Burlington Stores Inc (BURL) 2015 Q3 法說會逐字稿

Greetings and welcome to the Burlington Stores third-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 third-quarter FY15 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, our Chief Financial Officer.

Before I turn the call over to Tom, I'd like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available for seven days. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks in the Q&A that follows are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results 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 our FY14, and in other filings with the SEC all of which are expressly incorporated herein by reference.

Please note, that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliation of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

Now, here's Tom.

Thank you, Bob, and good morning, everyone. We're pleased that we're able to continue our positive momentum from the first half of the year and deliver strong third quarter results. The quarter featured increased comparable store sales and a significant rise in adjusted net income per share. Our performance continues to validate the strength and flexibility of our off price operating model and the successful execution of our growth strategies by our team.

Let me share with you some highlights of the third quarter. We reported strong sales momentum with total sales rising 6.4%. Comparable store sales rose 2.8% on top of a 5.2% increase in the same period last year.

We believe the third quarter is a testament to the strength and diversity in our offerings as we achieved the high-end of our comp guidance despite the headwind of unseasonably warm weather. With the third quarter we have reported 11 consecutive quarters of positive comp sales. In addition, we have reported comp sales increases in 20 of the last 23 quarters.

Gross margin, net of product sourcing costs, expanded by 10 basis points and we leverage our SG&A exclusive of product sourcing costs by 40 basis points. Adjusted EBITDA grew $10 million or 14% from the third quarter last year. This led to adjusted net income per share of $0.25, a 56% increase from $0.16 per share last year.

In addition, we're pleased to report the following accomplishments. The third quarter represented our fifth consecutive quarter with an increase in traffic. Comparable store inventory decreased by 7% contributing to a 10% faster comparable store inventory turnover during the quarter.

We repurchased 1.9 million shares of our common stock during the quarter for approximately $98 million. Overall customer satisfaction scores increased 12% versus last year. We entered the fourth quarter with a more current inventory position and sufficient open-to-buy liquidity to take advantage of the great buy-in opportunities we see in the marketplace.

Fueling our comp source sales increase were strong performances in bath, cosmetics and fragrances, home, youth, men's and juniors. In terms of territories, the Northeast and the Southeast were the strongest and the Southwest was the weakest on a relative basis. In addition, we continue to improve the quality and quantity of our vendor base. We continue to increase our better and best and branded unit receipt penetration.

I would now like to give an update on our three stated long-term growth strategies. Our number one growth strategy remains driving comparable store sales growth. Continued execution of our off-price model is critical in all merchandising areas with an increase focus on ladies apparel, home and bath, cosmetics and fragrances. In addition, we will drive comp store sales through our much improved store experience, our marketing testimonial campaign and our merchandise localization initiative.

In terms of merchandise category growth drivers, we continue to see opportunity in ladies apparel. We've made nice strides in this area and have more room for growth. We ended last year at a 24% penetration with our peer average closer to 30%. We recently added another divisional merchandise manager to missy sportswear to focus exclusively on special sizes in maternity, areas we believe warranted additional market coverage.

We're very pleased with our home performance in the third quarter. The home continues to be our biggest merchandising opportunity and we believe we are moving in the right direction. As we've stated before, we ended last year at a 9.5% penetration with our peer average around 26%. We will continue to build this business by increasing our vendor base and adding more nationally recognizable brands, building assortment diversity to improve choice, freshness and value, and investing in improved store presentations.

Another merchandising area that we are very excited about is our beauty growth strategy. This includes bath and body, skin care, hair care, accessories, cosmetics and fragrances. We believe this is another area in which we are under penetrated and we're looking to increase our vendor base and add more identifiable brands, improve the quality of our product and enhance our store presentation. Another benefit of this business is that it lends itself well to gift giving, something we are excited about for the fourth quarter.

Our much improved store experience continues to resonate with our customers. Last year, we converted from a customer phone survey to a web based survey that provides more detailed actionable customer feedback. Store managers now have the ability to immediately review online feedback from his or her store and react accordingly.

