tell you that. But there are certain classifications that are doing better than others in coats.

Actually leather has been very good this year and short wools have been quite strong. And we've been very pleased overall with our early trends in coats.

That's great. And just, can you give us a sense for what you're seeing in the competitive environment right now? I know you know Wal-Mart was out yesterday talking about some slowing in their same-store sales for October. But I know you had indicated that there was some strength in back to school; it sounds like coats are strong. Can give us a sense of whether you're seeing anything similar or things are still trending pretty positively across the board?

We're pretty comfortable with how things are trending. Cold weather still impacts us and all of our categories are strong there including sweaters, coats. I'm seeing some nice improvement in career wear. So I'm pretty strong overall.

Okay. And just lastly -- I know that you've been advertising the return policy pretty heavily. Can you give us a sense for how your customers are reacting to the return policy and what you're seeing just in terms of volumes as a result?

It's a little early to measure. We really have about seven weeks into the campaign roughly and I will tell you that we're getting a tremendous amount of accolades from consumers who are appreciative of it and lots of letters and things of that sort. But I can't tell you we've been able to measure it yet; it's a little early.

Now I will be frank with you, we really were expecting not to see an immediate reaction to it, that it would take some time. And the bulk of it I would say that we would hope to see would come in the Christmas selling season when people are really out there looking to buy and exchange and return gifts.

But so far so good. The transition has worked smoothly in the operational side of the business in terms of how it rolled out. And we obviously are receiving much less complaints back at the corporate office about our customer service as a result of the fact that we do give cash back today. But I would tell you that we're looking forward to the Christmas selling season.

And I know it is early to say, but do you get the sense that it's your existing customers who are buying in higher volume or that it's driving new customers into the stores?

I think it would be early for me to tell you that we clearly understand what's happening yet, but I will tell you that a little bit of both has been happening. We see both, we see some new customers coming into the store who said they didn't shop us before because of the policy. And now they're coming into the stores -- what we were hoping to achieve. And there's no doubt in our minds that even in our existing employee base, believe or not, we're finding employees are buying more for the same reason. So I would tell you all the above is happening, it's just a little too early to really measure it yet.

Great. Thanks very much.

Susan Jansen, Lehman Brothers.

Thanks for holding the call. I was wondering if you could talk about the home products business a little bit. I noticed that revenues are sort of flat quarter on quarter. And I'd just like to know what trends you are seeing in that business right now.

Yes, overall the larger furniture categories have been very strong for us as well as a combination of products that when we sell multiples are quite good. Bed in a bag for instance is quite good. When we sell packs of sheets they're quite good versus individual.

Is there anything weaker that's offsetting that perhaps?

Yes, I'm disappointed a bit in the bath area in particular, some categories in towels. We are reassorting part of our gift area right now, wall art and some accessory areas that we know will get some strength later, but some of the initial trends earlier weren't as strong.

So you view that more as an assortment issue than a competitive issue?

Yes, I do think it's an assortment issue because when we have been changing the assortments, we are seeing some nice returns from that.

We've also augmented that staff, to be frank with you, and we did bring in a new divisional to augment the staff which we thought we could use in that particular business and it does seem to be working well there.

That's helpful. I also noticed that your advertising was down about 20% during the quarter. Is this a timing shift or are you reassessing? What's going on with advertising?

I'm sorry you said down 20%?

I think it was down -- the advertising expense was down quarter-over-quarter, year-over-year.

Yes, it was down slightly, it was just timing but not -- I don't believe it was down 20%. I can follow up and confirm that with you.

Okay. It's possible I did the math wrong. So it is just a timing shift.

It would be a timing issue if it was whole.

Okay. Are your plans for advertising this year to step it up any in the holiday season given that you've now gone to a cash return policy?

We have. And actually what we've done is we really reviewed the entire advertising budget prior to this initiative. And we have definitely targeted -- if you notice, in every one of our commercials regardless of what's running it will also mention the cash back policy in it, both in a logo form as well as stating it. And it's in all print and inserts as well as whatever ROP we do and as well as TV. And in addition to that we've made a conversion, the methodology in terms of getting much higher gross rating points which is one of the measures of viewership in TV. And we are substantially increasing those GRPs.

I have seen it, so I guess you're successful.

That's a good sign.

Last question. The $9.8 million charge that's in SG&A, the one time, I was a little confused as to why you didn't add that into your adjusted EBITDA calculation. Is there a particular reason for that?

It is being added back to the adjusted EBITDA calculation.

Oh, it is. So the various component pieces are back in the -- are in the adjusted EBITDA calculation?

Yes.

Okay. I thought that might be the case, I just thought I would check. Thank you very much.

Christina Boni, Credit Suisse.

Good morning, everyone. My first question, just a follow-up on gross margin. Could you give us a sense if -- I know you highlighted shrink last quarter and I was curious what was happening in terms of shrink, if you were more pleased with the progress that you were making there. And maybe an update on distribution as well?

