Burlington Stores Inc (BURL) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Burlington Coat Factory first-quarter 2013 earnings 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 21, 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 in today's conference call to discuss Burlington's first-quarter fiscal 2013 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. 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 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 that ended May 4, 2013.

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 included 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. Thanks for joining us today. We're very pleased with our performance for the quarter, which included a net sales increase of 8.4% and a comp store sales increase of 3.4%. The gross margin rate improved 40 basis points from 36.9% in last year's quarter, to 37.3% this year. This improvement was primarily driven by lower mark down expense as a percentage of net sales, driven by continued improvements in the freshness of our inventory and a lower shrink accrual rate. As a percentage of net sales, selling and administrative expenses decreased to 30.8% during the quarter, compared with 31.3% in the prior year, primarily driven by improved leverage on store-related costs as a result of efficiencies realized in the stores.

The $21 million increase in these expenses was driven by the cost of new and non-comparable stores, as well as other costs directly related to the growth in sales. Interest expense decreased $3 million to $27 million during the quarter, compared to the prior year, due to lower average borrowings and lower average interest rates on our term loan and our ABL line of credit. Historically, we have discussed adjusted EBITDA as one of our primary financial performance metrics. In the past, this metric was especially helpful as a measurement of the cash flow generated from the business, as well as being a primary metric in measuring covenant compliance.

As we have continued to grow the business and improve the operating results, we now have very large covenant cushions and adjusted EBITDA is a somewhat less relevant measurement. While we continue to disclose our adjusted EBITDA calculations in our SEC filings, going forward, we will be discussing our reported EBITDA, which we believe provides an improved measurement of performance internally, as well as being more useful to you for analytical purposes. EBITDA is a key measurement in our day-to-day management of the business. EBITDA during the quarter increased $5.9 million to $69.6 million. Excluding the impact of $8.9 million of costs related to the amendment of our term loan facility in February of this year, EBITDA increased by $14.8 million, representing a 90 basis point flow-through improvement, as compared to the first quarter last year.

We have also introduced another key metric that we believe will be helpful to you, adjusted net income. This disclosure adjusts for the effects of net favorable lease amortization, costs related to our debt amendments, impairment charges, advisory fees, and the related tax effects of these items. Adjusted net income increased $10 million to $11 million during the quarter, compared with $1 million in the prior year, primarily driven by the operating results mentioned above and decreased interest costs, partially offset by increased depreciation and amortization. At the end of the quarter, we had $102 million in cash, no borrowings on our ABL, and $485 million in unused credit availability. Debt net of cash improved $127 million since the prior year's quarter, primarily related to our $79 million of payments on our term loan, as well as the $59 million increase in cash during the quarter. Today, we have no borrowings on our ABL and have availability of $443 million.

Merchandise inventory at the end of the quarter was $727 million, compared with $661 million last year, primarily the result of 21 net new stores since April 28, 2012. Comparative store inventories decreased 9% from the first quarter last year, driven by our merchandising initiatives, and we have increased our level of pack and hold inventory, which Paul will discuss in a few minutes. Accounts payable increased $160 million to $631 million at the end of the quarter, representing 78 days of accounts payable outstanding, reflective of our payment terms for inventory at quarter end. During the quarter, we generated $59 million in cash, cash flow from operations was $96 million, which was partially offset by a $30 million spend in capital expenditures, and a $7 million spend in financing activities. During the quarter, we invested $23 million, net of $7 million of landlord allowances, in capital expenditures.

Our expectation for the full-year capital expenditures remains in line with what we discussed on our previous call. During the quarter, we opened four new stores and closed one existing store, bringing our total store count to 503. I will now turn the call over to Paul.

Thank you, Todd, and good morning everyone. As Todd mentioned previously, the total sales for the quarter increased 8.4%, and our comp store sales increased 3.4%. We experienced strong performances in key businesses that cater to the core female customer, such as missy sportswear, intimate apparel, and accessories. In addition, our junior and men's businesses outperformed our Company average during the quarter. We were able to achieve these results by continuing to improve our execution of the off-price model. We are accomplishing this through the appropriate balance of upfront versus in-season purchasing, maintaining liquidity, expanding our vendor base, testing and reacting to new trends, delivering exceptional value, and flowing goods weekly the to ensure freshness on the floor.

