Q1 2022 Burlington Stores Inc Earnings Call

Ladies and gentlemen, please stand by your call will begin momentarily once again, ladies and gentlemen, please stay on the line.

Okay.

[music].

Okay.

Ladies and gentlemen, thank you for standing by and walked through the Burlington stores fiscal first quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session. When you need to press star one on your telephone if you require any further assistance. Please press star Zero I would now like to turn the call over to your host David Glick Senior.

Vice President of Investor Relations and Treasurer.

Thank you operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2022 first quarter operating results. Our presenters today are Michael O'sullivan our.

Chief Executive Officer, and John Crimmins, Chief Financial Officer.

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

A replay of the call will be available until June 2022.

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 2021 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 now Here's Michael.

Thank you David.

Good morning, everyone and thank you for joining us.

I would like to cover three topics this morning.

Firstly I will review our first quarter results.

Secondly, I will discuss our outlook for Q2 and for the balance of the year.

Sadly.

I will offer a few comments on the external retail environment and I'll explain while this environment may create near term headwinds for us we believe that it could drive longer term strategic benefits for our business.

After that I will hand, the call over to John to walk.

Through the financial details and then we will be happy to respond to your questions.

Okay, let's talk about our results.

Comparable store sales for the first quarter decreased 18%.

In Q1 of last year, we achieved 20% comp store sales growth.

We had estimated at the time.

Federal stimulus checks Griffin 10 to 15 points of this growth.

As we developed our plan for Q1, we knew we were up again this headwind.

So we planned the quarter at a mid teens comp decline.

We view this as a baseline that we would be able to beat.

In fact, we missed this plan.

As I will explain this was largely self inflicted.

The root cause of the sales Miss was that in store inventory levels were too low and unbalanced in February and March.

We had deliberately planned inventories down in Q1, but this backfired on us as we faced late deliveries and receipt Chen early in the quarter.

Let me explain.

Blaine, what we were trying to do.

In the past 12 to 18 months, we have reduced inventory levels significantly.

Providing greater flexibility and driving faster turns more freshness and lower markdowns.

We believe that we still have room to turn faster. So we reduced inventory levels further in Q1.

We were also mindful of the fact that during the quarter, we will be lapping the federal stimulus checks. So we felt that these lower inventory levels would provide additional flexibility.

As I say that's completely back fine.

In February we experienced significant receipt delays.

This created big gaps in our assortment, especially in our fastest trending businesses.

And these assortment gaps critically impacted our sales trend.

In March we moved quickly to take up receipt and inventory levels by early April our in store inventories were back up and in line with last year.

Since then our comp trend has improved.

During this call when describing our comp trend I'm going to use a three year geometric comp stack.

This is just like a simple three year comp stack, but it accounts for the compounding effect of growth from year to year.

Given our very large comp numbers last year, we believe that this geometric stack provides a more meaningful indicator of our multiyear trend.

This metric is described in more detail in today's press release.

In February our three year geometric stack with minus 6%.

In March it was minus 2% and in April it was plus 5%.

For Q1, as a whole our three get geometric stack with minus 1%.

Again, we are very unhappy with this result, and we recognize that it was largely self inflicted.

Our trend in April suggests that if our inventory had been appropriate since the start of the quarter.

Our comp performance could have been six points higher in Q1.

One other point on the inventory issue and then I'll move on.

We have raised our inventory plans for the rest of the year. So is that in store inventories will be in line to slightly higher than last year.

We still believe that we have room to increase tons, but we will not go after this opportunity until global shipping issues and delays normalized.

To be clear inventory levels for the rest of this year are now planned to be in line to slightly above 2021, but this means they will still be well below historic levels.

I'm going to move on now to talk about Q2, and the outlook for the rest of the year.

As I mentioned, a moment ago, our three year geometric stack in April was plus 5%.

Our may month to date trend has been consistent with April .

That said, we think it is prudent to plan Q2, more cautiously and this trailing two months trend.

So we are planning Q2 based on a three year geometric stack in the low single digits.

This implies a one year comp decline of minus 15 to minus <unk> 13.

This range compares with 19% comp growth in Q2 of 2021.

There are two reasons why we are being cautious in planning Q2.

Firstly, we all concerned about the economic environment, and especially about the impact of inflation on retail spending.

Lower income customers are under significant economic stress and it is not clear that this will change in the next few months.

The second reason for caution is that it seems to us as if many retailers are over inventoried and overboard.

We think that this could lead to a very promotional environment later in the quarter.

