Burlington Stores Inc (BURL) 2007 Q2 法說會逐字稿

Welcome to the Burlington Coat Factory's second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Robert LaPenta Jr, Vice-President, Chief Accounting Officer and Treasurer of Burlington Coat Factory. Please go ahead, sir.

Thank you, operator. Good morning. In accordance with our Safe Harbor guidelines, 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 projective store openings. Weather patterns.

The company's ability to control costs and expenses, and other factors that may be described in the company's 10K and 10Qs and 10K and 10Q 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 express 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 second fiscal quarter ended December 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 second fiscal quarter ended December 2, 2006. The company's fiscal year 2006, which ended June 3, 2006, was a 53-week year. As a result, each of the quarters in fiscal 2007 begins and ends one week later than the corresponding period of the prior fiscal year. All references to comparative store sales data compares the 13 weeks ended December 2, 2006, with the prior year's 13 weeks ended December 3, 2005. Where as all references to net sales compares the 13 weeks of the fiscal period ended December 2, 2006, with the prior year's fiscal 13 weeks ended November 26, 2005.

Overall, net sales in the second quarter were disappointing and fell short of our expectations. We believe the unusually warm weather in October and November caused a softening in same store sales. During the latter part of the quarter, we embarked on an expense reduction initiative to partially offset the soft comps we were experiencing. We believe much of those cost reduction initiatives will affect the results of Q3 and Q4.

I will now review the key highlights from our second quarter. Net sales, during the second fiscal quarter net sales increased $39.4 million or 4.2% compared with last year's second quarter ended November 26, 2005. Stores opened during the first six months of fiscal 2007 contributed $26.6 million in net sales during the quarter. Stores opened during the first six months of fiscal 2007 contributed $26.6 million in net sales during the quarter. Comparing net sales for this year's second quarter to net sales for the 13 weeks ended December 3, 2005, we experienced a decline of $.7 million. Comparative store sales decreased 2.4% during the quarter. Comparative store sales increased 5% in September, decreased 1.3% in October and decreased 8.8% in November. To reiterate, the company attributes unusually warm weather in October and November in many regions of the country as a significant contributor to the decline in same store sales.

Other revenue. Other revenue consists primarily of rental income from leased apartments, sublease rental income and layaway alteration and other service charges. The increase of $3.6 million from the prior year's balance of $8.5 million was primarily due to an increase in service fees.

Cost of sales. Cost of sales increased $11.7 million for the three-month period ended December 2, 2006, compared with last year's quarter. The dollar increased 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 61% in the fiscal 2007 three-month period from 62.3% in the fiscal 2006 three-month period. This decrease was primarily the result of increases in initial margin and reduced freight cost.

Selling and administrative expenses. Selling and administrative expenses increased $23.4 million, or 8.9% from the fiscal 2006 three-month period to the fiscal 2007 three-month period. The increase in selling and administrative expenses primarily consisted of $7 million in expenditures related to the merger transactions and $11 [inaudible] million due to an increase in the number of stores in operation this year compared with fiscal 2006. Selling and administrative expenses, excluding the $7 million in transaction costs, were 28.5% of net sales compared with last year's quarter of 28%.

Depreciation expense. Depreciation expense amounted to $37.2 million in the three-month period ended December 2, 2006, compared with $22.4 million in the three-month period ended November 26, 2005. This increase of $14.8 million is attributable primarily to the step up in bases of the company's fixed assets related to the merger transaction of approximately $416 million.

Amortization expense. Amortization expense was $12 million for the three months ended December 2, 2006, compared with $.5 million 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 merger.

Interest expense. Interest expense was $35.2 million in the current three-month period, compared with $1.5 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 nonrecurring, nonoperating miscellaneous items. In the second quarter of fiscal 2007, other income net increased $3.3 million, compared with fiscal 2006. The increase is due primarily to the nonrecurrence of one-time losses recorded in last year's second quarter of $3.5 million for losses incurred from hurricanes Katrina and Wilma.

