Q3 2021 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].

Good day, ladies and gentlemen, and welcome to the Burlington stores third quarter 2021 earnings conference call. At this time all participant lines are in a listen only mode. Later, we'll conduct a question and answer.

And instructions will be given at that time to ask a question you would need to press Star then one on your telephone.

As a reminder, this call is being recorded if anyone should require operator assistance. Please press Star then zero.

I would now like to turn the call over to David Glick Senior Vice President Investor Relations and Treasurer. Please go ahead.

Thank you operator, and good morning, everyone.

We appreciate everyones participation in todays conference call to discuss Burlington's fiscal 2021 third quarter operating results.

Our presenters today are Michael O'sullivan, our Chief Executive Officer and Jim.

John Crimmins, Chief Financial Officer.

Before I turn the call over to Michael I would like to inform listeners that this call may not be transcribed recorded or broadcast without our express permission.

A replay of the call will be available until November 30th 2021.

We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties.

Our 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.

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 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.

Here's Michael.

Thank you David.

Good morning, everyone and thank you for joining us.

Our usual approach on these calls.

It's the structure of our ball in a chronological order.

Starting with a review of the most recent quarter then moving on to the next quarter and the year ahead.

Finally, commenting on the longer term outlook.

Today, we are going to take a slightly different approach well.

Other than chronologically, we will cover these topics in order of their importance to our long term shareholder value.

I will begin with our longer term expectations. The timeframe for these remarks, we will be the next five years.

Then I will move nearer in and talk about 2022.

We think that 2022 is going to be very unpredictable.

That said, we believe it could provide the ideal setup for our business.

Finally, I will comment on our Q3 results and the outlook for the rest of the year.

Okay the longer term.

There are two aspects of the longer term that I would like to talk about.

Number one the macroeconomic and competitive environment.

And number two progress we are making on our buildings and two point strategy.

On the macroeconomic and competitive environment.

Let's start with the customer.

For many years it has been a growing consumer focus on value.

It is possible that we are entering a period of prolonged period of consumer price inflation across the whole economy.

We believe that an inflationary period consumers trade down not up.

In an environment of rising prices, we think shoppers will be even more attracted to the great value that we offer.

Our business is a third bigger now than it was in 2019.

One reason for this is that our value differentiation versus other retailers has grown.

The delta between the price of an item at Burlington and the price of a life items at a full price store has never been greater.

Leaner inventories in the full price channel have driven higher realized prices.

It is not clear if these higher prices will be sustained.

If they are sustained then in the coming quarters, we think that we may have the opportunity to capture additional market share to take up our retail prices or to do both.

If on the other hand retailers returned to more promotional habits.

These higher realized prices in the full price channel will come down.

If that were to happen then we think it would trigger yet another wave of consolidation of marginally profitable full price bricks and mortar stores.

We anticipate that the second scenario, a return to a promotional environment and a decline in realized prices is the more lightly.

But it's going to take some time to see how this plays out.

But in either scenario, we think that the long term implications for Burlington are very favorable.

I would like to talk now about the progress we are making on buildings and to point out.

The core of this strategy is to make our business as flexible as possible. So we can shape the sales trends take advantage of supply opportunities and deliver great value to our customers.

So far this year, we have chased from a comp kind of flat to an actual year to date comp of 18% versus 2019.

In addition to comp growth, we are very excited about our new store performance, especially our smaller store prototype.

In 2021, we have opened 101 new stores.

This translates to <unk> 77, net new stores after closures and relocations.

Our new stores are performing extremely well.

And I am excited to announce that we have decided to accelerate our new store opening program.

In 2022, we expect to open about 120 new stores.

Which after closures and relocations should yield about 90 net new stores.

Beyond 2022, we now expect to open 130 to 150 new stores each year.

About 30 of these will be relocations of older stores to newer smaller prototype locations.

So overall from 2023 onwards, we expect to open 100 to 120 net new stores each year.

Today, we have just over 800 stores. So in the next five years. This program will drive a very exciting transformation all balance Shane.

Moving closer in I would like to talk now about 2022.

We think that there are three factors that could make 2020 to a very good year for Burlington.

All three factors are difficult to predict.

Firstly sales.

This year.

All retailers have benefited from one time items like stimulus checks and pent up demand.

As we get into 2022 and these items it seems lightly.

<unk> trends across retail will fall off sharply.

On the other hand, it is possible that rising wage rates or further government spending will offset this decline.

We have to be ready for EBIT scenario.

Secondly pricing.

As I said, a moment ago, we don't yet know as higher realized prices at full price retailers will be sustained.

This will play out in 2022.

If these higher prices are sustained even as supply loosens up.

And we think we will have a tremendous opportunity to drive sales or to take up retails or to do both.

And if there was a general rise in inflation across the whole economy.

This opportunity could be even greater.

Thirdly, we do not know if the issues with global supply chains will ease in 2022.

They do then this could have a huge beneficial impact on off price supply.

And it could also drive significantly lower freight and supply chain expenses.

We don't have great visibility on any of these three items no one done.

But in this situation our playbook is always to plan, our business conservatively and be ready to chase.

So our initial buying and operating plans for 2022 are anchored on a mid single digit comp decline.

This is not a prediction of what we think will happen.

We do not have enough visibility for a reliable prediction.

Should think of the minus 5% comp as a baseline starting point for the <unk>.

In 2021, our baseline with a flat comp.

Year to date, we have chase sales 18 points above this baseline.

As for our margins so much depends on freight and supply chain expenses.

Again, we can see that we do not know how these will play out.

We think that these expenses should start to come down in 2022, but we don't know when and how much this will happen.

In a moment John will share our margin estimates assuming that these costs remain at current levels through mid 2022, and then begin to moderate.

I'm going to wrap up my remarks with a few comments on our Q3 performance and our Q4 outlook.

As described in today's press release comp growth in Q3 was 16%.

We estimate that warmer weather from late September onwards, reduced our comp by about three points.

In other words, we believe that our underlying weather adjusted comp in Q3 was about 19%.

For Q4, we are currently projecting our comp performance to be in the low double digits.

Our month to date comp is running well ahead of this what really matters is the next four to five weeks.

If the sales trend is stronger and we are ready to trade it.

Let me move on now to talk about inventory levels.

Comp in store inventories were down 24% at the end of Q3.

This means they were slightly above our plan coming into the quarter.

Our plan was for in store inventories to be down in the high Twenty's.

The other promising news is at the end of Q3 reserve inventory was 30% of total inventory versus 21% in 2019.

It is usually the case that you drain reserve inventory in the third quarter.

You pull goods out shippers to get prepared for holiday Inn.

In fact, we built our inventory in Q3, whereas the receipts in Q3 increased 174% versus the same period in 2019.

We were able to make some great opportunistic buys during the quarter.

It is too early to extrapolate.

But we think that over the coming months.

Likely to see a very favorable buying environment as other retailers cancel late deliveries.

One final point on inventories.

At end of Q4, we are planning in store inventories to be down in the mid 30% range.

We believe that we can end the year more cleanly than we have in the past and therefore, thereby transition more effectively to the spring season.

I would like now to turn the call over to John to walk us through the financial details.

Thanks, Michael and good morning, everyone.

I'm going to follow a similar approach to Michael.

I'll start by talking about our longer term financial prospects, then I will move in there and make a few comments about 2022, and then finally I will finish up with additional color on our Q3 results and our current expectations for the fourth quarter.

On the longer term as Michael described we are very excited to announce that we will be accelerating our new store opening program.

We are now planning to open 90, net new stores next year and then from 2023 onwards, we expect to open between 100 and 120 net new stores every year.

Combining this faster pace of openings with a conservative comp assumption should generate average annual topline sales growth over the next five years in the low double digit percentage range.

Over this period.

With these sales growth assumptions. We also believe that we can achieve 200 to 300 basis points of operating margin expansion.

We've made very good progress on margin expansion. This year, but this has been masked by higher freight and supply chain expenses.

We expect that some of these expenses will moderate over time.

But we also believe that we have the opportunity to drive further leverage, especially occupancy cost and operating expenses.

This combination of sales growth and margin expansion.

Should drive average annual earnings growth and approximately mid teens.

This growth estimate does not include any additional benefit from using available cash flow to repurchase shares or to pay down debt, thereby reducing interest expense.

The numbers I have described are annual averages for the five year period.

We anticipate significant variability in these results year to year.

In addition, as you know we may not plan our business each year with this level of growth.

Our model is to begin each fiscal year with a more conservative plan manage inventories and expenses Accordingly, and then chase the trend and take advantage of ahead of planned sales.

If we execute this model successfully.

We would expect to achieve the annual average performance metrics that I just described.

Let me move on to make a few comments about 2022.

As Michael described next year is very unpredictable in terms of topline sales and bottom line earnings.

We look forward to the day, when we can return to providing traditional guidance.

We are clearly not at that point yet.

For 2022, we did not have enough visibility to provide meaningful guidance for the year.

We are anchoring our initial buying and operating plans and a 5% comp decline.

Think of this as the baseline that we are using to set up our merchants and the operators. So we can chase the trend.

Take advantage of merchandise supply opportunities.

Given what we know at this point.

We would expect a 5% comp decline to drive operating margin deleverage of about 150 basis points.

This is based on the assumption that some.

Fly chain expenses.

At their current levels through mid 2022, and then begin to moderate.

This estimate also assumes no material increase in retail prices.

And no other significant cost inflation.

For reference using these same assumptions, we would expect a flat comp could drive about 60 basis points of operating margin deleverage.

And a 3% comp to generate flat operating margins versus 2021.

I would now like to talk about our Q3 performance and our Q4 outlook.

As a reminder, our Q3 results are being compared to the third quarter of fiscal 2019.

Total sales in the quarter grew 30% while comp sales increased 16%.

As Michael mentioned, we estimate the unseasonably warm weather in October and some of our most important regions.

<unk> impacted our comp sales growth by about three points during the quarter.

The gross margin rate was 41, 4%.

