Burlington Stores Inc (BURL) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Burlington Stores second-quarter FY16 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, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's second 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 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 until September 7, 2016. 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 are very pleased with our second-quarter performance. Our sales and earnings accelerated from our strong first-quarter pace and exceeded the increased guidance we shared last month. Once again, our positive operating performance included growth across all key financial metrics, reflecting the ongoing success and the disciplined execution of our off-price model.

Our presentation of trend-right products, compelling brands, and everyday value continues to resonate with our customers, leading to increased traffic and transactions at our stores. We remain excited about our business prospects as we begin the second half of the year. We expect our strategies to further enhance the execution of our off-price model and position us well to deliver consistent growth in 2016 and for many years into the future.

Let me share with you some highlights of the second quarter. Total sales increased 9.7%. Comparable store sales rose 5.4% on top of last year's 5.6%, giving us a two-year positive comp of 11%. With the second quarter we now have reported 14 consecutive quarters of positive comp sales.

Top-performing businesses were better and moderate at missy sportswear, home, beauty, youth apparel, and athletic in men's shoes. I'm also pleased to note that our Baby Depot business reported a positive comp for the quarter. As you know, this business remains a differentiator for us and the team has worked hard to right-size the assortment to improve our in-stock position.

In terms of territories, the Northeast and the West were our strongest and the Midwest and Southwest were the weakest on a relative basis. With that said, our performance was broad-based as 28 out of 29 regions reported a positive comp.

In addition, we're pleased to report the following accomplishments. Our favorable momentum in traffic continued. With the second quarter, we have now recorded positive traffic in seven of the last eight quarters.

Comparable store inventory decreased by 7% at quarter end. This contributed to a 15% faster comparable store inventory turnover. Inventory aged 91 days and older continued to decline versus the prior year. We increased the percentage of better and best product as well.

Pack and hold as a percent of total inventory was 27% versus 28% a year ago. We ended the quarter with significant open to buys to capitalize on the vast opportunities we see in the marketplace.

We repurchased over 390,000 shares of common stock during the second quarter for $25 million, leaving $125 million remaining under 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 as we look to close the gap between our 11% sales penetration in our peer group who are north of 20%.

We've been focused on building our vendor base, adding more nationally recognized brands, expanding our assortments, increasing 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 and recently added our fourth DMM to this area.

We're 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 second quarter, we continued to benefit from having direct control of our fragrance category, which enabled us to deliver incremental values in sought-after brands.

We continued 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 second quarter better and moderate missy sportswear performed above the Company average. We are also seeing success from our expanded assortment in intimate apparel, which also outperformed the Company average.

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 locations 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.

Our store count remained unchanged throughout the second quarter at 570 stores. In total, new and non-comp stores contributed an incremental $52 million to our second-quarter net sales. In 2016, we continue to expect to open 25 net new stores with an average square footage of 51,000 square feet.

Our store pipeline, which has us well ahead of last year's pace for new store openings, continues to be more robust, benefiting from our enhanced marketing planning and real estate underwriting processes. This will give us more flexibility in our store opening strategy for 2017 and beyond and gives us confidence that we can reach 1,000 stores over the long term.

Third, we expect to enhance operating margin 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 extremely pleased with our second quarter performance as we enter the back half of the year with solid momentum.

A strong comp store sales, expansion in gross margin, and leverage in operating expenses led to the outperformance against our pre-announced guidance. We also continued to further enhance value for our shareholders by repurchasing our shares for the fifth quarter in a row and successfully completing our term loan repricing.

Turning to a review of the income statement, for the second quarter total sales was 9.7% and comparable store sales increased 5.4%, which follows five years of strong comp growth, including a 5.6% comp increase in the second quarter of 2015 and a 4.7% increase in the second quarter of 2014.

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 seven out of the last eight quarters.

The gross margin rate was 39.6%, an increase of 40 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 second quarter of last year.

During the second quarter we took 210 store physical inventories. We were pleased with the results of these inventories and it gives us reason to be encouraged that our shortage initiatives are working. As a reminder, our problem last year was not evident in July and really surfaced in January. Accordingly, we are maintaining a full court press with our shortage initiatives and will provide another update after we take our January inventories.

