Q1 2021 Burlington Stores Inc Earnings Call
[music].
Good day, and thank you for standing by and welcome to the Burlington stores, Inc. First quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will.
A question answer session to ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, David Glick Senior Vice President Treasurer and Investor relation.
Please go ahead.
Thank you operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2021 first quarter operating results.
Our presenters today are Michael O'sullivan, our Chief Executive Officer, and John Crimmins, Chief Financial Officer.
Before I turn the call over to Michael I would like to inform listeners that this fall may not be transcribed recorded or broadcast without our expressed permission.
Play of the call will be available until June for 2021.
We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties.
Remarks, and the Q&A that follows are copyrighted today by Burlington stores.
Remarks made on this call concerning future expectations events strategies objectives trends or projected financial results are subject to certain risks and uncertainties actual results may differ materially from those that are projected in such forward looking statements.
Such risks and uncertainties include those that are described in the company's 10-K for fiscal 2020 and in other filings with the SEC 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.
We are going to structure this morning's discussion as follows.
First I will review, our first quarter results.
Second.
I will discuss the outlook for the second quarter.
And third.
I will provide a high level update of the investments that we're making you know merchandising organization.
As you will recall this is 1 of the most important initiatives in our Burlington to pointing to full potential strategy.
After that I will hand, the call over to Shaun to walk through the financial details.
Then we will be happy to respond to any questions.
As a reminder, the results we discuss for the first quarter of fiscal 2021.
Being compared to the first quarter of fiscal 2019.
Given the impact of the pandemic asked yeah.
Our 'twenty 'twenty results do not provide a good basis for comparability.
Okay. So let's talk about our results.
In these quarterly earnings calls, we normally focus on comparable store sales growth.
In a moment I will discuss comp sales.
But I would like to start my remarks today by highlighting our total sales growth in the first quarter.
This includes new stores opened since 2019 as well as comp schools.
Of course total sales is what really matters when looking at what is happening with market share.
In the first quarter of 2021, our total sales grew by 35% versus the first quarter from 2019.
We see this as early and direct evidence of our ability to take significant market share.
The economy and the consumer emerge from the COVID-19 pandemic.
Now I will talk about comp store sales.
Comparable store sales in the first quarter increased 20% versus the same period in fiscal 2019.
For the quarter to date through mid March comp store sales were up mid single digits.
From then on they really took off.
For the balance for Q1, our comp trends averaged over 30% with the biggest surge coming in late March and then moderating as we moved through April.
We believe that there were a number of factors that drove this strong comp performance.
These include the latest round of stimulus checks the pace of the vaccine rollout pent up consumer demand and direct them.
Very strong execution.
In terms of category and regional performance our strength in the first quarter with broad based.
All major merchandise categories outperformed that plans.
And comp store sales in all regions of the country, we're well ahead of our expectations.
Our gross margin in Q1 increased 230 basis points.
This was despite a 110 basis point increase in freight expense.
I was especially pleased with the 340 basis point increase in our merchandise margin, which was driven primarily by lower markdowns.
Our receipts are fresher, we are turning faster and we are capturing the margin benefits of these faster turns.
The buying environment in the first quarter was very favorable and we were able to find great merchandise values to flow to stores and to fuel are ahead of plan sales trend.
At quarter end, our in store inventory levels were down 19% on a comp store basis.
This was deliberate and consistent with our stated strategy of running our business with much leaner in store inventory levels.
In fact, our in store inventory tons increased 15, 9% on a comparable basis for Q1.
Looking ahead, we are planning average comp store inventories to be down significantly throughout the year.
But this does not mean, they will necessarily be down at the end of every month and every quarter.
We are more flexible nimble and opportunistic than ever before this means that we will manage our receipt flow and our store inventories. So we can capitalize on sales opportunities as we see them.
Reserve inventory increased to 35% of our total inventory at the end of the first quarter for US is 34% in the 2019 period.
This modest increase disguises. The fact that we made very heavy use of reserve during the quarter to chase the sales trend.
Arizona receipts during Q1 actually increased 45% versus the same period in 2019.
In other words, we were able to make some great opportunistic and strategic buys to pack away from reserve.
But.
At the same time, we moved up the release of other goods from reserve to fuel our trend.
These were items that we had planned to release later in the spring that we flowed early to replenish our stores in April.
Our merchants have gotten very skilled at using reserve this way.
Now that I have reviewed the main elements of our Q1 results.
I would like to take a moment to step back.
And provide some editorial commentary.
The sales opportunity in Q1, which clearly attributable to external factors.
Especially the latest round of stimulus checks.
It is important to recognize that even when you kind of slow pitch down the middle of the plate you still have to make good contact.
Even when the sales environment is favorable you still have to chase it.
That is what happened.
We really connected with the pool in Q1, and we maximize our share of the sales opportunity.
Our success in doing this was driven by strong execution on our coal Burlington to point of initiatives.