This kind of environment tends to hurt our business.

Let me move on to our guidance for the full year.

Our updated guidance for the full year is based on a three year geometric stack of 5% to 8%.

This implies a one year comp decline of minus nine to minus 6%.

This is up against a full year comp growth in 2021, 15%.

Our updated full year guidance does assume an uptick in the trend as we get into fall.

While we remain concerned about the external environment. There are a couple of factors that we think could provide a tailwind for us in the back half of the year.

Firstly, there's been a sea change in the availability of off price merchandise.

We do not know if this has been driven by overproduction my vendors a decline in the sales trend at other retailers.

Sudden catch up of supply or all of the above.

But whatever the reason the buying environment now is better than it has been for years.

Our buyers are seeing great deals.

We have taken this opportunity to bill our reserve inventory.

At the end of Q1, our reserve with double the level of last year.

If this buying environment persists, and we would expect our assortments to be more compelling with even stronger values.

We know that in an environment, where the customer really needs a deal a more compelling value driven assortment can drive an improved sales trends.

We expect that the buys we are making now could begin to have an impact.

Summer.

The second factor that could cause our sales trend to be higher is this shop is begin to trade down looking for value.

Clearly there was a lot of focus and concern about the lower income customer right now.

Based on recent results it feels like the retail industry is bifurcated.

Those retailers.

The lower income customers are experiencing a weaker sales trends.

While retailers setting higher income shelters are seen stronger sales growth.

But we think it is unlikely that the impact of inflation and a possible broader economic slowdown this year will be confined only to lower income shoppers.

We anticipate that high inflation.

Interest rates are falling stock market and a possible economic slowdown will at some point affect other income groups as well.

Yes.

And we would expect to see a trade down customer in our stores and that could drive stronger sales trend grab business in the back half of 2022.

Let me recap.

Our guidance for Q2 is based on a three year geometric stack in the low single digits.

And our updated guidance for the full year is based on a three year geometric stack of 5% to 8%.

This guidance feels appropriate given the risks and uncertainties.

As a reminder, our inventory levels are in line with last year, and we have a very strong reserve position. So if the trend turns out to be stronger and we should be well positioned to chase it.

In a moment John will provide more financial details on our Q2 and rest of year guidance.

Before we go there I would like to provide some high level commentary on what we think might happen in the retail and the screen through the rest of this year.

As I described a moment ago, we believe that the economic environment is likely to worsen this year and that this could further undermine the trend across the retail industry.

We anticipate that if that happens it is likely to create headaches and challenges for us in the short term, but we believe that this slowdown could provide longer term benefits for our business.

Many investors will remember that last summer, we began to call. It out that 2022 could be a very difficult and turbulent year across the retail industry.

At the time, we characterized the strong trend across retail.

I'm thinking of a sugar high.

Driven by a combination of government support programs and pent up demand as the consumer emerge from the pandemic.

This sugar high chrome highest sales and for some retailers higher margins than they would otherwise have been able to achieve.

This sales trend was always going to be difficult to anniversary.

What we did not anticipate last summer, we said there would be other factors that would further undermine retail spending.

Pacifically the impact of inflation on lower income shoppers and potentially fallout from a broader economic slowdown.

The important point to make is that difficult and turbulent times in retail.

We're almost always in the long run good for off price.

Historically this has been the cycle.

Make no mistake, a slowdown in retail spending makes life difficult for us in the short term.

We are certainly feeling that.

But as an off price retailer, we can adapt to the new trend.

We can benefit from the loosening of supply.

And in the coming quarters, we may be able to drive our sales trends by appealing to the trade down customer.

In addition, we believe that difficult and turbulent times in retail sooner or later will drive further rationalization of full price bricks and mortar stores.

We do not know if or when this might happen, but if it does then it could represent a very important strategic tailwind to the off price retail channel.

Now I would like to turn the call over to John who will share more details on our first quarter financial performance as well as our outlook for fiscal 2022 John .

Thanks, Michael and good morning, everyone.

I'll start with some additional financial details on Q1.

Total sales in the quarter were down 12%, while comp sales were down 18%.

Our three year geometric comp stat was minus 1%.

The gross margin rate was 41.0% a decrease of 230 basis points.

<unk> 2021 first quarter rate of 43.3%.

This was driven by a 150 basis point increase in freight expense combined with an 80 basis point decrease in merchandise margin.

Product sourcing costs were $157 million versus $141 million in the first quarter of 2021, increasing 180 basis points as a percentage of sales.