As we have now anniversaried the start of this new survey, we are very pleased to see double digit increases in not only overall customer satisfaction scores but in the major components including friendliness of Associates, speed of checkout, interior cleanliness and ease of shopping. This year, we completed 11 remodels and 13 refreshes and we will continue to remodel and refresh our store base as appropriate in order to continue to provide the best possible shopping experience for our customers.

We continue to receive positive feedback about our marketing, testimonial campaign. Again, these are real customers in our stores bragging about the great values they have found. This campaign will continue in the fourth quarter and our overall marketing spend will be in line with last year.

We continue to make progress in terms of tailoring our assortments across brands, lifestyles, sizes and climate. Our localization efforts 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. In terms of the fourth quarter, we remain well-positioned to capitalize on the key holiday selling season with great brands and product across categories, an expanded offering of gifting options and compelling value.

As our guidance suggests, we believe it is prudent to plan comp sales conservatively and drive optimal profitability. Of course, the flexibility of our off-price models allows us to maximize sales opportunities in real time and we will certainly take advantage of these opportunities as they occur.

In addition, the disruption created by the increased inventory at many retailers and our sufficient open-to-buy, should give us great pack and hold opportunities as we turn the corner into 2016. We expect to end the year at a low to mid-single digit decrease in comp store inventory. We've decided to advance approximately $50 million of Easter receipts into the fourth quarter to ensure we capitalize on our first quarter Easter opportunity.

Our second growth strategy is expansion of our store fleet, which continues to be an important growth driver for us. We remain pleased with the performance of our new stores that continue to perform in line with their underwriting model. During the third quarter, we opened a net of 20 new stores. In total, new and non-comp stores contributed an incremental $44 million to our third quarter net sales.

I am pleased to report that effective in November week one, we officially opened our final new store of the year bringing us to 25 net new stores with an average growth square footage of 54,000 square feet. In addition, our pipeline for 2016 is ahead of where we were last year at this time and our approved deals have an average square footage of 52,000 square feet. We continue to believe that we have significant white space 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.

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

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We are pleased with our third quarter performance. Our earnings exceeded our expectations driven by growth in sales, gross margin expansion, leverage and operating expenses and lower interest expenses. Additionally, we repurchased shares for the second quarter in a row to the benefit of our shareholders.

Turning to a review of the income statement and starting with sales. For the third quarter, total sales grew 6.4% and comparable store sales increased 2.8%, which follows two years of strong comp growth including a 5.2% comp increase in the third quarter of 2014, and a 3.9% comp increase in the third quarter of 2013. In terms of comp metrics, our growth in comparable store sales was driven by increases in traffic and units per transaction, while average end at retail and conversion were down slightly versus the prior year. This represented our fifth consecutive quarter with an increase in traffic.

Our gross margin rate was 39.8%, an increase of 10 basis points versus last year. We remain focused on inventory management and continue to reduce the level of aged merchandise compared to the prior year. Product sourcing costs, which include costs to process goods through our supply chain and buying costs, both of which are reported in selling and administrative expenses, were flat to last year as a percentage of net sales.

Selling and administrative expenses, exclusive of product sourcing costs and advisory fees, improved 40 basis points to 28.9%, primarily driven by a reduction in incentive compensation partially offset by an increase in stock based compensation. Expense leverage was also achieved in advertising and store occupancy.

Adjusted EBITDA increased 14% or $10 million to $83 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 million to $37 million. Interest expense decreased approximately $2 million to $15 million, primarily driven by the savings realized as the result of our 2014 refinancing.

The adjusted effective tax rate was 37.7% versus 39.9% last year. The decrease in tax rate was primarily the result of state tax credits available to us for our new corporate headquarters and the benefit of federal hiring credits from prior years realized during FY15. Combined, this resulted in an increase in adjusted net income of $7 million to $19 million for the quarter, compared to $12 million last year.

