Q2 2022 Burlington Stores Inc Earnings Call
[music].
Good morning, My name is really and I will be your conference operator today.
This time I would like to welcome everyone to Burlington stores second quarter fiscal 2022 operating results conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's presentation there'll be a question answer session.
If you require operator assistance at any time, Please press star zero.
I would now like to introduce David Glick.
Senior Vice President Investor Relations and Treasurer. Please go ahead.
Operator.
Good morning, everyone.
We appreciate everyones participation in todays conference call to discuss Burlington's fiscal 2022 second quarter operating results are.
Our presenters today are Michael O'sullivan, our Chief Executive Officer, and John Kremen Principal Financial Officer also on the call today is Christian Moore, EVP and 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 expressed permission.
A replay of the call will be available until September one 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.
<unk> 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.
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 discussed 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 discuss our second quarter results.
Then I will review our outlook for the rest of the year.
Thirdly, I will talk about the longer term outlook.
After that I will hand over to Jon to walk through the financial details and then we will be happy to respond to any questions.
Okay, let's talk about our results.
Comparable store sales for the second quarter decreased 17%.
This was on top of 19% comparable store sales growth last year.
During this call when describing our comp trend I am going to use a three year geometric comp stack.
This is just like a simple three year comp stack, but accounts for the compounding effect from year to year.
Given our large comp numbers last year. We think this provides a more meaningful indicator of our trend.
This metric is defined in more detail in today's press release.
In may our three year geometric comp stat was plus 4%.
In June it was flat and in July minus 7%.
Well Q2, as a whole it was minus 1%.
This was below our guidance for a positive low single digit three year geometric stack.
These results are poor and we are very disappointed.
Yeah, well external factors that contributed to these results and in a moment I will describe these in detail.
But before I do let me say that no matter what external headwinds we face we have to do better than this.
On an absolute and on a relative basis. These comp results are well below our expectations.
When you look at comp performance and our business. There is no mystery about what drives these numbers.
It's about offering the best value in the categories brands styles and price points that the customer is looking for.
This is how we executed our business in Q2, but when you look at our results, especially on a relative basis.
Clear that we did not move far or fast enough.
Let me turn now to the external environment.
We believe that there were two major factors that impacted our trend in Q2.
First of all the low to moderate income customer is under significant economic pressure.
The low to moderate income customer is our core customer.
Approximately 40% of the money spent at Burlington.
From shoppers with household incomes of less than $50000.
Low to moderate income shoppers helped drive our extraordinary growth last year.
And they remain an important part about future growth plans.
But right now they are under severe economic stress and versus last year, they have considerably less money for discretionary spending.
The second factor that contributed to a weakening trend in Q2.
Was that promotional activity, especially among retailers that said low to moderate income shoppers surged.
The root cause of this.
There was a massive imbalance between inventory levels and sales across retail.
The glut of inventory that started to emerge in Q1.
<unk> into a tidal wave in Q2.
In normal times promotional activity tends to be limited to seasonal merchandise and styles that have not sold well.
But what we are seeing right now is that there is such an imbalance between supply and demand that most retailers are having to aggressively clear inventory.
Our customer proposition the key reason to shop at our stores is that we offer better value than other retailers.
In Q2, this value differentiation with squeezed.
Our customers.
As I described earlier heavily focused on value.
They have a lot of options about where to spend their limited funds and they cross shop heavily looking for the best deals.
For our customers.
Talk cross shopping destination for apparel and footwear is Walmart.
Load by target.
The current level of promotional activity will not last forever, but while it does it will create a very significant headwind for us.
Let me draw these strands together for Q2.
External factors that contributed to our trend in the quarter.
The low to moderate income customer is under economic stress and retailers. These.
These customers.
Luggage with promotions.
These headwinds are real.
As an off price retailer we have advantages.
The overall sales trend may be weak, but we can shift into the areas that the customer is buying.
And we can use the supply imbalance deliver great value in these categories.
Hey, Ken This is what we did in Q2, but our results show that we did not move far or fast enough.
We can do better.
Before I move on to talk about the outlook, let me just comment on earnings.
Despite the weak trend in Q2, our margins came in ahead of expectations.
There were two reasons for this.
Firstly, we managed our in store inventories very close to plan.
So we didn't have a lot of excess inventories.
This meant that our markdowns were modest compared to many other retailers.
We could have taken broader and deeper markdowns.
Might have driven sales, but not necessarily earnings.
Instead, we focused markdowns on excess seasonal merchandise and ended the quarter very cleanly.
Okay.
