Q3 2020 Burlington Stores Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Burlington stores incorporated third quarter 2020 earnings what cash costs.
All participants are in out west and only now I from Speaker presentation. There will be a question answer session cash. The question. During this session on either press star one on your telephone.
Please be advised that todays conference is being recorded if required for any further assistance. Please press star here and I would now like to him and the conference over to your Speaker today, David Glick Senior Vice President of Investor Relations and Treasurer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We.
We appreciate everyone's participation in today's conference call to discuss Burlington, Cisco 2023rd quarter operating results.
Our presenters today are Michael O'sullivan for Chief Executive Officer, and Jon Kimmins, Chief Financial Officer before.
Before I turn the call over to Michael I would like to inform listeners that this call may not be transcribed recorded for broadcast without our expressed permission.
A replay of the call will be available until December 1st 2020.
We take no responsibility for and accuracies that may appear and transcripts of this call by third parties Howard.
Our remarks and accumulate that follows are copyrighted today by Burlington stores.
Remarks made on this call concerning future expectations events strategies objectives trends for projected financial results for subject to certain risks and uncertainties.
Actual results may differ materially from those that are projected and such forward looking statements.
Such risks and uncertainties include those that are described in the company's 10-K for fiscal 2019, and and other filings with the FCC all of which are expressly incorporated herein by reference.
Please note that the financial results and expectations, we discuss today 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 Michael.
Thank you David.
Good morning, everyone and thank you for joining us on.
On this morning's third quarter earnings call.
We are very glad that you could be with us.
We're going to structure of this mornings discussion as follows.
Uh huh.
For view, our third quarter results.
Okay, and I will talk about the outlook for Q4.
Good.
I will describe how we're thinking about the post pandemic world.
And what actions we are taking to prepare for it.
After that I will hand, the call over to John to walk through the financial details.
Then we will be happy to respond to any questions.
Okay, let's start with the third quarter.
Our comparable store sales performance in the third quarter.
He did our expectations down 11% losses last year.
I think it is important to break down this comp performance in more detail than we normally would.
As we came into the quarter on the trend was very weak and comp store sales for August and it down more than 20 per cent.
The weak trend in August was driven by two main factors.
Costly as we came into the third quarter, our in store inventory position was well below where we wanted it to be.
We discussed the underlying reasons for this you know second quarter earnings call.
It was not until the end of August the in store inventory reached and planned levels.
Secondly back to school is typically the dominant driver of traffic into our stores in early Q3.
This traffic did not materialize in August and for a while we did not know gets back to school would happen a tool.
Once we go through August both of these factors turned around.
Like early September our in store inventory levels had recovered and the back to school traffic and we had expected in August finally showed up in September.
Our baseline plan for Q3 had been minus 20 per cent comp.
But in September and October we traced the trend to minus 4% comp for the combined two month period.
Our gross margin in Q3 was up approximately 260 basis points. This.
This was driven by high on Mako and by lower Mark Downs.
The buying environment in Q2, and Q3 was very strong and now Bucks and took advantage of great opportunistic deals.
These deals allowed us to successfully pulse and long terrific value to the customer.
We were pleased and without Q3 market performance, but we do not believe that this high on Mako is sustainable.
As the buying environment normalizes, our goal will be to continue to use opportunistic buying to offer great value and that by price sales.
But we do not expect to capture high market share as a normal course of business.
The other key drivers of our improved gross margin was a faster inventory turns and lower markdowns.
Okay, and there were certain aspects of Q3, and we're very unusual and that contributed to this improvement.
We do not expect to achieve a similar level of markdown improvement in the fourth quarter.
I would like to turn now to the sales outlook for the fourth quarter.
Unfortunately, the environment remains very unpredictable.
In fact, the situation across the country with COVID-19 appears to be deteriorating.
This is happening at the worst possible time for retail.
The fourth quarter has gotten off to a weak start with November month to date comp running down in the low double digits.
Our assessment is that this initial we trend has been driven by unseasonably warm weather rather than by Kobe.
Typically we would expect this impact to turn around later in the course on.
But there is risk that by then the research and seen COVID-19 cases may have and mine and already fragile trend.
Candidly, we just don't know.
But again, just like Q3, we need to be prepared for a wide range of possible outcomes.
We are tightly controlling our inventories and liquidity, we will remain very flexible I got to pull back for to chase the sales trend.
Together with everyone else on this call we have been following the positive news on potential vaccines with great interest.
This positive news suggests that the end of the pandemic is within sight, but.
But realistically, it's probably means that it will be the second half for Twentytwenty, one for the retail environment Scott to feel normal again.
I would like to use the next few minutes to talk about how we are thinking about the post pandemic world.
And more importantly, what actions we are taking to prepare for it.
As I have discussed on previous calls and some important respects, we do not think that once we get through the pandemic well, we'll just for that because the way loans.
Our view is that the on demand of the pandemic will lead to an acceleration and a couple of very important trends credit.
Trends that have been evidence for some time.
Firstly, the consumer desire and need for value.
And secondly, the gross of E commerce and be expense on.
Full price bricks and mortar retailers.
We expect these trends to drive further rationalization of full price bricks and mortar retail over the next several years.
And these physical stores close we expect some shoppers, especially more affluent time starved for shoppers will migrate more of that spending online.
We anticipate that other shelters value oriented shop, and this will find their way to on price.
This is consistent with what has actually been happening over the last several years.
E Commerce has been growing rapidly and bricks and mortar on price, we count has been growing in parallel.
And the categories, where we compete and at the low price points and we also E. Commerce, it's much less effective for competitive and meeting the needs of value oriented shop and.