Adjusted net income per share increased to $0.25 versus $0.16 last year. And our fully diluted shares outstanding were 75.4 million compared to 76 million last year. For the first nine months of FY15, total sales rose 6.9% and included a comparable store sales increase of 3%, following a 4.2% comparable store sales gain in the first nine months of last year.

Gross margin was 39.6% representing an increase of 90 basis points versus last year which was primarily driven by a reduction in markdown rate. This improvement more than offset a 40 basis point increase in product sourcing costs. As a percentage of net sales, selling, general and administrative expenses, exclusive of advisory fees and product sourcing costs, improved 20 basis points to 28.2%, primarily driven by expense leverage in advertising and store occupancy. Additionally, there was a reduction in incentive compensation which was offset by an increase in stock based compensation.

Adjusted EBITDA increased by 16% or $36 million, to $259 million representing a 60 basis point increase in rate for the first nine months of FY15. Depreciation and amortization expense exclusive of net favorable lease amortization, increased by $4 million to $109 million. Interest expense decreased approximately $25 million to $44 million, driven by the August 2014 refinancing.

The adjusted effective tax rate was 38.5% versus 40.1% last year. The decrease in the effective tax rate is primarily driven by state tax credits available to us for our new corporate headquarters and the benefit of federal hiring credits from prior years realized during FY15. Combined, this resulted in an adjusted net income of $65 million versus $30 million of adjusted net income last year. Adjusted net income per share was $0.86 versus $0.39 last year and our fully diluted shares outstanding were 76.1 million shares versus 75.7 million last year.

Turning to our balance sheet. At the end of the quarter, we had $29 million in cash, borrowings of $276 million on our ABL and have availability of approximately $278 million. At the end of the quarter, total debt was $1.4 billion.

Merchandise inventories were $934 million versus $900 million in the prior year. The increase was primarily driven by increased pack-and-hold inventory levels and new store inventory, partially offset by a decline in comparable store inventory of 7%. As Tom mentioned, our comparable store inventory turnover improved by 10%.

Cash flow provided by operations was $104 million, primarily related to our improved operating results. For the remainder of 2015 and beyond, we expect to generate the necessary free cash flow to fund all of our capital expenditures, business initiatives and to support any potential opportunistic capital structure enhancements. Capital expenditures net of landlord incentives were $135 million for the third quarter. This includes approximately $57 million net for store expenditures and approximately $37 million to support continued distribution facility enhancements.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased 1.9 million shares of stock for approximately $98 million. Today, we announced that our Board of Directors authorized a new $200 million share repurchase program. This brings total availability under the share repurchase programs to $277 million.

We remain on course for our debt leverage to be at or below 2.5 times at the end of 2015, which we believe will further decline in future years through continued growth in EBITDA. Given our financial positioning we were able to delever our balance sheet while also returning capital to shareholders as we opportunistically utilized our recent repurchase authorization. We ended the quarter with 566 stores and opened our final store of the year during the first week of November, bringing our total net new stores for the year to 25.

Turning to our outlook. For the fourth quarter of 2015, we expect net sales to increase in the range of 3.7% to 4.7%, comparable store sales to be in the range of flat to up 1% on top of last year's 6.7% increase. We believe it is appropriate to guide conservatively given the unseasonably warm November and our expectation of an extremely promotional Q4 given the high inventory position at many retailers.

Our adjusted net income per share is expected to be in the range of $1.44 to $1.48 versus $1.43 per share last year, utilizing a fully diluted share count of 74.4 million shares. As a reminder, last year's EPS benefited from a $3.2 million one-time legal settlement or $0.03 per share.

