Burlington Stores Inc (BURL) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory third quarter 2009 earnings 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, April 17, 2009.

I would now like to turn the conference over to Bob LaPenta, Vice President and Treasurer. Please go ahead, sir.

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

We will begin with a review of our operating results, followed by a discussion of the business conditions and business performance from Jack Moore. Tom will then discuss the team's top priorities, which were outlined on the last call. After the prepared remarks this group will be available to answer questions.

As a reminder, 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 third quarter ended February 28, 2009. Remarks made on this call concerning future expectations, events, objectives, strategies, trends, or 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 in the Company's other filings with the SEC, all of which are expressly incorporated herein by reference.

We will now discuss our results for the third quarter and nine months ended February 28, 2009, compared with last year's third quarter and nine months ended March 1, 2008. I will now turn the call over to Todd.

Thank you, Bob, and good morning, everyone. I will spend a few minutes on our financial highlights and then address the specifics of some key P&L line items.

We are pleased to announce that net sales increased $34 million or 3.4% to $1,021.1 million during the third quarter. Since the end of last year's third quarter we opened 31 net new stores. Non-comp stores contributed additional sales in the quarter of $76.7 million. Same-store sales decreased 4.3%.

Our adjusted EBITDA increased 12.9% to $136.5 million from $120.9 million last year. Our year-to-date adjusted EBITDA of $262.6 million is up 8.1% versus last year. Our margins in this quarter of 37.9% are consistent with prior years' of 38%. Year-to-date our gross margin is 38.6%, up from 38.2% last year.

Our average inventory per store decreased 14% through improved receipt and liquidity management. Our total debt at the end of the quarter decreased $69 million to $1.337 billion from $1.406 billion despite opening 31 net new stores and investing in our DC consolidation.

We have very significant liquidity. At February 28, we had $428 million of available borrowing capacity on our ABL and as of today we have no borrowings outstanding on our ABL.

I will move on to some specifics regarding the operating performance for the quarter. Our selling and administrative expenses for the quarter decreased $7.9 million or 2.9%, and as a percentage of sales improved 170 basis points versus last year driven by cost savings initiatives. This reduction was realized with 31 additional stores. This is quite an accomplishment given in Q2 selling and administrative expenses were $27.8 million higher than last year.

As the data indicates, this change represents a reduction in quarterly cost structure of over $35 million. We mentioned on the previous call that the Company had embarked on several cost-cutting initiatives that would result in a $45 million reduction in our cost structure for the third and fourth quarter combined. Given our results in Q3, we are now projecting our cost structure decreases in total in excess of $60 million during the third and fourth quarters of fiscal 2009.

The major areas contributing to the $7.9 million reduction in Q3 were a decrease in comparative store payroll of $15.5 million and a benefits cost decrease of $4.5 million due to a one-time pickup of forfeitures on unvested 401(k) balances. These reductions were partially offset by increased occupancy costs of $13.1 million primarily related to the new stores.

Interest expense was $21.6 million compared to $29.9 million last year. The decrease in interest expense was primarily related to lower interest rates. The average interest rates during the quarter on our ABL and term loan were 3.4% and 4.4% compared to 6.6% and 7.3%, respectively, in last year's third quarter. Adjustments of the Company's interest rate cap agreement to fair value also resulted in a reduction of interest expense of $1.8 million in the quarter.

We recorded $28.1 million of impairment charges related to long-lived assets at 23 stores. We also recorded a $279.3 million impairment charge to our trade name. This impairment charge primarily resulted from lower sales assumptions and the impact current economic conditions are having on the royalty rate assumption, a key variable in the valuation.

Due to our cost reduction initiatives and continued strong EBITDA performance, our business enterprise valuation did not change significantly since our assessment at fiscal year-end 2008. As a result, we did not have impairment to our goodwill.

Other income net decreased $9.6 million to an expense of $1.6 million in the current fiscal quarter. The decrease is primarily related to a decrease in breakage income of $3.9 million and an additional write-down on the investment in the money market fund of $3 million. Also, in last year's third quarter, we received $2.4 million from Visa and MasterCard class-action settlements.

As I mentioned earlier, our adjusted EBITDA for the quarter was $136.5 million, a $15.6 million increase from last year. Merchandise inventory at quarter end was $726.8 million compared with $784.1 million last year. Inventory per store decreased 14%. Accounts payable as a percent of merchandise inventory at the end of the quarter was 56.2% compared with 59.4% for the comparable period last year. However, the number of AP days outstanding actually increased from 72 to 78 days.

