Burlington Stores Inc (BURL) 2016 Q1 法說會逐字稿

Greetings and welcome to the Burlington Stores first fiscal-quarter 2016 operating results 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. Thank you, sir. You may begin.

Thank you, Operator. Good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's first fiscal quarter 2016 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 express 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 FY15 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. Reconciliations 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 had a great start to FY16. Both our top and bottom line results surpassed the guidance we provided on our year-end call.

Our positive operating performance, which included growth across all key financial metrics, continues to reflect the disciplined execution of our off-price model. We firmly believe that our customers are responding to our presentation of trend right product, compelling brands, and everyday value, which is leading to increased traffic and transactions at our stores.

We remain excited about our business prospects as we begin the second quarter. We expect to further enhance our execution of our off-price model and deliver consistent growth in 2016 and for many years into the future.

Let me share with you some highlights of the first quarter. Total sales increased 8.4% and comparable store sales rose 4.3%. With the first quarter, we now have reported 13 consecutive quarters of positive comp sales. In addition, we've reported comp increases in 22 of the last 25 quarters.

Top performing businesses were Better and Moderate Missy Sportswear, Home, Beauty, Youth Apparel, and Shoes across all categories, including Ladies, Men's, Kids, and Athletics. In terms of territories, the Northeast and the West were our strongest and the Midwest and Southwest were the weakest on a relative basis.

In addition, we're pleased to report the following accomplishments. Comparable store inventory decreased by 9% at quarter end, this contributed to a 7% faster comparable store inventory turnover. Inventory age 91 days and older continued to decline versus the prior year. We increased the percentage of nationally recognized brands, as well as better product.

Pack-and-hold as a percent of total inventory was 28%, versus 26% a year ago. We ended the quarter with not only higher pack-and-hold levels, but with an increase in more quality brands and categories, as well. We repurchased over 900,000 shares of common stock during the first quarter for $50 million, leaving $150 million remaining on our authorization that was put in place in November of last year.

I would now like to give an update on our three stated long-term growth strategies, which we continue to focus on in 2016 and beyond. 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 increased focus on Home, Beauty, and Ladies Apparel. In addition, we will drive comp store sales through our much improved store experience, our marketing testimonial campaign, our merchandise localization initiatives, and gift giving strategies throughout the store.

In terms of merchandise category growth drivers, we remain pleased with our Home performance. The Home category continues to be our biggest merchandising opportunity, and we've been focused on building our vendor base, adding more nationally recognized brands, expanding our assortment diversity to improve choice, freshness and value, and investing in improved store presentations. This certainly has us moving in the right direction. We continue to invest in this team, as we look to close the gap between our 11% sales penetration and our competitors, who are north of 20%.

We are also very excited about our Beauty growth strategy. This includes bath and body, skin care, hair care, accessories, cosmetics and fragrances. We know this is another area in which we are underpenetrated, and we're looking to increase our vendor base, add more identifiable brands, improve the quality of our product, and enhance our in-store presentation. For the first quarter, we benefited from having direct control of our fragrance category, which enabled us to deliver incremental values and brand.

We continue to see opportunity in Ladies Apparel. As a reminder, we ended this past year at a 24% sales penetration, compared to our peer group that is approximately 30%. As I mentioned before, in the first quarter, Better and Moderate Missy Sportswear performed above the Company average. To strengthen our leadership oversight in Ladies Apparel, we added a sixth divisional merchandise manager to focus exclusively on Special Sizes and Maternity, areas that we believe warranted additional market coverage.

In terms of our customer experience, we're very pleased to see healthy increases, not only in overall customer satisfaction scores, but in the major components, including friendliness of associates, speed of checkout, interior cleanliness and ease of shopping. This year, our capital plans include the completion of 11 remodels and 20 refreshes. We will remodel and refresh our store base, as appropriate, to continue to provide the best possible shopping experience for our customers.

We frequently receive positive feedback about our marketing testimonial campaign. Again, these are our real customers in our stores bragging about the great values they have found. This campaign will continue throughout 2016 and our overall marketing dollar spend will be in line with last year.

We are making progress in terms of tailoring our assortments across brand, lifestyle, 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.

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, as they continue to perform in line with our underwriting assumptions.

