Burlington Stores Inc (BURL) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Coat Factory first-quarter 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, June 18, 2010.

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

Thank you, operator, and good morning. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's first-quarter 2010 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; Mike Geraghty, our Chief Operating Officer; Todd Weyhrich, our Chief Financial Officer; Marc Katz, our Executive Vice President of Merchandise, Planning, and Allocation; 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. Tom will then briefly discuss sales results. After the prepared remarks, this group will be available to answer questions. This call may not be transcribed, recorded, or broadcast without express 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 May 1, 2010. 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-KT 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 first quarter ended May 1, 2010 compared with last year's recast first quarter ended May 2, 2009. Last year's recast first quarter represents the month of February, which was previously reported as part of our old third quarter of fiscal 2009 and the months of March and April of 2009, which were previously reported as part of the old fourth quarter of fiscal 2009. As part of our routine closing process, certain timing adjustments were made to the recasted financial statements to make them comparative to the current quarters.

I will now turn the call over to Todd.

Thank you, Bob, and good morning, everyone. I will spend a few minutes to discuss a key item in our press release and will then move on to our financial highlights and the specifics of some key P&L line items.

While I want to remind everyone that we do not provide forward-looking guidance in the normal course, nor will we today, but because the change in our fiscal year-end is an unusual circumstance, we want to provide information regarding comparability of our prior-year quarterly results that we believe is important as you develop your own expectations.

We provided recast quarterly financial information for the 12 months ending January 2010 in our 10-Q. I would like to take a few minutes to further discuss the comparability of our first and second quarters this year versus the respective periods last year.

As we have discussed on previous calls, we took significant initiatives during 2009 including incremental markdowns at times to reduce our level of aged inventory and to ensure an improved mix of current goods in our inventory. The timing of markdowns was and remains dependent on the content of the inventory and how well it is selling. In the final quarter of our fiscal year ending in May 2009, we heavily weighted the markdowns for the quarter in the months of March and April to properly address inventory aging and pricing needs.

Our inventory management disciplines over the past several quarters resulted in a much more normal cadence of markdowns during the months of March through May in 2010. The differential in the timing of markdowns last year versus this year combined with the change of months included in each quarter caused by our fiscal year-end change significantly benefited the performance comparison of the current first quarter. This will have the opposite effect to the year-over-year comparison for our second quarter.

We have discussed the estimated effect of these items on last year's first and second quarters in our press release as adjusted EBITDA is calculated on a more comparable basis. We believe this gives you better insight to our operating performance.

We are very pleased to report an increase in adjusted EBITDA on this more comparable basis of 32.8% to $78.2 million for the first quarter. This increase was driven by an increase in our net sales of 7.8%, which included increased comparative store sales of 3.3% and an improvement in our SG&A of 50 basis points.

Inventory management disciplines remained very strong, resulting in our average inventory per store declining 9% versus last year and our debt net of cash at the end of the quarter improving by $196.7 million versus the prior year. We have very significant liquidity. At the end of the quarter, we had $237.2 million in cash and no borrowings on the ABL compared with last year's quarter of $61.8 million in cash and no borrowings. We have $306.6 million in unused availability on our ABL.

I will now move on to some specifics regarding the operating performance for the quarter. As previously mentioned, net sales increased in the first quarter $64.7 million or 7.8%. Comparative store sales contributed $27.3 million or 3.3% of the increase and non-comparative store sales contributed an additional $36.6 million in net sales.

Cost of sales decreased $1.8 million or 30 basis points for the current quarter compared with the quarter a year ago. Cost of sales as a percentage of net sales decreased to 61.7% from 66.8% a year ago. The decrease in cost of sales is the result of fewer markdowns taken this quarter compared with the quarter last year, as I discussed earlier.

Selling and administrative expenses decreased 50 basis points on a percentage of sales to 31.1% during the three months ended May 1, 2010 compared with last year. Total selling and administrative expenses increased $16.4 million during the period compared with the same quarter last year. $9.9 million of these costs were related to non-comparative and new stores.