Product sourcing costs, which include cost to process goods through our supply chain and buying costs, both of which are reported in selling, general and administrative expenses, increased 15 basis points to last year as a percentage of sales. SG&A, exclusive of product sourcing costs and a nonrecurring legal charge that is excluded from adjusted net income, improved 120 basis points to 27.2%. This improvement was primarily driven by leverage in payroll, occupancy, utilities, and includes 20 basis points or $0.02 per share from a one-time reversal of previously recorded healthcare benefits.

Other revenue and other income decreased $1.4 million from last year to $7.4 million, driven by a reduction in income from third-party fragrance sales as the category has been transitioned to a Company-operated model. We continue to expect other revenue and other income to decline by 15 basis points as a percentage of sales for the remaining quarters in FY16 due to the transition from a leased to and owned business.

Adjusted EBIT increased 31% or $24 million to $99 million, representing a 130 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 adjusted effective tax rate was 37.6% versus 40.8% last year. The decrease in effective tax rate was the result of a decrease in state tax rate and increased federal hiring credits. Combined, this resulted in adjusted net income of $28 million for the quarter, an increase of 90% to last year.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased over 390,000 shares of stock for $25 million, ending the period with approximately $125 million remaining on our share repurchase program. Diluted shares outstanding were 72 million compared to 76.5 million outstanding last year, primarily driven by the repurchase of 4.8 million shares since the second quarter of 2015.

Increased sales, expansion in gross profit margin and disciplined expense management led to our strong cash flow generation that allows us to fund our growth initiatives while repurchasing our shares, resulting in diluted adjusted net income per share of $0.39 versus $0.19 last year. Keep in mind that the $0.39 per share was inclusive of $0.02 per share of the nonrecurring healthcare benefits reversal.

For the first half of 2016, total sales rose 9% and included comparable store sales increase of 4.9%, following a 3.1% comparable store sales gain in the first half of last year. Gross margin was 39.9% representing an increase of 40 basis points versus the first half last year. This improvement more than offset a 15 basis point increase in product sourcing costs.

As a percentage of net sales, SG&A, exclusive of product sourcing costs, decreased 80 basis points to 27%. Expense leverage was driven mainly by reductions in store payroll and occupancy and advertising spend, partially offset by increases in stock-based compensation.

Adjusted EBITDA increased by 24% or $43 million to 220 million, representing a 110 basis increase in rate for the first half of 2016. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $6 million to $78 million, and interest expense increased slightly to $30 million.

The adjusted effective tax rate was 37.6% versus 39% last year. The decrease in effective tax rate was the result of a decrease in state tax rate and increased federal hiring credits. Combined, this resulted in adjusted net income of $70 million versus an adjusted net income of $46 million last year, up over 50%.

Diluted adjusted net earnings per share were $0.97 versus $0.60 last year. And our fully diluted shares outstanding was 72.2 million shares versus 76.5 million last year.

Turning to our balance sheet, at quarter end we had $30 million in cash, borrowings of $223 million on our ABL, and had unused credit availability of approximately $312 million. We ended the period with total debt of $1.4 billion.

Merchandise inventories were $745 million versus $802 million in the prior year. The decrease was primarily driven by a decline in comparable store inventory of 7%. This decrease was partially offset by new store inventory.

Cash flow provided by operations increased $104 million to $103 million, primarily related to our improved operating results and changes in working capital, inclusive of the reduction in our inventories. 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 $66 million in the second quarter.

As Tom mentioned our store count remained unchanged during the quarter and we continue to expect to open 25 net new stores in 2016. Given our strong financial positioning we were able to achieve a leveraged ratio at 2.6, while also returning capital to our shareholders as we opportunistically utilized our recent repurchase authorization.

Just prior to quarter end, on July 29, we completed the repricing of our existing term loan facility with a $1.1 billion term loan priced at 2.75% plus a 0.75% LIBOR floor. The net proceeds of the new senior secured credit facility will be used to pay all indebtedness outstanding under the existing term loan B facility priced at 4.25%. The new term loan repricing is conservatively expected to reduce interest expense for the second half of 2016 by $2.8 million and by an estimated $5.6 million or $0.05 per share for a full year at current borrowing levels.

Turning to our guidance, we are raising our full-year 2016 outlook based on our very strong first-half results. We now expect net sales growth in the range of 7.8% to 8.3%. We now expect comparable store sales to increase 3.6% to 4.1%.

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 50 to 60 basis points. Interest expense to approximate $59 million. An adjusted tax rate of approximately 37.8%, And a share count of approximately 72.2 million shares. We expect net capital expenditures to be approximately $160 million, and depreciation and amortization to be approximately $160 million.

