Q4 2021 Burlington Stores Inc Earnings Call

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Good day, and thank you for standing by and welcome to the Burlington stores fourth quarter 2021 earnings call.

At this time, all participants are in listen only mode.

After the presentation, there will be a question and answer session.

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I'd now like to hand, the conference over to David Glick Group 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 fourth 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.

Court, it or broadcast without our express permission.

A replay of the call will be available until March 10, 2022.

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

It marks in the Q&A that follows are copyrighted today by Burlington.

Worse.

Remarks made on this call concerning future expectations events strategies objectives trends or projected financial results.

Jack the certain risks and uncertainties actual results may differ materially from those that are projected in such forward looking statements.

Such risks and uncertainties.

Including those that are described in the company's 10-K for fiscal 'twenty 'twenty and in other filings with the SEC all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations, we discuss today are on a continuing operations basis.

Conciliations of the non-GAAP measures, we discuss today to GAAP measures are included in today's press release.

Now here's Michael.

Thank you David.

Good morning, everyone and thank you for joining us.

On this morning's call we are going to provide a lot of detail on our Q4 results.

Our 2022 outlook, but that is not where we would like to stop.

We realized that on these types of calls it can be often be difficult to see the forest for the trees.

<unk> tends to be so much focus on short term issues, but it can sometimes be very hard to see the bigger picture.

So this morning, we would like to structure the discussion as follows.

I will start by sharing and updating our perspective on the longer term outlook and opportunity for off price and for Burlington in particular.

As part of this discussion I will review, our 2021 results and I'll use these results to provide a progress report on our Burlington two points I was tracking.

Secondly, I will talk about the outlook for 2022.

But again I will try to place this outlook within a broader strategic context.

We think that the next couple of years could create huge disruption across retail and that this may drive further restructuring of our industry.

We strongly believe that Burlington is a value focused flexible off price retailer will be a clear winner in this restructuring.

Finally, I promise, we will talk about Q4.

We saw a major slowdown in our trend in the quarter and as I will explain we have a good handle on the drivers of the slowdown.

Okay, So let's start with the longer term.

So many years, leading up to the pandemic. It was evident that our industry was undergoing a major restructuring.

When you look at publicly available market share data you can see that traditional department stores and other retailers, especially mall based retailers have been losing share over a long period.

And from the same data it is clear that for many years the off price retail channel has been gaining significant market share.

We believe that the most important and powerful trend driving this restructuring is the consumer need for value.

There is a growing segment.

Filters, who cares above all else about values.

For many years now this powerful trend has driven the growth of off price retail at the expense of traditional retailers.

Everything that I've said sofa was evident before the pandemic.

But I would like to bring this therapy is up to date based upon what happened in 2021.

Last year sales trends boomed across retail driven by stimulus checks and pent up savings.

Meanwhile, supply constraints inventory levels remain very tight.

It is not surprising that this drove higher realized retail prices.

But the quick the key question coming out of this is does anybody think that the customer no longer cares about value.

Our strong view is that of course, the customer still cares about value in fact, given the rise in general price inflation together with growing economic uncertainty, we suspect that over the next couple of years, the consumer need for value will be more important than ever.

And the long term trend of market share moving to the off price channel will if anything accelerate.

Two years ago pre pandemic, we launched our strategy to go after this market share opportunity, which we imaginatively cold Burlington to point to.

This strategy is intended to make our company more off price flexible and nimble. So we can better chase the sales trends and more effectively capture supply opportunities.

Benchmark data shows that we are by far the smallest and least productive and least profitable of the major off price retailers.

We have a significant and unique opportunity to drive the growth about topline sales and earnings overtime.

So now I would like to turn to our full year 2021 results and I would like to use these results to assess the progress we have made with Burlington to point to.

Let's start with some huge positives.

In 2021 we grew total sales by 28% versus 2019 and comp sales by 15%.

This growth was well ahead of our peers.

In achieving these results we demonstrated our ability to chase.

We had planned a flat comp for the year, but then chased 15 points above this.

It's $1 2 billion of incremental sales.

We did this with 20% less comp store inventory.

This drove foster tunes and over 150 basis points of high on the margin.

There were also important milestones and investments that had no immediate effect on results, but are central to Burlington to point to and we will have benefit years ahead.

There were two in particular.

We grew our buying and planning teams at.

At year end and merchandising head count was 36% higher than 2019.

We hired and promoted some incredible off price talent.

Secondly, we began to rollout our smaller store prototype.

As we discussed in our November call, we plan to increase our store count.

Approximately 60% to 70% over the next five years.

And almost all of our new stores will be this new smaller more productive and more profitable prototypes.

This program will completely transform our company.

