Burlington Stores Inc (BURL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Burlington Coat Factory first quarter, April 28, 2012 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 15, 2012. I would now like to turn the conference over to Mr. Bob LaPenta, 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 first-quarter 2012 operating results. I'm Bob LaPenta, Treasurer of the Company. Our presenters today are Tom Kingsbury, our President and Chief Executive Officer; Paul Metcalf, our Chief Merchandising Officer; and Todd Weyhrich, our Chief Financial Officer.

Todd will begin with a review of our operating results, followed by a discussion of the business conditions and business performance. Paul and 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 first quarter of fiscal 2012, which ended on April 28, 2012. Remarks made on this call concerning future expectations, events, strategies, objectives, 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 our 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 for the first quarter of 2012, but first let me start by saying, as we indicated on our last call, we continue to build and manage this business for the long-term with our focus on delivering financial performance that will maximize the value of the Company over the next several years.

Net sales for the quarter increased $53.3 million or 5.7% to $982.4 million. Comparative-store sales increased $5.8 million or 0.6%. This marks our third consecutive first quarter of comparative-store sales gains. We believe these increases were driven by our improved merchandise content and our continued customer-experience initiatives, driven by the planned investments made in the business.

Adjusted EBITDA decreased $10.5 million or 13% to $69.9 million for the quarter. The decrease in adjusted EBITDA was primarily driven by a planned decrease in our gross margin rate, and increased selling and administrative costs. During the quarter, gross margin dollars increased $10.8 million, driven by our increased sales volume. Gross margin rate decreased from 37.9% during the prior year's quarter to 36.9% in the current year, primarily driven by increased markdowns. As Tom will discuss in further detail later, we're pleased with the progress we've made in managing our inventory, and we continue to believe that gross margin performance for the full year will be in line with our historical levels.

Selling and administrative expenses increased $18.3 million to $307.1 million. Selling and administrative expenses as a percentage of net sales increased to 31.3% during the quarter compared with 31.1% last year. The dollar increase in selling and administrative expenses was primarily driven by new and non-comparative stores, which accounted for $14.3 million of the incremental costs in 2012. The remaining increase in selling and administrative expenses was primarily driven by planned strategic investments in our merchandising team, store operations and field management, support teams and supply chain.

Interest expense decreased $1.4 million to $29.5 million during the quarter, primarily driven by an adjustment of our interest rate cap agreements to fair value. At the end of the quarter, we had $53.7 million in cash, no borrowings on our ABL, and $472.4 million in unused credit availability. We are currently out of the ABL, and have availability of $441.7 million. We continue to be in compliance with all of 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 $660.9 million compared with $689 million last year. The decrease in our inventory levels compared with the prior year is primarily the result of a comparative-store inventory reduction of 15.6% as a result of our ongoing merchandise and supply chain initiatives. The decrease was partially offset by the opening of 20 net new stores, as well as an increase in the level of pack-and-hold inventory in the current quarter compared to the prior year's quarter.

Accounts payable as a percentage of merchandise inventory at the end of the quarter was 71.3% compared to 71% last year. During the quarter, we spent $16.2 million net of $12 million of landlord allowances and capital expenditures. Our expectation for full-year capital expenditures remains in line with what we discussed on our last call.

During the quarter, we opened five new stores, bringing our total store count to 482 at the end of the quarter. For the remainder of 2012, we are planning to open between 17 and 19 new stores.

I would now like to turn the call over to Paul.

Thank you, Todd, and good morning, everyone. Before I comment on our sales performance for the first quarter, I would like to say how excited I am to be here at Burlington. As someone who has worked in the off-price channel, I continue to believe that today's consumer is more value-driven than ever before. This fits nicely with the top priority of our merchant team, which is to consistently acquire and flow terrific name-brand values to the stores. Under my leadership, this will not change. The team has worked hard over the last two years at getting back to the principles of executing the off-price model, and I look forward to working with this merchant team to continue down this path. In addition, the growth opportunities are tremendous, and I'm equally as excited to work with the vendor community in developing merchandising strategies together to maximize this growth.

