Burlington Stores Inc (BURL) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Burlington Stores, Inc. Third Quarter 2018 Earnings Webcast Conference Call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to turn the conference over to David Glick, Vice President of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2018 third quarter operating results.

Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, Chief Financial Officer and Principal.

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 December 5, 2018. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and 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 fiscal 2017 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, David. Good morning, everyone. We were very pleased with our third quarter results, driven by comparable store sales gain of 4.4%, total sales increase of 13.7% and an 80 basis point expansion in adjusted EBIT margin. These results drove a strong 73% increase in adjusted earnings per share, well ahead of our guidance. We remain highly focused on executing the strategies that have driven consistent comparable store sales and increased EBIT margin results over the past several years.

Turning to highlights of the third quarter. This is our 23rd consecutive quarter of positive comp sales growth. Our total sales growth exceeded the high end of our guidance by 170 basis points, driven by above planned comparable store sales and an outperformance in new and non-comp sales. We leveraged SG&A less product sourcing costs by 60 basis points and expanded our gross margin by 20 basis points, which drove an 80 basis point increase in our adjusted EBIT margin and our adjusted earnings per share grew 73%.

As a reminder, our comparable store sales increase of 4.4% lines up the comparable calendar weeks, specifically the 13 weeks ended November 3, 2018, versus the 13 weeks ended November 4, 2017. We continue to believe this is the most accurate representation of our comparable store sales performance and is the basis in which we plan and manage our business. Once again, a key driver of our results was the outstanding performance of our new stores.

Our total sales increased 13.7%, 170 basis points above the high end of our sales guidance. Our strong sales growth was driven by an acceleration in comparable store sales from the second quarter trend as well as the strong performance of our new and non-comp stores, which contributed $128 million in sales for the quarter.

As a reminder, we lost $17 million sales in last year's third quarter due to weather-related closures to stores that were closed for 7 or more days. These stores sales are included in this year's third quarter non-comp sales. We opened 28 net new stores during the third quarter of 2018. And with the 3 former Toys "R" Us locations we opened in November, we have now completed our store openings in 2018. Our final store opening comp for 2018 is expected to be 68 gross new stores and 46 net new stores. This count is up slightly from our last quarterly update as we were able to accelerate the opening of 1 Toys "R" Us store previously planned to open in early 2019 and 2 previously expected store closures that were moved out to 2019. We continue to feel very good about the current real estate environment as site availability of attractive location remains very favorable. As mentioned previously, the Toys "R" Us bankruptcy contributed 3 new stores in the fourth quarter of 2018. In addition, we are evaluating several additional sites which have strengthened our new store pipeline. Over time, we view the Toys "R" Us real estate opportunity as similar to the Sports Authority bankruptcy. To date, we have opened 32 former Sports Authority locations with a few more stores still in the pipeline.

Moving to category highlights. Our top-performing businesses were home, including toys, beauty, men's and ladies sportswear, athletic shoes and athletic apparel and baby apparel and Baby Depot.

Regarding geographic performance, the Northeast and the Southwest performed above the chain average, while the Midwest comped below.

Moving to inventory management. We ended the quarter with comp store inventories down 1%. However, similar to the actions we took in the second quarter relating to back-to-school receipts, we accelerated $67 million in holiday gifting product into October due to the 53rd-week calendar shift. Excluding this receipt acceleration, comparable store inventories were down 6% versus last year.

In addition, over the course of the third quarter, comparable store inventory turnover improved a solid 6% on top of last year's 10% improvement.

Inventory aged 91 days and older once again declined significantly as we focused on maintaining a fresh and exciting assortment for our customers. The buying environment remains very favorable, and we are very pleased with the extensive assortments and amazing values that we continue to deliver to our customers.

Pack and hold as a percentage of our total inventory was 18% versus 15% a year ago. Our inventory freshness metric, inventory received in our stores that is less than 30 days old, increased versus last year at the end of the third quarter.

We continue to bring value to our shareholders as we repurchased approximately 50 million of common stock during the third quarter and 160 million year-to-date through the end of the third quarter. At the end of the third quarter, we had $357 million remaining on the existing share repurchase authorization.

Now let me update you on our long-term strategic priorities, which include: focusing on driving comparable store sales growth; expanding, modernizing and optimizing our store fleet; and increasing our operating margins.

First, with regard to driving comparable store sales growth, our underlying strategies remain: one, enhancing our assortments as we continue to improve our execution of the off-price model with particular focus on underpenetrated businesses; two, building on our marketing initiatives to ensure we are continuing to engage both new and existing customers; and three, improving the store experience for our customers.

