Burlington Stores Inc (BURL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory first-quarter earnings results 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 Friday, October 17, 2008. I would now like to turn the conference over to Mr. Robert LaPenta, Vice President and Treasurer. Please go ahead, sir.

Thank you, Franklin and good morning. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's first-quarter 2009 operating results. I am Bob LaPenta, Vice President and Treasurer of the Company. With me today are Mark Nesci, our Chief Executive Officer; Jack Moore, our President of Merchandising, Planning, Allocation and Marketing; Todd Weyhrich, our Chief Financial Officer; Mark Katz, our Chief Accounting Officer; Charlie Guardiola, our Senior Vice President of Supply Chain; and Fred Hand, our Executive Vice President of Stores.

We will begin our call with a review of our operating results, followed by a discussion of the business conditions and business performance from Mark Nesci and Jack Moore. After the prepared remarks, this group will be available to answer questions.

This call may not be transcribed, recorded or broadcast without expressed permission. A replay of this call will be available for 24 hours. In addition, I need to remind everyone that information provided on this call is primarily related to the Company's results of operations for the first quarter ended August 30, 2008.

Remarks made on this call concerning future expectations, events, objectives, strategies, trends or other projected financial results are forward-looking statements that are subject to certain risks and uncertainties. Actual results or events may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the Company's annual report on Form 10-K and at the Company's other filings with the SEC, all of which are expressly incorporated herein by reference.

I will now discuss our results for the first quarter of 2009 compared with the first quarter of 2008. Net sales. Net sales increased $28.2 million to $707 million for the first quarter ended August 30, 2008 compared with the same quarter a year ago. Same-store sales increased 0.2% for the three-month period ended August 30, 2008.

In addition, 20 new Burlington Coat Factory stores opened in the quarter and stores opened in fiscal 2008 that are not yet included in comparative sales contributed $31.8 million in sales. These increases were partly offset by $5.2 million in sales in last year's first quarter that were related to a barter transaction.

Cost of sales. Cost of sales decreased $4.5 million, or 1% for the first quarter of fiscal 2009 compared with the similar quarter last year. Cost of sales as a percentage of net sales for the current quarter decreased to 62.1% from 65.4% a year earlier. The decrease in cost of sales was due to lower markdowns in the quarter resulting from the acceleration of $16.9 million in markdowns into last year's fourth quarter. In addition, initial markups also improved year-over-year, which are the result of reduced costs attributed to better buying efforts.

Selling and administrative expenses. Selling and administrative expenses increased $14.8 million, or 5.9% for the current first fiscal quarter compared with the similar quarter a year ago. The increase is due to an increase in occupancy-related costs of $9.9 million, which is primarily related to new stores and stores opened in fiscal 2008 that were not yet operating for a full quarter; an increase in advertising cost of $2.5 million, primarily from additional spending on television media; and an increase in payroll and related costs of $2.1 million.

Depreciation. Depreciation expense amounted to $30.4 million compared with $30.8 million for the first quarter in 2009 and 2008 respectively. Amortization. Amortization expense related to net favorable leases and deferred debt charges remained relatively consistent with the prior year at $10.7 million and $10.8 million respectfully.

Interest. Interest expense was $26.4 million and $33.2 million for the three-month periods ended August 30, 2008 and September 1, 2007 respectively. The decrease in interest expense was primarily related to lower interest rates on our ABL senior secured revolver and our senior secured term loan facility. The average interest rates on our ABL line of credit for this year's first quarter and last year's first fiscal quarter were 4.1% and 7.1% respectively and for the same periods for the term loan were 4.9% and 7.6% respectively.

Other revenue. Other revenue, which consists of rental income from leased departments, sublease rental income, layaway alteration and other service charges and miscellaneous revenue items, decreased to $6.4 million for the current first fiscal quarter compared with $6.8 million for the first fiscal quarter in 2008. The decrease of $0.4 million is primarily from the Company no longer charging dormancy fees on outstanding store value cards and instead recording breakage income, which resides in other income net.