The decrease of 100 basis points versus 2019 third quarter rate of 42, 4%.

This was driven by a 180 basis point increase in freight expense.

Which more than offset an 80 basis point increase in merchandise margin driven by lower markdowns.

Product sourcing costs were $173 million versus $90 million in the third quarter of 2019.

Increasing 250 basis points as a percentage of sales.

Higher supply chain costs represented most of the deleverage.

The drivers of these higher costs were consistent with what we have discussed in prior quarters.

Adjusted SG&A was $581 million versus $486 million in 2019, decreasing 210 basis points as a percentage of sales.

Other income and other revenue were down by $8 million or 60 basis points as compared to the third quarter.

Full year, 19, which benefited from $8 million of insurance recoveries.

Adjusted EBIT margin was six 1%.

180 basis points lower than the third quarter of 2019.

Excluding the non operating other income or revenue deleverage.

Our adjusted EBIT margin declined 120 basis points.

Said another way.

During Q3, we drove 310 basis points of operating margin expansion from merchant margin and operating expense leverage on a 16% comp, but this was more than fully offset by 490 basis points of deleverage on freight product sourcing costs and a comparison.

Nonrecurring other income in Q3 of <unk>.

2019.

All of this resulted in diluted earnings per share of <unk> 20 versus $1 44 in the third quarter of 2019, driven primarily by $86 million of debt extinguishment charge related to the partial redemption of our convertible notes.

Adjusted diluted earnings per share were $1 36 versus $1 53 in the third quarter of 2019.

During the.

<unk>, we opened 40 net new stores, bringing our store count at the end of the third quarter to 832 stores. This.

This included 56, new store openings 15, relocations and one closure.

In the fourth quarter, we have opened an additional eight new stores and we expect to close two stores.

As a result, we should end the year with 838 stores.

Now I will turn to our outlook for Q4.

We are projecting comp sales growth in Q4 to be in the low double digit percentage range.

We are expecting the extraordinary freight and supply chain expense headwinds to continue through Q4.

This means that our low double digit comp projections should translate.

250 basis points of deleverage in operating margin during the quarter.

With this outlook for Q4, we now expect our full year operating margin to be flat versus 2019.

It is important to reinforce the point that this means that for the full year.

We'll have absorbed about 360 basis points of deleverage on creating supply chain expenses with 360 basis points of offsetting favorability in other areas of the P&L.

Specifically much higher merchant margin and significant leverage on SG&A expenses.

With that I would like to turn the call back to Michael for closing remarks.

Thank you John.

Before we open it up for questions I would like to recap and reinforce.

Some key points that we have made this morning.

Firstly, we think that our longer term prospects are extremely bright.

So we have decided to put our foot on the gas and we are accelerating our new store program.

Secondly, we believe an inflationary price environment could drive greater traffic to our stores.

We need to see how this plays out, but we think that it could offer us the opportunity to take share take up retails OTT Bose.

Thirdly, we anticipate that 2022 will be very unpredictable.

Our playbook is to plan and manage our business. So we can aggressively chase the very significant sales margin and supply opportunities that we believe might emerge.

Finally, our Q3 trend remained very strong.

Chase $218 billion in sales above our original plan, but we still ended the quarter with in store inventories and reserve inventory's in great shape.

We are very well positioned for the fourth quarter.

I would like now to turn the call over to the operator for your questions.

Thank you.

I'll ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.

We ask that you please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Matthew Boss with Jpmorgan. Your line is now open.

Great. Thanks, and really appreciate all the color.

So.

Maybe first for Michael on your long term unit growth prospect, Michael could you just speak to drivers behind the decision to accelerate this ramp of new store openings. What gives you confidence to expand the program now.

Well good morning, Matt Thanks for your question.

As you know at the beginning of this year.

We raised our long term potential store count to 2000 stores.

And it's where do you think that time, we've been looking at the pace.

All of our new store openings, how many stores, we should open each year.

There are there were three factors that led into our decision to accelerate this pace the first.

His financial I'm sure many of the analysts on this call.

I've already done the math you know looking at our press release this morning.

To estimate new store productivity and what you see with those numbers as our new store productivity. This year has been extremely strong.

And we know that this is partly due to the same tailwind that have driven our comp growth this year, but even if you adjust for those tailwind and new stores is still running well ahead of our internal hurdles.

As a reference point of the 100 or so stores that we opened this year just over half are under 30000 square feet.

So this performance really gives us a lot of confidence in our new smaller store prototype.

First reason financial secondly.

The second factor is strategic.

I talked about this in my earlier remarks, so I won't I won't beat a dead horse, but year to date you know our business is almost a third pickup than it was in 2019.

That suggests to us that the customer is really responding very well to the great value that we that we're offering and we're taking significant market share.

Again, it gives us confidence as we open more stores over the next few years will be we'll be swimming with the tide will be taking share.

The other major off price retailers have two to three times the number of stores that we have so this feels like a.

Opportunity, that's really unique to Burlington.

The third factor.

This decision was operational we earlier this year, we put together an internal cross functional team to look at what would it take to significantly accelerate paas store expansion that that cross functional team included real estate stores supply chain merchandising planning I T.

And in other areas and based on the plans and actions that that team developed.

We feel very comfortable that we can support that.

The pace of openings that we described it in our remarks.

Obviously with new stores.

You have a pipeline of new no new locations that goes out over the next two to three years. So we can we can look at that pipeline are apt to say, we're very happy with the number and the quality store locations that we see ahead of us. So you can tell we're very excited by this opportunity.

Great and then maybe just a follow up for John on the multi year top and bottom line growth targets that you laid out on the call could you just share with us more of the building blocks to get to those levels of sales growth margin expansion and EPS growth.

Good morning, Matt sure happy to take you through a little bit more detail on that.

The top line is pretty straightforward really if you combine the new store program, but we were talking about with conservative low single digit percent annual comp increase this gets you to a low double digit percent annual sales growth that I mentioned.

Basis of our model.

We're confident that we can achieve this average annual growth.

Moving on to margins.

Let's let's just kind of revisit what happened with margins this year.

For the full year.

Expecting freight in product sourcing cost to de lever by about 360 basis points, but as I just said in my remarks.

We are projecting operating margin to be approximately flat versus 2019, so in other words.

We've really driven 360 basis points with favorability in other areas and that comes from higher merch margin driven by lower markdowns and higher leverage on operating expenses.

Looking forward there may be some additional merch margin opportunity, but because we've seen such a significant increase this year, we haven't assumed assumed any further improvement there in our model.

For store occupancy.

We expect to capture additional leverage as we migrate.

Towards our smaller store prototype.

But we do see opportunities to drive further efficiency on store and supply chain expenses.

We think that overtime freight expenses will decline from this years historically high levels.

Not necessarily all the way back to pre pandemic levels.

We're assuming that supply chain expenses will probably be a bit stickier, but they too will moderate to some degree as we seek plus become more predictable and reliable.

When you combine all of these different factors together, we think that we can capture the 200 to 300 basis points of operating margin in the next five years that we called out.

Of course, there could be additional headwinds that move against us, but there could be tailwind that move in our favor.

That could impact individual years during the period, but on average we think these things should it should even out over time.

And if we were to achieve significantly higher than the low single digit average comps. We've modeled for this period, we would expect to drive more operating margin expansion.

Now if you combine the low double digit projection for annual top line growth with a margin expansion of two to 300 basis points over the next five years, then you get to the mid teens earnings growth that I described in my prepared remarks.

Thank you. Our next question comes from the line of Ike <unk> with Wells Fargo. Your line is now open.

Good morning.

Right.

A couple of questions. My first question is on supply chain.

Can you guys talk a little bit excuse me more about the issues and how they're specifically affecting your company and then I guess for example, what impact has it had on store level inventory levels, and then I have a follow up.

Yes.

Yeah I'll take that.

Morning.

I think that's a great question I know there's been.

There's been a lot of reporting and some concerns about about inventories.

So I think it might be helpful to draw.

Distinctive merchandise availability and supply on the one hand, and the timely delivery of receipts on the other hand.

Firstly.

The availability of merchandise has been continues to be very good.

Of course, there are certain categories and brands, where there might be constrained, but that's always true.

It was an off price retailer, we're not dependent on a single category or brand were very good.

Moving money from businesses, where there's either a weak trend or pull supply.

Two businesses, where there's strong sales and good supply opportunity that's off price that's kind of what we do.

I think the data for Q3.

The pretty good illustration of this in Q3, we chased 16% comp growth on an original plan of flat.

That represents about $218 million of ahead of plan sales, but our in store inventory levels still ended Q3 ahead of plan.

And at the same time, we were able to build up our reserve inventory.

So we were very happy with supply in Q3, and we continue to be happy we think there's a good chance because supply is about to get even better.

So that that supply but.

But let me, let me move on and talk a little bit about.

About receipts specifically.

Timely delivery of receipts.

Described when you look across the whole store, we really have not had an issue with merchandise availability. This year, we found great but spent our open to buy.

There have been challenges and we've had these challenges along with everyone else.

As in the timely delivery of receipts in other words with good showing up late.

This isn't the Ventas volt the problems on a global and very widespread.

Brett, but it has created inefficiencies in our transportation and supply chain network.

Ironically, those headwinds becomes stronger the more you try to chase the business and respond to the trend.

There's definitely been a challenge and it's cost us money, but we've been able to get the goods that we need and we've been very happy with the inventory levels in our stores. So so to recap.

Merchandise availability and supply have been very good and we think theyre going to get better but navigating the receipt flow has been an issue and frankly, it's been expensive, but we've done it.

So that's how I would describe that.

That's super helpful. And then just a quick follow up on retail prices. Michael you were alluding to just what do you see happening with prices across the industry to be do you think.

Think higher prices are sustainable and then do you believe these guys can raise prices is something the company has done in the past just kind of curious how you frame all that up.

Yes, so it's a great question Mike.

Yeah, I I think I think the city. This situation has really evolved over the last few months and actually continues to evolve.

