Burlington Stores Inc (BURL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Coat Factory first-quarter 2011 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 17, 2011.

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

Thank you, operator, and good morning everyone. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's first-quarter fiscal 2011 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; Tom Weyrich, our Chief Financial Officer; Marc Katz, our Executive Vice President of Merchandise Support and Information Technology; 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 some general economic comments -- some general comments about the business. 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 the call will be available for 24 hours.

In addition, I need to remind everyone that information on this call is primarily related to the Company's results of operations for the first quarter of fiscal 2011, which ended on April 30, 2011.

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 the Company's other filings with the SEC, all of which are expressly incorporated herein by reference.

Now I will turn the call over to Todd.

Thank you, Bob, and good morning everyone. We are very pleased to speak with you today about our first quarter, during which the Company exceeded our planned performance for sales and adjusted EBITDA. Our adjusted pretax income, exclusive of the impact of the Company's refinancing transactions, was also ahead of plan, and increased 42% compared with the first quarter last year, demonstrating the continued improvement in execution of our core initiatives and the resulting financial performance.

With that I will now go through some key P&L highlights and some other key financial highlights before turning the call over to Tom. Net sales for the quarter increased 3.8% to $929.1 million. Comparative store sales increased 0.5%. New and noncomparative store sales increased $40.8 million. And there was a partial offset reducing net sales from three closed stores.

The 0.5% increase in comparative store sales comes on top of a 3.3% increase in the prior year's first quarter. We believe this increase was driven by continued progress in improving our merchandise content, store experience and receipt management.

Gross margin dollars increased $9.5 million versus last year's first quarter to $351.8 million. This increase is attributable to the increased sales volume, partially offset by a planned decrease in gross margin rate for the quarter.

Gross margin as a percent of sales was slightly better than our plan at 37.9% for the quarter. The decrease versus last year was due to planned decreases in initial markups based on our initiative to be more aggressive in initial pricing, which we believe will result in faster inventory turnover and reduced markdowns. We are planning margins for the spring season in total to be in line with last year.

For the current quarter selling and administrative expenses as a percentage of net sales remained consistent with last year at 31.1%. Total selling and administrative expenses increased $10.3 million compared with the prior year's quarter, driven almost entirely by cost of new and other noncomparative stores.

As we discussed on our last call, the Company completed the refinancing of its term loan, senior and senior discount notes with the issuance of a $1 billion term loan and $450 million of senior notes on February 24, 2011. As a result we recorded a loss on extinguishment of debt in the amount of $37.8 million, comprised of $21.4 million of call premiums that we paid to the holders of the notes, and a $16.4 million non-cash write-off of deferred financing fees.

Interest expense increased $3.5 million to $30.9 million for the quarter compared with the prior year. The increase is primarily driven by increased interest expense of $7.4 million related to the new term loan, partially offset by the impact of a $3.3 million fair value adjustment of our interest rate cap agreements.

Adjusted EBITDA for the quarter increased 2.8% to $80.4 million and was driven by the increased sales.

I will now move on to some key balance sheet and cash flow items. At the end of the quarter we have $67.5 million in cash, no borrowing on our ABL, and $388.9 million in unused availability.

We continue to be in compliance with all of our bank agreements and financial covenants. We believe that significant, additional covenant cushion compared with the similar periods a year ago will continue to be generated throughout this fiscal year as a result of both an improvement in our overall operations, as well as less restrictive covenants due to the refinancing.

Merchandise inventory at the end of the quarter was $689 million compared with $634 million a year ago. The increase in merchandise inventories was driven by new stores and increased pack and hold inventory as a result of opportunistic buys. Pack and hold inventory remains well below 10% of our total inventory.

Comparative store inventory decreased slightly as a result of our ongoing initiatives to enhance our merchandise content and freshness. Accounts payable as a percent of merchandise inventory at the end of the quarter was 71% compared with 79.6% in the prior year's quarter. Adjusting to exclude all non-merchandise payables and the effect of the pack and hold inventory results in AP as a percentage of merchandise inventories at the end of the quarter of approximately 71% compared with 72% in the prior year's quarter.

