Q4 2020 Burlington Stores Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Burlington stores fourth quarter 2020 earnings call.
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After the presentation, there will be a question and answer session to ask a question. During the session you will need of press Star then one.
Please be advised at todays conference maybe recorded.
I'd now like to hand, the conference over to your host today, Mr. David Glick Senior Vice President Investor Relations and Treasurer. Please go ahead Sir.
Thank you operator, and good morning, everyone. We appreciate everyone's participation on today's conference call to discuss Burlington's fiscal 2024th quarter operating results. Our presenters today are Michael of 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 at this call may not be transcribed recorded or broadcast without our express permission.
Replay of the call will be available until March 11, 2021.
We take no responsibility for in Accuracies that may appear in transcripts of this call by third parties.
Our remarks on the Q&A that follows are copyrighted today by Burlington stores.
Remarks made on this call concerning future expectations.
Vince 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 set of describing of companies 10-K for fiscal 2019 and at other filings with the SEC.
SEC all of which are expressly incorporated herein by reference.
Please note that the financial results and expectations. We discussed today are on a continuing operations basis reconciliations of the non-GAAP measures. We discuss today to GAAP measures are included in today's press release now Here's Michael.
Thank you David.
Good morning, everyone and thank you for joining us on this mornings fourth quarter earnings call.
We are very glad that you could be with us.
We are going to structure this morning's discussion as follows.
I will review our fourth quarter of results.
Second.
I will talk about the outlook for 2021.
But I.
I will discuss the market share opportunities that we see ahead of us.
And for <unk>.
I will provide an update on how selling.
From two point of <unk> strategy and key initiatives.
After that I.
We'll hand, the call over to Jon to walk through the financial details.
Then we will be happy to respond to any questions.
I would like to start my review of the fourth quarter by acknowledging our store teams that strong execution of safety and social distancing protocols at our stores and providing a safe environment for our associates and our customers in Q4 and indeed throughout <unk>.
2020.
This attention to safety at our stores was critical to supporting our business.
Okay. So let's talk about our results.
Comparable store sales in the fourth quarter were flat versus last year.
We were down 10% in November.
In December and positive.
Positive 17% in January.
I would like to provide some detail on the drivers of this month by month comparable store sales performance.
As we discussed on the third quarter call. We believe that the weak trend in November was driven by unseasonably warm weather.
Given the legacy of our brand and our particular strength in council where on.
Usually warm weather in the hole.
Our traffic and sales more than most although we kind of.
This was the primary driver of the 10% comp store sales decline for the month.
Our sales trends improved significantly in December as weather normalized traffic improved and customers responded to the great merchandise values that they found in our stores.
We chased over $100 million sales above our internal plan in December.
We were particularly pleased with this improvement in the sales trend in December given the external environment.
The resurgence in COVID-19 cases across the country made at.
We faced lower occupancy limits in many stores and reduced operating hours in some of all of major markets.
We improved to a flat comp in December.
Find these limitations.
How come performance in general.
Accelerated further to positive 17%.
We believe that day.
This was primarily stimulus Griffin.
But no matter. The reason this strong performance again demonstrated our ability to react to the trend.
Sales and most importantly, <unk> to deliver great merchandise value to our customers.
How gross margin in Q4 was up approximately 40 basis points.
Despite a 70 basis point increase in freight expense.
I was at very pleased with the 110 basis point increase in on merchandise margin, which was driven primarily by lower markdowns.
Our receipts on a fresher.
Turning faster and we are capturing the margin benefits of these talks dump inventory turn.
The buying environment in the fourth quarter was very favorable and we were able to find great merchandise values to flow to stores and to fuel. Our ahead of plan sales trend.
At year end, our in store inventory levels were down 16% on a comp store basis.
As a reminder, at the same point last year, they were down 15%.
On a two year basis, we are operating with significantly less in store inventory.
This is deliberate and consistent with our stated strategy of running at business with much cleaner in store inventory levels in.
In fact, our in store inventory tons increased 27% on a comparable basis to Q4.
Evidence that our strategy is working.
Reserve inventory increased to 38% of our total inventory at the end of the fourth quarter versus 33% last year.
It would've been higher bumps of the fact that we released some of our debt early.
This was merchandise that we had originally planned to release in February.
Kind of weighted into January to support sales and replenish in store inventory.
Of course this is exactly what reserved inventory is intended for.
I would like to turn now to the outlook for 2021.
The consumer environment remains very unpredictable.
The pace of vaccine rollouts of scrap.
Net of virus mutations the timing of tax refunds and the potential for additional titles stimulus.
These are all variables that we have no control over and have very difficult visibility into.
These variables could dramatically impact our sales trend in either direction.
As Tom will discuss later and the cool we have planned at.
And we will be reporting fiscal 'twenty 'twenty, one compared to fiscal 2019.
This is to avoid the lack of comparability in our fiscal 2020 results.
Well in total baseline planning purposes, we are assuming a flattish comp for 2021 compared to 2019.
But it is important to understand that this is just a baseline.
We intend to manage our business very flexibly.