Firstly.

Full price retailers this year.

We've been getting much higher realized prices.

And it's clear why that is because a much leaner inventories.

Now initially I have to say I was skeptical on that my view was that as soon as supply loosened up.

Promotions would come back and then these higher prices would just come back down.

But now I'm not sure.

These retailers are clearly enjoying the stronger margins, so maybe and I want to underline the word maybe.

Environment will be less promotional going forward.

Maybe these retailers will control their inventory more tightly.

So they can preserve the higher margins, but again, let me.

Repeat that I'm underlining the word maybe.

We really need to see what happens as supply constraint. These do we go back to promotions or not.

But if the environment really is less promotional coming forward I think that could be great for us.

So when we talk about value in offering value to customers our reference point for value.

Is the pricing at full price stores.

So is that reference point moves up if those that those higher realized prices really become permanent.

It would be a huge opportunity either to drive sales or to drive margin or to do both and frankly that decision might depend upon specific category that we're talking about but but I think we'll have plenty of opportunities that if that Pat referenced price is permanently higher.

Anyway, that's one thing that's going on.

The other thing that's going on and this is risk changed over the last few months.

<unk> it feels like the prospects for generalized price inflation across the economy have really grown.

As I said in my remarks. This isn't just in the sectors that we compete and it's also I think it's also food it's gas prices at the cost of living.

Again, we have to see what happens over the next couple of quarters, but we believe that in an environment of rising prices.

<unk> should do very well our value proposition.

He is already very strong, but it could it would become even stronger in that environment.

And again, we think this could present us with an opportunity to drive higher sales and higher margins.

When you look back at the transcript to this call you'll see that.

There were a lot of it and what I just said a lot of maybe even a little bit so.

So we don't really know how this will play out we think that these trends.

Be very favorable to us or for us, but at this point it makes sense to be cautious in our locations.

That said, we are making some adjustments we we've looked at our fast very fast tuning businesses and we started to push prices up in those businesses, we look at businesses, where we think.

Pricing may be sharper than it needs to be and we've been testing some higher retails and so far the things we've tested the prices we pushed up it's worked it's worked well, but but it's fairly modest at this point.

The other thing is that as you'd expect we're also watching competitors very closely.

Our merchants visit competitor stores, all the time, but there were no there were no trade secrets with Chrysler that prices displayed on the ticket.

And actually by looking at the clearance rack you can also see if those higher prices of working or if they just scribing markdown.

No I guess I would finish up by saying we are mindful in all this but we are the third largest off price retailer. So clearly it wouldn't make sense for us to take the lead on rate when retail prices, but we're not proud if if we see something and we believe something is working there's really nothing to stop us from from Boeing.

Hi.

Thank you.

Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open.

Thanks, Good morning.

I wanted to follow up on the freight and supply chain pressures. John are you seeing any signs of easing here and when do you think it's reasonable to see that or is it possible that this is a more permanent situation.

Well good morning, Irina Thanks for your question good question.

Yes, so you've heard me say over the last couple of calls we think that this record breaking freight expenses that we've seen so far this year.

Mostly temporary.

We still believe that it's driven by an imbalance in supply and demand and we think that over time it should correct itself.

So we think that's the case.

Like everyone else, we don't really know when that's going to happen.

Certainly haven't seen anything yet that would indicate that things are starting to improve.

As we said previously we think that some of this higher supply chain expenses that we've seen this year, particularly the wage rate piece are going to be more permanent but.

But we expect that the wage incentives and the operating efficiencies we've seen this year.

We're going to get better.

As the supply chain situation improves.

We just don't have good visibility into when any of this stuff is.

Going to actually happen, but let's just consider the other side of it.

Suppose it doesn't work out that way.

Suppose that these higher expenses.

<unk> here to stay but they become a permanent part of the expense base well.

We think the only way that happens is in.

An inflationary scenario.

And so I would refer to what Michael was just talking about.

If costs are permanently higher than we would expect that prices would rise permanently across all of retail.

It's the only way that most retailers would be able to absorb the costs.

And so that would certainly apply to us as well.

Inflation.

Inflationary situation.

We'd certainly be able to raise prices, while continuing to maintain our value proposition.

And in this scenario our value proposition would likely be even more important to our customers.

Thanks, and then you've been pretty proactive about paying down debt, but you added back the share repurchase this quarter, what should we expect in terms of capital allocation going forward.

John I'll take that question. Thanks, Lorraine it's a.

A good question yes.

And we have paid down a considerable amount of data over the last year and I think it may be helpful to provide kind of a recap of our debt pay down as well as our debt outstanding and leverage ratios.

If you go back to the height of the pandemic, we borrowed $400 million on our ABL and we raised about $1 1 billion in <unk>.

Market that.

But given our strong recovery over the last year, we have been able to pay down.

About $860 million out of the one $5 billion, we borrow during 2020.

We pay down our ABL to zero as you.

As you May recall, we executed a make whole call on our high yield notes and we recently repurchased in Q.

Past quarter of $160 million in convertible note. So so where does that leave us we have about $1 6 billion and total gross debt.

$950 million on our term loan and a little under $650 million in our converts and on a net debt basis, given the $1 2 billion in unrestricted cash we had in the quarter, that's about $400 million. So put all those numbers me I think it just leaves us in a much more comfortable place from a leverage perspective.

Active and if you look on a on a trailing 12 month basis, excluding capitalized operating leases our gross leverage is down to one six times gross debt to EBITDA and our net debt ratio is down to four and we would expect to continue to reduce those leverage ratios. So.

Given that progress in reducing our leverage we were comfortable resuming our share repurchases during the past quarter, we repurchased around $150 million of stock and that leaves us $250 million remaining on our authorization.

So what do we do from here.

We're going to evaluate it through the lens, we always use.

First and foremost we're going to invest in our <unk>.

Growth and secondly.

We will utilize excess cash in the most accretive way for our shareholders and that's what we'll continue to do.

Thank you.

Our next question comes from the line of John Kernan with Cowen. Your line is now open.

Good morning, Thanks for taking my question.

Michael John David Thanks for all the guidance through next year.

And it's quite a bit more than we're getting from many of your peers across the sector.

I guess, John New store growth now a bigger part of the narrative.

Be helpful. If you could provide just some high level modeling assumptions around new store productivity.

Particularly given the new store prototype.

And I have one quick follow up.

Thanks, John you're happy to do that.

So let's start with how you should think about sales volumes for our new stores.

On average.

We expect new stores to have initial sales volumes that are.

Around 70% to 80% of our chain average as they open up.

Obviously there'll be some variability for each individual store, but if you use this average should be a reasonable assumption for modeling.

Actually this year, we're seeing a slightly stronger performance and that is our new stores are performing their plants, because they're being driven by the same tailwind should have helped help us deliver our strong comp store performance.

So.

From there you should anticipate comp store sales growth for the new stores.

Faster than the chain for several years after opening which would be consistent with what we've now seen for the last several years.

Across the next five years, you should expect more than 75% of our new stores will be less than 30000 square feet, So really moving to a smaller store format.

Big way.

In terms of profitability and capital returns.

Can rely on what we've continued to say we've been saying in the past to EBIT margins for each store are expected to be accretive to the company in their second year and each store is expected to deliver return on invested capital.

Also accretive to the company's return on invested capital.

In 2019, our average sales per store is about $10 million with.

With the growth that we've seen this year. Our 2021 average sales per store is going to be north of $11 million per store.

Sales of our new store is 75% of our average that means that the store should do over $8 million and then comp above the chain average for several years.

So from a productivity perspective.

In our 25000 to 30000 square foot stores.

We're expecting.

Over $300 a foot on a gross square foot basis.

$400 a foot on the selling square foot basis, So big step forward.

The activity at the store level.

And even as we're paying a little more rent per foot in many of these better high traffic locations.

This level of productivity.

And with a smaller footprint and the lower operating expense structure.

Should really help us to drive operating margin expansion, while growing the top line faster and delivering a terrific returns that we expect from these stores. So we're really excited about our new sports, but we're also excited about the relocation opportunity that we have.

Yes.

New store numbers that we laid out today for the next five years, including an average of 30 reloads per year.

In most cases these are gonna be moves from oversized boxes with low sales productivity many of them older and they need us at least refreshing.

Moving into fresh new highly productive.

Mauler boxes with lower occupancy costs.

Relocations for us usually results in a pretty healthy sales lift and improve four wall profit.

Got it sounds like productivity is planned to move significantly higher I guess, Mike.

My follow ups, just on Q4, a lot's happened since the last call in August could you just walk us through what changed in the Q4 outlook.

Versus the outlook you gave us on the last call. Thank you.

Okay, alright, great. Thanks.

So for.

For Q4, we said where we're comfortable.

With our sales forecasts were actually running ahead of our <unk>.

Low double digit sales forecast.

But theres still you know.

Some risk and some really big weeks in front of us as we move into December.

On the margin front.

It just really comes down to wanting to be a bit more conservative on our EBIT forecast.

Our implied outlook for Q4.

If you look at what we gave last quarter.

<unk> was down around 200 basis points. So now on a low double digit comp were forecasting down about 250 basis points. So I would remind you that we're still maintaining our flat EBIT margin forecast for the full year.

The reason for that.

The reality that we're dealing with is the key.

Cost pressures in supply chain and freight.

In wages to to some degree along with the volatility of timing of receipts.

It's just really difficult to forecast with any precision. So we really wanted to recognize the difficulty forecasting these expenses and add a bit more conservatism just to protect against the volatility that we see.

Yeah.

Got it thank you.

Okay.

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is now open.

Yes.

Great. Thanks, so much.

Wanted to follow up on.

Michael on your inventory comments.

You mentioned when you were talking to the inventory that you think there's a good chance that supply is about to get better.

Wondering if you could expand on that for us.

Sure I will.

Good morning, Kimberly good to hear from you.

Yeah. So so I think I feel like the congestion.

And the delays in global supply chains, and transportation systems have been have been fairly well reported.

