Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing buying books through the Burlington stores Q4, 2019 earnings conference call.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question answer session to asked a question during recession, either press star one or the telephone if you require further assistance. Please press Star then zero I wouldn't electric supposed to his conference call Mr., David Glick Senior Vice President Treasurer 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 2019 fourth quarter operating results.
Our presenters today, our Michael O'sullivan, our Chief Executive Officer, and John Crimmins, Chief Financial Officer.
Before I turn the call over to Michael I would like to inform listeners that this call may not be transcribed recorded or rebroadcast without our expressed permission.
A replay of the call will be available until March 12, 2020.
We take no responsibility for inaccuracy is that may appear in transcripts of this call by third parties.
Our remarks, and acumen aid that follows or copyrighted today my 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 2018, and another filings with the FCC all of which are expressly incorporated herein by reference.
Please note that the financial results and expectations, we discussed today or in a continuing operations basis reconciliations of non-GAAP measures. We discussed today to GAAP measures are included in today's press release now Here's my.
Thank you David.
Good morning, everyone and thank you for joining us on this morning's fourth quarter earnings cool.
We would like to structure our discussion this morning as far as.
First I will begin with some brief comments on our fourth quarter results.
Second.
I would like to take a step back and talk about our strategy and the initiatives that we will be pursuing to support this strategy.
My comments will build on many of the point that we discussed in our third quarter Cool last November.
Good using the strategy discussion as context, I will talk about the outlook for the next few years and specifically our sales and earnings guidance.
Fiscal twentytwenty.
I will then hand, the call over to John to provide more details.
Fourth quarter financial results.
And on our guidance at this school Twentytwenty.
We will then be happy to respond to any questions that you may have.
Okay and stuff with the full quota.
As reported in today's press release, we were pleased with our solid comparable store sales gain of 3.9%.
Which together with strong performance from our new and Noncomparable stores contributed to a total sales increase of 10.5%.
Adjusted EBIT margin expanded by 40 basis points. This drove a 15% increase in adjusted earnings per share ahead of our guidance.
In his comments later in the cool John will provide more detail on the main drivers of this margin expansion.
In terms of specific businesses, our strongest growth came in two ways and gifts.
We were pleased with the performance of these seasonal businesses.
We also made progress developing key underpenetrated categories, such as home and beauty.
Let me move on now to talk about how strategy.
I've been with the company for almost six months.
I continue to be very impressed by our executive team.
The merchant organization the strong partnerships, we have built without vendors.
Flexibility about supply chain and the quality of our stores organization.
All of these fundamental capabilities and functions are in very good shape and provide a strong happen for continued growth.
But as successful as we have been over the last five yes, we are still a long way from what I will call our full potential as a business.
Our sales productivity and that profit margins have improved over the years remains significantly behind relevant benchmark.
So over the past few months I had been working with the executive team to develop define and begin to implement our strategy to achieve its full potential.
The cool premise of this strategy is that the off price shopper cast a bubble now about great merchandise value.
Every day, they provide feedback on what they like what they don't like and how they define value.
We can see this information and these insights in our daily sales reports.
The off price model has a major advantage over other retail format.
By buying near ran and Opportunistically, we can respond to this feedback and adjust out plans and merchandise assortments based on what the customer is actually telling us.
So to drive toward our full potential our strategy is to even more aggressively execute steel price modal.
We are in off price retailers the off price sector is winning and we intend to become an even stronger off price retailers.
We have a great talking point and set of capabilities today, and merchandising supply chain systems and stores.
But there are numerous ways in which we can become even back at executing a model.
Over the past few months, we have developed and begun to implement detailed initiatives to support this off price full potential strategy.
For the purposes. This cool I'm going to simplify the discussion and group these activities into five buckets.
Number one actions to more effectively faced the sales trend.
These actions include holding and tightly controlling liquidity.
Turning a comp sales slightly more conservatively.
And making sure that how much in some planners are well positioned to chase sales.
These actions will not only enable us to more effectively chased the trend. They will also allow us to take rates were advantage of in season opportunistic buys.
Number two.
Greater investment in our merchandising capabilities.
This includes more headcount, especially in growing or under developed businesses.
Training coaching.
Improved tools and reporting.
The other forms of merchant support.
These investments will improve our ability to develop vendor relationships to source, great merchandise buys to more effectively chase the sales trend and to strengthen and expand key businesses.
Number three operating with leaner inventories.
We have too much inventory in our stores and have already begun to reduce these inventory levels.
Our goal is to make every hang accounts.
Going forward, we will be carrying much less inventory and within the racks, the customer will find a higher mix of fresh receipts and great merchandise values.
This should lead to higher styles faster turns and lower markdowns.
And before improving operational flexibility.
Executing the off price model is a team game.
The merchant some kind has faced the sales trend and shift the assortment based on what the customer is telling us.
