Burlington Stores Inc (BURL) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Burlington fiscal 2012 conference call. (Operator Instructions). As a reminder, this conference is being recorded Friday, April 26, 2013.

I would now like to turn the conference over to Mr. Bob LaPenta. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate everyone's participation today in today's conference call to discuss Burlington's fiscal 2012 operating results.

I am 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 broadcasted 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 the 53-week fiscal year ended February 2, 2013. All comparable sales metrics are based on a 52-week year.

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, which we are going to file later today with the SEC, and all 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 will be speaking with you today primarily about our results of operations for fiscal 2012, which marked our fifth consecutive year of adjusted EBITDA growth.

Before I get into our 2012 results, I'd like to take a minute to discuss our recent debt transaction. In February, after our fiscal year ended, we completed through our newly-formed parent company, Burlington Holdings, an offering of $350 million of senior notes due 2018, which are not registered with the SEC and, therefore, are not publicly traded. The 2018 notes are senior unsecured obligations of Burlington Holdings, which is not an obligor or guarantor under our previously-existing senior secured credit facilities.

Additionally, as none of the subsidiaries of Burlington Holdings are obligors or guarantors under the 2018 notes, the debt will be recorded only on Burlington Holdings financial statements and will not be included in the financial statements of the Company.

Interest on the 2018 notes will be paid semi-annually, in February and August, and can be paid in cash at 9% or, subject to certain conditions, may be paid in kind at 9.75%. Our intent is to pay the interest in cash with funding for the payments of Burlington Holdings to be made available by cash dividends from the Company.

The net proceeds from the offering were used to pay a cash dividend of approximately $336 million to Burlington Holdings shareholders, with the remaining proceeds covering transaction costs.

Now I would like to move on to our 2012 results. Net sales for the year increased 7.2% to $4.131 billion. Comparative-store sales for the year increased 1.2%, which came on top of a 0.7% comp-store sales gain in the prior year.

The improvement in our comparative-store sales were negatively impacted by the direct and indirect effects of Hurricane Sandy, as well as the unseasonably warm temperatures many of our regions experienced during the fall season and the holiday selling period.

New and noncomparative stores contributed $197 million of sales growth, and the 53rd week resulted in $54 million of incremental sales.

Gross margin rate improved slightly from 38.7% during 2011 to 38.8% in 2012. Gross margin dollars increased $111 million in 2012 compared with the prior year, primarily driven by the sales increase.

As a percentage of net sales, selling and administrative expenses increased to 31.9% during 2012, compared with 31.5% in the prior year, primarily driven by planned incremental buying, store occupancy, and logistics costs as part of our ongoing investments to drive sales, partially offset by reduced corporate and selling costs. The dollar increase in selling and administrative expenses of $102 million was driven by $67 million related to new and non-comparable stores, $22 million for expenses directly related to the 53rd week of operations, as well as the previously-mentioned cost changes. Adjusted EBITDA increased $2 million to $352 million.

Interest expense decreased $15 million to $114 million during 2012 compared to the prior year, due to a $6 million reduction in amortization of deferred financing fees as a result of the refinancing the past two years, a $5 million decrease in interest expense related to lower average borrowings and lower average interest rates on our term loan and ABL line of credit, and a $3 million decrease related to adjusting our interest rate cap agreements to fair value.

During fiscal 2012, the effective tax rate decreased to 13.3% from 39.8% in fiscal 2011 as a result of an increased benefit from the recognition of certain tax credits and the reversal of uncertain tax positions due to the settlement of audits.

Net income increased $32 million to $25 million during fiscal 2012, driven primarily by a $36 million decrease in the loss on extinguishment of debt compared with the prior year.

At the end of the year, we had $43 million in cash, no borrowings on our ABL, and $423 million in unused credit availability. Debt, net of cash, improved $285 million since the prior year, primarily related to our repayments, net of borrowings, of $190 million on our ABL line of credit and $87 million in payments on our term loan.

Today, we have no borrowings on our ABL and have availability of $485 million.

Merchandise inventory at the end of the year was $680 million, compared with $682 million last year, and was primarily the result of comparative-store inventory reductions of 13%, driven by our ongoing merchandising initiatives, partially offset by the opening of 23 net new stores and an increase in pack-and-hold inventory.

Accounts Payable increased $224 million to $500 million at February 2, 2013, and represents 84 days of Accounts Payable outstanding, reflective of our payment terms for inventory at year end.

During 2012, we invested $134 million, net of $33 million of landlord allowances, in capital expenditures. During 2013, we estimate that we will spend between $150 million and $160 million, net of the benefit of landlord allowances of approximately $33 million. These capital expenditures are expected to include approximately $74 million net of landlord allowances related to store expenditures; $28 million to support information technology; and the remaining capital is expected to support distribution, facility enhancements, and various other initiatives, including the construction of our new corporate headquarters in Florence, New Jersey.