That's the store closings that I have described and playing out and will be an opportunity for bricks and mortar off price retail to gain significant share.
Our priority of Burlington, and as the smallest least developed and leased for profitable of the major off price retailers is to position ourselves to take advantage of this opportunity.
We've talked in the past about Burlington two point, though are on price for potential strategy.
The core objective of Burlington 2.0 is to significantly improve how we execute the off price model.
I would like to use our Q3 results to describe some of the ways in which Burlington to point out he is already having an impact on the business.
To be clear no on at Burlington will ever be happy with a decline in comp store sales.
But there was some positive aspects of this performance to call out.
Number one.
In the summer and much instead, a great job going off to a tremendous opportunistic buys.
As these receipts finally arrived in stores and ignited the sales trend and.
September.
Number two we then chased this sales trend, we controlled and channels and liquidity to go off to the strongest merchandise categories and to shift the assortment.
The overriding focus was on offering wow value.
Number three.
And our supply chain and in our stores, we put a huge emphasis and urgency on getting the fresh receipts through the system and out to the sales for.
This worked.
Despite significantly ahead of planned sales in store inventory came in almost exactly on plan at the end of Q3.
Number four we managed these inventory levels deliberately and conservatively griping be ahead of planned sales to a faster turn on and thereby driving lower markdowns.
Overall I am pleased with these aspects of outperformance I see them as early signs of progress with Burlington 2.0.
We can and we will get back on.
This improved execution on the off price model will be very important as we position ourselves for the post pandemic world and the opportunities that lie ahead of us.
The things that I've, just talked about much greater focus on value.
Tighter liquidity control lower inventory and more urgency and receipt flow I thought described these are already important and growing aspects of how we are managing the business.
But there are other aspects of Burlington to point out there are at a much earlier stage of development for implementation.
I would like to share some high level updates on three of these.
Marketing.
Merchandising and our store prototype.
First of all marketing.
Our marketing team has done some great work this year looking at how we can communicate a stronger much more direct off price value message and how we can deliver this communication and a more targeted and cost effective way.
We will start to roll out these changes in Q4, we.
We believe for this new marketing program will help to leverage our marketing reach and spend in the years ahead.
Secondly, our merchandising organization.
As we have discussed in the past, we believe that BT and April or better execution, and the off price model and driving growth in our business is to invest in our merchandising capabilities.
I am very excited about the organizational growth plan that we have developed for our buying and planning group.
It involves a combination of external hires and very importantly, the development and promotion of internal talent.
In terms of external hires we are pleased and somewhat surprised that the number and quality of candidates that we have successfully interviewed hi, Ed and on boarded this year despite the pandemic.
We are also excited about the pipeline of external candidates.
There are two factors that are helping us.
The pandemic itself is obviously, causing major disruption in the retail industry.
This is freeing up some terrific merchandising talent and experience.
Secondly, we have an extremely compelling story.
As the smallest of the major off price retailers, we have a lot of growth ahead of us.
And many merchandising categories. The company you've got a relatively early stage of its development and.
And talented merchants and planners, who join our team now have a great opportunity to participate in our gross and at the same time drive their own personal and professional development in the years to come.
The other critical aspect of our organizational gross plan is the development of internal talent growing our own.
We have a lot of high potential talent and I merchandising and planning organization.
I'm excited to see this talent grow and take on more responsibility.
Internal promotions are a key part of our organizational plan.
We have stepped up our training and development programs. This year and we have plans to do much more over the next few years.
The third aspect of Burlington 2.0 debt.
I'd like to update you on our store prototype.
As we have discussed in the past, we believe that we have an opportunity to significantly improve store level productivity and economics by further reducing the size of our stores.
Our real estate and store operations teams have done a lot of work in the past here on a 25000 square foot store prototype.
We feel good about the merchandising and operational plans and we have developed for this smaller prototype.
We expect the economics of this format could be very favorable and we anticipate and it will become a central part of our new store opening and relocation programs, especially from Twentytwenty two onwards.
We will be finalizing these plans over the next several months and we expect to have more details to share with you you know fourth quarter earnings call in March 2021.
At this point I would like to turn the call over to John to provide more detail on our financials.
Thanks, Michael and good morning, everyone let.
Let me start with a review of the income statement.
For the third quarter total sales decreased 6% for comparable store sales decreased 11%.
It's Michael described earlier on.
Comparable store sales improved significantly after our inventory is recovered to more appropriate levels at the end of August.
We believe this improvement was driven by our improved inventory position the delay and back to school purchases and the outstanding values offer to our customers from the great merchandise fives, we were able to deliver in Q3.
The gross margin rate was 45.0% and increased 260 basis points for since last year's rate for 42.4%.
This improvement was primarily driven by lower markdowns and higher markup, which were partially offset by increased freight costs.
We do not expect to be able to generate the same level of year over year gross margin improvement from Q4 that we were able to achieve and Q3 there.
For two reasons for this.
First well our clearance levels are down versus last year at the end of Q3 clearance inventory entering Q3 was extraordinarily low due to our aggressive Q2 clearance strategy that's.
That significantly reduced our clearance markdowns and August, which we don't believe it's repeatable and Q4.
Second well, we significantly exceeded our planned sales in Q3 sales for acute for remain very uncertain due to the impact for the pandemic, which would affect our inventory and markdown levels, depending on how sales played out during the holiday season.
Product sourcing costs, which include the cost of cross selling goods through our supply chain and buying costs.
We're 144 million and the third quarter of 2020 versus 90 million last year, increasing 360 basis points as a percentage of sales.