Interest expense increased $6.5 million to $27.4 million in the quarter. The increase was driven primarily by an increase in our non-cash interest rate cap expense, lower average interest rates on our ABL and term loan facility, and lower average balances on our ABL facility, partially offset the increase and resulted in a decrease in cash interest expense.

Other income net increased $5.9 million from last year's quarter. The increase was primarily the result of a $3 million write-off last year of an investment in the reserve money market fund, which was a one-time charge. Net income for the quarter was $5.2 million compared with a loss of $36.9 million in last year's quarter. Merchandise inventory at quarter end was $634 million compared with $672 million last year, an improvement per store of 9%.

Accounts payable as a percentage of merchandise inventory at the end of the quarter was 79.6% compared with 69.1% for the prior year's quarter. Total debt net of cash improved $196.7 million to $1.0428 billion, a 15.9% decrease. We continue to be in compliance with all our bank agreement financial covenants and we believe that additional covenant cushion will continue to be generated in the fiscal year despite the tightening of the covenant requirements.

For the full year of fiscal 2010, we are estimating CapEx spending between $100 million and $110 million net of landlord allowances of approximately $38 million. This includes net spending on store projects of approximately $60 million with the remaining capital going to support IT, supply chain, and other initiatives.

In addition to the 10 stores opened in the spring, we plan to open between 11 and 14 additional new stores inclusive of one relocation during the remainder of fiscal 2010.

I would now like to turn the call over to Tom Kingsbury.

Thank you, Todd, and good morning, everyone. As you may remember, we provided our first-quarter sales results on our transition year-end conference call just six weeks ago. On that call, I discussed first-quarter sales as well as our top three priorities in some detail. Today I will reiterate the comments related to the first-quarter sales results and will discuss the status of our top three priorities on the next call.

For the first quarter of 2010, we reported a 7.8% increase in total sales and a 3.3% comparative store increase, our best sales performance in some time. Within our merchandising categories for the quarter, areas that performed better than the Company average included accessories, shoes, intimate apparel, dresses and suits, men's, and home. Categories that performed below the Company average were juniors and Baby Depot.

By geographic region, the Southeast and the Southwest outperformed and the mid-Atlantic and the New England regions performed below the Company average. Inventory management continues to be an important initiative for us which resulted in 9% less inventory on an average store basis at the end of April.

The currency of our inventory continues to improve versus last year. We ended the quarter with 43% of our inventory aged 30 days or newer versus 35% last year.

In closing, I would like to thank our store and corporate team for contributing to our first-quarter 3.3% comp store increase. In addition, I would like to thank our vendor community. We continue to receive outstanding support and involvement. They are excited about our growth and they continue to assist us in developing strong merchandising strategies.

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

(Operator Instructions) Karru Martinson, Deutsche Bank.

Good morning, everyone. In terms of the comp sales trends here, how does that break out between baskets and traffic?

Overall we measure and we look at all those components overall but historically we have not really given that kind of detail. But we feel good about how we are progressing in all of those categories.

Okay, and was there any sort of meaningful change in terms of how the comp with calculated this time versus a year ago given the disclosure in the 10-Q?

This is Todd. The calculation for comp store sales, what we did to change our calculation was to bring it more in line with how we look at it internally, and so our comp store sales are calculated starting at a point in time after our grand opening event has concluded. So basically it's starting in the 14th or 15th month of the store's operations. And that way you're looking at a very clean comp where there's no comparison over any grand opening activity.

And so when we have our disclosures in the 10-K and in the 10-Q and in our press release, we are always stating those on a comparable basis.

Okay, and in terms of SG&A, should we kind of look at this as a percentage of sales as the run rate going forward or are there additional areas where you feel that you can tie in that line item?

We continue, as we've said on earlier calls, to challenge our operations of the business and our efficiency and always looking for ways to do things better and faster and more efficiently. As we have also said on a number of previous calls, we are also reinvesting a number of those savings back into the stores and back into the support functions that support our ultimate presentation to the customer. So we at this point aren't recommending that you look at changing the run rate substantially going forward.