If at all comp during 'twenty 'twenty, one is stronger than flat then has demonstrated in Q4, we have the ability to chase of stronger sales trend.
And Conversely of course, we can pull back at.
Turns out to be necessary.
I would like to move on now to talk about the exciting longer term market channel opportunities that we see ahead of us.
For many years now non predating the pandemic the e-commerce and off price retail sectors have been gaining market share at the <unk>.
<unk> of Department stores.
We believe that would be possible at the pandemic may drive an acceleration of this trend.
Leading to further consolidation and additional closures of full price bricks and mortar retail stores.
As we have described before as these physical stores closed we believe that many shopping, especially more affluent time stopped shopping will migrate more of their spending online.
But we anticipate that other shoppers more value oriented shoppers will find their way to off price.
With all of that said, we recognize that none of the shortage in house stores cans about our market share will.
Well take care of them as they should it's finding great value on a brand or style or an item that they lock.
Our focus and the central objective of our Burlington to point out of strategy is to improve our ability to deliver this great merchandise value.
I would like to pivot now and offer some updates on Burlington to point in time.
As I said earlier, we believe our strong performance relative to our expectations. In Q4 was primarily driven on the successful execution of our core Burlington to point of strategy.
Delivering great value to customers by tightly managing liquidity.
Chasing sales buying opportunistically.
Operating with lean inventory getting fresh receipts to the sounds of Lawrence pumps as possible and flexing our store model based on receipts and traffic.
As we move into 2021, we will continue to look for ways to refine and improve our execution of these key strategies.
I wonder if the most important long term enablers of delivering great merchandise value to customers is to invest in our buying and planning capabilities.
As I mentioned in our November call, we are pursuing a major multi year growth plan for our buying and planning organization.
We are heavily investing in the capabilities and will be growing this organization at a much faster rate than sales.
This expansion will happen across all merchandise categories and in each class of buying offices.
The growth will be especially significant in our New York City, and a west coast buying offices.
Head count in both of these locations will grow several fold in the next few years.
We have very strong vendor relationships today, but we want to further expand and develop these key partnerships.
We recognize that in some cases, having a stronger on the ground presence in New York City, and Los Angeles will help us to achieve that.
The final update that I would like to provide is on a real estate strategy.
As discussed on our November call, 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 are excited about this prototype.
We expect net about one third of our new store openings in 2021 will be in this format.
And then over time, the smaller prototype will grow to represent the majority of our new store openings.
Of course, the key enabler of <unk>.
Going to the smaller prototype is to operate with leaner in store inventory levels.
When you have less in store inventory you need connect physical space.
This has significant economic benefits.
Translating to lower occupancy costs and higher operating margin.
The smaller prototype also provides important strategic benefits increase.
Increasing the pool of potential real estate sites and providing the opportunity to open profitable stores in more locations around the United States.
We are very excited to announce that based on these factors we are raising our long term potential store count to 2000 stores from our previous call of one thousands of stores.
As a reminder, we had 761 stores as we began this fiscal year.
So clearly we have a lot of runway and opportunity ahead of us.
Bringing it back to this year as John will describe in a moment, we plan to open approximately 100 new stores in 2021.
While closing or relocating approximately 25 stores per total.
Increase of 75 net new stores.
Moving forward, we will continue to evaluate the pace of new openings each year.
Now I would like to turn the call over to John to provide more detail on our financials.
John.
Thanks, Michael and good morning, everyone.
Let me start with a review of the income statement.
For the fourth quarter total sales increased 4%.
While comparable store sales were flat.
The gross margin rate in the fourth quarter was 42, 5% an increase of 40 basis points versus last year's rate of 42, 1%.
This improvement was driven by a 110 basis point increase at our merchandise margins.
Which was attributable primarily to a reduction in markdowns.
This merchandise margin increase more than offset.
Significant increase in freight expense, which increased 70 basis points over last year's rate.
Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs.
We're $143 million in the fourth quarter of 2020 versus $89 million last year increase.
Increasing 230 basis points as a percentage of sales versus last year.
Higher supply chain costs accounted for 180 basis points of this deleverage.
This was consistent with the expectations that we discussed at our third quarter call last November.
The major drivers were higher wage rates.
Higher wage incentives.
The impact of lower AUR and product mix.
At the inefficiencies caused by safety protocols and the general disruption in the flow of receipts across the global retail supply chain.
The balance of deleverage in product sourcing costs came from higher buying costs.
This is consistent with Burlington to point out and our strategy of investing in our merchandising capabilities.
Adjusted SG&A was 554 million versus $4 99 billion of last year.
Increasing 160 basis points versus the prior year.
SG&A deleverage was primarily due to increases in store related and corporate costs, including $39 million in COVID-19 related expenses.
Adjusted EBIT decreased by $70 million to $224 million.
All of this resulted in diluted earnings per share of $2 33.
Versus $3 <unk> last year.
Adjusted diluted earnings per share were $2 44.
Versus $3 21.
During the quarter the company paid down the 250 million per.
Previously outstanding on its ABL facility.
And in the fourth quarter with no outstanding balance.
We ended the period with available liquidity of approximately $1 9 billion include.