Inventory management continues to be an important initiative for us. Overall, we are pleased with the level and currency of inventories at the end of the quarter. Our comp store inventory levels were down 8.7% versus last year, which contributed to a 15% faster turnover. In addition, the level of inventory aged 91 days and older continues to decrease versus last year.

Also, we are excited about the brands and values that we've been able to secure through our pack and hold program. At the end of the quarter, pack and hold inventory grew versus last year. As we have stated before, we do not set targets for pack and hold inventory. The amount is totally dependent on the availability of highly desirable branded product or key seasonal merchandise at great values.

Our gross margin rate for the quarter was 40 basis points over last year. The improvement was driven by a lower mark down rate and lower shrink accrual, based on our improved shrink trend during fiscal 2012. While we are pleased with the improvement in gross margin rate for the quarter, as we have stated before, margin rate will fluctuate from quarter to quarter. We continue to believe that our full gross margin rates for the year will be in line with our historical levels. The consumer 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 continue to deliver great values to our consumers. 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 first-quarter results, which included a $10 million increase in adjusted net income, largely driven by our 3.4% comparable store sales increase. We continue to be very excited about 2013. We believe that the improved execution of the off-price model throughout the organization, the level and currency of inventories, the implementation of our mark down 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.

From a new store point of view, similar to our recent pace, we expect to open 23 new stores this year. These stores will span the country from East Harlem, New York to Cincinnati, Ohio, and Scottsdale, Arizona. In addition, we plan to open up a West Coast buying office to increase our access to brands and vendors. In closing, I'd like to thank our store and corporate team for contributing to our strong comparative store sales increase, and our significant growth in adjusted net income. With these comments, I'm going to conclude our prepared remarks. Operator, we are ready to begin the Q&A session. Thank you.

(Operator Instructions)

And our first question comes from the line of Grant Jordan with Wells Fargo. Please go ahead.

Thanks for taking the questions. My first question -- I just wanted to clarify your comments on inventory. Whenever I look at it, it looks like gross inventory's up about 10%, and your store base is up about 4%, which would imply an increase in comp-store inventory?

Grant, this is Paul. Comp-store inventories are actually down 8.9% for the end of the quarter.

I'm just wondering why that gross inventory is up 10% then. Is there some sort of adjustment you're making?

Grant, the increase is in the DC and pack-and-hold inventory that we've been able to take advantage of due to market conditions.

Okay. What kind of categories have you been increasing in the pack and hold?

It's across the board, but we have focused on branded and seasonal categories.

Okay. And what's your typical time frame whenever you go out and increase the pack and hold like that?

Typically, the goods are delivered the following season -- anywhere from six months to nine months out.

Okay. And then a follow-up question in terms of working capital -- it looks like you got a lot more leverage on your payables this quarter. Is that just due to timing, or is there anything specific there?

There is -- I think, in the end, the easy way to look at that is it fluctuates a bit during the course of the year. The number of days payable that that represents right now is pretty typical of what our terms are over the past couple of years. It's fluctuated a little bit. But it's really timing of receipt of goods and payment.

So as we continue to buy closer to need, Grant, you're going to see, just naturally, as a result of that, payables as a percent of inventory will rise.

Okay. All right. Well, thank you. That's all I had.

And our next question comes from the line of William Reuter with Bank of America. Please go ahead.

Can you remind me when the markdown optimization software was implemented? And my understanding is that this software becomes more valuable as you get more information. So kind of where we are in that process, and when we will kind of continue to see benefits through?

So obviously, we've been working on the transition in merchandising systems for a few years. That functionality basically came in during the year last year, as we rolled it out across different areas. There are some of the areas that are still coming in this year, but for practical purposes, all the areas are using it at this point. But to your comment about the longer you use it, the better the optimization becomes, you continue to tweak your settings as you work forward, as your inventory gets cleaner. So we do think that is helping us. We do think we're relatively early in the games on that, and it will continue to help us going forward.

