A concurrence of factors has helped Burlington Stores Inc. fire on all cylinders.
The off-price retailer is benefiting from lower-income shoppers who need a deal, as well as trade-down consumers who want a deal. A decision to flow goods later in the quarter allowed it to adjust the mix, and lower product sourcing costs contributed to better margins for the first quarter.
Burlington’s CEO Michael O’Sullivan told investors Thursday in an earnings conference call that results were “driven by higher merchandise margins from strong regular price selling, leading to faster turns and low markdowns, and also driven by faster than expected progress on our supply chain initiatives.”
He said the company also made a “deliberate” decision to flow seasonal merchandise later in the quarter versus last year’s timetable.
“The benefit of that is that it gave us a chance to read and react more effectively to early season trends,” O’Sullivan said. “By flowing receipts later, we were able to adjust the mix of those receipts and we were able to adjust the allocation of those receipts by store based upon real selling data. And I would say that contributed to faster inventory turns, lower markdowns, and stronger sales.”
The CEO also said delayed tax refunds contributed to a slower start to the quarter’s sales. He all income groups are feeling economic pressure, and identified two main customer segments. The deal shoppers tend to be lower income and have larger families, while the want-a-deal shoppers have slightly higher incomes and more financial choices. The former “needs value, especially at opening price points” and tend to seek out moderate brands.
O’Sullivan also said that over the last five quarters, discretionary income for the lower income group “appears to have stabilized.” And while still fragile, the situation isn’t getting worse given that real incomes aren’t shrinking as they did in 2022 now that inflation has come down, he said.
And while that group remains a very important customer base for Burlington, O’Sullivan sees some opportunity ahead for its other customer base now that the trade-down consumer is walking through Burlington’s doors. “We believe that now that demographic is also feeling the pinch. We think that’s good for us. It means that those customers are shopping off price in search of value,” he said, explaining that this group likely had savings previously that helped insulate them from the impact of inflation.
For this group of customers, O’Sullivan sees an opportunity to increase its mix of brands as a way to elevate its assortment mix. “In fact, we’re already seeing some success with that approach in businesses like sportswear. We plan to lean into that opportunity more,” he said.
But the CEO was also quick to note that while brands are important, in off-price the “most critical thing by far is value. Brands are just one component of value. Fashion, quality and, of course, price also drive the customers’ perception of value. You can have a great brand but if the fashion, the quality or the price is wrong, [the item is] going to end up in the clearance rack.”
Because in this economy, all shoppers are now focused on value, O’Sullivan said that Burlington can do more to drive sales with trade-down shoppers. “When those shoppers walk in our store, they’re more likely to be drawn to great deals on on better brands,” he said.
As for some retailers electing to reduce—or roll back—some price points, O’Sullivan doesn’t think that’s necessary.
“As an off-price retailer, relative value is critically important to us.…Many retailers raised their prices over the last few years. Now that the consumer is pushing back, it’s not that surprising that some retailers are having to roll their prices back,” he said. In contrast, O’Sullivan said Burlington has not raised prices and the reason is that its core customer has been under economic pressure since the end of 2021. “So we’ve had to stay very, very sharp on value. In other words, I feel like we’re already starting in a very strong value position,” he said.
That starting point on value that began in 2023 didn’t come without some growing pains. A year ago, O’Sullivan acknowledged that charging higher prices in 2022 was a mistake that “backfired” because asking customers to pay more when rivals were rolling out promotions wasn’t the best move.
Net income for the three months ended May 4 more than doubled to $78.5 million, or $1.22 a diluted share, on a net revenue increase of 10.5 percent to $2.36 billion, which included a 10.5 percent increase in net sales to nearly $2.36 billion. Net income in the year-ago quarter were $32.7 million, or 50 cents a diluted share, with total revenue of $2.14 billion that included net sales of $2.13 billion. Comparable store sales for the quarter rose 2 percent, while the gross margin rate rose 120 basis points to 43.5 percent. Supply chain initiatives helped to lower product sourcing costs to $183 million from $187 million a year ago.
O’Sullivan said new stores were the key driver of top-line growth. The retailer opened 36 new stores, relocated 11 and closed 11 locations, ending the quarter with 14 net new stores in the period and a total of 1,021 doors. He said Burlington is “on track to open 100 net new stores” for the year.
Additional sales from new store growth—mostly 25,000-square-foot doors in busy strip malls—will become an important driver of Burlington’s goal to reach $16 billion in sales in five years.
Kristin Wolfe, executive vice president and CFO, told analysts that Burlington expects to close or relocate 150 to 200 stores over the next five years. She said the plan is to exit out of older oversized doors that are in secondary and tertiary centers, and move into “higher traffic centers that tend to trade more broadly across income demographics.”
The company is also planning to open a new distribution center in New Jersey during the second quarter.
For the full Fiscal Year 2024 ending Feb. 1, 2025, Burlington guided adjusted earnings per share (EPS) in the range of $7.35 to $7.75, excluding certain costs connected to the acquisition of certain Bed Bath & Beyond leases. Total sales were projected to rise 8 percent to 10 percent, on top of the 10 percent gain for the year ended Jan. 27, 2024, with comparable store sales up 0 percent to 2 percent.
For the second quarter ended Aug. 3, 2024, adjusted EPS was guided to the range of 83 cents to 93 cents, on a total sales increase in the range of 9 percent to 11 percent, with comparable store sales up 0 percent to 2 percent.