Total debt at the end of Q3 was $1.337 billion compared with $1.406 billion last year. The $69 million decrease in total debt was due mainly to decreased borrowings on our ABL as a result of our cost reduction and inventory management initiatives.

Our 2009 fiscal year CapEx spend is now projected to be $80 million net of landlord contributions. We are estimating CapEx related to store projects of $35 million; $25 million related to supply chain and $20 million related to IT initiatives. In March of this year we opened an additional six stores which brings our current store count to 433.

I would now like to turn the call over to Jack Moore.

Thank you, Todd. In addition to Todd's comments, I will provide some additional information about our third quarter and an update on our key initiatives we have discussed during the past several conference calls. First an update on our sales performance.

As Todd said, total sales increased 3.4% during the quarter and our comparative store sales decreased 4.3%. Our performance continues to be stronger than the broader retail averages and specifically the department store and specialty store categories.

Within our merchandising categories we were extremely pleased with the performances in shoes, accessories, and home. Categories that underperformed the Company average were sportswear, youth, coats, and outerwear. By geographic region we had strong performance in the Plains, Great Lakes, and Northeast and we were weaker in the Far West, Rocky Mountain, and Southwest.

Strong inventory management has resulted in a more current inventory position with 14% less inventory on average store basis.

We continue to believe strongly that our customer is excited about our business model of providing outstanding values associated with well-recognized national brands. As stated in previous conference calls, our initiatives continue to be trend-right national brands at outstanding values. During this economic climate we have gotten more access to great nationally-recognized brands at tremendous values. We are excited about the growth of many of these national brands within our mix.

As you know, we do not comment about specific brands, but we would encourage you to shop our stores.

Fresher inventories. We continue to be aggressive with taking markdowns on older merchandise. We have done this during the past year and will continue to do so going forward. We feel it's imperative to keep our inventories fresh and current. We will continue to focus on increasing the percent of current inventory to total inventory.

Receipt management. We are committed to a constant flow of fresh merchandise of the hottest brands and styles that are available. We will continue to manage our receipts in a conservative manner with the object of staying more liquid and buying more opportunistically in season. Within this philosophy we are focused on reaching a broad customer base with a good, better, and best strategy with a priority on fashion categories that cater to our core female customer.

Great prices. This is a critical part of our formula. We continue to closely monitor our pricing to ensure we are competitive with key retailers and that our pricing resonates a strong and compelling value.

Planning and information functions. This continues to be a very high priority. Better information and planning will enable our teams to get the right merchandise to the right stores at the right time.

And distinctive and strong marketing messages. It's important to tell our story well; to encourage customers to make Burlington Coat Factory a top shopping destination. We started a new relationship last year with our marketing agency, Cramer-Krasselt, and we are pleased with our progress. We will continue to refine and develop strategies that focus on delivering our message effectively and with the specific purpose of driving more traffic to our doors.

Now I would like to turn the call over to Tom Kingsbury, our President and CEO. Tom?

Thanks, Jack. Good morning, everyone. First and foremost, it is a pleasure to speak to all of you for the first time. I would like to start by talking about my initial thoughts about Burlington Coat Factory. I feel the model is very, very strong and the off-price retail channel is more viable than ever.

With the current economic conditions and with disposal incomes being less customers really appreciate a great value, so our concept of great brands at great values is truly resonating with the customers. I feel if we can stay riveted to the following priorities -- merchandise content, the store experience, and receipt management -- we will continue to win with the customer.

Our first priority is merchandise content and it's designed to ensure that we continue to deliver a consistent flow of the hottest brands and styles available in the market. We will continue to prioritize those fashion categories that cater to our core female customer, including sportswear, accessories, and shoes, while protecting our core competencies, especially coats and outerwear. We will look to deliver freshness by consistently delivering new assortments and styles weekly and by testing more, reacting quickly to best-sellers and emerging trends.

Our second priority is the store experience. We are empowering our store teams to provide an outstanding customer experience for every customer in every store every day. We will continue to enhance the visibility and clarity to the quality and breadth of our merchandise offering by enhancing our merchandise presentation standards and in-store signage. The team has spent considerable time in evaluating store payroll to ensure we are appropriately matching floor coverage to customer traffic.

Finally, and most importantly, the store experience will continue to be rooted in a mindset that views the business through the eyes of the customer.

Our third priority involves receipt management. This priority is targeted to ensure that we have the right goods in the right store at the right time. By reducing our emphasis on upfront and all store buys we are afforded the ability to buy more receipts opportunistically in season to take full advantage of the very good supply of merchandise that is currently available.