Turning to our guidance for full-year 2015. We expect net sales growth in the range of 5.8% to 6.3%, comparable store sales to increase 2% to 2.5%, adjusted EBITDA margin expansion of 20 to 30 basis points, interest expense to approximate $59 million, an adjusted tax rate of approximately 37.8%. The decrease in effective tax rate includes the realization of federal hiring credits related to prior years at a rate higher than previously anticipated and the benefit of the implementation of other tax strategies that will be in effect during the fourth quarter. A share count of approximately 75.7 million shares, net capital expenditures are expected to be approximately $160 million and depreciation and amortization of approximately $148 million.

This results in adjusted net income per share guidance to a range of $2.28 to $2.32, similar to our previously stated range of $2.27 to $2.32. As a reminder, our adjusted net income per share in 2014 was $1.83. Please keep in mind as you model that our share repurchase activity began in Q2, therefore you cannot simply add each quarter's EPS to get to the full-year EPS.

Now, I would like to turn the call back over to Tom for concluding remarks.

In summary, the third quarter represented another period where we met or exceeded our goals, demonstrating the power of our off-price operating model. We continue to see significant opportunity ahead to further enhance our execution and bring consumers great brands and great value.

While we believe it is appropriate to take a more conservative posture with regard to the fourth quarter sales, the flexibility of our operating model and our extremely liquid position should allow us to capitalize on opportunities and take advantage of inventory buys that will bolster our performance in 2016. I believe we remain well-positioned to capitalize on the significant runway that lies ahead for our Company.

Now, I would like to turn the call over to the operator to begin the question and answer portion of the call.

(Operator Instructions)

Matthew Boss, JPMorgan.

I think it would be helpful, could you guys just elaborate a little on the puts and takes in the fourth quarter to same store sales guidance that you spoke to? I think first, how the flat to up 1 comp compares to what you saw in October exiting the quarter?

Second, maybe any comments at all if you could just help us out on November so far? And then third, just with the promotional backdrop that you commented on, your ability to maintain the value proposition from a price perspective I think would be really helpful to walk through.

Hello Matt, this is Tom. I will take that one. First of all, I have spent the last three weeks in stores and fundamentally, I feel very good about where we are positioned overall. Our assortments look extremely good. We built our national brands over this year. We're up about, as a penetration, we're up about 240 basis points.

Going through the stores, our gift strategy is really strong. We increases the square footage we gave the gifts overall because we know that is an opportunity. That's our third year of executing our gift strategies. Our bath and body and fragrance business as I mentioned, was a big plus for us and you can really see the product rolling in and the quality of that assortment there. Also the home business, right now in the third quarter, we had a very strong home business and the assortments there are really, really improving overall.

Fundamentally, we feel very good about where we stand today. We just felt it was important to be conservative. November was warmer than we anticipated or currently is warmer than we anticipated.

When we were obviously looking to see what was happening with other retailers, we were surprised at the level of inventory that they had as they exited the third quarter. We just felt it was important to be prudent. Fundamentally as I said, we feel very good about where we stand today but we just felt that November was significantly warmer then last year. We talked about that on the earnings call last year.

The good news is, we feel that for the balance of the quarter, we should have a strong performance. The coat business last year underperformed the Company significantly so we feel that even though we had a good November last year, we underperformed in the balance of the fourth quarter. So we feel good about that. The promotional activity as you mentioned, with high inventory levels, historically we see a lot more promotions happening just because people obviously need to liquidate goods.

For us to deliver value, we have continued to do that overall. We've utilized pack and hold, we delivered a lot of our pack and hold in October of this year. We ended with 14% versus 12%.

It is a lower level than we have been at but because we delivered a lot of goods in October, to be prepared for the fourth quarter to delever really strong values overall. We feel we're really prepared to offset any kind of promotional activity but the scale of the promotional activity is still to be determined.

If we just took a step back and we think beyond this near-term malaise that I think we're seeing out there and it is clearly not just you, if we think multi-year, is there any change or can you talk about your comfort with still achieving that long-term 2% to 3% comps and 20% net income growth algorithm?

