Burlington Stores Inc (BURL) 2015 Q1 法說會逐字稿

Greetings and welcome to the Burlington Stores first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob LaPenta, Vice President and Treasurer for Burlington Stores. Mr. 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 FY15 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer, and Marc Katz, our Chief Financial Officer.

Tom will begin with a brief overview of the quarter's financial results and update you on the progress towards the key initiatives that we believe position us to achieve our long-term goals. Marc will then review our financial results and future outlook in more detail before we open the call for questions.

Before I turn the call over to Tom, I would like to inform listeners that this call may not be transcribed, recorded, or broadcast without our express permission. A replay of the call will be available for seven days.

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 10-K for FY14 and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Now here's Tom.

Thank you, Bob, and good morning, everyone. We started the year by delivering earnings that exceeded our guidance, despite reporting comparable store sales below our guidance. We believe this speaks to our ability to effectively manage receipts and expenses over the long term.

Key highlights for the first quarter included net sales increased 4.9%; gross margin expanded 160 basis points to 39.7% as we entered the year with significantly less aged inventory; adjusted EBITDA increased 10% to $101 million with EBITDA margin expansion of 40 basis points; and adjusted net income per share on a fully diluted basis rose to $0.41, up 64% from $0.25 per diluted share last year.

Also at quarter end, our comparable store inventories decreased by 11%, which contributed to an 18% faster comparable store inventory turnover and we ended the quarter with pack-and-hold inventory representing 26% of our total inventory versus 19% last year.

I will now provide additional detail regarding our sales performance for the quarter. The first quarter marked our ninth consecutive period of positive comp sales, and we have delivered comp sales increases in 18 of the last 21 quarters.

With that said, we believe our Q1 comp-store sales were negatively impacted by the following factors: the timing of federal tax refunds, which accelerated sales from February into January; lower markdown sales as a result of ending 2014 with a much lower amount of markdown inventory; and increased store closures days due to weather and some receipt flow issues in three key Easter businesses.

As you know, our special occasion dress-up business is a differentiator for us. Because of this, Easter is a higher penetration for us versus other retailers. Unfortunately, we encountered some receipt flow issues in our ladies shoes, handbags, and dress and suit business. Due to ladies receipts, we missed key selling weeks during the quarter. I am pleased to report that once the receipts landed in ladies shoes, the business began to turn around nicely.

In terms of handbags, we have a new divisional merchandise manager and two new buyers working very hard to turn this business around. While we have seen some progress since Q1, we expect more improvement in the back half of the year.

Our ladies dress and suit business has been a top-performing business for us for many years. We are very confident in this team and believe this business will also be back on track this fall.

While the three businesses I just mentioned were disappointing, I'd like to highlight that we experienced strong performances across many other areas of the Company, including missy sportswear, juniors, bath and body, cosmetics and fragrances, men's apparel, and our home business.

In addition, we continued to improve the quality and quantity of our vendor base. We continue to increase our better, best, and branded unit receipt penetration. As in previous quarters, we believe the increase in comp sales was not only driven by better assortments but also by continued improvement in our store experience.

We remain focused on simplified merchandising, clear navigational signage, sized fixtures, well-organized selling floors, and a better alignment of selling hours to customer traffic, which all translate into a better customer experience. During the quarter, the Northeast territory was the strongest and the Southwest and West territories were the weakest on a relative basis.

I'd like to provide an update on a few other initiatives that position us well for the future. We continue to make progress in terms of tailoring our assortments across brands, lifestyle, sizes, and climate. We continue to improve the timing of our seasonal product deliveries by region, allowing us to get the right products to the right location at the right time. We believe our localization strategy was a bigger contributor to our strong full-price selling which increased 14% comp during the third quarter.

We continued our store expansion with the opening of five new stores, while closing one location during the quarter. We remain pleased with the performance of our new stores that continued to perform in line with their underwriting model. In total, new and non-comp stores contribute an incremental $49 million to our first quarter net sales.