During the first quarter we opened 6 new stores and closed 3, bringing our total store count to 570. In total, new and non-comp stores contributed an incremental $53 million to our first quarter net sales. In 2016, we expect to open 25 net new stores with an average square footage of 51,000 square feet. Our store pipeline for next year has never been this robust. The maturity of our market planning and real estate underwriting processes gives us confidence that we can 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'd 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 to begin the year with solid momentum, as evidenced by our strong first quarter performance, which handily surpassed our sales and adjusted net income guidance. We also continued to further enhance value for our shareholders by repurchasing our shares for the fourth quarter in a row.

Turning to a review of the income statement. For the first quarter, total sales rose 8.4% and comparable store sales increased 4.3%, which follows five consecutive years positive comp growth in our first quarter. In terms of comp metrics, our comparable store sales performance was driven by increases in traffic, units per transaction and conversion, while average unit retail was down versus the prior year. We have now experienced traffic increases in six out of the last seven quarters.

Our gross margin rate was 40.1%, an increase of 35 basis points versus last year, as benefits from higher initial markup were partially offset by an increase in markdown rate and a slight increase in the shrink accrual versus the first quarter of last year. Product sourcing costs, which include costs to process goods through our supply chain and buying costs, both of which are reported in selling, general and administrative expenses, increased 20 basis points to last year as a percentage of sales.

Selling, general and administrative expenses, exclusive of product sourcing costs, improved 60 basis points to 26.7%, primarily driven by leverage in occupancy and advertising spend. The quarter also benefited from the deferral of approximately $2 million of expenses originally planned for in Q1 that will now happen in Q2.

Other revenue and other income increased $1.5 million from last year to $10.4 million, driven by a $2.5 million benefit from New Jersey Grow Credit as a result of our expansion of our corporate office space in Florence, New Jersey. This was partially offset by a reduction in income from third-party fragrance sales, as the Company transitioned to a company operated model.

Given that the use of New Jersey Grow Credit is based on New Jersey taxable income, any unused credits are allowed to be sold to other companies. The sale of the credits is viewed as the sale of an asset and, consequently, we recorded that sale in other income.

As we stated on our last call, due to the transition of fragrances from a leased to owned business, we expect other revenue and other income to decline by 15 basis points as a percentage of sales for the remaining quarters in FY16.

Adjusted EBITDA increased 19%, or $20 million, to $121 million, representing an 80 basis point expansion in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased $3 million, to $39 million, and interest expense increased slightly to $15 million.

The effective tax rate was 37.6% versus 37.8% last year. The decrease in effective tax rate was the result of a decrease in state taxes. Combined, this resulted in adjusted net income of $42 million for the quarter, an increase of 33% to last year.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased over 900,000 shares of stock for $50 million, ending the period with approximately $150 million remaining on our share repurchase program. Increased sales, tight inventory and expense controls, and our strong cash flow generation that allows us to fund our growth initiatives while repurchasing our shares resulted in diluted adjusted net income per share of $0.57 versus $0.41 last year. Finally, diluted shares outstanding were 72.4 million, compared to 76.5 million outstanding last year, primarily driven by the repurchase of 4.9 million shares since the first quarter of 2015.

Turning to our balance sheet, at quarter end we had $28 million in cash, borrowings of $222 million on our ABL, and unused credit availability of approximately $339 million. We ended the period with total debt of $1.4 billion.

Merchandise inventories were $805 million, versus $822 million in the prior year. The decrease was primarily driven by a decline in comparable store inventory of 9%. This decrease was partially offset by new store inventory.

Cash flow provided by operations increased $52 million to $30 million, primarily related to our improved operating results. For 2016 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 $28 million in the first quarter. Given our strong financial positioning, we were able to achieve a leverage ratio of 2.6, while also returning capital to shareholders as we opportunistically utilized our recent repurchase authorization.

During the quarter, we opened 3 net new stores, ending the period with 570 locations. We continue to expect to open 25 net new stores in 2016.

We are raising our full year 2016 outlook, based on our very strong first quarter results. We now expect net sales growth in the range of 7.1% to 7.6%. We now expect comparable store sales to increase 3% to 3.5%. Our comp sales guidance reflects an increase of 0.5% related to the transfer of our fragrance business from a leased to an owned model.

As I previously mentioned, we continue to expect other revenue and other income to decrease 15 basis points from the loss of lease income for the remaining quarters in 2016, adjusted EBITDA margin expansion now to increase 30 to 40 basis points, interest expense to approximate $62 million, an adjusted tax rate of approximately 37.8%, and a share count of approximately 72.4 million shares.

