Burlington Stores Inc (BURL) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Coat Factory second 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, September 24, 2010.

It is now my pleasure to introduce Mr. Bob LaPenta, Vice President and Treasurer. You may proceed, sir.

Thank you, Frances, and good morning everyone. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's second 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; 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 and our top three priorities. After the prepared remarks this group will be available to answer questions. This call may not be transcribed, recorded or broadcast without our 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 three and six months ended July 31st, 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 second quarter ended July 31st, 2010 compared with last year's recast second quarter ended August 1st, 2009. Last year's recast second quarter represents the month of May, which was previously reported as part of our old fourth quarter of fiscal 2009, and the months of June and July of 2009 which were previously reported as part of our first quarter of the 35 week transition period which ended January 30th, 2010. As part of our routine closing process, certain timing adjustments were made to the recast 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'd like to start by revisiting some of the discussion we had during our last call, regarding the timing of our markdowns and how that impacts our comparative financial results for both the first and second quarters of fiscal 2010 compared with their respective periods in the prior year. As we discussed on our prior call, due to a shift in the timing of our markdowns, our first quarter results were positively impacted. In turn, this shift negatively impacted our second quarter results. However, on a year-to-date basis, the shift in the timing of these markdowns did not have any impact on our adjusted EBITDA. During the final quarter of our fiscal year ending May 2009, we heavily weighted the markdowns for the quarter and 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 significantly benefited the performance comparison of the first quarter. This had the opposite effect to the year-over-year comparison for the current second quarter. We have previously discussed the estimated effect of these items in last quarter's press release as adjusted EBITDA as calculated on a more comparable basis. In reference to the quarter-over-quarter comparison for the three months ended July 31st, 2010, we will discuss these items in a similar manner. We believe this gives you better insight to our operating performance for the quarter. Again, we want to reiterate that these items have no impact on our year-to-date adjusted EBITDA.

I'd also like to point out that subsequent to the filing of our 10-Q and prior to our earnings release with the approval of the administrative agents for the term loan and ABL line of credit, specific charges associated with our litigation reserve and our transfer tax liability were added back to consolidated net loss when calculating adjusted EBITDA. These changes resulted in approximately a $6.5 million increase in adjusted EBITDA compared with the disclosures in our 10-Q and we believe provide a more accurate comparison to last year's performance.

Adjusted EBITDA for the six months ended July 31st, 2010 increased $24.7 million, or 40.2% to $86.1 million. This increase is primarily driven by total sales growth of 6% during the period, inclusive of comparative store sales increase of 1.9% and an improvement in gross margin, of which the largest driver of the improvement was the need for fewer markdowns. Adjusted EBITDA for the three months ended July of this year was $7.8 million compared with $2.5 million for the three months ended August 2009 as calculated on a more comparable basis with the current year. This increase is primarily driven by our 4% sales increase including a comparative store sales increase of 0.3%, and a 70 basis point reduction in our SG&A. Inventory management disciplines remain very strong, resulting in our average inventory per comparative store declining 9.3% versus last year, and our debt net of cash at the end of the quarter improving $93.2 million versus the prior year. We have significant liquidity. At the end of the quarter we had $81 million in cash and no borrowings on the ABL compared with the last year's quarter of $25.8 million, and $18.7 million in ABL borrowings. As of July 31st, 2010, we have $335.2 million in unused availability on our ABL.

I will now move on to some specifics regarding the operating performance for the six and three months ended July 2010. Net sales for the six months ended July 31st, 2010 increased $92.4 million, or 6% to $1,000,000,623.4 million. New and non-comparative store sales increased $66.6 million, and comparative store sales increased $29.6 million or 1.9%. These increases were partially offset by a decrease in net sales of closed stores of $8.1 million. Net sales for the three months ended July 31st, 2010 increased $27.8 million or 4%. New and non-comparative store sales contributed $30.7 million, and comparative store sales contributed $2.3 million or 0.3%. These increases were partially offset by a decrease in net sales of closed stores of $4.7 million.