During 2012, we opened 25 new stores and closed two existing stores, bringing our total store count to 500, inclusive of our online store, at the end of the year.

I will now turn the call over to Paul.

Thank you, Todd, and good morning, everyone. The majority of my comments this morning will be related to our full-year results, but first, I will provide some color around our fourth-quarter sales performance.

In terms of Q4, clearly our sales results were negatively impacted by the effects of Hurricane Sandy and the unseasonably warm weather in December. As we mentioned on the last call, at the height of the storm we had over 130 stores impacted, of which two remained closed through November, one which was closed permanently. 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 in the affected areas experienced loss of power for an extended period of time.

The storm also impacted operations at the Port of New York and New Jersey, delaying the delivery of goods in the region. Fortunately, as the flow of receipts returned to normal levels, we were very pleased with our January sales performance.

As Todd mentioned previously, total sales for the year increased 7.2% and our comp-store sales increased 1.2%. 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 Junior business, accessories, and youth businesses outperformed our Company average during the year.

We were able to achieve these 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 the Northeast outperformed, and we were weaker in the Midwest.

Inventory management continues to be an important initiative for us. Overall, we were pleased with the level and currency of our inventories at the end of the year. Our comp-store inventory level was down 13% versus last year, which contributed to a 16% faster turnover. In addition, the level of inventory aged 91 days and older continued to decrease versus last year. At the end of the quarter, pack-and-hold inventory represented approximately 15% of the total inventory.

Our gross margin rate was slightly better than last year. As we have stated before, we believe our full-year gross margin rates will continue to be in line with our historical levels.

We continue to believe that our customer remains extremely value conscious. 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 consumer.

I will now turn the call over to Tom.

Thank you, Paul, and good morning, everyone. I have a few brief comments this morning, and then we will open it up for Q&A.

We are very proud of our achievements in 2012, which included celebrating our 40th anniversary, opening our 500th stores, and exceeding $4 billion in total sales.

In addition, for the second year in a row we delivered a comparative-store sales increase, and for the fifth year in a row, an adjusted EBITDA increase.

We are very excited about 2013. We believe that the level and currency of our inventories, the longer tenure of our buying organization, the implementation of our markdown and allocation optimization systems, as well as the outstanding support we are receiving from the vendor community, has us well positioned for 2013 and beyond.

In closing, I'd like to thank our store and corporate team for contributing to our 1.2% comparative-store sales increase and our fifth year in a row with an increase in adjusted EBITDA.

With these comments, I'm going to conclude our prepared remarks. Operator, we are ready to begin the question-and-answer session. Thank you.

(Operator Instructions). William Reuter, Merrill Lynch.

You noted that pack and hold was 15% of your inventory, which was up a little bit. I guess I'm curious whether you guys made some opportunistic purchases or whether it was related to cold weather product that you guys had bought during the season that didn't sell.

It was a combination of both, Bill. This is Paul. A combination of both. We do not have a target on pack and hold, but there continues to be a lot of goods available in the market, and we're continuing to evaluate and continuing to take advantage of those opportunities.

Okay. A lot of retailers have talked about the challenges in cold weather apparel. I was curious if you guys could quantify at all how much this may have impacted your results, meaning if we were to carve out that segment, how your same-store sales would have been.

We don't give specifics, Bill, on bi-segment results. What I can tell you in terms of where we ended the year for all of our cold weather product -- I'm talking sweaters, jackets, fleece, all of those heavy seasonal fall classifications, we ended much less than last year and we're very comfortable with that.

Okay. And then, just lastly, your same-store sales have maybe trailed some of the off-price retailers, but has been pretty much in line with the department stores. I guess if you can talk a little bit about why you think -- you guys are a blend of the two, why you are trailing the off-price guys and more in line with the department stores at this point?

Bill, it is Tom. Normally we don't really comment on our competitors, but as our model continues to be executed better and better and as our team matures, we think -- we feel that we will be in line with our main competitors.

Okay. That's all for me. Thanks a lot.

Okay, thanks, Bill.

Grant Jordan, Wells Fargo.

My first question, if you can talk about how you see store growth going this year and maybe next year, as well.

Grant, this is Fred Hand. We are actively seeking opportunities. We are very excited that we opened up our 500th store this past year. We believe there is still significant opportunity to continue to open stores in new and existing trade areas.

As we've said in the past, we continue to target new store growth, anywhere around 20 to 25 stores a year. And if we find great opportunities, we have both the financial capacity, as well as the bandwidth, to open more than 20 to 25 every year.

As you've opened some in the bigger markets, like the New York stores, has that given you any confidence to maybe go into some other larger markets?

We continue to be pleased with the results of the stores that we have opened up. And our new store portfolio from the past few years has really performed commensurate with our expectation. And we have continued confidence in our ability to be able to add new stores in large markets, as well as small markets.

