Burlington Stores Inc (BURL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Burlington Coat Factory Third-Quarter 2011 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, Monday, December 19, 2011.

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

Thank you, operator, and good afternoon, everyone. We appreciate everyone's participation in this afternoon's conference call to discuss Burlington Coat Factory's third 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 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 our third quarter fiscal 2011, which ended on October 29, 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 in the Company's other filings with the SEC, all of which are expressly incorporated herein by reference.

Now I'm going to turn the call over to Todd.

Thank you, Bob, and good afternoon, everyone. We'll be speaking with you today about our results of operations, which continue to out-perform our prior year results on a year-to-date basis. For the nine months ended October 29, 2011, comparative store sales increased 1.9%, while total sales grew 5.6% to $2.6211 billion. New and non-comparative store sales contributed $112.7 million of sales growth, which was partially offset by an $18.9 million decrease due to store closures. Comparative store sales increased 1.5% for the quarter, while total sales for the quarter increased 4.7% to $898.7 million. New and non-comparative store sales contributed $33.1 million of sales growth. We believe these increases were driven by our improved merchandise content, and our continuing customer experience initiatives, partially offset by the unseasonably warm weather in September and October that many of our regions experienced.

Gross margin dollars increased $27 million and $63.4 million for the three- and nine-month periods, respectively. The increase in both periods was driven by increased sales volume, as well as an increased gross margin rate to date. While we have seen an improvement in our margin period over period, we anticipate our full-year margin to be in line with our historical levels.

Total selling and administrative expenses increased $31.5 million and $46.7 million during the three- and nine-month periods versus last year. This resulted in total selling and administrative expenses of $317.1 million and $882.7 million for the respective periods. On a year-to-date basis, selling and administrative expenses as a percentage of net sales remained constant at 33.7%.

The increase in costs in the quarter were largely driven by our decision to make incremental strategic investments in our operations, which we were able to fund as a result of the savings we realized throughout the first half of the year. These investments were primarily in store operations, focused on continuing to improve our customer service and store recovery, and the supply chain to further support our opportunistic buying model. In addition, we continue to strengthen our merchant, field management, and support teams. New and non-comparative stores accounted for $6.6 million of the increase during the three-month period. The increase in selling and administrative expenses during the nine months compared with the prior nine-month period was primarily driven by $35.2 million of expenses related to new and non-comparative stores.

Interest expense increased $9.9 million to $34.8 million for the quarter compared with the prior year, and $19.6 million to $98 million for the nine-month period versus last year. These increases were primarily driven by higher term loan and ABL balances, and higher interest rates on our term loan. Adjusted EBITDA for the quarter decreased $4.7 million to $58.5 million, and increased $12.7 million, or 8.5%, to $162 million for the nine-month period. The decrease in adjusted EBITDA for the quarter was driven primarily by our decision to reinvest some of our expense savings from the first half of the year, as described earlier, partially offset by our overall increase in sales. The increase in adjusted EBITDA for the nine-month period was primarily the result of our overall increase in sales, specifically our comparative store sales increase of 1.9% during the period.

I will now move on to some key balance sheet and cash flow items. At the end of the quarter, we had $45.8 million in cash, $158.1 million borrowed on our ABL, and $401.3 million in unused credit availability. The borrowings on our ABL at the end of the quarter compared with the same period a year ago represent the impact of the debt refinancing during the first quarter of the year, which resulted in the Company borrowing on its ABL, as well as an increase in inventory, primarily due to nine new stores opened during the quarter, as well as inventory purchased for six new stores that were opened in November. We continue to be in compliance with all our bank agreements and financial covenants, and continue to have significant covenant cushion compared with the similar period a year ago.

As we mentioned on our last call, on September 2, 2011 we completed an amendment and restatement of our $600 million ABL line of credit, which extended the maturity date through September 2, 2016. As a result of this amended credit agreement and the debt refinancing that the Company completed in February, we now have no significant debt amortization or maturity over the next five years, and we believe we have the liquidity to fully support our currently anticipated growth initiatives.

Merchandise inventory at the end of the quarter was $945.7 million, compared with $892.2 million a year ago. Comparative store inventory decreased 3.2% 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 plan to increase that percentage going forward. Accounts payable as a percentage of merchandise inventory at the end of the quarter was 68.7%, compared with 76.6% in the prior year's quarter. The decrease reflects the Company's increased investment in pack-and-hold inventory as of the quarter end compared with a year ago, as well as the timing of payments in the current period compared to the prior period.