We remain excited about the business prospects as we begin the second quarter and expect the continued implementation of our three key priorities that we outlined during our IPO to enable us to maintain our positive performance in 2015 and beyond. First, we expected to drive comparable store sales as we continue to benefit from our enhanced off-price model, much improved store experience, our marketing testimonial campaign, and our merchandise localization strategies.

We began the second quarter in a strong inventory position with substantial open-to-buy. We will continue our plan to deliver more fresh product each month of the quarter. In addition to higher penetration of pack-and-hold as a percent of our total inventory will help us deliver more great values on the floor.

By category we expect to see continued sales growth from the investments we've made in our ladies apparel, home, bath and body, and accessories businesses. We continue to be underdeveloped in these areas and are very excited about the opportunity in 2015.

From a store execution standpoint, we are consistently conducting various tests within our stores ranging from faster movement of receipts to the selling floor to different fixture types. When our testing platform indicates a positive return on investment, we look to roll out these initiatives Company-wide as soon as possible.

In addition, last year we converted from a customer phone survey to a web-based survey that provides more detailed, actionable customer feedback. We believe this method is going to allow us to take our overall customer satisfaction scores to a new level.

Second, expansion our store fleet continues to be a critical growth driver for us. We're excited about our new 2015 store program, which spans from coast to coast. We remain on track to open 25 net new stores in 2015 and continue to believe that we have significant whitespace for growth to reach 1,000 stores over the long term.

Third, we expect to enhance our operating margins as we continue to optimize our markdowns, tailor our assortments by store, and remain disciplined managing our receipts. Operating margins are also expected to benefit as we grow our top-line and leverage fixed costs.

Let me bring you up to speed on a couple other developments that I believe position us well for the future. First, I am delighted to announce that effective May 11th, we named Jennifer Vecchio as our Chief Merchandising Officer.

Jennifer brings 14 years of great off-price experience. Jennifer is familiar with our Company practices and cultures, as she has been consulting for us for a year-and-a-half, making this a seamless transition. We are very excited to have Jennifer as part of our executive leadership team.

Separately, in appreciation of our Burlington associates effective July 5th, all full-time, and part-time associates with six months or more of service making less than $9 per hour will be raised to $9 per hour. We believe this change demonstrates our commitments to our employees to be an employer of choice and to become competitive with other retailers. The incremental payroll associated with this move has been completely offset by SG&A reductions across the Company.

In summary, we are pleased to have delivered a 64% increase in adjusted diluted EPS. I am pleased with our performance to date in the second quarter, and I am confident that we have a strong team and the right strategies to build upon our positive momentum during the balance of the year. Our Board of Directors shares this confidence, which is evident in their authorization of a $200-million share repurchase program, which Marc will discuss momentarily.

And now, I would now like to turn the call over to Marc to review our financials and outlook in more detail.

Thank you, Tom, and good morning, everyone. Thank you for joining us today. We delivered a total sales increase of 4.9% and a comp-store sales increase of 0.8%. Our comparable store sales increase was driven by an increase in traffic and an increase in units per transaction. This was the third quarter in a row with an increase in traffic.

Conversion and AUR both declined. Our gross margin rate was 39.7%, an increase of 160 basis points versus last year. This is directly correlated with the lower level of aged inventory that we began this year with versus last year.

While the lower level of inventory contributed to a significant reduction in markdowns sales, it also resulted in significantly fewer items on the floor that needed to be marked down. Accordingly, we took fewer markdowns in the quarter, which was the primary driver of the reported margin increase. This improvement more than offset an 80-basis-point increase in product sourcing costs, which include costs to process goods through our supply chain and buying costs, which are in selling and administrative expenses.

Going forward, we expect reported margin improvements versus last year to slightly outpace product sourcing cost increases versus last year. As a percentage of net sales, selling and administrative expenses, exclusive of product sourcing costs and advisory fees, increased 40 basis points to 27.3%. The increase was due to a deleveraging of occupancy and marketing costs and increases in severance and stock-based compensation expense.