The second factor that drove above planned earnings is that with the weak sales trends, we aggressively controlled our expenses.
As a result, although we came in below our guidance for sales or earnings were above the high end of our guidance range.
Later in the call John will provide more details on this.
So what do we think happens next.
I'm going to move on to the outlook and I will split my remarks into the near term outlook.
The rest of the year and then further out.
We believe that the current retail environment characterized by weak sales trends and significant promotional activity is likely to be with us through the rest of the year.
We also think that this promotional activity is likely to delay the emergence of any significant trade down sharper.
Think about it there is really no need to trade down when every major retailer is on sale.
Based on these factors, we are lowering our guidance for the back half of the year.
Our updated guidance is based on a minus 4% to minus 1% three year Geometrics Tac.
This translates to one year comp range of minus 13% to minus 10% for the back half.
As a reminder, our comp growth for the back half of 2021 was positive 10%.
Our plan for the full assumes significant pressure on merchant margin.
We had originally planned for an increase in merch margin.
Bob.
But we have now pulled back on there.
As I said earlier the most important driver of sales is the value that we put in front of the customer.
We need to challenge every hanger in our assortment and make sure we're offering the best value.
During this time, we will tightly control buying and liquidity carefully manage inventories and aggressively pursue opportunities to drive down expenses.
But.
The net effect of all this is.
Is that we expect our results for the full year to be well below our normal expectations.
And well below what we believe we can accomplish over the next couple of years.
Let me segue to talking about the next couple of years.
Last year actually on this call we described.
The current situation.
Strong consumer spending fueled by government stimulus and it's significant.
It's a nice supply constraints, we described that situation as completely unsustainable.
Let me say, we believe that the now current situation.
Retail sales trends and massive oversupply of merchandise.
Equally unsustainable.
In the next few months, we will start to work on our plans for 2023.
To support this process, we have started to sketch out scenarios for what the retail environment could look like in 2023.
I'd like to describe the scenario that based upon what we know at this point, we think is most likely.
Firstly, we believe the inventory overhang across the retail industry is likely to clear over the next several months.
We expect that by early 2023. Once this overhang has clear promotional activity will have declined significantly.
Secondly, we anticipate that the supply environment will tighten somewhat.
Many vendors have been hurt by the current imbalance and they are likely to pull back.
Buck with weak consumer demand, we think that will still be plenty of merchandise supply for the off price channel.
We also expect to carry attractive reserve inventory into 2023.
Thirdly, we believe that in 2023 expense environment is likely to have changed significantly.
Especially for freight rates.
There are already some early signs of this.
We also think it is likely that by then the labor market will have softened, which could ease pressure on wage rates.
Fourthly, we anticipate that the economy will have slowed.
As this happens inflation should moderate, thereby easing some pressure on low to moderate income shoppers.
And this slowing economy may also drive heightened consumer focus on value.
Riding trade down shoppers to our stores.
Lastly, we think that several financially weak bricks and mortar retailers may have to close stores.
<unk> would free up potential market share and real estate.
Forecasting the future is a very risky undertaking, especially after what we have lived through over the last three years.
We believe the scenario I've just described isn't just possible it's slightly at some point in 2023.
We are optimistic about next year.
We expect to drive recovery in sales and earnings.
And don't forget back on track towards our longer term objectives.
I would now like to turn the call over to Joan to provide more details on our Q2 results and our rest of year guidance.
Thanks, Michael and good morning, everyone.
I will start with some additional financial details on Q2.
Total sales in the quarter were down 10%, while comp sales were down 17%.
Our three year geometric comp stat was a minus 1%.
In terms of earnings the headline is that we face gross margin pressure in Q2, but this was more than offset by productivity and expense savings elsewhere in the P&L.
Comp sales came in below our guidance range for adjusted EPS came in above.
For Q2, our adjusted EPS was <unk> 35.
Versus the guidance range of 18% to 31.
That was the headline now.
Now, let me provide more detail.
The gross margin rate was 38, 9% a decrease of 320 basis points versus 2021 second quarter rate of 42, 2%.
This was driven by a 110 basis point increase in freight expense.
Combined with 210 basis points lower merchandize margin.
About half the decline in merchandize margin was driven by higher markdowns and about half from a true up to our shortage reserve.
It is worth calling out.
Although our markdown rate was higher than last year. It was still significantly below 2019 and historical levels. This was despite the extraordinarily high external promotional activity.
Product sourcing costs were $157 million versus $146 million in the second quarter of 2021, increasing 130 basis points as a percentage of sales.