Cost of sales as a percent of net sales improved to 62.9% during the six months ended July 31st, 2010, compared with 63.9% last year. The largest driver in our improvement in cost of sales percentage is due to fewer markdowns in the current six month period compared with the prior year comparable period. For the current quarter, compared with the quarter a year ago, cost of sales as a percent of net sales increased to 64.4% from 60.5%. The increase in cost of sales is the result of fewer markdowns taken in last year's quarter compared with this quarter, as I discussed earlier. As a percentage of net sales, selling and administrative expenses improved 60 basis points and 70 basis points during the current six and three month periods compared with the prior six and three month periods. These improvements are largely the result of a decrease in occupancy related and payroll related expenses at our comparative stores, as well as a decrease in business insurance costs. For further details on our improvement in selling and general administrative expenses, please refer to our 10-Q.

Total selling and administrative expenses increased $21.7 million to $550.3 million for the six months ended July 31st, 2010, compared with last year. This increase was driven by new and non-comparative store sales or store increases of $29.5 million. Total selling and administrative expenses increased $5.2 million during the three month period ended July 31st, 2010, compared with the same quarter last year. $4.8 million of these costs were related to new and non-comparative stores. Interest expense increased $15.7 million to $53.4 million during the six months ended July 31st this year compared with last year. And increased $9.3 million to $26.1 million in the quarter, driven by an increase in our non-cash interest rate cap expense for both three and six month periods ended July this year. Lower average balances on our ABL and term loan facilities partially offset the increase in both periods. Other income net decreased $5.8 million from last year's quarter. Primarily the result of insurance recoveries received during last year's quarter.

Merchandise inventory at the end of the quarter was $661.2 million, compared with $661.5 million last year. Or an improvement per comparative store of 9.3%. Accounts payable as a percentage of merchandise inventory at the end of the quarter was 69.3%, compared with 60.7% last year. Total debt, net of cash, improved $93.2 million to $1,000,000,198.9 million or a 7.2% increase. Since March we have not had any borrowings on our ABL nor do we expect to during the remainder of the fiscal year. 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 2010 we are estimating CapEx spending between $100 million and $110 million, net of landlord allowances of approximately $34 million as we have discussed on previous calls and in our 10-Q.

In addition to the ten stores opened in the spring, we have opened 11 new stores in September inclusive of one relocation. We've closed one store and plan to open four additional new stores during the remainder of fiscal 2010.

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

Thank you, Todd. Good morning everyone. In addition to Todd's comments, I will provide some additional information about our sales performance and an update on our key priorities. As Todd said, total sales increased 4% during the quarter, and our comparative store sales increased 0.3%. Within our merchandising categories for the quarter, we continue to be pleased with the performance in dresses and suits, intimate apparel, accessories and shoes. Our men's and home divisions also performed very well. Categories that underperformed the Company average were Missy's sportswear, juniors and Baby Depot. By geographic region, the Southeast, Mid-Atlantic, New England regions outperformed, and sales were weaker in the Midwest, West and Southwest. Strong inventory management resulted in 9% less inventory on a comparable store basis.

I would now like to give an update on the Company's top three priorities. Merchandise content, the store experience, and receipt management. Merchandise content continues to be our first priority. It is designed to ensure that we deliver a consistent flow of trend-right, national brands at outstanding values. We remain focused on reaching a broad customer base with a good, better, best strategy, with a priority on fashion categories that cater to the core female consumer. I'm happy to report we have areas of the business that continue to make meaningful improvements to merchandise content and are experiencing strong comp results. These areas have worked hard to deliver freshness by consistently delivering new assortments in styles weekly, focusing on breadth of assortment versus depth. I would also like to point out that our ability to secure contemporary better and best merchandise continues to be very good. Having this type of merchandise in our mix is important to our success and has always been part of the Burlington merchandise philosophy.

Our second priority entails refining our store experience through the eyes of the customer. We continue to measure 13 different aspects of customer satisfaction through our in-store customer survey program. I am pleased to report that at the end of Q2, we experienced a 12% improvement in overall satisfaction. Some of our store initiatives that are currently underway include implementing a refresh program in stores that have certain needs such as new carpet, painting, fitting room enhancements and various other improvements. Last year we completed the refresh program in 26 stores and are targeted to complete an additional 25 stores by the end of fiscal 2010. We are conducting lighting retrofits which will make the stores more energy efficient while improving the lighting within the stores. Last year we completed retrofits of 70 stores, and have identified 60 additional stores for upgrades by the end of fiscal 2010.