As Todd mentioned previously, the total sales for the first quarter increased 5.7%, and our comp-store sales increased 0.6%. 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 businesses that contributed more than the Company average were Juniors and the Home division. We are extremely pleased that our Missy Sportswear business ended the quarter slightly ahead of the Company average. This is a perfect example of how executing the proper off-price principles can translate into positive comparative-store sales. By geographic region, the Northeast and the Southwest out-performed, and we were weaker in the Midwest and the West.

As I mentioned earlier, the merchant team's top priority in 2012 will be the same as it was in 2011, which is executing the 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, and ensuring we are priced right initially. These are the core tenets of off-price merchandising, which are designed to ensure we consistently acquire and flow terrific name-brand values to our stores.

Again, I'm very excited to work with this merchant team and the vendor community in maximizing the growth opportunities here at Burlington. I will now turn the call over to Tom.

Thank you, Paul. Good morning, everyone. I have a few brief comments regarding inventory management and our gross margin rate for the quarter. Inventory management continues to be an important initiative for us. Overall, we were very pleased with the level and currency of our inventories at the end of the quarter. Our comparative-store inventory level was down 16% versus last year, which contributed to a 14% faster turnover. In addition, the level of inventory aged 91 days and older decreased 15% versus last year. At the end of the quarter, pack-and-hold inventory represented approximately 10% of our total inventory.

Our gross margin rate for the quarter decreased 100 basis points versus last year. The primary driver of this decrease is the planned timing of markdowns. We currently expect our gross margin rate for the Spring season to be in line with last year, just as we planned it. 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, 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 consumers.

In closing, I'd like to thank our store and corporate team for contributing to our total and comparative-store sales increases, while simultaneously reducing comp-store inventories by 16%. 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. Operator?

(Operator Instructions) Our first question comes from the line of William Reuter with Bank of America Merrill Lynch. Please proceed with your question.

This is actually Spencer in for Bill. Thanks for taking my questions. I was wondering on the decrease from comparative-store inventory -- that was a little bigger than what we were thinking. Would you expect this -- a similar trend going forward throughout the year?

Hi, Spencer. This is Marc Katz. I'll take that question. I think as we've stated previously, we believe that we are carrying more product than is necessary in our stores. So, in 2012, similar to 2011, we're looking to continue to reduce our comp-store inventories, which we believe will result in faster turns and reduced markdowns. We're not really going to give a number, in terms of where we are going to end up, other than say -- we continually want to look to turn faster and reduce our comp-store inventories.

With all that said, our comp-store inventory numbers, obviously just the outcome of all of our reductions and our receipts, and we're very focused on freshness on our floors. And we're spending a lot of time looking at the goods in the 0 to 30 age bucket, making sure that our currency of inventory is where we want it to be, and we're very happy with where we ended Q1.

Okay, great. Thanks, and then, as far as the availability of open-to-buy, have you seen any change in the availability of merchandise as far as -- like with the disruption JCPenney is causing?

No, really, there's still a lot of goods, as I said in the prepared comments. There's plenty of goods to buy overall, and we're really working hard on having open-to-buy on a weekly basis, to go into the market, and secure great values for our customers, but we haven't seen any kind of disruption.

Okay, thanks, guys. That's it.

Thank you. Our next question comes from the line of Karen Eltrich with Goldman Sachs. Please proceed with your question.

Following up on the inventory, is this primarily apparel-driven, or is it all across the store? And was this quarter particularly high because of the unseasonable warm winter that maybe elevated your cold-weather clothing?

Well, we ended last year at a good place as well, Karen, and the reduction came pretty much across-the-board. It wasn't just apparel. It was all zones.

Great, and how many remodels have you completed this year? What is the plan for the total year, and what kind of sales response are you seeing to these initiatives?

This is Fred Hand, I'll respond to that. Our plans for remodels are very much in line with what we've done in the previous years. We're in the midst of doing refresh and remodels as we speak today, and we're pleased with the performance of our stores that we've actually completed the remodels, and continue to work on the stores that are on their remodel process right now.