Including approximately $1 4 billion in unrestricted cash and total balance sheet debt of approximately $1 9 billion.
Before I provide our outlook I wanted to comment on how we are approaching planning our business and reviewing our performance during this year.
As you know fiscal 2020 was a highly unusual and volatile year, making comparability.
Of fiscal 'twenty 'twenty, one results to fiscal 2020 very difficult.
Accordingly, not only of the plants, we have developed benchmark against fiscal 2019, but our comparable store sales results at many of the financial measures, we will be reporting in fiscal 2021 will be compared to fiscal 2019 as well.
Given the uncertainty caused by the ongoing pandemic, we are not prepared at this time to give specific sales or earnings guidance for fiscal 2021.
That said, we can provide some guidelines to help you model of fiscal 2021.
Let's start with sales.
As Michael said for internal planning purposes, we are using a baseline of flat comp in fiscal 2021 versus fiscal 2019.
In a moment, we will discuss the cost headwinds that we expect to pace in fiscal 2021.
Before we do that.
It's important to call out that as we compare 2021% to 2019, we will have naturally incurred two years of expense growth.
Typically on a flat comp our EBIT margin with declined 20% to 30 basis points on a one year basis.
Or 40 to 60 basis points over two years of expense growth.
Staying with sales for a moment as you think about total sales growth for FY 'twenty, one versus FY 19.
Should factor in two years of new stores over that time period.
34, net new stores in fiscal 2020 at.
75 planned net new stores in fiscal 2021.
Moving on to gross margin.
We expect higher freight cost to continue to pressure our reported gross margin in fiscal 2021.
We do expect merchandize margin improvement to offset higher freight costs as we continue to play on our comp store inventories down which should result in further reduction in our markdown rate.
Moving down the P&L, we expect continued cost pressure and deleverage from product sourcing costs in 2021.
Primarily from higher supply chain costs.
We expect significant deleverage versus 2019, driven by similar headwinds to those we experienced in the fourth quarter.
In terms of SG&A in FY 'twenty, one versus FY 2017, you should also factor in ongoing COVID-19 related.
G&A expenses in fiscal 2021.
After combining the deleveraging effect of the two year flat calm the incremental expense pressures that I've just outlined on various offsets and mitigation mitigation strategies that we have identified so far our modeling would suggest an EBIT margin decline.
End of 70% to 80 basis points, if comp sales are actually flat in fiscal 2021 versus fiscal 2019.
Again to be clear this was based on comp store sales growth being flat on a two year basis.
If our comp store sales growth is stronger than this then we would expect our operating margin performance to be better.
Finally, let me share some specific outlook items for your modeling purposes.
Net capital expenditures for fiscal 2021 are expected to be approximately $470 million net of landlord allowances.
In fiscal 2021, we expect to open 100, new stores, while closing or relocating 25 stores, resulting in 75.
<unk> net new stores.
This includes 18, new stores that were shifted from fiscal 2020 into fiscal 2021.
Depreciation and amortization expense exclusive of favorable lease costs is expected to be approximately $260 million.
Interest expense, excluding $32 million in noncash interest on the convertible notes is expected to be approximately $80 million.
And we expect our effective tax rate to be approximately 24% to 25%.
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 thank the entire team at Burlington.
It is an understatement to say that we operated in a very difficult environment in 2020.
I am proud of how the Burlington organization handle these challenges.
And I'm amazed at the progress we made on our strategic priorities.
To express its appreciation, we announced earlier today that we will be paying a special. Thank you bonus to the majority of our store supply chain and corporate Office Associates, Inc.
In recognition of their hard work and commitment in 2020.
This is a very exciting time for us at Burlington.
We are all energized by the significant growth opportunities, we see ahead of us.
And by the strategies, we are pursuing to come off of these.
With that I will turn it over to the operator for your questions.
Operator.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.
In the interest of time, we ask that you limit yourself to one question and one follow on.
Our first question comes from Matt Boss with Jpmorgan.
Great Thanks, and congrats on the material improvement.
So Michael first.
How did you arrive at the baseline comp assumption that youre using for planning purposes. This year and more so could you just elaborate on your thinking behind this forecast overall.
Sure well, Matt good morning.
Great to hear from you.
I guess there were really two main thought.
Behind this baseline.
Firstly.
I should reiterate 2021.
Is it very difficult years of forecast there on a.
Number of potential positives.
<unk> vaccines.
On the potential for additional stimulus spending.
There were also some risks and some some negatives the possible spread of additional Berry.
Continuing on the unemployment rate so a lot of uncertainty.
The window at uncertainty, we need of baseline that we can plan against.
One that will give us flexibility. So we can shape the trend if our comp gross turns out to be stronger.
We can pull back if we need to.
Our feeling is that.
Starting with a flattish baseline we can we can move in either direction. So that was the first of all.
Second thought is that our recent trend gives us confidence that this is a good baseline to start with.
So let me talk about Q4, and then I'll talk about the quarter to date. So Q4, obviously, we just reported a flat comp for Q4, but there are couple of important puts and takes.
To this number.
No.
We know that the federal stimulus checks helped us in January.
And Conversely, we also noted at the unseasonably warm weather really helps us in November.