Our third priority is receipt management. We continue to manage our receipts based on our receipt to reduction ratio with an emphasis on liquidity. This affords us the ability to buy more goods in season, opportunistically. We were pleased with the overall currency of our inventories at the end of Q2. The percentage of inventory 30 days or newer was 46% versus 43% last year, and we ended Q2 with 8% reduction in inventory 91 days and older. In addition, we experienced a 20% improvement in comp store turnover for the spring season.

As Todd previously mentioned, we have opened 11 new stores, inclusive of one relocation, and closed one store during September. We plan to open four additional new stores during the remainder of fiscal 2010. Accordingly we are planning on ending fiscal 2010 with 461 stores. While we don't discuss individual store results I should mention that as a group the new spring store's performing in line with our plan.

In closing I'd like to thank our store and corporate team for contributing to a 6% increase in total sales, and a 40% increase in adjusted EBITDA for the spring season. In addition, I'd like to thank our vendor community. We continue to receive outstanding support and involvement. They're 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.

Thank you. (Operator Instructions). Our first question, from the line of Grant Jordan with Wells Fargo. You may proceed.

Good morning. Thanks for taking the questions. My first question, maybe just help us understand a little bit more the deceleration of same store sales in the second quarter relative to the first quarter?

Really the short answer is that based on cold weather in February, it really helped with the comp store increase in the first quarter. Really, we were able to do a lot of coat business in February.

Okay. And are your ticket and traffic trends pretty consistent with the total same store sales number?

Yes, they are.

Okay. And then a couple of just housekeeping questions. Two things. First, there was a fairly large cash escrow, if you could go over there. And second go over the litigation reserve, what's driving that.

Grant, good morning, this is Bob LaPenta. The cash escrow was something that we did. We have self-funded insurance policies for workers' comp and general liability that require us putting up a substantial amount of collateral. In the past we always did this with a letter of credit. The fees for letters of credit have gone up and since we have a significant amount of excess cash on the balance sheet, what we did was we replaced that letter of credit with a trust account where the cash just sits in a trust account and earns interest for the Company but it saves us on some banking fees and there's really no down side to doing it. If we ever need the cash we could always replace it quickly with a letter of credit and pull the cash out.

And the litigation reserve, we typically don't get into the details of anything regarding ongoing legal issues but it's just a change in the reserving during the quarter. And the reason it's an add back is because we do not expect there to be any cash implications in the current operating cycle.

Okay. All right. Thank you very much.

Our next question is from the line of Karru Martinson with Deutsche Bank. You may proceed.

Good morning. In terms of the new store roll-outs here and the changes that you're making, when you look at your network of stores, how many of them do you feel are negative or underperforming on a four wall basis?

This is Todd. We typically don't give out information on individual store results but as I've indicated on a number of previous calls, we do not have a large number of stores that don't contribute. And so the underlying question is, is there a portion of the store base that we plan to take some immediate action with, there isn't anything like that in the works.

I've certainly noticed a larger number of ads on the television. What's been the response there and is this kind of level of spending going to continue going forward?

To talk about the spending in general. Our spending will be comparable to what we spent in previous years overall. We shifted more into network TV versus print which we've been doing now for the last 12 to 18 months. But I think we're doing a better job of buying our media and I think we're getting better placement overall. But the spend in general will be comparable.

Okay. And your bonds are callable. I want to get a better sense of how you guys view your capital structure and how you're approaching that, given a stronger market out there.

It's something that we will look at but we haven't made any decisions in the near term to have any changes in our capital market.

All right. Thank you very much, guys.

Our next question from the line of William Reuter from Bank of America-Merrill Lynch. You may proceed.

Good morning, guys. Your average inventory per store has continued to show reductions on a year-over-year basis and I was wondering if we were at the point now where we're going to start to see some greater investments in inventory and might see those going up over the next couple quarters?

I think where we're at with inventory now, we've obviously made some pretty substantial steps over the last 18 months or two years, but where we're at with inventory now, we're very comfortable with the levels that we have and you shouldn't expect there to be any major decreases in inventory in the short term here.

Okay. And in terms of the breakdown between in season purchases and pre-season purchases, I remember when you guys came to market with your transaction, you talked about that. Can you talk about where that percentage lies now and whether this has changed over the past year?