Adjusted EBITDA increased by 10%, or $9 million, to $101 million representing a 40-basis-point increase in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $1.5 million to $36 million. Interest expense decreased $12 million to $15 million, driven by interest savings related to the debt refinancing in August of 2014 and principal payments made during FY14.

At the end of the quarter, we converted $800 million of our $1.2 billion term loan outstanding to a fixed rate of 4.9% by executing an interest rate swap. The remaining outstanding term loan of $370 million remains at the floating rate of 4.25%, tied to the LIBOR index with a floor of 1%. Although one can never predict when the Fed will raise or lower interest rates, we believe that locking in the majority of our term loan at a historically low interest rate through May of 2019 was in the best interest of the Company and our shareholders.

In terms of returning cash to shareholders, I'm happy to announce that our Board of Directors has authorized the Company to repurchase up to $200 million of our common stock over the next 24 months. The share repurchase will be funded through free cash flow the Company will generate.

We expect our debt leverage to be at or below 2.5 times at the end of 2015, which we believe will continue to decline in future years based on EBITDA growth alone. Through this repurchase authorization, we now have the ability to delever and return capital to shareholders at the same time.

The adjusted effective tax rate was 37.9% versus 40.2% last year. The decrease in the rate is the result of realizing certain tax credits. Combined, this resulted in an increase in adjusted net income of $13 million, or 69%, to $31 million for the quarter.

Diluted adjusted net income per share increased 64% to $0.41 versus $0.25 last year and our weighted average diluted shares outstanding were 76.5 million shares versus 75.5 million shares last year.

Turning to our balance sheet, at the end of the quarter we had $35 million in cash, borrowings of $180 million on our ABL, and have availability in excess of $380 million. At the end of the quarter, we prepaid $50 million in term loan debt, resulting in total debt of $1.3 billion.

Comparable store inventory decreased 11% compared with the end of the first quarter last year. As Tom mentioned, our comparable store inventory turnover improved by 18%. Cash flow use from operation was $22 million, primarily related to increased pack-and-hold purchases.

The Company anticipates generating free cash flow during the remainder of 2015 and beyond to fund all of the Company's capital expenditures, business initiatives, and its recently announced share repurchase program. Capital expenditures, net of landlord incentives, were $32 million in the first quarter.

Tom mentioned earlier we opened five stores in the quarter and we closed one existing location. We ended the quarter with 546 stores. We continue to expect to open 25 net new stores in FY15.

In appreciation of our Burlington associates, effective July 5th all full-time, and part-time associates with six months or more of service making less than $9 per hour will be raised to $9 per hour. This decision resulted in an incremental $5 million of store payroll, which has been completely offset by SG&A reductions across the Company. Accordingly, this decision will have no impact on our quarterly or annual guidance.

Turning to our outlook, we're introducing second-quarter guidance and reiterating our full-year outlook. For the second quarter of FY15, we expect net sales to increase in the range of 7% to 8%, comparable store sales to increase between 3% and 4% on top of last year's 4.7% increase. Adjusted diluted net income per share is expected to be in the range of $0.10 to $0.13 versus $0.01 loss per share last year, utilizing a share count of 76.6 million shares.

Turning to our guidance for full-year 2015, consistent with the long-term growth objectives we shared during our IPO, for FY15 we continue to expect net sales growth in the range of 6% to 7%, comparable store sales to increase 2% to 3% on top of last year's 4.9% increase, EBITDA margin expansion of 10 to 20 basis points on top of the 60 basis points of expansion we achieved in 2014. In addition we expect interest expense to approximate $61 million, a tax rate of approximately 39%, and the share count of approximately 77 million shares.

Net capital expenditures are expected to be in the range of $150 million to $160 million, and depreciation and amortization of approximately $150 million. This brings our adjusted net income per share guidance to a range of $2.15 to $2.25. And now, I would like to turn the call back over to Tom for concluding remarks.

In summary, I'd like to thank our store and corporate teams for delivering a 64% increase in adjusted diluted EPS. With a strong and talented team and significant runway to further optimize our off-price model, we are confident in our ability to continue our success in 2015 and well into the future.

