Burlington Stores Inc (BURL) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2011 earnings conference call. During the presentation, all participants will be in a listen-only mode.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, September 15, 2011. I would now like turn the call over to Mr. Robert LaPenta, Jr. Please go ahead, sir.

Thank you, operator, and good afternoon everyone. We appreciate everyone's participation in this afternoon's conference call to discuss that Burlington Coat Factory's second quarter fiscal 2011 operating results. I'm 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 Support and Information Technology. And also joining us on the phone is 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 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 second quarter fiscal 2011, which ended on July 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 risk certain risks and uncertainties. Actual results or events may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the Company's annual report on Form 10-K, and in the Company's other filings with the SEC, all of which are expressly incorporated herein by reference. Now, I'll turn the call over to Todd.

Thank you, Bob, and good afternoon, everyone. We're very pleased to speak with you today about our year-to-date performance during which the Company exceeded our planned performance for sales and adjusted EBITDA. Comparative store sales increased 4%, while total sales for the quarter increased 8.9% to $793.3 million. Not-new and non-comparative store sales increased $38.9 million, and were partially offset by a $3.2 million reduction in sales related to closed stores.

For the 6 months ended July 30, 2011, comparative store sales increased 2.1%, while total sales grew 6.1% to $1,722.4 billion. New and non-comparative store sales contributed $79.7 million of sales growth, which was partially offset by a $14 million decrease due to store closures. The increases in comparative store sales for the 3 and 6 month periods were 4% and 2.1%, and come on top of comparative store sales increases of 0.3% and 1.9% in the same period a year ago. We believe these increases were driven by continued improvement in our merchandise content, store experience, and receipt management.

Gross margin dollars increased $26.9 million and $36.4 million for the 3 and 6 month period. The increase during the 6 months was driven entirely by increased sales volume, as our year-to-date margin rate is essentially flat, consistent with our plan. The increase for the 3 months was driven by increased sales volume, as well as an increased gross margin rate. This increased rate was primarily related to fewer markdowns taken during the quarter, offset by planned decreases in the initial markups, as we discussed on the prior quarter's call.

Our continued decrease in initial markups are based on our initiative in being more aggressive in initial pricing, which we believe will result in faster inventory turnover and reduced markdowns. Total selling and administrative expenses increased $4.9 million or 1.8%, and $15.2 million or 2.8% during the 3 and 6 month period versus last year. This resulted in total selling and administrative expenses of $276.7 million and $565.5 million for the respective periods. These increases were driven by costs of new and other non-comparative stores.

As a percentage of net sales, selling and administrative expenses for the 3 and 6 month periods decreased 240 and 110 basis points, respectively. Of the 240 basis point decrease, 160 basis points reflect the increased expense leveraging, and 80 basis points reflect the impact of $6.5 million of non-recurring charges that were recorded in the prior year's quarter. Interest expense increased $6.2 million to $32.3 million for the quarter compared with the prior year, and $9.8 million to $63.2 million for the 6-month period versus last year. These increases were primarily driven by a higher term loan balance and higher interest rates.

Adjusted EBITDA for the quarter increased $15.3 million or 196.2% to $23.1 million, and for the 6-month period increased $17.4 million or 20.2% to $103.5 million. These increases were primarily driven by increase in our sales volume, as the result of our continued improvement in execution of our core initiatives, and our improved expense leverage.

We do not expect a favorable year-over-year expense trend to continue in the third quarter, as we plan to invest more heavily, particularly in store operations to continue to improve customer service, and store recovery capability, and supply chain to support our opportunistic buying model, and to continue to strengthen our merchant, field management, and support teams. Our pre-tax net loss decreased $9.1 million to $55.9 million for the quarter, a 14% improvement compared to the second quarter of last year.

I will now move on to some key balance sheet and cash flow items. At the end of the quarter, we had $31.8 million in cash, $79 million borrowed on our ABL, and $272.3 million in unused credit 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 overall operations, as well as less restrictive covenants due to the refinancing.