Other income net. Other income net, which consists of investment income, gains and losses on disposition of assets, breakage income and other miscellaneous items, increased $1.9 million to $2.5 million for the three-month period ended August 30, 2008 compared with the three-month period ended September 1, 2007. The increase is related to an increase of $1 million in insurance recoveries and breakage income of $800,000.

Income tax benefit. Income tax benefit was $23.9 million for the first fiscal quarter in 2009 and $33.4 million for the prior year first fiscal quarter. The effective tax rates were 42.4% and 39.8% respectively.

Adjusted EBITDA. Adjusted EBITDA for the first quarter of fiscal 2009 was $17.3 million, a $21.9 million increase from last year's first quarter. The increase in adjusted EBITDA was primarily due to our stronger performance in the quarter driven by growth in net sales and improved gross margins, which were clearly impacted by the acceleration of permanent markdowns into last year's fourth quarter.

Merchandise inventory. Merchandise inventories at August 30, 2008 were $825.5 million, a $95.8 million increase from last year's first-quarter balance of $729.7 million. Inventories are up primarily due to 33 new stores opened since last year's first quarter and 10 additional stores planned for opening in our second quarter. Average per-store inventory increased 4.2% versus last year. While this is impacted by the 10 stores not yet open, we also made a conscious decision to accelerate the timing of coat and outerwear receipts, which Jack Moore will discuss in a few minutes.

Accounts payable. Accounts payable at August 30, 2008 was $451 million, a $24.2 million increase from last year's first-quarter balance of $426.8 million. Accounts payable to inventory percentage is relatively flat to last year at 57.9% after adjusting for pack and hold and the timing related to the day our calendar month ends for rent purposes.

Liquidity. At August 30, the Company had $285 million in borrowings outstanding on its ABL and unused availability of $277 million. Our cash position was $99.4 million versus $52.5 million at the same time last year. The increase in cash and the ABL line of credit borrowings is primarily due to management's desire to have more liquidity on hand given the current credit environment. Looking out over the next 12 months, we believe the cash generated from operations along with existing cash and availabilities remaining on our revolver facilities will be sufficient to fund cash flow requirements.

Before I turn the call over to Mark, I would like to make a few comments related to our fiscal 2009 cash CapEx forecast. We are forecasting net capital expenditures related to store projects of approximately $41 million, which is $14 million less than we said on the last call. Mark will provide additional insight on that change in a few moments.

Additionally, we have not changed our plan to spend approximately $24 million related primarily to supply chain initiatives and approximately $18 million related to information technology initiatives, $6 million of which relates directly to a warehouse management system. I would now like to turn the call over to Mark Nesci, our Chief Executive Officer.

Thank you, Bob and good morning, everyone. During today's call, I will provide a brief overview of business conditions and then I will provide a few comments on my planned retirement as previously announced on the last conference call.

Our comparative store sales increased 0.2% in quarter one of fiscal '09 versus a 2% decrease in quarter one of fiscal 2008. As I stated on our last call, we believe that several of our initiatives are gaining traction and I wanted to commend the hard work and effort of our team, which enabled us to produce a positive comp and significant EBITDA improvement in an extremely difficult economic environment.

As far as September is concerned, I am sure you've all seen results from the retail sector. While we historically have not discussed post-quarter results, given the unprecedented turbulence in the financial and credit markets, I would like to provide some comments about our September sales. Our September sales were in line with our first-quarter trend after adjusting for the hurricane impact. Due to the hurricanes, we had 14 stores closed for approximately a week. An additional two locations were heavily damaged and we are hopeful that they will open in the spring season.

As we move through these uncertain macroeconomic times, we are taking a balanced approach to our landlord and vendor partnerships. We also continue to challenge various decisions within our operating and financial plans to ensure they are still the right decisions for the business.

As part of that process, we have evaluated spring new store openings and expect to defer several of those stores into 2010. This change and other store-related capital project changes resulted in the $14 million reduction in CapEx that Bob previously mentioned.