After adjusting for these specific factors, we estimate that our underlying comp store sales trend in Q4 was down around 1% so at minus one 1%.
The other day at the point is our quarter to date trend.
I caution you were only work for.
Four or five weeks into a 13 week quarter, but at this point our quarter to date trend is flat.
In other words at this point in the quarter, our trend is consistent with the baseline plan that I've. Just described so I guess to summarize at 2021 going on.
B of tough year to forecast lots of things that could happen that could help or hurt sales.
And what we need to do is to plan out of business and be ready to react to a stronger or weaker trend as we did in Q4.
And you have given as I say given the data that we have right now it feels like a flat comp it seems like a reasonable assumption for baseline planning purposes.
That's great congratulations on the performance in February of particularly given the weather that I know of certain parts of the country has seen as of <unk>.
Follow up for John how best to think about 2021 margin pressures maybe on the context of your goal to close the margin gap versus peers over time, meaning do you see any structural barriers that might make this more difficult.
Yes, good morning, Matt. Thanks, It's a good question.
I think maybe the best way to answer it.
Might be to separate out into two different time periods.
Yes first of period from now until we kind of get.
Through the whole pandemic thing and then.
That's that could be maybe the next 12 months and second the period. After we emerge from the pandemic. So that's probably 2022 and beyond.
For the first time period may be up to the next 12 months hopefully a little shorter.
At the sales trend is still going to be really difficult to predict.
Traffic into our stores, probably going to continue to be off.
Industry wide supply chain issues that we're seeing are probably going to continue putting pressure on pay per.
Freight and supply chain expenses.
And the various COVID-19 related safety measures that we have on our stores and distribution centers will likely need to remain in place for some time.
As I said in the prepared remarks, if you can.
Combined the deleveraging effect of a two year flat comp.
At the expense pressures and the various offsets that we've identified.
This would suggest an EBIT margin decline of 7% to 870 to 80 basis points. If comps store sales are actually flat in 2021 versus 2019.
As we said previously.
Typically don't expect margin leverage unless we achieve at 2% to 3% comp sales growth in a year so for 2021.
This would require two year comp growth of 4% to 6% versus 2019.
At the recovery from the pandemic were to accelerate over the next few months at our comp trend were to pick up that we could be back on track.
But that all depends on external factors will will be on what we can actually control.
Alright, so let's switch over and talk about sort.
Subsequent time period after the pandemic.
At this point when that's all behind us.
We don't see any structural expense changes that would interfere with our longer term margin opportunity.
As we've discussed in the past, we see three main drivers of operating margin improvement.
Of course of the first one of sales higher.
Higher sales productivity drives leverage.
There are a number of steps that we're taking to drive sales focusing on low values.
Tightly controlling liquidity.
Chasing the sales trend.
After a great opportunistic buys and investing in our merchandising capabilities.
The second piece would be gross margin.
We think we have a significant opportunity to continue to turn on inventories faster than we have historically.
And by doing that that's going to drive lower markdowns.
I think we've demonstrated that pretty well in Q3, and especially in Q4 of 2020.
And that gives us a lot of confidence that we have additional opportunity to increase our turns.
The third point I had mentioned is up.
Occupancy costs.
Our stores are bigger than less and less productive than our peers.
Driving higher sales will help but as we discussed on our prepared remarks, we also see significant opportunity to reduce the size of the store, which in turn would reduce occupancy cost in our stores overturn at.
With early to to point out we have specific initiatives in place to go after each of these opportunity areas.
Despite all of the challenges we faced in 2020, we're really happy with the progress that we made at each of these areas.
Most importantly, we remain confident that with good execution, we will drive the significant improvement in operating margin in the next several years.
Once we have the pandemic behind us.
Great color best of luck.
Thanks, guys.
Our next question comes from Ike <unk> with Wells Fargo.
Hey.
Morning, everyone.
Two questions first for John on the product sourcing costs major.
A major source of deleverage in the fourth quarter, just any more detail you can kind of give us give us on on the puts and takes of line item and then to that point I think it's been I mean of $143 million. The last two quarters is that a good way to think about.
The next couple of quarters as we start the first of all.
Yes. Good morning. Thanks, Thanks for the question at <unk>.
Switching costs is complicated so let me kind of explain at the way that we think about it so yes.
As I mentioned in prepared remarks.
Product sourcing costs de Levered by 230 basis points in the fourth quarter.
Higher supply chain costs represented 180 bps, so that deleverage. So let's talk about that first is probably use if I break it into a few buckets.
First 90 bps of the supply chain deleverage came from higher wage rates and from wage incentives.
Yes.
Similar to what we discussed at in the third quarter, the higher wage rates accounted for about half of the 90 bps and we expect that increase to be permanent.
We anticipate that over time.
We're likely to find some efficiencies that could partially offset the higher costs. The other half came from the temporary wage rate of incentives. These were used to increase staffing won extra work was needed to overcome.
Situational factors.
The receipt flow volatility that we faced.
Covid related safety measures.
Of course, we would expect these factors to abate over time.
Next bucket.
Think about includes.