I've lost count of the number of ships that are waiting off the coast of Southern California at this point.

But it seems like it just keeps hitting new records every day.

The containers some of the containers on those ships have merchandise vendors.

And retailers had ordered with the expectation that they would be delivered for the holiday period, the holiday selling period.

Oh for the full season.

And it is clear that some of that merchandise is not going to get here on time.

Frankly, if it hasn't landed by now it's already too late.

There's no point for a retailer there's no point in taking receipt of holiday merchandise in January for example.

So our expectation is that that merchandise should find itself. So it can find its way into the off price channel.

And we think that's likely to be a big opportunity, especially through our reserve inventory now you know I mentioned that we started to see some early signs of that.

It's too I think it's too early to predict where that's going to lead but a hunch is that the next couple of months could be could be a very good buying opportunity for off price.

Fantastic, Michael and it sounds like you feel really good about the inventory position here for holiday I just wanted to make sure that I understand you correctly on that.

I just wanted to follow up quickly if I could on the 30000 square foot stores.

It sounds like you're seeing well above plan results.

In particular, this year and I wondered if you can.

Care to share how the stores in particular those smaller stores.

Subset of your new locations, how they're delivering on annual volumes. This year. Thanks, so much.

Okay.

I'll take the first part of that Kimberly on the inventory levels, and then I'll, let Joan.

Bond on.

What we're starting with the prototypes, but but on on holiday inventory levels.

At this point, obviously, we're sitting in the third week of November.

I'm in a good position to judge and I'm very confident that we will have the inventory in our stores and that we have enough receipts on the way to stores to support our sales projection low double digit number now if sales were to run well ahead of low double digit then we might start to see some gaps in.

Some very high trending businesses.

But that just means that the sales in those businesses were very very strong. So so it's a high class problem. It's a you know I think the risk to US right now in some ways. The sales outpaced our expectations not that we are we have an issue with that with inventory overseas and then John do you want to talk about this more yes sure sure. So.

So first of all as far as.

The performance of all of our new stores this year and not surprisingly, they're running well above the way that we had planned them as we underwritten them.

Yes, I think everybody in retail has a strong tailwind this year so.

That's certainly a big part of it but it also does give us some confidence to see the new stores.

Which include a large percentage of smaller stores.

Not as big as what we're moving toward.

But.

They are all performing the way, we would expect them to perform understanding that we have these kind of tailwind behind us.

Within the group of smaller new stores, we're very pleased with their performance.

It's become less about the size and more about the strength of the trade area, if youre looking at individual stores.

We've got some some of the smaller format stores that.

Really blown out of the water.

Then.

Others that are performing well, but overall.

As far as proof of concept and we're very pleased with what we've seen from smaller stores that you've opened so far.

Great to hear and thanks for all the color on the long term strategic outlook. It's really helpful. Thank you.

You're welcome.

Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Hey, guys. Thanks for all the detail today.

Repeat the comments earlier, it's very very helpful to hear you think through the 'twenty two and longer term maybe.

Maybe this one's for John but I think you know.

Important it seems like you're drawing a pretty fine line pretty hard line between first half and second half of next year is that is that really lapping stimulus and the costs rolling in such that obviously, we are we understand from your language today first half was really tough in second half.

Closer to that algorithm that you that you spoke to for the for the longer term.

And then Michael what what really if you think about the AUR in retail comment what it really is the governor to raising that to you. Today you know I think one of your dollar store competitors said they are raising to $1 25.

Off price competitors are raising AUR as you point to the value in your stores being historically wide versus the full price channel do you need to be that wide and how do you think about whether your share gains have come from continuing to widen that relative value spread versus the better operations. We've seen from you in the store is moving.

It's a high traffic locations you know operating their in store inventories better how do you gauge when you may have let that value spread widen to far based on your comment that its pretty wide right now.

Alright, so Michael I'll start with that.

Question on the kind of time and cost pressures next year.

So.

Yes.

As I said before.

I really don't have a crystal ball here, what we can see today is.

We haven't seen anything that indicates that improvement, particularly on the freight side.

<unk> has started.

So.

It's a modeling assumption that we're using it's not.

We have this insight information but.

So, but I think it's a fair way to think about next year that if you didnt see any improvement for the first SaaS and you're starting to see some improvement in the second half that's really as deep as our thinking goes there.

So it's based on.

If that improvement does start to happen.

That's that's the impact that we've seen on our margins if it doesn't start to happen. It goes back to the comments that we had this may be more of an inflationary environment and there may be more room to take price and then with model. So.

That's kind of the way, we think about how we've modeled scenarios for next year.

Okay.

And then Michael your question on what's the what are the governors on on AUR and taking up retails I think it's a it's a really good question.

And I think it's important.

It is important to understand that in off price.

Really matches is sort of the restaurant.

Put price and what I mean by that is when the customer walks in the store when the customer walks in the off price stood at walking into that store because they're expecting a deal they were expecting the values to be great and actually we encourage that so so when you look at a price ticket at Burlington It shows our price, but it shows.

Ah compare it to a comparable price compare at prices based upon the out the door price at another retailer that we're saying look you can buy this price of Burlington, Here's what it would've cost you had you gone to this other place.

So that's that's kind of what of what the off price customer proposition really is so bringing that back to your question then how.

How should we think about the differentiation in our prices versus the competitors. If the competitors move up prices that gives us an umbrella to move up prices too high there's no doubts about that where else is the customer going to go Hum.

The uncertainty that we have and.

The reason we were thinking of a patient here is because those higher realized prices at full price stores, you're going to be sure that they're going to stay where they are they're going to stay high before you start moving up your own prices I mean, I mean I've been in retail.

Pretty long time and I.

I would say over.

Over the years.

The department stores have been very very promotional.

So you'd have to believe now that that's going to stop there, they're going to stop being promotional.

So if that were to happen if it really were the case.

<unk>, we're going to stop promoting and they were going to hold onto those high realized prices then yes, we could move up higher prices, but it's actually this is just a short term thing and then higher realized prices are being driven by the fact that we happened to have supply chain constraints, yeah, and leaner inventories and it actually as supply loosens up next year.

Realized prices will come down than it would have been a mistake had we raised our prices. So that's the reason we're hesitating now this will all play out in the next couple of quarters I think we won't have to wait long, but that's really the key driver for US now there is this other issue that I've mentioned in the script about well what happens is in place and across the whole <unk>.

<unk> takes off well that if that happens then obviously, we're all raising prices, but that's a different driver I think but that's how we're thinking about it.

Thanks, a lot for the help.

Thank you.

Our final question will come from the line of Adrianne, yet with Barclays. Your line is now open.

Good afternoon and good.

Morning, and thank you again for all the detail.

Couple of quick questions here, Michael can you talk about the perceived health of your core target customer and if you can remind us what the target household income is knowing that you know.

About 50% of U S households are under 75, K and then what percent of your customers are noncredit or cash buyers and then my follow up for John on the structural wage inflation embedded in the long range plan. Obviously, we're hearing of 15 minimums going into 17.

And just some color there thank you very much.

Yeah, Adrienne I'll start with.

The first question.

Our customer we think kind of customer.

We think our customer is very healthy right now we think.

When you look at the.

At our comps.

Throughout this year.

We feel pretty good about about the trend that we've been to sustain.

The underlying customer is clearly.

Responding very well to the values that we offer now in terms of.

How our customer differs from other retailer customers one thing we know about our customers.

If they shop at every retailer because our customer is the off price customer has more than anything about about about value.

And the way they find value as they cross shop, a lot. So we know that we have a huge overlap.

With other retailers customers, which is why I say.

If other retailers raise retails.

You can have a chance to take market share or raise our own retail because we know that there was cross shopping between us and other retailers now to answer your question more specifically our customers tend to skew younger larger family size more moderate income.

And I think those customers right now.

A pretty healthy and the <unk>.

The sales.

Sales trend has been very strong if I project forward to next year.

And just sort of add a thought about if inflation really does take off in this economy. We actually think we may have a lot of new customers coming up you know customers, who are perhaps on slightly higher incomes, but they're getting squeezed by higher price inflation. So that's the reason why we feel somewhat optimistic that if there is inflation across to you.

Economy consumers are different income levels are going to be more interested than ever and the value that we offer.

Yep.

Yeah.

Okay. So I'll take the wage part of your piece of your question Adrian.

So first of all just a reminder.

We've used this kind of market by market analysis, where we make wage adjustments as.

We see that they are necessary.

Using for several years and we're pleased with the way that's been working.

This year.

It turned out much different than the way we had planned at the start of the year.

We've made some very significant changes on the GEC side to remain competitive.

And ensure that we can attract.

The workers that we need to operate our distribution centers most of which are in <unk>.

We're seeing California Perry.

Market. So we've brought wages up quite a bit there and that's the part of our supply chain costs.

We refer to as being a little bit stickier, that's now permanent part of our wage base and of course. It is included in our outlook this year.

Modeling.

On the storage side, it's been a little bit of a different story hasnt been.

Quite as.

Hasn't been nearly as competitive as the DC situation, although in the second half of the year, we have seen it.

A little bit tighter and we've had to make some adjustments a little bit higher than what we had expected at the start of the year.

To remain competitive, but it's very different kind of market by market. So we're still very comfortable with our market by market approach. So I would say.

We've taken a bigger step forward than we would normally have in a single year as far as the spine market with adjustments and then modeling going forward we've modeled in what.

And.

<unk> for what we expect will need to do to continue to remain competitive.

It's informed by what we've learned about this year.

Thank you great color and best of luck for holiday. Thank you.

Yes.

This concludes today's question and answer session I will now turn the call back to Michael Sullivan CEO for closing remarks.

Before we hang up I would like to take this opportunity to thank everyone at Burlington for their hard work in the third quarter and throughout the year I know that the entire Burlington team Chad my sense of energy and excitement around the sales margin and supply opportunities. We see ahead of.

Yes.