This results in adjusted net income per share guidance in the range of $2.92 to $2.96, versus 2015 actual adjusted net income per share of $2.31. As a reminder, our prior guidance was $2.68 to $2.78. Our new full-year guidance reflects increased performance-based incentive compensation expense in the second half of the year of approximately $0.02 per share, $0.01 per share in Q3, and $0.01 per share in Q4.

For the third quarter of 2016 we expect net sales to increase in the range of 7.1% to 8.1%, comparable store sales to increase between 2.5% and 3.5% on top of last year's 2.8% increase. Adjusted net income per share is expected to be in the range of $0.30 to $0.32 versus $0.25 per share last year, utilizing a fully diluted share count of 72.1 million shares.

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

In summary, our second-quarter and first-half results are evidence of the success and momentum we can generate through consistently executing our off-price model. We are excited with our business prospects as we enter the second half of the year.

We expect to continue expanding under-penetrated categories, growing our footprint, and delivering great brands, strong values and an improved in-store experience for our customers. I would like to thank our store and corporate teams for their hard work and dedication, which have been key to our performance.

And now, I would 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, everyone, good morning and congrats on a really strong quarter. Congrats. Marc, for you, it sounds like the shrink initiative should be working given your comments around the 210 physical store inventories you took in the quarter. Can you just maybe provide us some more color here and remind me what's assumed in your guidance on a full-year basis in terms of shrink versus last year?

Sure, you bet, Ike. We took 210 physicals this spring split between June, July. We were pleased with the results. It gives us reasons to be encouraged that our shortage initiatives are working.

We saw improvements versus the prior spring across all territories in virtually all merchandise categories. So, feel good about that. But, Ike, just as reminder, if you remember, last we did not notice a problem in July.

The problem really surfaced in January. We have not lost sight of that. So, we're keeping a full-court press on our shortage initiatives and we'll provide you another update in January.

In terms of the accounting on shortage, first, just in Q2, Q2 reflects a slightly higher shortage accrual than we had last year, and that's similar to Q1. We'll do the same thing in Q3. But on a full-year basis our guidance does reflect slightly favorable shrink rate versus last year.

So, obviously the implication there, Ike, is there's a good guide in Q4.

Got it. And then, Marc, just one more quick one. I think it looks like you're guiding to an increase in your incentive comp in Q3 and Q4. Can you just help clarify how the outperformance in maybe the first and second quarter impacts the comp by $0.01, I think you said, in the back half of the year in both quarters?

You got it, sure. Our accounting policy is to straightline the projected annual incentive compensation expense over the four quarters of the fiscal year. So, given our strong spring performance, most notably the 4.9% comp and the 62% increase in ante per share, at the end of Q2 when we forecasted our full-year incentive compensation expense, it resulted in a number that was higher than our plan.

So, that incremental amount that needed to be recorded was split between Q2 and fall. So, obviously Q2 took a piece of that, and then in fall we've got $0.01 per share charge that will happen in both Q3 and Q4.

Got it. Thanks a lot, guys. Congrats again.

John Kernan, Cowen.

Good morning, everybody. Thank you for taking my question and congrats on pretty flawless performance on the top line, bottom line, and the initiatives on the capital structure. The commentary around shrink for the fourth quarter is really helpful.

Can you also help us understand what the opportunities are from a top-line perspective in Q4? Your implied guide seems to call for a deceleration in comps from what we're running right now. And there was obviously a period of pretty big disruption throughout retail last year, particularly for retailers with the outerwear exposure like yourselves.

Can you just help us understand what you think the biggest opportunities for continued comp growth in the fourth quarter as you lap one of your easiest comparisons in a long time?

I will start and answer the part relative to the merchandising category and then Marc can talk about the comp guidance. First of all, we feel that the strength that we've had in the home business and the beauty and the fragrance business should materialize also in the fourth quarter overall. We also feel that our gift giving strategies throughout the Company should also help us in the fourth quarter of last year.

If, in fact, we get some benefits because it might be colder than last year, we could also have a stronger performance in cold weather products. Marc, do you want to talk about --?

Sure. John, our guidance is no different than how we've got it all year. Our philosophy is to plan and guide conservatively. It's 2.5% to 3.5% comps.

We do that because with that we plan an expense base and a receipt plan that supports 2.5% to 3.5%. And it's the beauty of our model. Our merchandising teams have proven that they're very adept at chasing the business.