Okay, how about the negatives.

The most significant of these came in in 2021 came in the form of freight and supply chain headwinds.

Our operating margin in 2021 contracted by 60 basis points versus 2019.

This was driven by 170 basis points of deleveraging freight expenses and 200 basis points of deleverage in product sourcing costs.

I am not sure margin and SG&A leverage we were able to offset the lion's share of these higher expenses.

We believe that some of these higher freight and supply chain costs will go away over time, but some will remain.

We know that we have other opportunities you know P&L and as I will describe in a moment. We also believe that we have potential to take up prices.

So we remain very confident you know a five year earnings algorithm that we discussed back in November .

Let me sum up our progress in 2021 has demonstrated by our results we made huge progress on Burlington to point in time.

We are much more flexible and nimble and we are much more off price than we were two years ago.

We still have huge opportunity ahead of us, but the progress that we showed in 2021 exceed any expectations that we had when we launched Burlington to point to just two years ago.

Okay.

Let's move on to 2022.

As we described in November 2022 is a very unpredictable yeah.

All retailers will be up against comps that were inflated by nonrecurring factors.

And to this huge uncertainties around COVID-19 economy inflation interest rates and freight and supply chain costs.

In a moment I will talk about how we are planning our business in the face of this uncertainty.

But firstly I would like to explain how this uncertainty fits within the broader strategic context that I described a moment ago.

Those investors, who have followed off price for a long time know that a volatile and uncertain environment has in the past tended to favor off price.

Uncertainty can be difficult for any retailer, but it is especially difficult for traditional re tenants.

They can't Chase the trend all pull back as effectively as we can.

It makes it difficult for these retailers to manage inventories and that's often generates supply opportunities for off price in.

2022 turns out to be a volatile yeah. This could further strengthen our business.

The biggest challenge for us in 2022 is that we are going to be up against industry, leading comp sales growth from last year.

In the first three quarters of 2021, we ran 18% comp growth.

This was four percentage points ahead of our off price peers.

In the first quarter of last year, we ran 20% comp growth that was seven to eight percentage points ahead of our off price peers.

It makes sense to be cautious going up against these extraordinary combs.

The other thing that is making us worry is that since early December there has been a slowdown in traffic to our stores.

Several analysts on this call who publish very helpful updates on traffic trends by retailer.

This data suggests.

There was a modest pickup in traffic and temporary versus January but the two year trend for most retailers is still well below December .

There could be many reasons for this one micron the timing of tax refunds winter weather disruptions the impacts of inflation or just seasonal transition of spring assortments.

It's difficult to calibrate to each of these factors of course traffic may pick up more significantly as some of these transitory issues recede.

In a situation of uncertainty like this our playbook is to plan conservatively and then be ready to chase and take advantage of opportunities.

In November we described that our initial buying and operating plans for 2022 are anchored on a mid single digit comp decline.

Since then the slowdown in traffic has made us more rather than less cautious.

Especially about the first half of the year.

We have rebalanced, our full year plan to recognize higher risk in the first half offset by more upside in the back half.

Overall, our full year baseline plan remain a mid single digit comp decline.

As we said in November you should not think of this as a predictions we do not have enough visibility for a reliable prediction rather please think of it as a baseline. So we can react to whatever happens.

As a reminder, our baseline at the start of 2021 was the flat comp.

We then chase 15 percentage points above this plan.

And John will share our margin estimates for this plan.

These estimates assume freight and supply chain costs remained elevated through mid year.

And then begin to abate.

You should note that these margin estimates do not yet been significant price increases. So let me talk for a moment about retail prices.

As a value retailer it makes sense for us to be cautious when it comes to raising prices.

That said there are several factors that give us confidence that we can raise retails.

The most important of these is that over the past year the value gap between us and other retailers has expanded.

We have room to raise prices, but still offer great value to shoppers.

We have already started to move up our prices and we will get more aggressive in the coming quarters.

Happens that could be upside to the margin estimates that John will provide.

But given the uncertain outlook, we want to see how the trend develops before we built this margin upside into our forecast.

I would like to move on now and talk about Q4.

During the quarter total sales grew 18% versus 2019 and comp store sales grew 6%.

Compared to the rest of 2021 these numbers represent a major <unk>.

A disappointing slowdown.

We ran 16% comp through November , but then the trend dropped off.

From the traffic monitors that we have in stores, we know that about half of this slowdown can be attributed to lower traffic and the other half to lowest spending CRO shelter.

We believe that the decline in traffic in December was driven by external factors.

Especially the surge in the Omagh corn variant and historically warm weather in December .

But as discussed earlier on a two year basis traffic levels have remained subdued over the past couple of months.

There could be multiple reasons for this.

