Burlington Stores Inc (BURL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory's third quarter 2010 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Friday, December 17, 2010. I would now like to turn the conference over to Bob LaPenta. Please go ahead, sir.

Thank you, Ben, and good morning, everyone. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's third-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, Tom Weyhrich -- Todd Weyhrich, excuse me, 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 nine months ended October 30, 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 third quarter ended October 30, 2010, compared with last year's recast third quarter ended October 31, 2009. Last year's recast third quarter represents the month of August, which was previously reported as part of our first quarter of the 35-week transition period which ended January 30, 2010, and the months of September and October 2009, which were previously reported as part of our second quarter of the 35-week transition period. 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 providing some information regarding our proposed financing arrangement, which was terminated by the Company. On November 3, 2010, we announced our intention to commence cash tender offers for our outstanding senior notes and senior discount notes. In connection with this offer, and subject to prevailing market conditions, we intended to raise approximately $1.5 billion of new debt, the proceeds of which would be used to repay our existing term-loan term facility, repurchase or redeem our outstanding notes, make a distribution to our equity holders, and pay related expenses. However, as market -- as changes in market conditions drove less favorable pricing, on November 18, we announced the termination of the offerings.

I will now move on to our financial performance. Net sales for the nine months ended October 30, 2010, increased $78.2 million, or 3.3%, to $2.4816 billion. New and non-comparative store sales increased $102.7 million. These increases were partially offset by decreases in comparative store sales of $19.2 million, or 0.8%, and net sales of closed stores of $13.7 million. Net sales for the three months ended October 30, this year decreased $14.2 million, or 1.6%. Comparative store sales decreased $48.4 million, or 5.6%, which was partially offset by an increase in net sales of new stores of $34.8 million. Unseasonably warm weather in September and October was the primary reason for the decline in our comparative store sales.

Our sales penetration of coats and cold-weather accessories during the fall and winter months is highly sensitive to daily temperatures versus the prior year. Sales of these items are adversely affected by warmer temperatures, and sales of other products are also negatively affected by the resulting reduction in store traffic. In markets where we trade, the average daily high temperature in October was six degrees warmer than last year, and the average daily high temperature in September this year was four degrees warmer. Conversely, as the average daily temperature in November returned to normal seasonal levels, we are very pleased with the level of comparative store sales that we have achieved.

Cost of sales as a percent of sales improved slightly to 62.4% during the nine months this year, compared with 62.5% last year. The improvement is the result of the need for fewer markdowns on a year-to-date basis. For the current quarter, compared with the quarter a year ago, cost of sales as a percent of net sales increased to 61.4%, from 60%. The increase was the result of planned increases in both markdowns and shrink during the period.

For the nine-month period ended October this year, selling and administrative expenses as a percentage of net sales remained constant at 33.7%. For the three months ended October, selling and administrative costs increased 100 basis points compared with the prior year, largely the result of our 5.6% decrease in comparable store sales. Total selling and administrative expenses increased $25.7 million, to $835.9 million, for the nine months this year compared with last year. This increase was driven by new and non-comparative store increases of $36.3 million, partially offset by a $10.6 million decrease in cost for comparable stores and corporate expenses.

Total selling and administrative expenses increased $4 million during the third quarter, compared with last year. $15.1 million of the increase was related to new and non-comparative stores, which was partially offset by decreases in selling and administrative expenses at comparable stores and corporate expenses of $11.1 million. The reduction of comparable store and corporate expenses was primarily the result of our ongoing initiatives to reduce the cost structure.

Interest expense increased $20.1 million, to $78.4 million, during the nine months ended October this year compared with last year, and increased $4.3 million, to $24.9 million, in the quarter, primarily driven by an increase in our non-cash interest rate cap expense and interest incurred as part of the litigation settlement for both the nine- and three-month periods ended October this year. Lower average balances on our ABL and term-loan facilities partially offset the increase in those periods.

Adjusted EBITDA for the nine months ended October 30, 2010, increased $8.1 million, or 5.8%, to $149.3 million, primarily driven by the total sales growth of 3.3% and slight improvement in gross margin rate, as previously discussed. Adjusted EBITDA for the three months ended in October this year was $63.2 million, compared with $79.7 million for the three months last year, primarily driven by the reduction in comparative store sales, planned increases in both markdowns and shrink for the period, and a net increase in selling and administrative expenses, as previously discussed.

We have significant liquidity. At the end of the quarter, we had $53.7 million in cash, no borrowings on the ABL, and $559.9 million in unused availability. 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. Merchandise inventory at the end of the quarter was $892.2 million, compared with $846 million last year. Comparative store inventory increased 0.5%. The planned increase in comparative store inventory was the result of the timing of when goods were shipped to the stores. In preparation for the holiday selling season, the Company accelerated inventory flow to the stores, which resulted in an increase in comparative store inventory.