This deleverage was due to higher supply chain and buying costs, driven by higher supply chain wages and growth of our buying and planning team respectively.
Adjusted SG&A was $518 million versus $550 million in 2021, increasing 120 basis points as a percentage of sales, which was driven primarily by deleverage on occupancy expense.
Adjusted EBIT margin was two 1% 610 basis points lower than the second quarter of 2021.
Our guidance for Q2 had been for 610 to 670 basis points.
We were able to achieve the high end of our adjusted EBIT margin guidance by offsetting the lower than expected comp sales and gross margin with expense savings.
Put into the context of our Q2 2019 adjusted EBIT origin.
Second quarter of 2022, adjusted EBIT margin declined by 500 basis points versus that time period.
This about 450 basis points were driven by freight and supply chain deleverage.
All of this resulted in diluted earnings per share of <unk> 18.
Versus $1 50 in Q2 of 2021.
Adjusted diluted earnings per share were <unk> 35.
Versus $1 94 in the second quarter of 2021.
But the ended the quarter our in store inventories were 5% below 2021 on a comp store basis, and our reserved inventory was 52% of our total inventory.
This was 31% last year.
In dollar terms, our reserve is more than double last year's levels.
This increase was driven by our merchants taking advantage of great buying opportunities during the quarter.
In Q2, we opened 11 net new stores, bringing our store count at the end of the quarter to 877 stores. This.
This included 13, new store openings and two relocations.
Now I will turn to our outlook.
As Michael mentioned, we are updating our back half forecast based on a minus four to minus 1% three year geometric stack.
This implies a one year comp range of minus 13% to minus 10% for the second half of fiscal 2022.
Based on this range.
On our expectation of a continuing heavy external promotional environment.
Our adjusted EBIT margin is expected to decline by 160 to 80 basis points, which would generate adjusted EPS for the back half of $2 81 to $3 41.
This will drive full year adjusted EPS of $3 70 to $4 30, and an adjusted EBIT margin decline of 410 to 360 basis points.
Breaking out the quarters, we're modeling Q3 at a one year comp decline of minus 18% to minus 15%, which translates to minus 4% to minus 1% decline on a three year Geos stack basis.
This range should lead to a Q3 adjusted EBIT margin decrease of between 360 and 260 basis points.
Third quarter adjusted EPS of <unk> 36.
To 66.
We are modeling Q4 at a one year comp decline of minus 9% to minus 6%.
For Q4 translates to the same three year Geos stack that were planned in Q3.
Is 4% to minus 1% decrease.
Recall that our Q4 'twenty one comp comparison decelerated from 16% in Q3 to 6% in Q4. This comp sales range should lead to fourth quarter adjusted EPS of $2 45 to $2 75.
I will now turn the call back to Michael.
Thank you John .
Let me summarize some of the key points that we have covered this morning.
We are disappointed with our Q2 sales performance.
There were two major external factors that contributed to our Q2 the trend.
The low to moderate income customer is under a lot of economic pressure.
During the quarter, there was a huge surge in promotional activity.
We believe that these factors are likely to continue into the fall season, our updated guidance assumes the sales trends will remain weak and that merchant margins will be pressured by high levels of external promotional activity.
Our business is all about offering the best value on the categories brands styles and price points that the customer is buying.
We can do a much better job on that.
As we look ahead to 2023, we are optimistic.
There are several factors that we think could drive a significant recovery.
<unk> and earnings and would start to get us back on track so our longer term financial objectives.
Now before I turn the call over to the operator for Q&A. There are a couple of additional topics that I would like to call out.
Firstly, we recently released our latest corporate social responsibility report.
On this call we do not have time to discuss the content in any detail.
But I would like to encourage investors to take a look at the report on our Investor Relations website.
The report describes the huge progress that we've made over the past year on our major environmental social and governance priorities.
If there are any investors who have questions about any of these topics.
Like more information then please contact our Investor relations team.
The final thing that I would like to do before moving to questions is to comment on our CFO transition.
On this call, we have our new and our retiring CFO .
Some might call that an embarrassment of riches.
I would like to welcome our newly appointed CFO Christian Wulff.
Who joined US a few weeks ago.
Christine comes to us with over a decade of off price experience, serving in a variety of financial strategic and operational roles.
We are very excited to have Kristin as part of the team.
Of course on the flip side of the CFO transition.
We'll be saying goodbye to John Crimmins, who retired this month.
This is John's last earnings call. So please ask him some tough questions.
I would like to take this opportunity to thank John on behalf of the company and the board.
It's hard work and commitment to the company over the years.
And to wish him all the best in his well deserved retirement.