Any of which are transitory.

But again this is another reason we are being cautious in Q1.

As I mentioned, a moment ago the slowdown in trend in Q4 was also driven by less spending per shopper.

Other words, they came to the stool, but they spent less.

This was driven by our own execution.

Let me explain.

As you know, we had shipping issues and delays throughout 2021.

We largely overcame these issues by placing orders earlier, thereby building a cushion to absorb expected delays.

This worked well yeah, even through November we were in very good shape, but then in the critical weeks, leading up to a holiday <unk> got much worse.

Holiday sensitive businesses like holiday decor gifts toys and food missed critical receipts.

When we placed the orders we had built in more time to absorb delays, but in retrospect. This additional time was not enough.

This is very disappointing.

We are confident that both of these issues, we could have achieved low double digit comp.

I know that's kind of token we'll get you on the subway, but they're all important lessons for us here and we're taking a number of actions to manage this process differently going forward.

Based on their results, we believe that our peers built more cushion into their timelines.

Now I would like to turn the call over to John to provide more details on the Q4 and full year financials, and our 2022 outlook.

Thanks, Michael and good morning, everyone.

I'll start with some additional financial details on Q4.

Total sales in the quarter grew 18% while comp sales increased 6%.

As Michael said, our comp growth was up 16% in November but then it started to drop off in December .

The gross margin rate was 39, 8%.

The decrease of 230 basis points versus 2019 fourth quarter rate of 42, 1%.

This was driven by a 260 basis point increase in freight expense, which more than offset a 30 basis point increase in merchandise margin driven by lower markdowns.

Product sourcing costs were 159 million versus $89 million in the fourth quarter of 2019.

Increasing 210 basis points as a percent 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 $578 million versus $499 million in 2019.

Decreasing 50 basis points as a percentage of sales.

A an expense point of view the timing of the slowdown in December could not have been worse.

Then we were staffed for holiday based on a low double digit comp.

Pulled back once we got through holiday, but.

Then we had incurred significant expense.

Adjusted EBIT margin was nine 2%.

410 basis points lower than the fourth quarter of 2019.

All of this resulted in diluted earnings per share.

$1 85 versus $3.08 in the fourth quarter of 2019.

Adjusted diluted earnings per share were $2 53.

Versus $3 21.

In the fourth quarter of 2019.

At the end of the quarter, our in store inventories were down about 30% on a comp store basis.

This was consistent with our strategy of finishing the year with much cleaner inventories.

Separately during the quarter, our buyers began to see a lot of great buying opportunities for reserve inventory.

We thought that this might happen and we were ready to take advantage of these great deals.

Reserved inventory grew 62% versus 2019, we.

We think that this will provide some great ammunition in 2022.

During the quarter, we opened eight net new stores, bringing our store count at the end of 2020 , one to 840 stores.

This included eight new store openings and no relocations or closures for.

For the full year, we opened 101, new stores, while relocating 17 and closing five adding 79 net new stores to our fleet.

I'd like to move on now and talk briefly about our full year 2021 results.

Total sales increased 28%.

Comp store sales, 15%.

We chased one 2 billion in sales above our original 2021 sales plan.

Our operating margin for the full year contracted by 60 basis points, but it's very important to understand the major puts and takes.

Merchant margin was over 150 basis points higher.

Our SG&A leverage was worth 160 basis points.

These items were more than offset by 170 basis points of deleverage on freight and 200 basis points of deleverage on product sourcing costs, mostly driven by supply chain costs.

Let me move now to 2022.

As discussed in November our baseline plan assumes a mid single digit comp decline for the year.

We have planned the first half more conservatively than the back half with.

With the first quarter plant most conservative we've all at a mid teens comp decline.

On the stack comp basis. This Q1 plan is more conservative than the full year.

But we think this is prudent.

Given all of the reasons, we described earlier.

Until we begin to lap the stimulus payments.

It makes sense to be cautious.

Again as we discussed in November we would expect a mid single digit comp decline for the full year to drive operating margin deleverage of about 150 basis points.

This estimate assumes that freight and supply chain expenses remain at elevated levels through the middle of the year and then begin to abate.

Can they assume no material increase in retail prices.

For Q1, we would expect a mid teens comp decline to drive operating margin deleverage of about 750 basis points versus the first quarter of 2021.

Given that we were up against 20% comp growth last year it might be more helpful to you as 2019, that's the comparison Europe for Q1.

On a stacked basis, our Q1 plan implies comp growth of 5% versus 2019.

And the operating margin deleverage of up to 400 basis points.

This margin deleverage versus Q1 2019 as COO.

Completely driven by higher freight and supply chain expenses.

I would now like to turn the call back to Michael.

