Burlington Stores Inc (BURL) 2011 Q4 法說會逐字稿

Welcome to the Burlington Coat Factory fourth-quarter 2011 earnings conference call. During the presentation, all participant lines 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, April 20, 2012. I would now like to turn the call over to Bob LaPenta, VP, Treasurer with Burlington Coat Factory. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in this morning's conference call to discuss Burlington Coat Factory's 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; 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 the fiscal-year ended January 28, 2012. 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, which we will file later today, 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 morning, everyone. I'll be speaking with you today about our results of operations, which marked our fourth consecutive year of adjusted EBITDA growth. Net sales for 2011 increased $184.5 million, or 5% to $3.8541 billion. Comparative store sales increased $26.3 million, or 0.7%. We believe these increases were driven by our improved merchandise content and our continued customer experience initiatives. The improvement in our comparative store sales was negatively impacted by the unseasonably warm temperatures many of our regions experienced during the fall season and the holiday selling period. Gross margin dollars increased $73.4 million in 2011, compared with the prior-year, primarily driven by our increased sales volume. Gross margin rate increased slightly from 38.6% during 2010 to 38.7% in the current year, primarily driven by improved [shrink].

During 2011, total selling and administrative expenses increased $58.7 million to $1.2153 billion. Selling and administrative expenses as a percentage of net sales remain constant at 31.5% for 2011 and 2010. The dollar increase in selling and administrative expenses was primarily driven by new and non-comparative stores, which accounted for $49.6 million of incremental SG&A cost in 2011 versus last year. Interest expense increased $29.8 million to $129.1 million during 2011compared to the prior year. The increase was primarily driven by higher average balances on our term loan and ABL line of credit as a result of our February 2011 refinancing transactions. These substantially extended the maturities of our debt instruments resulting in no significant maturities related to our new term loan or our new notes until fiscal 2017. Incremental interest expense incurred as a result of our February 2011 financing transaction amounted to $34.7 million.

Adjusted EBITDA during 2011 increased $11.9 million to $350 million, primarily the result of increased gross margin, largely generated from increase in sales. Adjusted pretax income exclusive of the impact of the Company's debt refinancing increased $9 million, or 16.9% to $62.1 million for 2011. As a result of our debt refinancing in February 2011, we incurred a $37.8 million loss on extinguishment of our previous debt, which included a $16.4 million non-cash write-off of deferred financing fees. Also as a result of that debt refinancing, we incurred $34.7 million of incremental interest expense during 2011. Adding those amounts back to our pretax net loss provides a better view of our operating performance and results in the amount of $62.1 million compared with our pretax income of $53.1 million last year.

I will now move on to some key balance sheet and cash flow items. At the end of the quarter, we had $35.7 million in cash, $190 million borrowed on our ABL, and $242.6 million in unused credit availability. As of today, we are out of the ABL and have availability of $472.5 million. We continue to be in compliance with all our bank agreements and financial covenants, and continue to have significant covenant cushion compared with a year ago. Merchandise inventory at the end of the quarter was $682.3 million, compared with $644.2 million a year ago, including the addition of 17 net new stores since last year, and increased pack and hold inventory as a result of opportunistic buys. Pack and hold inventory remains below 10% of our total inventory. Comparative store inventory decreased 7.4% as a result of our ongoing merchandise and supply chain initiatives. Accounts payable as a percentage of merchandise inventory at the end of the year was 40.5% compared with 29.6% in the prior year.

During 2010, we made $237.7 million of advance payments in order to maximize our availability on the ABL during 2011. Given the strength of our business during 2011, we elected to make prepayments on our term loan of $40 million, and advance paid $152.9 million of payables. During 2011, we spent $116.4 million, net of $32.4 million of landlord allowances and capital expenditures. During 2012, we estimate that we will spend between $130 million and $140 million net of the benefit of landlord allowances of approximately $30 million. These capital expenditures are expected to include approximately $90 million net of landlord allowances related to store expenditures, $20 million to support information technology, and the remaining capital is expected to support distributions, facility enhancements, and various other initiatives. During 2011, we opened 20 new stores and closed three stores, bringing our total store count to 477 at the end of 2011. For 2012, we are planning to open between 17 and 25 new stores.