Our third quarter results underscore the progress we are making expanding some of our key underpenetrated categories, particularly home and beauty. In addition, we are very encouraged by the early momentum we have in our gift business, including toys. These growth categories, home, beauty and gifts, continue to expand disproportionately, helping us to build a long-term sustainable foundation for our company that makes our business less weather sensitive, which is particularly important in the critical holiday season.

With regard to home, we had another excellent quarter in this key strategic business, which still represents our largest category growth opportunity.

We are on track to expand upon the 2017 penetration level of 14% of our total sales, and we believe we can achieve a penetration level of 20% over time. We continue to see opportunity to expand our branded portfolio in home and are targeting several key underdeveloped and new categories to drive further penetration increases in the fourth quarter of 2018 and beyond.

Our beauty business outperformed in the third quarter, and we continue to expect this category to increase in penetration for years to come.

The beauty and fragrance businesses are key elements of our holiday gift strategy, which we anticipate will be key sales drivers in the fourth quarter. Ladies apparel remains a significant intermediate and long-term opportunity as our penetration remains well below our peer group. Once again, missy, better and active sportswear outperformed the chain average in the third quarter. We continue to focus on improving the sales trend in our heritage businesses in ladies apparel.

As we've discussed previously, we believe having 2 SVPs in ladies apparel will add the specialization and focus necessary to capitalize on the significant penetration opportunity.

In addition to home, beauty and ladies apparel, we now see a new penetration opportunity in baby and toys. As it relates to baby, this includes Baby Depot, baby apparel and accessories. Given our long-standing presence in these businesses, we have cultivated strong vendor relationships, which we can now leverage. Given the disruption in these businesses caused by the Toys "R" Us bankruptcy, we see additional opportunity for outpaced growth over the next few years. You'll continue to see us invest in more inventory, floor space and marketing to support these exciting growth opportunities.

Moving on to our vendor base. We continue to improve the quality of our brand portfolio, driven by the growth of our merchandising team, excellent product availability and a vendor community increasingly committed to grow with Burlington. We carry approximately 5,000 brands today and as we grow underdeveloped categories and enter into new businesses, we would expect that number to increase over time.

Turning to our marketing activities. We are building upon the momentum of our successful TV testimonial campaign, featuring real customers highlighting why the love shopping at Burlington. As we gear up for the holidays, you will see those TV spots reflect the expanded assortment of gifts, toys and holiday-themed merchandise our customers can find in our stores.

Looking ahead, we are focused on finding efficient and effective ways of reaching our customer where she spends her time, increase our efforts in digital channels to break through the clutter and ensure our message is being heard. We remain pleased with the results of our multichannel media plan and believe it positions us well to win with our customers this holiday season.

Improving our store experience continues to be a key growth initiative for us. We are making significant progress in 2018 modernizing our store fleet as we have completed the remodels of 40 of our stores, which includes 6 stores that were closed last year due to weather-related issues, all of which are complete and ready for holiday.

The second growth initiative is expanding our store fleet. As discussed earlier, given the favorable real estate environment, we're opening 68 gross and 46 net new stores in 2018, which compares to 48 gross and 37 net, respectively, in 2017.

We plan to end fiscal 2018 with 675 stores, yet we are a national retailer that operates in 45 states plus Puerto Rico. As we have discussed before, our C-Point strategy is a critical tool that we utilize in our new store site selection process. We have been using this C-Point approach since 2015, when we first utilized this tool to identify close to 500 potential locations that could get us to 1,000 stores over time. We believe the strategic tool has helped drive the strong new store sales and EBIT performance versus our underwriting model that enabled us once again to outperform our new and non-comp sales plan in the third quarter.

Having refreshed this dynamic C-Point tool at the end of 2017, we're able to quickly evaluate real estate opportunities that are presented to us, such as the recent Toys "R" Us bankruptcy. This gives us great confidence so we can comfortably reach our goal of 1,000 stores.

In 2018, we increased the number of gross new store openings by 20. This significant increase in new stores, combined with remodels, will translate to another 108 stores in our brand standard. In just 2 years, 2017 and 2018 combined, we'll have increased the number of stores in our brand standard by 190 stores. Looking out 5 years, at the current rate of new store openings and remodels, we would expect a significant majority of our stores to be in our brand standard.

We also remain focused on our third growth priority, continuing to increase our operating margin. Over the last 5 years, we've expanded our operating margin by 370 basis points, an average of approximately 75 basis points per year.

