Burlington Stores Inc (BURL) 2016 Q3 法說會逐字稿

Greetings and welcome to the Burlington Stores third-quarter 2016 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob LaPenta. Please go ahead, sir.

Thank you, operator. Good morning. We appreciate everyone's participation in today's conference call to discuss Burlington's 2016 third fiscal quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and CEO and Marc Katz, our CFO.

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 til December 6th. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follow 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 excited that we delivered strong third-quarter results, reflecting growth across our key financial and operating metrics, continuing our favorable momentum from the first half of the year. The quarter was highlighted by increased sales, positive comparable store sales, and expansion in operating margin, which led to a more than doubling of our adjusted diluted earnings per share and surpassing our guidance.

Our consistent performance continues to demonstrate the ongoing success of our initiatives to elevate our off-price model. Our focus on providing our customers with compelling assortments and highly desirable brands at great values continues to resonate with them, leading to another quarter of increased store traffic. We believe we are well-positioned as we begin the final quarter of the year.

Let me share with you some highlights of the third quarter. Total sales increased 9.1%. Comparable store sales rose 3.7% on top of last year's positive 2.8%, and marked our 15th consecutive quarter of positive comps sales.

Top-performing businesses were home, beauty, athletic and men's shoes, better and moderate missy sportswear, and Baby Depot. Yes, you heard that correctly; Baby Depot outperformed the Company average. The Baby Depot team has been working very hard on the assortment and our in-stock position, and we are delighted to see this result for a business that remains a differentiator for us.

In terms of territories, the west significantly outperformed the chain average, followed by strong performances in the southwest and the northeast. The Midwest and southeast underperformed the Company average.

In addition, we're pleased to report the following accomplishments. As I mentioned, we continued to drive positive traffic, and with the third quarter, we have now recorded positive traffic in eight of the last nine quarters.

Comparable store inventory decreased by 8% at quarter end. This contributed to a 12% faster comparable store inventory turnover. Inventory aged 91 days and older continued to decline versus the prior year, while our better and best penetration increased versus last year.

Pack and hold as a percent of total inventory was 12% versus 14% a year ago. We continue to see significant opportunities in the marketplace, and we have been able to utilize our open-to-buy dollars to take advantage of these great deals.

We repurchased over 919,000 shares of common stock during the third quarter for $75 million. On November 15, 2016, our Board of Directors authorized a new $200 million share repurchase program, which is to be executed over the next 24 months. This brings total availability under the share repurchase programs to $250 million.

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. First, we continue to look to drive comparable store sales growth.

As you have heard us say, we see great opportunities in all areas of the business, but specifically, we have increased our focus on home, beauty, and ladies apparel. To support our comp sales growth, we will continue to improve our in-store experience, maximize our marketing testimonial campaign, and capitalize on our merchandise localization initiatives.

This upcoming quarter will be our fourth year in a row enhancing our gift-giving selection for the holiday season. We have learned a lot over the last three years in terms of assortment and store presentation. We have incorporated these learnings into this year's gift-giving strategy.

Turning to our merchandise category growth drivers, we remain pleased with our home performance. We continue to believe that we have significant opportunity to grow this category from a penetration level of 11% to north of 20%, which is in line with our peer set. We have invested in our team, our in-store presentations, as well as focused on developing and improving our vendor base.

We are also very excited about our beauty growth strategy. This includes bath and body, skin care, hair care, accessories, cosmetics and fragrances. Similar to our home category, we believe that there is a great runway to increase our sales penetration of our beauty business. We will continue to expand our investment in beauty and improve our vendor base similar to our strategy with home. For the third quarter, we continued to benefit from having direct control of our fragrance category, which enables us to deliver sought-after brands and incremental values.

Our third category, which we are focused on is growing our ladies apparel business. 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 third quarter, better and moderate missy sportswear outperformed the Company average. We are also continuing to see success from our expanded assortments and intimate apparel, which also outperformed the Company average.

This year, our capital plans include the completion of 12 remodels and 18 refreshes. We will remodel and refresh our store base, as appropriate, to continue to provide the best possible shopping experience for our customers.