Our key operating assumptions need to be able to support the downstream implications of this chase.
Over the last few months I have been very pleased by how well our stores and our supply chain teams have responded to this challenge.
For supply chain. This means absorbing sudden changes in the forecast and getting merchandise to the floor as fast as possible.
The stores it means flexing up well flexing down individual departments based on receipt flow and trend.
In Twentytwenty, we will be looking at ways to make our key operational processes, even more nimble and effective.
Number five challenging expenses.
As a company we already have a strong expense management culture.
This focus on tightly controlling expenses fits very well with my own preferences and experience.
But even in this area, we have significant additional opportunities.
There are two main drivers of these.
First a more conservative approach to planning naturally forces, even tighter expense control.
When you kind of business at an annual 1% to 2% comp growth rather than 2% to 3% annual comp growth. This triggers a more difficult set of budget discussions.
And working through our detailed operating budget for Twentytwenty, our executives and expense manages did a great jump rebasing their expense plans to live within the tighter constraints imposed by the lower comp growth assumption.
Obviously, they should put us in a much stronger position to drive operating expense leverage on any ahead of plan styles.
Second as the executive team and I have worked on the details of our full potential strategy.
We have identified areas of the business.
Business processes, and operating norms, and frankly things we have been doing for years now.
We have begun to challenge with a new and additional lens of our full potential strategy. We think we can find ways to drive higher efficiency as well as increased flexibility and many of these areas.
Across the five buckets of activity that I have described there were some actions that we have already begun to take.
Like building more of a sales pace into the business, while reducing our inventory levels.
These actions should start to have some very early beneficial impact in twentytwenty.
But there are other important items, such as greater investment in our merchant capabilities that will take much longer have impact and to flow through to performance.
Overall, I would expect initial but modest benefits in twentytwenty, a greater impact in 2021, and then more momentum in Twentytwenty too.
My intent is to use our quarterly earnings calls in May August and November to provide detailed commentary on our business results and near term outlook and only where appropriate to offer some very high level updates on the strategy.
But each year, we will use our march pool to provide a more in depth assessment and analysis of our off price full potential strategy.
At this point I would like to turn to our Twentytwenty guidance.
As noted in today's press release, we're guiding to full year comp store sales growth of 1% to 2% and EPS growth of 8% to 10%.
There are several specific points that I would like to call out.
Our comp guidance is slightly lower than we have provided in the past.
This is rooted in our full potential strategy as I discussed earlier planning slightly more conservatively and then chasing the trend in season actually puts us in a stronger position to drive momentum in our comp store sales growth.
Our plans also include much tighter management of inventory levels.
At the start of February our comp store inventory levels were down 15% versus last year.
So we have started twentytwenty with very clean inventory levels and content.
There will be some exceptions month to month, but overall, we expect average inventory levels to be down low double digits throughout the year.
This tighter inventory control should drive faster turns and lower markdowns.
The Twentytwenty budget also includes a significant step up in the resources, we are investing in our merchant capabilities.
These investments are being offset by expense savings across a broad range of areas elsewhere in the P. now.
Overall, we believe that our guidance is appropriate given the strategic posture of the company, but let me emphasize if the sales trend is that we will take that.
Before I turn the call over should gone I would like to address two additional topics.
First beginning with our first quarter results, we will report our comparable store sales growth and our total sales growth percentages on a rounded basis.
This practice is in line with how our off price his report that results.
Secondly, we made the decision recently to wind down our E Commerce operation.
This represented about 0.5% of our total sales.
In our business, which is a moderate off price business the nature of the treasure Hunt and the average price point that we operate that mean that bricks and mortar stores have a significant competitive and economic advantage over E commerce.
We intend to focus our energy and resources on driving profitable sales growth in our bricks and mortar stores.
We will also continue to aggressively expand an upgrade this store network through our new store opening and remodel programs.
I'm now going to turn the call over to John who will provide more detail on our fourth quarter financial results and on our Twentytwenty sales and earnings guidance.
Thanks, Michael Good morning, everyone.
Let me start with a review of the income statement.
For the fourth quarter total sales increased 10.5% and comparable store sales increased 3.9%, new and non comp stores contributed an incremental 151 million in sales for the fourth quarter.
Our Q4 comp store sales performance was driven primarily by an increase in units per transaction, which you are and conversion up slightly while traffic was down slightly.
The gross margin rate was 42.1%, a 20 basis point increase versus last year's rate.
Merchandise margins increased 40 basis points, which was partially offset by an increase in freight costs.
Merchandise margin increase was driven primarily by an increase in markup as well as a slight benefit from lower shortage.
Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs.
Were flat as a percent of net sales versus last year's rate.
Adjusted EPS DNA, excluding management transition costs was 22.5% 20 basis points lower than last year as a percentage of sales.
This improvement was driven largely by strong sales growth, resulting in leverage on occupancy and marketing expense as well as corporate costs.