Through the end of the third quarter, our operating margin has increased an additional 80 basis points. While we are very pleased with this progress, we continue to believe we have a significant operating margin opportunity over time versus our peers. To accomplish that objective, we will execute the same strategies that we have deployed over the last 5 years: increasing total sales to leverage fixed costs, optimizing markdowns, remaining disciplined with inventory management and maintain an active profit improvement culture across all SG&A areas.

Now I'd like to turn the call over to Marc to review our third quarter financial performance and updated outlook in more detail. Marc?

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the third quarter by recording our 23rd consecutive quarter of positive comparable store sales. In addition, we achieved strong contribution from new and non-comp stores and expansion in adjusted EBIT margin, which combined, delivered a 73% increase in adjusted earnings per share.

Next, I will turn to a review of the income statement. Due to the 53rd week in fiscal 2017, our results are reported for the 13 weeks ended November 3, 2018, versus the 13 weeks ended October 28, 2017. All of our results are reported on this fiscal basis, with the exception of comparable store sales, which we report on a shifted basis comparing similar calendar weeks, which are the 13 weeks ended November 3, 2018, versus the 13 weeks ended November 4, 2017.

For the third quarter, total sales increased 13.7%, and comparable store sales increased 4.4% on top of last year's 3.1% increase. New and non-comp stores contributed an incremental $128 million in sales for the third quarter. As Tom mentioned earlier, we did lose $17 million in sales in the third quarter of 2017 due to weather-related store closures. We did recoup those stores' sales in this year's third quarter, which was a contributor to the significant increase in non-comp sales.

Our Q3 comparable store sales performance was driven by increases in traffic, units per transaction and conversion, while AUR was down slightly. We have seen traffic increases in 15 out of the last 17 quarters. As of today, we have reopened all but 1 store that closed during the 2017 due to weather-related issues. We expect that store, which is located in Puerto Rico, to reopen in the first quarter of 2019.

Gross margin rate was 42.4%, an increase of 20 basis points versus last year, on top of a 100 basis point increase in the third quarter of 2017 and another 140 basis point increase in the third quarter of 2016. Excluding the negative 20 basis point impact of freight in the third quarter, gross margin was up a solid 40 basis points, despite our very difficult margin comparisons. We continue to expect freight to be up approximately 20 basis points for the year.

Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs, were 20 basis points higher as a percent of net sales. Higher product sourcing costs were driven by increased receipt flow, partially due to the 53rd week calendar shift as well as a higher level of movement in and out of our pack and hold and short-stay storage locations.

SG&A less product sourcing costs was 27.7%, 60 basis points lower than last year as a percentage of sales. This improvement was driven largely by strong sales growth and expense leverage, primarily on occupancy and marketing as well as disciplined expense management.

Adjusted EBIT increased 29% or $26 million to $115 million. Strong sales growth, leverage on fixed expenses, disciplined expense management and increased merchandise margins led to an 80 basis point expansion in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, leveraged 15 basis points and increased $3 million to $48 million. Interest expense decreased by $1 million versus last year's third quarter to $14 million.

The adjusted effective tax rate was 17.2% for the third quarter, driven by the statutory reduction in federal tax rates and the accounting for share-based compensation. Combined, this resulted in adjusted net income of $83 million, a 70% increase versus last year.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased approximately 307,000 shares of stock for $50 million. At the end of the third quarter, we had $357 million remaining on our share repurchase authorization. All of this resulted in diluted earnings per share of $1.12 versus $0.65 last year.

Adjusted diluted earnings per share were $1.21 versus $0.70 last year. The $1.21 per share result represents a $0.17 beat versus our top-end guidance. This beat was split between $0.11 of true operating outperformance and $0.06 due to a lower tax rate.

The lower tax rate was primarily attributable to greater-than-expected impact from the accounting for share-based compensation.

Turning to our balance sheet. At quarter-end, we had $85 million in cash, $105 million in borrowings on our ABL and had unused credit availability of approximately $434 million. We ended the period with total debt of $1.1 billion and a debt-to-adjusted EBITDA leverage ratio of 1.4x.

On November 2, 2018, we closed on the repricing of our term loan, which had $961 million outstanding at the end of the third quarter. We successfully lowered the applicable margin on our term loan facility from LIBOR plus 250 basis points to LIBOR plus 200 basis points, a meaningful 50 basis point reduction.