While we clearly took some actions to reduce our inventory levels by the end of January, since February we have been on a more normalized receipt cadence that is based on a receipt to reduction ratio. In other words, we are attempting to match receipt dollars to sales and markdown dollars in an effort to smooth out our receipt flow and minimize peaks and valleys.

In closing, I would like to thank our store and corporate team for contributing to a quarter that resulted in a 12.9% increase in adjusted EBITDA. The results from our expense reduction and inventory management initiative have exceeded our expectations. The incremental savings created by these initiatives affords as much more flexibility.

In addition, I would like to thank our vendor community. We continue to receive outstanding support and involvement. They are excited about our growth story and they continue to assist us in developing and executing our merchandising strategies.

With those comments I am going to conclude our prepared remarks. Operator, we are ready to begin the Q&A section.

(Operator Instructions) Bill Reuter, Bank of America.

Good morning, guys. I think you guys mentioned in your prepared remarks that you guys had zero borrowings right now on your ABL. I don't know if you have this handy, but do you have a sense for ballpark what it would have been at this time last year?

Well, at the end of the third quarter, which was February -- which was March 1 last year, we had borrowings in excess of $100 million. This time last year we were in to the line -- I don't know the exact number, but was somewhere similar to that number. Somewhere around $100 million and then we finished last year at May at $181 million.

This is the first time we have been out of the line completely at this stage.

Okay. But it would have been somewhere around the $100 million range, just kind of ballpark-ish?

That is correct.

Okay. And then I don't know if you can talk at all about your AP to inventory ratio that was down very slightly. Were there any change in your vendor terms or with the factors that we should be aware of?

No, we have been spending a good amount of time with the factors. In the environment that we are working in we think it's prudent to make sure that everyone is informed as to how we are performing so Bob and I have been in contact with the factors. From those discussions and with the very few discussions we have had with vendors directly, we feel we have really strong trade support this point. We have not seen any reduction in our terms.

And you know there is a lot of things in AP besides just merchandise payables. There is non-merchandise payables that have to do with CapEx timing and there is also rent payments. And so when you take those into consideration, we are actually five days better in terms of our AP trade days than we were last quarter. So we have not seen any reductions in terms.

Okay. And then just one last one, I was wondering if you could talk at all about the trends that you guys are seeing in terms of returns.

You mean store level returns?

Yes.

I don't think we have seen anything that has been off of our historical pattern, right?

Correct, yes.

Okay. Thanks, guys.

Grant Jordan, Wachovia Securities.

Good morning. Thanks for taking the questions. First, you guys have done a really impressive job in cutting costs out at the store level as well as inventory. Maybe you could just give us a little more color on what is different in the stores, like how are you operating your stores differently with the lower cost base and what categories have you cut back in inventory?

This is Fred Hand. First, let me say that we are very pleased that we have been able to run the business more efficiently without sacrificing service to our customers. Our savings really started with us maximizing the rollout of our SOPs, our standing operating procedures, that we put into place that were fully implemented in first quarter. Our SOPs were focused on cashiering, the cash office, Baby Depot, and the receiving areas. Those efficiencies were gained in these areas by reducing the workload in the stores. Non-essential tasks have been removed throughout the actual store operating process.

In the third quarter we implemented three additional savings opportunities. We introduced a new store management model during the third quarter of fiscal '09. This new model was designed to provide consistent management coverage by sales volume. W also began to allocate payroll to the stores based primarily on an expected sales per hour metric versus a dollar amount. In the past our practice was that we would allocate payroll based on sales volume by door and not necessarily the component of sales per hour. By doing that we began allocating payroll based on sales patterns by store to ensure that we are matching floor coverage to our customer needs.

Finally, we began to closely monitor new higher rates to insure new hires were brought in at rates commensurate with their experience. We will continue to monitor these changes and we make course corrections as appropriately necessary.

Grants, this is Jack Moore. On the question of inventories, a significant amount of the average store inventory was reduced with the flows of November, December, and January. We pretty much did it across the board, so I don't get into specifics by merchandise category. Also, at the same time, like I think every retailer, we were aggressively taking markdowns to make sure our inventory was being addressed properly and valued properly.

And as Tom said, since February we have had a normalized flow, probably slightly down on an average store basis. Again, just to be conservative and to make sure that we are not overbuying. We are very, very pleased with how the team has executed this. We think the stores are reflective of that now.