Net capital expenditures are expected in the range of $150 million to $160 million, and depreciation and amortization of approximately $160 million. This results in adjusted net income per share guidance in the range of $2.68 to $2.78, versus 2015 actual adjusted net income per share of $2.31. As a reminder, our prior guidance was $2.62 to $2.72.

For the second quarter of 2016, we expect net sales to increase in the range of 6.3 % to 7.3%, comparable store sales to increase between 2.5% and 3.5%, on top of last year's 5.6% increase. Adjusted net income per share is expected to be in the range of $0.20 to $0.23, versus $0.19 per share last year, utilizing a fully diluted share count of 72.3 million shares. We note that our guidance for the second quarter of FY16 includes a shift of approximately $0.02 per share in expenses from the first quarter.

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

In summary, we are well positioned to drive growth throughout 2016, as we continue to maximize the potential of our off-price model. We believe we have the right initiatives in place to maintain our positive momentum and capitalize on the opportunities ahead as we expand underpenetrated categories, grow our footprint, and deliver great brands and great values to our customers. We ended the quarter with lean inventories and significant open to buy, which positions us to take advantage of the many in-season deals on fashion and branded merchandise we see in the marketplace.

I'd like to thank our store and corporate teams for their hard work and dedication that have been key to our performance. And now, I'd like to turn the call over to the operator to begin the question-and-answer portion of the call.

(Operator Instructions)

Ike Boruchow, Wells Fargo.

Hello, guys. Good morning and congrats on a great quarter.

Thanks.

So we know you guys had some execution issues last year in Q1 that you just lapped. The flow through this quarter looked great. Just curious how meaningful the proper execution in those key Easter categories was to delivering those results?

And then, are you confident with your ability to continue to drive similar results for the remainder of the year, or now that we've lapped that should we naturally see more a normalized step down in momentum, especially as it seems the environment continues to get choppy out there? Thanks.

This is Tom. I'll take that one. So obviously, our first quarter comps were driven -- our good first quarter comps were driven, based on good execution. And we really made some strong, strong progress in a lot of the businesses we called out last year.

Our Ladies Shoe business was very, very strong in the first quarter. Our Handbag business outperformed the Company average. And our Ladies Dress business was slightly below the chain average.

And the other business that was very good, as I called out in the prepared remarks, was the Youth Apparel business. That was very strong, and that's indicative of strong execution for the Easter time period overall.

We feel that our guidance reflects how we feel about the business going forward, and we feel that as long as we continue to execute our off-price model and we get great values and great brands, we should continue to perform at a very nice level, regardless of what's happening out there. And a lot of times it benefits us when the business is choppy out there, because there's more opportunities for us to get more product and more brands and better values.

So overall, we felt very good about our first quarter results and we made some good progress on the things that held us back a little bit last year.

Great. Congrats, guys.

Thanks, Ike.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you. Good morning. I wanted to focus on the second quarter for a minute.

Are you able to take advantage of some of the great deals out there on summer goods and sell them within the quarter? And then what other specific initiatives are in place to lap last year's strong performance?

We'll talk about the second quarter, obviously, when we have our earnings call in August, but one thing I can say is that the month of May has gotten off to a really solid start. Obviously, we still have a lot of the quarter to go, but so far it's been a solid performance overall.

What are we doing to lap it is what we've been doing all along, and that's really scouring the market, being in the market every single week to buy product and get the best brands that we can on the floor, get the best values on the floor overall. And we're reacting to the business every day, to your question about are we looking for shorts and tees and everything, yes, of course we are. We do that every week.

There will be a point in time where we won't be looking for that and we'll be looking for shorts and tees that we can pack and hold for spring of 2017. But we just continuously buy every single week. And we make decisions based on the types of weeks of supply we want, as to whether or not we're going to deliver it to our selling floor or we're going to put it in pack and hold.

But the key to our business in general is our agility and our ability to manage our receipts and our inventories. As you saw we were down 9% in comp store inventory, our turns are much faster, is getting goods, buying goods every single week.

Great. Thank you.

Thank you.

Kimberly Greenberger, Morgan Stanley.

Great. Thank you. Really great start to the year. I wanted to ask about free cash flow.