With that I would now like to turn the call over for your questions.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Matthew Boss from Jpmorgan. Please go ahead. Your line is open.
Great. Thanks, So Michael maybe taking a step back what are your thoughts on the relative performance that we've seen from the major off price retailers.
Or said differently comps for these retailers have historically trended together versus the wider gap that we've seen year to date today. So what do you think is driving this divergence in your view.
Hello, Good morning, Matt Thanks for the question.
We watch we watch App has very closely.
We know we can learn a lot from them.
So so of course, we've interrogated the.
Year to date performance.
Let me, let me share our assessment.
Yeah first of all in terms of the divergence that you are calling out.
The data is very clear if you look at year to date.
On a three year geometric stack basis.
One of our off price peers is up in the mid teens.
Other is mid single digit and we're minus 1%.
As you would expect we're not we're not happy with this.
We think that there were really two factors that explain the difference firstly.
The customer mix.
Is quite different between these retailers, depending upon who you are comparing us with.
That could be more or less significant the low income shock.
Hello income shopper really drove our relative outperformance versus both periods last year.
Stimulus checks et cetera had a bigger impact on low income customers and.
I think that was really a much stronger tailwind for us than it was <unk>.
This year those shoppers are struggling and I think that's contributing to two hour we could trend.
This demographic disadvantage when costs go ahead, but at some point in.
Inflation will moderate and low income customer will start to recover and I think it's important to understand that longer term.
That low income customers in large and growing demographic and frankly, it's a demographic that really likes bricks and mortar retail.
Okay.
It's hard to know how much that customer pieces worth but there was a second factor that we think is important.
And this one this is the one that matters most to me because I think we can control and influence that.
Once you once you adjust for any differences in customer mix. All you have left is relative execution.
And to be clear I don't mean operational execution for sure.
Are things that we can improve.
There are things we are improving in our operations.
But there's nothing there that's driving relative comp performance.
As relative merchandising execution put another way if a customer walks into one of our stores versus one of our peers, what do they see which still has the most compelling assortment and value and therefore, where are they going to buy wherever they're going to spend money now.
Now most retailers.
Faced with the weak sales trend or a tough promotional environment are stuck because they cant do much state.
Just need to grind through it but as an off price retailer, we can shift our assortment mix to the areas that the customer is buying.
And we can take advantage of supply opportunities to deliver great value in those areas.
As I said in the remarks in Q2 that is how we executed our business, but when you look at our results, especially on a relative basis.
It's clear that we really didnt move far enough.
<unk> did a better job.
For me there are really two there are two action implications one short term one long term.
Yes short term for the <unk>.
Half of the year, we were looking we're really looking at every aspect of value in our assortment, we need to make every hanger count in our assortment.
And then more importantly longer term, we know we can get better at executing the model last year.
We showed we were really good at chasing sales when the customer had money. This year. The challenge is different the challenges.
The low income customer doesn't have as much money and the only way to drive the trend is by offering really great value.
I think that's a that's a muscle we need to develop more.
Yes, the last couple of years, we've been investing especially in merchandising to improve our execution.
And I'm pretty confident that once those improvements so once those investments have bedded in.
To help us improve and over time close the gap with our peers, but again I come back to and I agree with you. Our Q2 comp results are evidence that we're not there yet.
Thanks.
Great color. My second question is more focused on the multiyear too.
2022, clearly turning out to be a tough year across retail I guess have the challenges from this year effect that you're thinking about longer term opportunities.
Yes.
Good question.
I think I think it's important to separate short term headwinds from.
Longer term structural factors.
I joined Burlington.
Three years ago might be assists with the off price model.
This focus on value responsiveness to trends ability to take advantage of supply disruption immunity to e-commerce.
Model.
Advantaged to me versus other retail models and separately within off price.
The Burlington I saw an opportunity to improve how we execute the model.
The objective of Burlington to point out.
No.
Forwarding to today sitting here in 2022 that strategic and investment thesis really hasn't changed all the structural advantages that the off price model.
The retail channels still apply.
And I think the improvements, we're making a stronger buying organization the more flexible operating model will over time strengthen our own execution of the off price model.
So obviously I cant ignore.
Over the last three years, we've seen some significant curve balls the impact of inflation on our core customer and the tidal wave of promotions.
Hey, just the latest of these chemicals, but but it's important I think to realize that these things are not going to last.
Last couple of years have not been normal.
Sooner or later.
The long term trends will ramp to reassert themselves, especially the <unk>.
Relatively advanced as a bulk price.