Higher supply chain costs represented about two thirds of the deleverage.

The drivers of these higher costs were driven primarily by higher supply chain wages.

Adjusted SG&A was $513 million versus $518 million in 2021 increase.

Increasing 300 basis points as a percentage of sales.

Adjusted EBIT margin was three 1%.

780 basis points lower than the first quarter of 2021.

Our plan for Q1 had been for <unk>.

<unk>, a 750 basis points decline.

The shortfall relative to our plans was driven by lower than expected comp store sales.

Put into the context of our Q1 2019 EBIT margin.

First quarter EBIT margin declined by 410 basis points versus that time period.

Written by 530 basis points of combined freight and supply chain deleverage. So merchandise margins for the first quarter, we're still 260 basis points higher than the first quarter of 2019.

Reflecting the progress we've made in terms of inventory reduction and faster inventory turns.

All of this resulted in diluted earnings per share of 24.

<unk> was $2 51 in the.

The first quarter of 2021.

Adjusted diluted earnings per share were <unk> 54 versus $2 59 in the first quarter of 2021.

At the end of the quarter, our in store inventories increased by approximately 2% on a comp store basis.

Selecting the aggressive actions taken by our merchandising team to rebuild our comp store inventories.

Our merchant team was able to take advantage of a great off price buying environment to build our reserve inventory.

At the end of Q1 reserve represented 50% of our inventory versus 35% last year.

In dollar terms this is almost double last year's levels.

We are very pleased with the great guidance that we've put away in reserve.

During the quarter, we opened 26 net new stores, bringing our store count at the end.

Of the first quarter to 866 stores.

This included 33, new store openings and seven relocations or closures.

Now I will turn to our outlook for the full fiscal year 2022 and for the second quarter.

As Michael mentioned in his comments the macro conditions affecting all of retail makes it very difficult to plan and forecast sales.

Because of these conditions the range from the outlook. We are sharing today is wider than it would be under different circumstances.

We are updating our full year comp sales outlook to a decline of minus 9% to minus 6%, which as Michael explained is based on a three year geometric stack of plus 5% to plus 8%.

Based on this updated comp outlook, we now expect our EBIT margin to decline by 200 basis points on the low end of this comp range and by 130 basis points at the high end.

This sales and margin outlook translates to EPS of about $6 at the low end of this range at about $7 at the high end.

In Q2, we expect a comp decline of minus 15% to minus 13% compared to last year's Q2 comp of 19%.

As Michael mentioned earlier this is based on a low single digit three year geometric staff.

This would result in operating margin deleverage of 670 basis points to 610 basis points versus Q2 of 2021.

This margin deleverage versus Q2, 2021 is driven by higher freight expenses and supply chain expenses as well as SG&A deleverage on the comp store sales decline.

This translates to EPS guidance for Q2 of 18 to 31.

For the back half of fiscal 'twenty, two this outlook anticipates comp store sales of minus 2% to plus 3% with an expectation that Q4 comp sales will be stronger than Q3.

I will now turn the call back to Michael.

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

Coming into Q1, we anticipated a difficult sales trends as we lapped the impact of the stimulus payments from last year.

We planned accordingly, but we missed this plan because our inventory levels were low and unbalanced early in the quarter.

This issue was largely self inflicted.

Once we got our inventories in shape in early April our trends improved significantly.

That said as <unk>.

<unk> crank remains weak and we're concerned about economic headwinds.

We are planning Q2 based on a three year geometric stack in the low single digits.

And we have updated the full year based on a three year geometric stack of 5% to 8%.

We anticipate that 2022 could be a disruptive and turbulent year across retail.

If this happens then it would create challenges for us in the short term.

But our assessment is that in the past disruptive and turbulent times in retail have almost always in the long run been good to the off price channel.

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

Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key our first question comes from Matthew boss with Jpmorgan.

Great. Thanks.

Michael maybe to start larger picture clearly the environment has completely changed versus a year ago.

What do you think this means for the Burlington to point out a strategy and also for the longer term opportunities in your business.

Well good morning, Matt Thanks for the question.

I think that my answer.

He is going to sound, a little counterintuitive and I recognized.

Given our disappointing Q1 results I need to offer this answer with a with a huge dose of humility.

We think that the external conditions that we're seeing now and that we're likely to see in the upcoming quarters.

It presents a major opportunity for our business.

The last year.

There were several investors who asked me.