Operator, we are ready for questions.

(Operator Instructions)

Our first question today is comings from David Glick from Buckingham. Please proceed with your question.

Thank you, good morning. Tom, you guys have been very, very consistent in terms of top-line performance over the last couple of years, and I think investors have come to rely on that consistency of at least a 2 to 3 comp. Some of the factors you talked about today, generally, I would like to get a better handle on specifically how they impacted their comp. But obviously some of them you are aware of in mid-March when you gave your guidance, obviously impacted your business after.

If you could walk us through the list of what appear to be transitory factors and help us better quantify the impact that had on your business, number one. And number two, obviously, there are some signs that your sales are improving in the second quarter, which is very encouraging. Obviously, you need a 3 to 4 comp to get back to your 2 to 3 guidance, but if you can give us as specific as you can be around your confidence that your guidance represents the past conservatism that you've outperformed over the last few years, that would be really helpful.

Okay. First of all, to address the comp for the first quarter, as I mentioned in the prepared remarks, we did have a shift of sales into January from February from the accelerated federal income tax returns. As you know, we had a very strong performance in the fourth quarter. We picked up 6.7%.

Our comp sales and markdown product were significantly below last year, and we finished 2014 in the best shape in aged product in our history. Our 90 day and older experienced the largest dollar drop in the last five years, approximately $120 million. Obviously, that helped and contributed to our 160 basis points in gross margin, and then we talked about some store closures due to weather.

Lastly, I think, and most importantly, maybe to answer your question about things that will not to transfer into the second quarter was we had some receipt flow issues in three key businesses: ladies shoes, handbags, dresses and suits, which we felt were really self-inflicted due to under-calibrating the timing of receipts to hit the stores prior to Easter.

So to answer your question, relative to when we gave our guidance in March, early March, we were still three weeks out from Easter. We felt we were still going to get the goods into the stores. Obviously that didn't happen.

And also we felt that other businesses could make up the deficiency if in fact we did experienced declines in these businesses, but that clearly didn't happen because of the obvious importance of these businesses prior to Easter. But it was really issues that we had in terms of just calibrating the receipts coming into the store. Easter was a little bit earlier -- a couple weeks earlier than last year, which compounded the issue.

But in terms of confidence about our guidance in the second quarter, obviously our second-quarter performance to date we're very encouraged. Obviously there's less weather dependency in the second quarter versus the first quarter.

The trend lines are clear with no meaningful calendar shifts. Obviously Easter, we're highly penetrated in Easter in general based on our history and our customer. So that, obviously, impacts us a lot.

Ladies shoes, now that we have receipts in is now outperforming and obviously the shoe business, ladies shoe business is very important in the second quarter. Obviously we saw a lot of sandals, and dresses and suits are less important in the second quarter; the second quarter is more casual. So, that's why we feel confident in our guidance of 3 to 4.

Is there any specifics you can put around some of those -- I don't know if Marc can, but some of the deficiencies in the first quarter? What it cost you in comp and are you running ahead of your plan in the second quarter? That would be helpful to know.

Really, I think that's a lot of detail to get into in terms of identifying by issue in terms of how it impacted our comps. But let me put some color around that, because that's a good question. If we would've made our plan in the three Easter businesses that I described, we would've been in the high end of our range.

The high end of 2 to 3.

Yes. Okay.

Our next question today is coming from Lorraine Hutchinson from Bank of America Merrill Lynch. Please proceed with your question.

Thank you, good morning. I wanted to follow up on those three women's categories. It sounds like in addition to delays, you may have some product issues as well that will take some time to get through. Can you talk a little bit about particularly ladies dresses and suits and handbags?

I know some new buyers in the handbag business. But maybe if you could give us some clarity on how long you think it will take those categories to perform, and also if you could quantify how big those three categories are as a percentage of your total sales.

Let me address the ladies dress and suit business. As I mentioned, we feel very good about our team there, and obviously, we're less -- dresses and suits sell better as we enter into the second half of the year. So we really feel we have really some good things in place to capitalize on that business in the second half of the year.