Income taxes. Income tax expense was $13.4 million for the three-month period ended December 2, 2006, and $28.6 million for the similar period of last year. The company revised its estimated tax rate for the 2007 fiscal year from 42.5% in the first quarter to 38.3% in the second quarter.

Net income. Net income amounted to $11.7 million for the three-month period ended December 2, 2006, compared with $45.4 million for the second quarter a year ago. The decrease in net income of $33.7 million is due primarily to additional expenses related to the merger transaction. If we adjust net income for all of the merger-related costs, net income for the current second quarter would have been $54.1 million and $8.7 million increase from last year.

During the six months of 2007, the company opened 11 new Burlington Coat Factory Stores and two stores previously closed due to hurricanes Katrina and Wilma. Five Burlington Coat Factory Stores were closed during the quarter.

Available today to answer questions are Mark Nesci, our Chief Executive Officer, Tom Fitzgerald, our Chief Financial Officer, and Liz Williams, our Chief Merchandising Officer.

Operator, we are now available to answer any questions.

Thank you. [Operator Instructions] The first question comes from the line of Reid Kemp from Merrill Lynch. Please proceed.

Good morning. I would like to understand some of the changes in your margins in a little bit more detail. I was wondering if you could share with us the percentage of the product that was shipped via the drop ship versus internal D.C. system in the quarter versus last year.

Sure. It's Tom Fitzgerald here. We continue to track to about 70% of our merchandise flowing through our distribution centers, which is a dramatic shift from where we've been in the past, as you know. That number has been fairly consistent over the past few months and week-on-week within those months, and we're continuing to evaluate our opportunities to optimize that even further. So, that was, as Bob mentioned, that was the key contributor to the reduced freight costs that helped our margins.

Is it right, doing the arithmetic here, to look at that as about a $4 to $5 million savings year-over-year? Am I backing into that right?

Well, we don't really like to quote the specific components of our margin. But it's a significant contributor to the margin increase year-on-year.

Okay.

And does that penetration expected to go up more throughout the next couple quarters and, therefore, maybe some more savings are in the pipeline?

Yeah. As I was trying to say, we're continuing to look to ways to optimize that and push it up a little bit more. I mean, but we got the most significant gains, I think, during the current year.

Okay.

Just another one. On the savings that Bob mentioned that you targeted during the quarter as the sales became a little weaker due to the weather, could you elaborate more on what sorts of savings you saw? Was it adjustments in your ad spend late in the quarter? Was it cutting back on store-level staff. Could you elaborate more on that?

Yes, as Bob said, it really didn't affect the second quarter's results. It's really more going to affect subsequent quarters. And, you know, without getting into specifics because then that would be forward looking, really, I think the way to think about it is it's our initiative was not unlike many other retailers would do when they see sales trend softening. It's really more going to affect subsequent quarters. And, you know, without getting into specifics, because then that would be forward looking. Really, I think the way to think about it is, it's -- our initiative was not unlike many other retailers would do when they see sales trend softening. So, we fundamentally just deferred some expenses that we didn't think were all that critical. That we could defer the activities that would drive the expenses. And then we look for other prudent belt-tightening moves. That, when you add it all up and accumulate it, it adds up to some significant dollars. But we'll talk about those more in subsequent quarters, as opposed to now.

I think the only thing I would add to that is that we made sure we didn't do anything to affect the sales going into December for the holiday shopping period. And that's why, as Tom has said, the majority of the savings will continue into the future.

Okay. Tom, last quick one, the borrowing base, did you have full access to the borrowing base throughout the quarter? And, if not, where did it top out in terms of your maximum availability?

Yes, we did. We had -- because of the higher inventory levels, we had full availability of the borrowing base. We peaked at $365 million early in the quarter and we've paid down most of the balance as of the end of the quarter. I believe we had a $165 million remaining and most of that was paid down in December.

Thanks a lot.

Thanks. Lynn, can we go to the next question?

Thank you. The next question comes from the line of Bill Reuter from Banc of America Securities. Please proceed.

Good morning, guys.

Hey, Bill.