To describe what's what would an ideal environment look look like prop business in 2022, and you should file this on the be careful what you wish for because my response was that the best scenario for us would be number one a dramatic slowdown in the sales trend across retail leading.

Two significant expansion of off price supply with really great buying opportunities.

I'd also leading to downward pressure on expenses, especially freight rates.

And then secondly, a much sharper consumer focus on merchandise value.

We don't compete in this scenario yet, but there are signs that that could be where we're headed I think you can see you.

You can see aspects of this scenario and what's going on right now.

And if the full economy starts to slow down in the coming months.

This could lead we think to up to a further weakening in the sales trend across retail.

A further increase in supply downward pressure on expenses and a heightened focus on value.

Last year at the time I was describing that scenario I can feed it.

That those conditions would also makes life difficult for us for a period of time, but we're not immune to economic difficulties.

But we know that we can adapt and we know we can take advantage of these circumstances.

Way that other retail models cannot.

Everything we've been doing on buildings and two point, though is aimed at improving our ability to offer great value to our customers.

And making it more flexible so we can react to changes in trend will supply.

So again and again I say this with some humility given given our Q1 results, but we believe.

That the current conditions in the upcoming quarters could present, a big opportunity for us.

Okay. That's great color and then just to follow up on inventory supply as it sounds like this is another situation that is also drastically changed could you just elaborate on the buying environment today, what categories and types of merchandise are you seeing what do you think is driving this increase in <unk>.

Fly and do you think it will last.

Yes, so good question.

Yes, as I said in the prepared remarks.

There has been a.

Complete sea change in terms of merchandise availability.

We're seeing availability now in categories.

Where supply has really been constrained for a long time.

We're seeing brands that we haven't seen.

Couple of years.

This increase in supply has been pretty broad based seasonal basics apparel home accessories.

We've been able to make some some great deals now would you buy a large amounts of merchandise in a short period. It can't all flow to stores at once so so many of those deals have gone into reserve.

And we'll release those over the next over the next few months.

On the part of your question about what's driven the increase in supply.

I suspect it's a number of things I think I think that many retailers and vendors over awarded and overproduced versus what and now seeing in the sales trends.

Also I think that retailers and vendors probably built in a cushion to their orders to account for shipping delays and those shipping delays have now eased so they have too much merchandise and finally.

The mix of merchandise that the consumer is buying has has really shifted and I think that's taken some vendors by surprise. So so there were some categories, where there was not what I would call a glut of supply.

I think the final part of your question was will it last and we don't know if the if the economy weakens then we could see even more merchandise sustainability.

The other complicating factor, though is the COVID-19 situation in China, It's hard to know what impact the recent shutdowns that could it could have.

They could create shortages later in the year, that's possible, but on the other hand extended overcompensate then they could add to merchandise availability, we'll have to see.

That's great color best of luck.

Thanks, Matt.

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

Hey.

Yeah.

Michael I'm curious, how you're thinking about.

<unk> within your own business, I think compared with some of the other retailers you've been a little bit more cautious on taking up your retails I guess in light of the.

The much weaker sales trends that youre seeing right now how are you thinking about.

<unk> for you.

Yourself and your peers.

Yes, good morning, Ike Thanks for the question.

As you say, we've been quite wary about taking out <unk>.

<unk> prices.

Our view has been that well.

Our view was the retail prices rose across across the industry last year, mainly because <unk>.

Consumer demand exceeded supply.

And our concern was always.

What happens when that reverses.

That's kind of what's happening now the supply of merchandise and most of the categories. We compete in.

As now outgrown demand.

So sooner or later, we would expect that that will pressure retail prices.

And in the in the earlier comments, we made the point that at the end of Q2. So at the end of the spring season, we think that the retail environment could get a lot more promotional as we can.

That is trying to clear spring merchandise.

But with that said, we also recognize that the underlying costs of product on now.

Minutely higher some of those higher rates and.

In supply chain costs.

Wei.

And for us that means that retails, even even promoted prices even promoted retail prices.

We're unlikely to ever go back to their 2019 levels. So we think that means that there is now a permanently higher price umbrella.

And that's why we see some potential to hedge up our own prices even in this environment now.

And we've developed.

On the last call. We explained that we have developed a plan to raise retails really in the back half of 2022.

And that plan is very carefully focused on businesses, where we believe we have where we have that opportunity.

We recognized in this environment are all risks.

So we're going to be capital and we're going to make adjustments to the plan as we go alone.

There is just one other point that I think.

Sure.

Worth making.

Actually I think we should.