So you think kind of where inventory levels were at the end of Q2, adjusting that for a seasonal basis, is kind of -- that is the right level for the current environment we are in?

Correct.

Okay, that is helpful. And, Tom, maybe just one question for you. As you look at Burlington and where it's operating, what do you think is the biggest opportunity for the Company to really improve the earnings line going forward?

Well, I think the most important thing that we do right now is really focus on driving the top line. I think clearly working hard in terms of our comp store sales growth. I think that is what is really going to deliver most of the earnings so that is what everyone here on the team is really focusing on.

Do you think that is possible in the environment we are in to get those back to a positive figure or is it you have really got to wait for the consumer to rebound?

I don't know if I really want to talk about the future projections in terms of sales. But I feel that based on what I have said, if we can focus on the categories that really cater to our core female consumers such as sportswear and accessories and shoes -- as Jack indicated, our performance in accessories and shoes has been very, very good -- I think we are going to have some improvement in top line.

Great. Thank you very much.

Emily Shanks, Barclays Capital.

Good morning. I wanted to ask on the heels of Bill Reuter's question around the factors. You had said that you all spend time with them. Related to the factors and the vendors, what type of information do you provide for them -- excuse me, provide them with? Is it up to the date minute information or are they just looking at historical data?

Emily, this is Bob LaPenta. What we do and the factors -- since day one we have had a portal just for the factors to see monthly performance compared to our plan as well as our borrowing base certificates that we prepare monthly so they can have a view of where our liquidity is as well as our covenant calculations that we do on a quarterly basis. We provide all of that information and have always provided all that information to the factors.

In this environment what we have done it is we have just reached out to the factors that have been supportive of our business. We wanted to make sure that they had a good view of just how we have been performing to the plan. Then just sort of looking out over the next two to three quarters what our liquidity and availability will be to be able to pay our trade debt, because we feel it's a very good story and it's really important in this climate that they understand that.

And so that is what we have been doing and we feel it's giving them that view. I know they have been very appreciative of it and I think it has just worked well.

This is Todd. And to be clear, that process is one really that Bob has done historically with the factors. The only thing that is different is we have given -- I am still relatively new to the Company, I have been involved in that process since last year but that is really not new activity.

Great, that sounds like a good strategy. And then if I could, moving on to SG&A, you guys made excellent progress on that front. I was hoping to get a little bit more detail, specifically around the decline in store payroll costs. Is that due to simply cutting employees? Are you changing hours? What exactly is driving that big reduction?

This is Fred Hand again. It's a combination of different things; it's not just necessarily cutting payroll and cutting employees. It's really focusing on the efficiencies that we are gaining from the standard operating processes that we have put into place, reevaluating our staffing in the stores to where it's more commensurate with our traffic flow. Just changing our model a little bit and really focusing more on efficiencies and really treating our stores more differently based on their volume matter.

All of those initiatives combined has really afforded us the opportunity to be able to be more efficient.

Okay. And so do you feel as though -- because I mean this jump is obviously pretty significant versus the prior quarters on a year-over-year basis, do you -- should we assume that you will get that benefit from here on out for twelve months or how should we think about that?

Well, again, I don't think we are going to talk about the future operating initiatives. But we are constantly looking at opportunities to where we can align our resources with our long-term objectives and we look at efficiencies. The reductions that we have taken into place will be in place. However, we do make course corrections as we go through the process and as the business evolves.

So I really can't study that we are going to see the same thing going forward. We are addressing it as we go forward on a daily basis.

Right, but I mean -- I am sorry. Go ahead.

Emily, this is Marc Katz. Let me jump in here and see if I can help you out for SGA as it relates to Q4. As you know, we spoke last quarter and we talked about $45 million, right? So we were $22 million, let's say, quarter -- Q3, Q4, and Todd just mentioned the $35 million number so obviously we are very pleased with our performance here.

Most of that increase came from not only stores, but we also had a one-time item as relates to forfeitures for the $4.5 million. And that was something that we just got as the result of an aggressive pick process here at the Company. But as you think about Q4, we are saying it's not necessarily going to be the $35 million again. We are tailoring that back. The one-time forfeitures saying for $4.5 million won't happen and there are a few other things happening in the stores in Q4. We are going to tailor that back a little bit and that is why we are saying slightly over $60 million for the total back half of the year.

Okay, that is very helpful. That is it. Thank you.

Colleen Burns, Oppenheimer.

Hi, good morning. Is there any commentary you can provide around Easter or general comp trends in March and early April? Have you seen a similar trend to the third quarter, better, worse?