As far as the comps go, we really felt confident that the 2% to 3% comps are definitely achievable. We are still saying our comps for this year were going to be 2% to 2.5%. We just feel that the fourth quarter, we need to be conservative. The flip side of all of that to look at it from a positive perspective, the fact that it is warmer, a lot of the department stores are overstocked, we feel it is going to be a great buying opportunity for us to position us for a very strong 2016.

When there is any disruption in the market, as you know, we can take advantage of that. We feel this is going to be a really unique opportunity for us to continue to build our pack and hold inventories, deliver, continue to deliver great value in 2016. We are looking at it from a fourth quarter, it may the headwinds but long-term, we really feel that it is going to garner a lot of great opportunities for us.

Matt, I think your second question Matt, was more geared toward our financial objectives that we stated in our IPO and how we feel about that going forward. We are still working on our 2016 financial plan, Matt. We have not completed that yet.

We're in the middle to late innings of getting through that. Still have some big questions as it relates to wages and decisions that we're going to make but let me help you here a little bit. Given that we're not complete with it yet, EPS will be our driver going forward in terms of the financial objective obviously. And while we haven't completed the plan yet, there are consensus EPS numbers that are out there for us for 2016 and beyond. And at least at this point, we can tell you we are not uncomfortable with the consensus EPS increase that is baked into 2016 right now.

That's great. Thanks a lot for that incremental color. Best of luck.

(Operator Instructions)

Lorraine Hutchinson, Bank of America.

Just to be clear, when you think about the fourth quarter guidance, do trends have to improve from where they are today to hit that? And then separately, how are you thinking about coming up against last year's very strong January result?

(Operator Instructions)

Ms. Hutchison, please continue with your question. Start from the beginning please.

As you look at the fourth quarter, do you need trends to improve versus where they are today to hit that guidance? And then secondly, you are up against a very strong January from last year, can you talk about strategies to comp that number? Thanks.

Our guidance includes where we are currently today, it includes everything, the zero to 1% comp, is inclusive of what we feel is going to happen in every single month. We feel that just to talk a little bit about January which we really want to get into each individual month, but we feel that we have an opportunity in general in cold weather products because of our quick sell through we had last year, which we feel can help offset that strong January.

Kimberly Greenberger, Morgan Stanley.

I wanted to ask a question about margins. As I recall, the sourcing cost, buying and distribution, had actually been rising over much of the last year to 1.5 years. It looks like you have finally reached a point where that is hitting an inflection. I think they were flat here as a percentage of net sales in the third quarter. I'm wondering if you can talk about your efforts to improve either productivity at the distribution centers or anything else that helped you get to that result this quarter?

Secondarily, the SG&A looks like it is leveraging here and that was helped at least in part by some store occupancy. What comp do you all need in order to leverage store occupancy?

Thirdly, I think this was the first quarter where there was some movement to a $9 an hour wage rate. And even with that, SG&A leveraged very nicely. So I'm wondering if you were able to find other offsets or some productivity gains and just how you are managing through the wage piece? Thank you so much.

Kimberly this is Marc. I will take that one. I think we have talked before about product sourcing costs and how we look at those with reported margins. We always look at the net of the two of those and we really manage that on an annual basis, on a full-year basis, and we expect our reported margin to slightly outpace our product sourcing costs which incidentally is exactly what happened in Q3.

You are absolutely right though. It was really the -- Q3 was the first quarter where we didn't have a pretty sizable increase in those costs. And we do not know that one quarter makes a trend but to the extent that it does, over the course of the next few quarters here, it does stay leveled off. And that really puts us in a great position to where we can then start making decisions about whether we let gross margin rate continue to flow to the bottom line or pass on that much more value to our customers. Time will tell on that one.

As far as the SG&A lever rate, it's really mid to high 2% is typically where we will see that. And you're absolutely right on the wage rate. The $5 million incremental in wage dollars this year started in July, had a full quarter of it in Q3, we were able to find offsets for the entire $5 million all the way through the end of this year and that is why we were able to cover it. We were happy with the SG&A performance on top of the 2.8% comp.