Probably a good idea to change the vocabulary on this topic.

Our primary motivation here is not to take up retail prices.

Our primary motivation and incentives to take up merchant margins.

If we can increase merchant margins and that will offset higher freight and supply chain expenses.

Raising retail prices is just one way the most obvious way to drive up merchant margin.

So there are two other important levers that our merchants are focused on right now.

Firstly as.

As off price supply off price merchandise supply has opened up we started to see better deals in.

In other words, we're paying less goods.

In some situations, we will plan to pass on some of that value to consumers, but in other situations. We may use it to capture margin.

Secondly.

We're making changes to the merchandise mix.

Largely based on what the customer telling us the customers is shifting in terms of the <unk>.

Type of merchandise that they are interested in buying and many of those changes will also naturally drive the highest margin.

So let me wrap up.

Yes, we believe there is an opportunity we still believe there's an opportunity to raise retails, but we're going to be careful and we're going to make sure.

Whatever we do we still have a really differentiated values versus other retailers.

At the same time, we're going to aggressively go after other opportunities to drive up higher.

Client merchant margin.

Got it Super helpful. And then maybe just one follow up for John just looking at the model.

Can you just walk us through the assumptions that are embedded in the updated.

<unk> full year guidance that you've given I think you originally assumed that free and supply chain expenses could moderate in the back half of the year is that still the assumption we should use them.

The other assumptions that you can call out would be great.

Yes, well first of all good morning, Ike Thanks for the question.

So I'll try and explain how we're thinking about the full year guide so.

So first obviously, we're taking a little more cautious approach.

We've certainly seen a slowdown in discretionary spending with some of our core customers.

Let me explain our comp store sales plan I think it's pretty simple our trend over the last two months has averaged a mid single digit three year G O comp.

And as Michael was describing earlier, we think the sea change in product availability.

The potential for trade down.

Some of the execution issues that we had in Q1 that are behind us and lapping some of the execution issues. We had in the second half of last year creates a little bit of a tailwind for us going into the second half of the year and that gives us reason to expect an uptick.

Compared to our first half.

Our full year guide of a minus nine to minus six comp is based on a three year Geo stack of 5% to 8%.

Now also remember we have easier comp sales and margin comparison in the second half of the year.

This coupled with the dramatically improved firing buying environment.

And the potential for some pricing adjustments.

We've worked in.

It should help US show a strong comp improvement on a one year basis during the year and operating margin improvement, especially in the fourth quarter.

On the cost side as you know our biggest drivers of de leverage should that Britain supply chain been talking about that for a while.

And we've been talking about a couple of different scenarios that could develop in the second half of the year.

The first was the supply chain and freight costs would begin to moderate in the second half as the supply demand imbalance kind of worked its way back to a more natural or normal balance.

Haven't really seen any dramatic improvement in that direction yet.

We'll expect it will happen over time, but we're not assuming much improvement in the second half of the year. Our second scenario assumes modest rate supply chain costs didn't begin to improve that this would be part of a broader inflationary environment and obviously that's happened probably faster.

More dramatically than most people were expecting a few months ago.

We've previously said that in an inflationary environment, we'd be confident in our ability to raise prices, while maintaining our value proposition.

We still think this is true, but we are doing this very carefully.

Aware of the degree to which today's inflation has affected the buying power, especially for.

Our lowest lower income customers.

But as Michael just said there is another way that we're able to offset cost headwinds that doesn't rely on taking up retail prices, but does raise merch margins.

Yes, and that's the fantastic buying opportunities that are out there now where we can get some really terrific deals we plan to pass some of this on to consumers, but we also plan to use some of it to drive margin.

So to sum it up besides the change in the sales range. We gave in today's outlook. There were two other changes to our full year outlook.

We now see the supply chain and freight costs deleverage.

A little higher than last year, we had been assuming a small improvement.

And we've also increased our planned merchant margin for the full year building in some upside for.

Realization of some pricing and the other market opportunities. So the net result of course the.

Change is a little better flow through than what we had called out in our previous outlook.

When we said that we would expect an operating margin deleverage of 150 basis points at a mid single digit comp decline today, we're saying 130 basis points of deleverage at the high end of our full year comp range, which is the minus six.

Great. Thanks, guys Bye bye.

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

Thanks. Good morning, Michael My question is about the inventory issue that you had in the first quarter I'm. Just curious if there is any additional context on why you planned inventories the way you did and what went wrong.

Then also just curious if the shipping delays that you saw in February have gotten any better.