As we indicated on last quarter's call, we had expected significant deleverage and product sourcing costs for the third quarter for a number of reasons.
Like most other retailers we struggled at the end of the second quarter and into the third quarter as we tried to get her DC is fully staffed and operating effectively.
We prioritize inventory flow over cost efficiencies during the quarter as our teams work to getting inventory back to appropriate levels in our stores and.
And then to chase the positive trends, we were seeing this we experienced sales well above our plans levels during the quarter.
Supply chain cost cost 208, 80 basis points product sourcing cost be leverage.
About 100 basis points for 16 million of this de leverage was driven by temporary code it related costs, which include recoup recruiting expenses and.
Incentives, we put in place as we work to get our DC teams back to full strength.
Wage rate increases since last year drove another 70 basis points of de leverage.
The balance of supply chain de leverage was driven by for additional factors.
Occupied occupancy costs as we added additional storage and processing space that is not yet fully utilized.
The decrease in there you are.
Changes and product mix.
And the disproportionate increase and receipt receipt volume process as we work to catch up on rebuilding our inventories.
The remaining de leverage and product sourcing costs came from buying costs, because we lost sales leverage on the fixed cost base for us.
Rich and dosing organization, while continuing to invest and improving our merchandising capabilities.
We do expect continued significant de leverage and product sourcing costs in the fourth quarter. So we could see some modest improvement and rate even at similar sales volumes.
CPC recruiting and temporary incentive costs will be behind us.
The best way to think about modeling product sourcing costs for the fourth quarter is to assume a similar dollar level for chronic sourcing costs.
We incurred in the third quarter.
Adjusted SGN day was 495 million versus 46 million last year, increasing 240 basis points versus the prior year.
SGN a de leverage was primarily due to increases in store related and corporate costs, including 20 million and cobot related expenses.
These increases were partially offset by a reduction and marketing expense.
As for the pandemic continues and seems likely to worsen during the fourth quarter. We will continue to play in our business and our inventory levels conservatively and adjust to the trends we see.
While our SGN expense will flex with our sales volume, we could see continued SGN a de leverage in the fourth quarter.
Adjusted EBIT decreased $81 million to $59 million in the third quarter, driven primarily by the lower sales volume increased product sourcing costs.
We did not repurchase stock during the quarter we.
We have 348 million remaining on our share repurchase program, which remain suspended.
All of this resulted in diluted earnings per share 12 cents versus income of $1.40 for last year.
Adjusted diluted earnings per share were 29 cents versus a profit on the dollar 53 per share last year.
The quarter, and we had approximately 1.3 billion and cash $250 million and borrowings on our ABL.
958 million on our senior secured term loan facility.
Face value of 805 million and convertible notes.
And 300 million and senior secured notes we.
We had unused availability of approximately 292 million and.
We ended the period with total balance sheet that approximately 2.2 billion.
Merchandise inventories were 867 million versus 1 billion for million last year for 14% decrease and the last few months, we have made an adjustment to how we classify our merchandise inventories. This.
This reclassification.
Tended to better reflect our strategy to drive faster turns for in store inventories well at the same time, taking advantage of great opportunistic buys that will be stored for later release.
Using this updated classification on merchandise inventories at the end of Q3 broke down as follows.
First of all in store inventories. This includes inventory that is in our stores on its way to stores or being processed EBIT DC to be sent to stores. These inventories were down about 20% on a comp store basis at the end of Q3.
This was in line with our plan of down 20% to 25% versus last year.
Secondly reserve inventory. This includes all inventory that is being stored for later release, either later and the season Ward and subsequent season.
This reserve inventory was up 8% at the end of Q3.
It represented 25% for total inventory at the end of Q3 compared to 19% last year.
I'll talk more about this in a moment.
During the quarter, we opened 30 net new stores, bringing our total store count for the ended the third quarter to 769 stores.
This included 30, new store openings and seven relocations.
In the fourth quarter, we do not expect to open any new stores, but do expect to close eight stores, resulting in a day.
And and expected fiscal year and store count for 761 stores.
As compared to our outlook on our last earnings call.
We still opened 62, new stores in fiscal 2020, but we decided to close two additional stores.
As discussed on the last earnings call, we still expect to open 18, new stores in fiscal 2021 that were shifted from opening in fiscal 2020.
We will have more to say on our 2021 expected new store openings as well as our broader real estate strategy over the next several years.
On our fourth quarter call in March.
Net capital expenditures were $188 million for the first nine months for fiscal 2020 net.
Capital expenditures are now expected to be approximately 245 million for fiscal 2020.
Now I will turn to some comments on our outlook.
And as described earlier the sales trends for the fourth quarter is very difficult to forecast.
But month to date comp for November is down low double digits.
We believe that this month could a trend has been negatively affected by the warmer year over year temperatures, but even once the weather turns around the range of possible outcomes for the remainder of the fourth quarter is very wide.
It is possible that the resurgence and COVID-19 cases and actions and restrictions taken by government authorities and response could have a significant negative impact on the trend.
Given this uncertainty we will not be issuing for more sales and earnings guidance again this quarter.
We continue to play on the business conservatively, keeping tight control over liquidity inventory and expenses.
This posture and gives us the flexibility from a liquidity and open to buy standpoint.
Flex up on receipts and opportunistic purchases, if we see the stronger sales trend than expected.
We were able to demonstrate that ability because we flexed up our receipts to chase September and October sales and we will take that same flexible approach to planning and reacting to what we see and the fourth quarter.
On the other hand, the trends are below expectations, we will have the flexibility and liquidity to pull back on our purchases if necessary.
As I explained a moment ago, our in store inventories at the end of Q3, we're down about 20% on a comp store basis, which was in line with plan.