And when those things happen, hopefully, that Tom talked about, we're very confident that we'll be able to take advantage of that.

Okay, that's helpful. And then one of the things we've noticed is that the department store inventory levels have dramatically improved over the course of the past three months. And they're finally, if you just look at the inventory growth versus the sales growth spread, probably in the best position it's been in, in several years. Is there any concern that as the department stores improve their inventory position that your ability to capitalize on closeouts and take off inventory from the full-priced channel, will that get a little bit more difficult?

I don't really think so. There's always been ample product in the marketplace for us to take advantage of. I don't really feel that the reduction in the department store is going to really have an impact on that.

We do have a really high-quality pack and hold for the fall season, as we've mentioned multiple times before, so that should really help drive our business. But I've been asked that question now in the eight years that I've been at Burlington and we've always had plenty of inventory to choose from.

Okay, thank you. Best of luck.

Matthew Boss, JPMorgan.

Hey, guys, congrats on the nice quarter. On the margin side, a key take that I had from our meetings on the West Coast was you guys are now looking for a 50/50 split in terms of EBIT margin between the gross margin and the SG&A in that 500 to 600 basis points longer term. Can you just talk about the mindset shift and maybe the higher opportunity that you now see with the gross margin?

Yes, we've been pleased. And, again, the way that we really view the gross margin is net of product sourcing costs, Matt. Our product sourcing costs will continue to increase just based on we're going to continue to add to our merchandising team, and we're going to continue more than likely to have goods flow through our supply chain in what I'll refer to as more higher expensive lanes within our DCs.

The way we look at that is really reported margin being able to offset any increase we have in those product sourcing costs. The good news we've had in margin to date really has just come from stronger IMUs. Our IMUs have been very strong across all buy types, whether it was a pack-and-hold buy, an in-season buy, a closeout buy.

Really, across the board we've had strong IMUs. So, we feel very comfortable that we'll be able to continue to drive that.

In addition to, we still have plenty of room to continue to turn faster, reduce our comp store inventories. It will enable us to continue to do that, and will also more than likely result in less markdowns. We think that will help play into the margin piece of that equation.

And from an SG&A point of view -- the other half to your point -- very active profit improvement culture at the Company. It's the number one goal and objective for every sales support team. And that's how we're going to go about attacking that half of our opportunity.

Great. And then just a follow up on the SG&A front, what's the comp needed to leverage your expense base today? Should we think about any change into next year as we think about some of the wage pressures? Just thinking about fixed cost hurdles today versus next year and long term.

Mid to high [2s], Matt. And the way we think about it is we accelerate each point of comp once we get above [3]. So, [3] to [4], and [4 to 5], we expect another 15 basis points of leverage.

Great. Best of luck.

Kimberly Greenberger, Morgan Stanley.

Great, thank you so much. And I will add my congratulations, as well, on a really exceptional quarter. Marc, I'm wondering if you can walk through the product forcing distribution and buying expenses.

And just talk to us about, as you grow and scale the business and become more efficient, what are the pieces of that expense that increase over time, and what are the pieces that you think you can get some leverage on? I'm just wondering, as I look out over the next one, two, three years, will some of the slight deleverage that we're seeing in product sourcing costs, will that at some point turn into actually a leverage and a margin opportunity? Thanks so much.

Sure, Kimberly. Certainly, at some point, you would think that, that could happen. But with that said, the two areas of our business that we were always invest in is our merchandising team and our supply chain.

Tom mentioned within his prepared remarks just adding another DMM to home. We have such opportunity there. It's our number one merchandising opportunity.

And it's all about having feet on the street, having people in the market every week. So that something we're going to continue to invest in.

Same with supply chain. Supply chain is so critical to this model. The more, quote-unquote, dirty buys that we have, that just means the more units that flow through our more expensive lanes.

So, one day to answer your question, I think that can happen but it's not something that we're necessarily betting on in the short term. The key for us to manage that, Kimberly, is to make sure our reporting margin offsets whatever that increase is, and we've been very successful at doing that for years now.

Yes, you have. And just one clarification on the average retail price, I think you mentioned, Marc, that it was down slightly. Is that a reflection of just much more compelling buys that you're getting in the market? Is your policy to pass those savings that the buyers are securing on to your consumers and, therefore, somewhat, if the AUR is falling, is that somewhat of a reflection of just the better deals in the market that you are able to secure? Thank you.