Yes.

Well good morning, Lorraine and good to hear from you.

Yes, as I said.

Actually as I said, it had remarks, where we're very disappointed about Q1.

We know we should have done better.

And we recognized that we were the architects of our own downfall in the quarter.

But with that said, let me let me offer a more full bodied explanation of what happened and what we would do.

I think the best starting point is that we believe rightly because it turns out that.

2022 would be a difficult and unpredictable year in retail.

And as you've heard us say in the past our strategy for dealing with uncertainty our playbook if you like.

Is to be as nimble and flexible as possible.

A core principle behind Burlington to Quinto.

So with that in mind.

When we planned 2022.

We try to do three things.

First of all we plan sales conservatively.

Now we're happy that we did this it's clear it was the right thing to do.

It looks like many other retailers were more optimistic and as a result, then I will <unk> and over inventoried and wear now.

That means that we have a bit more flexibility to respond to the buying opportunities.

<unk>.

In addition to signing conservatively.

We planned our liquidity very tightly.

For example.

Means that we still have open to buy for the second quarter and the rest of the year and again that just gives us more flexibility.

Given the current external environment.

Now the third thing we did and this is the one that goes to the heart of your question we planned our inventory.

We believe we can turn pasta.

And these.

And these plans were again intended to increase our flexibility.

As I said in the remarks it did not.

<unk> work in fact, instead of providing flexibility these leaner inventories.

Meant that we were exposed with receipts did not show up early in Q1.

This was a mistake.

Okay.

Let me, let me move on to the up to.

The last part of your question had to have the receipt delays improved since February the answer is yes. They have.

The situation is completely changed just a few months ago many vendors.

Your living hand to mouth that warehouses were empty and they were literally just in time waiting for merchandise to get through the ports now a few months later domestic warehouses are full.

And then in many cases that the backyard.

So in that situation the vendors.

Do you want to get the goods now as soon as possible. So as you'd expect shipping delays that have fallen off dramatically.

Thanks, just a follow up question for John .

John you talked about some of the freight pressures youre seeing.

Any other main margin drivers to call out versus 2021, and then also versus 2019 levels. Thanks.

Yes, good morning, Lorraine. Thanks, It's a good question.

So I'll start with Q1, and then I'll try and give you a little color on the way, we're thinking about Q2, and the full year margins as well.

So as I said, a little earlier in the call are for.

For Q1, our EBIT declined by 780 basis points and that missed the outlook that we've been given by about 30 basis points.

That was pretty much all related to the.

More deleverage on our expense base.

Sales coming up short of our mid teens baseline plan.

About 230 basis points of deleverage versus last year.

Gross margin 150 of that would be related to freight 80 basis points on the merch margin side.

Product sourcing costs de Levered by 180 basis points and again that was about 120 bps supply chain and 80 basis points related to our continued investments in our merchandising team.

So the rest of the the leverage numbers 370 basis points was just deleverage on all other costs driven by the.

Pretty large decrease in comp sales when you compare it to the first quarter 2019.

EBIT declined 410 basis points.

It was entirely driven.

530 bps of combined trade and supply chain deleverage in fact, the merch margins for the first quarter were still 260 basis points higher.

Again, the first quarter of 2019.

That's a reflection of the progress that we've made turning inventory faster and operating with.

Smaller inventory in our stores.

<unk>.

So moving on to the second quarter.

We sit today, we expect operating deleverage.

670, 610 basis points on our comprehension of minus 15 to minus <unk> 13, compared to last year's plus 19 comp.

Compared to Q2, 2019 that would mean deleverage 500 bps.

At the high end of the range, the minus 13 comp and the majority of that would be driven by freight and supply chain deleverage.

We do expect to have some merchant margin grow too Matt.

But that's pretty much going to be offset by the deleverage on all other expenses.

Negative comp level.

And then finally for the full year.

As I mentioned earlier.

We're expecting our operating margin rate to be a little better than what we said on the last call.

Uh huh.

<unk> hundred 50 basis points of operating margin level Deleveraged at mid single digit comp decline was our previous outlook now, we're saying, it's a minus six comp we're expecting 130 bps of operating margin contraction.

So a couple of things that changed their first.

We anticipate higher gross margin rate, resulting from.

Better merch margin driven by the combination of great product availability, which drives costs down.

And some selective price increases as I mentioned earlier, partially offset by a little higher than expected freight and supply chain costs.

Including.

Some higher domestic freight fuel cost than what we had anticipated as we developed our plan.