We recognize that our customers had a lot of choices in the first quarter as to where they could spend their stimulus dollars.
We operate in an extremely competitive industry.
We know that we have to earn our customers' business by offering the best merchandise value across the assortment every day.
Burlington to point toe is enabling us to do this.
I was very pleased with how well we executed in Q1 in all areas of the company buying.
Buying planning supply chain stores marketing and all areas of the company combined together to deliver our strong Q1 results.
Now I would like to talk about the outlook for Q2.
Based on our results for the first quarter, we have raised our internal baseline comp sales trend to positive 10 per cent for Q2.
At this point, we have not adjusted our baseline comp sales plans for Q3 and Q4.
We have held those plans flat for now.
I anticipate that we will make adjustments to Q3 and Q4 once we have greater visibility.
As we have said before it is important to understand that this baseline comp sales trend is just a planning tool.
In this environment the sales trend is extremely difficult to predict.
By now most of you know our playbook pretty well.
We intend to manage our business flexibly comp.
Comp trend during the second quarter exceeds 10%.
As we demonstrated in Q1, we have the ability to chase the stronger sales trend.
And converting of course, we can pull back if that turns out to be necessary.
The other aspect of the outlook that I would like to call out is that we continue to face significant challenges driven by industry wide supply chain issues.
These issues are causing huge volatility and delays in receipt flow.
And they are also driving significantly higher freight and supply chain expenses.
In the first quarter, we were able to stay on top of these challenges.
Our planning distribution and logistics teams did an outstanding job anticipating and working around these issues.
This meant that despite the challenges we were able to get fresh receipts to our stores in a timely fashion to fuel strong sales trend.
Meanwhile, our merchant margin performance and the expense leverage on ahead of planned sales in Q1 helped offset significant freight and supply chain expense headwinds.
But as you have heard from other retailers these issues have not gone away in.
In fact over the last few months they have deteriorated.
As John will describe in his remarks, we now believe that these issues will be with us current lease the balance of the year.
And they will put some pressure on our margin recovery.
I would like to move on now to provide an update on 1 of the core priorities within our Burlington to point of a strategy.
Investment in our merchandising capabilities.
We had ambitious growth plans for our merchandising organization coming into the year and I am pleased to report that we have.
Running ahead of these trends both in terms of new hires and promotions.
1 important milestone to share is that we recently signed a lease for double the square footage of our New York City Biomarkers.
I should also note that last year, we relocated our west coast buying office to substantially bigger space.
We are excited about our plans to grow our on the ground presence in New York and Los Angeles over the next few years.
I'm also happy to report that we have a robust pipeline of candidates.
There were 3 factors.
That are driving our ability to attract great merchandising talent.
Firstly cash.
They can see that we have a unique opportunity to grow our business over the next several years.
Secondly, Burlington to point toe is creating a huge amount of bounce excitement and energy around the strategic direction of the company.
And thirdly candidates are attracted to our culture.
We do not often talk about this third point, but it is very important so let me spend a few moments on it.
I believe.
The bedrock for any lasting and successful strategy.
Strong culture.
An inclusive and diverse workplace, where people are valued and respected.
And where they are supported and encouraged to achieve their own full potential.
We recognize that nurturing this culture is a journey not a destination.
<unk>.
That said I believe that agriculture is a major competitive advantage for us.
In fact, we were recently voted to Fortune's 100 best companies to work for.
We were 1 of only 7 retailers could be recognized on this list for 2021.
We are proud of this award.
It is a tribute to our associates and to our managers and leaders throughout the company.
Sure.
Now I would like to turn the call over to John to provide more detail on our first quarter financial performance.
Sean.
Thanks, Michael and good morning, everyone.
I will start with a review of the income statement.
A reminder, the results we discussed for the first quarter of fiscal 2021 are being compared to the first quarter of fiscal 2019.
For the first quarter total sales grew 35%, while comparable store sales increased by 20%.
The gross margin rate in the first quarter was 43, 3% an increase of 230 basis points for <unk>.
2019 first quarter rate of 41.0%.
This improvement was driven by a 340 basis point increase in our merchandise margins.
Which was attributable primarily to a reduction in markdowns.
This merchandise margin increase more than offset the significant increase in freight expense.
Which was 110 basis points higher than 2019 first quarter rate.
Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs were.
We're $141 million in the first quarter of 'twenty 'twenty, 1 versus $79 million for the first quarter of 2019, Inc.
Increasing 160 basis points as a percentage of sales.
Higher supply chain costs accounted for 140 basis points of this deleverage.
These expense pressures were consistent with what we had seen in Q4 with similar underlying drivers.
Higher wage rates and wage incentives inefficiencies caused by safety protocols.
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 all of our strategy of investing in our merchandising capabilities.
Adjusted SG&A was $518 million versus $428 million in 2019.
Decreasing 260 basis points as a percentage of sales.