For the nine-month period, capital expenditures were $89.4 million net of $26.9 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 nine-month period, we opened 14 new stores and closed three stores. Since the end of the quarter, we opened six new stores and closed one location that was previously relocated, bringing our total store count to 477 today.

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

Thank you, Todd, and good afternoon, everyone. I will keep my comments this afternoon focused on our third-quarter sales performance, and some general comments about our business. We were pleased that total sales for the quarter increased 4.7%, and our comparative store sales increased 1.5% despite unseasonably warm weather throughout many key regions for the second year in a row.

We continue to experience strong performances in key businesses that cater to our core female customer, such as dresses and suits, intimate apparel, accessories and shoes. In addition, other areas of the business that contributed more than the Company average were coats and outerwear, home, and our Baby Depot division. We believe that many of last year's self-inflicted issues in coats and outerwear business have been addressed. Our missy sportswear business showed an improvement in trend, but still performed below the Company average.

By geographic region, the Southwest, New England, Mid-Atlantic, and Southeast out-performed, and we were weaker in the West. Our balance of up-front, in-season, and opportunistic purchasing, coupled with our emphasis on open-to-buy liquidity, is enabling us to take full advantage of the abundant supply of desirable merchandise that's currently available in the marketplace. By maximizing our in-season buys, we believe that we're able to take full advantage of known trends in emerging businesses, as well as drive lower costs from 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 missy sportswear business, and believe that we have made progress toward executing these merchandising principles. We did see an improvement in trend for this business during the third quarter.

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 third quarter. Our comparative store inventory level was down 3.2% versus last year, which contributed to a 9% faster turnover. In addition, the level of inventory aged 91 days and older decreased 8% versus last year. As we headed into the all-important fourth quarter, the percentage of our inventory aged between 0 and 30 days old was 4% higher than last year.

Our gross margin rate for the third quarter was 120 basis points higher than last year. The improvement is due to fewer mark-downs versus last year. As we have stated before, while we may have fluctuations within quarters, we are planning full-year gross margin rates to be in line with 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 to our customers.

In closing, I'd like to thank our store and corporate team for contributing to our year-to-date 5.6% increase in total sales, and an 8.5% 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'm going to conclude our prepared remarks.

Operator, we're ready to begin the question-and-answer session. Thank you.

Thank you.

(Operator Instructions)

William Reuter, Bank of America Merrill Lynch.

Good afternoon.

Hi, Bill.

I was wondering if you could talk a little bit about the weather that we saw in October and how that may have impacted you. And then if you can talk specifically with regard to how you left the quarter in terms of your inventory of cold-weather goods, and whether, as things have gotten cooler here, things have picked up a little?

Okay. As for as the weather goes, we really don't talk about it by month, but for the quarter, as I mentioned, we were just slightly cooler than the previous year, which was really record-setting. So there wasn't that much of a differential in the weather versus the previous year. As it relates to cold-weather product, we really -- we begin delivering those goods in September and October, and really the level at the end of the third quarter was in line with what we anticipated the sales to be for the fourth quarter.

Okay. In your prepared remarks you made a comment with regard to the abundant supply of goods that are available this time. Are you seeing -- that sounds to me more bullish with regard to supply than we would have been at this time last year. Is that fair?

I would say it's comparable to last year. There was abundancy of product last year as well as this year, so it's fairly comparable. We really don't have any problems at all securing the inventory or the receipts that we need to fill our stores. So it's not really -- it wasn't an issue last year, and it isn't an issue this year.

Okay, and then one last one from me. I think you may have implemented a few technology systems, the workforce management and the mark-down optimization. Can you talk a little bit about where we are with those two initiatives; whether they started and what you've seen so far?

Sure, Bill. Let me give you a feel for where we are. In June of this year we completed the implementation of our core merchandising systems, and those really provide the foundation for new software and enhanced capabilities. Those went in in June. In August we implemented a merchandise financial planning system, which is really making us more efficient in our merchandise planning, also enabling us to really better control open-to-buy and improving visibility to data. So another win for the Company that went in in August. But clearly the two biggest gains are one that you mentioned, mark-down optimization, and the second is allocation. Both of those systems are currently in a pilot mode, as we speak. We're looking to roll both of those out company-wide in spring 2012 and really see the full benefit of those in the back half of 2012.