Accounts payable as a percentage of merchandise inventory at the end of the quarter was 76.6%, compared with 69.5% last year. For the full year 2010, we are estimating CapEx spending between $110 million and $120 million, net of landlord allowances of approximately $34 million, as we have discussed in our 10-Q. In addition to the 24 stores opened in the nine months ended October, inclusive of six relocations and one closed store, we have opened two new stores in November. I would now like to turn the call over to Tom Kingsbury.

Thank you, Todd, and 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. We entered the third quarter with a 1.9% comparative store sales increase for the spring season. We were disappointed to reverse that trend as our third-quarter comparative store sales decreased 5.6%, driven by unseasonably warm weather in September and October. As the temperature returned to normal seasonal levels in November, we were pleased with the level of comparative store sales that we achieved.

In the third quarter, we experienced strong performances in key businesses that cater to our core female customer, such as dresses and suits, intimate apparel, costume jewelry, and ladies' shoes. In addition, we experienced growth in our men's and home divisions. Our coat and outerwear business experienced declines, as well as missy sportswear and Baby Depot. By geographic region, the Southeast, Southwest, and West outperformed, and we were weaker in the Midwest and the Mid-Atlantic.

I would now like to give an update on the Company's top three priorities -- merchandise content, receipt management, and the store experience. Merchandise content continues to be our first priority, designed to ensure that we deliver a consistent flow of trend-right, national brands at outstanding values. Our main focus continues to be improving the content for our core female customer, leveraging our coat franchise and expanding other categories to lessen our dependency on coats and cold-weather products.

One of the keys to improving our content is to develop assortments that reflect a good-better-best strategy across many lifestyles. Those areas I previously mentioned -- dresses and suits, costume jewelry, intimate apparel, and ladies' shoes, have done a superb job at delivering a balanced assortment on a consistent basis. Where we have not consistently executed this strategy, we are performing the below the average -- for example, missy sportswear. We continue to believe strongly that our customer is excited about our everyday low-price model. The consumer can come into our stores every day and feel confident that she is getting a good deal.

Our second priority is receipt management. We continue to manage our receipts based on a receipt-to-reduction ratio, with an emphasis on liquidity. We are targeting and have implemented disciplines to monitor open to buy for 30, 60, and 90 days out from receipt date. This affords us the ability to buy more goods opportunistically, in season, to take full advantage of the very good supply of merchandise that's available in the market. We were pleased with the overall currency of our inventories at the end of the third quarter. The percentage of inventory 91 days and older improved versus last year.

We continue to monitor and adjust our open to buy paradigm, in which we purchased both preseason and in-season merchandise. From fiscal 2006 to fiscal 2009, the majority of our purchasing was preseason, with a balance in-season and opportunistic. With our new model, we have moved towards purchasing less preseason, with a majority in-season and opportunistically. By maximizing our in-store -- in-season buys, we believe that we are able to take advantage of known trends and emerging businesses, as well as drive better terms with our suppliers. Our third 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 satisfaction survey program. I am pleased to report that at the end of the third quarter, we are still experiencing a 12% improvement in overall satisfaction.

Some of our initiatives that are currently underway include rolling out our new design characteristics to all new and remodeled stores. At the end of this fiscal year, we will have 46 stores that reflect elements of this new design, implementing a store refresh program in stores that have certain needs such as new carpet, painting, fitting room improvements, and various other improvements. We have completed store refreshes in 51 stores during the past two fiscal years, and expect to continue this program going forward. We are conducting lighting retrofits, which will make the stores more energy-efficient while improving the lighting within the stores, making it easier for the customers to navigate the stores. We have completed lighting retrofits at 139 stores over the last two fiscal years, and expect to continue an aggressive lighting retrofit program going forward.

In closing, I'd like to thank our store and corporate team for contributing to our year-to-date 3.3% increase in total sales and 5.8% increase in adjusted EBITDA. In addition, I'd 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 these comments, I am going to conclude our prepared remarks. Operator, we are ready to begin the question-and-answer section. Thank you.

Thank you. (Operator Instructions) One moment, please, for our first question. Our first question comes from the line of William Reuter, Bank of America. Please go ahead.

Good morning.

Good morning.

With your -- you're moving towards the one third, one third, one third products between the preseason, in-season, opportunistic. I'm wondering when you guys hope to kind of achieve those types of balance, and as you move there, how this should impact your margins?

Hi, Bill. We're currently at those levels at this point in time. We're continuously refining it. But we're pretty much there now, overall. And based on different things that are happening, such as increases in cotton and other increases in Chinese labor, in terms of price increases, we really plan to maintain our gross margins and pass any savings that we get from this to our customer so we can continue to deliver a lot of value.

Okay. So, it sounds like, from your initial comments, that this is more about getting the product that people want and driving sales, as it is -- as opposed to improving margins. Is that the right way to think about it?

Absolutely.

Okay. And then, just one more. In terms of the new stores that you've been opening, I'm wondering if you can comment on how those are performing. And then, just remind us what you think the store opportunity might be for Burlington domestically.