We did not change our decision regarding the supply chain initiative as the return on that investment far exceeds our internal hurdle rates. As far as our existing vendor relationships, they remain strong. We continue to add new vendors each week and work collaboratively with all the vendors through these uncertain times.

To conclude my remarks, during our last call, I did announce my intention to retire. Our search for my successor continues. As I previously stated, there is no established timeline for this transition because the priority is to find the right person with proven abilities and the right cultural fit. Because of the confidentiality and the nature of this search, we have no further planned remarks and we ask that you respect that. Thank you in advance for your corporation and I'll now turn the call over to Jack Moore.

Thank you, Mark. A few weeks ago, during our fiscal 2008 conference call, I provided an overview of our operating priorities and initiatives for fiscal 2009. Since that call was only a few weeks ago, during today's call, I will spend a majority of my prepared remarks addressing some of the key questions that I anticipate will be asked. But first, a quick update on the sales for the quarter. As stated earlier, we are very pleased with our positive comp in the first quarter. Above average categories were coats and outerwear, shoes, accessories and below average categories were home and men's.

By region, above average regions were the Northeast, the Mideast and the Great Lakes and below average regions were the far West, the South and the Southeast. Many of our initiatives that I stated on the last call are starting to have a positive impact on our trend versus our competitors.

As we all know, the most significant issue facing us and all retailers is the general slowdown of the economy. It's the ultimate impact on consumer spending. For the foreseeable future, we believe the consumer will be very cautious.

With all that said, it is important to state the following. We strongly believe that our business model of providing great, everyday values with trend-right, nationally-recognized brands is a strength in this type of economy. Our primary focus will be to maximize sales by executing our business model and to do this by managing our inventories thoughtfully and diligently. Overall, our inventories are fresher and newer. We are well-positioned going into the holiday season.

As we had planned, our average store inventories are up 4.2% as of the end of August. A majority of the additional inventory is in our coat and outerwear businesses. As the coat authority, we are excited about the trends and fashions in this category and have invested appropriately.

As with all retailers, we have a few areas of higher inventories than I would like and a few areas better than expectation. We will continue to proactively manage inventories and address any issues on a timely basis.

Going into the second quarter, our cumulative markup is higher than last year. This affords us some flexibility to address issues and to take higher markdowns if necessary. Also, in this challenging and competitive retail environment, it is critical to be priced right. We are committed to having great values and we will continue to pass those values along to our customers.

Of all the initiatives I have discussed with you during the last call, I am excited about our new marketing message. By now, many of you have seen our new marketing campaign on TV or cable. We are excited about the partnership with our new creative agency, Cramer-Krasselt, and the creativity and energy that they are bringing to our brand.

In closing, I would like to thank the Burlington Coat Factory team, the stores, the merchants and all operational teams. Everyone is working hard, is focused on the consumer and is driving the business. I am very proud of their work. With those comments, I am going to conclude our prepared remarks. Operator, we are ready to start the Q&A section.

(Operator Instructions). Grant Jordan, Wachovia.

Good morning. Thanks for taking the questions. I believe you do a decent amount of your business through factors, if you could just give us an update in terms of your discussion with Factors and how long they are willing to provide factoring out to the vendors.

This is Bob LaPenta. Probably about half of our payables are Factors and we have good relationships with the factoring community and we have not had any significant issues arise as a result of any of the credit issues that are going on out there in the market today.

And do you anticipate seeing any?

We do not. Just to err on the side of caution, we have decided to draw down more of our lines of credit so that we are more liquid, but we believe we have got adequate liquidity to meet all of our working capital needs through this season and through 2009.

So just to follow up on that, it looks like your cash balance is roughly $45 million higher than it was this time last year. Why that level? Is it -- $45 million -- was that a specific number you were targeting to gain for extra liquidity or what was your thought process?

Yes, the thought process was just -- and this was really before most of the noise started to occur in the capital markets -- was to be a little bit more liquid given some of the uncertainty we were starting to feel out there in the capital markets and that has even increased since then and we believe it was the prudent thing to do.