Paul Lejuez, Citigroup.

Just curious what sort of results are you seeing on pack away merchandise and what margins do you see on that product relative to the rest of your assortment? Do you look at that as more of a sales driver or a margin driver or both? And then, can you fill us in on what categories were weaker for you guys? I'm curious about CapEx next year Marc, as you getting through that planning process. Thanks.

I will take that, Paul, and I'll let Marc talk about CapEx. I'll take the first part of that. Pack and hold is our fastest turning, highest margin product we have in our assortments. Because by definition, it's great values, it's great brands, great values. We have a very rigorous process in order to approve anything that goes into pack away.

As far as categories, as I mentioned, the home business is very good. The bath and body business was really good. We had a strong total shoe business overall. The categories in the third quarter that were weaker, outerwear coats and outerwear were weaker just because of the weather as we have talked about, but fortunately we were able to offset a lot of that. Our performance in general was pretty broad-based in terms of how well we did in the third quarter.

One thing I should mention is baby depot continues to underperform. As I mentioned multiple times on different calls, it is a business that is in transition, we are working really hard to fix it and we anticipate the fix to be in place in 2016, we should have improvement throughout 2016. Marc, do you want to talk about your CapEx?

Sure, Paul. We're going to end this year at about $160 million in CapEx. Some of that is related to a campus renovation here at corporate. We are not done yet with our 2016 capital planning, but what I can tell you, Paul, is I expect it to be down slightly.

Ike Boruchow, Wells Fargo.

Hi, everyone. This is Lauren Fresh on for Ike Boruchow. Congratulations on a great quarter. Given how important weather has been, could you illuminate on the penetration of coats and outerwear in the business in Q3 versus Q4?

We really haven't broken it out, but I will talk to in a total basis. Coats and outerwear represents 7% of our business on an annual basis which we have talked about before. Obviously, it's come down over time and that's because we're building everything else around it.

We like our coat business so we are trying to maintain the volume but build everything else around it. As we get into colder months, the penetration grows. So it is less important in the third quarter. It is more important in the fourth quarter and that is obviously weather driven.

John Morris, BMO Capital Markets.

Good morning. Let me add my congratulations to everybody as well. The inventory buying opportunity that you guys see currently that is so attractive coming from the full price channel, are those goods, clearly you'll pack some of those goods away. I'm wondering how quickly you would put those goods back out on the floor?

Tom, you talked about as you turn into next year, is it potential that those cancellation goods that you are able to take advantage of could help with the fourth quarter, the first quarter and/or into next year? I'm wondering how that would flow and work. I'm wondering if getting back to the opportunity a year ago from the port disruption, are we through most of that benefit or are you actually in a position to release some of those goods into the stores currently now as well? Thanks.

Most of the pack and hold we have already delivered on the selling floor, as I mentioned earlier. Some of the goods that we will find will deliver this year but I think the majority of the goods will be goods that will pick up later in the season and we will pack and hold those goods for next fall. They'll continue to deliver value in the third quarter of 2016 and the fourth quarter of 2016. There may be some that will deliver but the majority is really going to be for next fall, which is a good thing because obviously we'll have a lot more ammunition for next year overall.

The port disruption, that is pretty much over. We delivered a lot of the stuff that we picked up last year in October. Some of it will be delivered in the fourth quarter because we still have 14% of our inventory in pack and hold. Some of the goods from the port disruption we deliver in spring 2016, but that is behind us and again, now the weather, the headwinds of the weather and the over inventories, that is just another opportunity for us to buy and we've worked really, really hard on managing our inventories.

Obviously you saw how we ended on a comp store basis at the end of the third quarter. We are anticipating the end of the fourth quarter to be similar. We always have money in our pocket, we're always looking for great deals and we have the flexibility to take advantage of things that are currently happening. Even though it is a headwind as I mentioned in the fourth quarter, we are excited about 2016 and the opportunities that this disruption is causing.