I was wondering if you guys could comment at all, if you have any sense of how the cash-back policy has been doing, or I was wondering if the weather man created too much noise to have a good sense of this.

Yeah, Bill, It's a good question. As expected in the second quarter we saw an increase in the trend of returns as we moved through the quarter into the latter part of November. And you also know that we didn't really -- that we rolled this cash-back policy out across the chains, so we don't have the classic control group to compare our results against, and there are lots of things that are affecting our business. So, we're not able to fully isolate the impact of the cash-back policy change from all those other variables. But we still believe that it was absolutely the right strategic decision, both from a competitive and customer perspective.

Okay.

So, even if you look at some of the stores there in the southeast, or where weather might not have been quite as big an effect, it's still challenging to kind of quantify that?

Yeah. I think the way we think about it is -- so, yes, is the short answer. The longer answer is all regions of the country really experienced this unusually warm weather. So, while the temperatures are relative across the country, they're also relative to last year all regions were significantly warmer than they were last year. So, hard to really isolate that.

Okay.

Do you guys break out what percentage of coat sales are in the third quarter historically?

Yes, we track it --

Of the holiday selling season.

Yes, we track it, but we don't disclose for competitive reasons divisional or key categories sales statistics.

Then one last one. Okay. And just one last one. I know you guys said you've been at the 70% of product through D.C.s, which is what you guys told us you wanted to do, which is good. Do you have a sense for where this might be in a few years long-term? Is this your goal, or do you guys have the goal of going farther than this?

The original goal was to get to that 70% range. And we've achieved that. And as Tom has said, we are looking further to see if there is any other optimizing we can do to drive it further. It really depends, to be frank with you, on the purchases in any given year since we do buy a portion of our inventory, what we refer to as, very opportunistically. And to the extent that we buy it in season opportunistically, we typically want to bypass distribution cycles and go directly to the stores and get immediate results. So that buy can fluctuate from year to year. But the range, as mentioned, was to hit the 70 and we certainly have hit that. But we do continue to look to further optimize.

That makes sense. Alright, guys.Thanks a lot.

Thanks, Bill. Lynn, can we go to the next?

Excellent, sir. Thank you. The next question comes from the line of Karru Martinson from CIBC World Markets. Please proceed.

Good morning. In terms of your advertising mix which was materially higher this past quarter, do you feel you are in the right channels with the right product focus even with the warmer weather I couldn't help but notice an emphasis on the coats in your advertising.

Yeah, I think we were clearly stressing the cash-back policy change earlier in the quarter. And, so I think our mix of advertising was very different than it was in historical periods in terms of the messaging we were delivering. The mediums that we used were relatively consistent throughout the year. If I'm understanding your question properly, or, sorry, throughout the quarter if I'm understanding your question.

The messaging added, in literally all of the media that we were utilizing to the fact that we were changing our policy of cash back we felt that to be a prudent decision to go out and tell the public, obviously we had made a significant change to our policy. So whatever commercial that were planned for each of the divisions to cover each of the areas of the business added that message into it. That was consistent. But we didn't significantly change the mix to the divisional level of how we promoted goods.

And how comfortable are you with your current inventory composition? And do you see increased mark downs necessary to move some of the outer wears with December having been warmer, as well, than unusual?

Yes, that's somewhat of a forward-looking statement. What I'd really end up saying is, we overall in the season we are planning more aggressive inventory turns and that was the strategy really at the beginning of the season. Clearly in June and July. So we were able to pull back somewhat in our trends of inventories coming forward by obviously moving deliveries or not purchasing open to buy dollars and we utilized our mark downs to reduce some of our inventories. Particularly in the cold weather areas.

Okay. I guess I'm following up with that lastly and what regions were you seeing some strength in perhaps compared to others that were weighing down on your same-store sales?

Do you mean regions, or parts of the assortment?

I guess I would go for both then.

I just didn't hear the question. We don't comment so much on regional performance and in terms of the assortment.