Our marketing initiatives also support our sales growth priority, and our marketing testimonial campaign continues to resonate. This campaign will continue throughout the fourth quarter, and our overall marketing dollar spend will be in line with last year. In addition to our typical coats and cold-weather messaging in the fourth quarter, we will be enhancing our efforts around our gift-giving strategy, highlighting our expanded assortments throughout the store.

Another building block to continue to grow our top line is our localization efforts. We have made great progress in delivering assortments to stores to reflect their individual customer base, as well as the climate and environment where they are positioned. These strategies will help 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 initiative is the expansion of our store fleet. Our new stores continued to perform in line with our underwriting models. We are very pleased with early reads on our 2016 new stores, as a majority of the stores are operating well ahead of plan.

During the third quarter, we opened 23 new stores and closed 1, bringing our total store count to 592. In total, new and non-comp stores contributed an incremental $70 million to our third-quarter net sales. In 2016, we continued to expect to open 25 net new stores with an average square footage of 51,000 square feet.

Our store pipeline has us on track to open approximately 30 net new stores in 2017. 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.

Our third priority is to continue to expand our operating margins, as we are able to benefit from increased leverage of our fixed cost, as well as from our strategies to optimize markdowns, localize our assortments, and remain disciplined with regards to inventory management.

Finally, I would like to publicly state how pleased I am that Ted English has joined our Board of Directors. Ted is a highly accomplished business leader whose 30 years of retail experience is a strong complement to the expertise that is currently represented on our Board. We are confident that Ted's 22 years of off-price experience will help us capitalize on new and existing opportunities, and maximize value for our shareholders.

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 very pleased with our third-quarter performance. Strong sales growth, expansion in gross margin, leverage in operating expenses, lower interest expense, and a lower tax rate all contributed to the out-performance against our prior guidance for the third quarter.

Turning to a review of the income statement, for the third quarter, total sales improved 9.1% and comparable store sales increased 3.7% on top of last year's 2.8% increase. This marks our 15th consecutive quarter of positive comp store sales growth.

In terms of comp metrics, our comparable stores sales performance was driven by increases in traffic, conversion, and units per transaction, while average unit retail was down versus the prior year. We have not experienced traffic increases in eight out of the last nine quarters.

The gross margin rate was 41.2%, an increase of 140 basis points versus last year, as benefits from higher initial markup and a lower markdown rate were partially offset by an increase in the shrink accrual versus the third quarter of last year.

As you may recall from our comments on our second-quarter call, during Q2, we took physical inventories in 210 stores and were encouraged with the results, which demonstrates that our shortage initiatives are working. As a reminder, last year's issues surfaced during our year-end physical inventories. 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 20 basis points to last year as a percentage of sales. SG&A, exclusive of product sourcing costs, improved 40 basis points to 28.5%. This improvement was primarily driven by greater leverage in advertising expense, occupancy, and store payroll, partially offset by increased incentive compensation expense.

Other revenue and other income decreased $1 million from last year to $8 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 declined by approximately 15 basis points as a percentage of sales in the fourth quarter and 2016, due to this transition from a leased to an owned business.

Adjusted EBITDA increased 33%, or $27 million, to $110 million, representing a 150-basis-point expansion in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased $3 million to $41 million, and interest expense decreased $2 million to $13 million.

The effective tax rate was 35% versus 37.7% last year, primarily related to a decrease in state tax rate and an increase in federal hiring credits. Combined, this resulted in net income of $32 million, an increase of 114% compared to last year, and adjusted net income of $36 million for the quarter, an increase of 90% compared to last year.

We continued to return value to our shareholders through our share repurchase program. During the quarter, we repurchased over 919,000 shares of stock for $75 million.

On November 15, 2016, our Board of Directors authorized a new $200-million share repurchase program, which is expected to be executed over the next 24 months. This brings total availability under the share repurchase programs to $250 million. Diluted shares outstanding were 71.6 million compared to 75.4 million outstanding last year, primarily driven by the repurchase of 3.8 million shares since the third quarter of 2015.

Increased sales, expansion in gross profit margin, and disciplined expense management led to our strong cash-flow generation, giving us the opportunity to fund our growth initiatives while repurchasing our shares. This resulted in diluted net income per share of $0.45 versus $0.20 last year, and diluted adjusted net income per share of $0.51 versus $0.25 last year. For the nine months of 2016, total sales rose 9.1% and included a comparable store sales increase of 4.5%, following a 3% comparable store sales gain in the first nine months of last year.