Again at the minus six Cup high end of our range, our EBIT margin would be seven 3%. So compare that to 2019 operating margin of nine 2%.

<unk> leverage of 190 basis points.

And we expect that deleverage story for the full year is going to be very similar to what we talked about in Q1, and what I. Just said, we kind of expect in Q2 significant deleverage caused by freight and supply chain costs. Some additional deleverage on our fixed cost base.

All of that deleverage, partially offset by.

Substantial gross margin growth, so that's kind of the whole picture.

Thanks.

Our next question comes from John Kernan with Cowen.

Good morning, Michael John and David.

Just a couple of questions about the macro environment and your customer.

Michael in your remarks, you referenced the low income consumer being under economic pressure.

Intuitive given the inflationary environment, how should we think about.

That the relative importance of that demographic to your business are there any stats you could share with us.

Also curious on just just detail on what Youre seeing.

With that customer how their traffic conversion and basket levels.

Training.

Sure.

Well good morning, John .

I would say compared to.

Many retailers.

I would I would characterize our core customer demographics.

Younger.

More ethnically diverse on larger family size.

And low to moderate income.

And I would say that we without those as wonderful demographics.

This segment of the population is growing and understand value and in many ways.

Populate that that customer group represents everything that's growing in America.

In fact for many many years I think low to moderate income shoppers have been the growth engine not just for us but for value retail as a whole, especially bricks and mortar valuable channel.

Now of course as you say.

A bit customer low to moderate income customer is under a lot of pressure right now.

That makes sense in 2021.

Certainly in proportion to their income these shoppers, where big beneficiaries of government support programs stimulus checks.

We'll benefit extended unemployment.

And those programs have now gone that alone would have may 2020 to a difficult year, but if you layer on top of that retail price inflation for essential items like food and gas is now running at extraordinarily high levels and again those items represent a disproportionate share of household budgets for those shoppers.

So it's not difficult to see why why does present.

The significant economic stress.

What can we share what we see this in our own data.

The vast majority of our stores.

However in trade areas that have average household income below 75000, so the vast majority of our stores.

And in 2021, our stores that are in low to moderate income areas.

That's by far the strongest increases in comp sales across that chain.

This year also.

Quite simply this year they've shown the biggest deceleration.

Now in the short term, we don't expect that the economic conditions. These consumers is going to improve in the short term.

But we do think it's a big opportunity for us these shoppers need value now more than ever and in the <unk>.

Coming quarters, we think we can do a much better job of delivering that value.

Let me wrap up my answer by reinforcing the point.

These customers of the future, yes, yes, right now they are.

All facing headwinds and those headwinds are likely to persist for the next few quarters, but this is a large demographic group and these customers are coming back.

In the coming years, we believe that this will again be a major source of growth for value retail, especially bricks and mortar retail.

Got it maybe just one other follow up question again related to the consumer.

Are you seeing any evidence of a trade down customer in the store.

Do you think that trade down business is likely to be a meaningful sales driver over time and is there any built any of that built into the second half guidance.

Yes, it's a good question.

I don't think we've seen much of a trade down customer so far.

But we do think that in the back half of them yeah.

It could change and that's why we're actually a little more optimistic about the back half of the year and we have built in an element of that to allow us to our guidance.

A moment ago.

It makes sense that the lower income customers crumbling.

But we don't believe that that will go.

This is where the economics scrap is going away.

Yes.

It's possible that we're only in the opening stages at this economy, we don't have a crystal ball, but it seems likely to us that high inflation higher interest rates falling stock market.

And a potential recession is going to affect a much broader set of consumers at some point.

And when those consumers are squeezed.

Thank you.

<unk> will be looking for value add.

And that they may trade down and historically that is typically what has happened whenever this thing.

Whenever there's been a broader economic slowdown it hasnt just affected low rent comes from because it's also affected middle or even some higher and help us.

And in that situation everyone is about value.

Again, we don't know when that might happen, but it does.

That we believe that it may help to drive our sales.

Sales trends.

Okay. Thank you.

Our next question comes from Kimberly Greenberger with Morgan Stanley .

Okay, great. Thanks, so much good morning, and thanks for all the detail today.

Michael how.

How are you feeling about your merchandise assortment now.

Speaking to both quality and quantity.

And based on your earlier comments it sounds like Youre in a position to chase.

Now here in the second quarter and in the back half of the year.

Assuming I heard you right on that.

As you Chase now are you starting to get delivered on time or are you still experiencing significant delays.