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

Carla Casella, JPMorgan.

Hi. A few questions here. In terms of the labor management in the store, can you talk about how many additional staff you have on average on the floor, or what percentage it's gone up during this holiday versus last?

Good afternoon, this is Fred Hand. We don't really elaborate on the percentage. What I can tell you is that what we've done is we've really re-evaluated where we have our team, and the percentages by area. We've now changed it to where we're able to provide a better service to the consumer, either be it through the flow of goods from the back to the front, and really allocating the payroll based on where we see the business needs it the most. Our experience has been that it's proven to be positive, and we continue to look for opportunities to where we can enhance that even more.

Okay, that's great. Then on the -- some of the stores that we've visited, the men's business has been particularly strong. I'm wondering if -- do you see men's up across the board? Is that something that may tick up in the annual percentage of sales coming from each segment? Is men's likely to tick up for this year?

I'd like to answer that question, but we really don't talk about each individual businesses, giving color on every single business is not really what we'd like to do, not only to have that out there for many reasons. We just would really like to stick with our overall performance overall versus each individual business. We just really don't want to share that information out there.

Okay. But in terms of just the square footage, has the allocation been about the same this year versus last in men's?

Yes, definitely, it's comparable to what it has been.

Okay. Then you -- your comments on the inventory sound very positive, you're positioned well going into the fourth quarter. How would you say -- are you comfortable with your holiday merchandise now, and with the coat inventory where it stands, as we've been almost through the Christmas season?

Yes, as Tom mentioned, in terms of Q3, our comp store inventories were down 3.2%. We turned 9% faster. As we headed into Q4, we were very comfortable with our inventory levels in coats and outer wear, and believe that we had fixed the self-inflicted issues from the prior year.

Okay. One last question. If you could just discuss the promotional environment, and whether it's been focused more on any one part of the business? I think from what we saw anecdotally, we saw a lot of promotions in the home area the early part of the season, and wondering if you've seen it more heavily, your competitors discounting in either apparel, home, or coats -- or any specific areas that you could point out that your competitors are promoting heavily?

Well, as every year, there's a tremendous amount of promotional activity in the marketplace overall. The good thing is, we believe is, our everyday low pricing model really serves us well. We are able to deliver value to the customers every single day when they come into the door. But we're in a very promotional environment, as we have been for quite a few years now, and I think the promotions are really, a lot are across the entire store, as it has been in the past. But yes, I don't see anything any bigger than others. It's usually pretty more storewide-based type of promotions.

Okay, great. I'm sorry, I for forgot one of mine when I talked about inventory. Is there further opportunity to reduce your inventory? You mentioned inventory per square foot being down. Is there further opportunity there or are you about as lean as you can get on a per-square-foot basis?

Our goal really is to continue to increase our turnovers. We really feel it will serve us well in many regards. We feel that having leaner inventories on the selling floor will help our customers navigate through the store. But yes, that's one of the things we're looking to do, is really continue, as we had a 9% increase in the third quarter, we want to continue to increase our turnovers. We just feel that's going to be beneficial to us.

Okay, great. Thanks a lot.

Karen Eltrich, Goldman Sachs.

Great, thank you. What, if any, impact are you seeing from the Filene's liquidation?

We normally don't talk about our competitors overall, so we really would prefer not to say anything. But understand that they weren't that large a company, so it'd probably be immaterial.

Great. Can you maybe comment on how your new small-store format is performing, and kind of what variances you're seeing in terms of return on capital versus your regular-size stores?

The smaller store test is really what we're -- what we have going on right now. We have a number of stores that we opened up this year that are a smaller-store format. Overall, we're pleased with what we're seeing. There's a loot of things that we're learning on how to do better and more effectively. But I would say that the overall test so far has proven to be fruitful, and we continue to evaluate opportunities as they come up.

We're -- this is Tom. We're excited about having a smaller footprint overall, for many reasons. As you probably know, we found that having the entire category that we carry in the larger stores in the smaller stores also to be the way to go overall, but we're excited, and we really feel that there's an opportunity for us to have a smaller box in the future.