The second quarter is more casual, so they are less important. But I feel we are on track there. We have a very good team, as I mentioned, and we're going to obviously move that business forward.

We do have some issues in our handbag assortments and we have a new DMM running that business and two new buyers running that business. So, it's going to take a while to improve the assortments, but we feel that we have a lot of good things in place and we should see some positive momentum in the second half of the year.

In terms of size of the three businesses, Lorraine, I'm not sure if you heard Tom's comment to David, but if we would've hit plan in Q1 for those three businesses, we would've ended up at the high-end of our guidance.

Thank you.

Our next question today is coming from Matthew Boss from JPMorgan. Please proceed with your question.

Hey, good morning, guys. Your outlook for the year is unchanged despite the embedded wage increase. Can you just talk through some of the offsets the you were able to find in the P&L?

How do we think about the comp needed to leverage fixed cost expenses this year and next? And ultimately, any change to your multi-year 20% plus bottom-line algorithm?

First, let me take the wage issue first. It was $5 million of incremental store payroll, Matt. And really what we did is we challenged every pyramid head at the Company to find offsets for that, and every pyramid head came through. So they were efficiency gains literally across the board in our Company that helped offset the $5 million.

I will tell you, without getting into details on those, Matt, what I can say is that we did not take hours off the selling floor. They were all efficiency gains from other areas of the Company, so that's number one.

Number two, we are still sticking with our 10 to 20 basis points of EBITDA margin expansion for the year. As you know, we are planning and guiding fall conservatively.

We do that because with a conservative comp plan and guidance, with what comes with that is a lower expense base and lower receipt plan. And we are confident that our team can -- our merchandising and planning team is very adept at chasing business when it's out there to chase.

The last thing I would add is in terms of our full-year fiduciary, we did mention on our last call that we had $9.4 million of incremental expenses related to stock-based comp, the new building cost, and now we've got the $5 million on top of that. And we're absorbing all of those and sticking with our 10 to 20 basis points of expansion. No change to future year outlooks, in terms of what we provided during our IPO.

Great, and then just a quick follow-up on new store productivity, second quarter in a row up almost 150% in the quarter. Can you just walk through what you are seeing from the smaller store format? And really how should we think about the opportunity to right size the fleet, and there is a material number of leases that come up for renewal the next few years, just the best way to think about that.

Really happy with our new stores in terms how they are executing versus our underwriting models. Our stores that are less than 60,000 square feet, Matt, are still producing the sales per square foot about 22% higher than the chain.

And as you think about the stores that we are opening in 2015, we have 17 of them that are 55,000 square feet or less. So, we really happy with how they're performing and how they are doing in line, both on the top line and from an EBIT margin contribution as well.

We only have one store, Matt, in 2015 that's about 60,000 square feet that we are opening; it is 62,000 square feet. So the average is around 55,000 square feet for this year, and in the last couple years 2013 and 2014 they are around 60,000 square feet.

We are working very, very hard on opening stores that are smaller. We have a team working on even a smaller format, just because we feel that based on the inventory reductions that we've had over time that we can definitely operate the entire assortment of Burlington in a smaller square footage store.

Great. Best of luck.

Thank you.

Thank you. Our next questions today is coming from Ike Boruchow from Sterne Agee. Please proceed with your question.

Hi everyone, thank you for taking my question. Just a quick question, either Mark or Tom, around the product-sourcing cost comment you guys had in your prepared remarks. I'm just curious, I think you commented for the rest of the year, gross margin expansion should offset the product cost increases that you'll see.

And I'm just curious, are we at a point in the supply chain where that is a sustainable factor in the model? And basically, how should we think about those two line items over the next -- the rest of this year and into the future?

I think I'll give the same answer that I gave last quarter, Ike, in we are not in the ninth inning of executing our off-price model. So as we continue to go to more opportunistic, more pack-and-hold, more closeout buys, our distribution center has to touch those goods more often than an upfront bus, we believe that the product sourcing costs are going to continue to increase.