Yes. Categories that we were very pleased with their trends were youth and infants. The whole boys/girls apparel categories were strong through back-to-school and continuing to trend very well in the dress-up clothing areas. Our shoe areas continually outperformed our estimates, particularly in the youth area and career as well. We were also very pleased with urban, which we have a strength in our urban categories across the board, which helped to continue our trends in juniors, young men's, youth and accessories. And then overall, one of the things we are really seeing a real trend on, improvement started early and continues to grow is the whole career area, which is a strength for our company, so we are very pleased to see that throughout all of our categories of business.

Thank you very much.

Okay, Lynn.

Thank you. The next question comes from the line of Grant Jordan from Wachovia. Please proceed.

Very good. Thank you for taking my question. What question, just in terms of the timing of the two quarters I know in this year's quarter you've got the benefit of a week after Thanksgiving, maybe just talk about how that impacted sales year-over-year.

Well, in terms of year-over-year, it's pushing in each quarter the quarter is starting one week later and it's ending one week later. So, in the second quarter, because of the significant sales per week that we see during the holiday season, that week that was added to the quarter that ended December 2, replaced the week that started in late September and ended in early October. So it was -- I'm sorry, late August and early September. So, it was a significantly bigger sales week that got added to the mix of 13 weeks this year when you compared it to the fiscal week last year. That's why we took so much time to try to explain that phenomena. Because it is increasing sales in the fiscal quarter due to that additional week, or due to the delta to the change in the weeks, I should say.

Can you give us an idea, maybe, just in the magnitude between that week you lost versus the week you replaced it with?

Yes, it was around $24 million.

$24 million.

Yes.

And I assume going into the third quarter probably something similar magnitude if you were losing that week.

Well, the only thing you have to look at in the third quarter is because the Easter season moves up, you may get some positive impact from the shift of the Easter season.

Okay. And then maybe just going back historically whenever you've experienced a prolonged period of warmer weather in a December/January period, just talk about how you addressed that and how maybe this year might be different maybe as you focus on the higher inventory turns.

Well, I mean, every season's a new season. And I would tell you historically when we've had warmer winter seasons in the past, you know, the new season that starts over is like a fresh start. [Inaudible] doesn't realize the warmth of the prior winter they look forward to the spring season opening. So, we are planning just as we typically would plan to have a good spring season. It's true that some of the carry-over items in the cold weather product that increased but to the extent we were put in our buying strategy and were able to cancel enough orders in season where we felt were prudent to do so and we were able to manage this effectively.

Then on the last call you did give some color on how September and October were trending. I was wondering if you could do the same for December and January on this call.

It's Tom here. I know have I only been here three months but I don't recall that we gave much in terms of forward-looking statements. Well, what I will tell you is as we think about the Q2 results we talked about how we believe our results were significantly impacted by the unseasonably warm weather. It certainly impacted other retailers. But we believe it had a really disproportionate impact on us given the importance of our coat, outer wear and other cold weather categories of particularly the latter part of Q2. And you know, as we've said on these calls before, we analyze the weather during this time of year in particularly. Just as an example of the temperature changes that we experienced, the three days after Thanksgiving, so the Friday, Saturday, Sunday, were, on average, 11 degrees warmer across the country, this year than they were last year. So we're not talking about a couple of degrees. Those are pretty significant numbers. And so while coats have really declined as a percentage of our sales over the years, they still represent a meaningful portion of our business in November and into Q3. And clearly the traffic generated by our coat shoppers also positively impacts other departments. So, unfortunately, the unseasonably warm weather and in fact the record-setting warm weather continued into December. So, with that, Lynn, we'll go to the next one.

Thank you. The next question comes from the line of Alexis Gold from UBS. Please proceed.

Hi. I just wanted to say thanks for taking my question. I just wanted to ask couple questions more on coat sales. I know that it's hard to estimate, but I think if there was an estimate we saw [Inaudible] came out and said that they thought coat sales were going to decline 20% this period versus last. I mean, is that a fair number do you think that is in line with what you are seeing? Or are you performing even better than that?