Marc, I may have missed it, but could you just remind me the free cash flow here in the first quarter. And as we think about leverage coming down, I think that you've indicated you expect to reduce leverage over time through growth in EBITDA. And obviously, you've started to return capital to shareholders via stock buybacks.

If you can look out one, two, three years, Marc, do you have a bridge on how you're thinking about the pacing of the leverage ratio, how much, based on your guidance for this year, do you expect it to come down by the end of 2016? And then if you have maybe a three-year target or if there's any sort of a more medium to longer term outlook you could give us on the leverage, that would be great.

Sure. Kimberly, this is Bob. Let me weigh in on that.

So we haven't given targets on our leverage. We ended last year at 2.7. We ended the Q1 at 2.6, not by paying down debt, by just growth in the EBITDA.

And so I think the way we're looking at it, we're just going to fund the needs of the business first with free cash flow, and then we'll opportunistically look at debt pay down or share repurchase quarter by quarter. We'll share that activity with you at the end of the quarter on the call, just like we did this quarter.

I think it's reasonable to expect as we continue to grow EBITDA, you'll see that leverage ratio come down. But more than that, we really haven't made any long-term strategic decisions that we can share. But I think it's safe to say you could expect to see it continue to decline, just based on the EBITDA growth.

Great. Thank you, Bob. And Tom, my follow up is just on Q1.

The execution obviously was reflected in a very nice comp here. We heard from other retailers that they experienced a great deal of volatility month by month in the first quarter.

I'm wondering if you saw that, as well, or if maybe your business happened to perform in a bit more of a steady manner? Thanks so much.

We had positive comps every single month within the first quarter. But candidly, our performance built over time. April was stronger than March, and March was stronger than February.

So we just saw it building as we were progressing through the first quarter overall.

Just to add on that, Kimberly, April was our strongest month, as Tom said. And the first day of fiscal April was up against Easter last year, so you actually had an extra day in the month.

Thanks so much, Marc.

Matthew Boss, JPMorgan.

Great quarter, guys. So two questions.

Can you talk about the trend in IMU, and then just how to think about gross margins as the year progresses? Just larger picture, how you're thinking about competitive positioning in the back half?

Let me take the IMU trend, and you take --

So the big driver in our gross margin in Q1, Matt, as you called out, was IMU. And really, we just attribute that to better buying. And it was better buying across all buy types, whether it was upfront, pack and hold, close-outs, in season production, every one of those buy types had stronger IMU, just due to better buying.

So we're very excited about it. And we continue, over the course of the year, the story's similar to what we said last time.

We expect product sourcing costs to increase this year, just based on adding to merchandising headcount and based on the units that are going to be flowing through our supply chain in more expensive lanes, i.e. put the light in fragile. And we fully expect our reported margin to offset that in net over the course of the year to have 30 to 40 basis points of expansion.

Great. And then just a follow-up. So 10% of your stores, I believe, are in the smaller format. And looking through the K, I think roughly 40% of your stores are up for lease renewal the next three years or so. Can you talk to drivers of the higher productivity, and more so, how this structurally ties to the longer term SG&A and EBITDA targets?

Let me talk to, Matt, the issue that you talked about with the leases coming due that we have in the K. I want to make sure that you're clear on something.

Most of our leases contain an initial 10-year period and then have multiple 5-year options. The terms for the options are locked in with the initial lease. So in other words, it's pre negotiated contract rents.

As these options come up, they're not fair market value rents. So when the initial lease period comes up, we have options. We can look at renewing terms that are favorable, or under current market rates, but then we can relocate or negotiate new terms.

So it really gives us tremendous flexibility. But since those rates are locked in, I think you can understand why the majority of our leases are going to be renewed.

To give you a little bit more granularity on the stores, we had 117 stores up for renewal in our K that I you think you alluded to. 48 of those are in 2016. And out of the 48 in 2016, 44 of those stores have already been renewed.

We think we've got roughly 15 to 20 of those stores as potential remodel candidates down the road. Only 4 of those stores are being closed, and 2 of those are MJMs, and one of those closures is actually going to be a relo. So just to try to give you a little bit more flavor on how that works.

Got it. So I guess my follow-up would be, of the percent of your stores that are in the smaller format, how should we think about that smaller format as a percent of the total maybe five years from now?

I think you should assume all new stores that we open are going to be in that smaller format.