Brian Tunick, Royal Bank of Canada.

This is (inaudible) on for Brian. The first question on the AUR declines this quarter, was that mostly mix shifts or incremental promotions? And looking into fourth quarter, how you are planning the AURs?

The second question --

Can you repeat your first question, please?

The AUR declines I guess you mentioned this quarter, was that mostly due to mix shifts amongst product categories or more incremental promotions?

What is your second question?

The real life safe strategy, are you looking to open stores around 50,000 square feet this next year? So when you look at your existing store base, do you have any material opportunities to get out of leases on larger stores given the good results you are seeing within these smaller store concepts?

I will take the first part and Marc can take the second piece of this. From an AUR perspective, yes, there are mix differences. As we enter bath and body and cosmetics, that drives down the AUR to a certain degree.

The reduction in baby depot, that also has an impact on the AUR. Also, we look at delivering a lot of value in areas year-over-year we have reduction in AUR because we're getting better at what we do and we are delivering more and more value on the selling floor. But it is a balance between, it is mix, better values and more pack and hold going in which is value in general.

As far as real estate goes, we're going to continue to reduce the size of our stores, as you mentioned, our 52,000 square foot parameter for 2016. And we are always evaluating our real estate portfolio and we're always looking at our leases. And as they come up for renewal, we decide if we want to relocate into a smaller box or a different location.

We are always looking at that in general. We've taken some of our stores and we have reduced the size. We call it optimization where we've taken a bigger box and made it smaller. So the customers really voted they want a smaller box. So we have worked on all of that. Marc, do you want to elaborate on that?

I think I would add to that Tom, is that 98% of our stores are for a while even profitable and you have very nice EBITDA rates. If we can do something with a larger store when it comes up with lease expiration, as Tom talked to in terms of giving back space to the landlord would be fantastic or if there's a relocation. But if those two things cannot happen, these are still very profitable stores. We're not going to get out of them.

John Kernan, Cowen and Company.

Thanks for taking my question and congrats on the strong results in a tough environment. Just wanted to go back to the gross margin line one more time. The year-over-year increase from a basis point perspective was much less than it had been in the first half of this year and throughout 2014. So just wondering were markdowns higher this quarter or did you just pass along some of the product sourcing costs to the consumer?

Actually the 10 basis point improvement was a slight improvement in markdown rate to be honest with you, John. Again, we really manage reported margin in product sourcing cost together. Over the course of the year, we say that reported margin will slightly outpace.

I would tell you if you are looking at net/net over the first two quarters, it was more of a story with the first two quarters that we had that drove a lot of the margin expansion with Q1 of course, as we ended the prior year with so much less aged inventory. That was mainly the story there and then a different story in Q2.

To the extent, this is again, one quarter does not make a trend on product sourcing costs. But again, if we do see it level out over the next few quarters and we are at the quote/unquote high point, then it is a great place for us to be in terms of letting more gross margin rate flow through or pass on that much more value to customers.

Can you talk about home a little bit? I know this has been an initiative that you have been looking at. How big of a percent of the mix is home? Where can this go? And how do think that will ultimately affect your store experience?

As we've said, we have a big opportunity in home. Last year was 9.5% of our business. Some of the people in the same space were in excess of 20%.

We really feel that home is going to continue to grow consistently for many years until we get to the same level. What is really great about it is all the businesses in home are performing very well. Home textile business is very good, the home to core business is good, housewares, food, luggage, toys, et cetera, those are all very good. So it is really the improvement is really broad-based and we feel really good about where we are headed.

It really won't impact our store experience negatively. It will actually be positive because obviously more choices for the customers. What we brought in so far has resonated with the customers based on our current performance. I think it will only help the experience overall and as we continue to improve our dollar per square foot and reduce inventories in other categories, obviously, it will make room for an expansion of the home. I think all in all, it is very positive.