Colleen, this is Jack Moore. I hate to be redundant, but we are not going to talk about our progress in the fourth quarter at this point. I think we will talk about it more at the next call.

Okay. And then just on the cost savings, just to give a little more color, I think you quoted like a $35 million number in the third quarter. Can you maybe talk about -- was that all SG&A? Was some of that supply chain initiatives that benefited cost of goods sold?

The $35 million was all SG&A; that was the [line] Todd was referring to and yes there actually are some supply chain items that are in SG&A. Mostly all of our warehousing costs are in SG&A so that was there. We did have a couple million as well in gross margin as it relates to the supply chain.

You did. Was that like a $5 million number that benefited --?

No, (multiple speakers) -- incremental to that $35 million.

Okay. And in the fourth quarter are you expecting more of that improvement to come in the gross margin level from the cost saves?

No, no. A little bit less in SG&A, as I said on the last answer.

Okay. And then, the chain -- the advertising expense reduction in the quarter, it looks like from reading the Q that it was driven by some changes in strategy shift to more TV. Can you give a little color around some of the changes there?

This is Jack Moore again. The changes were pretty small and insignificant. We just spent a little bit more on TV and a little bit less in print.

Okay. And then just lastly, I think you spoke about having a greater percentage of your inventory current to total. Could you maybe say where it is today or where your goal is?

Our goal is to keep improving it. We don't give out specific percentages, but our goal is to continue to improve the freshness of our inventory.

Okay, that is it. Thanks.

(Operator Instructions) Tom Carroll, Imperial Capital.

Good morning, guys. Great quarter, fantastic. Quick question for you, could you just talk a little bit about the value proposition that you are seeing in today's environment? Just expand on that a little bit, what you are seeing and how you are reacting to it.

This is Jack again. The customer expects great values. In today's environment she knows that she can get a great price at many, many different places. I think every retailer is focused on making sure their prices are very sharp and continue to be very sharp. We don't see that abating in the near term at all.

Great, thank you.

Mike (inaudible), [Loehmaker].

Hi, guys. Very good quarter. Wanted to ask -- first question was about the improvement in home. I think this is the first time we are hearing that the home business is starting to turn for you guys.

And second was just going to be when you do your price comparisons, I know one of the issues about the markdowns is the department stores were taking is that was reducing sort of the price differential between you and them, let's just call it on coats. Can you talk about maybe is that price differential expanding or staying stable now? Thank you.

This is Jack again. To answer your first question about our home business, the home team has been working very, very hard to improve their performance. As we have stated in several conference calls awhile back, that was one of our disappointing businesses. And, again, it's attributable to the talent of the team and the product they are buying.

As far as the price differential between other types of retailers, our focus is to have great initial pricing that beats our competition. When we look at department stores whose business model is a high/low model, we focus very much on what their out-the-door price is including what the sales price is as well as what any coupons or discounting that may happen on top of those sales prices. Our whole formula has been based upon great initial pricing that is stronger than our competition and we continue to focus on that.

We don't disclose percentages -- differences between categories in our own pricing.

Would you say that as they moderate their inventories that you are seeing more normalized opportunities that you have seen in the past as far as where you are priced relative to them on their out-the-door pricing?

It's hard to say what is normal right now. I think we are still in a very competitive situation. I think the future remains to be seen, but we are just continuing to focus on what we have got to do which is make sure the initial price is very strong. And if we have goods that are not moving to take markdowns to get those prices lower.

Good, good. And with home, can you just talk about maybe the product mix where -- what type of -- has that changed much or are you still having the same kind of mix there relative to where you were maybe a year ago? Or are you moving to lower-priced, faster-moving items, more replacement type goods versus maybe having more -- I don't know if it was small appliances or what you might have had in, like such as can openers or mixers or anything like that that you might have had in your inventory maybe a year ago or two years ago?

I think that was like 10 questions, and unfortunately I can't answer any of them. Overall, our mix is very similar to last year. The merchants are just working their tail off trying to do a better job of executing our basic business model in home.

Okay, thank you.

Jamie Zimmerman, Litespeed Partners.

Hi, it's David Fry here for Jamie. I was just wondering if you had made any debt repurchases or any plans to do any debt repurchases.

We do not have any plans to make any debt repurchases at the Company.

Is our sponsor looking at making any repurchases on the notes?

Whether they decide to purchase going forward or not is really not something that we can discuss.

Okay. Fair enough, thank you.

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

Okay, then that concludes this conference on our third-quarter operating results. Thank you, everyone, for participating. Have a great day.

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