And as you look at your store expansion, how many of these are happening in new markets versus existing markets? And as you enter new markets, are you finding that you have the brand awareness, or is there a slower store maturation process?

Well, the remodels, along with the new store growth, they are really across the country. It's a combination of both new markets, as well as existing markets. And what we're trying to do also in the existing markets is to have our newest prototype store, so that we can have the new Burlington prototype in every market that we can get to. That would be our long-term strategy, but right now, it's a mix both in existing and new.

Great, and actually, as you mention the new prototype, is that alluding to the new small store? And actually how many of the new stores you're opening this year are of that format, and how are you finding that to work?

Well, the new prototype -- really what I'm alluding to is the new look for us. We're obviously trying to take into consideration what the consumer feedback has been, opening up the store that's easier to navigate -- brighter stores. Obviously a better layout, and that's what's woven into the equation when we talk about a new prototype.

And as far as the smaller store, I will tell you that we've opened up a number of stores in the past year. Some of them are smaller format. It's a very small percentage of our stores, and we're pleased with what we're seeing. We're learning a lot about the small store, but as a Company, our focus is really still in the big box, and we continue to evaluate any opportunity that comes up.

Great. Thank you very much.

Our next question comes from the line of Grant Jordan with Wells Fargo. Please proceed with your question.

This is David Eller filling in for Grant. Could you guys talk about how weather may have affected sales in the first quarter, and whether you think some sales were pulled forward from Q2?

Well, for us, it's really a combo because of -- actually the warmer weather, based on our penetration in coats during this time period, during the Winter, it really has a negative impact on us overall. So, as far as Summer goods moving forward into the first quarter, we really still feel we have a big opportunity in the second quarter overall to sell Summer goods, so we don't really feel that there was any pull forward at all. We really feel that going forward that we can continue to sell Summer goods.

Okay, and then, you've talked in the past about your commitment to passing on value to customers as product costs come down later in the year. Can you give some color on whether you've seen any of your competitors begin to make adjustments to pricing?

I really don't want to comment on our competition. Our goal in life is really to push hard to deliver as much value to our customers as we possibly can. We're in the market every single week looking for good deals, so that we can pass them on to our customers overall. As you know, it's a very competitive business, and we're really focused on delivering great trends, great value to our customers on a daily basis, and that's where our focus is.

Okay, and then, you've also focused on talking about the increasing breadth rather than depth of merchandise. What are your expectations for your SKU count -- how that might change going forward?

We're really committed to the off-price model, as we mentioned before. And one of the tenets of off-price model is to have a very broad assortment overall. So, in general, we feel that it's going to continue to -- the SKU count is going to continue to expand. We're in the treasure-hunt business, and we want the customer to come in and see a lot of different product for them, so they can find something that they like, and has a lot of value to them overall. But we see it continuing to expand. We are not going to give the specific numbers, but it will expand in the future.

Okay, that's all for me. Thanks for answering my questions.

Thanks.

Our next question comes from the line of Todd Harkrider with UBS. Please proceed with your question.

Yes, going back to the weather questions. You had a headwind with weather in the fourth quarter, but earnings were up, and then the first quarter you had a tailwind where earnings were down. Obviously, you've done a great job of growing earnings, and margins for that matter, over the years, but just trying to get a better feel on the volatility on the earnings, and any clarity there would help.

This is Todd. I'll go ahead and take that one. If we go back to what we said in the prepared remarks, obviously the biggest driver was the timing of when we took our markdowns in the first half of the year. We've talked routinely in this forum that we're managing the business primarily for the full year, and then to a lesser degree within the seasons, and the quarters much less so. And what we invest in the business, and whether that's in markdowns or whether that's in investments in SG&A or capital is very much focused on what's going to drive the best result for the year. So, the timing of markdowns that we took in the first quarter, again, as we mentioned earlier, we expect our gross margins to be consistent with where they've been the last couple of years for the full year. So, that's timing.