And the dividend that we're going to get from the improvements that we're making to the business. So I still have huge confidence that we're going to achieve our longer term goals and objectives.
Thanks Best of luck.
Thanks, Matt.
Our next question comes from Ike <unk> from Wells Fargo. Please go ahead. Your line is open.
Hey, good morning, everyone. Michael one for you I'd be interested to know what you think's happening with pricing across the current retail industry. When you kind of look out at.
Some of your competitors and other soft line players out there and then.
What might be the implication for price increases at Burlington, but you kind of factor those things.
Hey, good morning.
Yes, there's plenty of all the topics discussed over the past year I think this is the one that has seen the greatest.
The evolution.
A year ago.
A combination of stimulus spending pent up demand.
Alright merchandise supply meant that most major retailers were achieving.
Higher realized prices than they had in years, there were very few promotions and margins.
We have very strong across the industry.
I have to say I think I think those days are over.
Now most retailers have too much inventory and that they are having to take very significant markdowns in realized prices.
Plummeted.
My view is this is this is a huge overcorrection.
Once the inventory bubble passes which may take some time.
And I think pricing across the industry, we will get we will get more rational again.
Let me talk about what that means for us.
Yes, we talked a little bit about this I think on the on the call in May.
The thing that we really care about 1 billion.
Isn't price its markup.
If merchandise availability means that we combined goods.
At lower cost and that should allow us to drive markup without without necessarily raising prices.
Our original plan had been to take advantage of the opening up of supply to increase amount in the back half of the year.
But as you can tell from our guidance and based on the factors we've discussed.
We're much more cautious about this now.
As long as the external environment remains heavily promotional.
We think we're going to have to pass along some of this market mark up to the customer.
But that said once the bubble palaces.
We will revisit that and we expect that we would recover some of that markup.
Got it. Thank you. Thanks, Thank you Michael.
Second one for Jonathan John first of all congratulations best of luck with retirement.
To give you a hard one but.
On the EPS performance in the second quarter.
Was better than the guide despite the comp Miss.
Could you just kind of talk us through the puts and takes of the performance during the second quarter.
Yeah sure Thanks for the best wishes.
Yes, it's a good question there certainly were a lot of moving parts in the second quarter pick the best way to answer it is just kind of run through to GNL sorry, the P&L.
Give me a little color.
So, yes, as I said earlier gross.
Gross margin de Levered by.
By about 320 basis points to.
210 basis points of that was a decrease in merch margin about half of that was driven by markdowns and as I said earlier.
Mark down rate was still significantly better than in 2019.
The rest of the merch margin decrease was driven by a true up to our shortage accrual.
Just on physical inventory results, we took a physical inventory in June you measure the results and make an adjustment based on what you learn from that.
We also saw a 110 basis point increase in freight expense compared to last year.
Remember last year most of the increase in freight rates took place during Q3 and Q4, so we're still.
Kind of.
It's still a tough compare it gets better in the second half of the year.
Our product sourcing costs deleveraged by about 130 basis points, but half of that was from supply chain and half was from continuing to invest in our merchandising team.
Even though we.
We did manage expenses pretty aggressively in the quarter, we're still investing in all of our product to two quite O initiatives.
Part of that some of the productivity gains that we're seeing.
Somewhat related to these initiatives that are underway.
Yes.
G&A side.
Sorry.
More broadly on supply chain.
We also had a similar to freight.
Compare for the second quarter, but we actually came in a little better than we expected.
Again, thanks to some of those productivity gains SG&A.
De levered by about 120 basis points better than we would've expected with a minus 17 comp so again benefit from some of the productivity improvements.
Disciplined expense management.
That line.
So we.
We also had combined deleverage of about 30 basis points. That's the net result of depreciation expense and other income within other income there were some gains from.
From the sale of real estate of about $4 million, so a little bit of a nonrecurring item that helped us in the quarter. There. So altogether that should account for the 610 basis point operating margin decrease that.
We saw we also had some unanticipated good news in <unk>.
Net interest expense.
We had $3 billion.
Interest income related to a tax refund that actually nets against our interest expense.
The P&L.
Got it thanks guys.
Our next question comes from Lorraine Hutchinson from Bank of America. Please go ahead. Your line is open.
Good morning, so the updated guidance represents a pretty significant revision it wont be really helpful. If you could share more of your thinking on how you arrived at the sales guidance and also any major call outs in terms of margin or expense assumptions and if you view this guidance as conservative.
Hi, Lorraine, it's Christian here I've actually been working closely with Michael and John on developing the guidance. So let me jump in and out I will try to respond to your question on sales a couple of points to call out first we've missed our sales guidance for the last three quarters.