SG&A leverage was primarily due to leverage on store related costs and marketing expense.
As well as overall leverage of fixed costs achieved on a 20% comp.
Adjusted EBIT margin increased by 360 basis points to 10, 9%.
Versus 7.2% in the first quarter of 2019.
Yeah.
All of this resulted in diluted earnings per share from $2.51 versus $1.15 in the first quarter of 2019.
Adjusted diluted earnings per share for $2.59 versus $1.26.
In the first quarter of 2019.
Yes.
During the quarter, we opened 23 net new stores, bringing our store count at the end of the first quarter to 784 stores.
This included 26, new store openings, 1 relocation and 2 closures.
We ended the period with available liquidity of approximately $2.1 billion.
Including approximately $1.5 billion for the unrestricted cash and $549 million of availability on our ABL.
Our total balance sheet debt is now $2.1 billion, which.
Which includes $959 million on our term loan.
$805 million in convertible notes 3.
$300 million in high yield senior secured notes and no outstanding balance on our ABL.
Yes.
Given the improving visibility on the sales earnings and cash flow trajectory of our business.
We are beginning to get more comfortable utilizing excess cash on our balance sheet to reduce our gross leverage.
Accordingly.
With our earnings release. This morning, we announced that we initiated the process to execute a make whole call that will fully redeem for $300 million.
Standing of our 625% high yield senior secured notes.
Given the strength and momentum of our business. We think that now is a good time to begin to reduce our leverage.
Despite the recent strength of our business the outlook remains very unpredictable.
So we are not providing specific sales or earnings guidance for the remainder of fiscal 'twenty 'twenty 1.
But as we did on our last earnings call, we would like to share some high level comments on how we're thinking about our possible financial performance for the full year 2021.
Okay.
As Michael mentioned earlier, we will continue to plan sales cautiously and.
And adjusted the trends that we see.
As we did in the first quarter.
Our current base flights baseline comp sales plan for the second quarter is 10%.
For the back half of the year. We are currently assuming a flattish comp, but we'll update these plans as visibility improves.
This translate.
2 our full year comp baseline planning assumption of approximately 7%.
As you think about total sales growth for the balance of FY 'twenty 1 versus F 2019.
You should remember to factor in 2 years of new stores over this time period.
We opened 23 net new stores in Q1.
We expect to open 9 net new stores in Q2.
43, net new stores in the second half of 'twenty 'twenty 1.
The growth in new store in non comp sales.
Combined with our comp baseline assumption of 7% with deliberate.
Approximately 20% total sales growth for the full fiscal year.
1 final point to make on sales.
As you look further out and begin to model 2022.
It will be important to back out the impact of onetime macro factors such as the federal stimulus checks debt.
Contributed to our extraordinary sales performance in Q1.
Of course, we will provide more information on our 2022 sales outlook.
Much later this year for early next year.
On our last earnings call. We explained that our modeling would suggest an EBIT margin decline of 70 to 80 basis points, yes comp sales were flat in fiscal 'twenty 'twenty 1 versus fiscal 2019.
Obviously, our stronger sales trend year to date should help this margin performance.
But it's also important to call out that we now expect more severe expense pressure from freight and supply chain costs.
These increased freight and supply chain expenses will drive margin leverage than we had previously estimated.
As a result, given our updated full year comp baseline assumption of 7% on modeling now suggests a full year operating margin declined from 20 to 30 basis points.
Finally, we expect operating margin in the second quarter to be under more pressure than later in the year as.
The result of increased freight and supply chain costs and the timing of some expenses.
Specifically.
We expect the operating margin to be down 70% to 80 basis points in the second quarter due to the aforementioned factors.
With that I will turn it over to Michael for closing remarks.
Thank you John.
Let me wrap up my remarks by reiterating the point that I made earlier.
The sales opportunity in Q1 was attributable to external factors, especially the federal stimulus checks.
But our success in maximizing our share of this opportunity is driven by our own strong execution.
Of our Burlington to point out strategy.
This execution was clear across buying planning supply chain stores marketing and all areas of the company.
So let me finish by <unk>.
Everyone Burlington for such a strong all around team performance.
With that I will turn it over to the operator for your questions.
Operator.
Okay.
As a reminder to ask a question you will need to press star 1 on your telephone.
Sure Your question press the pound key.
Could you please limit yourselves to 1 question and 1 follow up question.
Our first question comes from the line Matthew boss from Jpmorgan.
Great Thanks, and congrats on the material momentum.
So first for Michael So if we think about the second quarter here straight with relative comp performance well ahead of peers is it fair to take this as a sign that Burlington to point out is working and if so should we expect this level of relative outperformance to continue as we look forward.
Well good morning, Matt.
Nice to hear from you.
Thank you for asking that.
That question.
I'm going to focus my answer on on outperformance rather than relative performance.
Of course, we can.
How we compare versus other other retailers.