So given the acceleration and the dislocation in the credit markets, have you drawn down further on the revolver to be proactive?

We have.

Okay. Can you give us that amount?

As of the end of the -- I think I can only give you what we reported on the quarter, which was $285 million.

Okay. But it is higher since then?

Yes.

Then my last question, obviously, we are dealing with a significant slowdown unlike recent times certainly. What is your approach to proactively taking additional markdowns if needed to clean up your inventories?

This is Jack. Like we stated, our cum markup going into the quarter is healthy, so we have the flexibility to do the right thing. In retailing, you need to take your markdowns on a timely basis. You need to make sure you are taking care of your problems. So basically, every week, every month, we address it the same way.

Okay, great. Thank you.

Karru Martinson, Deutsche Bank.

Good morning, guys. With the liquidity profile that you guys have, what is your capacity and willingness to take a look at your bonds in terms of a buyback? You're trading in kind of the low 30s right now.

Yes, we have no plans to buy back any of the bonds and actually have very limited availability with our bank agreements to buy back the funds.

And in terms of the interest rate saving that you had here year-over-year, have you locked in these lower rates? Where do we stand on that?

The term loan and the ABL are variable rates. We have interest rate caps that create a ceiling. The caps are at 7%, so if LIBOR goes above 7%, we would exercise our interest rate caps to prevent any further charge to the Company on our variable rate loans. Looking out over the last five to six months, LIBOR rates have gone up about 200 basis points, but still, compared to last year, we are about 90 to 100 basis points below last year's rates.

Okay. And in terms of -- I think one of the things, Jack, you have been brought on board here with the advertising changes and the product offering changes is to kind of broaden the Burlington Coat Factory customer base. I mean are you guys seeing any traction with that?

I am very pleased with the trend in most of our businesses. Again, like we stated in the past, we are a little bit of an off-price business and we are also a little bit of a value department store business. I like being in the value department store business. I think it enables us to attract a lot of consumers. We have always had a lot of offerings in our stores. I think the point of our new creative agency is to try to get that message out there with more clarity and distinction so that we can attract more people into the store.

And just lastly, I think I ask this every time, but just the availability of goods in the market as other retailers pull back their inventories. What are you seeing there?

There is lots of availability.

So no change in what your expectations are for initial markups and availability of goods?

No, there is lots of availability. The next 30 to 60 days even becomes more critical as it relates to availability as you get closer into mid-November and the Thanksgiving period, but currently there is plenty of goods in the market.

Thank you very much, guys.

Colleen Burns, Oppenheimer.

Hi, good morning. It sounds like some of the inventory per store increase was related to timing. What is your expectation for the year? Do you expect to work that number down over the next couple of quarters?

Yes. The 4.2 was -- a majority of it was additional coat and outerwear inventory because the trends in that market were just outstanding and that is one of the reasons why that business is very healthy for us right now. I do not expect that inventory to go up. I would like to work it down over time as I see the trends in various businesses. Again, we are in a very good position and we will respond to each business pattern based upon the availability of goods and what is really selling.

Okay. And then gross margin increased in the first quarter, even excluding the timing shift to the permanent markdowns. On the last call, it seemed that you were cautious regarding initial markups looking out to this year. Given the continued economic softness, are you seeing better buying opportunities than you originally thought?

I continue to be very cautious. I think we all know we are living in unprecedented times. While there are a lot of availability of goods out there, there is also a lot of pricing pressures coming out of the market. So basically our buyers are working very hard to negotiate the best possible deal and price it the best possible way. But to say long term we know if it is going to go up or down, we don't know. At this particular point, we are pretty flexible to manage it the right way.

Okay. And then lastly, with advertising, advertising was up a little bit in the first quarter. What is your expectation for the year? Do you expect that to be higher in absolute dollars than last year?

It will be higher in dollars versus last year mainly because the size of the Company is growing. Advertising as a percent of sales is very consistent.