Adjusted EBIT, excluding management transition costs increased 14% for 35 million to 297 million.
This translated to a strong 40 basis point increase in rate for the quarter.
Depreciation and amortization, excluding favorable lease costs increased 4 million to 55 million.
Net interest expense decreased by 2 million versus last year's fourth quarter to 11 million.
The adjusted effective tax rate was 23.8% for the fourth quarter versus last year's fourth quarter adjusted effective tax rate 22.2%.
Combined this resulted in adjusted net income excluding management transition costs of 218 million, a 13% increase versus last year.
We continue to return value to our shareholders through our share repurchase program.
During the quarter, we repurchased approximately 376000 shares of stock for $83 million.
We have $399 million remaining on our share repurchase authorization.
All of this resulted in diluted earnings per share of $3, an eight cents versus $2.70 last year.
Adjusted diluted GAAP diluted earnings per share were $3.25.
This is $2.83 last year, which excludes a four cents of management transition costs, which was not reflected in our guidance.
The $3.25 per share result represented an eight cents beat versus the high end of our original guidance with seven cents would that be a true operating b and one cents of the upside attributable to the tax benefit related to share based compensation.
Turning to our balance sheet at quarter end, we had $403 million in cash no borrowings on Arabia ill and an unused credit availability of approximately 502 million.
We ended the period with a total debt of approximately 1.0 billion.
And a debt to adjusted EBITDA leverage ratio of 1.1 times.
On February 26, 2020, we completed the repricing of our senior secured term loan facility.
Which lowered our applicable interest rate margin by 25 basis points from LIBOR, plus 200 to LIBOR plus 175, which is expected to result in approximately 2.4 million in annualized interest savings.
Merchandise inventories were 777 million versus 954 million last year. This decrease was due primarily to a 15% decrease in comp store inventory levels.
As well as a decrease in pack and hold inventory, which was 26% of total inventory at the end of fiscal 920 19 compared to 30% at the end of fiscal 2018.
Comp store inventory turnover improved 13% for the fourth quarter.
Moreover, we were pleased with our inventory content and freshness inventory, aged 91 days and older at the ended the fourth quarter was down versus the prior year at record low levels.
During the quarter, we added one net new store, including one relocation and to store closures.
Ending the period with 727 stores.
In fiscal 2020, we expect to open 80, new stores and closed or relocate 26 stores. This translates to 54 net new stores planned to be opened in fiscal 2020.
This projected store count factors in the closure of our E Commerce business, which has historically been counted as one of our stores.
Our average new store in fiscal 2020 will be 39700 square feet. The first time, our average new store will be less than 40000 square feet.
In terms of our fiscal 2019 full year performance.
Total sales rose, 9.3% and included a comparable store sales increase of 2.7% following a 3.2% comp store sales gain in fiscal 2018.
Gross margin was 41.8% flat as a percentage of sales versus fiscal 2018, which included the offset of a 20 basis point increase in freight.
Merchandise margin for fiscal 2019 was up 20 basis points versus the prior year product sourcing costs were flat as a percentage of sales versus last year.
As a percentage of net sales adjusted SDMA improved 20 basis points to 25.5% expense leverage was driven mainly by strong sales growth, which resulted in expense leverage on occupancy marketing and corporate expenses.
Adjusted EBIT increased by 12% or 73 million to 674 million, representing a 20 basis point increase in rate for fiscal 2019.
Depreciation and amortization, excluding favorable lease costs increased by $19 million to 210 million.
Net interest expense declined 6 million to 49 million.
The adjusted effective tax rate was 20.1% as compared to last years adjusted effective tax rate of 18.8%.
Combined this resulted in net income of 465 million and increased 12% versus last year and adjusted net income $499 million exclusive of management transition cost versus an adjusted net income of 443 million last year.
Diluted earnings per share were $6 in 91 cents versus $6.04 last year.
Diluted adjusted net earnings per share for 741 versus 644 last year.
This excludes a six cents impact of management transition costs incurred during the third and fourth quarters of fiscal 2019.
Our fully diluted shares outstanding were 67.3 million shares versus 68.7 million last year.
Cash flow provided by operations increased 252 million to $892 million for fiscal 2019, driven by higher net income and changes in working capital.
Net capital expenditures were $269 million for fiscal 2019.
Now I will turn to our outlook.
As a reminder, as Michael discussed in his prepared remarks going forward, we will be around in comp store and total sales percentage changes for fiscal 2020.
For the 2020 fiscal year, we expect.
Total sales growth in the range of 8% to 9% as compared to fiscal 2019 on top of last years total sales increase of approximately 9%.
This includes and approximately 0.5% decrease related to the closure of our ecommerce business as Michael discussed earlier in the call.
Comp store sales to increase in the range of 1% to 2% for fiscal 2020 on top of last year's approximately 3% increase.