In addition, Fitch initiated an investment grade rating on our term loan of BBB-, the second investment grade rating we have received on our term loan.

Fitch also initiated a BB+ corporate rating, one notch below investment grade, joining Moody's at Ba1 corporate rating, also one notch below investment grade.

Standard & Poor's remains at BB corporate rating, but does have our rating on a positive outlook.

We have made significant progress strengthening our debt profile in 2018, including the term loan repricing and pay down as well as the ABL extension, which in turn has helped us reduce interest expense.

However, our term loan is a floating rate facility, and not only have we faced LIBOR interest rate increases in 2018, but the Fed's median forecast calls for one additional rate hike in 2018 and 3 additional rate hikes in 2019. With the repricing and pay down accomplishments behind us, we are now turning our attention to interest rate hedging.

As a reminder, $800 million of the $961 million outstanding on our term loan is fixed at an effective LIBOR interest rate of 1.65%, including the swap premium, through May of 2019. We are actively evaluating our hedging options and we'll update you when we have made a decision regarding any hedging strategies beyond May of 2019.

Merchandise inventories were $1,057,000,000 versus $904 million last year. This increase was driven primarily by inventory related to 48 net new stores opened between the end of the third quarter of 2017 and the end of the third quarter of 2018 as well as an acceleration of $67 million of retail in holiday gifting product into the third quarter of fiscal 2018 due to the 53rd week calendar shift impact.

Pack and hold inventory was 18% of total inventory at the end of the third quarter of fiscal 2018 compared to 15% last year.

Comparable store inventory turnover improved 6% for the third quarter, while comparable store inventory was down 1%. Excluding the previously mentioned receipt acceleration, comparable store inventories were down 6%. In addition, we were very pleased that inventory aged 91 days and older at the end of the third quarter was once again down significantly versus the prior year.

Cash flow provided by operations increased $154 million to $375 million, driven by higher net income.

Net capital expenditures were $198 million for the first 9 months of fiscal 2018.

During the quarter, we opened 36 gross new stores, relocated 6 stores and closed 2 stores, ending the period with 679 stores.

For fiscal 2018, we now expect to open 68 gross new stores and close or relocate 22 stores, resulting in 46 net new stores for the year.

In terms of our year-to-date performance, total sales was 12.1% and included a comparable stores sales increase on a shifted basis of 4%, following a 2.4% comparable store sales gain in the first 9 months of last year.

Gross margin was 41.7%, representing an increase of 40 basis points versus the first 9 months of last year, primarily due to a lower markdown rate and higher IMU, which more than offset higher freight cost.

Product sourcing costs were approximately 10 basis points higher as a percentage of sales versus last year.

As a percentage of net sales, SG&A, exclusive of product sourcing costs, decreased 40 basis points to 26.9%.

Expense leverage was driven mainly by leverage on the strong 12.1% increase in total sales, disciplined expense management and our active profit improvement culture.

Adjusted EBIT increased by 26% or $71 million to $339 million, representing an 80 basis point increase in rate for the first 9 months of 2018.

Depreciation and amortization expense, exclusive of net favorable lease amortization, leveraged 10 basis points and increased by $11 million to $141 million.

Interest expense was flat at $44 million.

The adjusted effective tax rate improved to 15.9%, driven by the statutory reduction in federal tax rates, the accounting for share-based compensation and impact of the second quarter revaluation of deferred tax liabilities resulting from recent changes to New Jersey state tax law. Excluding the impact of the revaluation of deferred tax liabilities, the adjusted effective tax rate improved to 17.2%. Combined, this resulted in net income of $230 million, an increase of 60% versus last year and adjusted net income of $249 million versus an adjusted net income of $157 million last year.

Excluding the impact of the revaluation of deferred tax liabilities, adjusted net income was $245 million, up 56% versus last year.

Diluted earnings per share were $3.35 versus $2.04 last year. Diluted adjusted net earnings per share were $3.62 versus $2.22 last year.

Excluding the impact of the revaluation of deferred tax liabilities, diluted adjusted net earnings per share were $3.56, up 60% versus last year.

Our fully diluted shares outstanding were 68.8 million shares versus 70.6 million last year.

Now I will turn to our updated outlook. For the 2018 fiscal year, we now expect total sales growth in the range of 10.9% to 11.2% as compared to fiscal 2017, excluding the 53rd week. Comparable store sales on a shifted basis to increase in the range of 2% to 3% for the fourth quarter of fiscal 2018, resulting in a full year fiscal 2018 shifted comparable store sales increase of 3.4% to 3.7% on top of last year's 3.4% increase.