During the fourth quarter, we will continue to manage in store inventory is conservatively versus last year.
In contrast, we expect to significantly increase our reserved inventory.
At the end of Q3 this inventory was up 8% for since last year. This increase would have been more significant but for the fact that we deliberately pushed some of our reserved inventory purchases from Q3 into Q4.
We did this for two reasons first and free up supply chain capacity for current and holiday merchandise and second because we believe that the buying environment for this merchandise could be even more attractive in the fourth quarter, yes.
If this turns out to be correct, and we estimate that reserved inventory by the end of January.
Would be up more than 50 per cent compared to last year.
Finally, as we did last quarter, we can update you on certain the school 2020 cash flow and expense items that may be useful for modeling purposes.
Capital expenditures net of landlord allowances are now expected to be approximately 245 million.
We expect to open 62 net sales.
32, new stores, but now anticipate relocating we're closing 28 stores.
For revised total of 30 for net new stores in fiscal 2020 per.
Previously, we had expected to close or relocate 26 stores.
Depreciation and amortization expense exclusive of favorable lease cost is now expected to be approximately 225 million.
And interest expense, excluding $24 million in non cash interest on the convertible notes is now expected to be approximately $75 million.
With that I will turn it over to Michael for closing remarks.
Thank you John.
As I wrap up my remarks, I would like to express my warm appreciation and gratitude to all our associates at Burlington.
We continue to operate in the midst of a global health crisis, which is likely to continue to impact our lives in the months ahead.
This is a challenging time, but.
But it is also a very exciting time at the company.
There are a lot of very good things happening.
The way that our associates and mobilized behind that income 2.0 has been particularly impressive and further reinforces my belief and confidence in our prospects over the next several years.
With that I will turn it over to the operator for your questions.
Operator.
Thank you as a reminder to ask a question for press Star one on your telephone switch on your question press, the pound key and and.
Interest and time, we ask you limit yourself to one question and one follow up any additional questions. Please reenter the queue I for.
First question comes from Matthew Boss of Jpmorgan. Your line is now open.
Great Thanks, and congrats on the improvement.
Michael maybe any additional color that you can provide on the components of comp store sales and the corridor traffic basket size average unit retail I think would be very helpful. If you can add any color.
Sure well good morning, Matt. Thank you for the question.
You know I'm going to start by reading the actual data and then I'll provide some editorial commentary.
And so so that's the traffic for the quarter was off by more than 20%.
Our average basket size and units.
Was up by more than 20%.
Average unit retail.
For the average price per unit was down about 10% and if you combine those items. The average transaction size and dollars was higher by about 10% low double digits.
And if you mix all of those variables together of course, you get minus 11 and comp decline and the courts and so that's that's the data and.
Let me, let me sort of off for up some conclusions that I would draw from from this data.
The last point I would make is that the decline and traffic versus last year. It is disappointing.
It improved as we came out of August but it was still weak in September and October.
I think are really two factors.
Gross that weakness first most obviously if you like we're in a pandemic ROV shoppers, who who just and not going to be comfortable coming back into a brick and mortar environment until we get through this and.
We have very robust safety and social distance and programs in our stores and we've marketed beads, but but we realize that despite those measures realistically traffic is going to remain depressed until we get through and that makes it up at some point number one point number two I think we have to acknowledge that.
Compared with GAAP heads.
We have felt and can we not necessarily a top of mind destination.
For some of the key merchandise categories that shop and on most interested in and right now.
Yes, as I will describe in a moment, we've made huge progress in areas like.
And casual apparel, but but we recognize that in these businesses. We are starting from the behind the scenes periods.
Pete the second conclusion that I would draw from the data, though is much more positive and it's that I think we are doing I think we're doing an excellent job driving business with the traffic that is coming into on stores.
Weve shifted our assortment and we're offering great values actually great values and many of the same cash Greece I just mentioned categories that the customer wants to buy right now we.
We significantly expanded our home active casual essentials and basics merchandise Assortments. This enabled us to chase the trend and September and October.
I think you can actually see the strong the value in the in the low are you on and the high basket size shows and the customers that are coming into the store are responding very well.
That buying many more items and that spending more during each visit. So I think these are encouraging indicators encouraging indicators of what might happen, if and when traffic levels pick up once we get through because of 19 and damage.
That's helpful and and then as a follow up on the industry supply chain and so on the August call, you've talked about delivery delays from vendors and how these and impacted your in store inventory I'm curious, where we stand today and if these delays have dissipated.
Sure Yes, it's a good question that was a big part of the story on on last call.
Let me, let me chunk out my on a little bit.
I'll start with.
With an update on our own internal supply chain I wrote and distribution centers.
You'll recall.
And in August we explain that along with many other retailers we'd run into significant staffing issues in on distribution centers and that those issues.
And really hampered our ability to get in store inventories.
To planned levels as fast as we would have liked.
The simple update here is that those issues have been resolved and Q3, we took a number of actions, including higher wage rates and on boarding and benefits and.
These actions weren't we've been very happy with how I distribution centers.
And been able to ramp up for peak holiday production and on.
And about and November month to date and right now, obviously, we'll wrap and processing level.
So that's the update on our own internal supply chain, but.
But the the broad sort of industry wide issues have not gone away, they're on chronic delays and much nice deliveries across the retail industry I'm sure that you've had this elsewhere.
These delays are being driven by I would say and a number of factors, including ongoing staffing issues and benda distribution facilities.
Timing issues kind of associated with the surge of orders that took place following along down earlier this year.
And then I would also say import delays specifically related to congestion at the West coast ports.