Before we move to questions. Let me summarize some of the key points that we've covered this morning.

We have a strong belief that our industry will continue to be reshaped by a powerful consumer need for value.

This should drive further significant and market share gains for off price retail.

We are extremely bullish about our business.

We see a lot of uncertainty in the near term outlook.

Advantage that we have over traditional retailers.

We can react to whatever happens just as we did in 2021.

We are planning our business conservatively, but flexibly for 2022.

At this point I would like to turn the call over to the operator pure questions.

If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.

To withdraw your question press the pound key.

Our first question comes from Matthew Boss with Jpmorgan.

Great. Thanks.

So first Michael on your full year baseline comp plan could you provide any color on how you arrived at this plan, how youre thinking about possible risks and also potential upside drivers to the comp plan for this year.

Good morning, Matt Thanks for the question.

I think what al.

Between the full year plan.

And then separately I'll comment on the first quarter plan.

For the full year, our starting point was to look at.

The three year stacked comp.

I think most investors are familiar with this approach.

Historically, we've averaged about 3% comp growth per year.

So over a three year period, the stack comp would be 9% three plus three plus three.

To hit a three year stack comp of 9%. This year. It means that our 2022 comp would need to be minus six just mathematically.

In other words take the 15 comp we've just reported which was a two year stack had minus six 9%.

Now of course, we recognize that that's just the starting point just because I went through your attack has been 9% historically it doesn't mean it will be 9% this year.

There are several things that could cause that comps could deviate from history.

Factors that could make it higher than certain factors that could drive some upside for example.

Recovery in.

Traffic.

Accelerates as the pandemic recedes.

It's possible that higher wage rates will mean that sales actually remained quite resilient, even as we lap stimulus and then there's also the possibility that inflation may drive great and customers. So there.

That could drive and performance to be better there also taxes.

Cost of risk again, the impacts of inflation could go the other way and actually squeezed consumer spending.

Higher interest rates could cause an economic slowdown.

Our global supply chain constraints could continue it.

Difficult for us to weigh all of those factors, but based upon the data we believe that a 6% comp decline, which kind of gets you to that mid single digit yielding 9% Korea stack feels like a reasonable starting point I want to underscore that it's a starting point or baseline.

We intend to chase com.

So that's the full year, let me comment briefly on our Q1 plan of down mid teens.

Putting together our plan for Q1 was actually much more difficult complaining with full year.

The problem is that not only are we up against 20% comp from last year.

Almost all of that growth came in the second part of the quarter.

So for the first six weeks of Q1 last year, we ran 5% comp.

Then the stimulus checks were mailed out and for the remainder of the quarter, we ran 33% comp.

Faced with those numbers, we've planned our business conservatively, because we want to see what happens to the sales trend once we anniversary the stimulus and.

In mid March.

I don't know I can see that it may turn out that we plan to conservatively and if that's the case of course, we will make adjustments.

Great and then maybe to follow up Michael larger picture.

On it in your first remark there, but larger picture as we think about the consumer impact of price inflation across the economic backdrop, what impact do you think this could have on your business in terms of traffic and spending levels and in particular, how you think it may impact or have a potential negative impact on the low income shop.

Or.

Yes.

It's a question we've been thinking a lot about.

We believe that.

The higher inflation.

That we're seeing right now it could create a risk to our business, but also.

It could create a big opportunity.

Let's start with the risk.

Hard to articulate the risk.

In the coming months its possible that consumers, especially low income consumers as you referenced will be squeezed as we lap stimulus payments and at the same time.

General price inflation begins to bite, especially on the central items like food and gas.

I should point out that.

Michigan to that again.

Especially among low income consumers is the wage rates have also been going up.

So we don't really know how that would play out but we recognize that there is a risk.

Now as I mentioned, a moment ago, there's also a potential opportunity for us usually in times of economic stress.

When consumers are under pressure.

Natural and rational reaction is to focus even more heavily on finding great value.

Some higher inflation affects everybody.

As a as a value leader Burlington, we should be well positioned in that situation.

And we think we might benefit from a trade down customer.

My experience tells me that that is actually what has happened historically the record shows I think the record shows.

At off price retail has done very well in times of economic stress, but again, we don't know will that be a trade down customer when might this is Craig down happened. So we're being cautious and we will see what happens.

That's great color. Thanks, Thanks for all the detail best of luck.

Thanks, Matt.

Our next question comes from Ike <unk> with Wells Fargo.

Hey, Good morning, Michael John David I guess.

Question first for Michael and a follow up for John .

Michael in the past I think you've been fairly cautious even may be skeptical about rising retail prices.