Need to start hitting or better still beating the guidance. We give so we think this guidance may be conservative, but this feels appropriate.
I also mentioned the sales trend is very difficult to project right now the reason our guidance is more conservative than our year to date trend as we believe the promotional activity. We saw pick up in mid June will continue into the fall and another point I would add is our August month to date geometric Comstock is running in line with this guidance.
Of course, there are a couple of factors we havent built these and these could help us if inflation slows and if gas prices continue to decline those things could help and then it's promotional activity elsewhere.
It's down we may start to see that trade down shopper in our stores.
In terms of the margin and expense side of the guidance as John mentioned, we're forecasting EBIT margin decline of 160 to 80 basis points in the fall.
Gross margin will improve slightly this is really due to freight driven by some moderation in input costs and less pressure to accelerate delayed receipts compared to what we saw last year.
Merchant margin is now planning a lower than last year and as Michael mentioned in his remarks, much lower versus our previous expectations due to the promotional environment.
And I'll also call out that the fall plan it doesn't.
The productivity gains that will help us continue to leverage expenses, particularly in supply chain and stores.
While we continue to invest in the growth of our business and both supply chain and stores in the fall of last year saw one time hiring.
Fences that will not be necessary this year.
Lastly, comparing Q3 and Q4 the margin decline in the third quarter is expected to be more significant. This is really due to weaker comp sales in Q3, but also in Q4, we are lapping peak freight and supply chain cost pressures from last year. So let me finish up by saying yes.
We do think this is a conservative plan.
This feels appropriate given the environment and the way we're managing the process.
Thanks. My second question is about inventory levels, given the weak sales outlook. How are you feeling about your inventory levels and if the sales trend turns out to be a little stronger or are you confident that youll be able to respond.
Good morning Lorraine.
Michael Let me, let me try and answer that.
Yes, I'll start with with inventories and then I'll talk about.
Our ability to chase if the trend is stronger.
On inventory I.
I think it's important to go or distinction between in store inventory and reserve inventory.
In store inventory is basically.
What we have for sale, if you think about sales turns markdowns and margins.
This is the inventory that matches, if we have too much of this inventory then it will turn it will turn slowly and we will take markdowns.
Now in Q2.
Our plan was to manage our in store inventory inventory in line with last year.
And Thats, what we did and I was pretty happy with the execution of our inventories.
We ended the quarter very cleanly.
And we ended with in store inventories on a comp basis, just slightly below 2021 levels, but were pretty happy with that.
<unk>.
Turning to reserve inventory reserve inventory is much higher than last year and that's deliberate.
Reserved is largely driven by opportunistic buys and otherwise merchandise.
We've gotten a great deal and that we're storing for release in the future months or even next season.
The sell through and the gross margin characteristics of reserve inventory tend to be much better.
Other types of bi.
We manage what goes into reserve carefully to make sure. That's the case and we're pretty happy with our reserve position.
Let me finish up there on the last part of your question.
How confident are we that we can chase sales I'm more confident about that now if the sales trend is strong.
Then I have been for two years.
This is the.
This is one reason why we're comfortable with the conservative plan if the customer ends.
Ends up wanting to spend more with I'm comfortable we can chase it.
And we can either.
Accelerate releases then we know we have a good reserve balance or we can go into the market by fresh receipts and we know there's plenty of supply in the market.
Neither of those things was true last year supply was much more difficult.
This time last year, but now it's freed up everybody puts us in a good position to chase, yes, yes.
<unk>.
Thank you.
Our next question comes from John Kernan from Cowen. Please go ahead. Your line is open.
Good morning, John Congrats on your retirement Christian welcome.
Thanks Chuck.
So the full year operating margin embedded in the updated guidance it.
Obviously, I'm quite significant deleverage versus 2019.
How confident are you that you can get back to that 2019 margin structure and any detail on gross margin and SG&A rate as I. Appreciate it. Thank you.
Well good morning, John .
It's Michael at this point I don't think it would be fair to have Kristen I'll have to answer that so let me let.
Let me offer an answer.
In the next several months and we will be developing our budget for 2023 and will also when we do that we'll go through an exercise of updating our long range plan.
So coming out of that we should be able to provide a more specific path and timeline for growing our margin.
But for now I think kind of launched the question at a high level.
If you if you take the upper end of our updated guidance it implies.
And EBIT margin for the full year 2022 and.
That is about 420 basis points below 2019.
Sure.
The drivers of that EBIT margin contraction, all very clear.
