Burlington Stores Inc (BURL) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Coat Factory's second-quarter 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, Wednesday, September 19, 2012. I would now like to turn the conference over to Bob LaPenta, Vice President, Treasurer. Please go ahead, sir.

Thank you, operator and good morning. We appreciate everyone's participation in today's conference call to discuss Burlington Coat Factory's second-quarter 2012 operating results. I'm Bob LaPenta, Treasurer of the Company. Our presenters today are Tom Kingsbury, or 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 our 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 fiscal 2012 second quarter, which ended on July 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 through the second quarter of 2012, ended July 28.

We are pleased with our overall performance as comparative store sales performance strengthened as the season progressed and our adjusted EBITDA performance was on plan for the six-month period. Comparative store sales increased 2.9%, and total sales increased 8.9% during the quarter, which came on top of a 4% comparative store sales gain and 8.9% total sales increase in the prior year. Net sales for the quarter increased $70.9 million to $864.2 million. For the six months, comp sales increased 1.7% while total sales grew 7.2% to $1.8466 billion. New and non-comparative store sales contributed $97.3 million of sales growth. We believe the increases in our comp sales were driven by our continuously improving merchandise content and the significant investments we've made in the business that continue to improve the shopping experience for our customers.

We feel very good about our Q2 adjusted EBITDA results, and the fact that they were in line with our expectations on both a quarter and year-to-date basis. Specifically, adjusted EBITDA for the quarter increased $7.6 million or 32.9% to $30.7 million, primarily driven by our comp sales increase of 2.9% and higher gross margin rate during the quarter. During the six months, adjusted EBITDA was on plan with a decrease of $2.9 million or 2.8% to $100.6 million. Planned strategic investments in our merchandising, store operations, and support teams were the primary drivers of the change. As we've discussed on previous calls these investments were made primarily during the back half of fiscal 2011 and have not yet annualized.

During the quarter gross margin dollars increased $34.3 million, driven by our increased sales volume and a 100 basis point increase in gross margin rate. For the six months, gross margin dollars increased $45.1 million, driven entirely by our increased sales volume. Gross margin rate remained consistent with the prior year as 37%. 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.

We continue to be pleased with the progress we've made in sales performance and inventory management. Consistent with our plan, selling and administrative expenses increased $29.5 million to $306.2 million during the quarter, and $47.8 million to $613.3 million for the six months. As a percentage of net sales, selling and administrative expenses increased to 35.4% during the quarter, compared with 34.9% last year and 33.2% for the six-month period ended July 2012 compared with 32.8% in the prior year. The planned increases in selling and administrative expenses as a percentage of net sales for both the three- and six-month periods were primarily related to the investments I mentioned earlier. The dollar increase in selling and administrative expenses for both the three- and six-month periods ended July 28 were primarily driven by new and non-comparative stores, which accounted for $14 million and $28 million, respectively, of the incremental costs in 2012.

Interest expense decreased $4.7 million and $6.1 million for the three- and six-month periods. In May of 2012, we refinanced our term loan, which resulted in a 50 basis point reduction in our interest rate. This resulted in $2.3 million of savings in term loan interest during the quarter. For the six months the decrease in interest expense was primarily driven by non-cash expense related to the amortization of deferred financing fees, and adjustments to our interest rate cap agreements to fair value, and a decrease in commitment fees as a result of our September 2011 amendment to the ABL.

At the end of the quarter we had $31.7 million in cash, $18.2 million in borrowings on our ABL, and $390.9 million in unused credit availability. We currently have $75 million of borrowings on our ABL and have availability of $443.7 million. Merchandise inventory at the end of the quarter was $636.8 million, compared with $665.2 million last year. The decrease in our inventory levels was primarily the result of our comparative store inventory reduction of 15.4%, driven by our ongoing merchandising initiatives. This reduction was partially offset by the opening of 20 net new stores since July 30, 2011, as well as a slight increase in the level of pack and hold inventory in the current quarter compared to the prior year's quarter.

Accounts payable increased $31.9 million to $447 million at July 2012. Accounts payable days outstanding remained relatively consistent with the prior period. During the six months we spent $44.7 million in capital expenditures, net of $17.7 million of landlord allowances. Our expectation for full-year capital expenditures remains in line with what we discussed on previous calls. During the six-month period ended July 28, 2012, we opened 6 new stores and closed 1 existing store, bringing our total store count to 482 at the end of the quarter. For the remainder of 2012 we're planning to open 22 new stores inclusive of 4 relocations, which would bring our total store count at year-end to 500. I would now like to turn the call over to Paul.