Of course, we do but we don't know what is going on at other companies and of course, we have no control over what they do that the only thing that we control.
Our own performance.
So with that said, let me talk about Burlington to point out.
As you know.
We started telling the story of Burlington to point out.
Back in February or March for 2020.
Obviously, it was great timing, but despite the pandemic, we were able to push forward with the strategy throughout last year.
It is gratifying debt in the last couple of quarters, we've started to see some of the early benefits.
It feels like we've been telling the story.
And now it's really nice to be delivering some strong results to go along with it.
As a reminder, the call.
Core premise of Burlington to Quinto.
Is that we can be more off price more flexible and more responsive to the trend.
And that by doing this that we'll be able to drive significantly improved sales and profitability.
Maybe what I should do is just take a few minutes to peel the onion, a little bit and described.
That flexibility and responsiveness looked like across the company in Q1.
I'll start with merchandising team.
In the first quarter.
For decades leadership.
<unk> massively shifted the assortment from where it had been in 2019 remember that's what we're comparing ourselves against 2019.
They did that based upon what the customers have been telling us and they chased into the hottest category from trends are.
We controlled our liquidity extremely carefully so when the time came we were able to support and firm that buyers.
They went into the market and took advantage of some great opportunistic buys from some wow deals.
Great value is what drives sales in off price and great value for 71 third of our business in Q1.
Moving on to planning with all the uncertainty and volatility of the past year.
Our plants have become very agile and flexible.
<unk> forecasting and recall cost in the business.
And taking up and moving around open to buy dollars based upon trend and dependability.
Our planning team played a critical relative we chased from our baseline plan of net comp in Q1 core actualized Homeschool channel growth, 20%, obviously, that's a serious strength.
Next supply chain and logistics some of the biggest challenges we faced in Q1.
We're in supply chain, and logistics global and domestic transportation networks, well and continue to be to BMS.
Despite those issues.
Process more receipts in the month of March.
Then we did in the comparable timeframe, leading up for holiday last year.
Normally for holiday, we spend months preparing for peak receipt flow.
But in an incredibly compressed timeframe, our supply chain and logistics teams again demonstrated remarkable if you are let's say, maybe we're able to overcome the challenges that we face.
And then finally stores, we experienced huge sales volume to our schools in March again comparable to the year.
Privilege time period, leading up to the holiday, but unlike holiday, we didnt have time to go out and recruit seasonal skol.
Field and store teams had to react very quickly with what they had.
They did an amazing job flexing up to support recent increase in sales.
Hopefully it comes across from what I've said is that we were very flexible nimble even entrepreneurial in Q1, we saw the sales opportunity and we went for it.
I think it was a really really good early demonstration of going from 2 point in time.
Let me, let me finish up just from the second part of your question should you expect this kind of relative performance going forward.
I guess I could answer that by saying look we are enjoying this.
Please so we've had a couple of good quarters, but we know that it is just 2 quarters.
We operate in an extremely competitive space.
I would expect that our relative performance GAAP versus our peers that we've seen in the last couple of quarters is going to disappear or perhaps at least narrow in the coming months I'd be very surprised that debt.
Great and then maybe as a follow up for John in the repaired.
I can't even speak in the prepared remarks, you mentioned, a worsening and industry wide supply chain and freight issues do now regard. These higher expenses is permanent or should we think of them as transitory and how do you think that might affect your long term margin potential.
Yes, good morning, Matt. Thanks for your question, obviously, a complicated situation.
Earlier this year, we thought or maybe we hoped that some of the industry wide supply chain issues would have started to settle down by now.
But that clearly hasnt happened and in fact, the whole global supply chain situation seems to have gotten maybe even a little bit worse.
There are really 3 key areas where the.
For the situation impacts us the most.
I'll start with Ocean freight as the first 1.
You've heard from everyone. There are significant capacity issues and delays with imports, especially shipments going through coming in through the west coast ports.
The demand for ocean freight as far exceeding supply right now and it's significantly driven up freight rates.
Burlington, we don't directly import a lot of merchandize ourselves, but the problem is that a lot of what we sell is imported from not by us but by our vendors.
So the higher rates do affect us both the small part of our business, where we import the product that we sell and the product that's imported by our vendors.
These higher ocean freight costs end up hurting our merch margin.
Second part where we are.
Exposure as a domestic credit.
It continues to be significant congestion in.
Domestic freight networks all modes of transportation.
This congestion is affecting both the speed that we're able to move merchandise.
Along with the cost.
And the third area, where we're impacted us in supply chain, particularly supply chain wages.
And the areas of our country, where our distribution facilities are located.
We've seen some significant labor shortages, we've talked about this previously.
Starting late last summer, we began to aggressively raise wages and wage incentives to attract and to retain the workers that need.
It's worked for US is provided.
<unk> that we need with these pressures haven't totally gone away.