Gross margin was 40.3%, representing an increase of 70 basis points versus the first nine months of last year, driven by strong merchandise margins. This improvement more than offset a 20-basis-point increase in product sourcing cost.

As a percentage of net sales, SG&A, exclusive of product sourcing cost, improved 70 basis points to 27.5%. This improvement was driven by increased leverage in occupancy, store payroll, and advertising expense, partially offset by increased incentive compensation expense.

Adjusted EBITDA increased by 27%, or $70 million, to $330 million, representing a 120-basis-point increase in rate for the first nine months of 2016. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $10 million to $119 million and interest expense decreased $1 million to $43 million.

The effective tax rate was 36.7% versus 38.6% last year, primarily related to a decrease in our state tax rate and an increase in federal hiring credits. Combined, this resulted in net income of $90 million, an increase of 75% versus last year, and adjusted net income of $106 million versus an adjusted net income of $65 million last year, up over 62%.

Diluted net income per share was $1.25 versus $0.68 last year. Diluted adjusted net earnings per share were $1.47 versus $0.86 last year. And our fully diluted shares outstanding were 72 million shares versus 76.1 million last year.

Turning to our balance sheet, at quarter end, we had $33 million in cash, borrowings of $174 million on our ABL, and had unused credit availability of approximately $384 million. We ended the period with total debt of $1.3 billion.

Merchandise inventories were $823 million versus $934 million in the prior year. The decrease was primarily driven by a decline in comparable store inventory of 8%. Pack-and-hold inventory represented 12% of inventory at quarter end versus 14% last year.

Cash flow provided by operations increased $183 million to $287 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 $120 million through the third quarter.

Turning to our guidance, we are raising our full-year 2016 outlook based on our very strong results from the first nine months. We now expect net sales growth in the range of 8.4% to 8.7% and comparable sales stores to increase 3.9% to 4.2%.

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 fourth quarter in 2016.

For the full year, we now expect adjusted EBITDA margin expansion to increase 70 to 80 basis points, interest expense to approximate $57 million, and adjusted tax rate of approximately 37.3%, and a share count of approximately 71.8 million shares. We expect net capital expenditures to be approximately $160 million, and depreciation and amortization, exclusive of favorable lease amortization, to be approximately $160 million. This results in adjusted net-income-per-share guidance in the range of $3.11 to $3.15 versus 2015 actual adjusted net income per share of $2.31.

As a reminder, our prior guidance was $2.92 to $2.96. Our new full-year guidance reflects increased performance-based incentive compensation expense in the fourth quarter of $0.02 per share, due to the outperformance in the first nine months of the year.

For the fourth quarter of 2016, we expect net sales to increase in the range of 6.6% to 7.6% and comparable store sales to increase between 2.5% and 3.5%. Adjusted net income per share is expected to be in the range of $1.63 to $1.67 verses $1.49 per share last year, utilizing a fully diluted share count of 71.3 million shares. As a reminder, in the fourth quarter of last year, we recorded a 100-basis-point benefit in other SG&A driven by workers' comp and incentive compensation accrual reversals.

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

Thanks, Marc. I want to thank all of our associates for contributing to another strong quarter at Burlington Stores. We remain excited about our business prospects as we begin final quarter of the year.

Having just completed visits to many of our locations, I continue to be impressed with the excitement of our associates, and presentation of our stores and gift-giving assortments. I am equally confident in our ability to further evolve our off-price model to drive sales productivity and profitability growth for many years into the future.

With that, 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.

Hi, good morning, everyone, and congrats on a really, really strong quarter.

Thanks, Ike.

Marc, this one is for you. Maybe can you just give us some more color on how the beat in Q3 was driven? The comp was a little above the high end, but the bottom line was substantially better, so just a little more color on the flow-through you saw. And then just more broadly, how should we think about wage and labor inflation into 2017, and how that should impact the flow-through margins next year?

Hi, good morning, Ike. I think you may have just set a retail record. We're 7.5 seconds into Q&A for a Q3 call, and you ask about the next year. So congratulations on that. Congrats on that, Ike.

Let's start with the first one. Let's start with the beat in Q3. As you, I think you mentioned it was an $0.18 beat. It was one of those quarters, Ike, where literally every line of the P&L ended up favorable; it wasn't one line item. It literally -- we got good news out of everywhere from sales through taxes.