Yes, shrink, we're booking an estimate for shrink in the first quarter which is consistent with what we were booking last year. We won't know actual shrink results until the fourth quarter when we take physical inventory. So shrink expense, unless something comes to light that will make us reevaluate it, will be consistent throughout the first nine months of the year.

Okay. And then on distribution, can you give a sense if there's any update there?

I'll take that. I think, as you know, our initiative is to move more of the goods through our central warehouse rather than direct shipping to the stores. And we're continuing to make progress on that initiative moving from where we were about half of the goods coming through the distribution center to more like 70% going through the distribution center.

But as you know, this is a key time of year and we're sort of being flexible in the different categories to make sure we don't miss any business as we go through what is a pretty big transition for us. So trending away from 50-50 towards 70-30 and feeling good about the progress.

Okay. Good. And just in terms of your revolver borrowings as of September, maybe you can give us a sense if from a cash perspective you were on plan and what we should see in terms of peak borrowings as you go into the holiday season?

We actually peaked in September, early September. We've paid back an additional $50 million since then and we continue to stay on our availability plan and we would expect to continue to pay that balance down and be almost out of it by the end of the calendar year.

So when we look at the September 2nd number, that's really essentially towards the peak?

That's where we peaked, that's correct.

Okay. And then 50 down from there?

Yes.

That's helpful. Thank you very much.

Karen Miller, Bear Stearns.

In your 10-Q you mentioned that you had negotiated to have some private-label men's goods manufactured for you and that you might expand this to other areas. Can you talk a little bit about why you decided to switch from your general policy of offering branded apparel? And would you expect to have better margins if you did go more of this private-label route?

Sure. Actually we're not switching from our policy of all. We are always going to be a branded operation, it's what we built the business on and we continue to do that.

What we're really looking to do here is we took -- in the case of the men's clothing business, we decided to augment that inventory. And the way we did it was we took what we call opening price points that were non-branded apparel to begin with. There were names that didn't have any name recognition, they were really meaningless names. They were made by several different manufacturers scattered about the Orient.

What we chose to do was to brand a product which in this particular case was the name [Fumagowi]. And Fumagowi is a brand that's been out in the wears for many years. And we ended up making an arrangement with the licensor in this particular case to have the exclusive to sell that brand in our stores. And in doing that what we're really doing is taking nonbranded goods that were before, putting the Fumagowi label on it which does have name recognition and it's one that we can advertise exclusively that's going to be sold in the Burlington stores.

So that will be a very small percentage of our total business and all of us retailers -- all the off-pricers that you can think of, whether it's the T.J.'s, the Marshall's -- they all have what we call nonbranded apparel as well. So most retailers operate with some of this, and the rationale behind it obviously is to help them get more margin and that is our plan with this rollout.

Now when you say roll it out, we're going to roll it out certainly in men's sportswear and accessories before we roll it out in any of the other divisions. So we're going to test it there first and then we'll decide whether we roll it into any other divisions.

Okay, great. Thanks. And then just if I could expand on the answer on Alexis' question regarding how you're seeing sales. I know you were a little bit more specific on your fourth-quarter conference call that September was trending positive on the back of a couple of quarters of negative comps. Could you just comment a little bit more explicitly for us if you are seeing those same strong trends in September carrying over into October?

Overall the categories that were doing well in September are still doing fairly well in October. So I'm feeling comfortable with October. I would say that September is -- part of September's business was driven off of a very strong cold spell that happened for the entire industry and that probably won't be repeated in October because it got cold last year in October.

Would you say that some of the September sales were borrowed from October? Do you think that's possible?

No, I don't think they were borrowed.

It's no secret that cold weather does drive business in all retail this time of the year. And obviously all retailers have cold weather garments, not just Burlington, although we obviously have a mainstay in the coat business. But having said that, truly we do see a significant difference when there's a 3 or 4 degree difference from this year to last year in each market. And we do look at weather in the entire country by market. And we literally log it that way and we measure our sales against that way as well. So we will tell you that cold weather does bring a lot more consumers into our stores and we do see a big lift when the cold weather turns on. So we do look forward to that.

And are there any particular fashion trends that are helping the coat sales? I know that you had mentioned last year your margins were hurt a little bit because down coats were popular and they are in general less profitable than wool coats. It seems like just based on your comments that wool coats are back in favor again. So we could expect that that would be little bit helpful?

Yes, and actually down is still quite good and is still our number one category. It's just not trending -- it's trending well, it's just other categories are trending stronger than I expected them to trend. So that's why I mentioned short wools and leather.

I think what you may be recalling as well is that there was a particular style, a coat that was manufactured under a brand last year that we sold a substantial amount of coats of that one style, which is an unusual event. We sold probably a few hundred thousand or better of this one particular coat. And that coat we do have back in business this year. We have it again this year -- we didn't expect it to do as well, but it's doing quite nicely.

