Off-price retail company Burlington Stores (NYSE:BURL) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 12.3% year on year to $2.29 billion. Turning to EPS, Burlington made a non-GAAP profit of $0.98 per share, improving from its profit of $0.26 per share in the same quarter last year.
Burlington (BURL) Q3 FY2023 Highlights:
- Revenue: $2.29 billion vs analyst estimates of $2.30 billion (small miss)
- EPS (non-GAAP): $0.98 vs analyst expectations of $0.98 (small miss)
- EPS (non-GAAP) Guidance for Q4 2023 is $3.12 at the midpoint, below analyst estimates of $3.24
- Free Cash Flow of $120.7 million, up from $32.24 million in the same quarter last year
- Gross Margin (GAAP): 43.3%, up from 41.2% in the same quarter last year (beat)
- Same-Store Sales were up 6% year on year (beat vs. expectations of up 5.3% year on year)
- Store Locations: 977 at quarter end, increasing by 84 over the last 12 months
Founded in 1972 as a discount coat and outerwear retailer, Burlington Stores (NYSE:BURL) is now an off-price retailer that has broadened into general apparel, footwear, and home goods.
For example, if department store Kohl’s is left with a glut of swimsuits because of unusually cold weather, Kohl’s may sell those in bulk to Burlington at pennies on the dollar rather than discount the items and try to sell them individually. This is often done to clear floor space for a new season.
Burlington’s buying approach focuses on finding excess inventory or overstocked items from other retailers, so selection can change quickly and be varied. Shopping at Burlington is often a treasure hunt–what the consumer loses in reliable selection or the latest trends is made up for with very low prices. Prices of Burlington merchandise can be significantly lower than those of department stores. Over time, the company’s size and buying power has led to a more consistent selection of items from brands such as Tommy Hilfiger, Champion, and Dyson to name a few.
The core customer is the value-conscious shopper who enjoys the thrill of the hunt. This customer is typically a middle-aged, middle-income woman. This customer is willing to spend more time going through less organized racks and shopping exclusively in person–since Burlington has a very limited online presence–in exchange for meaningful discounts.
Off-Price Apparel and Home Goods Retailer
Off-price retailers, which sell name-brand goods at major discounts because of their unique purchasing and procurement strategies, understand that everyone loves a good deal. Specifically, these companies buy excess inventory and overstocks from manufacturers and other retailers so they can turn around and offer these products at super competitive prices. Despite the unique draw lure of discounts, these off-price retailers must also contend with the secular headwinds of online penetration and stalling retail foot traffic in places like suburban shopping centers.Off-price and discount retail competitors include TJX (NYSE:TJX), Ross Stores (NASDAQ:ROST), and Ollie’s Bargain Outlet (NASDAQ:OLLI).
Burlington is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.
As you can see below, the company's annualized revenue growth rate of 7.2% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new stores and expanded its reach.
This quarter, Burlington's year-on-year revenue growth clocked in at 12.3%, falling short of Wall Street's estimates. Looking ahead, analysts expect sales to grow 9.4% over the next 12 months.
Number of Stores
When a retailer like Burlington is opening new stores, it usually means it's investing for growth because demand is greater than supply. Since last year, Burlington's store count increased by 84 locations, or 9.4%, to 977 total retail locations in the most recently reported quarter.
Taking a step back, the company has rapidly opened new stores over the last eight quarters, averaging 9.2% annual growth in its physical footprint. This store growth is much higher than other retailers. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.
Burlington's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 4.3% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.
In the latest quarter, Burlington's same-store sales rose 6% year on year. This growth was a well-appreciated turnaround from the 17% year-on-year decline it posted 12 months ago, showing the business is regaining momentum.
Gross Margin & Pricing Power
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.
Burlington has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it's averaged a healthy 41.1% gross margin over the last two years. This means the company makes $0.41 for every $1 in revenue before accounting for its operating expenses.
Burlington produced a 43.3% gross profit margin in Q3, marking a 2.1 percentage point increase from 41.2% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).
Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, Burlington was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 4.6%. However, Burlington's margin has improved, on average, by 1.6 percentage points year on year, an encouraging sign for shareholders. The tide could be turning.
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Burlington reported EPS at $0.98, up from $0.26 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2020 and FY2023, Burlington's adjusted diluted EPS flipped from negative to positive. These results show that the company is heading in the right direction as profitability is vital for success in the challenged consumer retail sector.
Wall Street expects the company to continue growing over the next 12 months, with analysts projecting an average 39.6% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Burlington's free cash flow came in at $120.7 million in Q3, up 274% year on year. This result represents a 5.3% margin.
Over the last eight quarters, Burlington has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 0.3%, subpar for a consumer retail business. However, its margin has averaged year-on-year increases of 7.1 percentage points, a great result that should improve its prospects.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Burlington's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC is 9.7%, somewhat low compared to the best retail companies that consistently pump out 25%+ returns.
Key Takeaways from Burlington's Q3 Results
With a market capitalization of $8.76 billion, Burlington is among smaller companies, but its $615.9 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
Although revenue missed slightly, the all-important same-store sales metric in retail beat expectations. It was also good to see Burlington beat analysts' gross margin expectations this quarter. Lastly on the positives, full year EPS guidance was raised and management gave positive commentary on the current environment, saying that “November is off to a solid start, helped by cooler weather at the beginning of the month. We feel very good about how we are set up for Holiday." The stock is up 12.6% after reporting and currently trades at $154 per share.
Is Now The Time?
Burlington may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Burlington isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been mediocre over the last four years, but at least growth is expected to increase in the short term. And while its expanding store base shows it's playing offense to grow its brand, the downside is that its declining same-store sales suggests it'll need to change its strategy to succeed. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically.
Burlington's price-to-earnings ratio based on the next 12 months is 20.1x. In the end, beauty is in the eye of the beholder. While Burlington wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.
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