And the volatility and receipt flow is added to these pressures by driving lower efficiency in our distribution centers were not able to plan when receipts are going to come in.
Reliably so we have to make a lot of adjustments and that has a negative impact on our ability to be efficient.
And remember.
Without this year comparing to 2019, so we have 2 years for wage inflation and we don't have the benefit of comparing to the increases debt.
Debt wages that we made in the fall of 2020.
Onto the second part of your question are these cost permanent.
Are transitory.
Typically external freight rates, whether its ocean freight road of rail.
Tended to be driven by supply and demand we.
We don't really see a structural change here.
We think that the issues were.
Talking about a cyclical and that overtime they will correct themselves.
Does seem to be very much driven by an out of balanced supply and demand equation exacerbated and extended.
Huge pent up demand, we're seeing with so many consumer products. So we do think that the situation will get better we just don't see that happening in 2021.
On the supply chain expenses, we do believe that some portion of these costs specifically for higher wage rates will be permanent as we talked about on our Q4 call net.
That said, we do have a pretty good track record of finding offsets to these types of costs through process changes automation for other productivity improvements.
We already have a number of initiatives underway and we would expect to be able to at least partially offset these higher wage costs over time.
It will take a little time.
For the final part of your question.
No we don't see anything in the current environment that causes us to doubt our ability to significantly increase our operating margin over the longer term.
And our business there are always headwinds from pressures, but we don't see anything that materially impact our ability to achieve our longer term margin potential.
That's great color congrats on the performance guidance.
Thanks for that.
Thank you. Our next question comes from the line of for.
For Cao from Wells Fargo. Your line is now open.
Hey, good morning, everyone. So 2 questions 1 for Michael and follow up for John So Michael in your comments you mentioned some of the external drivers of the Q1 comp performance can you just give some more color on these.
In particular I'm curious about how much you think the stimulus checks may have helped or been worked for the trend and then lastly can you give any insight on the month to day trend and May perhaps.
Sure.
Mike.
On the first part of your question.
The drivers of our comp growth in Q1.
Maybe the I think the best place to start is probably by going back to mid March.
At that point.
Our quarter to date comp was running up mid single digit.
From that point on the <unk>.
Trend really accelerated our average comp growth for the remainder of the quarter as I mentioned in my remarks was within Inc.
70% the biggest spike as you would expect came in late March.
And then the trend started to cool off in April.
It held up pretty well, but it but obviously it cooled off.
For that Spike in late March.
Now we think there were a few factors that growth that sales trend most significant byte Bob with the federal stimulus checks.
During March the government published data every day showing the value of checks that was sent out in the previous day.
So it was not difficult for any retailer to correlate that data with that with their own sales trend.
Our own modeling suggests that those checks.
10 to 15 percentage points of comp store sales growth in Q1.
Now of course, our average our overall comp growth actualized at 20%.
So we think the remaining 5 to 10 points of comp is explainable from 2 other factors to other types of factors firstly.
Obviously, the pace of the vaccine rollout.
Accelerated during the quarter and somewhat related to that.
We think that there was.
Some pent up demand that helped to drive the trend is consumers for our pump whereby that lines might start to return to normal.
It's hard to quantify the impact of those factors.
But we believe that day.
Sustaining our comp trend through April and even into May I am going to talk about the main months. Thanks.
Net debt environment.
The other important factor with our own performance.
Inc. That we have to give ourselves some credit here.
Our comp growth in Q1, our strong execution in the quarter really help to maximize our share of the sales opportunity.
That's a good segue I think for the second part of your question about.
For the month to day trend in Maine.
As a reminder, our baseline comp plan for Q2 is 10%.
And at this point.
With 3 and a half weeks into may.
Comp sales trend is running ahead. This baseline so that gives us confidence.
Q2 baseline of 10%.
So let me finish up as I, usually do by saying that we are ready to chase the sales trend whatever it turns out to be or to pull back depending upon how things play out cash.
As we get in Q1.
Got it.
Quick follow up for John If I may just a number of other retailers and off price stores have talked about the COVID-19 related cost as a big source of margin deleverage on strong sales I don't think I heard you. Even mentioned these just kind of wondering how those have affected your margins are you seeing much less of an effect than others is why why or why not would that be just any color would be great.
There.
Yes.
Thanks, Good question and good morning by the way.
Yes, so I can't really speak to other retailers, but happy to add a little more color around how we think about our COVID-19 costs.
So let's look backwards first as you know.
Yeah, when we talked about the third and fourth quarter of last year, we share that we had COVID-19 cost of $20 million in Q3.
And $39 million in Q4, and the $39 million in Q4 included a significant full year. Thank you bonus for our non exempt associates.
So I think whats caused that causes some confusion comparing to others as we got to kind of narrow definition I think for a COVID-19 costs. We've included only what we see as the direct costs. So that means we include what we spend on personal protective equipment and cleaning supplies.
Ms.
And incremental cleaning.