We really have never given out any stats in terms of what we buy before season and what we buy opportunistically. Obviously, as Tom mentioned, we manage our receipts based on our metric with an emphasis on liquidity so it's something we look at. We like to stay as liquid as we can but we've never really given in to specifics.

And then just lastly, you guys have 461 stores now. Do you have a sense for what the total store opportunity might be for the Burlington typical box?

We don't quote as to what the opportunity is. All I can tell you is we're aggressively pursuing any opportunity that comes about from a real estate point of view. So we have growth that's going to happen for us as we move forward but we don't really quote as to what number that is.

In the 461, just so we're clear, that's the number we're going to end this fiscal year with.

Okay, that's it from me.

Our next question from the line of Carla Casella with JPMorgan. You may proceed.

Hi. Thanks for taking the question. Your working capital's been a much bigger source of cash in the first half than we had expected. Do you expect for the full year you'll end with a large source of working capital or should that normalize out?

It will normalize out in the second half of the year. But the first half of the year got the benefit of all the excess cash flow management we did at January 30th. So we paid a significant amount of trade payables early in January that came back to us in the first quarter of this fiscal year.

Right, okay. And with 9% less inventory, would you still expect that you could maintain sales growth in the back half or do you think we could see sales decline in the back half?

We're not going to comment on how we see the sales going forward overall but we feel we have the appropriate inventory levels to do the kind of business that we are planning right now.

Okay. And then just one last question. Gross margins, year-over-year for the first half are up. They bounced around a bit in the first two quarters because of the changing of the year-end. As we go into the back half, given the quarters have changed, is it going to move any significant promotional periods, such that third quarter margin might be viewed as expected to be weaker than your prior reporting or fourth quarter stronger, or should we see any more unusual changes?

Further to Tom's comment, we really don't give guidance other than I would say, and want to reiterate what we said in previous calls, that we do expect our margins for the full year to be very comparable with last year, but getting into quarter to quarter changes is not something that we think is appropriate to do.

Okay. Great. That's all I have. Thanks.

(Operator Instructions). Our next question is from the line of Grant Jordan from Wells Fargo.

I had one follow-up question. You guys did a great job providing us the breakout of the restated numbers going back last year. One thing that I don't believe we have are the same store sales by quarter last year. Is there any way you could give us that?

We'll give some consideration to that. We haven't had it in -- you want to just go ahead. All right. We can give it.

For Q3, Grant, last year we were up against a down 0.2. And for Q4 we'll be up against a down 7, 1.

Do you have it for the first two quarters of last year as well?

Q1, down 2.3. Q2, down 6.9.

Okay, great. And then for the year, what was the total number?

Down 4, 3.

Okay. Great. Thank you very much. That's very helpful.

Our final question from the line of Mary Gilbert with Imperial Capital. You may proceed.

Good morning. Just following up on working capital, on a year-over-year basis how should we look at working capital? Will it be relatively flat given the strides that you've made in reducing inventories on a per store basis?

Again, when you look at it on a year-over-year basis, if we don't go through the same excess cash flow management initiatives at the end of this year that we did last year, working capital will look significantly better than it did from the prior year.

Okay. So we'll have a favorable adjustment unless you strategically decide?

Yes, that's correct.

Perfect. Okay. That's very helpful. Now, going forward, looking out with your store growth strategy and given that inventories are now better balanced, is it fair to say that we should assume working capital will probably increase based on the growth of the store base?

Yes. Again, it's going to depend on the number of stores that we open, but clearly as we open more stores there's going to be a need to acquire more inventory to be able to properly merchandise those stores.

Okay. Super. Then one final thing, and I know somebody already hit on this, but given your cost of capital currently and the fact that we're in a pretty attractive environment for financing, it seems like it would be very attractive to reduce your cost of capital. That would be pretty accretive to the equity.

This is Todd. We can't comment on our plans that relate to capital structure but we obviously we continually monitor what the opportunities are and when we believe it's appropriate we'll take the action that's correct.

Okay. Great. Thank you very much.

Okay. Operator, that concludes the Q&A section of the conference call. To all the participants, thank you very much for participating in our second quarter earnings conference call.

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