Good morning, this is Fred Hand. As in the case with most retailers with such an aggressive growth, we don't really comment on the exact performance individually. But I can tell you that in the retail environment that we're in, so far we're very pleased with the overall performance in the new stores. And as far as the strategy for future growth, we're constantly seeking the opportunity, where we can, to be able to expand in the markets that we're in. And the real estate market, as you very well know, there's opportunities out there, but we're really being selective as to which ones fit our portfolio the best. But we see great opportunity next year for more growth.

Okay. That's it for me. Thank you.

Thanks, Bill.

Our next question comes from the line of Emily Shanks, Barclay Capital. Please go ahead.

Good morning.

Good morning.

Hi. I had a follow-up question around the retrofit lighting. If I recall correctly, at the time of the April 2006 LBO, this was a strategy that the Company was implementing at that time as well. Is this something incremental, or is this just continuing to touch the footprint, or what is different about that now versus then?

The initiative that we have right now with the lighting retrofit really started about two years ago. And our strategy there is, that the -- whatever initiative that you're alluding to as part of the LBO is really not related to what we're doing now. We're actually going through and -- the relighting retrofit program that we have is really to illuminate the stores much better, and make sure that they're much better lit, and help the navigation process. And I will tell you that the impact and the result that we're getting from the stores that we have done -- the response from the consumer is terrific. So, I -- I can't comment on the initiative that you're commenting on in 2006. This is a different initiative that we have.

Okay. That helps clarify it. Thank you. My second question is, there's been a set of news on the tape around the Fendi litigation settlement. And we've seen numbers of $10.05 million that is due and payable to Fendi. Can you update us if -- one, that's the correct amount, and then two, what the timing of that payment will be?

This is Todd. We normally don't give details on litigation matters. To the extent we can comment on it, those disclosures are included in the 10-Q. But those -- we're fully reserved and all the information that we're giving related to -- to our cash availability all takes into account the -- the payments. And it was paid -- and it was paid in the third quarter.

Oh, it was. Okay. All right. Apologies if we missed it. Thank you. And then my last and final question is just around T.J. Maxx. With the shuttering of the A.J. Wright banner, can you comment if -- one, you perform differently up against A.J. Wright versus T.J.Maxx and you hope to benefit for from this, and/or two, if there are any store closures that may be potential opportunities for you guys?

We normally don't comment on what's going on with our competition overall. And, we're really -- this is obviously new news for us, in terms of their shuttering A.J. Wright. So, we're still working through what we want -- what we're going to do. But we normally don't comment on what's going on with our competition.

Okay. Good luck during the holidays.

Thank you.

Thank you, Emily.

And our final question comes from the line of Carla Casella from JPMorgan. Please go ahead with your question.

Hi, I just had a little bit of follow up on the amount of product you're buying in-season versus preseason. When would you have gone to that third to third to third, would that have been a year ago, or are we comping apples to apples at this point?

Right now, we really started it with spring 2010, that's really where we first got traction. And really, as we went into fall 2010, it was probably really more -- more in sync with what we wanted to do. So we're not comping it yet. So obviously, as we get into 2011, we'll be up against it, some of that.

Okay. And then, with the seasonal -- the weather turning more seasonal, can you give us any color on what you're seeing? Are you beginning to work down into the inventory from the end of the quarter, as coats sell through?

Well, the weather obviously has turned more seasonal, which has the effect that you would expect for us. We were up very slightly toward the end of the third quarter and our -- our expectations are, right now, that we would end the year slightly below last year on a comp store basis. So we -- we're happy with how we're positioned for inventory, and obviously, the current temperature differential is in our favor, at least so far during the holiday season.

Any color in terms of how November or December comps could be?

As you know, we don't comment on monthly comps.

Okay. And then, my last question was, have you thought of plans to come back -- are you -- I guess, view on your capital structure, I'm wondering if you have a time frame, or that you would like to come back to market to refinance some maturities that -- I guess they're not real near term, but not too far out. Any plan there?

Hi, this is Bob LaPenta. Yes, we -- we will -- we will look again in 2011, if the opportunity is right and the opportunity is there, we will look to take advantage of the capital markets. But currently, with our long-term, low-cost capital structure in place, there's -- there's no pressure to do that. But certainly, it is something we'll be looking at closely in 2011.

And certainly, the going out here last month was really just to try to take advantage of a very opportunistic market. Unfortunately, that market changed sort of in the middle of what we were doing.

Okay. And one last question -- have you announced time frame that you expect to replace the COO?

At this point -- at this point in time, we -- I'd prefer not to -- to really discuss that overall. At this point in time, there -- we don't have a plan to replace the COO.

Okay. Great. Thank you.

Mr. LaPenta, I would now turn the call back over to you.

Okay. Thank you, Operator. Thank you, everyone, for participating in this third-quarter conference call. Enjoy the rest of your 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.