Finally, I would like to wish everyone on today's call, a very happy and peaceful Thanksgiving Wheeler.

We look forward to sharing our fourth quarter results with you in March.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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Yeah.

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Good day, ladies and gentlemen, and welcome to the Burlington stores third quarter 2021 earnings conference call. At this time all participant lines are in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time to ask a question you would need to press Star then one on your telephone.

As a reminder, this call is being recorded if anyone should require operator assistance. Please press Star then zero.

I would now like to turn the call over to David Glick Senior Vice President Investor Relations and Treasurer. Please go ahead.

Yeah.

Thank you operator, and good morning, everyone.

We appreciate everyones participation in todays conference call to discuss Burlington's fiscal 2021 third 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 call may not be transcribed recorded or broadcast without our express permission.

A replay of the call will be available until November 30th 2021.

We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties.

Our 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 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.

Here's Michael.

Thank you David.

Good morning, everyone and thank you for joining us.

Our usual approach on these calls.

It's the structure of our a mall in a chronological order.

Starting with a review of the most recent quarter then moving onto the next quarter and the year ahead.

Finally, commenting on the longer term outlook.

Today, we are going to take a slightly different approach rather than chronologically. We will cover these topics in order of their importance to our long term shareholder value.

I will begin with our longer term expectations. The timeframe for these remarks, we will be the next five years.

Then I will move near in and talk about 2022.

We think that 2022 is going to be very unpredictable.

That said, we believe it could provide the ideal setup for our business.

Finally, I will comment on our Q3 results and the outlook for the rest of the year.

Okay the longer term.

There are two aspects of the longer term that I would like to talk about.

Number one the macroeconomic and competitive environment.

And number two progress we are making on our buildings and two point strategy.

On the macroeconomic and competitive environment.

Let's start with the customer.

So many years it has been a growing consumer focus on value.

It is possible that we are entering a period of prolonged period of consumer price inflation across the whole economy.

We believe that an inflationary period consumers trade down not up.

In an environment of rising prices, we think shoppers will be even more attracted to the great value that we offer.

Our business is a third bigger now than it was in 2019.

One reason for this is that our value differentiation versus other retailers has grown.

The delta between the price of an item at Burlington and the price of a light item at a full price store has never been greater.

Leaner inventories in the full price channel have driven higher realized prices.

It is not clear if these higher prices will be sustained.

If they are sustained then in the coming quarters, we think that we may have the opportunity to capture additional market share to take up our retail prices or to do both.

If on the other hand retailers were turned to more promotional habits.

These higher realized prices in the full price channel will come down.

If that were to happen then we think it would trigger yet another wave of consolidation of marginally profitable full price bricks and mortar stores.

We anticipate that the second scenario, a return to a promotional environment and a decline in realized prices is the more likely.

But it's going to take some time to see how this plays out.

But in either scenario, we think that the long term implications for Burlington are very favorable.

I would like to talk now about the progress we are making on Burlington to point to.

The core of this strategy is to make our business as flexible as possible. So we can shape the sales trends take advantage of supply opportunities and deliver great value to our customers.

So far this year, we have chased from a comp kind of flat to an actual year to date comp of 18% versus 2019.

In addition to comp growth, we are very excited about our new store performance, especially our smaller store prototype.

In 2020, one we have opened 101 new stores.

This translates to <unk> 77, net new stores after closures and relocations.

Our new stores are performing extremely well.

And I am excited to announce that we have decided to accelerate our new store opening program.

In 2022, we expect to open about 120 new stores.

Which after closures and relocations should yield about 90 net new stores.

Beyond 2022, we now expect to open 130 to 150 new stores each year.

About 30 of these will be relocations of older stores to newer smaller prototype locations.

So overall from 2023 onwards, we expect to open 100 to 120 net new stores each year.

Today, we have just over 800 stores. So in the next five years. This program will drive a very exciting transformation of our chain.

Moving closer in I would like to talk now about 2022.

We think that there are three factors that could make 2020 to a very good year for Burlington.

All three factors are difficult to predict.

Firstly sales.

This year.

All retailers have benefited from one time items like stimulus checks and pent up demand.

As we get into 2022 and these items it seems likely that.

<unk> trends across retail will fall off sharply.

On the other hand, it is possible that rising wage rates or further government spending will offset this decline.

We have to be ready for either scenario.

Secondly pricing.

I think I said a moment ago.

We don't yet know and higher realized prices at full price retailers will be sustained.

This will play out in 2022.

If these higher prices are sustained even as supply loosens up then we think we will have a tremendous opportunity to drive sales or to take up retails or to do both.

And if there was a general rise in inflation across the whole economy.

This opportunity could be even greater.

Thirdly, we do not know if the issues with global supply chains will ease in 2022.

They do then this could have a huge beneficial impact on off price supply.

And it could also drive significantly lower freight and supply chain expenses.

We don't have great visibility on any of these three items no one done.

But in this situation our playbook is always to plan, our business conservatively and be ready to chase.

So our initial buying and operating plans for 2022 are anchored on a mid single digit comp decline.

This is not a prediction of what we think will happen.

We do not have enough visibility for a reliable prediction.

Should think of the minus 5% comp as a baseline starting point for the chase.

In 2020, one our baseline with a flat comp.

Yes to date, we have chase sales 18 points above this baseline.

As for our margins so much depends on freight and supply chain expenses.

Again, we can see that we do not know how these will play out.

We think these expenses should start to come down in 2022, but we don't know if when and how much this will happen.

In a moment John will share our margin estimates assuming that these cros remain at their current levels through mid 2022, and then begin to moderate.

I'm going to wrap up my remarks with a few comments on our Q3 performance and our Q4 outlook.

As described in today's press release comp growth in Q3 was 16%.

We estimate that warmer weather from late September onwards, reduced our comp by about three points.

In other words, we believe that our underlying weather adjusted comp in Q3 was about 19%.

So Q4, we are currently projecting our comp performance to be in the low double digits.

Our month to date comp is running well ahead of this what really matters is the next four to five weeks.

If the sales trend is stronger and we are ready to trade it.

Let me move on now to talk about inventory levels.

Comp in store inventories were down 24% at the end of Q3.

This means they were slightly above our plan coming into the quarter.

Our plan was for in store inventories to be down in the high Twenty's.

The other promising news is at the end of Q3 reserve inventory was 30% of total inventory versus 21% in 2019.

It is usually the case that your grain you reserve inventory in the third quarter.

You pulled goods out shippers to get prepared for holiday Inn.

In fact, we built hours up inventory in Q3, whereas the receipts in Q3 increased 174% versus the same period in 2019.

We were able to make some great opportunistic buys during the quarter.

It is too early to extrapolate.

But we think that over the coming months.

Likely to see a very favorable buying environment as other retailers cancel late deliveries.

One final point on inventories.

At the end of Q4, we are planning in store inventories to be down in the mid 30% range.

We believe that we can end the year more cleanly than we have in the past and that death, thereby transition more effectively to the spring season.

I would like now to turn the call over to John to walk us through the financial details.

Thanks, Michael and good morning, everyone.

I'm going to follow a similar approach to Michael.

I'll start by talking about our longer term financial prospects. They never move in there and then make a few comments about 2022, and then finally I will finish up with additional color on our Q3 results.

Expectations for the fourth quarter.

On the longer term as Michael described we are very excited to announce that we will be accelerating our new store opening program.

We are now planning to open 90, net new stores next year and then from 2023 onwards, we expect to open between 100 and 120 net new stores every year.

Combining this faster pace of openings with a conservative comp assumption should generate average annual topline sales growth over the next five years in the low double digit percentage range.

Over this period.

And with these sales growth assumptions. We also believe that we can achieve 200 to 300 basis points of operating margin expansion.

We've made very good progress on margin expansion. This year, but this has been masked by higher freight and supply chain expenses.

We expect that some of these expenses will moderate over time, but.

But we also believe that we have the opportunity to drive further leverage, especially due to occupancy costs and operating expenses.

This combination of sales growth and margin expansion should drive average annual earnings growth and approximately mid teens.

This growth estimate does not include any additional benefit from using available cash flow to repurchase shares or to pay down debt, thereby reducing interest expense.

The numbers I have described are annual averages for the five year period.

We anticipate significant variability in these results year to year.

In addition, as you know we may not plan our business each year with this level of growth.

Our model is to begin each fiscal year with a more conservative plan manage inventories and expenses Accordingly, and then chase the trend and take advantage of ahead of planned sales.

If we execute this model successfully.

We would expect to achieve the annual average performance metrics that I just described.

Let me move on to make a few comments about 2022.

As Michael described next year is very predictable in terms of top line sales.

Bottom line earnings.

We look forward to the day, when we can return to providing traditional guidance.

We are clearly not at that point yet.

2022, we did not have enough visibility to provide meaningful guidance for the year.

We are anchoring our initial buying the operating plans, 5% comp decline.

This is the baseline that we are using to set up our merchants and the operators. So we can chase the trend can take advantage of merchandise supply opportunities.

Given what we know at this point.

We would expect a 5% decline to drive operating margin deleverage of about 150 basis points.

This is based on the assumption that rates.

Supply chain expenses.

Maine at their current levels through mid 2022, and then begin to moderate.

This estimate also assumes no material increase in retail prices.

And no other significant cost inflation.

For reference using these sales assumptions.

We'd expect a flat comp could drive about 60 basis points of operating margin deleverage.

And a 3% comp to generate flat operating margins versus 2021.

I would now like to talk about our Q3 performance and our Q4 outlook.

As a reminder, our Q3 results are being compared to the third quarter of fiscal 2019.

Total sales in the quarter grew 30%.

Comp sales increased 16%.

As Michael mentioned, we estimate the unseasonably warm weather in October and some of our most important regions negatively impacted our comp sales growth by about three points during the quarter.

The gross margin rate was 41, 4%.

Decrease of 100 basis points versus 2019 third quarter rate of 42, 4%.

This was driven by a 180 basis point increase in freight expense.