Depreciation and amortization exclusive of favorable lease amortization to be approximately 235 million.
Adjusted EBIT margin rate to be approximately flat versus last year.
Net interest expense to approximate 45 million.
An effective tax rate of approximately 21%.
Capital expenditures net of landlord allowances expected to be approximately 400 million.
This results in adjusted earnings per share guidance in the range of $7, a 97 cents to $8 in 12 cents than expected increase of 8% to 10%.
This outlook excludes and expected 16 cents negative impact from management transition cost.
For the first quarter of 2020, we expect.
Total sales growth in the range of 8% to 9% on top of last years total sales increase of approximately 7%.
Comp store sales assumed to increase between one and 2% on top of last year's approximately zero percent comp store sales result.
Effective tax rate of approximately 15%.
And adjusted earnings per share in the range of $1.29 cents to $1.34 cents.
This compares to $1.26 per share last year.
This outlook excludes an expected four cents negative impact from management transition costs.
With that I will turn it over to Michael for closing remarks.
Thank you John.
In summary, we are pleased with our solid results for Q4 and fiscal 2019.
These results demonstrate that we were in a strong position as a business and that we have a great platform for growth.
But despite these results we believe that we still have a long way to go to achieve our full potential as a business.
We have an amazing team here about intent and it has been remarkable to watch this team over the last few months develop and start to mobilize behind our full potential strategy.
I'm very excited about what we're going to achieve together over the next several years.
Before I turn the call over to the oil price up your questions.
I would like to make a few comments about the Corona virus.
The situation is evolving very rapidly and there are a lot of unknowns.
Our guidance for the first quarter does not and cannot incorporate the full set of risks that we along with other retailers may be exposed to in the coming weeks.
That said, we are taking steps to prepare as best we can for a range of possible outcomes.
Our number one priority in these preparations is to ensure the safety of our associates and our customers.
Secondarily, we will manage our business. So it can be effects. It can flexibly respond to whatever situation we're faced with.
With that I would like to turn the call back to the operator to open it up to questions.
Operator.
Ladies and gentlemen, if you have a question or comment at this time. Please press the star than the one key on your Touchtone telephone. If your question has been answered a question with yourself from the Q. Please press the pound key immune trust, its RMBS, which will limit yourself to one question and one follow up and feel free to get back in queue for additional questions.
Our first question comes from Matthew Boss with JP Morgan.
Great Congrats on on a nice quarter and thanks for all the detail.
So Michael you you described in detail how the approach you're taking will set the company up to better chase the sales trend going forward.
Maybe could you elaborate on what happens if the external environment or to weekend and sales trends, where it's a slow.
Well good morning, Matt and thank you for your question.
Yes, Youre right in my remarks, I described how the actions were taking.
Controlling liquidity running with leaner inventories.
Turning comp growth slightly more conservatively.
And capturing managing expenses I described how these actions could put us in a better position to flex up and chase the sales trend if.
The trend is that by taking this approach we can more effectively execute the off price model and that should help us.
Contrived, our sales momentum and profitability over time.
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But the advantage of the off price model is not just in chasing the upside.
The off price model is also advantaged versus other retail formats when it comes to absorbing the downside.
And we'll be times, when the external sales trend will weaken.
That could be macroeconomic.
Political weather numerous other external issues that could cause.
Consumer confidence consumer spending to soften.
When this happens it affects all retailers.
The difference with off price is if we can kathleen control and liquidity and tightly manage our inventory and expenses and plan our comp sales somewhat conservatively.
And we'll be in a better position to absorb and recover from any any downturn in sales.
And maybe the best way to sum this up I think is to say that.
The off price model when its managed provides the flexibility to chase the sales trend up.
All to absorb and recover from a decline in the sales trend.
And it's able to do that because it doesn't suffer from the same long lead times and rigidities that other retail formats suffer from.
That's helpful. So John and then can you help us walks through the components of your 2020 guide maybe specifically if you could help break down the growth between gross margin expansion SGN a leverage in share repurchases and then just any help with the margin rate puts and takes in Europe.
First quarter guidance, I think would be really helpful.
Sure Matt Thanks for your question.
Let me start with our full year guidance.
So as you know, we're taking a little bit more conservative approach in terms of planning the topline with our comp sales of 1% to 2% total sales at 8% to 9%, which includes our 54 net new stores in the wind down of our E Comm business.
Which is going to hurt us by about <unk>, 0.5%.
We plan to our inventory and expenses to be consistent with these sales assumptions as Michael said in our prepared remarks. We believe this more conservative approach is going to give us.
A chance to chase more opportunistic buys.
So the sales trend is there we're going to chase it and we hope that would drive incremental sales, which in turn would drive more favorable leverage.
From a markdown and from an expense standpoint.