This is Tom. Our decline in AUR is not new. This has been happening for many quarters now.

While we're always focused on passing value on to our customers, we also have a mix shift in our business, with home and beauty being two big contributors to our comp increase. Both of those businesses have an AUR that's below the Company average. But, also, in the other areas of the Company we are getting better at buying and utilizing all the off-price tools -- the pack and hold, opportunistic buys.

We've been building our better and best penetration. And even while doing that, our AUR has been down slightly. So, it's a combo between mix and we're getting better at executing the off-price model.

Thanks so much.

Lindsay Drucker Mann, Goldman Sachs.

Hi, good morning. This is Edward McLaughlin on for Lindsay. You touched on it early but can you provide any more color on the composition of your pack-and-hold inventory in terms of the quality of brands or expected markup? And do you anticipate the cadence of how you flow through that inventory, particularly the cold weather product, to stores to be any different versus last year?

First of all, I'm not really going to comment on what manufacturers or brands that are in our pack-and-hold inventories. But just based on the large supply of goods coming out of last fall, we really feel good about the quality of our pack and hold as we go into the fall season.

As far as releasing pack and hold, it would be comparable to last year. We began releasing goods in August and we'll continuously deliver goods throughout the fall season. So, really no big changes versus last year.

Okay. Thanks.

Brian Tunick, RBC.

Good morning. Thanks for taking our questions. This is [Binnam Barnett] on for Brian. A long-term question -- clearly this, shaping up to be big EBITDA growth year for you guys, with the [beat] so far. Just wanted to see what would be a normalized EBITDA growth algorithm as you look out the next three years?

As far as long-term growth algorithm, really, the way we talk about that is [ANI] per share, at this point. We had 26% increase in ANI per share in 2015. This year, based on the high end of the guidance we just gave, it's closes to the 28% range.

In terms of going outward, we will complete our 2017 financial planning process prior to year end and we will be able to discuss it more on our Q4 call when we give 2017 guidance. The best I can tell you is, with all that said, we continue to believe we're a growth Company, and in future years we believe we will continue to guide double-digit ANI per share growth. But that's about the most we can comment on at this time.

Got it. Thank you. My follow-up question is, second quarter seems to be a quarter where you consistently put out very strong comps. Is there anything in this quarter that enables you, or is there more opportunity in this quarter, that enables you to perform so well in the second quarter?

I think one of the issues -- one of the things with the second quarter, there's less weather influences in the second quarter versus some of the other quarters overall. But beyond that, no, we're utilizing pack and hold more efficiently in terms of delivering more seasonal goods, summer goods on a seasonal basis. But beyond that, really, there isn't that much difference.

Great. Thanks very much. Best of luck.

Dana Telsey, Telsey Advisory Group.

Good morning and congratulations on the results. As you think about the categories of where you're looking to enhance, whether it's beauty, whether it's women's apparel, are you seeing the benefit of newer brands? Is it existing brands?

And given the department stores' closures what new advancements with vendors are you seeing? Thank you.

It's a combination between new brands, existing brands. Our penetration is so low that we can experience, obviously, growth with our existing brands. We're in the market every week and we're opening new brands every single week.

We're leveraging also our West Coast office to bring in new brands. So, it's just a combination. In terms of impact with closures and stuff like that, I don't think it really has any meaningful difference.

But, in general, we just have a big opportunity in terms of being able to bring in new brands and build our existing brands.

And the testimonials on marketing that you've done have been very effective. Is there anything we should be watching for as we go through the fourth quarter this year on marketing and any changes in the marketing budget? Thank you.

No, we're going to spend about the same amount of money as we spent in previous years. We're looking to leverage our marketing spend overall. We're doing some tweaks and shifts into more digital versus other medias.

Obviously that's where the eyeballs are today, so we're looking at that overall. I think you'll see more gifting in our marketing for the fourth quarter versus prior years just because we feel very good about our initiatives there overall.

Thank you.

Pam Quintiliano, SunTrust.

Thanks so much for taking my questions. And let me add my congratulations on a really phenomenal quarter. First, on -- I don't know if you'll give it -- but any commentary at all on back to school, especially given you guys are a family shopping destination?

We are hearing from others that are some new fashion trends out there in the marketplace that is causing the customer to be more engaged. So, anything at all would be helpful on that.