Okay, great. That's it for me. Very helpful. Thank you.

Carla Casella, JPMorgan.

Hi, I wanted to ask about the competitive environment, specifically we're seeing Wal-Mart become more aggressive in apparel; Kohl's is doing pretty well at the low-end. And then I'm wondering also at the department store level are you seeing a better strategy or more consolidated strategy out of Federated now that they've completed the merger?

I don't think I've seen it yet for all of the Federated stores, so I'm not sure that -- I certainly can hear it in the marketplace and there's still a lot of concern, which helps us, because of the amount of resources they are uncertain about how much business they're going to do with Federated. So that always leaves goods on the table for us. I really haven't heard a lot about Wal-Mart. I know that they've had some issues with their apparel business and I'm sure that that hurts the marketplace in some degree.

If you're referring to their trying to lead the fashion business or get into the fashion business, I think they've had not a stellar result there yet. And it certainly doesn't appear to us in the retail environment that that's a business that they really understand well yet at this point in time.

Okay, great. And then on the -- you've had a couple questions on inventory, but specifically how would you say you're positioned for the holiday? Is your inventory leaner, more full price, going into the holiday do you expect more initial markups?

We're in actually very good shape with our inventory right now. We're very pleased with what the assortments look like and what the overall dollar amount is.

Okay, great. Thanks a lot.

Jeff [Kobylarz], Stone Harbor.

Good morning. I was curious if you could just comment about the difference you're seeing in the cost of your freight and shipping cost this year versus last year?

As Tom spoke to earlier, a big supply chain initiative for us has been to shift from dropship to central. So as we see that we've been benefiting from better freight spend as a result of that. That's the big driving force why we want to convert from the dropship. We've seen with actual fuel prices with the softening of the gas and oil prices, we haven't seen any of the spikes from the fuel surcharges that we saw last year.

Okay. That's good. And can you comment about the availability of goods out there in the market?

Yes, it's still quite strong. Actually I'm seeing more and more in the apparel categories than I've seen before. I think that the apparel business overall has been just fair, particularly in ladies wear. So I think that there is a tremendous amount of goods available.

I will attest that I am also -- tell you that what we said earlier that with the Federated merger and what have you that there clearly are still a lot of rambunctious vendors out there that are very nervous. And it appears to us that there is certainly no shortage of merchandise in the marketplace today.

Okay. And then Cohoes is a very small part of your business, but the comps are down 12%. Any general comment about what your thoughts are about that business?

Yes, we're winding it down. The plan right now is to officially close that chain down which will be done sometime after the holiday season. And likewise we are going to take at least -- right now the plan is to take four of those boxes and probably convert them. At least that's the plan. We're working through those arrangements with our landlords as we speak so they will continue to operate four stores, it just will be under probably a different name, although we're still working that through.

All right, thanks very much.

(OPERATOR INSTRUCTIONS). [Marianne Manzolillo], Angelo Gordon.

I have a question regarding inventory. I see year-over-year your inventory is up by about $20 million and I was wondering if that's a factor of perhaps the new DC you've opened. Or else also as you shift from a dropship to central distribution, will you need to have more inventory on hand?

Mostly the year-over-year inventory is a function of new stores. We've opened 12 new stores in fiscal 2006, we've opened five in the first quarter of 2007 and we're planning 19 stores or another seven stores that opened in September. So most of that inventory would have been bought for those stores in the first quarter.

And we're right on our inventory plan and actually a little lower than that. So we're quite pleased with where we are in inventory right now. You won't see any issues with us.

And Accounts Payable, I noticed that's quite a bit higher versus last year. Is that a sustainable level or is that just a onetime blip?

The terms haven't changed dramatically. It will fluctuate from time to time. But essentially historically the payables, the inventory relationship should remain constant.

Okay. And then the question with your new sales return policy, what have returns been like? Have they been in line with expectations and could you maybe comment on perhaps what you're seeing in terms of returns?

I think as we expected the returns would increase a little bit. They're sort of in line with expectations. I think to Mark's point earlier, it's a little bit premature to fully assess and analyze given we're still pretty new into the total impact. But the initial response in returns is basically in line with what we expected.

It's a two-week policy, correct?

No, 30 days.

All right, thank you very much.

Andrew Berg, Post Advisory Group.

Sort of along the lines of the last question, to the extent the returns are running around the levels you'd expect them, can you comment at all on what you're seeing with respect to people who are coming back and doing an exchange versus a return? Are you finding that while you've got more people coming back and wanting to take advantage of the policy that they're swapping the new stuff versus just flat out cash returns?

Yes, there is that occurring and we do see customers who are bringing back product who are literally not only exchanging it but they're buying more in some cases. So that transaction that has an exchange shows some slight increases in the transaction itself -- in the sale of the transaction.

Okay, thank you.

Mr. LaPenta, there are no further questions at this time.

Okay. Thank you, everybody, and this will conclude our first-quarter conference call. Thank you, operator.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.