Depreciation and amortization, exclusive of favorable lease amortization, to be approximately $195 million. Adjusted EBIT margin expansion of 40 to 50 basis points. Interest expense to approximate $58 million. An effective tax rate of approximately 20%. Capital expenditures, net of landlord allowances, expected to be approximately $275 million. Based on our strong year-to-date 2018 performance, this results in an updated adjusted earnings per share guidance in the range of $6.33 to $6.37.

And finally, the company now expects adjusted EPS, excluding the estimated impact of 2017 tax reform, the accounting for share-based compensation and the revaluation of deferred tax liabilities, to be in the range of $5.01 to $5.05, representing an increase of 21% to 22% over the comparable 52-week 2017 adjusted EPS of $4.14.

For the fourth quarter of 2018, we expect total sales growth in the range of 8% to 9%, comparable store sales on a shifted basis to increase between 2% and 3%, effective tax rate of approximately 24.5% and adjusted earnings per share expected to be in the range of $2.71 to $2.75 compared to $2.14 per share last year.

With that, I will turn it over to Tom for closing remarks.

Thanks, Marc. In summary, we believe our results this quarter demonstrate, once again, the flexibility and the strengthening foundation of our business model. We drove financial results above our guidance and expect the execution of our strategic initiatives and store growth plans to enable us to continue our consistent performance. We remain confident in our outlook and remain highly focused on refining our off-price model and our ability to capitalize on the rapidly changing retail landscape. This positions us well to bring more great brands, styles and value to customers and increased value for our shareholders. Again, I would like to thank the store, supply chain and corporate teams for their contributions to our strong third quarter results.

Before I turn the call over to the operator, I wanted to congratulate our organization for being recognized by the Great Place to Work Institute for the second consecutive year as one of the best workplaces for women as well as best workplace in retail. To receive these awards for 2 years in a row illustrates that we are continuing to make progress toward a goal of creating an environment where everyone matters and feels welcome.

Finally, we are winding down our annual campaign where we raise money in support of the leukemia in the form of society effort to find a cure for blood cancers. We are very pleased that we met our $4 million fundraising goal, bringing our total contribution over the last 17 years to more than $36 million. We take great pride in all of these accomplishments.

With that, I'd like to turn the call over to the operator to begin the question-and-answer portion of the call. Operator?

(Operator Instructions) Our first question comes from Matthew Boss of JPMorgan.

So Tom, your same-store sales acceleration versus 2Q was pretty impressive on both the 1- and 2-year stack basis. I guess, are the receipt flow issues that you spoke to last quarter, should we think of those as largely behind us at this point? And maybe any color on category performance and may be an update on ladies apparel would be helpful.

Okay. Thanks, Matt. Yes, I'm pleased to report the receipt flow issues we experienced last June are decidedly behind us. I think that was evident in our third quarter comp sales results. Overall, we are very pleased with our third quarter comps. As I mentioned in my prepared remarks, a lot of strong categories were ones that have been consistently performing well for us, including home, beauty and athletic shoes and apparel. In addition, it appears we are gaining share in some more recent additions to our outperforming list, including baby apparel, Baby Depot and toys, which is really exciting. Finally, men's and ladies' sportswear also were strong. As it relates to your question on ladies apparel, missy sportswear driven by better and active continues to outperform for us. As for the balance of ladies apparel, what we refer to as heritage ladies apparel, these areas didn't hold us back in putting up a strong overall comp for the quarter. We all recognize that at 22% of our total sales, there's a big opportunity for us to capitalize on from a penetration standout point, given our peers at closer to 30% of total sales. As I mentioned in my prepared remarks, we now have 2 SVPs in ladies apparel. We believe that adding more leadership and specialization will improve our ladies apparel business over time, but it is a work in progress.

Great. And then Marc, maybe just a follow-up, can you provide any additional color, maybe, to help break down 3Q's gross margin build and just touch on the drivers? And how best to think about product sourcing costs going forward?