We're not going to comment on what's currently going on with back to school. Obviously we will provide a lot of color when we have our third-quarter earnings call.

Okay, doesn't hurt to ask.

Nice try. (laughter) We knew somebody would, Pam.

I was surprised it took so long. So, then, switching to real estate, can you just talk about the performance of your smaller stores? Any learnings that you can apply across the channel?

How low can you go in terms of the footprint? And then, along those lines, does it open up the potential to do more on-mall locations now because of the smaller footprint? And then, lastly -- and I know this is a bunch piled in here -- but what would you need to see to reevaluate your long-term store growth target?

I can go ahead and start with that. Most of the data points that we talked to, typically, with new stores, they haven't changed. It's still a really good story.

We're very happy with the performance of our new stores from both a sales and EBIT contribution point of view. They continue to perform in line with our underwriting models, Pam.

Our stores less than 60,000 square feet continue to produce, as sales per square foot, about 16% higher than the chain. That hasn't changed. Our average size in 2016 is going to be about 51,000 square feet.

And as we're looking into next year it's even going to get a little bit smaller. All in all, very happy with where we are. And the fact that we're able to continue to go into these smaller sizes, it just opens up more opportunities for us.

So, we're very excited about the pipeline, where we are, and how they are performing. I don't know, Tom, if there's anything to add to that or not.

No. I just feel that our boxes will continue to get smaller. We're very comfortable with a 40,000 to 50,000 square foot box. As Marc said, our inventories are going to continue to go down.

With the increase in inventories in our growth businesses, like home and beauty, we really feel that we can reduce our inventories in apparel. When I go in the stores today I still feel we have too much inventory and we can turn those businesses quicker overall. I think your question was -- are we looking to be more in malls?

Is there more opportunity now with the smaller footprint and what's going on in the mall environment or would you be interested in that?

Maybe. There might be but our focus is really in strip centers. Having a smaller box does open up more opportunities for us, in general, just because there's more supply of smaller boxes.

But our strategy remains what it has been, and that is to really be in the retail hubs. And we want to be primarily in strip centers even though we've done some stores in malls.

And just what you would need to re-evaluate that 1,000 store number, what you would need to see?

Right now we're really comfortable with the 1,000 stores. We don't really feel that we're going to accelerate and have more of that. We really feel we can achieve 1,000 stores.

We've worked with an outside company and we have over 400 [seed] points where we can add stores overall. Again, we're not in the store count chase business. We're in the opening quality stores.

Therefore, we would rather look back over the next five years and say we had some really good stores. But we're opportunistic and if there's things that come available and we feel the economics are good, we could potentially take advantage of that.

Excellent. Thanks so much. Best of luck.

John Morris, BMO Capital Markets.

Thanks. My congratulations to everybody, as well. Nice improvement on Baby Depot during the quarter.

I'm wondering if you can give us a little bit more color there. What you do attribute that to? But also where is that as a piece of the mix and what's the potential?

I know it's a very strong solid business for you. I don't know if it's more mature but maybe what's the potential relative to -- not your peers because you guys are pretty much leaders there, but what's the longer-term potential in mix?

We're really pleased with our Baby Depot business right now. Our team worked really hard to get the results that we had in the second quarter. We really feel that the performance is going to continue, at least through 2016.

It's an important differentiator for us. Is it going to have tremendous growth? Is this going to have growth like we have in our home or fragrance? No. But we want to continue to stay on course as to what we're doing currently because it is very important, it drives people into our stores overall.

The one thing we did, we right-sized the assortments and worked hard to make sure that in the items we're carrying that we are in stock. But it's not going to be explosive growth. It's going to be measured growth.

But we really feel good about all the work our team has done.

And the size of the mix of Baby?

The size of the mix? It's a small percent of total.

Got it. Marc, one quick follow-up. Unless I missed it, because I had to hop off for a quick second and back on, wage pressures going forward in 2017 -- some of your compatriots have mentioned they would expect to continue to see some wage pressures.

I'm wondering if you can qualitatively comment on the outlook there and/or contingency plans and how you would handle it. You've handled it so well through the course of this year in terms of some of the offsets. Would you still have that potential?

Sure, John. Let's maybe take a step back, recap what we did this year. Within our 2016 guidance, that reflects about $7 million of increases related to hourly wages.

We anniversaried last year's decision to go to $9 an hour and that impacted us this year February through June. We, of course, have incorporated the minimum wage increases across all the states. And then, finally, the last thing we did is our store ops and HR teams performed a market-by-market review and made adjustments that we deemed necessary.