Thank you, Todd, and good morning, everyone. As Todd mentioned previously, total sales for the second quarter increased 8.9%, and our comp store sales increased 2.9%. This is on top of a 4% comp store sales increase in the prior year. 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 ladies shoes. In addition our Junior business significantly outperformed our Company average during the quarter. All of these businesses I just mentioned were able to achieve these great results by testing and reacting to new trends, delivering exceptional value, and flowing goods weekly to ensure freshness on the floor.

By geographic region, the Southwest, Northeast, and Southeast outperformed, and we're weaker in the Midwest and West. As I mentioned on the last call, the merchandising team's top priority in 2012 continues to 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, ensuring assortments reflect more breadth versus depth of style, and making sure we are priced right initially. These are the core tenets of our merchandising strategies, which are all designed to ensure we consistently acquire and flow terrific name brands and values to our stores.

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

Thank you, Paul and 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 extremely pleased with the level and currency of our inventories at the end of the quarter. Our comparative store inventory level was down 15.4% versus last year, which contributed to a 21% faster turnover. In addition, the level of inventory aged 91 days and older decreased substantially versus last year. At the end of the quarter, pack and hold inventory represented approximately 10% of total inventory.

Our gross margin rate for the spring season was equal to 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, 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 terms of our new store growth, I am very excited to announce that on Friday of this week, we'll be opening our flagship store in Manhattan's Union Square. We will follow this up in October with a Midwest opening on State Street in Chicago. We believe these high-profile locations demonstrate our commitment to growth and to offering an immense breadth of merchandise across multiple categories. Consistent with new store growth targets that we have articulated in the past, these two stores in addition to our other fall openings will allow us to achieve the 500 store milestone this year.

In closing, I'd like to thank our store and corporate team for contributing to our 2.9% comparative store sales increase in the quarter and our 32.9% 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.

(Operator Instructions)

William Reuter, Bank of America Merrill Lynch.

I'm curious what you guys are seeing in terms of product deflation for the Fall, whether you've seen that coming through from your vendors. And if you are, how you're planning on dealing with it, whether you're going to reduce your prices or -- I know you guys guided to margins flat for the year, but how this whole dynamic could play out?

William, this is Paul Metcalf. I'll answer that. Right now, it looks like there hasn't been as much price deflation, but there's plenty of goods available in the market. So, we're going to continue to evaluate and look at the goods on a weekly basis. As Tom mentioned, we have a tremendous amount of open to buy, so we're just going to continue to revalue the goods as we see fit.

Okay. And then in terms (multiple speakers) of a lot of the department --.

Bill, this is Tom, in terms of overall, our goal is really to continue to grow our comps at the levels that we experienced in the second quarter. And any values we have, we really like to pass it on to our customers. That's why we're going to maintain our gross margins at the historical levels. But it's important for us to continue to deliver as much value as we possibly can to our customers.

Okay. And then, Paul, you noted that there's good availability for product in the market right now. I know that a lot of department stores, their inventory levels are in better shape than they've been in some time. I'm curious whether the levels of available product that you're seeing is -- seems better than last year or similar? What you guys are hearing or feeling.

I don't know if I'm comparing it to last year as much as I'm just comparing to what our need is and what the availability is. And there's plenty of availability out there for our needs between now and the end of the year.

Okay. And then just lastly, your shrink accrual rates are lower. I'm wondering how you guys made that assessment. I don't think you guys take inventory counts except for at the end of the year. Is that right?

That's right. The shrink accrual rate that's built in right now is based upon last year's assumed rate, basically where we came out last year. And then at the end of the year, we'll adjust to wherever we come out this year. The lower rate is basically what we experienced last year. We're not assuming, and what you're seeing in the P&L right now, anything that's incremental improvement, and we do expect that will probably show up in the fourth quarter though.

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

Karen Eltrich, Goldman Sachs.

As we look at the new store openings for this year, how many of those are in the smaller-store format? And as you open these stores, how are you finding the economics compare to your existing store base?

This is Fred Hand. We have a number of stores that we're opening up for the rest of this year that are in the smaller-store format, as well as the larger-store format. And frankly, the model that we operate under and how we open the stores, we have the flexibility and our model works in both sizes. Both smaller stores, less than 60,000 feet, and larger square-footage stores. We're able to operate in both sizes.

And so, the economics are comparable to each other?