For the quarter we make capital expenditures of $14.2 million, net of $19 million of landlord allowances. For the full 2011 fiscal year we estimate that we will spend between $125 million and $135 million net of the benefit of landlord allowances.

During the quarter we opened 5 new stores and closed 3 stores, 2 of which were in MJM and a Super Baby Depot, where were absorbed into an existing and expanded Burlington Coat Factory store in the same shopping center.

For the remainder of the year we expect to open approximately 15 new stores, inclusive of 3 relocations.

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

Thank you, Todd, and good morning everyone. Given that our last conference call was just eight weeks ago, I will keep my comments brief this morning, focusing on our Q1 sales performance and some general comments about the business.

As Todd mentioned, total sales for the quarter increased 3.8% and our comparative store sales increased 0.5% on top of a 3.3% increase in the prior year. We continued to experience strong performances in key businesses that cater to our core female consumer, such as dresses and suits, intimate apparel, accessories and shoes. In addition, we experienced growth in our junior and home divisions. Our coat and outerwear business experienced declines, as well as missy sportswear.

By geographic region the New England, West, Mid-Atlantic and Southwest outperformed, and we were weaker in the Midwest and the Southeast.

As I have stated before, in fiscal 2010 we refined our balance of upfront in-season and opportunistic purchasing, with roughly one-third of our purchases falling into each category. This balance, coupled with our emphasis on liquidity, is enabling us to take full advantage of the abundant supply of desirable merchandise that continues to be available in the market.

By maximizing our 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.

Those areas that are adhering to this purchase paradigm are delivering balanced assortments and our customers are responding positively. We are working hard on those categories that are performing below the Company average to execute these merchandising principles.

Toward the end of last fall we rejuvenated our Company's pack and hold program. This is specifically designed to take advantage of terrific buys of either highly desirable branded product or key seasonal merchandise for the next year. I would like to point out that we are not attempting to achieve a targeted percent of inventory by area. This is simply based on the right opportunities in the marketplace. As of the end of Q1, pack and hold inventory represented less than 10% of our total inventory.

Inventory management continues to be an important initiative for us. We are pleased with the level and currency of our inventories at the end of Q1. While the overall comp store inventory level was down slightly in Q1, this is on top of double-digit decreases in the two prior years.

During the last three years comp store turnover has increased 27%. In addition, the percentage of inventory age 91 days and older dropped 2% versus last year, while the percent of inventory age 0 to 30 days increased 3% versus last year.

Our gross margin rate for the quarter was 40 basis points below last year, but ahead of our financial plan. The decrease to last year is attributable to lower markups due to our desire for initial pricing to be more aggressive, which we believe should result in faster turnovers and reduced markdowns. Accordingly, the drop in gross margin for the Q1 is planned to be offset by reduced markdowns over the course of the spring season.

As we stated before, while we may have fluctuations within quarters, we are planning full-year gross margins to be in-line with our historical levels.

In terms of uncertainty as it relates to macroeconomic environment, sourcing or pricing costs, we continue to believe that our model provides us with tremendous buying flexibility, affording us the ability to mitigate these pressures.

We will stay focused on maintaining liquidity to ensure we have the appropriate amount of open to pay to take advantage of the continuous flow of desirable product so that we can continue to deliver great values as we progress through 2011.

In closing, I would like to thank our store and corporate team for contributing to our 3.8% increase in total sales and 2.8% increase in adjusting EBITDA, which was on top of last year's very strong 32.8% increase.

In addition, I would 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 these comments I'm going to conclude our prepared remarks. Operator, we are ready to begin the question and answer session. Thank you.

(Operator Instructions). Karru Martinson, Deutsche Bank.

When we look at the weaker categories here for missy sportswear and coats, they have been trending below the Company average now a couple of quarters. What is the turnaround strategy there, and what is the timeframe?

First of all, to talk about coats, we have new management in the coat area. We have a new General Merchandise Manager, who is very familiar with coats, and a new DM, Divisional Merchandise Manager, that also has a lot of experience.

As I mentioned on the last call, a lot of our problems in coats last year was really because of the things that we did in terms of not really offering the kind of assortment that resonated with the consumer.

So we have really spent a lot of time this spring preparing for this coming fall, obviously, where most of the business is. And we feel that we are going to -- we believe our performance will be good in the fall season as it relates to coats.