But back to the assumptions in our guidance from a gross margin perspective, we expect to get some merge margin expansion as we would expect our inventory strategy to drive lower markdowns. In addition, we do expect a little bit of improved leverage on freight partially driven by the elimination of our E com shipping costs.
As Michael discussed earlier, we're making investments in our business some of which will be in our merchandising capability and in our supply chain, which we include in our product sourcing costs. So we do expect some de leverage in product sourcing costs. This year as we spend in advance with the expected benefits.
We do expect a little bit of leverage on SGN added to comp.
We'll have some de leverage this year in other income, where we're lapping significant insurance recoveries in 29 team and in depreciation as we've accelerated our capex. Both this year in last year, primarily driven by investments in stores and in supply chain to support our planned growth all of this nets out to.
Our churn rate that will be approximately flat to last year Super quick recap gross margin less product sourcing costs, which include some investment nets to some slight leverage SGN a provide slightly more leverage.
The total of the two are offset by deleverage and other income and depreciation resulting in the flat EBIT margin rate for the year.
And our guidance also assumes share repurchases similar to the amount, we repurchased in Fynineteen, which was $300 million and finally, our tax rate includes the same EPS benefit from the impact of share based comp that we saw in 2019, which was about 46 cents.
As we've talked about previously we can't really control this and it's a very difficult to forecast or plan.
Share based comp impact on our tax rate. So what we'll do his update you on this factor each quarter as we've done this year.
As for our first quarter guidance.
Both our EPS growth.
Rate of 2% to 6% and our EBIT margin rate for Q1 will be less than our full year expectations as we de lever in product sourcing costs and SDMA during the quarter as we begin some of the incremental investments we've mentioned in support of our full potential strategy during the first quarter, which is our smallest Phil.
This quarter or the year and finally, just reminder, as Michael mentioned earlier, our guidance does not include any adjustment for the risk, we and other retailers face as the Corona virus situation continues to evolve.
Thats great color best of luck.
Okay.
Our next question comes from Ike, Berkshire with Wells Fargo.
Hey, Good morning, Michael Johnson David.
Michael.
First question in the prepared remarks, you mentioned the Corona virus Hemmings I'm, just curious is coming up a lot in this conference call can you can you can you provide any additional color on the possible impacts of this may have on the business I guess I'm. Just wondering if you think the bigger impact might be on supply or on demand of the business.
Well good morning.
Thank you for your question.
I'd say the honest answer is that we really don't know what impact the corona virus might have on the retail industry or on our business.
Situation is evolving very quickly and we're walking in unfold along with everyone else.
We are fortunate though in the sense that we don't have any overseas operations and we directly import very little of the merchandise that we Sal.
And for now we see no impact a tool.
But of course, there was a risk and that the situational worsen and that could affect either supply or demand.
As we thought about this there are a range of possibilities a wide range of possibilities on what could happen over the next few weeks and months.
So like any responsible company, we're preparing as best we can for multiple different scenarios.
I'm in those preparations.
I would say our number one priority by far is the safety and well being of our employees and our customers.
And we'll be guided by whatever the relevant agencies and relevant authorities.
Tell us, but but we will take whatever steps necessary to protect employees and customers.
Im secondarily as far as the business is concerned we'll make sure that we are as flexible as possible. So we can navigate the business through whatever issues that we need to.
That means tightly controlling liquidity inventory and expenses.
As I said, a few moments ago. The off price model is it's more resilient and more flexible than other retail models that does not mean that were not exposed to external risks in shocks, but it does mean that we should be able to more rapidly react to and recover from whatever situation we face.
Got it and then is the second question if I if I may on the E commerce, the shutdowns not a big surprise, but I guess could you provide more color on what drove this this decision errors and will will there be.
Any kind of savings from the shutdown was there any type of crossover traffic between ecommerce in stores is just wondering if there is a little bit more color you could share. Thanks.
Good question, let me address that.
There were really.
Three factors that went into the decision to shutdown our ecommerce operations.
Firstly, we're I moderate off price retailers I would underline the work moderate in that sentence. Our average unit retail is about 12 box not the average price per unit in our stores.
E Commerce when you fully account for the cost of merchandising processing shipping accepting returns, it's it's very difficult.
Impossible to make money at those price points in the businesses that we compete in.
There are also very significant constraints on recreating the off price treasure Hunt and an online environment.
Thats a reason number one secondly, and this isn't just a conceptual argument the data shows.
But over the last several years as E Commerce in general has grown.
Bricks and mortar moderate off price retail has continued to power ahead and to gain share.
You can see that just in our own results our topline growth in the last three years has averaged about 8% per year, driven by our bricks and motor stores and we're clearly taking market share I'm of course, we expect we anticipate E. Commerce is going to continue to grow in many sectors of retail but in the moderate of pro.
Nice business.
We believe growth is going to be driven by physical stores.
The third point to make is that we at Burlington with the smallest up to three major off price retailers.