With that said, as we've proven for the last two years and as we certainly proved in Q1 the reported margin increases that come with those buy types more than offset our product sourcing costs. So, we see it continuing through this year and we see reported margin offsetting it.

Got it. Great, good luck.

Our next question today is coming from Kimberly Greenberger from Morgan Stanley. Please proceed with your question.

Great, thank you so much. I just wanted to start on the wages. Is the $5 million the 2015 increase or is that an annualized number?

That is just from July 5th through the end of the year, Kimberly.

Okay, and then as you look out into 2016, would we then expect an additional roughly $5 million number?

I think you're looking at 7 months [went to 12]. Yes, there would be more certainly that would happen through June of next year, and then if any other decisions come as a part of our 2016 financial planning process in terms of if any other steps are made, we will go through that as part of our 2016 plans. And obviously try and do the exact same thing we just did, which is offset it.

Great. Then, just bigger picture, when you think about returning capital to shareholders, you've obviously just authorized a $200 million share repurchase program. How do you weigh the benefits of paying down debt and reducing interest expense versus share buybacks? And how should we expect the combination of that sort of capital return to play out over time? Thank you.

Kimberly, this is Bob. I'll take that one. As Marc mentioned earlier, we expect our debt leverage at the end of this year to be at 2.5 times or below. We expect our debt leverage to continue to decline meaningfully in future years based on EBITDA growth alone.

So, we're very pleased with being able to initiate this share repurchase program. It's a great way to return cash to the shareholders and delever.

We don't have a target, but we certainly feel comfortable at this range of leverage on the balance sheet now. And we'll continue to evaluate over time as we quantify the free cash flow that we'll generate what we think the best use of the cash will be for the Company and for our shareholders.

Thank you so much.

Our next question today is coming from John Morris from BMO Capital Markets. Please proceed with your question.

Hi, thank you. A quick question and then a quick follow-up. I think one of the other areas that you talked about, Marc, in terms of the shortfall was the low level of clearance inventory you had. I'm just wondering with your inventory in such great shape as it is at the end of the quarter, down 11% is there anything you can do, not that you necessarily want a lot of clearance inventory, but anything you can do to help that so that it would help the comp as well?

And then my follow-up is, is the buyback included in the full-year guidance? Thank you.

I'll take the first piece and then Marc can take the second. Really, we're trying to minimize how many markdowns that we are taking in general in terms of markdown product, because obviously our goal is to sell full-price goods as much as possible.

Historically, we've always had a high penetration of markdowns, vis-a-vis, some of the other people in our space. We're now getting more normalized in terms of our level of markdown sales overall.

And the other thing I just want to emphasize is our markdown optimization system really dictates systemically what markdowns we have to take. And we really utilize that diligently so that we're taking the markdowns at the right time.

So, there's nothing really we want to do to increase our markdowns. Overall, we let the system do it, and we're trying to reduce the amount of markdowns we have in our system, just because the fresh product we have on our floor, the goods that we receive in the first 30 days sell faster.

And John, I'll take the second question about the guidance. We did not change our share count in our 2015 guidance, and going forward what we'll do is on each earnings call, we will report how many shares and the dollar amount we spend each quarter on what we actually spent on the program.

Thank you, Bob.

Our next question today is coming from Stephen Grambling from Goldman Sachs. Please proceed with your question.

Good morning and thank you for taking the questions. To start, to follow up on Kim's question, the wage issue. With TJ actually now talking about a move to $10 next year, I realize it's still early, but would an increase, if you elected to follow that, be similar to what you saw this year or bigger?

Stephen, we're going to go through all of that when we go through our 2016 financial planning process. I'd hate to try to start guessing at that right now. Once we go through it, and probably on our year-end call when we start giving guidance for next year, we will let you know exactly what -- how much things cost us and hopefully that we were able to offset them.

Fair enough. And then on the delayed receipts, just to be clear, was that primarily planning-related or was there a port issue there? And then as we look forward, is there now some of that excess product coming in and is that product typically and a potentially lower margin rate? Thanks.