Let's spend a little time on that. So starting with sales, we had guided a total sales increase of 8.1%; we came in at 9.1%. In terms of initial markups, we've had strong initial markups the first two quarters of the year. We were expecting more good news, ended up being our strongest quarter versus last year in terms of initial markups. And that was across all buy types once again.

The first two quarters of the year, our markdown rate was slightly ahead of, or higher than, last year. In this year, our markdown rate came in lower. Our inventories are very current. Our goods aged 91 days and older are down drastically versus the prior year, and our markdown rate came in lower. So that was a nice formula, all in, with sales up, IMU up, and markdowns down. So between sales and the gross margin components, Ike, it was about $0.12 of the $0.18 beat.

We, of course, continue our profit improvement culture here at the Company. SG&A accounted for about $0.03. We also had some nice profit improvement on the tax line, and that helped us with $0.01 there. We got another $0.01 out of interest. And then with the share buyback, we got a little bit of a round on the shares. So that, all in, was the $0.18 beat in Q3.

As far as your 2017 question, I should start with the caveat that we have not yet completed our 2017 financial planning process. We have done a lot of work, but still more work to be done. There are some data points I can share with you, starting with wage pressure in the stores. It looks like it will be similar pressure in 2017 as it was in 2016, about $7 million, and that includes everything, Ike. That's state minimum wage increases, anything related to FLSA, and again, that competitive adjustments we do when we do the market-by-market review. So all in, it's again about $7 million.

In addition, we actually have some wage pressures related to our distribution center. So our distribution centers, as you know, are in New Jersey and California. There are some state minimum wage increases in both of those states, but also some competitive adjustments that we need to make, and that's in the $6 million to $7 million range as well.

On the flip-side of all that, I continue to be very impressed with our entire sales support team here at Burlington who continues to embrace our profit-improvement culture and continues to find ways to offset these expense increases. It really helps me in my job as we try to move forward. With all that said, we continue to believe we're a growth Company, and we are striving to achieve a 2017 [ANI] per-share increase in the 16% to 18% range. So that's all I can comment on right now. We'll obviously provide more color on our Q4 call when we give you 2017 guidance.

Awesome, man. Thank you for the color and congrats, guys.

You got it, Ike. Thanks.

Matthew Boss, JPMorgan.

Thanks, great quarter, guys. So, a couple things: Tom, on the top line, can you just talk about the consistency that you saw in the quarter? Any categories where you're finding more close-out opportunity? And just what you're the most excited about in terms of the assortment heading into the holiday?

Okay. The performance was pretty consistent throughout the Company overall. Obviously, we were excited about our home business, which outperformed. We're excited about our missy and better sportswear business in ladies. Also, the beauty business was very good also.

So when you look at it, the one area that we were disappointed in is in cold weather. Cold weather in the third quarter represented about 10% of our business, and cold weather is down 16%, so the balance without cold weather was up about 6%. So, obviously, cold weather is a headwind. But the exciting thing about it is based on the fact that we're building our home business, our beauty business, and we're really beginning to de-weather our business overall.

So what am I excited about? Well, I'm excited about home. I'm excited about our gift-giving strategy that we have put into place. Over the last 3 to 4 weeks, I've visited probably 50 of our locations and our presentation in gifts is really, really exciting. So we really feel that's going to carry us through for the balance until Christmas. And then, hopefully, if the forecasts are right, it looks like the weather is going to be colder in the month of December versus last year. So, hopefully, that answered your question.

Yes, it does. And then just a follow-up on the balance sheet: Your free cash flow is accelerating. Can you just talk about capital priorities from here, and touch on the decision to increase the new store growth roughly 20% into next year?

Yes, I will take the first part of that, Marc. This is Bob. We continue to see strong cash-flow generation from last year being driven, primarily by much stronger net income results this year, last year, and increases in working capital, primarily getting the benefit of bringing comp-store inventories down.

So our priorities are going to remain the same. We're going to fund the needs of the Business first, in terms of capital commitments and working capital needs. And we'll look opportunistically at capital allocation based on our analysis. And we'll try to look at what's most accretive as we look at debt paydown and share repurchase. And we'll continue to share, at the end of each quarter, any investments that we make.