And we took a number of steps in the third quarter to sort of navigate our way around these issues remember we seen this movie before and Q2.
So we were aware of the risks our plan as and buy as I think did a very good job juggling purchase orders and delivery dates. So at the end of the for the quarter. Our in store inventory levels were pretty much right on plan at day.
Down 20% on a comp store basis.
On the last point I would make is just stepping back and I'm sure you realize that there is potentially a very important silver lining in the delays and I've. Just described in the coming weeks. These delivery delays across the industry on lightly could translate into off price supply.
Could become and attractive on price buying opportunity and then.
Actually one of the reasons why we pushed some of our reserve inventory purchases to to later in the fourth quarter.
Great Best of luck.
Thanks.
Thank you and our next question comes from I. Perishables for your line is now open.
Hey, good morning, guys. So thanks for all the information Super helpful. I guess couple of questions on the first one is about if we could talk about the operating margins I guess it sounds like there's aspects to the Burlington 2.0 that should help drive margins higher over time, but I think there's also some expense headwinds you guys are alluding to supply chain.
And and product sourcing costs on like a big one day can offset some of these games, especially in the near term just how should we think about the different factors and their impact on margins and I have.
A follow up after that.
Great well good morning, like on a good to hear from you.
And I think I'll break down the question into.
Two different time periods in the short term.
What are what are our expectations for operating margins, specifically and 2021 in a moment on.
I'll show on to address that on but.
Yes.
Let me talk about the longer term and what is the operating margin opportunity for Burlington over the next several years.
On internally.
As we've modeled the impact of Burlington 2.0.
We've identified and sort of zeroed in on three main drivers of margin improvement.
And we believe that these tricks we drive is represent the lion's share of the margin gap. This is al and.
The first is sales of course, the high sales productivity drives leverage.
The steps that we're taking to drive sales of the things that we talked about in particular country.
Controlling our liquidity so we can shape.
Trends and take advantage of opportunistic buys and heavily investing and merchandising capabilities. So we can deliver even stronger value across all categories and in particular and develop under penetrated cancer brings assets.
First on the second lever and gross margin.
We believe that we have a significant opportunity to try and our inventory faster than we have historically and thereby drive lower markdowns.
One aspect of this of course is as I, just mentioned to drive higher sales, but the other critical enabler and tight control of inventory levels and also greater urgency and getting fresh receipts on to the sales floor.
If we do those things on I'm actually very confident we can drive faster inventory turns and significantly lower markdowns and I.
And I feel like we demonstrated that some degree in the quarter on.
The third driver of margin improvement is lower occupancy costs.
Our stores on peco and less productive than our peers again, driving higher sales will help but as I mentioned in the prepared remarks, we believe we have an opportunity to reduce the size about store prototype, thereby reducing our occupancy expenses over time.
Now as part of Burlington 2.0, we have specific initiatives in place to go off to each other levers I've just described.
Over the next several years and we expect I expect to make significant progress and driving improvements in our operating margin.
But that said you know these things never necessarily working on a straight line.
They're all going to be short term headwinds and certainly until we get through the pandemic there will be challenges and yes.
On the from de leverage on lower sales volumes, all higher operating expenses, such as supply chain, all has and related costs.
On our fourth quarter call and March will provide an updated view on on these headwinds for 2021, but it might make sense, but now maybe for Joe and to provide some initial comments on on on what we think we make price next year.
Sure, Thanks, Michael and good morning, and I.
Obviously, we still got a lot of work to do on our plans for next year.
But I think we can share a little color kind of how we're thinking about is as we put it together this year.
Usually you on when we start to build and annual plan.
We're going to set objectives based on what we want to achieve compared to the current year.
But since 2000 Twentys spin on such a unique unusual year, we're going to look back to 2019 as the base year.
For our 2021 plants, who will focus on on how 2021, who is going to differ from 2019.
Again normally one of the first assumptions that youd lock in on would be comp sales growth.
But we still have the pandemic going on.
It seems to be getting worse before it's likely to get better we're optimistic that there may be an end and site but.
But yeah, it's going to continue to impact all and retail and that's going to make.
Sales is likely going to be a little bit of a roller coaster as it's been than this year.
So this means we're going to have to plan conservatively.
And then we're going to look to flex to the business trends that as we see them develop and.
The good news on that is and we've had some pretty good practice and doing that this year.
So that means we're going to have conservative comp assumptions.
Whenever you have conservative comp assumptions, it's going to be difficult to drive operating margin expansion.
[music].
And it's going to be even more difficult and 2021, because we're building a plan from a base year 2019.
So if you think about it we will have experienced two years, a fixed expense inflation increases.
So ignoring any other cost headwinds we'd have to cover that with adequate sales growth before we begin to see our normal expense leverage.
And while we do expect some of the temporary corporate related expenses to and when the pandemic assets.
We can see that we will have some headwinds better.
Better still going to be there.
So what we can see now.
We've seen supply change with wage pressures that we had to respond to and this year.
And we've seen a lower value our trend.
And as Weve, Michael just talked about for what we've seen a third quarter.
We do expect to Lori you are to drive sales and its Michael does describe but.
But it also means that this more units to process per dollar sales.
More confident that overtime, we can mitigate these expense pressures we've got a history. If you have kind of always being able to figure that out.
But but some of our mitigating actions like reengineering production processes for automating and others are going to take a little longer theyre going to have some lead time.
So again compared to 2019, we're expecting to see pretty significant de leverage and supply chain expenses and 2021.
As I said, a moment ago, we still have a lot of work to do over the next few months and we're going to be on a much better position to share more detail on our sales and our expense plans during our March call.