The other item that we mentioned was SG&A. We've been investing in a number of key strategic initiatives in the business for the last couple of years, and the items that are directly impacting this quarter are investments that are primarily in our merchandising and some other sales-driving areas. But we've built out our merchandising team to be sure that in order to execute the model well, to have our merchants in market, in our stores, in our competitors on a routine basis. That's really the primary area of investment.

We've also invested, in terms of strengthening our field management organization to make sure that we are improving our execution in the stores, and raising our customer service scores. And we've also invested in supply chain to support the model going forward. So, part of what you're seeing in what you're referring to as the volatility of earnings -- it is just the timing of the spend that's happening this year. We do expect, as we said on our previous call, that our overall margins for the full year will be very much in line with our last couple of years.

Sounds good. And then, follow on the remodel question. Where do you see the biggest opportunities in your current footprint? And I guess where I'm trying to go with it is -- you look at the stores in the South such as Texas, and then look at some of the ones on the West Coast or the East Coast. It's like night and day. Could you talk about maybe the discrepancy there in regards to just profitability on the East Coast and West Coast versus South? Or any geographical break-out you can give along the bottom line and so forth would be helpful.

Okay, this is Todd. Others may chime in here, too, but in terms of profitability of the store base, the stores in each of our major regions contribute substantially to the overall performance of the Company. So, it's not like we're dominated in one certain region, and another one's not important. They are all very important.

In terms of the performance region-to-region, we've not gotten into what the profitability is in each one of the areas, and frankly, it's relatively consistent across the chain. We have very few stores that aren't contributors at the bottom line.

And so, as it relates to when you're talking about the night-and-day discrepancy, could you give a little bit more color what you're asking there?

Just when you just visit some of the stores, the ones that are in Texas, of course -- a decent amount are newer and some of the South are -- just the presentation and just the signage and just everything in regards to the store is a little bit cleaner and polished. Some of the other stores that are on the coast, it seems like they're needing a little bit of an upgrade or remodel. Just trying to see, in regards to those stores, if they are still just as profitable, and if you have any initiatives to actually try to remodel, if you see any more depth in regards to the remodels on the coast and so forth?

Probably the disparity that you're seeing in terms of the look of the stores is -- we've been working very hard over the last two to three years to really change the look of the stores. As Fred mentioned, we're working hard on the navigation in the stores, working hard on the lighting in the stores. We've changed a lot of the materials in our newer stores overall. So, that's probably where you're seeing the disparity overall.

One of the things that we've mentioned several times in other calls is the fact that we're really looking at highly productive stores. We may look at a total remodel or spend more money on a remodel, but candidly, in a lot of the other stores, we're just looking to spend money to maybe replace the carpet, do painting, clean up the restrooms, clean up the dressing rooms, and we're working through that. We're doing X amount every single year, and maybe some of the stores that you're seeing, they haven't gotten the refresh yet. So -- but we have a planful approach to refresh our stores in the future, so we can continue to improve the experience overall. But I really feel the biggest disparity is probably the newer stores, based on all the work that we've done over the last two to three years to improve the in-store experience.

And we can actually see it -- you've grown margins nicely over the past four or five years. I appreciate it. Thanks.

(Operator Instructions) Our next question comes from the line of Harold Citron with Credit Intel. Please proceed with your question.

Couple of questions here. In regards with reducing the inventory -- over the long term, do you expect to see any sort of material improvement in the gross margin as things go forward? I know you didn't want to go into too much detail regarding the expectations on turns, but I think the ultimate thing is to improve the margin here.

Well, as you mentioned, our goal really is to continue to improve our inventory turnovers, and we're talking about really our gross margins to be consistent on a historical level. We would like to pass most of the improvements in gross margin into more value to our customers overall, to continue to grow our business and increase our turnovers. So, we're not looking at big increases in gross margin going forward. We would rather continue to deliver great value to the customers every day.

Okay, so, more along the lines of the Wal-Mart model -- turn operating efficiency into lower prices and help drive the volume? Okay.