Off the 420 basis points of contraction of 370 basis points is from higher freight and supply chain expenses.
All the other line items combined.
<unk> margin and store costs et cetera, all of those combined represent about 50 basis points of contraction now within that within that bucket. There are positives and negatives, but obviously the biggest piece within that bucket is expense deleverage on a minus one comp over a three year period.
Which as you can imagine is significant.
So when we when we come to update our long range plan later this year.
Yes, it's pretty clear to me that they're off or there are four main buckets that we're going to be going after.
And I feel I feel pretty confident that we're going to find value in each of these.
The first of course is great and supply chain.
So just that 370 basis points of the 420 basis points.
Deleverage in 2019 has been in these line items.
As we've said before we're not expecting to get all of that back.
Some of those costs higher rate in the D. C. For example are going to be are going to be permanent but on that.
Drivers of those most of the freight rates the fuel costs.
Special wage incentives that we had to get people too.
Staff.
Special shifts that we had to run them more expensive.
Some of those costs should come down over time.
And I think it's early but there are signs that that's down.
Going to happen, so that's great and supply chain costs and I think we can we can pull out quite a bit the second the second bucket the second.
Lastly, we would go off tricky like as sales.
Today, we've talked about why sales have declined this year, especially the impact of inflation on low income customers.
The extraordinary levels of promotional activity and as I said in the remarks, we think those factors are temporary.
So we expect sales to pick up once were once inflation moderates and once this inventory bubble passes.
Add to that.
We believe that the longer term improvements.
We've been making to the business, especially in merchandising.
Further underpin our long term sales growth. So we think we think we can drive sales and that obviously will drive leverage on fixed expenses.
The third the third bucket that we will interrogate as its markup.
I think Christian just talked about we originally planned to.
To raise a merchant margin in the back half of this year through higher markup and that markup with based upon.
Prove supply environment that we can get merchandize that lower cost out because supply has eased up since last year.
Now as we've explained we're being more cautious about that now in this environment.
But once the external promotional activity begins to moderate this is absolutely something we will revisit.
And then maybe finish up on the fourth bucket that will interrogate as markdowns in.
In 2022, our markdown rate will still be well below 2019 levels, but it will be above 2021 levels in other words, we are.
Given back some of the progress that we've made last year and it's not hard to see why we've.
We've had.
Sales trend Thats below plan we've had.
External promotions that we've had to respond to.
But again once we get through this we've proven to ourselves that we can turn in Victoria pasta, and we'll get back to that.
So the fourth bucket, we would expect to get value from them.
I guess I should just maybe ill just finish up by saying we've always believed that we can drive margins above 2019 levels and we continue to believe that.
And in addition to the four items I just mentioned there are additional levers and im not going to review now we don't have time, but there.
There are additional levers that we believe will help us to get to double digit margins over time those include.
Lower occupancy cost based upon a smaller more productive store prototype and sing.
Significant efficiency and productivity improvements.
Thanks for making in our operations.
Alright, I appreciate the detail your comments, making easy setup for a follow up question is just on freight and supply chain expenses.
Are these all these expenses spiked in the back half of last year I think the model suggests there was a 200 basis point headwind to gross margin in the second half last year. You mentioned earlier that there are signs that some of these expenses are starting to soften we can obviously see the spot rates on osha and trucking rates coming down is there any benefit.
Of this softening in Q3 or for Q4 is this a 2023 story.
Yes, John Thanks.
I'll take that question.
So yes, as I said earlier during the second quarter supply chain and freight together cost about 170 basis points of deleverage rate was 110 supply chain. Another 16.
As you know costs in both of these areas to increase much more significantly in the second half of last year. So the impact on this quarters compare.
It is more difficult than we would expect it to be for the second half of the year, we think it will be.
A little bit of a little bit better for us in the second half of the year.
What we're seeing overall I think is similar to what we've heard and what you've probably heard from other retailers and as you mentioned for ocean freight clearly spot rates have been improving.
Our taking advantage of that where we can and when we can now.
Spot rates are improving in a meaningful way.
And we anticipate this trend is going to continue over the next two quarters and into next year, it's going to help us a little bit in Q3 and Q4.
But we expect it to be much more help going into next year and beyond.
Domestic freight there's been some improvement.
But so far it's been yes.
Less impactful and offset by high fuel prices.
But longer term, we think theres going to be much more meaningful movement, there havent really seen that much of it yet.
Supply chain costs.
We do expect some improvement in the second half of the year.
You'll remember last year, we had significant.