Got it thanks gentlemen.
<unk>.
I think you had talked about last quarter can.
Can you expand on that a little bit it sounds like you expect a stick and to continue into 21 day I'm, just a little bit more detail on that on that topic would be great.
Sure first let me kind of talk about what we saw on the third quarter, a little bit of new you are.
Yes, I think the biggest driver.
On our mix and merchandise.
Consumers are interest and different things now than they were prior to the pandemic, our strongest merchandise categories right now things like casual apparel active athletic basics essential on merchandise on the ones that you think.
When people are.
Our net back to their normal lives on average these have lower you are right.
Lower and you are.
And then the merchandise categories that haven't been as strong so it kind of traded up sales and these lower a cat for categories and we're not we're seeing you know Matt.
And that is strong sales and things like Korea, where were.
Ruptured apparel apparel tailored clothing, the more dressy categories and.
In general more dressy tends to means higher price.
And in general and less stress you test me and lower price. So that's one of the drivers the.
The second driver would be our pricing.
We've been working across all our merchandise categories to have sharp for her more competitive price.
Yes, it's Michael has been talking about we believe that and off price for the most effective way to drive sales.
The offer the best possible merchandise value.
That's what the customer really cares about.
The last couple of quarters, that's what our merchants have been focused on offer and great value and it's been working as Michael mentioned, the number of units per basket rose by more than 20% in the quarter.
And we think thats directly related to the better values that we offered.
Looking ahead now we think the merchandise mix might at some point shift back from the other direction.
Independent mix over certainly expect trends to go back to some degree of normal maybe a different new normal but the.
And at some point people will have a desire to dress up a little more again, if that does happen.
Then we'd expect that mix impact and are you are it may come back the other way.
But if it does happen.
There's a good chance that.
Potentially good news.
Would be offset by the downward pressure on who you are as we continue to execute the for.
And 2.0 strategy looking and drive sales by offering that great merchandise value at credit crisis, So that would likely mean, youre, which day below historical levels netting the two together as we look forward.
Thanks, John Thanks.
Thanks, and thanks.
Thank you and our next question comes from John Kernan of Cowen. Your line is now open.
Alright, good morning, hope everyone's ready for Thanksgiving holiday season.
On a question for Mike on that and one for John If I can.
So just first Michael what's your assessment and merchandise availability.
I think everyone is interested in what you're seeing right now, but also on the longer term outlook. Some other publicly.
Public vendors have talked about taking a more conservative approach going forward as it relates to inventory going into the off price channel are you concerned that this is constraining share growth overall.
Good morning, John.
A question.
John you followed off price, we felt for a long time, so I think you'll know.
Availability has always been.
The age old question and ill price and.
Certainly and.
If you go for it you could go back 30 years and the concern has always been the off price retailers will run out and supply.
Clearly that has not happened.
Oh price has achieved huge growth.
For that period.
And we talk about the reasons why but before I do let me let me address the short term availability first and then ill and I'll talk about the longest.
For Tenda availability I would say that.
The quick answer is that in the short term overall the availability of off price merchandise has been and continues to be very strong on.
We are pleased with the opportunities that we're seeing we're said, we're happy with the Assortments and the values and out stores and.
That's not to say that they are on some gaps some brands and some categories, where we'd like more supply the railway Dom and that.
Nature of on price, it's always off price supply is a weighted little lumpy, but.
But overall I would characterize availability now and right now and that's very good.
But I think that the more important part of your question with the longer term we have here at Burlington, we have ambitious growth plans over the next several years.
We believe as I described and my prepared remarks that we have an opportunity to take significant market share in the years ahead. So it's a good question do I think we will be constrained by much and by supply on.
No no I really do not think that.
And as you'd expect over the years I've spent quite a lot of time looking at this issue for both price and supply and were not hear concerns about supply and price I understand what triggered space concerned, but I have to say on I'm very skeptical about guns and sent and my skepticism is really based on on.
Two factors.
Number one I think it's very important to understand that our relationship with our vendors is very strong. It is a partnership its not its not transit transactional and so it's a long term relationship.
For the categories that we sell skew count the complexity and lead times on.
All of those factors make it very difficult for vendors to precisely for cost.
How many units at the style to good use.
Because of the off price channel actually don't have to get this right. They have they have an outlet a partner for excess merchandise for overruns and.
They have a partner for canceled orders.
So the way to think about this is we lower the risk for them.
And we want them to be successful and we can help them grow their businesses. So for those relationships ready on partnership.
The second point I would make and.
This is very important is that.
We compete in many different categories, we have thousands of vendors and brands and we did when.
We aren't reliant on any single on and only one Bender our largest spend on there's no more than a small percentage of our sales.
So it could absolutely be trued and individual bend and might cut back but that wouldn't make much of a difference on to us and the bigger scheme of things and.
In fact, as we grow up and the base.
Oh, sorry, as we grow.
And our vendor base is likely to increase significantly as well and some of our and most important underpenetrated businesses and.
Businesses like home beauty, the underlying vendor base is actually very fragmented you have a lot of very small vendors.
So as we grow those businesses in particular I would expect that the vendor count will increase actually had a much greater rate and it has in the past.
With all that said with everything I've just said my expectation is that there will be times when when there are specific brands on a specific vendors that have more or less availability. That's that's always going to be true as an off price retailers. We recognize that that means that there will be gaps and our assortment, but yes.
To come back to your your your main question am I concerned that this will constrain our growth no.
No for the reasons I've described on I'm really know.
All right. Thanks, Michael second question for John just on the 25000 square foot prototype seems like a big opportunity into.