You're speaking to the quarter we just came out of, right? September to November? Are you asking me -- is that what you're saying -- you're asking me if I thought 20% -- I think that's very high. That's what I would say.

It is. Okay. Great.

And I can tell you I have heard of other retailers that have told me such, though.

Okay. But then, in that sense, I guess, you'd say you did outperform the market in terms of your coat sales potentially?

Potentially.

And then, I know you can't comment on specific revenue break down, but is it fair to say, I mean, that the vast majority of the 11% annual coat sales do come during Q2 and Q3?

Yes.

Do you have a sense -- when we just think about traffic, the overall traffic that comes to the stores, do you think a pretty significant portion of that traffic is driven by the demand for outerwear and coats?

Yes, as we've -- historically, I've always said in the cold winter months we drive quite a bit of additional traffic in those winter months because of our coat destination and cold weather-related products and we didn't see that traffic this year.

And I guess, if we go back, it sounds like you're managing through this period pretty well. I think we tried to go back and look at some prior years and see where you have seen maybe similar weather impact and looks like 1998 was a pretty tough year. Do you think this year is tougher than 1998?

Well, I can't imagine 1998 -- this is unusually warmer than any year. So, I can -- some of the record-breaking weather of all time, since they've been recording records in certain markets around the country. But you're right, we have always done a good job. We will continue to do a good job of managing through these tough times. And we are very cognizant of the call associated with the business and we will continue to manage them accordingly.

And I guess just, lastly, we think about the fact that is actually starting to get colder, is it -- do people actually push off those coat purchases? Can you make up more of that in the coming quarter, in this quarter and the next quarter? And do you ever see sales that are pushed into March and April as people run out and buy coats last minute? And is there any sense that March and April are actually getting colder, in general, if we look at weather patterns? Is that something that you see if you look at your trends?

I can't tell you about March and April in general. I will tell you most retailers will all want to see March and April to be warm, so they can sell their -- start selling their spring and summer sales and the wears that they show in their stores. So, we're no different. We want to convert, like all retailers want to convert. To answer your first question, we do see pops. I won't tell you that even now, when cold weather hits, it normally brings a good result. Now there's no assurances we can't tell you with certainly that it could continue throughout the rest of the winter, but as a general rule, when cold weather comes, we see immediate reaction in cold weather-related product.

And then just, sorry, one more. As you look at your overall business, do you think you have been actually more promotional in order to drive traffic to the stores, if you look year-on-year during the quarter and if you look out even the January period that we have to date?

Yeah. We clearly are not a promotional retailer, as you know. We are every day low price. So, we do not want to change the model of this business. It's what built the -- it's the foundation. And it's what built the success of the business to continue to, we believe, to continue the EDLP retailing is something we want to do. Now, there's other things that we can -- that we are trying and testing to see whether or not we can encourage customers to come in, but not playing with price.

Great. Thanks very much.

Thanks, Alexis. Lynn, we probably have time for two more.

Thank you. The next question comes from the line Marianne Manzolillo from Angelo, Gordon. Please proceed.

Hi. You had mentioned before that the breakdown of shipping was 30% drop -- through your D.C.s. How does the breakdown work with your merchandise? Is that kind of similar? Is 70% of the merchandise brought pre-season and 30% of it purchased opportunistically?

Yes, they don't -- I'll let Liz answer more specifically, but those two stats actually don't relate to each other. Because we take opportunistic buys and pre-season buys through various distribution channels. So, Liz --

I mean, the opportunistic buys that come late in the season is the ones that are more significant that would altar our decision of whether we would drop ship it or send it through a distribution cycle. So, we can make opportunistic buys early in the season, but they may come through the distribution center. I don't want to confuse -- just so you understand.

And then you mentioned a couple times the improvement in your gross margin was due to higher initial margins. Could you discuss that a little more? Are you buying your merchandise differently, better? It caused a nice improvement in your bottom line.