Kimberly Greenberger, Morgan Stanley.

Great, thank you. I will add my congratulations as well to a really terrific quarter. I wanted to ask about new store productivity. I'm looking back over the last couple of years, and it looks like the new store productivity numbers are really (technical difficulty) in Q3. Is there something incremental about the new stores that are delivering even higher productivity levels than you expected or anything that you can share on that?

And then my clarification or my follow-up question is just about the puts and takes in SG&A. And I'm wondering if you can reflect back on last year to let us know if there were any incentive-comp reversals, either in the third or the fourth quarter of last year, that we should keep in mind as we're modeling the fourth-quarter SG&A this year? And just recap what you mentioned about workers' comp and the other benefits that you received in Q4 last year. Thanks so much.

Sure, Kimberly. I'm going to start with that second question related to Q4 of last year. In last year's press release for Q4, you could see that we spelled it out.

We had 100 basis points of good news between those two things you just mentioned, the workers' comp and GL reserves, and the incentive compensation, reversals on the incentive-comp side. And then we had implemented a profit improvement safety program in our stores in DC, which drastically reduced the number of incidents in our stores, and that allowed us to record that good guy in workers' comp.

So last year, Q4, 100 basis points of good news in other SG&A. Then the other thing, just again as a reminder, for a headwind for this year in Q4, we do have 15 basis points working against us in other revenue and other income.

And then as far as new store productivity is concerned, some of our stores that are less than 60,000 square feet continue to have a sales productivity 16% higher than our chain average. And as Tom did call out in his prepared remarks, our 2016 cohort that we opened up this year is probably our strongest cohort since I've been here. We are very pleased. It is a broad-based, nice improvement versus underwriting models across the board in that cohort. We feel very good about it.

Yes, let me weigh in a little bit on this, too. Our real estate team has done a very, very nice job in terms of site selection. We've added a lot more analytics behind how we're picking sites over the last 2 to 3 years. And there is a nice supply also of sites out there that we can choose from. So, hats off to our real estate team, because they have identified about 400 [see] points where we should have a store and we're just executing to that.

But when you look at our stores in terms of how they're looking, our new stores, as Marc said, they're a smaller footprint. I think the average this year was 51,000 square feet, and it's a much more intimate experience overall. And it reflects all the merchandise presentation changes that we've made over times, in terms of when we open new stores. So as Marc said, we're really excited about what's happening right now with our new store performance.

Terrific, thanks so much.

John Kernan, Cowen and Company.

Good morning, everybody. Thanks for taking my questions. Congrats on a nice quarter.

Thanks, John.

Marc, can you just help us understand what the implied guidance for gross margin and merchandise margin is for the fourth quarter? It appears that you're taking a fairly conservative stance, given some of the issues, [year lap and shrink], and just the level of full-price sell-through here in the merchandise margins in the third quarter. I'm wondering what your assumptions are that are embedded for 4Q guide?

Yes, we are assuming good news as it relates to shrink. Again, we were pleased with the 210 store physicals we took in Q2 of this year. We think it's encouraging for what's going to happen at the end of the year, so we continue to have good news planned in margin Q4 as it relates to shrink.

As far as other SG&A, John, I go back to, we were up against that 100 basis points of good news we had in last year's Q4. And as you think about, that was the workers' comp, as I just mentioned, and incentive compensation that was good news last year. And you see, as we have progressed throughout this year, we've had to continue to fund our incentive compensation accruals. So that's clearly a headwind as we go into Q4.

Okay, and then my follow-up is just, the inventory reductions on a comp-store basis and just overall on the balance sheet continue to be really impressive, particularly given the fact that your sales productivity, new store productivity and comps continue to move higher. I'm just wondering how much more you think you can reduce comp-store inventories and turn faster going forward without affecting same-store sales and sales productivity. Thank you.

Well, we feel confident that we can reduce our comp-store inventory mid- to high-single digits for the foreseeable future, even though we turn much faster we have over time. We've gone from selling 5% of our inventory a week to 10% of our inventory a week since I've started at Burlington.

We just feel that we have room to turn even faster. Some people out there in our space are turning faster than we are, and we're not going to do it overnight, but we're going to do it incrementally. And we think we're going to do that, as we just articulated, through a reduction in comp-store inventories of mid- to high-single digits.