Half price space, I guess, just bigger picture, what's changed and what gives you the confidence the Burlington can start to potentially take some AUR is up this year.

Well good morning. Thanks.

Thanks for the question.

Yeah.

Youre right.

In the past I have been very skeptical about price increases.

And I recognize that in the past couple of quarters.

The environment has really changed.

Yes, if I go back to last summer.

The view was that the main driver of higher prices at that point.

Was the sudden growth in consumer demand.

During a period of constrained supply so when demand exceeds supply you get higher prices.

But usually demand and supply move back into equilibrium over time and prices fall back.

But since then I think what's happened is we've seen.

It's a very rapid and I think somewhat unexpected increase in price inflation across the whole economy.

And it doesn't it doesn't look like it's going to end anytime soon and I think that that inflation is going to mean that some of the higher cost we've seen such as higher wage rates.

Are here to stay.

So retailers that's going to mean.

Not just a transitory increase in the cost base, but a permanent increase in their cost base and the only way to absorb those costs.

Retailers to keep prices elevated and raise prices further.

Given that all retailers face this issue.

It is likely to mean that there'll be higher retails across the whole industry.

Yes.

Moving onto what does this mean for us and actually the second part of your question well what gives us confidence that we can actually raised prices I think I would cite three main factors.

<unk> cutting our confidence number one.

Over the last few months, we've selectively tested higher retail prices and so far we have not seen any major issues.

As described earlier the slowdown in Q4 had multiple root causes.

Higher retails was certainly not one of them.

Reason, we're confident is that the value gap between us and most other retailers increased in 2021.

Our strategy is all about offering great value to the customer, but the value is relative.

As other retailers have raised prices, that's really created an umbrella for us to do the same but still offer great and importantly differentiated value to customers.

And then.

Third the finishing up the third.

We're confident is frankly, we listen to other retailers earnings calls as well.

Higher retail prices seem to be working for them.

We would never going to be a leader in raising prices, but we're certainly happy to follow when we see it working so as I said in my prepared remarks, we'd be at loop capital as we raise retails, especially in the first half of the year, but for the reasons. I've described we think we have plenty of room to take prices up but still off quite telling you to the.

Customer.

Got it thanks, Michael and then John just real quick I guess in November you guys shared a multiyear earnings I'll go just kind of curious how does the higher pricing and then of course higher freight and supply chain expenses affect the model that maybe you described a couple of months ago.

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

So let me just share.

We're thinking about that.

Compared to 2019 as you know our freight expenses de Levered by 170 basis points. This year.

We've talked a lot previously about the global and industry wide issues around freight so I'm not going to get into that again.

But we do think that over time these costs should improve.

We don't think Theyre going to return all the way back.

Back to kind of pre pandemic our historical rates.

So it's still kind of difficult to estimate where that's going to end up but we think that some of it may be 50 basis points.

<unk> leverage could become.

Permanent part of our expense base.

On the supply chain side again, we've been talking about that throughout the year.

Impaired to 2019, we had deleverage there of about 200 basis points.

Some of this was was higher wage rates, which we expect to be permanent.

But some of that deleverage.

Excuse me deleverage.

Driven by temporary incentives.

And inefficiencies.

That we don't expect to be be permanent again, it's really difficult to kind of forecast or estimate, but we will be disappointed if we don't recapture.

To 100 basis points of the overall supply chain deleverage.

I'd have to see how things evolve before we have confidence in where these numbers on landing, but if our numbers are right that would mean that these items would represent 150 to 200 basis points of deleverage our permanent permanent expense structure.

Now, obviously, we're not going to accept that.

Neither with any other retail.

We along with with all the other major retailers are going to look for ways to recapture this margin.

So one of the important levers and recapturing this margin is going to be our ability to pick up retail prices.

Nick will describe.

Little earlier.

Over the past year or other retailers that have raised the price umbrella and we believe that's going to provide the opportunity for us to take up our retail over time.

And still be able to offer great relative value to our customers.

So.

Mixing this all together I think there are some important puts and takes to our long term earnings model.

On the one hand, we expect some of the higher.

Great and supply chain expenses to become permanent.

On the other hand, we believe that we're going to be able to pick up retails and capture incremental margin.

So to wrap up and the terms in terms of our five year opportunity we see it the same way we saw it at the end of Q3, when we talked about 200 to 300 basis points of EBIT margin expansion and mid teens average annual earnings growth across the next five years.

And as far as.

2022.

We continue to expect.

Operating.

Margin expansion our expense.

Alberto if you will that modest expansion to begin around three comp so very similar to the way. We we spoke about it at the end of the third quarter.

Thank you.

Our next question comes from Lorraine Hutchinson with Bank of America.