Regarding our plans for 2012, I would like to reiterate past comments about our initiatives to continue to improve operating results. We've made incremental investments in many areas, but we have been most focused on those that will drive improved sales. In addition to capital expenditures, especially for merchandising systems and supply chain enhancements, we have invested in building our merchandising, field management, and support teams to continued to improve our execution. We've begun to see the fruits of those investments, ultimately, in delivering improved sales. We are building and managing the business for the long-term, with our focus on delivering our long-term financial commitments and maximizing the value of the Company over the next several years. While we continue to pursue opportunities that we believe will result in savings or efficiency improvements, we also continue to invest in the Company to drive sales.

As we move into 2012, we expect that the timing of investments will cause fluctuations in our quarter-to-quarter comparisons versus the prior year, especially in the spring, until we anniversary the investments made in 2011. For the full year 2012, we are continuing to plan conservatively on the top line and plan for our full-year margins to be comparable to recent results. I would now like to turn the call over to Tom Kingsbury.

Thank you, Todd, and good morning, everyone. I will keep my comments this morning focused on our full-year sales performance and some general comments about the business. We are pleased that total sales for the year increased 5% and our comparative store sales increased 0.7%. 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 juniors, home, and our Baby Depot division. We believe that many of the issues from last year, as it relates to our coat and outerwear business, were addressed. But unseasonably warm weather throughout much of the fall season negatively impacted this business. Our Missy Sportswear business ended the year with a significant improvement in trend, and we believe is well-positioned for 2012.

By geographic region, the Southwest, New England, and mid-Atlantic, outperformed, and we are weaker in the Southeast. In 2011, our top priority was executing our off-price model. This includes maximizing in-season buys, remaining very liquid, rejuvenating pack-and-hold, and ensuring assortments reflect more breadth versus depth of styles. This is all designed to ensure that we consistently acquire and flow terrific name-brand values to our stores.

In 2011, we invested in merchandising systems and our merchandising organizations. In 2012, we will continue to invest in the merchandise organization to maximize our access to desirable products and allow us to continue to increase our growing vendor base. To this end, I'm delighted to announce that Paul Metcalf will join Burlington as our Executive Vice President, Chief Merchandise Officer, effective next week. All general merchandise managers report directly to Paul. We are very excited to add Paul's extensive merchandise experience that includes both apartment store and off-price retailing to the merchandising team.

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 year. Our comparative store inventory levels were down 7.4% versus last year, which contribute to a 6% faster turnover. In addition, the level of inventory aged 91 days and older decreased 13%. Over the last three years, inventory aged 91 days and older, as a percent of our total inventory has dropped from 41% to 28%. At the end of the year, pack-and-hold inventory represented less than 10% of our total inventory. Our gross margin rate for the year was 10 basis points higher than last year. The improvement is due to lower shortage results 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 would like to thank our store and corporate team for contributing to our full-year 5% increase in total sales and 3.5% increase in adjusted EBITDA. In addition, I would 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 are ready to begin the question-and-answer session. Thank you.

Thank you. (Operator Instructions) Our first question comes from the line of Grant Jordan with Wells Fargo. Please go ahead.

First, I missed some of this, can you just go over what the debt was at the end of the year and what you did with your payables?

Sure, Grant, this is Bob LaPenta. At the end of the year, we had approximately $190 million outstanding on our ABL. We had $450 million outstanding on the senior notes, and we had approximately $950 million outstanding on the term loan. At the end of the year, as we have done in prior years, but have -- are now winding down the excess cash flow initiative of prepaying payables. We prepaid $152 million in payables at the end of January, compared to over $240 million last year. We decreased that this year. We expect to not have any acceleration next year, so the result of that was a fairly significant excess cash flow payment of about $47 million, of which $40 million was prepaid during the year. So we will have approximately $7 million prepay -- excess cash flow payment that we will make next week when we file the compliance covenants. Then we expect to have a meaningful excess cash flow payment next year.

You paid $40 million, you've got another $7 million to go on the term loan. That's what you said?

That's correct.

The reason you paid early was to avoid a larger excess cash flow payment?

No, we just -- given the liquidity and availability that we had, we just felt it was something we could do.

Do get better terms when you do that?

No.

Okay. I don't see that very often. What's the purpose in doing it then?

It was just to pay down debt faster.

The payables though, that's what I'm talking about.

I'm sorry, what was the question on the payables?

Do you get better terms? Why did you pay them early?