Interested in hearing more about the thinking and the financial planning and led to the smaller format and then in particular any early information or expectations around productivity and profitability and and the potential store numbers over time.
Well sure John Thanks for your question and good question.
And John you've been following us since the beginning so and other I have to tell you that we've got a.
Pretty good history, and continually reducing the amount of inventory, we've had and our stores going on for many years now and as we've been doing that.
We've been able to reduce our store size each year for the last however back however for back you want to go.
To the point at this year for.
For size is just under 40000 square feet. So.
This has really been kind of and learning opportunity for us we've been continually reducing the box size operating with cleaner inventories.
And well and quite a bit on the operating side.
And then.
Now we've got our Burlington, you probably know on off price for potential strategy for one of the main principle is to run with even leaner inventories.
So yes.
And our inventory.
And the confidence that we have and that.
Is it I guess you'd call it and neighborhood or other.
How much for that we think we can.
On a car for smaller box size.
We've been really pleased with the initial progress we've seen as we've started to work on these initiatives. So this stuff altogether just gives us and.
Added confidence in our ability to do this and so little bit of a clearer path.
To further in store inventory reductions.
So all together, you know kind of higher confidence and better visibility to how we can get to this 25000 square foot prototype.
So while this stuff has been going on particularly in the past year.
Our real estate team, our store design inventory planning and store operations teams.
Have been working on.
On actual prototype for the 25000 square foot store and we feel really good about the detailed merchandising and operational plans that they've been developing so we're really excited about potential that we see for the smaller stores.
In terms of the actual store level economics, and our opening plans.
And then a wait until our next call in March to get more specific on that.
But we do believe the smaller prototype offers potential for higher sales productivity and better expense efficiency and we think that over time, it's likely become a central element for both our new store and our existing store relocation plans once we kind of sort through our portfolio.
Excellent. Thank you.
Thank you for our next question comes from Lorraine Hutchinson of Bank of America. Your line is now open.
Thank you and good morning.
So Michael you spoke about traffic declines and the corridor. How concerned are you that shopper behavior may have changed during the trends and they do you think some of the business delivered moving online won't come back to bricks and mortar.
Hi, Lorraine.
Yeah, I think it's a very good very important question.
There's no doubt.
We could all see that E commerce has grown significantly.
Because of the pandemic and my guess is that.
Some of that share gain will be permanent.
Yes, I think some of this share shift would likely have happened anyway for the next few years, but the pandemic.
Accelerate today.
And I don't think as I said in my remarks, I I do not think that as we get through the pandemic shopping patterns will just go back completely to the way that they were.
Now I actually think that that share shift back that share gain by almost.
It's going to have the effect of critically on the mining full price bricks and mortar retailers, especially mall based retailers.
It seems lightly that balance that that will drive a wave of rationalization and store closures in the retail industry. I think we're just really seeing the start of that.
For the most important question for US is whether these customers go.
When a typical department store or a specialty retail store closings.
No for sure and some of that business will go online family.
Like I said in my prepared remarks that teams, especially lightly for more affluent time starved Shelton's if you like.
But you're on hypothesis is that many of the more value oriented shovels will find their way to off price.
We call for them greater for.
Great values and I actually think we can grow and take market share once we get through the pandemic and the.
The underlying premise of what.
I've just said is that we can satisfy these value oriented shoppers more effectively and more competitively Thomas.
And I actually I've had this conversation with many.
Many of the investors on this call you know, we operate and 11 $12 per average unit retail business with a very broad fashion assortment.
It is economically and strategically very difficult for an E commerce business to compete with us at the price points in the categories, where we compete.
The other point that I would make is that this isn't just a conceptual argument.
Thanks for the war has been happening for several years now you know E Commerce has been growing for some time.
And the full price bricks and wants a department store and specialty store channels have been shrinking for some time. Meanwhile, off price retail has been growing and taking share.
We at Burlington for example, they've been growing on top line and the high single digits each year for the last several years.
So bringing on back together, we believe that and the Alstom off for the pandemic, we could see an acceleration of the trends and I've just described no a reversal from.
Thanks, and then for John I appreciated the breakdown of product sourcing cost that you gave and the comments, let's say.
Just curious what proportion of the class do you think might be permanent.
Yes, Okay moving to thanks for the question.
So it's complicated so I'll kind of go through some of the stuff I said on the call that maybe put it in kind of.
Go forward context as well.
Let me just start reminding what's and product sourcing costs for us that includes all the cost of our supply chain and all the costs of our merchandising operations and as I said and the.
And our prepared remarks that on.
Overall, the product sourcing costs altogether de levered by 360 basis points during the third quarter.
So supply chain drove 280 fits for that de leverage.
About 100 basis points for $16 million of that we consider to be temporary coke and related costs.
And in this bucket we'd include the temporary recruiting costs and wage incentives that we have to use to get our DC is properly staff quickly took other store inventory is back to appropriate levels.
Along with some cost related to safety protocols that we put in place to protect or do you see associates.
About 70 basis points of the supply chain piece and the de leverage were.
Related to the wage increases that we've had to do actually since the third quarter. We had some wage increases that we had planned for this share and actually put in place earlier and.
And 2020, but then we had some incremental costs.
Was in response to changes and do you see labor market during the pandemic as the market because it's so much more competitive.
So the adjustments we've made.
They have been successful and getting or do you see is properly staffed.
And we believe our DC labor rates are now properly position.
But but of course this piece, it's a permanent wage increase so that is going to be part of our expense structure, Yes, we think about moving forward.
The other factors, causing the remaining mailing hundred that's for so supply chain de leverage were.
Occupancy de leverage the decrease in a bar.