Sure, Matt. In terms of gross margin, our merchandise margins were up 40 basis points and that was primarily driven by a lower markdown rate. We did pick up a little bit in IMU, but the lower markdown rate was the big driver there. And that more than offset the 20 basis points of freight headwinds that we had guided to. It was another quarter we experienced nice comp store turnover improvement, unit 6%. And once again, as we mentioned in our prepared remarks, our inventory aged 91 days and older continues to hit to record low levels. And our freshness, our goods 0 to 30 days old, continues to be at very high levels, so we feel good about that. The last thing on gross margins it's probably worth pointing out Q3 did represent a pretty difficult compare based on what happened in the 2 prior years, and we've picked up 100 basis points in Q3 of '17 and 140 in Q3 of '16. The product sourcing, you're right, it did edge up a little bit, up 20 basis points. Really, was due to the higher receipt volumes that were impacted by that holiday gifting product acceleration that we spoke to, where we pulled receipts out of Q4 into Q3, obviously processing more receipts because of that. And then in addition, we did experience an increase in merchandise moving in and out of our DC storage locations and that's for our pack and hold and our short-stay goods. We just had more movement in and out, and I don't expect that same level to happen next quarter.

Our next question comes from Ike Boruchow, Wells Fargo.

I guess, first one, Tom, so I think we see you accelerated a lot of holiday gifting product into Q3, and mentioned you had some good momentum in the gift business. I believe, you had a pretty good gifting business in holiday last year. Maybe some color on how you're strategizing to make that business even more important this holiday?

Okay, thanks. I mentioned in our prepared remarks, we did move $67 million in holiday gifting product into October to accommodate the 53rd-week calendar shift and strengthen our setup. We're really pleased with the trends and customer response so far to our gift assortment. I was out on the West Coast couple of weeks ago, went to over 20 of our stores, and I was very impressed in terms of the content I saw and the presentation I saw in the store. But with that said, I was very glad to see our solid execution in our gift assortment because as you know, we're up against a very challenging comp in the fourth quarter from last year, a plus 5.9%. While cold weather categories did comp below the chain last year, we have, once again, planned them conservatively this year due to weather variability and our continued desire to de-weather our business. We'll need solid execution in home, beauty and gifting given our tough compare.

Got it. And then just a second question, Marc, on the P&L. I think historically, you've given some color on the 3Q calls for the out year. So maybe on 2019, I think, we've heard from some of your competitors, pressures from things like wages and freight and even more recently lease accounting standard changes. Any chance you could help us understand how some of those factors may impact Burlington in 2019?

Yes. Sure, Irwin. Yes, I'll start with the caveat that we have not finalized our 2019 financial plan at this point, so obviously things could change. We will discuss in more detail on our year-end call in March. But we can share with you some of our initial findings as we work through it, especially as it relates to the headwinds you called out. Before we get in '19, let's set the stage for '18 and just make sure that we have the right 2018 baseline, and we're talking apples-to-apples. You may recall, when we had that onetime $0.06 tax benefit in Q2 of this year related to a change in New Jersey tax law, and we had spoken about that on our Q2 call, so that's one item. The second item is the one you brought up on the new lease accounting standard. I mean, that's going to have an obvious balance sheet implication for us. But it's also going to result in an incremental $5 million of OpEx for us, which equates to about $0.06 negative impact on 2019. And as it relates to that new standard, these are noncash timing adjustments that are primarily due to 2 things: one, tenant improvements, which are dollars that we receive from our landlords. That's being spread over a longer period of time than what we've been able to historically. And the second is the expensing of certain payroll versus being able to capitalize it in the past. So those are the 2 drivers of that $5 million. So if we assume that we land at the high end of our guide for '18 at $6.37, we believe a $0.12 reduction is appropriate to get to about $6.25 to have proper comparability for next year. In terms of the headwinds for 2019, we'll talk wages first, we continue to be pleased with our wage-competitiveness strategy. Our market-by-market approach to wages continues to result in reductions in our nonexempt turnover rates versus the prior year. And our open positions percent, that remains very low and that includes the hiring of seasonal workers that we just worked through. As you know, we've averaged about $14 million of incremental wages over the last few years, that's what we've averaged. We believe, 2019, it's going to be closer to $21 million, so we're going to have a ramp up there in our wages. And that includes both the stores and our DCs, and that reflects both statutory increases as well as competitive adjustments that we feel we need to make. Two other headwinds, freight and stock-based comp. We expect freight to have a comparable impact in '19 that it had on '18, which is a 20 basis point headwind. And then in addition to that, stock-based comp is likely to cost us an incremental $10 million in 2019, also similar to what it cost us in 2018. So there's all the headwinds. But with that said Irwin, I continue to be impressed with our sales support teams. The way that our company embraces our profit improvement culture. We continue to find ways to become more efficient, which helps us offset these incremental costs. So again, while we're certainly not final, we still have work to do, as I said earlier on our 2019 plan. I can let you know, at this point, we are targeting a low double-digit increase in [E&E] per share, and we'll certainly provide more color on our March call.