Thank you good morning, I have a question about supply how does the buying environment right now it looks like your reserve inventory grow really significantly in the fourth quarter can you just talk a little bit more about this.

Sure well good morning Lorraine.

Actually I'm glad you asked about this a feel like.

Quite a bit of time on the call talking about how shipping delays.

In the fourth quarter.

The flipside of that is that silver lining if you'd like.

Are you shipping issues happened across the retail industry.

And they've created.

Really strong buying environment for off price.

And we had we had hoped we have predicted that that might happen.

Over the past couple of months, our buyers have been able to take advantage of some really terrific buying opportunities and these opportunities are covered full merchandise that we will pack away until later this year and even late arriving spring merchandise.

Actually a good a good slice of the increase that happened towards year end was actually screen merchandise.

Flow to stores over the next few months.

We feel very excited about the value and the content Colbert is inventory now we're always very careful about what we allow into a reserved inventories are strict controls and strict criteria on what we are prepared to store away and reserve inventory, but we feel we feel really good about what we have in terms of value and content.

No I think it's pretty important to point out that inventory is going to be important.

If as we hope.

We will chase a stronger trend in 2022.

Leaving aside the reserve inventory, we've also been seeing a lot of good deals for in season merchandise that we can close stores right away.

The assessment is that coming out of 2021, many retailers and vendors.

Feel quite bullish about the outlook.

They turn out to be right and I hope they all.

But if they're not if the trend is not as strong as they plan and this is likely to generate a lot of very strong off price decline and again, we can use that to fuel any ahead of planned sales.

Thank you John .

It's been a year since you've increased your new store target and we heard today that youre continuing to accelerate the store opening cadence how is the program going how are these new stores performing and then how should we think about the impact of this performance.

The future outlook.

Good morning, Thanks for the question really appreciate it this one.

No.

Let me start just by reviewing kind of what's happened since we did announce our 2000 store target on last year's fourth quarter call.

Yes, we have walked through earlier, we finished 2021 with 840 stores. After opening 100 when these stores relocating 17 in closing five so we added 79 net new stores to the fleet of those new stores 48 of those were in the 30000 square foot or smaller.

New small store prototypes.

So it's still early but.

But overall, we've been very pleased with the performance of these.

These stores of all of our new stores, but especially the small format stores.

Today, we announced that we plan to open 120, new stores, adding 90 net new stores to our fleet during 2022.

We expect about 80 of those stores that we open will be in the 30000 square foot.

Our smaller format.

So as we've said previously.

You should expect that longer term over the next five years, 75% of the stores that we open will be in the small format.

So as we continue to add more of the small store prototypes of the fleet.

There are a few things that we're going to expect to see.

We're going to see our sales funds.

As we open these stores start at about 70% to 80% of the chain average as they open.

But we would expect comp store sales growth is going to be faster than the rest of the chain.

For several years after opening.

We would think consider operating margins.

Require operating margins for all of our new stores to be accretive to the company's operating margin in year two.

And then we would expect these stores to grow faster than the rest of the fleet over the next several years.

From an operating margin rate perspective.

We expect much higher sales productivity than our larger boxes.

These stores are.

They are in.

In excess of 300.

$300 a foot on the growth side at $400, a foot selling square feet.

And theyre going to have lower occupancy and lower operating expenses.

This more efficient operating model should translate to stronger full operating margins.

And access to better more extensive retail locations that should also drive strong sales.

Just another point to remember.

We're different from a lot of other retailers in that.

<unk> of our stores across our fleet varies tremendously.

We have so many huge older boxes.

We have way more space than we need as we reduce the inventory over the years so for us the big productivity gains that come with the smaller boxes and that's just going to help with.

Adding stores to new markets, but throughout.

There's also going to be a big relocation opportunity for us as we relocate.

Existing stores to smaller boxes.

Smaller boxes that are easier to operate more efficient to operate and are in stronger retail nodes. So a lot of these boxes are older oversized.

In need of some refreshing.

We've actually seen as we've been doing renewables that we usually see a pretty healthy sales lift along with improved.

Improved four wall profitability.

Finally over the next five years, we would expect to open well over 600 gross new stores, including about 150 relocations of older.

Less productive locations. So I think you can see that on a base of 840 stores over time. This is really going to be transformative to our chain.

Thank you.

Our next question comes from John Kernan with Cowen.

Good morning, everyone.

Thanks for taking our questions here.

I have a couple of questions for John .

<unk>.

How are you feeling about wage rates in stores given the levels of inflation, we're seeing the competition for labor and.

And how should we think about the level of wage growth for stores and Dcs, you're baking into the 2022 outlook.

I have a quick follow up.

Alright, okay. Thanks, Jim.

So.