Yeah. Overall the prices in the aggregate for the individual categories are largely flat, so we've not increased our margins by pricing higher on our assortments. The improvement margins come from harmonizing our buying practices. Physically we manage the mix of how we bought and physicians and assortments in order to enhance margins without raising the prices. The improvement in margins come from harmonizing our buying practices. Specifically, we manage the mix of how we bought and position our assortments in order to enhance margins without raising the prices.

Are you buying more merchandise preseason, or what is the breakdown between preseason and opportunistic buys?

I don't really see there has been a strong change in how we buy percent to when we buy it. If that's what you are asking me.

Okay.

So, the mix hasn't changed.

So I guess I'm unclear as far as the source of the improvement in the initial margins.

We are buying better. We are leveraging our -- we were taking advantage of opportunities where there could have been other opportunities to take extra mark on when we bought more aggressively. And it's a combination of all of them.

And do you have -- is there any problem buying merchandise? Because we read of retailers perhaps managing their inventories better, so there is perhaps less merchandise available for discounters. Are you seeing that at all?

No, not at all, actually. The phone never stops ringing.

You've got to realize, just like the retailers, many of the manufacturers of public companies they all want to meet their comp numbers, they all want growth and we don't see a shortage of goods in the marketplace available to us.

Okay, great. Thank you.

Thanks, Marianne. All right, Lynn. One more.

Thank you. The last question comes from the line of Susan Jansen from Lehman Brothers. Please proceed.

Good morning. Let me see if I can follow up a little bit on what Marianne was asking. So, was there a mix shift in the quarter, perhaps, because of the warmer weather that helped your gross margin?

No, not really.

Not really? Okay. And then to follow up on other questions, it sounds like your ticket trends during the quarter might have been flattish, but the traffic started to fall off as the weather stayed very warm. Is that the sort of trends that you saw? And can you give us any specifics as you move through the quarter around traffic level?

Well, we don't really have counters, so we can't measure traffic per se, as you may know. But, I think, in general, what you are saying is what we believe to be true. Prices were in the main flat and traffic was softening for many of the reasons Mark talked about a couple questions ago.

Okay, so your transaction count probably declined at least in the last month of the quarter?

It was certainly below our expectations.

Below your expectations, okay. And then to follow up on a couple of other things. The calendar shift that helped the second quarter, but it probably hurts your third quarter, just comparing the week in November to the week it will be March/April.

Yes. That's correct.

Okay, and is that the $24 million number you gave, is that that swing?

That's the swing in the second quarter. It may not necessarily be the swing in the third quarter.

Okay. So, okay, now I think I understand that.

Finally, can you tell us, in broad terms, what percentage of your revenues are represented by winter weather items, not just coats? I'm not asking something specific, but broadly. Is it 20%? Is it 25%? Total winter weather categories.

It's such a hard question to answer, because I don't always consider sweaters a winter weather category, because people buy them year-round. I don't always consider boots if they are trending. So, I'm not sure there is a clear answer to true cold weather versus trends of business categories.

Well, let me ask you a different way. Do you merchandise your more northern stores significantly differently than your southern, and perhaps that's the way if you stock those were they a different category of merchandise in October, maybe that's a way to go at it. How much different is the merchandise?

We do merchandise the south than the north, primarily November, December, really, versus October. Because, it really doesn't get that cold until later in the season.

But sweaters, for example, although they would be a staple for cold weather-related stores, certainly in the northeast and other parts of the country. We also do have a good sweater business even in Texas, because they normally do get a cold snap and when it gets colder there, instead of wearing an outer wear garment, they would wear a sweater more frequently. So, it's really hard to, I think, answer your question.

I guess what I was asking if in November and December you merchandise New York different than Texas, what percentage of the merchandise is different? Is it possible to gave ballpark for that, or is it just too vague?

I don't think it's significant enough for us to report to.

Okay. All right, thank you very much.

Okay, thank you.

Lynn, back to you to wrap it up.

There are no further question at this time. So, I will turn the conference back over to you.

Okay, thank you very much and that concludes the second quarter earnings conference call.

Thank you. Ladies and gentlemen, that does conclude the conference call today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.