And when we include the cost of our front door ambassadors of course, there are many other costs that had been indirectly impacted by the pandemic, but we don't include them in this bucket that we used to collect what we're calling COVID-19 costs.
Back at the end of the fourth quarter. We said, we were expecting quarterly COVID-19 costs to be similar to the $20 million. We had in Q3 for at least the first couple of quarters of 2021 for until the pandemic was going to be behind us.
We're still continuing with the same level of safety and cleaning protocols that we have in place for for 2020, but our COVID-19 costs for Q1 were only about $14 million. So let me explain that.
We significantly over bought PPE and cleaning supplies. During 2020, so we were able to spend much less on replenishing those supplies during the first quarter.
We're still prioritizing the safety and comfort of our customers and associates and are continuing with all of our safety protocols.
And we'll keep doing that until it's clear that there are no longer needed.
Super helpful. Thanks, Michael Thanks, John and Thanks, David.
Thanks, Mike.
Thanks, Mike.
Yes.
Thank you. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is now open.
Thanks, Good morning, everyone.
John you just delivered significant operating margin expansion in the first quarter.
Give us a little more color as to why you would expect operating margin to still Delever 20 to 30 basis points, if youre doing a 7 comp for the year and then also maybe help us understand the extra pressure in the second quarter operating margin that you called out.
Yes, good morning. Thanks.
Good question or questions there.
First let me start off by just saying that obviously, we're really pleased with our operating margin performance in the first quarter.
But yes, it was just sell outstanding debt.
And we have a bunch of unique factors that we wouldn't expect debt kind of sales performance for.
For the second quarter or the balance of the year.
It was the 20% comp in the 35% sales growth.
That drove that the 360 basis point operating margin improvement about 2 thirds of the improvement was from gross margin and the other <unk>.
From expense leverage and all of this was despite a 110 basis point headwind in freight and 160 basis point headwind and product sourcing costs, but again, both the gross margin expansion and the SG&A leverage.
Driven by the exceptional comp sales performance.
As we have said earlier.
In my remarks, we're not planning for sales performance to be anything like we saw in the first quarter.
We're planning for approximately 10%.
Up in Q2 comp sales and flattish for Q3 and Q4.
Comp baseline planning assumptions would deliver our full year comp performance of about 7% when you factor them in with our Q1 sales.
So back in March we'd said that we would expect to see operating margin expansion began.
At about a 6 comp or slightly higher comp.
For this year, our new outlook of 20% to 30 bps of deleverage at the 7% comp Inc.
<unk> the benefits for the strong flow through we saw in the first quarter.
But it's more than offset by the increases we now expect in trade and supply chain costs for the balance for the year and by some expense timing that will affect us.
The last 3 quarters for the year, so as for the pressure on the second quarter.
Along with the incremental costs for freight and supply chain.
The second quarter's margin is going to be affected by some expense timing so.
Let me try and explain what I mean by that.
First as we said in our remarks.
We used reserve inventory to chase the high sales demand we saw during Q1.
So that means during the second quarter, we're going to work to increase our incoming receipts to replenish our reserves to planned levels and thats going to cause incremental expense in the second quarter.
And then some of the timing issue so we.
We have an accounting policy.
<unk> capitalized as freight as it's incurred and then expenses. It later when the inventory is ultimately sold so what that means for some of the increased costs. We saw in Q1, we will hit our P&L a little later in the year, including in the second quarter.
And then we also have some annual expenses that are accrued on a straight line basis for the full year.
So this would include incentive comp accruals, which of course had been increased based on our new estimates of performance for the full year.
The debt.
The straight line annual expenses are going to have a negative impact on flow through in Q2, Q3 and Q4.
So combining all of these factors along with the second quarter being typically our smallest sales quarter for the year. That's how we got to our expectation of 70 to 80 basis point operating margin decline in the second quarter.
Thanks, and then if I could just ask a follow up question on a different topic, how does the redemption of the high yield notes fit into your forward looking views on the capital structure and then any thoughts on when we should expect for share repurchase to resume.
Hi, Lorraine this is David I'll be happy to take that question.
First I'd say that our overarching philosophy is to maintain.
<unk> and flexible balance sheet.
So we feel really good about the ongoing recovery in our sales and EBITDA.
At the end of the first quarter, we had over $1.5 billion of cash on the balance sheet. So now we believe that the combination of our business momentum and strong liquidity positions us well to start to address some of them some of our highest cost debt debt we issued last April.
And just as a reminder.
Stated in prior quarters that coming out of the pandemic our priority for excess cash is to reduce our gross leverage.
And to address your question around share repurchases look we've analyzed all of our potential uses of our excess cash.
And keeping in mind that conservative balance sheet philosophy, we just think it makes sense to redeem our high yield notes first.
Which we announced this morning, and then reassess the operating environment before we take more cash off our balance sheet to either pay down more debt or return excess cash to shareholders through share repurchases. So yeah.