And we have significant potential for phone the growth in bricks and motor network.
We have about 720 stores today.
Our off price peers, each have double or triple that so our focus is to drive increased sales through our existing bricks and mortar stores and through our new store opening program and our store relocation program.
Im on the other parts of your question given that it was only.
4.5% of science the impact to the shutdown of E commerce on our overall sales and earnings is not material and as for the cross over traffic between E. Commerce in stores. We think we have other more cost effective ways to engage with customers digitally and that by Dr. drive traffic to our stores.
Thanks, everyone. Good luck.
Thanks. Thanks.
Your next question comes from John Kernan with Cowen.
Good morning, Michael.
Okay well strategy.
Just wondering how big of a change this.
Strategy as for the company in total.
How difficult you think it'll be to get the organization moving in this direction.
Thank you John it's good to hear from you. It's a very good question.
I think I would onto that by saying.
As you look at Burlington over the last.
10 years, certainly over the last five years that the company.
As has developed and evolved as an off price retailers I'm all the major elements that I described in my prepared remarks.
Liquidity Chase inventory turns opportunistic buys merchant capabilities. These have all been part of the language half for a long time.
They are all critical components of the off price model.
All we're really doing now is committing the business too much more aggressively executing this model.
In other words, our full potential strategy is.
He is a more aggressive enhanced stepped up version of the same strategy that the company's been pursuing for many years.
Now it's true that we are making some significant changes, but those changes feel very natural I mean, it. Thank I would say that there's a lot of excitement and energy in the organization behind this full potential strategy.
Im one of our senior executives here at Burlington is a football fan I should be clear on American football fan of course anyway. His his description is that.
He says that over the last five years, we've been running the same plays.
These plays have worked well for us and have driven some very nice results, but now we're making some improvements to these plays.
And we also have some very interesting new plays.
So as a team we're feeling very good about the opportunity had to raise our game.
Look I am on him on shaky ground when it comes to American sports metaphors, but but I think thats a good description of how the organization feels right now about our full potential strategy as a lot of energy and excitement here and what we can achieve.
Got it looking forward to seeing some of these new place just as a follow up to that if you tried to quantify the financial impact of the fall off price potential strategy.
Is it possible to grow the sales productivity.
Towards the 400 dollar per square foot level that your peers operate and move the operating margin.
Closer to 13%.
That's a good direct question I'd actually I'd like you to ask that question again in a couple of years because right now.
I don't know enough to offer a menu meaningful quantification of Apple potential strategy.
Instead, let me let me offer up a couple of things that we do know things that I am confident Tal.
Firstly, we know that there are a lot of improvements that we can make and how well we deliver value to our customers and how effectively we execute the off price model.
Of course, it will take time for all of the initiatives and I've described to take hold but we're excited about our strategy and we're confident that we'll have a major impact on outperformance.
Secondly, we also know.
That's a very significant sales productivity and profitability gap between us and our off price peers.
For sure there are some structural differences between us and those companies, but still this data provides a useful reference point.
It gives us confidence that if we improve our execution of the off price model.
And we should be able to drive significant improvements in our financial results.
The.
The final point that I'd make is that progress never happens in a straight line, we're confident in our strategy and we know what we need to do but things will go wrong, we will make mistakes and there will be external factors that will temporarily get in the way.
As we move forward with our full potential strategy, we need to overcome and navigate those issues.
But this is the right direction of travel and should over time drive stronger financial performance.
Got it thank you.
Our next question comes from Lorraine Hutchinson with Bank of America.
Thanks, Good morning, Michael I was hoping to get your assessment of the fleet and then as you think through the long term, what's your potential for store count over the years.
Well Lorraine. Thank you for your question.
Our our new store opening program has been very successful we've we've increased a significantly over the last several years.
As as John mentioned in his prepared remarks in 2019, we opened.
76, new stores, we closed 24 stores.
For a net addition of 52 stores.
Now as you'd expect the stores the we're closing our older and less productive. So so the program represents a significant upgrade as well as expansion.
And as John also mentioned Runco back over the numbers, but as John also mentioned in Twentytwenty will be following a very very similar pace of activity.
So we're excited about the potential to add new stores, we think has plenty of runway that.
We.
We're also going to be experimenting with our prototype looking at opportunities to make that more flexible as John mentioned, we've been on a run now for the last several years of making the prototype a bit smaller we'll continue to push the envelope that so overall, we think as as plenty of additional opportunity to expand that the store base.
Thank you.
Our next question comes from Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much good morning, and Michael Thank you for.
Sharing your full potential strategy. This is spend are very very helpful. Color I wanted just asking about the strategy.
And I appreciate the glide pass that you offered which some modest benefits here this year.
More progress next year in and it's far greater impact I 2022, I'm wondering if you can help us.
Understand which of the size for baby to our three if the five you would start to see modest benefit from and I would imagine that particularly item number two investing in the merchandising team I would imagine that those will be so.