<unk> of our business during the quarter on how that impacted product sourcing costs drove some of that deleverage.
And this bucket of throw a bunch together.
I would include AUR, which was down slightly meaning that we process more units.
Category mix, which included a shift towards higher handling cost items like home.
Unless overall efficiency in our DC processing.
Resulting partly from the safety protocols at our Dcs.
But but also from the impact of the volatility around timing of receipts and when they were going to arrive at our Dcs.
We had mortgage moving into and out of reserve during the quarter as well.
As we reacted to the disruption in those planned receipts.
And two are stronger.
Original plan sales trends.
So all of these factors together drove about 60 bps of the supply chain deleverage.
Many of these factors are directly or indirectly related to COVID-19 and the disruption in the global retail supply chain that debt.
We have seen and continue to see.
But once the pandemic is behind US we would expect much of this.
To improve.
The last 30 bps of supply chain deleverage.
That was driven by.
Occupancy, where we added some new currently underutilized capacity and deleverage on our fixed cost base at.
A flat comp.
With higher sales and fully utilize warehouse in DC capacity, we would expect leverage on these expenses to improve and drive operating margin expansion in the future.
So just to kind of wrap it together.
I think the balance of deleverage.
The remaining piece of deleverage in product sourcing costs came from higher buying costs.
And that's it.
Consistent with our Burlington strengthening our merchandising capabilities objective overtime, we would expect to see continued deleverage as we continued to invest in that team.
The other part of your question to the specific dollar amount.
We really staying away from specific dollar amounts.
Because we really don't know what the sales volume.
Is likely to be we may have to flex up we may have to flex down.
We can't really predict what we're going to do as far as we see processing capabilities or our actual.
Processed.
Of receipts so.
I am going to stay away from anything to do with us.
Predicting.
Fixed dollar amount, but yes.
As we discussed.
We're going to whatever sales trend, we see if it's better or worse, we're going to flex with that and our variable costs. We'll move the same direction. So hope that helps.
Okay. Thanks, and then just on a.
Real quick second one on inventory in Q4, and any comments on what Youre seeing.
With the merchandise availability out there of another port congestion has been talked about but just any high level comments there would be great.
Yes. Good morning, Thanks for the question.
So first of all inventory levels.
Let me start with in store inventory.
And then I'll talk about reserve.
Our in store inventory levels.
I would say, we are really well controlled throughout the fourth quarter.
On a comp basis, they were down 20% to 30% for most of the quarter.
And.
Just think about that for a minute. We did the same comp sales as last year, but we did that with 20% to 30% less inventory in a pandemic.
Operating with leaner inventories as a core element of our Burlington to point out strategy.
And of course, this faster inventory turns as John referenced in his remarks expressed itself in higher merchant margin during the fourth quarter.
At the end of January our in store inventory levels were down 16%.
But it's important to remember that we began to cut our inventory levels in the fourth quarter of 2019. So this 16% cut on top of over 15% reduction at the end of January 19, 2019 in other words, we're now operating with much lower inventory levels than we have historically.
You would expect that we will continue to manage our in store inventory levels tightly coming forward.
There'll be variations, depending on the quarter at the time of year.
Overall, I would say that inventory level in store inventory levels will be down double digits throughout 2021 compared to 2019.
Let me move on to reserve inventory.
Our reserve was 5% higher at the end of Q4, but that statistic doesn't.
It doesn't really capture all of the movement in and out of Brazil. During the quarter. In fact, our January of reserve receipts. So of goods that were coming into reserve in January were actually up 42% versus last year.
So what happens of course is that our reserve releases were up even more they were up 62% versus last year. So reserve releases being goods that came out of the reserve.
In order to fuel our ahead of plan sales, we accelerated those when the system like that in other words.
Merchandise that we had planned to release to stores in February.
Or even early March we pulled up to support of very strong sales trend in January and to replenish our in store inventory levels.
As I said in my.
<unk> earlier remarks. This is exactly what reserve inventory is intended for.
We see as a very important tool on our merchants can use to chase sales and to take advantage of great deals in the market.
With that said that doesn't make it difficult to forecast what was out of inventory levels of lighting to be at the end of each quarter.
Reserved inventory balances could move up or down in 2021, depending upon those two things our sales trend buses plan at.
And the availability of great opportunistic buys that we want to pack away.
Let me finish up the last part of your question availability overall I would say that we were very happy with availability in the fourth quarter.
Since we're able to buy terrific merchandise at great values to support are ahead of plan sales in the quarter end to transition our assortment of spring. So we're very pleased with of merchandise we have a net stores right now.
Got it thanks, so much.
Thanks, Mike.
Our next question comes from John Kernan with Cowen.
Good morning, nice finish to a challenging year.
Can you talk about the impact of industry wide supply chain issues.
You reported a nice quarter, particularly versus sell side expectations are out there I'm, just wondering how incremental supply chain costs and headwinds.
Affected Burlington, and then perhaps more importantly, how they're going to affect of model in 2021.
Good morning, John.
It's actually already.
Really good question.
Let me do this.
I'll provide some <unk>.
High level commentary on what we're seeing in the industry.