Which more than offset an 80 basis point increase in merchandise margin driven by lower markdowns.

Product sourcing costs were $173 million versus $90 million in the third quarter of 2019 incur.

Increasing 250 basis points as a percentage of sales.

Higher supply chain costs represented most of the deleverage.

The drivers of these higher costs were consistent with what we have discussed in prior quarters.

Adjusted SG&A was $581 million versus $486 million in 2019, decreasing 210 basis points as a percentage of sales.

And the other income and other revenue were down about $8 million or 60 basis points.

Compared to the third quarter.

Fiscal year, 19, which benefited from $8 million of insurance recoveries.

Adjusted EBIT margin was six 1%.

180 basis points lower than the third quarter of 2019.

Excluding the non operating other income and revenue deleverage.

Our adjusted EBIT margin declined 120 basis points.

Said another way.

During Q3, we drove 310 basis points of operating margin expansion from merchant margin and operating expense leverage on a 16% comp, but this was more than fully offset by 490 basis points of deleverage on product sourcing costs and a comparison.

To nonrecurring other income in Q3.

2019.

All of this resulted in diluted earnings per share of <unk> 20 versus $1 44 in the third quarter of 2019, driven primarily by $86 million of debt extinguishment charge related to the partial redemption of our convertible notes.

Adjusted diluted earnings per share were $1 36 versus $1 53 in the third quarter of 2019.

During the quarter, we opened 40, new stores, bringing our store count at the end of the third quarter to 832 stores. This.

This included 56, new store openings 15, relocations and one closure.

In the fourth quarter, we have opened an additional eight new stores and we expect to close two stores.

As a result, we should end the year with 838 stores.

Now I will turn to our outlook for Q4.

We are projecting comp sales growth in Q4 to be in the low double digit percentage range.

We are expecting the extraordinary freight and supply chain expense headwinds to continue through Q4.

This means that our low double digit comp projections should translate.

250 basis points of deleverage in operating margin during the quarter.

With this outlook for Q4, we now expect our full year operating margin to be flat versus 2019.

It is important to reinforce the point that this means that for the full year. We will have absorbed about 360 basis points of deleverage on creating supply chain expenses with 360 basis points of offsetting favorability in other areas of the P&L.

Specifically much higher merchant margin and significant leverage on SG&A expenses.

With that I would like to turn the call back to Michael for closing remarks.

Thank you John.

Before we open it up for questions I would like to recap and reinforce.

Some key points that we have made this morning.

Firstly, we think that our longer term prospects are extremely bright.

So we have decided to put our foot on the gas and we are accelerating our new store program.

Secondly, we believe an inflationary price environment could drive greater traffic to our stores.

We need to see how this plays out, but we think that it could offer us the opportunity to take share take up retails also do both.

Thirdly, we anticipate that 2022 will be very unpredictable.

Our playbook is to plan and manage our business. So we can aggressively chase the very significant sales margin and supply opportunities that we believe might emerge.

Finally, our Q3 trend remained very strong.

We changed $280 million in sales above our original plan, but we still ended the quarter with in store inventories and reserve inventory's in great shape.

We are very well positioned for the fourth quarter.

I would like now to turn the call over to the operator for your questions.

Thank you.

Ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.

We ask that you please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.

Okay.

Our first question comes from the line of Matthew Boss with Jpmorgan. Your line is now open.

Great. Thanks, and really appreciate all the color.

So.

Maybe first for Michael on your long term unit growth prospect, Michael could you just speak to drivers behind the decision to accelerate this ramp of new store openings. What gives you confidence to expand the program now.

Yes.

Well good morning, Matt Thanks for your question.

As you know at the beginning of this year.

We raised our long term potential store count to 2000 stores.

And it's really since that time, we've been looking at the pace.

All of our new store openings, how many stores, we should open each yeah there.

There were three factors that led into our decision to accelerate this pace that's the first.

His financial I'm sure many of the analysts on this call.

I've already done the math you know looking at our press release this morning.

To estimate new store productivity.

You see with those numbers is that new store productivity. This year has been extremely strong.

And we know that this is partly due to the same tailwind that have driven our comp growth this year, but even if you adjust for those tailwind and new stores is still running well ahead of our internal hurdles.

As a reference point of the hundred or so stores that we opened this year just over half are under 30000 square feet.

So this performance really gives us a lot of confidence in our new smaller store prototype.

First reason financial secondly.

Second factor is strategic.

I talked about this in my earlier remarks, so I won't I won't beat a dead horse, but year to date you know our business is almost a third pickup than it was in 2019.

So that suggests to us that the customer is really responding very well to the great value that we that we're offering and we're taking significant market share.

Again, it gives us confidence as we open more stores over the next few years will be we'll be swimming with the tide will be taking share.

The other major off price retailers have two to three times the number of stores that we have so this feels like a <unk>.

An opportunity that's really unique to Burlington.

The third factor in making this decision was operational we earlier this year, we put together an internal cross functional team to look at what would it take to significantly accelerate past store expansion that that that cross functional team, including real estate stores supply chain.

Merchandising planning I T.

The other areas.

And based on the plans and actions that that team developed.

We feel very comfortable that we can support.

The faster pace of openings that we described it in the remarks, and obviously with new stores.

You have a pipeline of new no new locations that goes out over the next two to three years. So we can we can look at that pipeline and say, we're very happy with the number and the quality of store locations that we see ahead of us. So you can tell we're very excited by this opportunity.

Great and then maybe just a follow up for John on the multi year top and bottom line growth targets that you laid out on the call could you just share with us more of the building blocks to get to those levels of sales growth margin expansion and EPS growth.

Good morning, Matt sure happy to take you through a little bit more detail on that.

The top line is pretty straightforward really if you combine the new store program that we were talking about with conservative low single digit percent annual comp increase this gets you to a low double digit percent annual sales growth that I mentioned.

Basis of our model.

And we're confident that we can achieve this average annual growth.

Moving on to margins.

Let's just kind of revisit what happened with margins this year.

For the full year, we're expecting freight in product sourcing cost to delever by about 360 basis points, but as I just said in my remarks.

We're projecting operating margins to be approximately flat versus 2019, so in other words.

We've really driven 360 basis points with favorability in other areas and that comes from higher merch margin driven by lower markdowns and higher leverage on operating expenses.

Looking forward there may be some additional merch margin opportunity, but because we've seen such a significant increase this year, we haven't assumed assumed any further improvement there in our model.

For store occupancy.

We expect to capture additional leverage as we migrate.

Towards our smaller store prototype.

But we do see opportunities to drive further efficiency on store and supply chain expenses.

We think that overtime freight expenses will decline from this years historically high levels, though not necessarily all the way back to pre pandemic levels.

We're assuming that supply chain expenses will probably be a bit stickier, but they too will moderate to some degree as we seek plus become more predictable and reliable.

When you combine all of these different factors together, we think that we can capture the 200 to 300 basis points of operating margin in the next five years that we called out.

Of course, there could be additional headwinds that move against us where there could be tailwind that move in our favor.

That could impact individual years during the period, but on average we think these things should should even out over time.

And if we were to achieve significantly higher than the low single digit average comps. We've modeled for this period, we would expect to drive more operating margin expansion.

Now if you combine the low double digit projection for annual top line growth with a margin expansion of two to 300 basis points over the next five years, then you get to the mid teens earnings growth that I described in my prepared remarks.

Thank you. Our next question comes from the line of Ike <unk> with Wells Fargo. Your line is now open.

Okay.

Right.

A couple of questions. My first question is on supply chain.

Can you guys talk a little bit excuse me more about the issues and how they're specifically affecting your company and then I guess for example, what impact has it had on store level inventory levels, and then I have a follow up.

Yeah, I'll I'll take that.

Morning, Mike.

I think that's a great question I know there's been.

It's been a lot of reporting and some concerns about about inventories.

So I think it might be helpful to draw.

A distinctive merchandise availability of supply on the one hand, and the timely delivery of receipts on the other hand.

Firstly.

The availability of merchandise has been continues to be very good.

Of course, there are certain categories and brands, where they might be constrained, but that's always true.

It was an off price retailer, we're not dependent on a single crack category or brand, where we're very good at.

Moving money from businesses, where there's either a weak trend or poor supply.

Businesses, where there's strong sales and good supply opportunities that's off price that's kind of what we do.

Yeah, I think the data for Q3, you know provides a pretty good illustration of this in Q3, we chase 16% comp growth on an original plan of flat.

That represents about $218 million of ahead of plan sales, but our in store inventory levels still ended Q3 ahead of plan.

And at the same time, we were able to build up our reserve inventory.

So we were very happy with supply in Q3, and we continue to be happy we think there's a good chance because supply is about to get even better.

So that that supply.

But let me, let me move on and talk a little bit about.

About receipts specifically.

Timely delivery of receipts if I just described when.

When you look across the whole store, we really have not had an issue with merchandise availability that we found great Mike.

<unk>, our open to buy where there have been challenges and we've had these challenges along with everyone else is in the timely delivery of receipts in other words with good showing up late.

This isn't the Ventas volt the problems are global and very widespread but it has created inefficiencies in our transportation and supply chain network.

Ironically, those headwinds becomes stronger the more you try to chase the business and respond to the trend.

It's definitely been a challenge and it's cost us money, but we've been able to get the goods that we need and we've been very happy with the inventory levels in our stores. So so to recap.

Merchandise availability and supply have been very good and we think they're going to get better but navigating the receipt flow has been an issue and frankly, it's been expensive, but we've done it.

So that's how I would describe that.

Got it Super helpful. And then just a quick follow up on retail prices. Michael you were alluding to just what do you see happening with pricing across the industry to be do you think.

Higher prices are sustainable and then do you believe that you guys can raise prices is that something the company has done in the past just kind of curious how you frame all that up.

Yes, so it's a great question Mike.

I think I think the city. This situation has really evolved.

Over the last few months and actually continues to evolve.

I see two things going on right now you firstly.

Full price retailers this year have been getting much higher realized prices.