One of the other points I think we should make about that is -- we've said in the past, one of the key things we're making sure we do all the time is pass the appropriate value on to the customer. While that will help drive margin rate, we want to make sure that we're driving the right value to the customer. So we're not expecting a dramatic shift in what the margin rates are, because in the end we're wanting to make sure the value goes to the customer, and we're driving sales.

Okay. And then, when you were talking about different categories, it sounded like both women's as well as men's was strong. Were there any categories that were challenging for you guys in the quarter?

Overall, we had a strong quarter, as you can see by the overall results. I would say that there were some stronger performers, but there was no category that we were particularly disappointed in.

Okay. And then lastly from me -- with your store openings, do you guys open stores in outlet malls? I drove by one that seemed like it might have been your store, but I didn't go into the store.

And then, another question on those openings. What percentage of the new openings are mall-based versus standalone and strip centers?

This is Fred Hand. To answer your first question, in the past we have not opened stores in necessarily outlets. However, it all depends on the opportunity that comes up, and if there's a site that's available and the metrics make sense for us, we would look at it.

As far as the new stores are concerned, from a percentage point of view, the larger percentage of the new stores are going to be in strip malls and in strip shopping centers, rather than traditional malls. However, we look at every site on its own individual merit.

I think the one thing to add to that, Bill, is that we look at the performance of our stores and of our new stores, it has a lot more to do with what are the demographics, what are the traffic patterns, who is close to us, rather than is the store in an outparcel, in a strip mall or in a mall itself. We don't specifically target any one of those to go after. It's really about making sure we're opening locations that are servicing the customer base that we service well, and that's going to drive the right economics.

Okay. That's all from me. Thank you very much.

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

This is [Carl Center] on the line for Carla Casella. How was the relative performance of the youth and baby categories during the quarter, and how much of those categories are clothing versus hard goods?

We do not discuss the specifics of those businesses. Again, I would just say that overall, we were pleased with our performance across all our categories of business for the quarter.

Got it. And then, how is the test of pet products going in the stores where you have it? How many stores have the assortment?

The pet product is in all stores, all of our current locations, and I would say that the customer's responding very positively, and we're continuing to learn how to do the pet business. But it's something we feel good about going forward.

Then, do you guys disclose how much inventory was pack and hold, exactly?

We do not disclose that, because it varies based on the conditions of the market at any given time. The one thing we'd like to leave you with, though, is that it's growing as a percent to total, but we do not have targets on what it should be or what it should become. It's really just based on market conditions.

Got it. Got it. Thank you very much.

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

Not to harp on inventory, but when you guys talk about that balance of up-front and in-season purchasing, where is that mix going, or do you see that staying steady here?

Again, we don't comment on the specifics of what we do upfront versus what we do on the backside. But I will say that we'll do up-fronts only where we see there's not availability. And currently, there's plenty of goods in the market that are available for us to purchase.

I think the changes in the mix that we've had, although they're not dramatic so far, but our liquidity in-season and our ability to respond to what's working, has remained where it's been. We've got great liquidity all the time in-season, helping drive our results.

Okay. And then, when you look at the comp, the 3.4%, up against some of your broader retail competitors who all talked about weather and tough consumer and so forth -- when you look at ticket or transaction, what do you feel is driving that traffic to your stores right now?

Well, we really feel that the reason we had a strong performance, vis-a-vis the other guys in our sector, in the first quarter, really is driven by what I had mentioned in the prepared remarks is -- we have invested a lot in the Business, as we've talked about in other earnings calls, to position us for future growth. We really feel that we're getting some traction now overall in terms of these investments growing our Business. And candidly, the better we execute our model, in terms of the off-price model, the better our performance is going to continue. As far as -- in terms of ticket, we really don't -- we don't comment on that overall, but we really feel that, exactly what I articulated, is that our investments are paying off, and we're executing the model better.

And when you look at the CapEx budget here, opening 20, 25 new stores, what portion of your CapEx budget is going to go to the refreshes of your store base? I noticed the line -- 64% of your stores have been refreshed since 2006. What's the maintenance going forward here?