Expenses that will perhaps ramp earlier, maybe than some of the benefits I think you alluded to that earlier, so what would be which elements of the strategy would you expect kiss to you know sitting.
Here a year for now will you expect to be able to say, we made progress on X and y.
While we invested on a and b that would be helpful.
Yes, well good morning, Kimberly that's a good question.
As an executive team, we've actually spent quite a bit of time.
We're working through the timing and pacing the strategy, we want to make sure that where.
We're buying things off in indigestible chunks and that we can make progress.
On the things that.
The the closest in that of the easiest to sort of start with and as we work through the various initiatives I would say that they fell into three segments number one initiatives.
That we're moving forward with right away.
Number two initiatives that we need to test or to pilots or that will take a little bit longer to get underway.
And then number three initiatives that frankly, we need to study a bit more than not for implementation and twentytwenty, but maybe in 2021.
Now.
The things that ready youre getting at our in that first bucket and that the obvious things the stronger sales pace.
We're starting where we're already in a stronger sales chase right now planning the business more conservatively controlling liquidity much more tightly than we have in the past.
So so that's that's something we're doing out of the blocks leaner inventories, making sure that.
Our inventories are.
The content of our inventories is high quality as possible and there were turning as fast as possible.
Again out of the blocks, where that's that's a key initiative that where we are moving forward on.
Also within that first pocket, we're making investments in the merchant teams. So we are moving forward on that but I think the the benefits of that will come later, because obviously it takes time to build head count to build talent.
And to actually have having an impact on the business now the other things the things that fall into the other buckets. The initiatives, we need to test pilot and the initiatives we need to study for later implementation I won't get into those for competitive reasons, but by the rule designed to help us more effectively and fully execute the off price.
Model lateral under that umbrella and includes initiatives in merchandise planning and supply chain stores loss prevention real estate marketing and other areas.
But overall I feel like Adam executive team, we feel good about the amounts of activity. So we have going on in 2020 and as I said in my remarks, we think there'll be some early beneficial impacts this year and in that will cascade overtime and the way that you you mentioned in your in your question.
Great. Thank you so much.
Our next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Thanks for taking my question. Thanks to all the detail. This is this has been very helpful. Today the.
I guess, the I want to ask another way that 15% comp inventory reduction is one of the big Standouts, Michael I think John mentioned that there are some investments and start to flow in in the first quarter, but you also mentioned that the inventory initiatives or an area, where I thought you said you'd see results on a little more quickly versus some of the other initiatives you mentioned that will pay off more.
Over time.
How does that factor into the first quarter guidance and can you help us understand how much some of those investments you did mention impact the guidance for the first quarters within maybe think little bit more about the underlying trends in the business as you start the new strategy here.
Sure well be.
The.
Let me sort of onto your question more broadly.
The.
Faster inventory turns in our business.
Good drive.
Lower markdowns.
Actually should drive lower operating expense. So we've we've included some portion of that in Q1, and then more as we get through the year.
The now.
The reason why we feel we can move we can turn faster is.
We've been carrying a lot of inventory over time and compared with App has.
We turn will slowly we carrying more inventory and that's why we're very confident we can we can turn the business faster than we have we also believe that as we as we reduce inventories by by doing that will actually increase the mix of fresh receipts in the rack and that will help to drive sales, especially as we chased the bill.
Yes, if the trend is that.
So John are going to feed on anything else does not intend guidance I think.
The only the I'd say is yes, if you look at our full year guide.
What we tried to do this year was.
Ensure that the incremental investments that we're making in the business over the course of the year would be.
Yes.
Mostly offset by expense savings that we've also built into the plant and Michael talked in his opening remarks about.
Our planning process being.
A little more rigorous this year and we had some difficult discussions in.
And all of our expense managers managed to hit our expense targets for the year, which has allowed us to make some of these incremental investments over the course for the year you have a little bit of a bigger impact in the first quarter, partly because it's our small sales quarter and just the timing of how the expenses kick in.
Gotcha, and if I could follow that.
You mentioned.
You mentioned that I think traffic was slightly down in the quarter.
I know, there's a lot a new initiatives.
Coming up obviously to the comp inventory see starting to pull back there's a lot going on in stores, but.
With that traffic down in fourth quarter generally traffic across off price has been positive for several years, how do you how do you Michael how do you frame the traffic you saw in the quarter.
Versus that industry trended and how you think about the comps in the business going forward and again I, we understand there's a lot going on in stores in fourth quarter.
Yes, no I think it's fair question is actually you.
Since I've been at Burlington, one of things that I've realized as.
As our business for lots of legacy reasons our business.
The traffic in our business tends to be more affected by the weather than I would say out.
His.
And we never used as an excuse actually we were very happy with our with our comp performance for Q4 and what it tells you is.
Because it was a very warm winter.