Well I guess, let me start you've probably heard us talk about this.

Before we manage our labor cost plus closely by monitoring the local markets, where we operate stores in the same thing applies to our distribution centers.

As each competitive market changes, we've responded by making adjustments to be sure that we're competitive and we're able to properly staff our operations.

Last year as we discussed.

During the year, the DC labor market became ultra competitive in the second half of the year.

And so we responded with a combination of permanent wage increases and temporary incentives that allowed us to maintain our desired staffing levels at our distribution centers.

We also saw increased wage pressures in our stores, particularly during the fourth quarter.

So we responded similarly with a combination of permanent increases and temporary incentives. So as of the end of the year. We think we've kept up with the wage escalation that took place last year and of course, we're going to incur the full year impact of bonus adjustments this year.

But we've included that in our plans for the year.

And we've assumed that wage pressures are going to continue to accelerate in 2022.

Our planning assumptions and in the outlook that we shared.

Well, we think we've used reasonable assumptions, there's always some risk that we just relation may happen faster than we've anticipated.

Yes, it's certainly a volatile environment.

We've got what we think are reasonable assumptions, but we don't know what's going to happen.

But yes it is.

It is more pressure than we planned for.

Couple of things might be in our favor we'd likely see some sales benefits as many of our customers would have more income available wages are going up higher than we expect.

And it probably means that inflation is continuing.

Which could indicate.

A larger opportunity for us to raise retails to cover those additional costs.

Got it a lot of moving pieces there.

Pause for John or David.

Capex plan you shared for FY 'twenty two it's at 700.

And $25 million, it's roughly double FY 'twenty, one can you walk us through the step up is this 7% or so level of sales what we should model going forward.

Thank you.

Thanks, John I'll take that one this is David Yeah, I understand how that can look like a big step up so let me let me kind of walk you through what's happening. So we did spend about $318 million in 2021 at our plant at the original original plan at the beginning of the year was $470 million obviously it came in lower.

Some of that spend that was originally planned for 2021 has moved into 2022 why is caused by delays related to the disruption in the global supply chain. So it wasn't totally unexpected.

In fact, some of the shift towards for materials that we planned in order early anticipating that they might be delayed but it allowed us comfortable we could receive that well before they're needed.

So if you look at 2022 without those timing shifts we would've expected capex spent about $600 million and that is a step up from our original plan in 2021, So what is that driven by.

We're opening a 120 stores versus 101, so increased investment in our new store development process, we are adding supply chain capacity and processing capability to support our accelerated growth remember, 28% sales increase versus 2019, so we need to keep pace with our.

Hi chain and there are several other.

Initiatives that we believe will help drive productivity and efficiency across our business. So I think the way to think about it going forward.

Ralph.

600 million is it good.

Okay.

To be using us model going forward hopefully.

Very helpful. Thank you guys.

Yeah.

Our next question comes from Kimberly Greenberger with Morgan Stanley .

Great. Thank you and good morning.

I wanted to start with.

Just circling back to some of the points you made when you were answering <unk> question.

Can you just remind us of all of the levers that you've got at your disposal to adjust.

<unk> current sales trends and your stores, both as we work our way through the first quarter and the full year 2022.

Comment on the degree of use the ability of your reserve inventory to feed your spring business.

Any other levers that you've got at your disposal to chase.

Upside in sales trends should the opportunity arise.

Then the levers that you use as well to manage the risk on the downside if trends proved more challenging thank you.

Yes, good morning, Kimberly Thanks for the question.

I think actually I think you noticed that.

I think that question kind of goes to the essence of Burlington to point to.

We're not.

We're not the biggest retailer.

We're not the most sophisticated retailer, but we have to be the most flexible retailers.

And to point out is all about and the way we achieve that flexibility is to plan our business conservatively, but then be ready to chase and make sure that we have levers that have disposed them to chase.

I feel like over the last two years the whole company has been focused on that concept Burlington, two point and two planning conservatively and chasing.

And if.

If I think about merchandising in particular.

Merchant stopped with the conservative buying plan.

And then we chase based upon the.

The strength of the trend and in terms of individual levers.

Reserved inventory has certainly become important to us because you can see how that gives you ammunition to chase, but we also we control our liquidity now a lot more.

We're a lot more tightly than we used to and that means that the buyers have an open to buy they can go into the market buy in season merchandise and again chase now in terms of levers to pull back. The conservative plan itself is intended to accomplish that so so by planning conservatively if the trend doesn't materialize. That's okay. We plan conservatively.

That's the idea now I should say that last year I feel very good about how we demonstrated our ability to chase.

The thing that makes us a little cautious this year and the thing that makes us cautious about Q1 is that we recognize there are limits to this whole chase planning conservatively and then chasing work for us last year.