Subsequent to the end of the fiscal quarter, on September 2 we completed an amendment and restatement of our $600 million ABL line of credit, which extended the maturity date to September 2, 2016. This agreement will lower both our borrowing costs and unused line fees, as well as increased our borrowing availability. The Company's other long-term debt was replaced in February 2011 with a new $1 billion senior secured term loan facility which matures in 2017, and $450 million of aggregate principal amount of senior -- of 10% senior notes due 2019. With the completion of the amended credit agreement, the Company now has no significant debt, amortization or maturity over the next 5 years, and believes it has the flexibility to fully support our currently anticipated growth initiatives for the next several years.

Merchandise inventory at the end of the quarter was $665.2 million, compared with $661.2 million a year ago. Comparative store inventory decreased 6% as a result of our ongoing initiative to enhance our merchandise content and freshness. The increase in total merchandise inventories was driven by new stores and increased pack and hold inventory as a result of opportunistic buys. Pack and hold inventory remains below 10% of our total inventory, and we do not expect it to rise in the fall.

Accounts payable as a percent of merchandise inventory at the end of the quarter was 62.4%, compared with 69.3% in prior year's quarter. The decrease primarily reflects the Company's increased investment in pack and hold inventory as the quarter-end -- as of the quarter-end, compared with a year ago. For the 6-month period, capital expenditures were $44 million, net $24.1 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 6-month period, we opened 5 new stores and closed 3 stores, one of which was a MJM and one was a Super Baby Depot, which were both 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 18 new stores, including 3 relocations. I would now like to turn the call over to Tom Kingsbury.

Thank you, Todd, and good afternoon, everyone. I'll keep my comments this afternoon focused on our second quarter sales performance, some general comments about the business. As Todd mentioned, total sales for the quarter increased 8.9%, and our comparative store sales increased 4% on top of our 0.3% increase in the prior year.

We continue 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, other areas of business that contributed more than the Company average were juniors, youth, and our Baby Depot division. Our Missy sportswear business was the only area that was disappointing.

By geographic region, the Southwest, New England, mid-Atlantic, and Midwest all performed, and we were weaker in the Southeast. Our balance of upfront, in-season and opportunistic purchasing, 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 the 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 have been focused on the (inaudible) [Forrester] business. And we believe that we have made progress towards executing these merchandising principles. We expect an improvement in trends for this business during the fall season.

As I mentioned on the last call, we rejuvenated our Company's pack and hold program toward the end of last fall. This is specifically designed to take advantage of terrific prices, either highly desirable branded product for key seasonal merchandise for the next year. I'd like to point out that we are not attempting to achieve a targeted percentage of inventory by area. This is simply based on the right opportunities in the marketplace. As Todd said, as of the end of the second quarter, pack and hold inventory represented less than 10% of our total inventory.

Inventory management continues to be an important initiative for us. We were pleased with the level and currency of our inventories at the end of the second quarter. Our comparative store inventory level was down 6% versus last year, on top of a 9% reduction year before, and a 14% reduction 2 years ago. In addition, we continue to experience reduction in the level of inventory age 91 days and older, versus last year.

Our gross margin rate for the spring season was essentially on plan, in last year. As we stated before, while we may have fluctuations within quarters, we're not planning full-year gross margin deterioration versus our historical levels. In terms of uncertainty, as it relates to the 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 buy, 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'd like to thank our store and corporate team for contributing to an 8.9% increase in total sales, and a 196% increase in adjusted EBITDA. In addition, I'd like to thank our vendor community, who continue to receive outstanding support and involvement. They're excited about our growth, and we continue assist with 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).

And our first question comes from the line of William Reuter from Bank of America Merrill Lynch. Please go right ahead.

Good afternoon, guys. You guys talked about that you expect gross margins to be down from historical levels. I guess I'm wondering whether this -- when you say historical levels, whether you're saying they'll be down relative to last year, or whether I should think about relative to an average of the past couple of years? And if you could talk a little bit more about why those are going to be down?

William, this is Marc Katz. I'll take that question. I think maybe you misunderstood our comment, as it relates to the full year. Gross margin will not be down versus last year. We've been consistent with our gross margin -- will be in line with historical levels. So no, that's just not last year, you need to look at the prior 3 or 4 years, and that's what we mean by historical levels.