In some cases we went to $10, in some cases we went higher than $10, depending on what we had to do by market. Wages continue to be a dynamic process for us. We are always evaluating them.

We can tell you that we've experienced a reduction in our non-exempt turnover so far this year. But in terms of going forward we've had headwinds the last two years. We're going to have headwinds in 2017, just as you talked about, and a lot of other folks have.

We remain focused on what we can control, John -- run the Company as efficiently as we can, maintaining a very active profit improvement culture within our Company, and having an active list of profit improvement projects to be implemented is what enables us to offset these types of costs as they come up. So, we will continue to do everything we can to offset the increase in wages. We will be able to provide more specifics as it relates to 2017 in our Q4 call when we give guidance for 2017.

Great, guys. Thanks. Good luck for fall.

(Operator Instructions)

Paul Lejuez, Citi.

Thanks, guys. It's Tracy filling in for Paul. I had a question about the home business.

I was wondering if you could talk about what areas specifically within home you're seeing the most success. And what are the areas that you're looking to develop more? And then who do you think you are taking share from in this category?

And then, secondly, I know you mentioned you added a new DMM in home and I was wondering if there are any other areas of the business where you think you'll be adding new DMMs in the near future outside of home. Thanks.

The home performance has been pretty broad-based in terms of the performance overall. The home decor business really is a standout business for us overall in terms of performance. But we think that if you're looking at the future, we really feel that all areas of the business can grow very nicely.

In terms of taking share, really not sure where the share is coming from. We just feel that we just have a big opportunity overall in that.

In terms of adding other people, we're going to continue to add people, and we're going to continue to add people to support the business. We'll do that over time. Obviously wherever we need it we're going to add people.

It's one of the things that Marc indicated, that we're going to continue to look at every single year, and if we're going to spend money, we're going to spend money there and in supply chain.

Any specific areas? I know I think in last quarter you mentioned adding a DMM in special sizes and maternity. Any areas like that, that you've identified where you might be adding somebody?

No. I think, as you mentioned, we added a person in special sizes and we [added] somebody in home, and we're going to determine as we go when we need to add.

Great. Thanks, guys.

Roxanne Meyer, MKM Partners.

Great, thanks, and congratulations on a strong result in 2Q. My first question is on performance, just your relative trends by month, if you're able to qualitatively give us perspective as to where the strength was. And knowing that you had pre-announced mid July, came out with a really solid beat on top of that for comps.

Was there anything specifically that drove the strength in the second half of July?

Sure, Roxanne, I will take that. We typically don't give our monthly comps but I will tell you that we were pleased with every month of the quarter, just as we were in the prior year.

And then as far as the 4.2% to 4.5%, and we ended up at 5.4%, it's a fair question. We had two weeks left in the quarter when we went through the repricing. And at that point we risk-adjusted sales for the last two weeks for two things.

First, the August 1 was shifting out of fiscal July into fiscal August, and, secondly, you probably heard me talk about inventories. We still had 100 physical inventories to take within those last two weeks. And we risk-adjusted thinking it could create some business disruption just getting through those inventories.

And to be honest with you, it is a credit to our store operations team. They got through the 100 inventories, maintained the momentum throughout the quarter and the first ended up being not near as impactful to us. So, we're pleased to be able to report the 5.4%.

Okay, great. And then just looking at the leverage that you get, the fixed cost leverage on your comp, it's really impressive. And I'm just wondering, as you think about the leverage of the different categories -- payroll, occupancy, utilities -- are the leverage points different within the categories? And is there anything where you can expect change in the leverage points by category over the next several years?

Roxanne, we look at our expense base in total. So, when we talk about leverage points it's the expense base in total.

But let me give you a little bit more color on Q2 given that the flow-through was very good. We did achieve 20 basis points of good news from a one-time reversal of some previously recorded healthcare benefits. So, that was a nonrecurring good guy that we did get within the quarter.

And then also within the quarter, I think I've mentioned at least once, about the profit improvement culture at our Company. We had two teams specifically in occupancy and in utilities that had been working on some profit improvement plays that came through within the quarter. And those two were worth another 25 basis points to us within Q2.

So, we were very pleased to bring those home, as well.

Great. Congratulations and best of luck.

We have reached the end of our 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 November for our third-quarter call.

Have a great day. Thanks.

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.