We pay them earlier to reduce the excess cash flow payment that's required at the end of the year.

Okay. In terms of the weather during the quarter, obviously warm weather and you guys are -- have exposure to outerwear. Can you quantify what affect the weather might have had during the quarter?

The temperatures were about by 5.5 degrees warmer in the quarter versus last year overall. Just looking at the coat business, we would've broken even if in fact we wouldn't have dropped in coats overall. But the weather impacts more than just coats. It also has a impact on any other cold-weather product that we have in the stores, cold-weather accessories, sweaters, et cetera. But the good news is the fourth quarter, historically, we would have been impacted even more based on how warm it was versus the prior year. We have been able to really develop other businesses I mentioned, such as dresses and suits, our accessory business, our shoe businesses. It is helping mitigate the impact of weather for us.

Great, yes I thought results turned out fairly well, all things considered. Last question, can you detail some of the investments you referenced as affecting first-half results?

Yes, this is Todd. As we've talked on the last several calls over the last few years, we have been building especially the merchandising and planning and allocation teams along with everything else that supports that. So I'm not going to go through all those again in detail, but this last year in 2011, in addition to supply chain and systems investments, we've continued to build the team. And as Tom announced, our latest executive to join, which we think is going to make a big difference for us here at the Company. During 2012, we are basically just finishing out those initiatives, so the incremental investments in 2012 are very focused in merchandising P&A teams and infield teams. Not as dramatic incremental investments as we had in 2011. The real point that I wanted to make is that as those cost are coming in, we are investing them when we think they will -- that will be in the best interest of the Company, and so the timing is going to cause some fluctuations in performance in the early quarters.

Our next question comes from the line of William Reuter with Bank of America Merrill Lynch. Please go ahead.

In terms of your sales of cold-weather-related products, were they actually down during the quarter? And I don't know if you guys have ever commented on what percentage of your sales they are during a seasonal quarter like the fourth one.

The answer to the first part of that question, yes, the cold-weather categories were down versus the prior-year. We really haven't previously gotten into that detail in terms of what percent of the total. But candidly, as I mentioned prior, the progress we've made in other categories hopefully will help us continue to offset any unseasonably warm weather going forward.

Right, that make sense. I guess I was just curious whether if next year we have a better winter, whether that would -- that should be a tail wind for you guys next year. Is that the right way to think about that?

We're looking forward to colder weather next year. Hopefully it happens.

Great. And then following up a little bit on the questions regarding the first half of the year, comparisons being a little challenging. That is just going to impact the SG&A line. Is that right, that your SG&A might be a little higher in the first half?

That's primarily the point that I was trying to make. The thing I would like to focus on though is as we've said, each of the last couple of years, we've really managed the business season to season and for the full year, and been able to do a really good job of keeping steady margins and steady SG&A. And that's what we anticipate for the full year is basically rates consistent with the last few years.

Okay. And lastly, the slight gross margin decline was saw in the quarter, was that due to trying to clear out some of those cold-weather goods, which I'm sure were tough to sell given the weather? Or was it more inflation of apparel broadly and the challenge of pushing through across-the-board price increases?

Yes Bill, if you remember back in Q3, we ended about 120 basis points better in gross margin. At the time we said it was reduced markdowns. But we stated our annual gross margin rate would still come in at historical levels, which it did. So in Q4, while we did get a little bit of a good guide as is related to shortage results, the drop that you see is related to timing of markdowns.

Our next question comes from the line of Karru Martinson with Deutsche Bank. Please go ahead

From a housekeeping perspective, when is the 10-K coming out, or did I miss it?

No, it will be filed later today.

All right. Sticking with housekeeping, what was the rent expense for the year?

That's not something I have right in front of me, the details of that --

We will have it for you to second.

When we look at the gross margin here, in line with historical levels, the industry's been talking about a second-half pickup year in gross margin as prices come down. We still have higher labor and shipping, but what are you guys looking at in terms of the flow of the year, and will there be a benefit to you guys on that front?

As we have stated previously, whatever increase in gross margin that we can garner, we want to invest it and give better value to the customer continuously. We're totally focused on building our top-line sales. As the customer is still struggling, we want to make sure that we can pass on as much value as we possibly can.

Stated in his prepared remarks we expect our full-year gross margin rates to be comparable with the recent results.

