Burlington Stores Inc (BURL) 2012 Q3 法說會逐字稿

Welcome to the Burlington Coat Factory third quarter 2012 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 Friday, December 14, 2012. I'd now like to turn the conference over to Bob Lapenta, Vice President and Treasurer. Please go ahead, sir.

Thank you, operator. And good morning everyone. We appreciate everyone's participation in today's conference call to discuss Burlington Coat Factory's third 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 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 expressed 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 third quarter which ended on October 27, 2012.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are forward-looking statements and 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 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 end of the third quarter of 2012. Net sales for the quarter increased $69.2 million, or 7.7%, to $967.9 million. Comparative store sales in the quarter increased 2.1%, which came on top of a 1.5% comp store sales gain in the prior year. For the nine months, total sales grew 7.4% to $2.8145 billion. Comp store sales increased 1.8% which came on top of a 1.9% comp store sales gain in the prior year. New and non-comparative store sales contributed $144.3 million of sales growth.

Adjusted EBITDA for the quarter totaled $54.5 million, and was $155.1 million for the nine months. These represented $4 million, and $6.9 million decreases, respectively, driven primarily by a gross margin rate decrease during the quarter. As we have stated previously, while we may have fluctuations within quarters, we are planning full-year gross margin rates to be in line with our historical levels. Selling and administrative expenses were $335.1 million, and $948.4 million for the three and nine months. These represented increases of $18 million during the quarter, and $65.8 million during the nine months, in line with our plans.

As a percentage of net sales, selling and administrative expenses decreased to 34.6% during the quarter, compared with 35.3% last year, and remain constant at 33.7% for the nine months. The reduction in selling and administrative expenses, as a percentage of net sales for the quarter, was driven by timing of expenses in the third and fourth quarter this year versus last year. The dollar increases in selling and administrative expenses for both the three and nine month periods were driven primarily by new and non-comparative stores which accounted for $17.4 million, and $48.8 million, respectively, of the incremental costs in 2012.

Interest expense decreased $7.4 million and $13.4 million for the three and nine month periods. These decreases were driven by the refinancing of both our term loan and our ABL which reduced our interest rates and related costs and our inventory management initiatives which have lowered inventory levels, in turn, lowering our average borrowings during the year.

Debt, net of cash, improved $179.5 million, or 11.4%, since year end, primarily related to our repayments, net of borrowings, of $168.3 million on our ABL line of credit. At the end of the quarter, we had $30.2 million in cash, $21.7 million in borrowings on our ABL and $542.3 million in unused credit availability. We currently have no borrowings on our ABL and have availability in excess of $500 million. Merchandise inventory at the end of the quarter was $845 million, compared with $945.7 million last year. The decrease in our inventory levels was primarily the result of our comparative store inventory reduction of 16.6%, driven by our ongoing merchandising initiatives. This reduction was partially offset by the opening of 25 net new stores since the end of the third quarter last year.

Accounts payable increased $27.9 million to $678.1 million at October 2012. Accounts payable days outstanding at the end of the third quarter this year increased to 85 days compared with 68 days in the prior period. During the nine month period, we opened 21 new stores, and closed 1 existing store, bringing our total store count to 498 inclusive of our online store at the end of the quarter. Since the end of the quarter, we've opened 4 new stores including 1 relocation and closed 1 store which brings our total store count currently to 500. I will now turn the call over to Paul.

Thank you, Todd and good morning everyone. As Todd mentioned previously, total sales for the third quarter increased 7.7% and our comp store sales increased 2.1%. This represents 9 of the last 11 quarters with a comp store sales increase. We experienced strong performances in key businesses that cater to our core female customer, such as dresses and suits, intimate apparel and missy sportswear. In addition, our juniors, men's and youth business outperformed our Company average during the quarter. We were able to achieve these great results by expanding the vendor base, testing and reacting to new trends, delivering exceptional value and flowing goods weekly to ensure freshness on the floor.

By geographic region, the Southwest and Northeast outperformed, and we are weaker in the Midwest and Southeast. Inventory management continues to be an important initiative for us. Overall, we are extremely pleased with the level and currency of our inventories at the end of the quarter. Our comp store inventory level was down 16.6%, versus last year, which contributed to an 18% faster turnover. In addition, the level of inventory aged 91 days and older continued to decrease substantially versus last year. At the end of the quarter, pack-and-hold inventory represented less than 10% of the inventory.

Our gross margin rate for the third quarter was 120 basis points below last year. The majority of this reduction was planned, as is the improvement in the gross margin rate in the fourth quarter. As we have stated before, we believe our full-year gross margin rate will be in line with our historical levels. We continue to stay focused on maintaining liquidity, to ensure we have the appropriate amount open to buy so that we can continue to deliver great value to our customers. I will now turn the call over to Tom.