So really the first step is to reduce our gross debt before we consider went to <unk>.
Share repurchases, we'd really like to see really a more of a.
<unk> positive trend in our sales and EBITDA growth before we go beyond redeeming the high yield notes.
Thank you.
Thanks, Brian.
Thank you. Our next question is from the line of John Kernan.
Cowen Your line is now open.
Good morning, Michael John and David.
I also have 2 questions. Both are on growing from 2 point out first.
First is for Michael and then a follow up for John.
Michael you now have 2 quarters in a row Thompson margins well above expectations.
Take a step back would you say that you're further along with Burlington to point out than you initially expected to be at this point.
Are there any details on your major Burlington to point our initiatives what are the big things that are still left on the table.
Good morning, John Thank you for the question.
I think the easiest way to answer that question.
It's probably to separate out our net income to.
To point out priorities and initiatives.
Into a couple of major buckets firstly.
There are things that we're doing changes that we're making and we have making that are already affecting the business and are already driving performance.
So I'll talk about those in a moment and then secondly.
There are other things that we're doing and investments that would maintain debt by design will take time.
Really where the impact for business.
So first bucket.
<unk> a number of very important changes in priorities, including a much greater focus on value.
More conservative planning.
To set up a stronger chase cash.
Control of liquidity.
Lower inventory levels tighter control of expenses more flexible operating processes.
These are all things that we started doing last year.
It really helped the client that performance over the last couple of quarters, Yes to answer. Your question are we further along on these areas that I would have anticipated a year ago I would say, yes, absolutely.
Chicago alone.
<unk> been very impressive to see how our merchants and our operators have embraced Berlin from 2 points over the past open accounts, yes.
Now that's not to say that we can't get better and all of those areas. We know that we can.
Hi, there.
Other changes and improvements.
We're planning to make across the business that should make the chase more effective across buying planning supply chain and stores.
So that's the first bucket.
Second bucket.
<unk> changes.
Priorities investments.
We're moving full steam ahead with that.
That will take time to really impact for business.
I would stress that in many ways for these items will be much more important.
The longer term benefits to the company.
Just to dwell on 2 of those for a moment.
Of course.
1 big 1, which I mentioned earlier the investments that we're making.
Our merchandising capabilities. This is going to that's going to be critical to our ability to walk a great value to customers and that's really the key to driving our sales over the longer term as I said in my remarks, we're very pleased with the progress that we're making in strength and merchandising organization.
The other longer term item to call out is the work that we've been doing on our new store prototype in a new store opening program, we talked a little bit about those.
On the March call again, I feel like we've made a lot of progress but realistically.
Big significant savings from from this new store program I'm going to express themselves and <unk> for 5 years time.
Yes, I am very confident for that program is going to drive.
Driver of longer term shareholder value.
So again to answer your question on the second bucket.
Yes, we're moving very fast and I would say again, we are much further ahead than I could have anticipated a year ago.
Got it thank you John longer term gross margin question.
When you first launched Burlington to point I think.
You indicated there might be a 100 day 150 basis points of upside in the merch margin over time.
Really just through faster turns and lower markdowns.
Q1, merch margin up 340 basis points, you think debt the opportunity on the merch margin line might be even greater than you first thought.
Yes, Thanks John.
Good question.
So a couple of things so first day.
You have to really put our Q1 gross margin performance.
Into context.
Both in terms of the history of our first quarters and then.
A lot of unique stuff happened in Q1.
Let me talk about the history of <unk>.
Quickly Q1, hasnt been good gross margin quarter for us.
Look back to 2019 for example.
It was our lowest gross margin quarter of the year about 80 basis points below our full year gross margin.
So why is Q1 historically been a little weak for us well, we've usually turned inventory slower in the first quarter.
Usually we've carried over some clearance merchandise from the fall, which is it tends to get hurt our transition into the spring.
Now, let's take a look at Q1 of 2021.
Unusual for say the least.
We put up a 20 cup executed incredibly fast sales chase and increased our inventory turns by nearly 60%.
Precedented improvement.
That would be very difficult to sustain so these extraordinary returns are not something that we would ever planned for and they were driven by way ahead of planned sales.
And back in Q4, we also benefited from chasing ahead of planned sales.
For us to end Q4 with less fall merchandise than we would typically have so there was less for markdown in Q1, and it was easier to transition quickly to spring.
So that's kind of a long way of saying that we had plenty of room for improvement historically in our first quarter and we just put up a quarter that'd be very difficult to replicate due to all the unique circumstances, we had this year.
<unk> said all of that we continue to believe that we still have further room to reduce our comp store inventory levels.
Which should over time reduce our markdowns and drive even more improvements for our merchandize margin.
And we would also expect debt freight expense overtime would normalize and put less pressure on our gross margin in the future.
So, let's not extrapolate from 1 unusual exceptional quarter.