Okay, recent results. When you look at your customer and look at some of your competition out there, do you feel that your customer is more of that lower-end customer, Kohl's, JCPenney, Bontons, trading down, or is it more that you're competing with dollar stores and Ross and TJX for that customer's dollars?

We are in competition with everybody, to be honest with you overall, and we have found our customer to be more of a moderate income customer. We do have customers that are lower income, but our sweet spot is more of a middle income customer in total.

Okay. And when I just look at the start to the year for some of your competitors, in terms of raising guidance and strong spring sales, what are you guys seeing on that front?

We really don't give any forward-looking information or beyond what I gave in my prepared remarks. We will talk about first quarter when we release.

I figured as much, but thought I'd still give it a try. Thanks very much guys.

To get back to your earlier question about total rent, total rent for the year on a gross basis was $194.3 million, and total net rent was $175.1 million.

Our next question comes from the line of Carla Casella with JPMorgan. Please go ahead.

One follow-up on the inventory, you mentioned that you took markdowns in the fourth quarter to clear a lot of the winter merchandise. Was that completed in the fourth quarter, or did any of that bleed into first quarter?

I would say the majority of that was completed in Q4.

So your inventory at quarter end didn't have as much winter merchandise?

I think Tom mentioned in his prepared remarks, our inventory 91 days and older was 28% of total inventory. That is down from 41% for years before. We are very pleased with the performance at the end of the year.

That's great. And then I just missed, what was the cash balance?

Cash balance at the end of the year was $35 million.

And I'm sorry to beat a dead horse, if this is beating a dead horse, but on the SG&A, one thing I heard you say was that on an annual basis SG&A rates, or SG&A should be consistent with historical trends, but it sounded like some of the investments that you're making will make the rate maybe a little bit higher in the first part of the year than it had been in the past? Is that correct?

That is correct. But it will balance out by the time we get through the full year. We expect to have a very consistent SG&A rate in 2012 versus 2011.

Okay, that's great. And what type of investment, is this just the people you are adding on the merchandising side and in the field?

It's a combination of things, but it's very focused on from a CapEx standpoint, it's on finishing out the systems implementations and the supply chain initiatives to make sure we are supporting the business model. And as it relates to SG&A, it is focused in areas that drive sales. More heavily weighted in merchandising and in the teams that directly support that.

Great, and then you have made some big improvements over the last few years in terms of -- or focus on labor in the stores. Can you tell us where you stand there, and whether there is any more initiatives focused on in-store labor?

Yes, we've rolled out new systems over the last couple of years that we are seeing some benefits from, but very consistent with what we have been saying for the last several calls. And as Tom mentioned before, our focus is very much on driving top-line sales. And so while we find additional efficiencies in the business, in most cases we are investing those back in to make sure that we are improving customer service and execution at the store level. You shouldn't be looking for there to be substantial changes in store labor rates, because again, our goal is to improve the customer shopping experience.

Our next question comes from the line of Jordan Hughes with Goldman Sachs. Please proceed.

Hi, I was wondering if you could give a little more clarity on how you are planning to grow sales besides the new store openings? What initiatives do you have in store for this upcoming year to really grow the top line?

Well, first and foremost, we are focusing on making sure that we execute the off-price model superbly across all parts of the organization. We also feel, as Todd mentioned, our investment on the merchandising side and also in P&A, plan and allocation, that we will be able to generate more business as a result of this. So it's primarily just making sure that we're doing what we need to do from a model perspective and having people support that.

Okay. You said you plan to open 17 to 25 new stores. Do have an idea for store closures for the upcoming year?

As far as the stores closures are concerned, we don't have any store closings on our plan for this year.

Okay, thank you. And then it looks like you've broadened your offerings online. When did that start to happen? I don't know if you have disclosed this, but what percentage of sales is online currently and what results are you seeing there?

Online is a very small percentage of our total business at this point in time. We feel there is a nice opportunity in terms of online, but it's going to take time in order to really build that business. We launched a new platform in the fall season last year, which really helped us improve the navigation for our customers and the customer experience in general overall. But it's something over time that we are going to build, because we really feel -- it's obviously important, but we are really just at the beginning stages of that.

Great. And then you've talked about broadening vendors. Can you talk about your plans for 2012 on what categories you think you could bring in more vendors and how that could affect you?