And how were working around those issues and then I'll ask John <unk> to talk about the financial impact.
So the supply chain issues across the retail industry.
I would say over the last several months have been extraordinary.
The magnitude of the bottlenecks that congestion.
And the delays in getting merchandise into the country.
And then moving at around the country.
I would characterize all of this is unprecedented.
It is not difficult to understand why this has happened for a good chunk of last year.
Industry supply chains.
Down or completely shut down in some cases.
And then for several months after stores, we opened retailers and vendors were understandably cautious they didn't know what was going to happen.
And then all of a sudden in the fourth quarter. There was a rush to bring in merchandise for holiday and then more recently at the spring.
At all of that.
Thanks to major transportation hubs and the vendors warehouses of struggles walk right at normal capacity because of Covid related precautions, all because of staffing issues.
A few months ago I would've said.
The situation with total of the correct itself once we got through holiday.
Did not happen.
There is still very very significant industry delays coming through the ports.
The transportation hubs and even the warehouses.
Cope with these issues, we've had to juggle the timing of purchase orders reserve releases and in balance sheet flow I feel like we live through a version of this summer.
Summer and we learned some important lessons.
It's been very challenging, but I would say on buying planning and supply chain teams have really been able to stay on top of debt and we've been able to catch up of seats that we need to support our sales trend.
Even though we've been able to manage through the issues. That's clearly a financial impact in terms of high freight rates and supply chain expenses and at the moment.
I'll, let John provide more detail on how those might impact us.
In 2021, but before I hand off to John Let me make one final point, usually these situations where on merchandise or does it disrupted or delayed usually these situations end up expressing themselves in terms of increased off price supply.
Once these issues on wind and of course, they will unwind, but maybe not for a while we think this could be a very very good off price buying opportunity.
Okay.
I'll, let John Crimmins talk about the financial impact.
Thanks, Michael Good morning, John Thanks for your question.
So I guess obviously.
Obviously, there is two areas on our P&L that are impacted.
By all of this stuff freight and supply chain and Ive already talked quite a bit about.
Q4, so I'll focus a little bit more on the potential impact in 2021.
As Michael was describing these industry wide supply chain issues at.
<unk> gone away now that were in 2021.
<unk> continues to be huge pressure on the ports on.
Rail and trucking systems across the country.
And obviously this has had a significant impact on freight costs.
We don't believe at all or EBIT. Most of this cost pressure is permanent and we would expect debt at some point.
Supply and demand for freight is going to return to some kind of an equilibrium.
But we really don't know when that's going to happen.
So our expectation is that we'll be facing similar headwinds to what we saw on the fourth quarter and what we've seen so far this year well into 2021.
As I said earlier talking about gross margin for 2021.
We believe that we should be able to cover of these higher freight costs through higher merchant margin driven primarily by the opportunity we see to have lower markdowns again this year.
Okay, Let me move on to supply chain costs.
The main impact of industry wide issues on our supply chain is that they create unpredictability and receipt flow.
This unpredictability causes inefficiencies in our distribution centers to deal with the kind of ups and downs ebbs and flows.
We have to add shifts.
Okay.
To be staffed whatever receipts actually do show up on or do you see some are even through to get them out to our stores.
This drives up overtime.
And it's driven some of the other wage incentives that we have in place.
Talked about.
Once the industry wide situation normalizes, we would expect these.
Vince pressures.
Go away as well.
But again, there's no sign of that happening yet.
So at these costs could be with us of course sometime.
Just one more comment.
Probably just kind of echo.
Something that Michael just said.
At some point these industry wide issues and delays will resolve themselves and when they do this could be a really good off price buying opportunities. So so yes. The situation just driving expense had headwinds for us now.
But there could be a nice silver lining for us in the future.
That's helpful. Thank you.
Our next question comes from Lorraine Hutchinson with Bank of America.
Thanks, Good morning.
Adjusted to hear more about the increase in your store potential can you talk about what the thinking behind that how did you come to the 2000 store number and how confident are you on that potential.
Well good morning, Lorraine. Thank you for the question.
We've done a lot of work on this topic over the last 12 months.
And we are we're very excited about this opportunity.
As you know our previous target of 1000 stores.
Had been in place for a while.
But that estimate.
It's pretty dates at it was based on a set of assumptions around store prototype.
Store economics and market share opportunity there.
Really no longer apply let's start with the store prototype.
As we talked before we're introducing a new smaller 25000 square foot store prototype.
On our real estate merchandise planning and store operations teams.
On collaborated on some really great work to develop detailed operating plans for this prototype.
Over the next couple of years, we expect that this smaller format will become.
Entrail element and on new store opening plans.
And as I described in my remarks, the key enabler of moving to this smaller format is to operate with leaner in store inventory levels, which is obviously on a core element of Burlington to point in time.
The smaller store prototype surprisingly has some significant economic benefits and John referenced this in his remarks, the smaller footprint drives lower occupancy costs and of course this means high on operating margins.
The smaller footprint also means improved real estate availability for new stores and relocations.
We worked with a specialist third party analysts expense.
Analyze.
Information on our new store prototype.