Okay. Thank you.

Thanks, John.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thanks, good morning.

Good morning.

Hi, you talked a little bit about the opportunities that you have if the weather does return to a colder state in December and January. Can you maybe talk a little bit about other ranges of outcomes and how you're thinking about if the weather does not get colder? What are your other merchandising opportunities and how does your inventory look in these categories?

Okay. Well, all the weather is really baked into our guidance, our 2.5% to 3.5% comp. So we've taken into account any of the weather factors that's out there.

We're doing well in home, and home is going to continue to really drive our Business, as it has for a while now. And it's also very important for our gift-giving strategy to have a really strong performance in home.

By the fact that we have better values in fragrances than we did last year, because we're doing it ourselves now, and the opportunity we have in bath and body, two other categories that are very gift-giving by definition. So we really feel that we're well positioned. We have inventory beyond last year in all these key gift-giving businesses that it will continue to help de-weather our Business going forward. So as I mentioned, I think our presentations are very strong in-store.

Thank you.

John Morris, BMO Capital Markets.

Thanks, my congratulations to everybody as well, and great execution in a tough environment. We've talked a little bit about weather, but I'm thinking about how you called out the western area as outperforming. And I think that was one of the regions that was significantly warmer on a year-over-year basis.

So I'm wondering if you did anything strategically with the products, pulled back on outerwear or something like? Anything strategically there, what was driving that outperformance in the west? Perhaps it was the West Coast buying office that's been in place, but maybe some commentary there?

And then also, good work on the improvement in the Baby Depot department. As a percent of the mix or penetration historically, how high has that been and where is it now? I'm wondering if there's a lot more opportunity there. Thanks.

First of all, the weather was definitely a tailwind on the West Coast in the third quarter. It was 5 degrees cooler than last year, so that really, obviously, helped the Business over there. But, candidly, our West Coast office is helping us also. It's making us more and more relevant on the West Coast, and we're getting a lot of manufacturers that are based in -- on the West Coast overall. But mostly, we really believe it was driven by favorable weather.

As far as Baby Depot goes, it's about 3% of our Business. It was higher, obviously, previously. We really think it will settle in that 3%, maybe a little bit higher going forward, but we think it will stabilize at that percent to total.

Great, okay. Thanks.

Thanks, John.

Paul Lejuez, Citigroup.

Thanks, it's Tracy filling in for Paul. I was wondering what kind of success you guys were having with landlords taking back space in some of your larger stores? And then how many of those you did last year and what the hope is for next year?

And then my second question is: You guys mentioned how well your new stores were performing, but you did say only most were above plan. And I was wondering if there was any common theme in the ones that were not above plan? Thanks.

Well, as far as landlords, working with the landlords, we really haven't disclosed how many stores that has impacted. It isn't that meaningful, to be honest with you. We were hoping that we would get more takers on some of the space that we have. It's not like it's really going to hurt us, but we really -- we thought we would obviously have more success doing that overall. Can you repeat the second part of your question, please?

Sure, I'm sorry. You mentioned that most of your new stores in 2016 were above plan, and I was wondering if there was any common theme in the ones that were not above plan?

Yes, there's only a couple stores that are below plan overall, and there's no real commonality.

There's only two of them, as Tom just said.

Good luck, guys. Thank you.

Brian Tunick, RBC Capital Markets.

Good morning. This is [Dee Moyner] on for Brian. Another question on the cold weather product-wise for the quarter. I believe you mentioned you're generally buying, assuming that the weather will not be significantly colder than last year. But it sounds like everyone else is pretty lean across the board as well, both vendors and department stores. So if it actually turns out to be a cold winter, how do you feel about your ability to maybe to chase that cold-weather product?

Well, right now, we're pretty well set in terms of inventory levels in coats and cold-weather product. We were conservative. We just really feel that we can do more with the inventory that we're currently carrying and what we have to be released in the month of December. So we feel we are in really good shape. We can maximize the Business if the weather gets cooler than anticipated, but we are in good shape. We'll just turn faster.

Okay, thank you. And then a very quick question. The pack and holds, I think, is slightly lower year over year. Is that because you feel like there are good buying opportunities in season, and you're holding back on your packaway?