Missy sportswear, again, we have a new General Merchandise Manager in there and a new Divisional Merchandise Manager. And we are working really hard to ensure that we are really operating with the same merchandising disciplines that we have in the rest of the areas that are performing well. So we feel that we are getting in place -- and we believe that the performance in missy sportswear should improve as we progressed into the fall season and holiday seasons.

Okay. When we look at most of the retail sector everyone is talking about cotton and the impact here for the second half of the year. What are you guys seeing in terms of your buys, whether it is buying forward or even now buying in-season?

There is obviously pressure in the marketplace in terms of what is going on with cotton and labor costs, as I mentioned in the prepared comments. But we really feel that our buying model and the disruption in the marketplace in general will really help us in terms of continuing to deliver great values to the customers.

We think we can mitigate what is going on in the macroeconomic area based on the way we are buying goods. We are just buying goods closer to need. And we are able to take advantage of good, off-price and great off-price deals based on the fact they were keeping liquid -- we are keeping open to buy to take advantage of that.

Okay, just lastly, with the new design remodels that you guys have been doing, and you had like 46 done last quarter, what has been their performance there versus the store average?

Good morning. This is Fred Hand. The stores with the remodel and the new prototypes that we have are all in-line with our expectations. As any retailer, we are evolving and really adding on to the specifics within each prototype, but overall the performance is well in-line with our expectation.

All right. Thank you very much, guys.

Emily Shanks, Barclays.

I had a couple of questions. My first one was just around the subsequent events that was noted in the 10-Q, just specifically around the charge that you expect to be taking. I was curious what type of reorganization or what the specifics were of the quote [term] positions within stores and corporate locations. Was that just shrinking the number of employees or did you shutter stores subsequent to quarter end? How should we think about that?

There were no stores closed. And it really just has to do with making sure that the way we have our field management and the way we align labor within the stores is giving us the best results possible in the stores. So there is not a change in the store base. And the amount of charge that we expect to come out of that will be very much in-line with what you saw in the disclosure.

And in hand with that, can remind us, are you implementing a new employee hour management program? Is that part of this?

Yes, this is Fred Hand again. We are right now rolling out a new scheduling system. And the process -- we will be complete before we get to the fourth quarter of this year. And the outcome of that new process in the system will really be a much more efficient scheduling system based on productivity per hour, to where we can make sure that we have the appropriate staffing based on our productivity when our customers are in the store. And it really should enhance the efficiency of how we operate.

Right. As we have stated on a number of calls in the past and we have talked about this implementation, we are -- there is a portion of that that we built into our plan that is savings, but we are reinvesting a substantial amount of that money back into store labor to, again, give a better customer service.

Okay, great. Then my last question is around specifically your apparel and footwear offering. Can you give us a sense of which brands or vendors you see the most opportunity with? And/or are you seeing a significant mix shift by vendor as you look out over the remainder of this year? I don't know if you can comment on that.

We normally don't comment on specific vendors, but what we are trying to do is we are expanding our vendor base in general. We really feel that we need to offer -- we need to have a broader offering for our customers, because the treasure hunt philosophy that we operate under we feel we need more vendors. So the real shift is going to be to really expand our vendor mix overall.

But the philosophy that we are working under is we just -- we try to align ourselves with those vendors that are trending at a particular time and who has the right commodities that we really need overall. So you're not tied as much to really any specific vendors like maybe other retailers are.

We really feel that is an advantage for us, especially as costs increase and labor costs increase, because we can go from vendor to vendor looking for the best deals possible and we are just not tied to any specific vendors or vendor matrix.

Okay, that color is helpful. Thank you. Good luck.

Karen Eltrich, Goldman Sachs.

With the strategy that you mentioned for the gross margin in terms of the lower markup, how noticeable is this to the consumer -- to your customer? And are there any particular product categories that you're targeting with this?

We are pretty much -- it is pretty much a total Company strategy in terms of making sure that our pricing is a little bit more aggressive. And we have seen -- we have definitely seen the customers reacting positively to that. So we just feel that is something that we need to be going forward with really delivering values as much as possible as [a] first enters the store, which we really feel will increase our turns in the future.