Together with data on the demographics of our target customers.
We then combined got analysis with what we're seeing in the marketplace in terms of retail real estate opportunities.
The updated store count potential that we announced today is based upon all of that detailed remotely.
On the final point to make is that with this kind of exercise with this kind of modeling it's important to do a reality check.
Is this opportunity of renal is there enough market share opportunity to support 2000 Burlington stores.
So in addition to the detailed most of that I've. Just described we look very closely at.
<unk> retail market share.
At all over the next several years.
What will happen to the share of department stores specialty stores and mall based retailers.
Of course, we also looked at how successful e-commerce is likely to be in penetrating the categories that we compete in at.
At the price points, we offer and with the customer segments that we serve.
The bottom line from all of this analysis is that we feel very confident about the market channel that we have ahead of us and very confident about on a potential to get to 2000 stores.
Thanks, Michael and then share of any additional details on the economics of the 25000 square per protocol.
Yes sure sure.
Right.
At all.
I'll take that question so.
Yes.
As we've kind of described.
Just operating at a smaller box.
Brings your cost base down end.
If we're able to drive to similar sales volume in a smaller box.
Everything on.
All of the costs related to operating in that box or.
Less expensive so.
On the performance that we've seen.
Seen over the last.
It's been for a couple of years for us, but particularly in the second half of the year when we've really.
<unk> been operating with very lean inventories and driving sales volumes really gives us additional confidence debt.
We should be able to operate in the smaller stores.
And deliver very similar sales levels to what we have in some of our larger boxes.
The cost comes cost savings come on the occupancy line, but they also come on the rest of.
Operating expenses in the store smaller space for utilities for cleaning for maintenance.
All of those things.
It helped the overall.
Performance of the score.
And this will become a tailwind as we.
Look to continue to improve our overall operating margin so.
Really excited about the opportunity that we have there.
As Michael said, there is a lot of additional sites that.
Debt become viable for us and of <unk>.
All of our store format. So.
We see at us.
Of our.
Topline driver as we.
Are able to find more sites and open more stores and a driver of operating margin expansion and improvement as we are.
We'll be able to to have four wall operating margins of at a higher level. When we're driving similar sales on a less expensive.
Operations.
Thank you.
Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.
Great. Thank you so much for taking the question Michael I wanted to follow up on your comments that you chase over $100 million of sales above plan in December.
By my math would suggest about at about a 10 percentage point Delta.
Is that the right ZIP code and can you think that day.
Opportunity to continue chasing and sort of fine tuning this skill.
Over time will allow you to chase and even larger delta to sales.
Oh, good morning Kimberly.
So yes. Your math is right we do approximately actually just over $1 billion in December we came into the fourth quarter.
You'll remember actually in November we were running on a comp of of minus 10. So that was that was actually our original plan for the fourth quarter. We saw no reason why that would be better at the time in fact at.
At mid November people, who are getting very anxious about the.
The upsurge in COVID-19 cases around the country. So.
So.
So our original plan going into December was minus 10.
Correct at the math is right.
We brand 10 points above that two to hit back in December.
We.
To say that require quite a lot of what sort of.
Planners and the merchants and supply chain to go out that and find that merchandise and flow at to stores into school of sales and some of that as you will have heard was moving around with differences, which helped us as well now in terms of your question of can we chase more than that I hope, we don't have to in some way at that kind of hope that.
On the things settle down a bit I think.
On a pre pandemic wells I would be happy to back a year or two ago. If we had planned on one to two comp and chase two of five.
Obviously, the past 12 months has been pretty abnormal.
I would hope and of post pandemic world as I say things will.
<unk> settled down a little debt and again, it's correct that would be very important that we chase and we chase well.
I don't think over the long term.
I expect this kind of volatility.
I do for the next 12 months, but once we're out of the next 12 months I think things should settle down.
We all share of that wish.
My follow up Michael.
Just on the on the.
The investments and the bonding department and.
I think you mentioned debt.
That is.
Ongoing investment for 2021 could you maybe just talk about where those investment dollars are going is it going to be broader coverage more buyers.
And certain categories and if you can talk about some of the support.
That you're giving to your buyers in order to.
Give them greater tools to.
Enhance that in season shapes that would be great.
Sure.
Yeah, So it's actually all of the above.
If I start with.
On the merchant.
Themselves I would say.
The gross is the growth that we planned the debt.
Plant.
<unk> gross plan that we've developed.
Shows significant head count growth across all areas of the business there of some differences. So as you would expect at the.
The areas of our business where we're.
I would say less kind of if I take our underpenetrated versus our peers, we're going to invest more in those areas. So we can catch up.
But the growth is going to happen across the board.
The business.
And at all levels in terms of levels within the merchant team.
At the other Brian pulling component is the planning group Similarly.
A lot of growth in the planning group to support the.
The merchants and to support growth across across different businesses.
I called out in my remarks that.
The gross will be disproportionately high in New York City buying office in our West Coast buying office on New Jersey buying office will also grow but not to the same degree of New York and California because of the reason I described in the prepared remarks and then on your your point. Your question about support I think that's a really good question because we're also.