Fantastic. And in that vein, how many remodels have you completed this year, and what kind of sales lift are you seeing off those stores?

We've completed 47 remodels. Different scope, of course, within each individual one. As with any expansive project list that we have in this Company, as we had this year, the results are different. Overall, we see very good improvement in customer service results. The feedback from the customer is positive. And we anticipate that we will continue to have that kind of accelerated remodel positioning going forward.

Great, final question. With the SG&A, which obviously the investments seem very prudent and you're getting the sales results off it, but should we view this as a new run rate, or at some point should we expect the level to abate?

This is Todd. As we said in our script, what we were doing in the third quarter was very much to make sure that our execution during the third quarter, and especially our setup for the fourth quarter was where it needed to be. So the incremental investment was most heavy in the stores, but also in supply chain to support the buying model.

In other words, we were basically making sure that we were flowing the goods earlier, getting the stores set earlier and putting us in the best position to execute in the later third quarter and in the fourth quarter. We also are continuing to invest, especially in our merchant and buying and support teams here, but it certainly was an unusual rate, but it was to really position us best for the fourth quarter. So you shouldn't look at it as a run rate, but as an incremental investment.

Great. Sounds good. I got my daughter some fabulous diamond earrings from your New York store, so thank you very much for that.

Excellent, thank you.

Emily Shank, Barclays Capital.

Hi, this is Jon Kahnowitz filling in for Emily. Just looking at your third-quarter comps, can you talk about how that stacked up versus your plan, and if it was above or below what the main [drivers] of that were?

This is Todd. We normally don't give out variances to the plan. We look at our year-to-date sales, and everything that's going on economically, we're within the range of where we expect it to be.

Okay. And then just one more to revisit the weather question, or the weather issue. In the geographies that were most impacted, have you started to see those come back as weather becomes a little bit more seasonal?

Again, we don't talk much about the weather, but the markets where the weather was a positive impact, in some areas it's continued to be positive. In others, it's -- it really fluctuates. It's kind of hard to give you a clear answer on that. But our focus is more making sure that we're geared up for the holiday, and that's really what we've been focused on. It's really a mixed bag overall.

Okay. Thank you very much.

(Operator Instructions)

Operator, we have time for one more question.

Aqeel Merchant, Knight Capital.

Good afternoon, gentlemen. Just to make sure I understand your comments on gross margin correctly, you are up year-to-date, and you say that you are going to be flat for the year. Are you implying a gross margin decline in the fourth quarter or a continuation of trends?

Well, there's a number of things that happen in Q4 as it relates to gross margin. One, we have the typical IMU and mark-downs, we have our supply chain costs, and the other thing that happens in Q4 is that's when we take all of our physical inventories. So at the end of the year when we get done with all of those, and we get to our final inventory number, we also have the capitalization of a lot of those supply chain costs. So a number of factors bake into our Q4 gross margin, but, yes, we are saying from a full-year point of view that our gross margin rates will be in line with historical levels.

Okay. Then just to drill a little further into your comment about SG&A, how the costs in the third quarter were really one-time in nature. If I understood correctly, you do expect some increase in SG&A as a percentage of sales on a year-over-year basis, just not as high as we saw in the third quarter?

This is Todd again. Our investments in the third quarter again were primarily related to stores and supply chain in terms of just moving the goods to have the goods be set better for the fourth quarter. We are continuing to invest in making sure that what we do here in store support or at corporate and our merchant teams, our planning allocation teams and the other support teams, that those are functioning as they need to best serve the store. So we've continued to invest in those.

The other thing that has been an ongoing initiative for a number of years here, is we're constant looking for efficiencies throughout the business. What we've been doing for the last couple of years, and we talked about this at some length when we re-financed, that most of the savings that we generate, we are investing back in the business. Because in the end, our focus is much more about making sure our execution at the store level is as it needs to be, meaning we need to do everything right on the front end of the stores to help them, because we're trying to drive the top line. In terms of what you should expense from an -- expect from an expense standpoint, we do have a little bit higher level of investment. We also are expecting to offset those as we go forward into the future. So we're not expecting any major change in our run rate.

That sounds wonderful, gentlemen. That's all I had. Thank you.

Okay, operator. That concludes our conference call for today. Thanks, everybody. Happy holidays.

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 good day, everyone.