As I mentioned many times before, we're really not targeting what level of pack and hold we want. We still want to have a lot of flexibility to buy goods in season. The end of October or the end of the third quarter is always the lowest level, because we've released a lot of our pack and hold into the stores throughout the third quarter, especially in the month of October.

Plus, it's a higher stock level. So it's 12% on the highest stock level that we have throughout the year. But most importantly, we want to keep the pack-and-hold level at the appropriate level so we can chase the business. We really think that's key to our success.

Thanks very much. Best of luck.

Thank you.

David Glick, Buckingham Research Group.

Thank you and congrats on the quarter to the team. Just had a couple questions. I'm wondering, given the success you've had this year, how that impacts your thinking on what the optimal size is for your new store prototype? I think you said it was 51,000 square feet. And just curious what your thinking is as you continue to try to increase your productivity and hopefully increase your return on invested capital? And one follow-up, thanks.

Okay. Well, we feel that our stores are going to get smaller in the future. The stores that we have already committed to for 2017, the average is under 50,000 square feet. We can have a very, very strong assortment in all of our assortment in stores that are 40,000 to 50,000 square feet.

So as we reduce our comp-store inventories, we'll especially decrease them in apparel, because obviously we'll be adding to home and beauty. But yes, we feel that it's just going to continue to go down and that we can be in a box 40,000 to 50,000 square feet.

Great. One quick follow-up, if I could. Last year, you guys called a lot of audibles from a merchandising and assortment perspective to reposition away from some of the seasonal categories which were challenging. Can you compare and contrast your preparation from an assortment and a presentation set-up this year versus last? And what kind of opportunity you think that presents for you?

Last year we really called the audible in December week one and week two in order to move gifts to the front of the store. This year, we did it a month earlier. We also work for the buyers early on to ensure that we had the right level of products so we could be, obviously have the right presentation in store. So we're way ahead of the game versus where we were last year in terms of having a great gift presentation. I encourage all of you to go into our stores and look at our presentation. It's pretty impressive.

Thank you very much. Good luck in the fourth quarter.

Thanks, David.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone, and congratulations. As you think about the comp-store sales and the improvement you've seen, Baby Depot, how did that improve and what do you see the future there? And on the fragrances and beauty that you took in-house, how do you see that developing and what percentage of square footage should that account for? Congratulations.

Well, Baby Depot, we feel that we're going to continue to have a good performance there. It's not going to be a crazy big increase there.

One of the things we did is we rationalized their SKUs in that area. It's different than the rest of our store. And we made sure we had the appropriate amount of inventory per SKU, which was very, very helpful. But as I mentioned, it's about 3% of our Business. It may go up a little bit, but it's not something that's going to be outsized.

The beauty business, and bath and body, that's something that we feel that we have a big opportunity in the future overall. We basically, as I mentioned earlier, we took fragrance in-house last year, and we're really building the bath and body elements of the Business overall. But we see significant growth there. We really haven't commented on what kind of penetration we feel that we can have there, but it's going to be a significant contributor to our performance in the future.

Thanks.

Thank you.

Lindsay Drucker Mann, Goldman Sachs.

Thanks, good morning, everyone.

Good morning.

I wanted to start with a question on some of the marketing initiatives that you've had this year, whether you can share with us any -- how things like brand awareness or customer perception have evolved as you put these initiatives in place. And how you're thinking about your approach to marketing and maybe TV advertising in 2017?

Well, first of all, our marketing testimonial campaign has really resonated with our customers. We've been on that campaign now for, I don't know, the last couple years.

As far as our marketing goes in general, we'll spend the same amount of marketing dollars as we have in the past. And we're going to shift more to digital out of other medias, just because that's where the eyeballs are today. So you will see a tweak in terms of moving dollars into digital.

As far as those other metrics, we haven't really shared that information prior, so I really can't share that with you. But all I can tell you is that our customers really like our commercials. They can really relate to them. It's our customers in our stores talking about the great deals they're getting at Burlington.

And as Tom mentioned in his prepared remarks, Lindsay, in Q4, in addition to just our normal coats and outerwear advertising, you'll also see more as it relates to our gift-giving assortments.

Okay. Great. My follow-up is on AUR. Can you dig a little bit deeper into what's been the key driver of that metric? And perhaps on a like-for-like basis, so adjusting maybe for category mix, how AUR has been looking in apparel or in some of your larger categories? Thank you.