We typically don't get into that level of detail about CapEx. The thing that I can tell you is -- the disclosures that we gave in an earlier call, which is basically $74 million, net of landlord allowances in stores -- that's the combination of everything that we have in stores. So there's new stores. We have maintenance. We have refreshes. We've obviously touched a lot of the store base in the last five or six years, and we basically -- as we go through each year, we started with the ones that we thought we would get the most benefit from, that were in the most need, and we're working our way through that. We don't look at the level of investment that we will have going forward in the next couple of years to drop off significantly from that. We want to continue to refresh the base as needed.

Thank you very much. Appreciate it.

(Operator Instructions)

And our next question comes from the line of Hale Holden with Barclays. Please go ahead.

This is Jon Kahnowitz stepping in for Hale. On the gross margins, in the past you've talked about reinvesting back in price where you can. The last couple quarters have actually seen some pretty good gross margins. Just wondering if there's been any shift in how you're thinking about investing in price, initial mark-ups, or the improvement is really just a function of the cleaner inventories and the better turns that you've had?

Jon, this is Paul. As I stated in the prepared remarks, we feel our gross margins are going to still remain at historical levels. We have fluctuations by quarter, but we don't really manage to the quarter. We manage to the full year. So I would say that that gross margin improvement, again, is for the quarter. But for the year, we'll be at historical levels.

Okay. And then, on new store openings, you said 23 for the year. Over the longer term, is there a total number of stores you're ultimately targeting, or you think you can get to? And relative to that number there, do you think there's any need to build out any more infrastructure to support that, or do you still have the capacity you need at the existing DCs?

This is Todd. I'll take this, and then Fred can add if I miss anything important. I think as we look at the runway for new stores, I don't think we have ever put out there -- here's what we think the total number is. There's very clearly, though, as we look at our new store pipeline and we look at where we believe our markets, or, which we're in most of the ones we're going to be in, in the country, but there's still additional markets we go into, that there's room for growth in all those. As we look at our store openings for the next several years, we certainly don't see running out of white space or runway there. From a store growth standpoint, we don't see that as being a limiting factor at all.

Regarding underlying infrastructure, obviously with the growth rate we have both in comp sales that we expect going forward, and especially with the new stores coming on, as is the case with any retailer, at points, you need to expand your supply chain capabilities to keep up with that. We're obviously looking at that going forward, too. There will be at times incremental investment in supply chain, but as we look at that, we expect those investments will not negatively impact our flow through. Obviously, with our growth, what we're doing with our expenses, what we're doing with managing everything from a merchandising and sales standpoint, our goal is obviously to expand our flow through. So we believe we'll absorb those incremental costs, and keep the flow through positive.

Okay. Thank you very much.

(Operator Instructions)

And our next question comes from the line of Elie Radinsky with Cantor. Please go ahead.

You mentioned that you received some new brands. I'm not asking you to disclose the new brands, but are these new brands now afforded to you just because they're available, or was there some difference in the manufacturer's view of Burlington Coat, whereby they now feel that they're comfortable in selling in your stores, where they may not have been before?

Elie, this is Paul. We don't really comment on any brands that we're carrying. We continue to look for more brands in both quality and quantity, but specific comments about brands, we do not.

I didn't ask on the specific. I asked was there any difference in their view toward you, that you're now able to access these brands, where you may not have been able to in the past?

We've garnered a lot of support from the vendor community. They have noticed how we're operating the Business, and they're eager to support us. So we have more and more people coming to the table, in terms of wanting to give us that kind of support.

Excellent. You talked about -- there's a reduction in shrink. How exactly are you measuring that?

This is Todd. I'll take that one. The way we've handled our inventories in the past, we take the vast majority of our store inventories very close to our year end, so we have a very accurate count as we're closing the books and doing the audit. We are working through a process here, where, over the next few years, we will cycle through those during the course of the year. But to answer the question specifically, it's a detailed SKU count in each one of the stores, each of the inventory -- or each of the distribution centers, and ultimately, we're able to calculate precisely what the shrink result is. Over the last several years, we've invested in a very good management team and processes, and equipment to help us on that, and in the end we've been able to drive this shrink down meaningfully the last couple of years. We do expect to make continued improvements in that.