We do think we can continue to make progress.
But it's going to be really hard to predict that pace until we get into a more normal environment.
Alright, thank you.
Thanks, Tom Thanks, Jim.
Thank you. Our next question comes from non line of Kimberly Greenberger from Morgan Stanley. Your line is now open.
Okay, great. Thank you so much really fantastic Q1 here.
I'm just looking.
My question is on new store productivity.
There's a huge spread obviously 15 point spread here between comp growth and total sales growth. So it looks to us like new store productivity is coming in north of 100%.
Were there some 1 time benefits also helping your new store productivity numbers.
And if you could sort of parse through the performance there and talk about.
Where you would add.
Contemplate new store productivity trending for the year.
That would be fantastic. Thanks.
Yes. So typically this is John I'll try and answer that 1.
So.
A couple of things to keep in mind.
We're talking about new and non comp stores so that covers.
A couple of years.
Of growth for the stores.
They are all benefiting from.
The same circumstances, the pent up demand.
The extra cash in a customer's pocket.
Similar to what we saw in our comp sales trend for the quarter now having said that we're extremely pleased with our new store performance, they're doing very well against our underwriting assumptions.
Yes.
The other batch of stores.
There is some variability across the entire cohort.
But overall, we're extremely pleased with the performance of the cohort.
I don't know that Theres anything unique that I would call out.
About.
The new stores.
I think.
As I said I think that the conditions that are the circumstances that are driving their performance are pretty much. The same things we've talked about for our comp store performance during the quarter.
Thanks, so much.
Thanks, so much.
Thank you.
Last question comes from the line of Michael <unk> from Credit Suisse. Your line is now open.
Hey, guys. Thanks for taking our question here Mark.
Michael I just wanted to I wanted to ask why not take up the third quarter and fourth quarter sales office performance I mean, there's fairly visible stimulus coming.
Later in the year you, obviously got at least your share in the first quarter.
I'm just trying to think about what other puts and takes you might've put into the scenarios, where you see flat comps in the back half.
The year, knowing the stimulus is coming and then I guess, if we if we do see an upside sales scenario is maybe this 1 for John but if would you see an upside sales scenario.
The way you changed your plan for this year, you took the sales up about $500 million and.
I think EBIT up about $85 million so about.
Mid to high teens incremental margins.
Is that is that the right way to think about sales upside through through the rest of the year, Jonathan If you beat the plan.
Good well.
Good morning, Michael.
I'll take the first part of that question.
On our Q3 and Q4, it's a good question.
Yes, I guess, where I would start just by reiterating that our baseline plan.
It's just a baseline.
And right now Q3, and Q4 a plan for that that.
That provides our merchants with a plan that they can buy against and it provides our operators with a starting point for capacity staffing and expense planning.
That's what we really need now at this point, that's all that much and our operators will need what we do.
Know that if the trend.
Picks up where it's actually up the trend remains pretty strong.
We can adjusted baseline, but if we look at the baseline literally every week.
So we can adjusted baseline we can chase the sales.
I feel very confident that our merchants and our operators have that skill set and can chase the sales as they did in Q1 in the quarter in Q4.
No.
I agree with you we do see some positive factors on the on the horizon.
The.
The continuation of the vaccine rollout.
Hopefully that means that life will start to normalize a little bit in the second word is already starting to normalize but will normalize even more in the second half of the year and then the.
The child tax credits, which I believe will start to be rolled out in late July.
Anything typically anything that puts more money in our customers' pocket is a good thing we saw that in Q1, so that could be positive.
For the back half for the year.
And to be wary.
Yes.
The country haven't yet fully recover from the pandemic right now the situation is certainly looking better and more positive.
If there's 1 thing that the past year has taught us is that things can change pretty quickly.
Actually invitation for us is to plan and manage the business conservatively.
And then be ready to chase a stronger stronger trends in the kind of approach has served us pretty well, but it was a couple of quarters.
And then Michael I think you had a bit of a question on debt flow through we would think about with incremental sales.
Yes.
It's really difficult.
Project and Thats 1 of the reasons why we've kind of stayed away from trying to give any guidance here.
1 of the key elements for the chase is the.
The importance of moving receipts very quickly and with the volatility we see in the kind of freight networks and the pressure on global retail supply chain, it's hard to anticipate what might cost us too.
To kind of move those receipts quickly enough to to to feed a trend so.
Yeah that might may temper, the flow through a little bit it's a variable that we really can't predict right now.
Okay. Thanks, a lot guys and congrats again.
Thanks, Michael.
Okay.
Thank you at this time line is showing no further questions I would like to turn the call back over to Michael Sullivan for closing remarks.
Well. Thank you everyone for joining us on the call per day we.
We appreciate your questions and your interest in Burlington stores.
We look forward to talking to you again in August to discuss our second quarter results.
Meanwhile, the close by wishing you all a very very nice memorial day holiday. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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