We really feel that we can bring in more vendors throughout all the merchandising areas overall. With the addition of more merchants in our organization, our ability to really cover the market better will help us have more manufacturers, more vendors in the mix overall. But our goal is across the board, just find more and more people that we can deliver more and more value to the customers.

Great, and lastly just one question, on aged inventory at 28%, are you comfortable with that, or is that something you're still working on taking down?

We are pleased with our performance over the last three years, but we are going to continue to make that a high priority in terms of reduction of the number.

Our next question comes from the line of Todd Harkrider with UBS. Please go ahead.

Can you talk a little bit about your same-store sales turning positive a little bit better? The main break out I was hoping you can add color on is if your more mature stores are continuing to improve as you improve customer experience and fresher merchandise. Or is it primarily the more recent vintage stores hitting the comp base? Any help there would be appreciated.

This is Todd. We don't really get into parsing the store base, but I think in the end, what we have seen in terms of our sales performance changing is very connected with the execution across the stores. We've made progress in all of our stores in terms of execution, but we always have areas that we can improve. But in the end, the merchandise content that we have where we are executing our off-price model, and we are buying very little upfront, and we are chasing things that are working in season. Where that's been executed well, that is where our sales are better. Where we are a little bit behind in the execution where we wanted on the merchandising side, those are the areas that have tended to trail.

That's good. And then with [Toomey's] IPO skyrocketing yesterday, I have to ask the question if there is any changes in your thinking on your Cap structure? Maybe if you have a long-term view of where you would like to Cap structure to be in regards to debt leverage and so forth? Thanks.

I can't zero into that in detail, but what I would say is the capital structure we have in place right now gives us a whole lot of flexibility. We don't have any substantial amount of amortizations due in the short-term. So there's obviously a chance of an IPO in a future here, but in the end, we are very, very focused on just improving the business. And when our results and the markets are both in alignment, that will be when we look at it further. But there is no timeline at this point.

Operator, we have time for one more question.

Very good. Our last question comes from the line of Elie Radinsky with Cantor. Please go ahead.

Can you elaborate on the startup losses that you have had. How long it takes some of these new stores to turn around, and especially the operating performance of the stores that you opened last year?

This is Todd. I will let Fred chime in too, but in general, our stores that we have opened in the last two years have been pleased with them as a group in terms of how their performance has come out versus the underwriting models. Our stores, even in the first year, contribute, so we don't have a multiyear ramp-up timeframe before the stores contribute. They contribute in the first year of operations. And beyond that, there's not a lot of addition that we can go into.

How long does it take your store to become mature from an operating performance perspective?

We have a very good read in the first of operations as to what they store is going to do. So once we're past the first full year of operation, there is normally not a dramatic change in the results after that.

So it goes to the Company average EBITDA relatively quickly?

The concept obviously, we are underwriting the store to get a certain return on that store. So we look at the entire expense structure. So what we are more concerned about is, is the store performing against what we expected it to, and is getting to return that we want rather than comparing it to the overall store base. But the point is, our stores for the most part are mature within the first 18 months.

Okay, excellent. And what percentage of your sales come actually from coats, and what was it two years ago or so?

We really haven't given that detail overall, because it really depends on what quarter you're talking about. Just to give you little bit of color on it, if you look at it on an annual basis, it's currently less than 10% of our total. And it's obviously significantly larger three, four, five years ago.

So you mean double?

Yes.

Okay. And then lastly, from a merchandising perspective, is there any specific area where you would like to penetrate further that you are not penetrated now? And some of your stores also have home goods. Is that something that's going to be in the future of your plans as well?

Yes, to answer the question, first home is an integral part of our total merchandising strategy, and home will be in all of our stores going forward. We really feel we perform best when we have every category represented in our stores. So our goals are to really have a full assortment in every single store that we open overall. We are looking for growth really across the board in most of our merchandising categories. We really feel we can do even better, but we are focused on really building those categories they cater to our core female consumer overall. That is where our intensity has been over the years. But in general, we really feel we can have growth across the Company.

That does conclude the question-and-answer session. I would now turn it back to you for any closing remarks you may have.

Thank you operator, and that does conclude our conference call. I would like to thank all the participants who are on the call today. Have a good day everyone, thank you.

Ladies and gentlemen, that does conclude your conference for today. We do thank you for your participation, and ask that you please disconnect your lines.