But to reiterate my comment from before, we look at that, along with all the other things that are affecting margin. And first and foremost, we're looking to make sure that we're managing the overall P&L to improve our flow through. But in the end, we have to have the right prices to our customers. And so, again, back to Paul's earlier comment about -- we do expect the overall margins to be pretty consistent with historical is true, even though we expect shrink to continue to improve also.

Excellent. Lastly is on rent expense. When you're renewing leases, as the new footprint appears to -- the new stores appear to be slightly less in square footage than some of the legacy stores, if I may. Are you renewing leases for less square foots, and also, is your cost per square foot flat, increasing or decreasing on renewals?

This is Todd. I'll take that one. Most of our leases, we have multiple options on them. Those come up routinely. Our real estate review process looks at those, and as each new store comes up, we do look at the things you're asking about, in terms of what happens with the rent. In most cases, there are escalators, but they're normally in line with what inflation is. So it's rare that there's a big change in rent in any of our stores.

I think the point that I would leave you with, though, is every time we renew a lease and every new store that we look at, we are looking at the rent. But the rent per square foot by itself is not the primary metric. What we're looking at is what is the store going to produce in sales, what's the rest of the cost structure, and what's the overall economics and return of that store. The same thing's true, every time we do a renewal. And so there's not any dramatic change in what the rent per square foot is, but we certainly look at it a lot more in terms of what the financial impacts are, when you look at the entire store.

Okay. Thank you very much, and keep up the good work.

Operator, we have time for one more question.

Certainly. And our last question comes from the line of Andrew Berg with Post Advisory Group. Please go ahead.

With respect to store base, can you comment on how many stores are mall-based versus off-mall. And you said 23 openings -- how about closings for the year?

This is Fred Hand again. As far as the number of units that are in mall-based or off-mall, we don't disclose the specific number. But I will tell you -- the majority of our stores are not in the malls.

And as far as the 23 stores that we're opening up this year, we've opened up 4 in the spring. And closures, we've closed one store that's going through a complete renovation in the center, that we plan on reopening next year. But there's no plans for any further closures for this year.

Okay. And then, going back to earlier questions with respect to inventory in pack and hold, if your inventory of your store was down about 9% for the year, and I looked at the store count, it would imply that the growth in inventory as a total amount would say that your pack and hold is somewhere in the $100 million range, if I'm doing my math correctly. Can you comment at all as to whether or not that figure is at least in the ballpark?

And secondarily, can you comment on what you do, given -- I think it's that size -- to ensure that you don't get hooked on product that is fashion and it misses, and then your long inventory that becomes problematic to move or you have to mark down?

Andrew, I would say two things to your questions. The first thing is, in terms of the level of pack-away, that number is moving continuously. So it's a little bit hard to do the math that you're trying to do because as we bring it in and store it for future time periods, we're also releasing some of it. So the number's in a constant state of flux.

Regarding the quality of the pack-away, we have a very rigorous process that we feel we've initiated that makes sure that it's product that we're going to be happy with six months to nine months, when we take it back out again. And it normally does not have fashion, but it's branded and it's seasonal in nature. That's what we target.

Okay. Should I think of that being -- well, I guess denim would be a staple, would be year round. I'm just trying to get a better sense -- when you say it's seasonal, what may fall into that kind of category? Can you at least give me some broad strokes to what it is?

Things like sandals, coats, shorts, gloves, hats -- those kind of things I would say are weather dependent and seasonal.

Right, and businesses like junior sportswear which is a very fast turning, very fast fashion business, the likelihood of packing and holding that would be really minimal. So it's really things that are much more predictable that we would pack and hold. We wouldn't want to bring in anything that has a very short shelf life, as it relates to fashion.

But, Andrew, to your other comment too about denim, denim would be a category that also has a longer shelf life.

And when you're thinking about it for pack and hold, that holding period, you're thinking one, two, three seasons out?

It varies by the category.

On average?

On average, it's usually 1 to 1.5 seasons out.

Okay. Perfect. Thank you. I appreciate it.

Thank you. There are no further questions at this time.

Thank you, operator. So thank you, everyone, for participating in this quarter's earnings call. Have a good day.

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.