It's clear why that is because of much leaner inventories now.

Initially I have to say I was skeptical on that my view was that as soon as supply loosened up.

Promotions would come back.

And then these higher prices would just come back down.

But now I'm not sure.

These retailers are clearly enjoying the stronger margin, so maybe and I want to underline the word maybe the <unk>.

Environment will be less promotional going forward.

Maybe these retailers will control their inventories more tightly.

So they can preserve the high margins, but again, let me.

Pizza I'm underlining the work might be.

We really need to see what happens as supply constraint. These do we go back to promotions or not.

But if the environment really is less promotional going forward I think that could be great for us.

So when we talk about value in offering value to customers. Our reference point for value is the pricing at full price stores.

Is that reference point moves up if if those that those higher realized prices really become permanent.

It'd be a huge opportunity either to drive sales or to drive margin or to do both and frankly that decision might depend upon specific category that we're talking about but but I think we'll have plenty of opportunities that if that if that reference price is permanently higher.

That's one thing that's going on.

The other thing that's going on there.

This is risk changed over the last few months.

<unk> it feels like the prospects for generalized price inflation across the economy have really grown.

You know as I said in my remarks. This isn't just in the sectors that we compete and it's also I think it's also food it's gas prices at the cost of living.

Again, we have to see what happens over the next couple of quarters.

But we believe that in an environment of rising prices, we should do very well our value proposition is.

Already very strong, but it could it would become even stronger in that environment.

And again, we think this could present us with an opportunity to drive higher sales and higher margins.

Yeah. When you look back at the transcript to this call you'll see.

But there were a lot of it and what I just said, there's a lot of maybe he's got a lot of this.

So we don't really know how this will play out we think that these trends.

It'd be very favorable to us or for us, but but at this point it makes sense to be cautious in our locations.

That said, we are making some adjustments we we've looked at our fast very fast turning businesses and we started to push prices up in those businesses. We look at businesses, where we think our pricing may be sharper than it needs to be and we've been testing some higher rehousing.

So far the things we've tested the prices we pushed up it's worked it's worked well, but but it's fairly modest at this point.

The other thing is that as you would expect we're also watching competitors very closely.

Our merchant visit competitor stores all the time.

No there were no trade secrets with Chrysler that prices displayed on the ticket.

And actually by looking at the clearance rack you can also see if those higher prices of working or if they just scribing markdown.

No I guess I would finish up by saying we are mindful in all this that we are the third largest off price retailer. So clearly it wouldn't make sense for us to take the lead on rate when retail prices, but we're not proud of it if we see something and we believe something is working there's really nothing to stop us from consulting.

Okay.

Thank you.

Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open.

Thanks, Good morning.

I wanted to follow up on the freight and supply chain pressures. John are you seeing any signs of easing here and when do you think it's reasonable to see that or is it possible that this is a more permanent situation.

Well good morning Lorraine. Thanks for your question good question.

Yes, so you've heard me say over the last couple of calls we think that this record breaking freight expenses that we've seen so far this year are mostly temporary.

We still believe that it's driven by an imbalance in supply and demand and we think that over time it should correct itself.

So we think that's the case.

Like everyone else, we don't really know when that's going to happen.

And we certainly haven't seen anything yet that would indicate that things are starting to improve.

As we said previously we think that some of this higher supply chain expenses that we've seen this year, particularly the wage rate piece are going to be more permanent but.

But we expect that the wage incentives and the operating inefficiencies we've seen this year.

We're going to get better.

As the supply chain situation improves.

We just don't have good visibility into when any of this stuff is.

Actually happened.

But let's just consider the other side of it.

Suppose it doesn't work out that way.

Bose that these higher expenses are mostly here to stay but they become a permanent part of the expense base.

The only way that happens is in.

An inflationary scenario.

And so I would refer to what Michael was just talking about it.

If costs are permanently higher than we would expect that prices would rise permanently across all of retail.

It's the only way that most retailers would be able to absorb the costs and so that would certainly apply to us as well.

Inflation.

Inflationary situation.

We'd certainly be able to raise prices, while continuing to maintain our value proposition.

In this scenario our value proposition would likely be even more important to our customers.

Thanks, and then you've been pretty proactive about paying down debt, but you added back the share repurchase this quarter, what should we expect in terms of capital allocation going forward.

John I'll take that question. Thanks, Lorraine it's a.

Good question, yes.

We have paid down a considerable amount of data over the last year and I think it may be helpful to kind of provide kind of a recap of our debt pay down as well as our debt outstanding and leverage ratios.

If you go back to the height of the pandemic, we borrowed $400 million on our ABL and we raised about $1 1 billion in.

In public market debt.

But you know given our strong recovery over the last year, we have been able to pay down.

About 860 million out of the one 5 billion, we borrow during 2020.

We pay down our ABL to zero.

As you May recall, we executed a make whole call on our high yield notes and we recently repurchased in Q.

At quarter $160 million.

Convertible note. So so where does that leave us we have about a $1 6 billion in total gross debt.

$950 million on our term loan and a little under $650 million in our converts and on a net debt basis, given the $1 2 billion in unrestricted cash we had in the quarter, that's about 400 million. So.

But all those numbers I mean, I I think it just leaves us in a much more comfortable place from a leverage perspective, and if you look on a on a trailing 12 month basis, excluding capitalized operating leases. Our gross leverage is down to one six times gross debt to EBITDA and our net debt ratios down at that point.

For and we would expect to continue to reduce those leverage ratios.

So given that progress in reducing our leverage we were comfortable resuming our share repurchases during the past quarter, we repurchased around $150 million of stock and that leaves us $250 million remaining on our authorization.

So what do we do from here.

We're going to evaluate it through the lens, we always use.

First and foremost we're going to invest.

And our growth and secondly.

We will utilize excess cash in the most accretive way for our shareholders and that's what we'll continue to do.

Thank you.

Our next question comes from the line of John Kernan with Cowen. Your line is now open.

Good morning, Thanks for taking my question.

Michael John David Thanks for all the guidance through next year.

It's quite a bit more than we're getting from many of your peers across the sector.

I guess, John New store growth now a bigger part of the narrative.

Be helpful. If you could provide just some high level modeling assumptions around new store productivity.

Particularly given the new store prototype.

I have one quick follow up.

Thanks, John you're happy to do that.

So let's start with how you should think about sales volume for our new stores.

On average.

We expect new stores to have initial sales volumes that are.

Around 70% to 80% of our chain average as they open up.

Obviously there'll be some variability for each individual store, but if you use this average should be a reasonable assumption for modeling.

Actually this year, we're seeing a slightly stronger performance and that is our new stores are performing their plants, because they're being driven by the same tailwind should have helped help us deliver our strong comp store performance.

So.

From there you should anticipate comp store sales growth for the new stores.

Faster than the chain for several years after opening which would be consistent with what we've now seen for the last several years.

Across the next five years, you should expect more than 75% of our new stores will be less than 30000 square feet. So really moving through the to the smaller store format.

Big way.

In terms of profitability and capital returns.

Can rely on what we've continued to say we've been saying in the past to EBIT margins for each store are expected to be accretive to the company in their second year and each store is expected to deliver return on invested capital.

Also accretive to the company's return on invested capital.

In 2019, our average sales per store is about $10 million with.

With the growth that we've seen this year. Our 2021 average sales per store is going to be north of $11 million per store.

Sales of our new store is 75% of our average that means that the store should do over $8 million and then comp above the chain average for several years.

So from a productivity perspective.

In our 25000 to 30000 square foot stores.

We're expecting.

Over $300 a foot on a gross square foot basis.

$400 a foot on the selling square foot basis, So big step forward on our productivity at the store level.

And even as we're paying a little more rent per foot in many of these better high traffic locations.

This level of productivity.

And with a smaller footprint and the lower operating expense structure should really help us to drive operating margin expansion, while growing the top line faster and delivering a terrific returns that we expect from these stores. So we're really excited about our new sports, but we're also excited about the relocation opportunity.

Yes.

Net new store numbers that we laid out two days in the next five years, including an average of 30 <unk> per year.

In most cases, usually going to be moved from oversized boxes with low sales productivity.

Many of them older and need us at least refreshing.

Moving into fresh new highly productive smaller boxes with lower occupancy costs.

Relocations for us usually results in a pretty healthy sales lift and improve four wall profit.

Yeah.

Got it sounds like productivity is planned to move significantly higher I guess, Mike.

My follow ups, just on Q4, a lot's happened since the last call in August could you just walk us through what changed in the Q4 outlook.

Versus the outlook you gave us on the last call. Thank you.

Okay, alright, great. Thanks.

So for.

For Q4.

We said, we're we're comfortable.

With our sales forecast, we're actually running ahead of our <unk>.

Low double digit sales forecast.

But theres still.

Some risk and some really big weeks in front of us as we move into December.

On the margin front.

It just really comes down to wanting to be a bit more conservative on our <unk>.

EBIT forecast our implied outlook for Q4.

If you look at what we gave last quarter.

Was down around 200 basis points. So now on a low double digit comp were forecasting down about 250 basis points. So I would remind you that we are still maintaining a flat EBIT margin forecast for the full year.

The reality that we're dealing with is that the cost pressures in supply chain and freight.

And wages.

Some degree.

Along with the volatility of timing of receipts.

Just really difficult to forecast with any precision so.

We really wanted to recognize the difficulty forecasting these expenses.

A bit more conservatism just to protect against the.

The volatility that we saw.

Great.

Got it thank you.

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is now open.

Great. Thanks, so much.

I wanted to follow up on.

Michael on your inventory comments.

You mentioned when you were talking through inventory that you think there's a good chance that supply is about to get better I just wonder if you could expand on that for us.

Sure Good morning, Kimberly good to hear from you.

Yeah. So so I think I feel like the congestion.

And the delays in global supply chains, and transportation systems have been have been fairly well reported.

You know I've lost count of the number of ships that are waiting off the coast of Southern California at this point.

But it seems like it just keeps hitting new records every day.