If I can sneak one more question. I think either Marc or Tom, you mentioned you're accelerating Easter delivery. Should we expect inventory to be up a certain percentage in the fourth quarter?

No, John, you're absolutely right we said that in our prepared remarks. It is about $50 million of Easter receipts into Q4 of this year so that we can really capitalize on our Easter opportunity in Q1. But we still expect our comp store inventories to be down low to mid-single digits.

The reason we are doing it is obviously, Easter moves up a week from last year so it is earlier than last year. We want to make sure that we are really well prepared as we go into the first quarter to take advantage of the opportunity that we have in the first quarter of 2016.

Dana Telsey, Telsey Advisory Group.

Can you give a little update on supply chain? The supply chain enhancements, how that is progressing and the impact on pack and hold? And then, complexion to comp, what did you see as the drivers this quarter and how it differed from last quarter?

In terms of our supply chain, we're spending $160 million in CapEx this year. $50 million of that is really for our supply chain. And it is everything from additional storage for pack and hold to fragile lanes within our distribution centers to be able to handle this beauty product in home decor. And we are through all of that at this point and are happy with the progress that it has made. The second part of your question Dana?

On complexion of the comp, the drivers? Transaction.

Units per transaction was the biggest piece of the driver. Then it was traffic. Then we had two that were slightly down, conversion and AUR.

Marketing spend, how does it differ this year from last year for the fourth quarter? And testimonials, any new things we should be watching for?

In terms of the overall spend, it is in line with last year. We're going to continue to move forward with the testimonial campaign. We actually saw some of those commercials just this week and are very excited about them.

Pam Quintiliano, SunTrust.

Thanks so much for taking my question, guys, and congratulations on a great quarter. Just a few quick ones for you. Can you remind us what percent of pack and hold you had at end of Q4 LY? And then, when we think about regional performance, can we get into that just a bit more? Was there a wide range of results or was it pretty close together and what do you attribute the relative weakness in the Southwest to?

Last one, the smaller store formats, is there anything you are emphasizing or deemphasizing in those in terms of particular departments relative to what we're seeing in a broader base? And are there any learnings that you could take from these smaller store formats to apply to the broader base?

Let me take the smaller format piece of this and I will move into the regional performances. First of all, our smaller formats, they are 22% more productive than the chain balance. So what we are looking at and what we're learning from that is we can have the entire Burlington assortment in a smaller box. We feel that the experience for the customer is much more -- is more intimate and it is obviously resonating with them.

Really we're not -- we really don't have to really deemphasize any categories in a smaller box. We just based on the fact that we have taken a lot of inventory out of our stores, the need for that is really not necessary.

We feel very good about it. We're going to continue to go smaller. We're going to continue to reduce our inventories. We're going to continue to turn faster, improve the productivity of our stores. So we feel very good about that.

As far as regional differences, they were pretty close in terms of when you look at it, one of the areas where we had a little bit of contraction in the business was in Texas based on the border stores, what is going on there. But in general, our regions performed pretty consistently across the board.

Pam, our pack and hold inventory level at the end of 2014 was 27% of inventory.

One quick one follow up, number of vendors that you currently have versus last year, is there any way to frame either actual number or how many more incremental you have versus last year at this time?

We have talked about this before and we feel it is more prudent to talk about that at the end of the year because it is a fluid situation. We are getting out of vendors, we're adding vendors throughout the year and we feel that the best way to really talk about that is at the end of the year. So in our fourth quarter earnings call, we will give you an update as to the number of vendors we have.

I am assuming you're getting more people excited to be working with you?

Absolutely. We also are building out our California buying office which helps us obviously interact with more manufacturers.

Great best of luck in Q4.

We've reached end of our question-and-answer session. I would like to turn the floor back over to Management for any further closing comments.

Thanks again for joining us today. We wish all of you a happy and healthy holiday season and look forward to speaking with you at the ICR conference in January and when we report our full-year result in March. Thank you. Happy Thanksgiving 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.