Changes in product mix.
And an increase from receipts process versus sales.
We had during the quarter as we rebuilt our as we rebuilt our inventories back to appropriate levels. So first occupancy took to leverage.
That's.
We opened a couple of facilities that aren't yet fully utilized so that's a piece that we would expect this to get better over time as we move toward full utilization.
And one Lisa for processing and when most for more per store rich.
For the longer term as you would expect we're periodically and we do bring on other new facilities on line. So you kind of go through cycle de leverage than they hit kind of capacity and then eventually.
If they are efficient as we expect them to be they would actually help leverage.
On the other components. The one that you know from a go forward standpoint think about the most is the decrease in a war.
But as we said, it's not necessarily all bad news.
Well a smaller you are just translate to more units and higher supply chain costs.
Yes, one of the drivers.
On the decreases are focused on delivering better value for our customers, which of course should help drive sales and lead to fewer markdowns.
So as you would expect.
We are looking at admission and stuff, we can pursue and within our supply chain to try and offset some of these headwinds.
But some of these initiatives, especially as it relates to driving significant.
Productivity efficiency increases they're going to absolutely.
We're going to finalize our financial plan for 2021 as I said earlier for the next couple of months, but.
The GAAP I'll work to do.
Having said that we are expecting significant deleverage headwinds and supply chain compared to a 2019 expense structure was on.
Sure and a little earlier, so thats the supply chain so.
Of product sourcing costs and a distinct addition to the 280 basis points, we had 80 basis points of de leverage from lost sales leverage on.
Our fixed merchandising organization costs and from Burlington 2.0 investments, we continue to to make to improve our merchandising capabilities and we are going to be well worth it and when.
And we get to the other side of the pandemic.
So typically we'd look to offset incremental investments and the year that we're making them with efficiency savings but.
But we really didn't push that this year, we had so much going on with cope with that.
Yes, we wanted to be sure, where we're spending adequately and some of the places like store payroll, where we may have pushed for efficiency and a different from here.
Thank you.
Thank you and our last question comes from Kimberly Greenberger and Morgan Stanley. Your line is now open.
Great. Thank you and thank you so much for all the detail today, it's been extremely helpful.
Michael I wanted to just reflect back on the Burlington 2.0 strategy that you laid out you know roundly a year ago and.
And particularly focused on the inventory journey because.
This year has his obviously brought.
A eight and unprecedented opportunity, let's say to maybe accelerate.
What.
You had thought might be three or four and I'm not sure maybe even a five year journey toward ever more efficient levels of inventory in store within faster turns.
Go ahead.
Perhaps accelerated the journey.
And I'm I'm wondering if you can reflect on that and if it.
And you can share with us the way you're thinking about the impact of 2020 on net inventory journey.
And do you think in some ways that it's accelerated.
And your learnings your insight and it will allow you to debt to those leaner in store inventory was faster turns maybe a year or two in advance of those original target. Thanks. So much.
Well good morning, Kimberly and nice to hear from you.
You're right actually I I joined Burlington, just over a year ago. So I'm just celebrated my one year anniversary and.
Maybe I should start out by saying, it's been a heck of a year.
But joking aside.
Let me, let me sort of address the progress that we've made over the past 12 months. Thus is what my expectations might have been back then.
The first thing I'd say is I am very pleased the thing on mostly the balance is that we have a building and I feel like we have a very clear direction, we have a I'm going to call. It a transformational strategy and strategy, that's well understood and has a huge amount of support and traction within the company. So I feel like we know where we're going.
Secondly, and this kind of gets to your question. Despite everything that's happened this year and the challenges we faced.
I think we've been able to make pretty significant progress against and strategy and some of that progress has come from has come in the form of real changes that we've made for the business greater focus on value faster turns more liquidity more aggressive chase greater urgency and getting receipt to the sales for one of those things are real and in some ways.
They have been accelerated by the pandemic and by the issues and challenges we faced.
And we've also been able to make progress on on and some other areas like some of the initiative that I and I talked about earlier than.
The direct sort of earlier stage of development and implementation and those are important and you're going to be important and he has a head on.
But if I if I play narrow it down to your specific question on on inventory.
Hi.
You know I mentioned in response to an earlier question and I mentioned that as we think about marching on for chance he with Burlington two points. So we really think about that margin opportunity and three buckets Noah.
No amount towns clients.
Hi, and style and lower for me.
And if you were just to you know a very high level say, where is the margin improvement quantify the margin improvement across those three I would say for the third but so I think the third of the improvement can come from greatest sales productivity a third from lower.
Lower occupancy and a third from from lower markdowns.
I feel like we've made a lot of progress on that and lower markdowns piece, yes, but you.
I want to temper my answer and Okay. Theres been some very unusual circumstances that have helped us get that this year and we've ended up turning inventory Boston and we ever would have planned.
So so so I think we've made progress this year, but we really need a year or two to consolidate that progress and to make sure that the gains that we've made.
Captured over the longer term, but that's how I would characterize I feel like we've made more progress on that on the inventory piece and I would have expected in a relatively short period of time, but it's too early to declare victory. It's too early to take on to the bank just yet we need a bit of time to share to consolidate around that.
Fantastic Thanks for the insight.
Thank you and ladies and gentlemen, this does conclude our question answer session I would now like to turn the call back over to Michael Sullivan for any closing remarks.
Thank you everyone for joining us on the call today. We appreciate for questions. We look forward to talking to you again in early March to discuss our fourth quarter results.
Meanwhile, I know that it's going to be different and maybe a little subdued this year, but I wouldn't like to wish you and your families a very happy Thanksgiving.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].