Nonrecurring incentives and higher <unk> cost as we struggled to get our our DC is fully staffed and operating at full capacity.
I guess within supply chain, we should also kind of mentioned the rate side of it.
We have seen that wage inflation has slowed.
The <unk> mill the availability of labor has improved significantly since last year, but it's still a bit of a challenge.
We think wages will likely remain at current levels.
But we do anticipate some overall softening in the availability of labor.
Which should help overall staffing cost some of that.
Maybe a little bit of that in the second half of this year and then looking forward.
Sure.
Thank you.
Our next question comes from Kimberly Greenberger from Morgan Stanley . Please go ahead. Your line is open.
Okay, great. Thanks, so much welcome to Kristen and John well deserved.
Congrats on your retirement I don't have the.
A really hard ball question.
For you by I did want to follow up Michael on your comments earlier about.
Okay.
The agility and the adjustments in the quarter.
And maybe year to date when trends when consumer buying patterns shifted and changed it sounded like.
You would have expected maybe faster and.
More substantial adjustments in season. So I'm wondering if you can just reflect on what <unk> seen year to date.
In that agility.
And where in particular do you think there is an opportunity going forward.
Improved responsiveness and is that through.
Better systems better reporting to the merchants is that what are the sort of.
Steps to get new to get this sort of the merchant and the planning team where you'd like it to be so that the responsive capabilities in the business are better in the future.
Okay, well good morning, good morning, Kimberly.
First of all this is it really isn't fair youre supposed to ask John the hard questions.
But I think if.
I could try and I'll try and respond.
The.
I guess, what the right place for me to start is.
Yes, what we've done over the last couple of years.
And the last couple of years, we've invested in our merchandising team we've added.
Since 2019, we've added about 35% head count to merchandising team. We've also.
We've also been challenging and redesigning our planning and buying processes.
Our reports our tools.
All aspects of <unk>.
And the reason we've been doing that is because.
It's kind of it's the secret sauce of off price.
<unk> off price.
And within that there is absolutely a very.
Very difficult balance that merchants have to make between deciding where to spend our open to buy which categories, which styles, which price points.
And.
I think that that.
<unk> <unk>.
Improves with experience.
Over time, and I think that.
We did all those things.
In Q1, I want to be careful to acknowledge we did all those things in Q1.
It's really when I when I do a comparison with our off price peers I have to acknowledge wow.
Both of those things too and outperformed us so sorry.
So I kind of feel like again if I.
I said in the script, you have to kind of strip out customer differences.
But if I if I, if I strip out the customer differences I'm left with.
That relative merchandising execution as the thing where I think we still have opportunity and we still have a ways to go.
Okay.
Like I said in the script I feel like given the talent we brought on given the changes we're making.
We're absolutely going to be able to do that over time and last year. I think last year was interesting because I feel like we really demonstrated a lot of capability chasing the trend chasing into businesses people customers want to buy when they had money. This.
This year I, just think that challenge is a little different and.
And yes, we can.
We can do much better.
It sounds good thanks, so much.
Yes.
Our last question will come from Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.
Hi, This is Greg summer on for Chuck.
Wanted to ask how are you balancing the current better buying environment, and possibly even better buys down the road in the second half and when should we expect to see those buys get reflected in merchandize margins that the second half melanoma or more in 2023.
Could you just could you just repeat that question you broke up a little bit as you were asking the question.
Yes.
I just wanted to go away the balance between the current.
Buying environment, where you guys are seeing deals and the possibility of better deals are emerging in the second half.
Flow through to better merchandize margins, whether that can come through in the second half or it's more in 2023.
Yes.
It's a good question.
We.
We're being very careful right now and I would say actually throughout Q2, we were very careful to hold back on volume.
Right. Now. This is this is a buyer's market than a buyer's market patients.
What gets rewarded.
Very very careful about about how were spending our time, making sure that we're really waiting until the deal is as good as it possibly be.
And that applies to reserve just as much as inventory that was flowing to stores.
I would say that in Q2, the buying environment was excellent.
I think it's quite likely in the back half it could be even more excellent I think again it relates to all the things we've talked about the massive oversupply of inventory.
But it means that the buying opportunities very good let me make one final point when the when you have external promotions.
Like we're seeing right now.
So important that we get the very best deal when we're out there buying because we have to compete against those promotions. So it.
It can be done and that's the value of the off price model.
That's another reason why we are just very careful.
When we're buying right now.
Okay. Thank you.
Thanks.
We're out of time for questions today, I would now like to turn the call back over to Michael Sullivan for 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 November to discuss our third quarter results. Thank.
Thank you for your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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