What we did say about gross margin, in Q1, we were 40% off -- 40 basis points, excuse me, off of last year. And that was done based on lowering our initial markups, which we believe would help us be more -- result in faster turnovers and lower markdowns. And what we said with that is -- while we'll have fluctuations within quarters, we won't have them within the full year. And in Q2, our lower markdowns did came through, and that's what made our spring be equal to plan in last year. Is that clear?

Okay, so just to make sure I understand, you -- the general comment was that gross margins should be in line with historical levels?

That's right. You've got it.

Okay. One -- obviously, we've seen the market, both in terms of the economy as well as some of the stock markets, a little bit choppy or rough since the end of your second quarter. I guess just in big, broad brush strokes, are you guys seeing dramatic change in your consumer behavior since the end of the quarter?

Not really. We really feel that with all the fluctuation, in terms of what's going on currently in the marketplace, our value equation becomes even more important. And we're continuing to deliver great brands at great prices. And we feel that as things are unsteady, it's really an opportunity for us to do even better.

Okay. And then one last one, with the expansion of your vendor base, I'm wondering whether you guys track the number of unique customers? And I'm wondering how this may have trended, since you guys have made some of these expansion efforts?

Historically, we really haven't given that kind of information out, overall. We feel as we expand our vendor base, we'll be able to attract additional customers, we'll have a much broader product offering, which we feel will really help us and attract new customers.

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

Thanks, Bill.

Thanks, Bill.

Thank you very much. I will proceed to our next question, the line of Karru Martinson from Deutsche Bank. Please go right ahead.

Good afternoon. When you guys talk about investing more heavily to improve customer services, and improve the buying model, I mean, what does that exactly entail?

As we've talked about in numerous calls, we really plan and manage the business on a seasonal basis, much less so on a monthly basis and a quarterly basis. In the end, when we invest, how we invest, is all to drive the best long-term results. And basically what is happening in the back half of the year is, we do not expect the same level of expense leveraging in the third quarter, specifically because of the timing of our investment in store payroll, store recovery, and the supply-chain efforts to make sure that we're executing in the buying model, as Tom spoke about earlier, executing it well.

In other words, we're investing more heavily in the third quarter than we did last year, to make sure that we are properly set, and that we maximize the entire fall season, especially the holiday season. So we're investing more heavily in the third quarter, but similar to the margin discussion that Marc walked through a few minutes ago, it really is primarily fluctuation between the third and fourth quarter.

We do still plan to be basically on our plan for the full year, at all the primary line items, basically the top line, what our gross margin rate is, and what our EBITDA margin rate is. We're still projecting to be on our plan. So, really what we are highlighting there is just timing of investment during the back half of the year versus last year.

Okay. And then when we look at SG&A over kind of the past 2 years here for the third quarter, that's kind of been in the 115 to 120 -- I'm sorry -- level. I mean, is that how we should think about it? Or is it just -- is it kind of a massive significant investment up front, and then it kind of fades away? Just trying to get a sense for -- just the timing here and the size.

Okay. And I think in the big scheme of -- certainly a fiscal year and even in the back half of the year, the amount of incremental investment in Q3 is not really material. We just want to make sure that you are aware that the timing is shifting a little bit, compared to what it was last year. For the overall year, we do not expect our expense percent of sales to be meaningfully different than it's been in the past. We expect our adjusted EBITDA flow-through to be very similar with what it's been in the past couple of years, so it really is a timing item.

One of the things that we've talked about in numerous other calls is that we are very, very focused on making sure we're executing well, in terms of the right content in the stores, how it's presented at the stores, what the store customer experience is, and what we are making sure we are doing in light of the current situation in the economy, as Tom mentioned a little bit ago. We want to execute as well as possible here in the back half of the year to maximize sales. So basically what we're doing is looking for consistent flow-through, and trying to drive the top line as much as possible, and satisfy the new customers that are looking at us at this time.

And just lastly, you guys had a very strong, very healthy comp trend here in the quarter. What has been kind of the competitive response to you guys changing your initial markup here?