Okay, thanks. That's it for me.

Emily Shanks, Barclays Capital.

Hi, good morning. Emily Shanks from Barclays capital. I had a couple of questions. The first is around the comps. Can you give us some color around traffic versus ticket?

We typically don't do that, but as you would anticipate, all retailers are constantly trying to figure out traffic versus ticket, but we are very pleased with the trend so far.

Okay. Maybe the reason for the question is I'm trying to get a sense of, with the markdown cadence changing, did that actually boost the ticket portion of the comparable store sales results for the first quarter? I want to make sure I am thinking about that correctly.

No, the markdown change, as we stated on the last call, we simply moved markdowns up approximately two weeks out of the early part of June into the latter part of May and that was designed to really just make sure we were well-positioned going into the summer months, into the Father's Day period. It was nothing more than that. We had an opportunity, we had a business need and we decided that was the best timing for execution.

Okay. So it did not affect the ticket portion of the comp?

No.

Okay. So when you had made the statement I think maybe, Mark, in your opening comments said September sales are in line, sort of a flattish to modestly positive comp is what you're seeing in September?

Correct.

Okay. Great. And then -- I guess that was it. Thank you very much.

Tom Carroll, Imperial Capital.

Good morning. During the dislocation we just recently experienced, have you been in contact with Bain and kind of talked with them about your strategies and potential support there? Can you give us any color?

This is Todd. We are, obviously, in contact with the folks at Bain on a routine basis. That is just part of our normal operations and there isn't anything different than I think we indicated on the last call. We are cognizant of what is going on in the business and as is always the case, we are always looking to see if there is anything that we need to do differently and at least to this point, the only thing that is a real change from our original plans is, as Mark indicated earlier, we have elected to move out a few of the spring stores into the fall.

Okay, excellent. As far as the weather, it looks like it has kind of turned in your favor. What are the trends you are seeing so far in October?

We don't discuss October at this particular time, but the colder the better, so keep praying.

So year-over-year, you are seeing it as a benefit so far?

I think it is safe to say that when cold weather comes, we see sales spread up. They definitely jump when cold weather comes. When it doesn't come, they don't jump as much. (multiple speakers).

Excellent. Thanks, guys.

(Operator Instructions). Carla Casella, JPMorgan.

Hi, this is Mili Seoni for Carla. Has your supplier base changed at all in this environment? And how much do you buy direct from apparel vendors and how much from wholesalers or consolidators?

Our vendor base -- this is Jack -- our vendor base has not changed substantially over the past year. We continue to grow with the brands that are the most valued brands out in the marketplace. We don't really disclose how much business we do direct versus through jobbers. That is a sensitivity thing that we protect the confidentiality of those individuals. But if you walk our stores, I think you would see that we are very similar and we have gotten stronger with key national brands in the past year.

After stores that you plan to open this year, how much do you expect to spend per store to open and how much for inventory and is that why the inventory went up for the quarter?

That is a driver, obviously, of why the inventory went up for the quarter. We have a number of new stores here in the fall and that really is the primary driver of the increase. We normally don't go into the details of the inventory investment or the CapEx investment for a number of reasons. We have, depending upon what the anticipated revenue base of the store is, we, obviously, put the original inventory in those at different levels depending upon the expectations. The CapEx per store can vary pretty dramatically between being fully funded or turnkey or in some cases where there isn't funding. As we have stated in previous calls, the majority of our stores that we have opened recently and plan to open this next year are largely funded by tenant improvement money from the landlord.

All right. My last question, how do your seasonal merchandising plans differ this year from last and what percent of your orders are seasonal merchandise?

That's a lot of detail that we typically don't go through in conference calls, but, in general, we always try to buy our seasonal merchandise as close to need as we possibly can because there is a perishability factor and like I said, we don't really disclose specific strategies after that.

Thank you.

(Operator Instructions). Ken Bann, Jefferies & Co.

Good morning. I was just wondering if you could comment about the liquidation of Linens N Things and what impact that might have on some of your departments and whether you have put in place any plans given that liquidation?