The containers some of the containers on those ships have merchandise vendors.

And retailers had ordered with the expectation that they would be delivered for the holiday period, the holiday selling period.

Oh for the full season.

And it's clear that some of that merchandise is not going to get here on time.

Frankly, if it hasn't landed by now it's already too late.

There's no point for a retailer there's no point in taking receipt of holiday merchandise in January for example.

So our expectation is that that merchandise should find itself. So it can find its way into the off price channel.

And we think that's likely to be a big opportunity, especially through our reserved inventory now I mentioned that we started to see some early signs of that.

It's too I think it's too early to predict where that's going to lead but a hunch is that the next couple of months could be could be a very good buying opportunity for off price.

Fantastic, Michael and it sounds like you feel really good about the inventory position here for holiday I just wanted to make sure that I understand you correctly on that.

I just wanted to follow up quickly if I could on the 30000 square foot stores.

It sounds like Youre seeing well above plan results.

In particular, this year and I wondered if you can.

Care to share how those stores in particular those smaller stores.

Subset of your new locations, how they're delivering on annual volumes. This year. Thanks, so much.

Okay.

I'll take the first part of that Kimberly on the inventory levels, and then I'll, let Joan.

Bond on.

But certainly with the.

Prototypes, but but on on holiday inventory levels.

At this point, obviously, we're sitting in the third week of November.

I'm in a good position to judge I'm I'm very confident that we will have the inventory in our stores and that we have enough receipts on the way to stores to support our sales projection low double digit number now if sales were to run well ahead of low double digit then we might start to see some gaps in.

Some very high trending businesses.

But that just means that the sales in those businesses were very very strong. So it's a high class problem. It's a you know I think the risk to US right now in some ways that sales outpaced our expectations not that we are that we have an issue with that with inventory over seats and then John do you want to talk about the small yes sure sure. So.

So first of all as far as.

The performance of all of our new stores this year and not surprisingly, they're running well above the way that we had planned them as we have underwritten them.

Yes, I think everybody in retail has a strong tailwind this year so.

That's certainly a big part of it but it also does give us some confidence to see the new stores.

Which include a large percentage of smaller stores.

Not as big as what we're moving toward.

But.

They are all performing the way, we would expect them to perform understanding that we have these kind of tailwind behind us.

Within the group of <unk>.

Smaller new stores, we're very pleased with their performance.

Yeah, it's become less about the size and more about the strength of the trade area and if you're looking at individual stores.

Got some some of the smaller format stores that.

Our really blowing it out of the water.

And then the.

Others that are performing well, but overall.

As far as proof of concept, we're very pleased with what we've seen from the smaller stores that we've opened so far.

Great to hear and thanks for all of the color on the long term strategic outlook. It's really helpful. Thank you.

Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Hey, guys. Thanks for all the detail today.

Repeat the comments earlier, it's very very helpful to hear you think through the 'twenty two and longer term maybe.

Maybe this one's for John but I think.

Important it seems like you're drawing a pretty fine line pretty hard line between first half and second half of next year is that is that really lapping stimulus and the costs rolling in such that obviously, we are we understand from your language today first half is really top of the second half.

Closer to that algorithm that you that you spoke to for the for the longer term.

And then Michael.

If you think about the AUR in retail comment what it really is the governor to raising that to you. Today you know I think one of your dollar store competitors that they are raising to $1 25.

Off price competitors are raising AUR as you point to the value in your stores being historically wide versus the full price channel do you need to be that wide and how do you think about whether your share gains have come from continuing to widen that relative value spread versus the better operations. We've seen from you in the stores moving.

It's a higher traffic locations.

Operating the in store inventories better how do you gauge when you may have let that value spread widening too far based on your comment that its pretty wide right now.

Alright, so Michael I'll start with the <unk>.

Question on the kind of timing and cost pressures next year.

So.

Yes.

We really don't have a crystal ball here, what we can see today is.

We haven't seen anything that indicates that improvement, particularly on the freight side.

<unk> has started.

So.

It's a modeling assumption that we're using it's not.

Something that we.

We have this insight information but.

So, but I think it's a fair way to think about next year that if you didnt see any improvement for the first half and you're starting to see some improvement in the second half that's really as deep as our thinking goes there.

So it's based on.

If that improvement.

It does start to happen.

Yes, that's right.

The impact that we've seen on our margins if it doesn't start to happen. It goes back to the comments that we'd had this may be more of an inflationary environment and there may be more room to take price and then with model. So.

That's kind of the way, we think about how we modeled scenarios for next year.

Okay.

And then Michael your question on what's the what are the governors on on AUR and taking up retails I think it's a it's a really good question.

And I think it's important.

It is important to understand that in off price.

What really matters is sort of the restaurant.

Put price and what I mean by that is when the customer walks in the store when the customer walks in the off price stood at walking into that store because they were expecting a deal they were expecting the values to be great and actually we encourage that so when you look at a price ticket at Burlington It shows our price, but it shows.

Ah compare it to a comparable price.

At prices based upon the out the door price at another retailer. So we're saying look you can buy this price of Burlington, Here's what it would've cost you had you gone to this other place.

So that's that's kind of what of what they want custom.

Customer proposition really is so bringing that back to your question then.

How should we think about the differentiation in our prices versus the competitors. If the competitors move up prices that gives us an umbrella to move up prices too right. There's no doubt about that.

Els is the customer going to go.

The uncertainty that we have and the reason we were thinking the old patient here is because those higher realized prices at full price stores, you got to be sure that theyre going to stay where they are they're going to stay high before you start moving up your own prices.

I've been in retail.

Pretty long time and I.

I would say over.

Over the years.

The department stores have been very very promotional.

So you'd have to believe now that that's going to stop there, they're going to stop being promotional.

So so if that were to happen if it really were the case.

<unk>, we're going to stop promoting and they were going to hold onto those high realized prices then yes, we could move up higher prices, but it's actually this is just a short term thing and they're higher realized prices are being driven by the fact that we happened to have supply chain constraints that yeah, and leaner inventories and it actually as supply loosens up next year.

Realized prices will come down than it would have been a mistake had we raised our prices. So that's the reason we're hesitating. How this will all play out in the next couple of quarters I think so we won't have to wait long, but that's really the key driver for US now there is this other issue that I mentioned in the script about well what happens if inflation across the whole economy.

<unk> takes off whereby if that happens then obviously, we're all raising prices, but that's a different driver I think but that's how we're how we're thinking about it.

Thanks, a lot for the help.

Thank you.

Our final question will come from the line of Adrian Yet live Barclays. Your line is now open.

Good afternoon, and good morning, and thank you again for all the detail.

Couple of quick questions here, Michael can you talk about the perceived health of your core target customer.

Remind us what the target household income is knowing that you know.

50% of U S households, there under our 75 K and then what percent of your customers are non credit for cash buyers and then my follow up for John on the structural wage inflation embedded in the long range plan. Obviously, we're hearing is 15 minimums going into 17.

And just some color there thank you very much.

Yeah, Adrienne I'll start with.

The first question.

Our customer we think kind of customer.

We think our customer is very healthy right now we think.

Certainly when you look at the.

At our comps.

Throughout this year.

We feel very good about about the trend that we've been to sustain.

The underlying customer is clearly.

Responding very well to the values that we offer now in terms of.

How our customer differs from other retail customers one thing we know about our customers.

If they shop at every retailer because our customer is the off price customer has more than anything about about about value.

And the way they find value as they cross shop, a lot. So we know that we have a huge overlap with other retailers customers, which is why I say.

If other retailers raised retails.

You can have a chance to take market share or raise our own retail because we know that there was cross shopping between us and other retailers now to answer your question more specifically our customers tend to skew younger larger family size more moderate income.

And I think those customers right now.

Pretty healthy.

And the spending there.

Sales trend has been very strong if I project forward to next year.

And just sort of add or thoughts about if inflation really does take off in this economy. We actually think we may have a lot of new customers going up customers, who are perhaps on slightly higher incomes, but they're getting squeezed by higher price inflation. So that's the reason why we feel somewhat optimistic that if there is inflation across the us.

Consumers are different income levels are going to be more interested than ever and the value that we offer.

Yes.

Okay. So I'll take the wage part of your piece of your question Adrian.

So first of all just a reminder.

We've used this kind of market by market analysis, where we make wage adjustments as.

We see that they are necessary.

Been using it for several years and we're pleased with the way that's been working.

This year.

It turned out much different than the way we had planned at the start of the year.

We've made some very significant changes on the DC side to remain competitive.

And ensure that we can attract.

The work is that we need to operate our distribution centers most of which are in <unk>.

Hershey in California.

Competitive markets. So we've brought wages up quite a bit there and that's the part of our supply chain costs.

We refer to as being a little bit stickier, that's now permanent part of our wage base and of course. It is included in our outlook this year.

Modeling.

On the storage side, it's been a little bit of a different story hasnt been.

Quite as.

Hasn't been nearly as competitive as the DC situation, although in the second half of the year.

<unk> seen it get a little.

Bit tighter and we've had to make some adjustments a little bit higher than what we had expected at the start of the year <unk>.

To remain competitive, but it's very different kind of market by market. So we're still very comfortable with our market by market approach. So I would say.

We've taken a bigger step forward than we would normally have in a single year as far as the spine market with adjustments and then modeling going forward, we've modeled in what what.

An assumption for what we expect will need to do to continue to remain competitive.

It's informed by what we've learned about this year.

Thank you great color and best of luck for holiday. Thank you.

Thank you.

This concludes today's question and answer session I will now turn the call back to Michael Sullivan CEO for closing remarks.

Before we hang up I would like to take this opportunity to thank everyone at Burlington for their hard work and.

In the third quarter and throughout the year I noted that the entire Burlington team Chad my sense of energy and excitement around the sales margin and supply opportunities that we see ahead of us.

Finally, I would like to wish everyone on today's call, a very happy and peaceful Thanksgiving.

We look forward to sharing our fourth quarter results with you in March.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.