Well, economics vary based on different factors. There is a lot of variables that go into it based on location, based on the occupancy costs, so, there's different variables that go into it. But every one of them that we've agreed to open obviously looks suitable to our model. And that's where we're at right now. We're able to -- be able to operate in both sizes.

Great. And you mentioned you've increased your pack-away. What categories specifically are you focused on in this? And obviously this is because you're seeing some opportunity in the market, and you want to lock that in. But what are the merchandise categories that you're focused on for pack-away?

What we focus on in pack-away is each individual deal as it comes to us. We really try not to target any specific zones of business for pack-aways. It's really more related to what kind of deals that are presented to us, what we feel will obviously be strong as we enter into the next season overall. We try not to target it. We really encourage the merchants to go out there and find the best deals possible. And then we review every deal and decide on each individual deal as to what should be put in pack-and-hold.

Again, Karen, just to put the guard rails around it, we're talking 10% of our total inventory. And it was a slight increase from last year. Last year was probably 8%.

Great. And I know a focus for you guys, as you said, you've gotten tremendous support from the vendor community, but a focus has been to expand your vendor relationships and get new product into the stores. If we were to cut a rough number year-over-year, how much would you say that you've increased your number of brands that you're offering to your clients?

Karen, this is Paul again. I would say that we've intensified the increase, in terms of the number of brands. Probably -- if we're opening 400 or 500 a year, that's more than double and probably projected to be triple this year, in terms of the number of vendors [we're opening] new vendors across the Company.

That's great. And final question, obviously as you guys highlighted, the inventory management was quite impressive. Do you think this is sustainable, and is this a level that we can expect going forward?

Yes, Karen, this is Marc Katz. I'll take that. We've talked about this in the past, that we believe we're still carrying more product in our stores than is truly necessary. In 2012, similar to '11, we're going to continue to look to reduce our comp-store inventories, which we believe will result in faster turns and reduced markdowns. While we don't give numbers in terms of targets, we are going to continue to turn faster.

Great. Thank you very much.

(Operator Instructions)

Grant Jordan, Wells Fargo.

You talked a little bit about some of the in-store experience investments are driving up SG&A rate as you had expected. When do you think you'll be able to leverage some of the SG&A expenses with a positive comp?

Well, looking -- obviously we've had improving comps the last couple of quarters here. The investments that we made -- and again, they were primarily in the back half of last year and they are annualizing now. As we look forward for the rest of this year we're in right now, we're expecting the overall SG&A to be very similar a rate versus what we had last year. You shouldn't expect any incremental deleveraging on a full-year basis this year. And obviously as comps improve, we'll get leverage on that going forward, but this year we're looking for it to be relatively consistent on a rate basis.

Okay. You expect some of these investments will be largely contained to 2012?

In the end, we're obviously, as we've said on numerous occasions in the past, we're very focused on driving the top line and driving value to the consumer, and making sure that what we're doing is delivering that. Because that's first and foremost the most important thing we do is deliver well to our consumer and drive the top line. And we've been investing in a meaningful way in the areas that we think are going to help our comps. You're seeing traction in those these last many quarters, with the exception of some unusual weather in a couple of quarters, we've had strong comps for a lot of quarters in a row now. And we think that's the result of the investments we've made. We expect those to continue to pay off more and more as we go forward.

Okay. You talked about the inventory. Are there any categories where you've cut back more, or have targeted to cut back more than others?

Grant, it was really across the board.

Okay. Taking out SKUs, taking out just number of units --?

To be honest with you, the biggest focus on it, Grant, is reducing our aged goods.

Okay. And were the aged goods -- they were spread across categories?

Absolutely. Across the board.

Okay. Great. And then my last question, you talk about hitting the 500-store mark. You guys have obviously added a good number of stores recently. Whenever you look at your store base, is there some sort of bucket that you put stores in, in terms of newly built, newly remodeled, older -- how would that break down?

Well, this is Fred Hand again, Grant. By the end of this year, when we're at 500, we would have built 171 new stores since 2006. We have remodeled so far since 2006 about 30 stores. We have refreshed about 115 stores. We continue to evaluate all of our stores to determine where we need to do more refresh and remodels.

Okay. That's helpful. Okay. Thanks. That's all I had.

And Mr. LaPenta, we have no further questions at this time, so I will turn the call back over to you for any closing remarks.

Okay. Thank you, operator. Thank you, everyone, for participating in this quarter's conference call. And have a great day.

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 all lines. Thank you. Have a good day.