We've been putting a lot of thought and we're going to be putting a lot of investment into supporting at much in teams and that support takes a number of different forms.
Professional development.
Training getting the buyers better tools better visibility into that business.
<unk>.
Some improvements to our merchandising and planning systems. So we can react more quickly to what we're seeing and then also on the sort of the operating side of things sort of at making sure that the interface between our merchant teams and our supply chain organization works is visiting us at Cannes. So so so a lot of where we're doing in that area.
Very exciting thank so much.
Thanks Tommy.
Your last question will come from Michael Binetti with credit Suisse.
Hey, guys. Good morning, Congrats on a great holiday and obviously, a tough tough environment Michael.
Michael I wanted to talk to you the opportunity here at so attractive to the investment community has been to close the $3 to 400 basis point GAAP that you have versus the off period price peer group.
And that was at the 1000 store target and I know, it's early and you just told US about 2000 today, but I'm curious, what adding 1000 stores to the long term fleet does to that margin target.
Sure well good morning, Michael.
I think on it.
I'd anchor on my answer to that question.
Sort of going back to.
The framework that John Crimmins used a bit earlier, when talking about sort of the margin GAAP quote unquote margin GAAP.
John outlined at three levels.
Sort of closed that margin GAAP number one driving sales in that part of it means driving comp store sales and we talked a lot about all the things we're doing to try and drive comp store sales.
Gross margin and <unk>.
The key element that really.
Our tighter inventory control and therefore driving cost of tons and then the third bucket, which is the one that relates most closely to your question is occupancy cost, where we feel like our stores.
Big on less productive.
Peers and.
As we cut inventory levels, we've got at a chunk of an opportunity to move into smaller boxes.
So bringing it back to your question how does the 2000 store the increase of 2000 stores help us it helps us in the sense that it opens up more of those opportunities. It gives us the chance to increase the pace of new store openings. So obviously.
As we said in our remarks, we're planning 100.
Gross new stores this year that would net to 75 of that.
A lot more than we've historically at.
Opening stores more rapidly like that gives us the chance to go after that operating cost opportunity more rapidly if he'd like.
So that's how I would think of that.
Yes.
Michael Let me go ahead John.
Michael if I could just add one thing to that at.
As we consider.
New store sites, one of our financial hurdles hurdles is free.
The individual store to be accretive to the company's EBIT margin. So it's kind of built into the way, we think about what stores to move forward on.
We're very conscious of that operating margin opportunity. So as Michael described we will have more of these stores.
At almost by definition, if we're going to approve them.
Be.
Helping us closely operating margin GAAP.
Okay.
Thanks for that Jon and then if I could just ask one follow up at Michael maybe maybe at talk about the journey since you've been here now.
John referenced at two to three point same store sales leverage point that you guys have always spoken to in the past when you spoke about the annual cost inflation natural inflation.
At the evolution of that two to three point leverage.
At point is the is the input to closing that margin gap versus peers. So.
It was obviously impressive that you sold the same amount of the same revenue that goods. This year with 2030% less inventory. So obviously a lot of progress has been made already.
What is the evolution versus when you got here of that 2% to 3% leverage point today and based on the investments you talked about for this year.
Where will that be at the at the end of this year's at start looking at more normal years ahead.
Sure.
Yeah.
It is of Great question.
I would say the journey over the last.
Burlington almost 18 months I would say the journey over the last 18 months has not quite been the journey by expenses stuff at Tyco.
Alright.
Fundamentals havent changed the opportunity actually in my view is now greater than I thought back then and the strategy with doing it.
It's very similar to two.
What we talked about actually a year ago before the pandemic happened at everything we've talked about today, we were talking about a year ago.
Thats already happened I say all of it is really happens it's quite a big thing is we've had this at this very significant event. That's happened over the past 12 months now what's that what has that done to our journey again, it hasnt changed the fundamentals if anything I think the opportunity actually looks bigger now.
But it's also in many ways at accelerated.
Some of the things that we had talked about.
I think it's probably always true in any business situation when you're confronted with an unexpected challenge or a survey of crisis.
<unk> has been of severe crisis.
This is due to adapt to change at a much faster pace than you otherwise might have.
So at.
At the core of Burlington to point out at this concept of delivering great value Bye bye bye tightly managing liquidity chasing sales buying opportunistically operating with the inventories we did all of those things in 2020 on especially in the fourth quarter.
And because of the circumstances, we face we had no choice we had to do those things and actually to do the most of it.
At normal circumstances, I think the progress that we made in 2020 would have taken much stronger now.
I wanted to sort of temper that a little bit.
The fourth quarter is just one quarter.
Let's talk again, when we wrap up $12 16 of 20 quarters.
So we're not done we have a lot of work ahead of us so.
So I think we feel pleased about the progress we've made but we're humble enough to recognize there is still quite of lot of work ahead of us here.
Thank you so much guys.
Thanks.
That concludes today's question and answer session I would like to turn the call back to Mr. Sullivan for closing remarks.
Well. Thank you everyone for joining us on the call today. We appreciate your questions. We look forward to talking to you again in late May to discuss our first quarter results.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
And of course.
Okay.
[music].