In terms of competition, Nordstrom is growing its off-rack business at a pretty rapid clip here. Are you seeing any sort of impact on your operations, given that sort of growth?

We really don't comment on our competition, to be honest with you. We know we're in a very competitive business. That's why we're working really hard to continue to fine-tune our execution of the off-price model. Every single day, we look at every -- the entire retail community as our competition. And the way we're going to win and the way we're going to continue to grow market share really is to execute the model, and deliver values every single day. But everybody out there is our competition.

Okay, last quick question. Do you have a long-term goal in mind for the store base at this point?

Well, as we've been saying all along, our expectation is that we're going to open 20 new stores a year. That's what our goal is currently, but we're looking at every opportunity that comes around in terms of, if the economics are right, then we would consider it. But really, we're looking at, as we've said publicly multiple times, it's about 20 stores a year.

Okay, and I'm sorry, one thought did come to mind with that. In The Journal yesterday, they had the article about big-box stores having difficulty getting new tenants on that. Are you seeing any improvements in the rents for the new stores as you're coming online with them?

This is Fred Hand again. We evaluate every opportunity that comes up, and we are seeing quality space, and there's a lot of white space across the country, so it's really a mixed bag. I can't really sit here and tell you that we're getting great rents. It's just evaluating every site as an individual property based on the financials, and see if it fits the portfolio. But there's lots of opportunity out there, and we're evaluating everything that comes across that we look at.

And we're looking at the total economics of whatever deal we're doing. Where can we position ourselves from a competitive position overall, so it's just not one factor. It's just not -- just don't look at the rent. It's the comprehensive package of the total economics of every single deal, as they come across.

So, you're getting better sites then for the same money?

Not necessarily. I don't think you can draw a conclusion that it's better sites for the money. We look at the whole package. We don't evaluate a property just on the rent. We look at many different factors. If it's the right fit for us, if it's the right opportunity from a competitive point of view, that's really what we look at. But it's all the whole package that we look at, and that's how we're looking at our real estate strategy in the long term.

The one thing, this is Todd. The one thing I'd add to that is -- a big piece of it is, how does it fit into the long-term strategy, or as it relates to the market that we're trying to serve.

Okay, much appreciated. Thanks for the time, guys.

Operator, we have time for one more question.

Certainly. Our last question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

I missed a little bit of the beginning, so you may have said this, and if you did, you don't have to repeat it. But did you talk about what percentage of your merchandise inventory now is last season or clearance versus in-season merchandise?

We talked about reductions in our aged goods, 91-plus, which, at the end of Q1, we had a 15% reduction in our aged goods, and we talked about the freshness in the 0 to 30 bucket as a percent to total were higher now.

Okay.

Those were the (multiple speakers) statistics that we mentioned.

Okay, and those are year-over-year comparisons, or sequential?

Correct. Year-over-year.

And is there more opportunity there, or do you think you're at a good level now?

We really feel that we need to push hard to have more goods in the 0- to 30-day receipt bucket overall. And we're going to continue, as we've mentioned multiple times in the past, we're going to continue to have less aged goods on our selling floors. We really feel it's important. Our customers are looking for freshness, and so we're going to keep our foot to the pedal in terms of trying to get more goods into that bucket -- freshness.

Okay, and is it a matter of just the store logistics though, in terms of clearing the goods, or is it more on the receipt and the inventory system side?

I'd say it's all of the above.

Okay. And then, have you ever given your overlap with JCPenney? I mean, what percentage of your stores overlap?

No. We really don't comment on competition, or exactly where our stores line up.

Okay, and then just one last question. In your newer remodeled stores, have you shifted the mix of goods in any areas, like, I'm thinking shoes or home goods? Has that become greater -- has that gotten greater square footage in any of your new stores?

The new stores, how we allocate the space is based on the Company standards that we have, so I can't really tell you that we've allocated more or less space based on it being new. We appropriately allocate the square footage based on the business needs.

Okay. Great, thanks a lot.

Okay, so that concludes our conference call for today. Thank you, everybody, for participating, and have a great weekend.

Thanks, everybody.

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.