With regards to real estate, if you look at your new store expansion plans for the year how is this balance between new and existing markets? How is the environment -- are you still finding a lot of interesting opportunities?

We don't really comment on any specifics, but I can tell you that our real estate strategy is very, very promising for us, not just this year, but in years coming.

There is lots and lots of opportunity out there. And, frankly, we are looking at different options. Given the decrease in new markets and the new shopping centers going up, we're looking at other options that are available to us. And we anticipate that the growth strategy that we have will continue to be on pace. We will be on plan. So it still looks very strong for us.

Great. Final question. I am very intrigued by your BurlingtonBrag website. It looks like it is getting very good customer response. Are you finding this helpful in building that customer database?

On the same note, is there any thoughts to expanding your e-commerce site?

The quick answer to that is it is resonating very well with the customers. We are really getting a lot more hits and more interactions with the consumer based on that. We are pleased with the results so far.

And as far as e-commerce goes, we are looking at ways to improve it overall. We really feel it is important to our total model, and we will probably see more improvement in next year versus this year.

Great. Thank you very much.

Carla Casella, JPMorgan.

This is [Paul Simonhauer] for Carla Casella. I just wanted to ask you guys a couple questions. First, can you discuss your inventory receipt-to-reduction ratio? I think you guys have talked about this metric you want to improve. Where does it stand today and what is your timeframe for improvement?

Right now our receipt-to-reduction matrix for Q1 was right in-line with plan. So it is right where we want to be. Again, what we are trying to do with that is just match our receipts to all of our retail reductions, so sales markdowns and shortage.

We are happy with where it has been. As I said, it was pretty much a right-on plan in Q1, and we expect it to be in Q2 as well.

Then, also, what is your target for store payroll to sales? I think it currently stands at around 10%.

We don't give any -- in the normal course -- forward-looking information, but as I was alluding to earlier, our labor scheduling and how we are managing the stores while Fred's team continues to make improvements there, we are -- in terms of how we are organized, how we are managing the stores, we are reinvesting the savings back in. So you shouldn't be looking at a meaningful change in store payroll going forward.

Okay, great. Thanks a lot, guys.

Bill Reuter, Bank of America Merrill Lynch.

In terms of the expansion of your vendor base, I guess I'm wondering whether through this process you will be reducing your purchases with your existing vendors and whether this could negatively impact your margins?

Well, we don't really think that is going to occur. And we really feel, actually, by expanding our vendor base our margins -- We will have more deals. As we mentioned before, we are looking at margins to be at historical levels. But I really feel that is truly an advantage in terms of buying product, is having an expanded base.

We are just chasing trends. That is our strategy. We really -- we buy two-thirds of our goods in-season and opportunistically. And whoever has the right product at the right price is who we pursue. So I really feel that it is actually a positive versus any kind of negatives that would occur based on that.

With most of your purchases are there kind of volume thresholds where when you purchase a certain amount you meaningfully change the purchase price per unit up or down?

Well, obviously, there's all kinds of different strategies in terms of how we buy product, and it depends in every situation. There is no real model like some other retailers might have. It is really different from each vendor and how we deal with them. There is just no cookie-cutter approach in terms of how things work in our model versus other retailers.

Okay, and then one last one. I missed some of the prepared remarks, so I hope that this isn't redundant with what you have already talked about. But you guys talk about your effort to turn product faster, and I am wondering if you can talk about how this has changed the average age of your inventory?

Our inventory aging improved. Tom mentioned in our prepared remarks that our inventory 91 days and older improved 2% versus last year. And our inventory age 0 to 30 improved 3% versus last year. So everything that we are doing from an inventory management point of view is improving the aging as well as our [turn].

Okay, that is all for me. Thanks.

Karru Martinson, Deutsche Bank.

Just a housekeeping question. What is the remaining RP capacity to dividend out cash to the parent?

There's no opportunity to do another dividend right now with the current credit agreements.

All right. Thank you very much.

Operator, we have time for one more question.

Mr. LaPenta, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay, well, thank you everyone for participating in our first-quarter conference call. We look forward to talking to everyone again at our second-quarter conference 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.