Well, our AUR has been dropping for numerous quarters now. And a lot of it is mix-related, Lindsay. As we're growing our home business and our beauty business, those have AURs that are below the chain. And I would tell you the other drag that we saw in Q3 was coats and outerwear being down and being off. That's a higher AUR item, so that was another thing that contributed to AURs being down there.

But are you seeing price pressure broadly across on a like-for-like basis, so if you adjust for mix, are AURs down or is the story a little bit different?

The AUR has been down. It's been down historically because we're getting better at what we do. We're able to deliver more and more value to our customers over time as we're building our better and best penetration. So as our merchant team matures, we're able to deliver more value, which is really driving our Business.

Thank you very much.

You're welcome.

Roxanne Meyer, MKM Partners.

Great, good morning, and congratulations.

Thank you.

My question is on -- referring to the home category. You talked about that it could be key to de-weatherizing your Business, which is great. But in the meantime, your cold-weather items significantly impacted your third-quarter comps. Impressive to hear that the comp otherwise would have been up 6%. So I'm just wondering if you have got a strategy around the cold-weather items? Are you looking to maintain the percentage exposure that you have there or are you looking to further reduce it?

We're going to continue to de-weather our Business. We are looking for that penetration to go down. We want to be more of a gift-giving company for the fourth quarter overall, and be less reliant on what happens with the weather.

But whatever we're -- what we're doing is really, it's baked into our 2.5% to 3.5% guidance that we've supplied overall. But over time, it's come down a lot. If you look at coats, when I started here it was 13% of our Business, and now last year, it ended up around 6% of our Business. So we want to have a more broad-based approach to how we do business and that will be represented in the fourth quarter.

Okay. Great. Are you able to share more precisely how you are planning the 4Q in terms of commitment to the home and beauty category versus your targeted penetration for the cold-weather category?

No, we just give our guidance in total. At the end of the quarter, we'll let you know what categories outperformed, what underperformed, and we'll give you the cold-weather number, but our guidance is in total.

Great, and then just a quick follow-up. In terms of your gross margin, sounds like you had some nice, both IMU expansion as well as a decline in markdowns. How should we be thinking about those two drivers and the opportunity for continued increases in gross margin over the longer term? Will they come more from IMU or markdowns or a combination of both?

Sure, I will take that, Roxanne. As we've talked about, our 500 to 600 basis points of opportunity with our peers, we believe that about half of that is gross margin-related. So, and Tom mentioned earlier, we're going to continue to plan our comp-store inventories down mid- to high-single digits. That will continue to contribute to us turning faster. And in doing so, with us turning faster, we would expect markdown rates to come down and continue to come down over the longer term. I think we could also get some good news in IMU, but we do think our markdown rates will come down as we continue to turn faster.

Great, thanks and best of luck for holiday.

Thank you. Operator, we have time for one more question.

Pam Quintiliano, SunTrust.

Thanks, guys. This is [Mike Ramirez] on for Pam. Phenomenal quarter, congrats. We just have a few questions on the state of the consumer. First, can you please talk about the health of your consumer and their shopping habits heading into and post the election? And secondly, can you also discuss the income level of your customer and how that has been recently changing? Thanks.

Well, the overall environment, we believe that the consumer remains focused really on value. And there's a lot of things that are going on from a macroeconomic perspective.

But honestly, we can only focus on what we can control. That is to operate our off-price model by delivering great value, relevant brands, fresh product, and a great store experience for our customers every day. So we really feel that if we do that, we're going to do well.

And as we mentioned a couple times, we've had 15 straight quarters of comp increases and traffic increases in eight of the last nine quarters overall. So the customer wants value, we're going to deliver it to them and we really feel that can offset anything else that's going on overall. So the second part was about income?

Our median household income is $62,000. I think that was the question.

Yes, have you seen that changing recently?

Yes, as we continue to add more and more brands to our assortments, and more better and best product, the range of our consumer is $25,000 to $75,000, and we've seen an increase in customers that make over $75,000.

Okay, great. Thank you, guys.

Thank you.

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

Thanks again for joining us today. We wish all of you a happy Thanksgiving and a great holiday season. So thanks a lot. Have a good day.

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