Okay and I recognize that you guys are going to look to add to the covenant cushion being generated here, but how do you view your capital structure going forward in terms of whether it's a refinancing or anything else in terms of those types of actions?

We are always looking forward obviously to at the point in time where our debt comes due and we're keeping all of our options open. And at this point, it's probably not appropriate for us to discuss where we are at. But there are no immediate change in the works here.

Okay. Thank you very much, guys.

Emily Shanks, Barclays Capital.

Good morning. I had a follow-up question on the gross margin discussion around the markdown cadence change. Specifically that is the -- the $35 million is incremental gross profit dollars, correct? I was just seeing -- wanted to see if you could give us a sense of what sales are attributable to that and/or give us a sense of what the clean gross profit margin would be if we looked at it on a comparable basis.

Let me take I think the first part of that question and just make sure everybody is clear on the $35 million disclosure that we made. There were two things that happened to last year that prompted us to make that disclosure. The first was as you look at our old Q4, the March, April and May timeframe, it just so happens that we took the overwhelming majority of our markdowns in March and April. It wasn't something that we needed to talk about because as you know, it was all contained within our Q4 and we only talk in terms of quarters.

The second thing that happened last though is we changed our calendar year, so March and April moved into Q1 and May now is in Q2. So when you take those two things on last year and this year you have a much more normal markdown cadence. That is what resulted in us making the $35 million comment to give better insight into comparable operating performance.

I do want to mention that in terms of our spring season at the end of Q2 when we talk about the full spring season, this is a non event. The $35 million is at cost. It's a cost number, so yes, that's the quote unquote profit number as well that we added back into Q1 and that we will subtract out from Q2 in terms of the recast numbers you see in the Q.

And this is Todd. I think the second part of your question was sales that were generated from that. I think the key thing to note is -- as Marc just articulated -- is that this is purely a timing shift because of the cadence of the markdowns, so there isn't anything that you should expect to be unusual from a sales standpoint because it's not a large acceleration of markdowns. It's just from one month to another. So we don't think there's any substantial sales (inaudible).

Okay, all right, that actually helps quite a bit. Thank you. And then in terms of the other income that is on the P&L and inherently is included in EBITDA, it's a pretty big number. And specifically if I can find it here I think it was in the first quarter of last year it was $2.9 million. Just what is that? The other expense or income? And I'm not talking about the long-lived asset impairment or trademark impairment, but just specifically the other income.

Other income, that typically includes investment income, gains and losses on disposition of fixed assets, and just other nonrecurring type items.

Okay, so when we look at in 2Q '09 it was the $9.3 million number, away from the trademark impairment that was noted. Should we assume that that is all relative to investment income?

No, it would be -- investment income is actually not a large number.

Okay. I know it's a pretty specific question. I can follow-up off-line too.

Yes, I mean to go back to last year's second quarter, I would have to -- I would have thought we broke it out in the Q, but I can check.

Okay, yes, it is $9.267 million of other income. Okay, I can follow-up with you. Thank you. My last question is just around one of the addbacks on the EBITDA line specifically the insurance reserve, does that flow through SG&A on the P&L?

It does, yes.

Okay, perfect. Thank you.

Grant Jordan, Wells Fargo.

Good morning. Thanks for taking the questions. My first question, you guys continue to take inventory out of the stores and that's obviously helped margins. But now that you are starting to see same-store sales move back into positive territory, do you think you will look to be a little more aggressive on the inventory side?

Grant, I would tell you as we've mentioned before, we really manage our inventories on a receipt to reduction ratio. We don't look to be at a certain EOM at the end of the month. So yes, areas that we have that are trending and doing well, we obviously feed them with additional receipts.

Okay. All right, so do you feel like your stores have the appropriate amount of inventory given the traffic you're seeing?

Absolutely. We feel very good about our inventories in our stores. And as Marc said, we will continue to invest in those businesses that are doing extremely well but we are always going to be really looking and continuing our disciplines in terms of managing our inventories. We really feel that it's going to help us in the long run and our goal right now is to make sure we have the freshest inventory that we possibly can have on the selling floor today. But we feel the level is appropriate at this time and we will feed the things that are working.