We're really comfortable with stores in the 40,000 to 50,000 square foot range. Last year, as I said in the prepared remarks -- or this year, as I said in the prepared remarks -- the average is around 51,000 square feet. It will be less than 50,000 square feet in terms of the new stores that we're opening in 2017.

But we're going to continue to reduce our comp store inventories over time. We're very comfortable with having reductions of mid- to high single digits. So we're going to be able to operate in the smaller box, even as we grow our Home business and our Beauty business, because the inventories, comp store inventories are going to come down in our Apparel areas, just because we really feel we still have more inventory than we would like.

But we're just going to reduce it over time. We're going to reduce the inventories incrementally. But we really feel very good about operating in a smaller box versus what we had historically.

That's great. Best of luck.

Thank you.

John Kernan, Cowen and Company.

Hello. This is David Buckley on for John Kernan. Thanks for taking our question and congrats on a great quarter.

Thank you.

Love to just touch on for a minute how the purchasing environment has shifted from the beginning of this year into Q2. Are you guys still seeing great buying opportunities and have you seen an increase in the level of competition for this inventory?

Well, there's just a lot of inventory out there that we can take advantage of. As far as increase in competition for the product, I think it's about what it always has been, in general. It's just with the softness in some of the other retail sectors, we really there's going to be a consistent, constant flow of product that we can take advantage of.

We turn down a lot of deals every day because there are so many deals out there. So the quality, selectivity continues to improve. It's what we experience in terms of our pack-and-hold that came out of the fall season.

So high supply. We can be a little bit pickier in terms of what we bring in. But there will be a steady flow.

Okay. Great. Thanks. And just one follow-up, within your Home business, can you guys just talk on how many vendors you're working with now compared to last year and how you see that growing throughout this year? Thank you.

We really feel that we're going to be growing our vendor base there, just based on the fact that we are growing the business significantly. And there's a lot of opportunity for us to have more vendors from our West Coast office overall. But it's going to grow over time.

We really haven't spoken about each individual and how many manufacturers we have. But it's going to grow. It's definitely going to grow. It's just going to grow in concert with how we're planning on growing the business.

Okay. Great. Thank you.

Thank you.

John Morris, BMO Capital Markets.

Hello. Good morning. This is actually Brandon Cheatham on for John Morris. Impressive results, considering some of the spring weather headwinds that we experienced. I was wondering if you could comment on the comp this quarter compared to what you would expect of a normal spring weather pattern and if there was any variation by region? Thanks.

We did talk about the regions in our prepared remarks, overall.

The Northeast and the West outperformed and the Midwest and Southwest underperformed.

Right. So we can mitigate any kind of weather patterns, and we've been working really hard on that overall. And we talked about that in our fourth quarter call. The more we build our Home business, the more we build our Bath and Body business, the more we build our Shoe business, the more we build those businesses' percent of total relative to Apparel, we can mitigate the changes in the weather pattern.

And the variations by region sustained month to month, as well?

Yes, it was pretty consistent month to month.

Okay. Thank you.

Thank you.

Pam Quintiliano, SunTrust.

Great. Thanks very much for taking my question, guys, and congratulations on really fabulous execution. So just a few questions for you. As we think about Home and that ramp from 11% to get closer to that 20%, how do you see the progression happening?

I'm assuming a lot more doors or a lot more vendors are talking to you now that they're seeing your commitment to it and how the performance has been. And if you could just remind us how the margin profile has been in the Home classification, as well.

Okay. Well, we see the pattern of Home growing incrementally.

We're not going to get to 20% overnight. And we went from 9.5 % penetration to 11% from 2014 to 2015. We see a steady pattern of growth overall.

And the vendor community is really embracing us in terms of our Home business, but they're really embracing us in total in all categories. They enjoy doing business with us. But with the growth that we have in Home, obviously there's a lot of people that want to get on board and help and support us to help us grow that business, because it is such a growth business for us going forward.

As far as margin goes, all our margins within our businesses are comparable. The only business that has less margin is Baby Depot, as we've talked about before.

That's very helpful. And then that actually leads me to my next question, which was just an update on the Men's suiting and Baby Depot and how we should think about the space devoted to both of those, especially in your smaller format locations?

Baby Depot is improving, albeit we didn't comp in the first quarter. We cut the negative in half from 2015. But we've put a lot of really good things in place to ensure that we do have growth in the future.