Our traffic into our stores was was lighter.
But the traffic that came into our stores like what they saw and bought more of it and that's what really drove back home, that's how I interpret those those numbers.
Thank you very much parallel.
Our next question comes from John Morris with Davidson.
Thank you my congratulations on the great quarter, and thanks for that clarity Michael and John.
Question on the.
Probably a little bit more about where you see opportunity with the merchant team.
And.
It sounds like you said that there's.
The potential to increase the team wondering if you can share with us to what degree I guess in terms of ads.
Has that already started and.
Particularly within the merchandising where's the opportunity thanks.
Yes, Thank you John.
Yeah as I described in my prepared remarks.
The core premise of our full potential strategy is that the off price customer Kaz.
Above all else about great merchandise value.
So thats, where we need to invest to the key enabler of delivering great merchandise value to our customers is the strength of our merchandising capabilities. Those are critical to building vendor relationships sourcing great merchandise.
And to developing new and existing businesses.
No. We're lucky we have a we have a terrific merchant and planning team today.
Over the next few years, we're going to be investing heavily to further strengthen that group and the plan includes.
Several important elements number one significant investment in growing our own.
This means more training coaching and professional development for our merchants antennas.
So they can become even more effective they can develop skills and capabilities and they can build that careers at Burlington.
Secondly, a major increase in merchant and planning head count at all levels of experienced in seniority. So we can add more coverage and depth across categories and vendors.
And that's going to include growth in all of our major buying offices, New Jersey, New York and Los Angeles.
Thirdly investments and improvements in our merchandising systems it tools and reports.
The merchandising and his team teams have done a very good job over the last several years upgrading and updating our systems. We believe we can further enhance those systems to enable our full potential strategy and actually to drive competitive advantage.
And then for fleet as it as a whole bunch of other programs that were working on to leverage.
The capabilities that we have and to provide greater operational support if you'd like to out time merchant group.
Now I would say that we we've already ramped up significantly ramped up activity across all four of those buckets. It's already started.
And that that activity is going to continue for the next few years.
In my earlier comments.
So all I remember what it will take time for those investments to significantly payback.
As we sort of expand existing businesses and develop new businesses, but we're certainly already.
Well underway with increasing the investment.
Operator, we have very helpful more question.
Our last question last question comes from Roxanne Meyer with MKM partners.
Great. Thank you very much for taking my questions and thank you for all of the color.
Question regarding the change in inventory strategy that you have and how you think about pack and hold as part of that strategy going forward.
And second I'm, just wondering if you can comment on the performance of new store performance over the last year relative to prior classes. Thanks a lot.
Sure So roxanne.
On the pack and hold question.
Yeah, We mentioned in today's press release, the pack and hold inventory it declined from 30% of total inventory a year ago to 26% at the end of Q4.
But I would caution you not to read too much into that.
Last year's number was somewhat inflated because we had four merchandise ahead of the tariff deadlines that we had frac sand.
At this year's number of 26% is more in line with historical levels.
I would say two other things one is.
It's important to understand the pack and hold inventory is it's comprised of opportunistic buys so so by definition.
The level can fluctuate based on on the opportunities that the merchant c.. So it's hard to predict it quarter to quarter. Secondly, I would also say that.
We like pack and hold inventory and I think it's possible over time, we're going to want to grow our pack and hold strategically thats more of a longer term burn, but I think I just want to get across now that we we believe impact and pack and hold as.
As an important.
Way of bringing great merchandise value to our inventory.
So let's take the new stores performance question. So.
Yes, we continue to be very pleased with performance for our new stores.
From a sales perspective and from a profitability perspective.
They have continued to perform in line with or better than our underwriting models.
As we said previously.
Our new stores have been and are going to continue to be a driver of our comp store sales growth and operating margin expansion. Let me just kind of walk you through of too.
A few Nuggets, if you will.
So it starts with we have some pretty rigorous financial hurdles for all of our new stores.
First of all their underwritten to be EBIT accretive in their second year and their underwritten to be accretive to the Companys ROI see.
Return on invested capital obviously.
And we're pleased that on average our recent stope store cohorts have been outperforming their underwriting models.
Second the new Rick cohorts the stores that have opened in 2015 through 2017 that our past their year, two which is our underwriting base year have been nicely out comping. The chain in 2019. They also had EBIT margin increases the handily exceeded the EBIT increased for the chain.
So what we think we're seeing as an indication of a longer maturity curve than we use the C and our newer stores going back several years, and that's particularly encouraging since we underwrite them to be accretive to the company's EBIT in year two.
Terrific. Thanks for all the color.
Thank you. Thank you.
Okay. Thank you for joining us on the call today. We appreciate your questions. We look forward to US speaking with you at the front end of May to discuss our first quarter results. Thank you very much.
Ladies and gentlemen. This concludes todays presentation you may now disconnect and have a wonderful day.