We really don't want to talk about what our competitors are doing overall. We just feel it's the right strategy for us. And in the scheme of things, in terms of trying to figure out how do we deliver value, and how do we have faster turnovers -- so pricing is an important ingredient in that.

Thank you very much, guys. Appreciate it.

Okay, thank you.

Thank you. And we will proceed to our next question from the line of Emily Shanks from Barclays Capital. Please go right ahead.

Good afternoon, guys. I also had a question on the higher initial markups, and obviously, results have been some pretty nice gross profit margin expansion. Can you give us a little color around what the principles are around your execution strategy, namely, have you been -- is it a systems result? Or change of operating or compensation metrics for your merchants? What are some of the changes that are affecting that for you?

Emily, I guess I'd start that answer out with, again, this is 1 contributor to what we think is helping sales. And it's just a trade-off between initial pricing, IMU, and markdowns. And we're a little bit lower in IMU now, and that's resulting in lower markdowns. And our gross margin is netting out at the same place.

I'd tell you it's a contributor to the sales lift, but I think a far bigger contributor to our sales lift is the purchase paradigm, and the fact in how we're buying, in finding more goods in-season and opportunistically. That has a much bigger impact on our sales. And overall, at the end of the day, as Tom said in his script, our gross margin was right on plan, and flat to last year for the spring season. And again, for the full year, gross margin will be in line with historical levels.

Great. I appreciate the color. I also wanted to ask around just inventories -- you highlighted the comp inventory decline for the second quarter. It's a nice improvement. Should we assume that working capital could potentially be a source of cash for the year? Or what's the outlook in the back half of this year?

This is Bob, Emily. So this year, there will be a source of cash from working capital because of the excess cash flow initiatives that we did at last year's year-end that flowed into this fiscal year. So, there will be a benefit this year, but we don't expect that to continue after this year.

Okay. And are you giving us a sense of the size at all, of the source?

No. We haven't really shared that level of detail.

I think the other comment that I would make, Emily, is that in the end, we've reduced the comp store inventory each 1 of the last couple of years. We are adding a number of new stores here in the fall. We do have a little bit higher investment in pack and hold, although as Tom indicated, it's relatively immaterial in the big mix of our inventory. And so in the end, while our inventories on a comp store basis continue to come down, you shouldn't expect there to be any dramatic change by the time we get to the end of the year.

Okay. That's helpful. And my final question is just around Hurricane Irene. Can you comment about the impact on your stores closures or shutterings or anything of that nature?

Yes, it really was a non-event, for the most part. It hurt that weekend business in the Northeast because everybody was expecting a very bad hurricane, but in terms of any long-term closings, we didn't have any impact, thank God.

Okay. And we're happy to hear that as well. Thank you.

Thank you.

Thank you very much. And we'll proceed to our next question from the line of Rishi Parekh from Sterne Agee. Please go right ahead.

How are you doing? Top line was pretty impressive, and I just wanted to kind of drill down to your margins a bit. With regards to the planned decreases in your markups in the first quarter, do you believe you saw a majority of those benefits in that investment in Q2? Or have we yet to see the full benefit yet, meaning -- are we going to see more of it in Q3, Q4?

We feel that the lowering of our initial markup should be an ongoing help to our overall business, delivering value to the customer. So, since we started this, obviously, we've seen obvious improvement, and we feel that will continue.

Okay. And can you give us an idea what your pack and hold was last year in Q2 2010?

Very, very small. It was really, as Tom said, it was something that we heated up, and we really rejuvenated it in the fall of last year.

But again, where we said at the end of the second quarter, it's less than 10% of inventory, and we don't expect it to change a whole lot, in terms of the overall -- the investment level in the back half of the year.

Right. And to give some additional color on pack and hold as we see it, again, as I mentioned, we really aren't targeting a certain percent for pack and hold. We're letting the values, and we're letting the deals really dictate what level we'll have in pack and hold. It's something that we'll let it evolve, based on what's out there in the marketplace.

Okay. Can you just also give us an idea, or at least give us a breakdown of your same-store sales between traffic and ticket? And I have 1 more question after that.