Is it going to come in 2016? I'm not sure. But I think as we get into 2017, it will start comping overall.

And we thought it would comp quicker, but it's a very complex business and there's a lot of product that needed to be put in place. But we've also changed our presentation in store to help the business overall. But we're rallying behind it as a Company.

We really feel it's an important business for us, and it's a key driver. Even though it may turn slower and the gross margin may be last and the dollar per square foot is less, but we really feel it brings people into our Company, into our stores overall. So it's a real focus for us overall.

The square footage in Baby Depot is going to be probably maintained. We'll look to, in our new stores, maybe have some -- we'll have fixtures that will obviously improve the dollar per square foot overall. But we're staying really close to that business and we want to really grow that business in the future.

As far as Tailored Men's, it's an important business for us, also. We feel good about that business going forward, and it's a differentiator for us. It's like Baby Depot, it brings people into our stores.

And we really feel good about being the destination for dress-up product, in general. We have historically have over indexed in those businesses. So it's important business we're going to continue to grow.

And all Apparel, though, will have reduced square footage going forward. Because we're going to continue to reduce our inventories in Apparel to focus and put more inventory in those categories that I mentioned before.

But will there be an outsize reduction in the Baby Depot and the Tailored Men's relative to the other classifications?

No, there will not be.

Okay. Great.

There will be slight decreases.

Thank you so much. Best of luck.

Thank you.

Dana Telsey, Telsey Advisory Group.

Hello, everyone. Congratulations on the terrific results.

Thank you.

Can you talk a little bit about the buckets of SG&A and how you're managing the wage increases, and also, opportunity from the real estate closures that are out there, whether it's the Sears boxes or others, that you see and how those occupancy costs may differ? Thank you.

Let me start with the wages. I think as you know, we've got, baked into 2016, $7 million of increases related to the hourly wages. And we anniversaried last year's decision to go to $9 an hour, which impacted February through June.

We then incorporated all the minimum wage increases across, I believe it was 14 states, two going to $10. And then we performed a market by market review. Really, our store ops and HR team sat down, went market by market and said -- where do we need to be?

In some cases, they went to $10. In some cases, they went beyond $10. We feel good about that decision and we're happy with where we are, based on that. Obviously, we're able to cover that.

I think your question probably is a little bit more long term, as well. And as we think about wages, we had headwinds in 2015 and we had them in 2016. And given what's happened in some states, there's clearly going to be headwinds in 2017 through 2022.

We'll see how many other states jump in. But all we really do and all we really focus on, Dana, is being as aggressive as we can with our profit improvement culture and constantly looking for ways to become as efficient as we can possibly be. And moving forward, we'll look to offset incremental costs, just as we did in 2015 and 2016.

As far as real estate goes, we're opportunistic like we are when we buy product from our manufacturers. And we're looking at different things, nothing really concrete at this point that I can really talk about any kind of specific economics. But we look at everything that comes available to see whether or not the economics are right so we can add it to our fleet.

Thank you.

Thank you. Due to time constraints, our final question will come from the line of Brian Tunick with the Royal Bank of Canada.

Good morning. This is [Vielun] on for Brian. Thanks for taking our question. We just wanted to ask about Beauty and the Fragrance category and the strategy going forward.

You called it out as one of the best categories in the quarter, so it seems like the initial transition to in-house operations went well. Could you talk about a little bit more on how you see the category growing maybe in terms of sales penetration over time or the number of vendors you could possibly work with, again over time?

Okay. Beauty, as we've said many times, is a very, very large opportunity for us in general. And we really haven't talked about sales penetration.

All I can tell you is, it's going to become more and more important over time. It really ties into our entire gift giving strategies, and it's a really good category that candidly we were under developed in that business for a long time. And our merchant team has really worked hard to really build it.

And we think we're going to continue to add more vendors. We're going to add more product categories. We're going to add even better quality products, better brands, et cetera.

So we're going to continue to grow that business and it's going to become much more meaningful as we progress through the year of 2016 and beyond.

Great. Thanks very much.

Thank you.

We have reached the end of the question-and-answer session. Mr. Kingsbury, I would now like to turn the floor back over to you for closing comments.

Thanks again for joining us today and for your interest in Burlington Stores. We'll speak to you again in August for our second quarter call.

Have a great day and a great Memorial Day weekend. Thank you.

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