Maybe one more question along those lines. Are there any categories where you wish you had more inventory?

No, I think we're in pretty good shape relative to the areas that are doing well.

Okay, and then as it relates to the comps, you guys did experience positive same-store sales in the quarter. Is there any one thing you can attribute that to? Do you feel like your message is connecting with consumers better, that people are responding to your merchandise, that you have changed in some way?

I think it's contributed to the fact that we have improved our merchandise content overall and as I previously mentioned, the fact that we have pressure product in the store, the amount of product that we have that's 30 days and newer is significantly higher than last year, as I mentioned in the prepared remark. I think all that is serving as extremely well overall. We've really focused on some categories as I mentioned that are doing extremely well in helping our comps such as dresses and suits, as I mentioned.

So it really comes down to having better merchandise content in the store. Also in terms of improving our store experience overall, but most importantly, it's really how we are managing the business and managing receipts to ensure that we have the right flow and we are working hard on making sure that we have liquidity and open to buy so we can react to what's happening in the marketplace in terms of trend. We are doing a much better job than we have previously in that.

That's great to hear. Do you think along those lines are you going to look to change the amount you are spending on advertising this year or do you think you're going to be close to where you were?

Our marketing spend will be comparable to last year.

Okay, great. That's all I had.

Carla Casella, JPMorgan.

Hi, this is (inaudible) for Carla here. How much of your inventory position is current season versus markdowns? Could you quantify that and how would that vary from last year at this time? We're just trying to get a sense for when comps last year become more normalized on the inventory level.

I think the way to respond to that is we will just give you the same statistic that we gave in the prepared remarks and that was that 43% of our inventories aged 30 days or newer versus 35% last year.

Okay, can you tell us how much of your workforce is part-time versus full-time? Is this the level where you want it to be or do you have more changes to make on that front?

This is Fred Hand. A mixture of full-time and part-time for us is really not something that we disclose. However, I will tell you that we are constantly looking to improve efficiency of how we operate the stores and to be able to provide the service level that our customer expects. And that's how we're operating the business. So there's no -- specifics I can't get into, but it has been adjusted on a constant basis based on (inaudible).

All right, thank you.

Howard Weinberg, UBS.

Thanks, just want to talk a little bit about your vendor support. When I take a look at your AP inventory ratio, it looks like it's around 80% this quarter. I know at the end of the year it was artificially low at 23% just due to the timing around the excess cash flow sweep. But is there any change in vendor terms or has just been a function of the timing of when you purchased inventory and when you ultimately owe it based on some of the comments you've made about a higher percentage of your inventory, less than 30 days old?

What you're implying there is absolutely correct. Our vendor terms have not changed in a meaningful way for the last several years. We have had very consistent support and our terms are maintaining very, very close to where they've been historically. The high percentage of balance that we have at the end of the quarter is absolutely due to the freshness of the receipts here in the first quarter.

Great, thanks. Just on the letters of credit, I know it's higher than last year, around $80 million. The LCs that you are posting for the insurance and utility agreements, the increase despite sort of more stable banking market and improving operating trends, what drove that increase and you needing to post those larger LCs? And then the decrease in the LCs from last quarter, will that trend continue at that approximate same pace?

The increase in the LCs really came from collateral requirements that we have with our self-funded insurance policies. We are self-funded for our workers comp and our general liability and the insurance companies require that collateral will be put up for those reserves. And that's driving the biggest share of that LC increase. And I would expect that to sort of stabilize going forward. I wouldn't expect it to go up.

So was there any change in your needs or is it just the insurance companies just said you needed to post more based on your workers comp claims?

It's based on the claims outstanding that drives the collateral requirement.

Okay, great. Thank you.

Operator, we have time for one more question.

Sir, there seems to be no further questions at this time.

Okay, great. Thank you, everyone, for your participation in today's call.

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. Have a great day, everybody.