We don't really comment on other competitors' situations. In general though, the home business has been challenging. It has been that way for a couple of years. It has been at the top of our radar for a while to figure out how to take advantage of the challenge in the home market. Our home business is pretty important to us and we will continue to make that a priority to figure out how to grow that business.

Do you have any specific plans though given that this liquidation is going to start very shortly?

No, not that I can discuss on a conference call.

Okay, all right, thank you.

[John Kerber], [Bennett Financial Advisors].

Yes, you gave a comment that you believe you have sufficient liquidity for the next 12 months. I think that was your statement. So I guess my question is, implicit in that is you are saying that you see no problem with any of your covenants over the next 12 months.

That's correct. Our view looking out over the next 12 months is that we should not have any problem with any of the covenants' requirements.

Okay, thank you.

Amy Bloom, Stanfield Capital.

Can you talk about your warehouse initiative? Did you spend any CapEx on that this quarter and when do you expect to realize some benefits from that?

Yes, we will spend CapEx -- this is Charlie Guardiola. We will spend CapEx really related to the supply chain strategies over the course of the next 18 months and obviously, as that investment comes to life, we will begin to realize benefits. We expect the bulk of the benefits to begin to occur in the back half of next year. So we will begin to realize -- they will begin to ramp up in spring, but the bulk of the benefits will begin to realize in the back half of next year.

Thank you.

[Phillip Emma], R.W. Pressprich & Co.

Hi, good morning. Just a clarification on what you just said about the supply chain benefits in the back of next year. Is it next fiscal year or next calendar year?

Next fiscal year.

Okay, so those would be the back half of 2010 then?

Yes.

Okay. In terms of just your decision to increase cash, I am just curious if that came before or after your funds were trapped at the reserve fund?

That was before.

Okay. So that's just coincidental. The CapEx budget, the cutback of $14 million, will we see year-over-year decreases in SG&A as a result of that next spring?

No, because, obviously, we are opening a number of additional new stores here in the fall. We were heavily weighted towards fall openings to begin with and again, the number of stores that we are moving out in the spring is not a very large number. It is several stores. So there is additional SG&A coming on related to the new stores, but, obviously, we would only be opening those if we were comfortable with their contribution and meeting our hurdle rate.

Okay. So after subtracting out that amount, can you just reiterate what the plan for the year is then?

Yes, basically where we are at right now for CapEx for the year is we anticipate a net CapEx for stores of $41 million. The logistics initiatives are $24 million and we plan to spend roughly $18 million on IT.

Okay. The $41 million for stores, that includes the amounts spent in the first quarter then?

Yes.

Okay, great. Thank you very much.

Yes, those are all full-year numbers.

Terrific. Thank you.

Rob Magnuson, Goldman Sachs.

Hi, just following up on the reserve fund, did you receive the partial distribution this week and is there any update on full release of the fund?

Yes, we did not. The fund had announced that they were planning on redeeming approximately $20 billion in investments on or around October 14. Subsequent to that, the Company learned that the fund was delaying that distribution until they completed the process of calculating each investor's account balance and it is a day-to-day thing. We don't know anything more than that. We expect to get about $18 million of our $56 million soon, but don't have an exact date.

The remaining funds -- the fund has announced that, other than the Lehman paper that it wrote down, it does not believe that any of the other investments are impaired and they will continue to liquidate in an orderly fashion and as money is available, will continue to make future redemptions. Although the dates of those redemptions have not been announced.

And just lastly, the only other thing I would like to comment on is just that, based on our current plans, regardless of when this fund redemption happens, we have adequate liquidity throughout fiscal 2009. We don't believe that, other than maybe some increased borrowing on the ABL as a result of it, there should not be any other issue to the Company.

Great. Thank you.

And Mr. LaPenta, we appear to have no more questions, sir.

Okay. Thank you, everyone, for participating in the conference call. Have a good day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you would please disconnect your lines. Have a good weekend, everyone.