Thank you, Paul. Good morning everyone. I have a few brief comments this morning and then we'll open it up for Q&A. In terms of our new store growth, we are very excited about our flagship store in Manhattan's Union Square as well as the opening on State Street in Chicago, both of which occurred in the third quarter. 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, allowed us to achieve the 500-store milestone this year.

As you all know, we do not provide forward-looking guidance. However, we do think it's appropriate to provide some background regarding Hurricane Sandy. Our hearts go out to everyone who was and still is affected by this devastating storm. As a New Jersey-based retailer, the catastrophic effects of Hurricane Sandy were very real. Recognizing that thousands of people lost the contents of their homes during the storm, Burlington donated $250,000 in gift cards to our non-profit partners at Fashion Delivers and the Salvation Army.

These gift cards were distributed throughout affected communities in Southern New Jersey, New York City, and Long Island. Additionally, we donated 1,000 boxes of new merchandise to these organizations. This donation included coats, apparel, towels, sheets and other homegoods that provided immediate assistance to families struggling to rebuild their lives. At the height of the storm, we had over 130 stores impacted, of which 2 remain closed, at the end of November. While most stores were back online within a short period of time, thanks to the hard work and dedication of our field and support teams, many residents of the affected areas experienced loss of power for an extended period. The storm also impacted operations at the ports in New York and New Jersey, delaying the delivery of goods in the region.

In closing, I'd like to thank our store and corporate team for contributing to our 2.1% comparative store sales increase in the quarter, and our 18% improvement in turnover. 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 from Bank of America.

With your recently opened flagship stores in Chicago and New York, I was wondering if you could comment on how those have performed relative to your expectations and whether this could be the template for more urban, high-profile stores or whether you'll probably stick to just those two?

This is Tom. I'll answer that question. They're performing at the anticipated level overall. We feel that there could be some upside in terms of other urban locations and obviously, we do well where there's a high concentration of population. So yes, we think it could be something that we could expand in the future but they're performing at the level we anticipated.

Okay. And then in terms of just your store growth opportunity generally, you guys reached this 500 store mark. How do you feel about the total potential opportunity for stores domestically?

Fred, you want to take that? We also have Fred Hand joining us today remotely and if he's available, we'll let him take that.

Bill, to answer your question, our growth of our stores is very much in line with our previous plans. We feel very good about the opportunity to be able to continue to sustain the number of stores that we have opened in the last few years and to be able to maintain that kind of level. And we're looking at every opportunity that comes across.

Okay. And then just lastly, in terms of the -- I can't remember exactly where you are in terms of the implementation of the markdown optimization. Has that been implemented across all of the categories in your stores at this point? And then just how that's been going>

Sure. In August of this year, Bill, we implemented [MDO]. And it's in every category other than home, baby, coats and men's tailored. So it's everywhere else in the Company. Obviously, the science behind MDO determines the best time, the best price and the best place, or in our case, store, to maximize gross margin while achieving our desired sell-through targets as of the exit dates that we put in.

So we started, again, all those zones that I mentioned. We used it in fall and we just -- we expect it to continue to get better, obviously. MDO's one of those systems that uses a lot of history to come up with its recommendations. We expect it to get better over time. And as we become more conversant with the tool we expect more benefits in '13 as well.

Grant Jordan from Wells Fargo.

My first question, just on the markdowns that you took in the quarter to get the inventory down, how much of that contributed to the lower gross margin in the quarter?

Grant, let me walk you through what happened to us in the quarter. As we prepare our merchandise plans, we do it on a seasonal basis. So for our fall season, we planned a lower IMU as we're concentrating on being priced right initially. So for the season, we have a lower IMU and we also have a lower markdowns, which gets us back to the same place. It just so happens that in Q3, we had a timing issue that resulted in a net negative margin impact versus last year in Q3 but we believe we planned and we expect there to be a similar offset to that in Q4.

Okay. So just trying to conceptually think about that. So was there a corresponding reduction in gross margin as you moved the inventory down 16% on a comp basis? Or were you able to hold that fairly constant with the rest of the Company?

The inventory wasn't driven down strictly by markdowns, Bill. I mean, our inventory levels are down. We've also planned our inventory levels to down because we think we can turn faster, that ultimately will result in lower markdowns as well. But the reduction in our inventory levels is -- a piece of that's related to a reduction in aged goods but more so, that's related to buying with less depth per style and that's with further refining our allocations and using MDO on a store-by-store basis. Those were more impactful than the aged goods, if that helps.

That is very helpful. So as you've seen the inventory continue to come down in this quarter, down a pretty good amount, is there a target that you're driving towards in terms of stores or inventory per square foot?