Our next question comes from Lorraine Hutchinson of Bank of America.

I just wanted to confirm first that the 8% to 9% fourth quarter sales growth is on a comparable week basis and doesn't include the headwind from the 53rd week?

That is correct.

Okay. And then as we look at gross margin for the fourth quarter, I know there were some shortage headwinds last year. Is there anything -- any other items that we should think about as we're thinking about gross margin for 4Q and then even into next year?

No, I mean, what we're still going to take somewhere in the neighborhood of 380 to 400 physical inventories in Q4, similar to inventories we took in July. We expect those to be on plan. But that's the one unknown that'll happen. But other than that, nothing atypical.

Our next question comes from Kimberly Greenberger of Morgan Stanley.

I wanted to ask about new stores. The new store productivity this year has constantly come in above our forecast, and I'm wondering if you can talk about the drivers there. Is it simply better site selection? Is it competitor store closures that are giving you a sort of larger market share opportunity? And the 68 gross new stores you opened this year was a really nice acceleration from 2017. Any preliminary outlook for how we should think about store openings in 2019?

I'll talk first and then I'll let Marc if he wants to add some color to it. I think the reason we're doing well in our new stores is what I said multiple times and it's really our C-Point strategy that we've been working with since 2015. Our site selection process is more robust, and we're going into obviously better locations. Yes, I'm sure there are some transfers from some of the closures. As we mentioned, with Toys "R" Us, our baby business has been good, our toy business has been very good. So there is some transfer from that. But I think overall, I think, we're doing well in new stores because we really have a clear understanding of what we want our stores to look like, where we want to be located, want to make sure that the content -- our merchants work really hard to make sure we have the right content for all of our new stores. As it relates to 2019, we'll be happy to give that information on our fourth quarter conference call when we have a little bit better idea and it's more -- it would be a little bit more concrete than to talk about right now.

Understood. And I just wanted to follow up. Marc, do you have any color on the comp by month here in third quarter? And whether or not you saw acceleration in October exiting Q3?

I would just say that we were comfortable with every month in the quarter.

Our next question comes from John Kernan of Cowen.

So it seems like we're going to get some type of announcement on tariffs fairly soon. How do you think this is going to affect your vendors in the off-price industry in general? And do you face any potential higher cost from a sourcing perspective?

I'll take that one. John, first, we only import directly 5% of our receipts. And clearly, not all those receipts are in tariff-impacted categories and not all are imported from China. So the 5% is relatively low percentage of direct imports relative to most other retailers. Overall, if prices go up, we'll continue to maintain a relative pricing advantage. If we see retails increase in the full price channel, we'll maintain our value spread. Maybe, potentially, based on the disruption in the marketplace, it could be a benefit for off-price, but usually -- we usually do better when there is a disruption overall. We'll deal with whatever we have to. Our goal and everybody in the company's goal and especially our merchants' goal is to make sure we're delivering great value to our customers, desired brands that they want and great values overall. So -- but it is what it is and we'll just have to deal with it as it comes to us.

Got it. And then Marc, just one housekeeping question. Is the double-digit EPS growth that you're talking to for 2019, is that off the $6.25 number? Is that off the $6.30?

Yes.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Just expanding on the freight issue, if you think about some of the declines in spot rates for freight, does that at all -- in 2019, would you see that at all have -- easing the impact of freight costs, is there any opportunity? And then when you talk about stores and new store productivity in Toys "R" Us, the Sears' boxes that are available, obviously you wouldn't want that size, but are there slivers of those boxes that could be an opportunity for openings in 2019 and perhaps also at good rents. How do you see that opportunity?

Okay, Dana, I'll start off with the freight question and then I'll turn it over to Tom. Yes, I mean, in terms of freight, we've looked at everything as it relates to the next year. And we had 20 basis points headwind this year. We're primarily contract rate driven. And based on what we see in the rate increases flowing into next year and then our expectations for that and fuel and everything from spot rates to our East Coast West Coast mix and everything else, we still believe that we've got 20 basis point headwind that's coming at us. We'd love for it, as we get through the year, to not be as impactful. But based on all the data points we have at this point, we're looking at another 20 basis point headwind.