In your inventory receipts.

Well good morning Kim.

<unk>.

So the first part of good question, how are we feeling about the assortment right now.

In terms of quantity Google level.

Inventory I would say we feel very good.

Our inventory levels right now just a little bit higher than last year and last year. As a reminder, in the second quarter. We ran a 19% comp. So so I feel pretty good about our inventory level right now.

At the core.

Quality of the content I feel good about the quality of the content of our inventory and our assortment bumps.

I would say that we.

We recognize it's actually a huge opportunity to take it from good to great. We actually think that.

There's a lot of opportunity to make our assortment.

<unk> backed out there.

Yes.

The starting point is good but I think we could make it much better and the reason I say that is there are a couple of things that have happened in the past.

Monthly so firstly, if I really do think it has become clear that the customer has.

Shifted in terms of the categories that they are buying right now.

Yes.

This is intuitive last year the hottest trending.

Practically it's where we're home active apparel.

Casual apparel basics.

This year the customers.

They are interested in prestige classifications back to office career, where much more structured apparel woven versus mix and we had anticipated some of that but it's happening to an even greater extent than anticipated. So I think we have an opportunity to shift our assortment more than that in that direction.

Secondly, the other thing that's really happened over the past couple of months is just the point about merchandise availability has opened up.

There are really great deals out there now.

As I mentioned in response to an earlier question when you see great deals out there you can't just buy everything and flow it through school, it's quite away you need to sort of.

Florida stores over a period of time, so it takes a while for it to bleed into your assortment, but over the next few quarters, I really think with greater value in our assortment much more compelling values. So we're very excited about that.

The second part of your question I think was about how we are positioned to chase I think the answer is yes, we feel really good about our ability to chase right now partly because obviously.

Our inventory level, there's already a pretty pretty good point, but secondly, we have a lot of merchandise and reserve that we can pull on and then they say much nicer availability in terms of going out there now and buying but nice that we can play to stores has also improved so so we feel good about our ability to place in the second quarter of the South Grand plans ahead.

On on timely deliveries of receipts.

Again, that's completely changed in the last couple of months the situation in terms of.

The amount of merchandise, but now in the country and that's being imported into the country over the past few months means that domestic warehouses are critical and as a result vendors.

Vendors are shipping on time, because they want to get those goods out of the warehouse critical months ago their warehouses renting and they were waiting for goods to come out of the court.

That's completely changed.

Months.

Very helpful. Thanks.

Excellent.

Our last question comes from Chuck Grom with Gordon Haskett.

Okay. Thanks, very much most of my questions have been asked but I'll.

One question for you Michael just given your experience in the industry.

When you look back at other periods of consumer.

Russ.

2008, or so there's other times in the history of off price how long of a lag before you saw that middle income customer start to trade down it looks like right now with a little bit of an air pocket, where youre not getting the trade down by your current consumers starting to pull back a little bit.

So I'm just curious your perspective on the timing.

Sure, Yes, it's a good.

Good question Chuck Yeah, we've been we've been thinking about that.

I would say that obviously the <unk>.

Previous economic slowdown.

That's the most.

Maybe the most applicable is the.

As the financial crisis in 2008.

And I would say the one difference between what happened then and what's happening now.

As in 2008, the financial crisis kind of came as a shock to the whole economy all at once.

In September 2008, it was kind of it was felt across the whole economy and then that's sort of been led into what happened in 2009 and 2010.

Like here in 2022, this is a little bit different in that the inflation impact.

At least to begin with is being felt more by low income customers. They are the ones facing immediate shock because when you look at the cost of gas prices in food.

Those items represent such a big share of their wallet that the big increases we've seen in those areas are really hitting those customers most of all.

But as I said in my earlier remarks, we don't think it's going to stop there I think.

The impact on the overall economy is coming at us.

Head of US now, we could be wrong, but it seems to us to be lightly.

Therefore it.

It seems to me that the trade down customer, which might have been more evident back in 2008, more evident earlier might take a little bit longer.

At this time around but we don't really know, but thats, how I would.

I would compare it with previous economic slowdowns.

Great. Thanks very much.

Thanks Chuck.

And now I'd like to I'd like to turn the call back to Michael O'sullivan for any closing remarks.

Let me close by thanking everyone on this call for your interest in Burlington stores.

We look forward to talking to you again in late August to discuss our second quarter results.

You for your time today.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Yes.

Right.

[music].

Yes.

[music].

Right.

Thanks.