As we mentioned before, we really believe that we carry more product than is necessary in our stores. So we plan to reduce our comp store inventories again so we can turn faster. We will continue to do that. We're not really giving targets in terms of what we're going after. But I will tell you that we're going to continue to reduce our comp store inventories and turn faster and we will --

Okay. My last question, I know in the past couple years around the fourth quarter, you've moved your payables timing around as it relates to your working capital. Just to confirm, you're not planning to do that this year?

This is Bob Lapenta. We're not. We had said last year that we were going to phase out of that. We did it to a lesser extent last year and we're not planning to advance pay the payables at all this year.

Karru Martinson from Deutsche Bank.

I was just wondering if we could get perhaps some parameters on the Sandy impact? Certainly, almost a quarter of your stores being closed and then the hard-hit Northeast. Are we talking a $10 million, $20 million-type sales hit or what's the ballpark that we're looking at here?

As you know, we don't give guidance while we're in the quarter and we plan in our end-of-year conference call to give you some more color as to the impact of Sandy. But at this point in time, as you know, while we're in the quarter, we are not going to discuss that.

Okay.

But we'll be happy to give it to you later.

Thank you. Appreciate that. In terms of the comp, when we look at the traffic and the ticket, what's the mix there? And where do we feel that we're picking up share?

This is Bart Sichel, the Chief Marketing Officer. So we do track traffic but as you know, we don't share those numbers. It's important for us to look at both what that rate of traffic change is and what the conversion in the store is. In terms of the -- and so we do track it but unfortunately I won't share that with you.

In terms of the share, we compete against a wide range of retailers and so there's not a particular place when we see growth that it's coming from. It's coming across the board. It's coming from our closer competitors and from some -- and from players across apparel and home products generally.

I guess on the competitive front, I mean, the holidays are always a competitive season but would -- are you seeing anything different this year in terms of the rate of competition that's out there?

Well, it's -- as you mentioned, the holiday season is always very, very promotional and the way we look at it is the better we execute the off-price model and we will be able to deliver significant value to the customers every single day. So we really feel that our model is one that is really good and we can compete against any heavy promotion that is currently in the marketplace.

(Operator Instructions)

Carla Cassella from JPMorgan.

This is Paul Simenauer on the line for Carla Cassella. How are you guys doing today?

Good morning, Paul.

Just a few questions. So first, has warmer than average weather, at least in the Northeast has been pretty warm, has that impacted the business at all with the caveat? I understand coats are only 10% of the sales mix but there's other seasonal items. Just curious how that's gone?

Well, you're right, it has been warmer than typically during this time period. As we mentioned in other calls previously, colder -- we do better in colder weather overall, so I can't really -- don't really want to talk about specifics within the quarter, but as the weather gets colder, it's a help to our business.

Got it. And then how have customers been responding to your holiday season so far?

Well, as I mentioned previously, we really can't talk about the quarter that we're in. We'll be happy to share with you at our end-of-year conference call as much color about the holiday season as we can.

Okay. That's fair. Just one final question. Can you remind us who your target demographic is or if you could just talk about it --

Sure, it's Bart Sichel again. The customer that we go after is very much a mass customer and so they look a lot like the broad demographics of America as a whole. We're not going to comment in particular about, for instance, a target we go after buying on TV but it looks a lot like the country broadly.

Elie Radinsky from Cantor Fitzgerald.

How many of your stores were closed, either partly or all of Black Friday weekend?

Fred, do you want to answer that one?

Sure. We had three stores that were closed for that Black Friday weekend due to Sandy and since then, we have reopened two of the three.

Okay. Can you also talk about your online sales in the quarter that you had relative to your expectations and maybe your strategy for the current quarter for online?

It's Bart Sichel once again. Again, we don't comment on specifics or break out our online sales. We do have an online business. We've been in that space for quite a number of years. It's -- during this year, we've had very nice growth out of that online space, as I know many other retailers have as well and we're pleased with our progress. But we view it as an opportunity and it's an area that we're continuing to look at in the future.

Do you have thoughts about ordering online and picking up at your stores?

We currently don't process orders in that way, but we continue to look at all options regarding online.

Right. Let me comment (multiple speakers) -- this is Tom. I'd like to comment on e-commerce in general. As you know, we spoke about this previously. Our e-commerce business, we really feel that it is an opportunity, and it's very viable for our channel overall but it is small. It is small relative to other retailers. We really feel, though, that we're going to be able to ramp it up, but just to keep it in perspective, it is a small business for us overall.

We have no further questions from the phone lines. So I'll turn the call back to you now. Thank you.

Okay. Thank you, operator. I'd just like to thank everyone for participating in today's conference call. Thank you and have a great day.

Thanks. Happy holidays, 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.