Well when the trend is developing and you can kind of add to the plan and chase. It in Q1, what we're up against is a single event that happened in the middle of the quarter last year.

Comp went from plus 5% to 33%.

And we don't we're planning as best we can against that event, but our plan is wrong if that plan is too conservative.

Yes.

Maybe difficult to chase as fast as we need it may take us a few weeks. So I want to recognize that there are limits now going back to the last part of your question about reserve usability of reserve actually the great thing about what we put away in reserve is that a lot of the growth that happened in our reserve inventory in Q4 was in spring merchandise and there was also some growth.

And the full coated merchandise, which will bring up later this year, but there's a lot in that that we can use in the spring.

So that does give us some ammunition some additional flexibility.

Great. Thank you so much and John I, just wanted to circle back on your on your response on the store productivity.

Those new smaller stores are hitting north of $300 in sales per square foot sales per gross square foot, which is really impressive, particularly in light of the.

The legacy fleet and where they are on productivity.

I missed the way you characterized the sort of incremental margins or the new store margins.

Those locations as they are hitting that level or this is.

Accretive to overall company operating margins such that the growth of those smaller format stores has the effect of actually raising burlington's operating margin over time. Thanks.

Yes. Thanks.

It's a good question because theres actually.

Two different benefits that we can get from the stores.

The smaller format stores and the waiting can be a little bit different.

Depending on the stores so.

So first of all any of the stores that we opened smaller format.

The other stores.

Yes.

One of our financial hurdles is for them to be accretive to the company's EBIT.

That year, two which is the base year of underwriting and then for <unk>.

All of these stores, but particularly for the smaller stores.

We expect kind of a sales maturation process and operating margin optimization process.

That drives improvement greater than the rest of the fleet for the first few years, let's say.

And so we kind of get a combination of benefits.

Either it's going to be a higher EBIT margin than we would have expected.

<unk> of the operating efficiency of the smaller store or in some cases, the operating margin may be similar to some of these some of our other stores as we open them.

But we will have had access to.

A stronger retail node and are going to be.

In a position that we're very excited about the sales opportunity in the store. So it's kind of a blend of those things both benefits.

From these smaller format stores.

Very clear thank you so much.

No.

Our last question comes from Roxanne Meyer with <unk> partners.

Oh, great. Thank you good morning my.

My question is around home prior to the pandemic you had ambitions to grow that home business and clearly the pandemic has hurt the potential for home given the supply chain delays that disproportionately impact yet.

Just wondering if you could give us an update on how you've been able to expand category breadth.

How you think about growth this year, maybe particularly in the first half given supply chain constraints and just how youre thinking about the trajectory of the home business longer term.

Sure Roxanne I'll take that.

Yes home.

Really important business for us.

And a huge strategic opportunity for us.

It's interesting if I if I look at Q4.

By far.

Biggest slowdown in Q4.

In terms of business was home it fell off significantly in Q4 and that is directly attributable to the shipping issues and delays that we discussed earlier.

But if I step back from Q4 and talk about the full year, even with the slowdown in Q4, our comps across our home business was well over 30%.

Compares with the chain up 15% and our home merchants and planners did an outstanding job last year.

And yes, we had shipping issues all year. It's just we ended up with this with its crunch in the pool.

To answer your question about.

How is the penetration of home grown since 2019 in 2019, our home business home businesses were about 17% of our total sales in 2021 and again. This includes the slowdown in the fourth quarter, but in 2020 , one our home business was 20%.

All of our overall sales so pretty decent increase in penetration in that period of time.

And obviously, if we hadn't had the shipping issues in Q4, it would have been higher than that so a lot of progress.

And in terms of this year and the coming years again, we still we still think we have a huge amount of opportunity now that opportunity, we're going off grid, yes by expanding category by deepening vendor relationships, but more than anything else.

Coming off rent by strengthening the talent that we have especially in our merchandising group and when I look at it.

Talent, we were able to hire and promote last year I think we've made really great progress.

Great. Thanks for all the color and best of luck this year.

Thanks Roxanne.

That concludes today's question and answer session I would like to turn the call back to Michael O'sullivan for closing remarks.

Before we hang up I would like to take this opportunity to thank everyone at Burlington.

Their hard work throughout 2021.

As a token of this appreciation and toward the second year running.

We've avoided a special thank you bonus to the majority of our store supply chain and corporate associates in recognition of their hard work and commitment.

In 2021.

Close by thanking everyone on this call for your interest in Burlington stores.

We look forward to talking to you again in late May to discuss our first quarter results. Thank you for your time today.

This concludes today's conference call. Thank you for participating.

Now disconnect.

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