We historically have not given that information out. We do track it, though. We do look at it. We really feel those are important metrics we'll look at as a company. But historically, we have not shared that level of detail.

Could we assume it's mostly traffic?

As I stated -- (laughter).

Okay. That's fine.

I don't really want to comment on that.

Now, in terms of your inventory, I believe in the Q you said you made some forward purchases. Can you just kind of give us, or at least quantify what percentage of your total inventory reflects that amount? And did you also, in preparation of the new store openings, purchase any inventory during the second quarter, or does any of Q2 inventory reflect any of the inventory that's going to fill the new stores over the next couple of quarters?

I'm sorry. This is Todd, did you say forward purchases?

Yes, or just -- you bought some inventory ahead of expectations, it sounded like, from your Q?

So is this in reference to our comments on pack and hold inventory?

Yes, I guess it's also more for the new store openings, and just wanted to get an idea of any of that is in preparation of the new store openings?

Yes. Every new store has obviously a build that goes into it. Yes, there would have been some that would have been in July. I would tell you, it would have been less than the pack and hold percent, so it wasn't a significant number.

And that wouldn't have been -- any changes there wouldn't have been enough to move inventory levels -- (multiple speakers) year-over-year.

Okay. Great. Thank you.

Operator, we have time for 1 more question.

Certainly. And we'll proceed with our final question from the line of Grant Jordan from Wells Fargo. Please go right ahead.

Great. Thanks for getting me in. Just 1 follow-up on -- I think you said on the SG&A, although it was down as a percent of sales in this quarter, you said that was just a timing issue. Is that correct?

The SG&A during the first half of the year, as has always been the case, we're very focused on making sure we continue to drive the efficiency of the business. So the first half of the year performance was the result of our continued focus on that. In the back half of the year, we are investing on a relative basis between Q3 and Q4, we are investing more dollars earlier, to make sure that our execution is as good as it can possibly be, in our preparation for the holiday season. And to take advantage of what's going on in the economy now, where there are more customers that are likely to look at us, than may have been in the past. We want to make sure that we are harvesting all the opportunity that is coming out of the current situation. That's really what the driver is.

So would that include incremental advertising, store labor --?

The items -- are really focused around store payroll, and timing of store payroll during the course of the fall season versus last year. So we're spending a little bit more earlier. And again, we're not talking about a really material number in the big scheme of the fall season, in terms of incremental investment. But it's in store payroll. It's in supply chain, to make sure -- we have been highlighting for a number of quarters now, how much benefit we believe we are getting at the top line, because of adherence to the buying model, which means we're buying more in-season, more opportunistically.

And that means as those goods come in, we also want to flow them quickly. And we're continuing to invest, both on the capital side, which is in our initial plan, and in the expense side to make sure that we're flowing those goods effectively, so we get the maximum sales out of it. So those are the 2 primary areas.

Okay. That's helpful. You talked a little bit about how you're trying to take advantage of available in-season merchandise. Can you give us an update, in terms of where you stand -- what percent of your goods you're trying to buy in-season, and how you are relative to your goal?

Well, our model, as I've discussed previously, two-thirds of the goods we're buying right now are either in-season or opportunistic buys. So about one-third of our goods, we would be buying pre-season, things that are much more predictable, more on the basic sides, or where we know in certain businesses it's difficult to get the goods unless we buy it up front. But we're sticking to our one-third upfront, and two-thirds in-season and opportunistically. It seems to be working well. And as I mentioned, the areas that have done the best in terms of executing this model are the ones that we're experiencing the best gains in business.

Okay. And then my last question, have you given any thought in terms of what your store growth plan will look like for 2012?

Well, we consistently have said that we will be opening approximately 20 new stores a year.

20 new stores a year. And how many do you have left to open for this year?

There are 18 new stores to open in the remainder of this year, 3 of those though are relocations.

And will those be mostly third quarter?

It's a combination of third and fourth, and very early in the fourth.

Okay. Great. Well, thank you very much.

All right.

Thank you. Okay, operator. That concludes the conference call for today.

Thank you very much. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and ask that you disconnect your lines. And have a good day, everyone.