First of all, it wasn't a planning issue. We had the right plan. It was an executional issue in terms of hitting our planned receipts, bringing it in. There was some West Coast port issues; that obviously contributed to it, but I would really more characterize it as our execution in terms of getting the receipts in, as I mentioned before.

I think we probably timed it too close to Easter to bring the receipts in, and obviously that was a misstep on our part overall. What was the second part of that question, please?

Anyways, just as some of the product is now coming in, is there any difference in terms of the merch margin there as it hits in the next couple of quarters?

No, not really. All the markdowns we'd have to take in these areas are in our guidance.

Great. Thank you. Best of luck.

Thank you.

Our next question today is coming from John Kernan from Cowen and Company. Please proceed with your question.

Good morning, everyone. I'm trying to balance the comments around UPT and traffic driving the comp. It seems like markdowns in clearance were lower.

I thought AUR would have been a little bit higher. As you lower markdowns and push some of this pack away through it at full price as the year goes on, can AUR be a bigger driver to the comp?

John, I'll take that. Just to go through it one more time, our proxy for traffic is traffic. So our traffic was up for the third consecutive quarter.

In terms of transactions, we were down, because conversion offset our traffic increase. Our average basket was up, driven by units per transaction. AUR was down slightly.

Certainly understand your point about less markdown goods. I think you also have to also think about the mix of the business and the fact that what we are doing with bath and body, what we're doing in terms of growing home, and the fact that we're planning baby down in coats being less of a penetration; all of those things play in. So I think it's more of a mix of business that's driving that.

Okay, and then just a quick follow-up to that. Do you have any idea what comps would've been if you hadn't moved away from some of that markdown clearance inventory?

No, the only thing we said in terms of our comps for Q1 was that if the three businesses that Tom spoke to would've hit the plan, we would've been at the upper end of guidance.

Okay, thank you.

Our next question today is coming from Dutch Fox from FBR Capital Markets. Please proceed with your question.

Good morning. I wanted to ask about the pack-away inventory really quickly. Was that the result of opportunistic buying? Did you happen across a lot of good deals, perhaps related to the port strike or was it a distribution logistics backup that you seem to have had with a couple of your business lines?

Also can you talk a little bit how your planning on pack-away inventory to evolve over the course of Q2 and Q3? Do you expect to reverse out a lot of this, or are you planning on carrying that for the balance of the year? Thank you.

The pack-and-hold really is any disruption in the marketplace we were able to, because of the West Coast disruption, we were able to pick up some pack-and-holds. But we were able to pick up pack-and-holds really in a lot of different ways. Overall, things that came out of the fall season from the manufacturing community, we also took advantage of that.

Obviously, we are pleased with our level of pack-and-hold as it stands today. A lot of these goods will be released within the next six months overall. We really don't hold it for a long period of time. It depends on obviously the seasonality of the product in terms of how long we would hold it, but we would try to release a lot of these goods into the third and fourth quarter, obviously to support our fall sales overall.

We really don't target the level of pack-and-hold inventory. We really never have. We really let the deals speak for themselves. We let -- we have obviously our merchants really compete to bring pack-and-hold into the system overall.

We really -- we haven't really done that. Candidly, we've seen a lot of great deals, and we keep saying that we don't target it but it keeps getting bigger and bigger just based on the fact that there's more and more deals out there all the time. And obviously, it's the most productive and fast-turning product that we have.

So, it's fair to say based on the surge in pack-away inventories that there was so much good buying out there of good quality product, perhaps maybe at a better margin rate than you've seen historically. Is that fair?

Yes, there are a lot of great deals out there and we took advantage of it.

Great. Thank you.

Thank you. We've reached the end of the question-and-answer session. I'd like to turn the floor back over to Mr. Kingsbury for any further or closing comments.

I just want to thank everyone again for joining us this morning and your interest in Burlington stores. We look forward to speaking to you when we report our second-quarter results in September. Have a good day, everybody.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.