I'll take the Sears question. Obviously, we're more interested in going into power centers, strip centers overall. But we have taken advantage of some of the Sears' closures, where we'll take a piece of building and somebody else will take another piece of the building and they'll divide it up. And it'll appear that our store is more of a storefront building versus a mall-based building. But we're opportunistic in all of our real estate reviews. I think Kmart is probably more of an opportunity for us because it's the -- they're in very good locations. We'll have to carve up the box based on the current size of our boxes we desire. But I would say that's probably more of an opportunity than Sears just because it's more in the locations where we want to be, where we think we can be most successful. So overall, I mean, there's just a lot of opportunity out there for real estate.

Our next question comes from Michael Binetti of Crédit Suisse.

I'm just -- one quick one on the near term and I have a follow-up. But as you look at the fourth quarter guidance, it seems like you guys are baking in a pretty big deceleration in the EBIT margin improvement story. I know you like to err on the side conservatism, but I think the back out math says we're going to be down 20 basis points compared to an improvement of about 80 basis points year-to-date. You did mention some of the margin pressures from moving product around in and out of the DCs should get better going forward. I'm just wondering if you could help us think about the puts and takes that you guys are embedding as you look at the fourth quarter and the lands on that implied guidance?

Yes. Sure, Michael. All your numbers are right. The key though -- and by the way, our Q4 guidance hasn't changed all year. But the biggest factor in that really has to do with the 53rd-week calendar shift. And you're talking about total sales increase that's projected only 8% to 9% versus year-to-date, we're running 12.1%. So that's a huge driver there. The other 2 things on the SG&A front to keep in mind is the investment in wages is the highest in Q4. So that's going to have the biggest impact. And then based on our ramp up in CapEx and the timing of our spend in CapEx as it ramped up through the year, we really expect depreciation to delever in Q4 as well.

Okay, helpful. I guess then just bigger picture, you helped with some comments on next year with some of the line items that were the big ones that the peer group has pointed out. But I guess, as we kind of just backup and think, you guys -- we frequently talk about the Burlington story catching up to the margin gap between you guys and your closest off-price peers. As you look at that gap, excluding the freight and wage pressure, how do you think about how much control you have on timing as far as pulling those levers that close that gap you had with TJ or to Ross on a multiyear basis to help you continue to drive margin upside in the medium term if those -- these specific line items remain a cost pressure for a couple of years?

Yes. Mike, but I guess the way it is...

I guess, you have lot of control over it, right?

Yes. I guess -- the way I'd answer that is, in terms of our EBIT margins, we've picked up 370 basis points over the last 5 years, and we just guided this year to pick up another 40 to 50, and we feel real good about that. The game plan, we're going to continue to run is going to be the same game plan that we run today, right? So we worry about what we can control. And so as you think about the gross margin side, this model is rooted in value. So as you think about your different margin levers, it's -- IMUs not going to be a huge contributor there. But we know that we can turn faster. So we're going to continue to plan our comp store inventories down mid- to high singles, we strongly believe we can turn faster. That's going to result in a lower markdown rate. And then obviously, we're doing everything in our power and Tom talked a lot too to drive our top line and driving our top line and increasing our sales productivity is another major driver in helping us close that gap. And the last thing I'd say on SG&A is the #1 goal and objective for everybody that works within sales support here in the company has a profit improvement goal. And we're all looking for ways to become more efficient, and I think always having a list of projects we're implementing and a list of projects to be analyzed, that's what helps us offset a lot of these other cost to come through. So it's going to be the same game plan going forward that we run.

And our last question comes from Brian Tunick of Royal Bank of Canada.

This is Bilun on for Brian. I wanted to ask about the smaller store strategy and store pressures. This is another quarter of nice contribution from new stores. And now that some of these smaller and/or refreshed stores are more mature, I believe 3 to 4 years old and still performing really well, would it be possible for you to share with us maybe some more metrics around them, maybe the comp outperformance or the sales lift you're seeing from the smaller and/or refreshed stores?

No. Just in general, we continue to be very pleased with our new store performance for both -- in terms of hitting their underwriting models, not just from a sales point of view, but from an EBIT margin point of view as well. And the stat that we give is typically one that we give at year-end, and we'll be happy to give it at the end of this year too. But I think what you're referring to is at the end of '17, we gave a stat comparing our 2014 and 2015 new store cohorts and how they performed versus the balance of the chain. It just so happened, they exceeded the comp average by 240 basis points and their EBIT margin expanded by over 200 basis points, more so than the chain. And we'll update that for the newest round of cohorts at the end of this year.

And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Tom Kingsbury for closing remarks.

Thanks, everybody, for joining us today. We look forward to speaking with you when we report fourth quarter results in early March. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.