Okay. You talked about this a little bit, but clearly weather has been fairly strange or unusual, however you want to characterize it, over the past several months with the warm December and now we've got the cool spring. Just talk about as you guys continue to transition your model to be more in-season purchasing, what are some things that you are doing to take advantage of the weather or maybe how that is helping you or hurting you.

Grant, it is Paul again. I think the model allows us to be more reactionary to what's going on currently with our consumer. So it allows us to keep track with the values and keep pace with the values not only for what the wholesaler is offering us, but obviously what's going on in the retail environment.

So I think as we continue to move and mature in the soft price model, I think we will begin to weatherproof our business even more.

So as it has been cool in the spring, for example, that hasn't really presented more buying opportunities for you?

Really not comfortable commenting on spring right now. We'll have a call in a couple of weeks that will give you more detail.

Okay. As you were in the winter, and it was warm, did that present more buying opportunities for you than you would have had before?

There is no shortage of buying opportunities. I don't know whether it's because of the weather or just because of the model, but we are not struggling to find goods in the marketplace.

Okay. All right. Thank you very much.

Thanks.

(Operator Instructions). Carla Casella, JPMorgan.

Is there any update on your name and the potential to change the name? Now that you have the ability to do so?

This is Tom. Our new stores are -- a lot of our new stores are just called Burlington. And that is the position that we are going to be taking going forward.

So we'll continue to have a blend between stores called Burlington Coat Factory and just Burlington. We're not going to probably go back and change all the signage, but we really feel that we will continue to, when we add new stores, just be Burlington.

Okay, great. And then, it sounds like, I just want to clarify, you are including your online store as one store, and is that included in your same-store sales, then, as a single store?

Yes, that's correct.

Okay, great. And I think that's it. My other questions have been answered. Thank you.

Great. Thank you.

Hale Holden, Barclays.

I have a little bit of a bigger-picture question. A lot of wrenching changes going on around you in some of your competitors. And I was wondering, do you think that's a benefit to your format? Neutral? Just how you view yourself now in the current competitive mix.

Well, we really don't talk about our competition, but what we need to do and what we have been doing is really working hard in executing the model. And we really feel we're going to benefit mostly from our own execution of our model, delivering great brands at great values to our customers overall.

The second question I had is it seems like every day we hit a new near-high in the equity markets. And I was wondering just how you conceptually were viewing equity valuations and opportunity for maybe a monetization there.

This is Todd. We are really not in a place where we can talk about future transactions. We obviously are very focused, as Tom said, on running the business day to day and we don't give prospective guidance. We really can't comment on what we may do down the road in terms of any capital transactions. Sorry.

That's fine. I expected that. But I had to try from my seat.

The final question is any thoughts on the health of your target consumer? Obviously, you're not going to give me guidance for the current quarter, and that's fine, but maybe any trends that maybe she is seeing and how you can monetize that?

Our customer is very value conscious. That really hasn't changed. And we really feel that by continuing to deliver great values, that we are going to do well. So I think the customer hasn't changed tremendously. It's just more -- they are still looking for values.

Okay, I appreciate it. Thank you.

Okay, thanks.

Elie Radinsky, Cantor Fitzgerald.

Just wanted to know, I might have missed this, did you talk about new store openings for this current year?

Yes, Fred, go ahead.

Again, this is Fred Hand. Our new-store opening plans are in line with what we've committed to and communicated in the past, somewhere between 20 and 25 stores.

Okay. Can you also talk about the ramp up? When do you expect a new store to reach maturity, from an EBITDA perspective, or at least average EBITDA? Is it a three-year cycle or is it a 2.5-year cycle?

This is Todd. I will take that one. The details of the underwriting model, obviously we've done a lot the last few years to understand exactly what you are asking about. So we understand that in underwriting.

Our stores do mature more quickly than most other retailers, but giving the details of the payback periods or what timeframe they get to maturity, we really don't want to go into that in detail.

What I will tell you, though, is our underwriting model undoubtedly is looking at the markets that we're in. We're looking at how new stores affect the stores around them. And we look at the economics of each store on its individual merits and make sure that we get an appropriate payback and return on them, store by store. And we obviously monitor that month by month after we go forward.

You talked about same-store sale comps, and clearly you were impacted by the hurricane and its aftermath. If the hurricane was not here, do you have any estimate of what same-store sales might have been?

We really can't go into the details of that. We've analyzed the impacts of it, but in the end, the idea of talking about what the impact of weather was, they are all estimates. The impacts both direct and indirect of Hurricane Sandy are the same thing. Obviously, they didn't help our sales in the fourth quarter, but getting into the details of what we think that impact was we don't think is helpful.

The good thing is as we went through the quarter, and we talked very briefly as to what that did for buying opportunities, we did see sales strengthen a bit as we moved through the quarter. So we remain optimistic about this next year.

I appreciate that. Thank you.

Thank you, and there are no further questions at this time.

Okay, thank you, Operator. That concludes our conference call for today. Thank you, everyone, for participating.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.