Q1 2023 Burlington Stores Inc Earnings Call

Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the Burlington Stores Inc. First Quarter 2023 Earnings Webcast. I would now like to turn the call over to David Blake.

Speaker 2: Group, SVP Investor Relations, and Treasurer. Please go ahead.

Speaker 3: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2023 first quarter operating results.

Speaker 3: Our presenters today are Michael O'Sullivan, our Chief Executive Officer, and Kristin Wolf, our EVP and Chief Financial Officer.

Speaker 3: 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 1, 2023. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties.

Speaker 3: Copyrighted today by Burlington Stores.

Speaker 3: 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.

Speaker 3: Such risks and uncertainties include those that are described in the company's 10k for fiscal 2022 and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Speaker 3: expectations we discussed today are on a continuing operations basis.

Speaker 3: today's press release.

Speaker 3: Now here's Michael.

Speaker 4: Thank you, David.

Speaker 4: Good morning everyone and thank you for joining us.

Speaker 4: I would like to cover three topics this morning.

Speaker 4: Firstly, I will discuss our first quarter results.

Speaker 4: Secondly, I will talk about our guidance for the second quarter, and finally, I will comment on the full year outlook.

Speaker 4: After that, I will hand over to Kristin to walk through the financial details of our first quarter results and our 2023 guidance.

Speaker 4: Then, we will be happy to respond to your questions.

Speaker 4: Okay, let's talk about our Q1 results.

Speaker 4: CompStore sales for the first quarter increased 4% versus our guidance of 5% to 7%.

Speaker 4: On a geometric stack basis, this represents 3% comp store sales growth versus 2019.

Speaker 4: As I will explain in a moment, we believe that this weaker-than-planned comp growth was driven by two external factors.

Speaker 4: We started the quarter very strongly. In fact, until mid-March, our comp growth was running up double digits. As we have described on the last couple of calls, we have had a very strong focus on delivering great value in our assortment.

Speaker 4: expanding opening price points and offering great brands at WOW values.

Speaker 4: This strategy has driven the improvement in the sales trend that we have seen since early Q4.

Speaker 4: And this strong momentum continued well into the first quarter.

Speaker 4: Our merchants and operators have done a nice job executing this value strategy.

Speaker 4: The slowdown in our sales trend that we saw in the first quarter coincided with two external factors.

Speaker 4: Firstly, the timing of tax refunds.

Speaker 4: These had run ahead of last year, early in the quarter, but in March they began to fall off.

Speaker 4: Refunds ended the quarter well behind last year's levels and also below 2019 levels.

Speaker 4: The reason this is important is that tax refunds are the main delivery vehicle for important Federal Benefits programs like the Earned Income Tax Credit and Child Tax Credit.

Speaker 4: So, lower-income customers are hugely sensitive to lower tax refunds.

Speaker 4: This is what happened in Q1.

Speaker 4: Based on our own historic experience, we estimate that lower tax refunds cost us about a point for comp growth in the quarter.

Speaker 4: I think you have probably heard very similar commentary from other retailers that serve lower income shoppers.

Speaker 4: The second thing that happened, or didn't happen, was weather.

Speaker 4: In the important weeks leading up to Easter, temperatures across the country were cooler than last year.

Speaker 4: Our warm weather businesses, which were doing well early in the quarter, softened versus the rest of the store in mid-March.

Speaker 4: So, to summarize, we believe that the compound effect of lower tax refunds

Speaker 4: And, cooler weather leading up to Easter was the primary driver of the sharp fall-off in our trend in mid-March.

Speaker 4: Okay, let me move on and talk about the more recent trend.

Speaker 4: On a geometric stack basis, we began to see a pickup in the second half of April , and this momentum has continued May month to date.

Speaker 4: This recent pickup reinforces our belief that the slowdown that we saw in mid-March was driven by external transitory factors.

Speaker 4: We are guiding and managing our business to a comp growth range of 2% to 4% for the second quarter.

Speaker 4: If the momentum that we have seen since mid-April is sustained, then this guidance may turn out to be conservative.

Speaker 4: And, if this current trend remains strong, then our merchants and operators are ready and able to chase it.

Speaker 4: There is plenty of merchandise supply to support this chase.

Speaker 4: Overall, as we look ahead to Q2, we feel good. We believe that our strong focus on value and our strategies to support this are working.

Speaker 4: We need to stay very focused on these strategies, and we will.

Speaker 4: As I have described, we believe that the slowdown in the trend that we saw in Q1 is explainable and attributable to transitory factors, factors that should now be behind us.

Speaker 4: With that said, we recognize that this is a very uncertain environment and we remain very concerned about the economic health of the lower income customer.

Speaker 4: So it makes sense to manage our business cautiously and be ready to chase a stronger trend.

Speaker 4: Let me move on to the rest of the year.

Speaker 4: As we communicated in March, our guidance for the full year is for 3% to 5% comp store sales growth.

Speaker 4: And based on this comp growth, we expect to drive 80 to 120 basis points of margin expansion.

Speaker 4: We are still comfortable with this guidance. We see plenty of risks and uncertainties, but we also see some potential tailwinds.

Speaker 4: Let me elaborate on three of these potential tailwinds.

Speaker 4: Number one. Last year our industry was upside down with inventory.

Speaker 4: And this drove huge promotional activity, especially in mass retail.

Speaker 4: We think that the soft sales trends that many retailers have reported in Q1 are likely to drive higher promotional activity in Q2, but we still anticipate that this promotional activity will be below last year's levels.

Speaker 4: This year-over-year lower promotional activity should help our comp trend.

Speaker 4: Number two, last year we made the mistake of taking up retail prices in Q2 and Q3. This backfired.

Speaker 4: Our core customer was and is under significant economic pressure and those higher retails hurt us especially in the face of the promotional activity that I have just described. This year our values are sharpened and again this should help our trend.

And number three, last summer there were some external headwinds, in particular higher gas prices that hurt our customer and our trend.

Gas prices are now much lower and unless something happens to drive them back up, then this should become a tailwind for us over the next few months.

So, based on these tailwinds, we feel very good about our 4 year guidance.

The supply environment remains very strong and with our focus on value, we believe that we are well positioned.

In our remarks this morning, we have deliberately focused on the drivers of Q1 performance and the near-term outlook for Q2 and the full year.

We recognize that, given all the economic uncertainty, investors are trying to understand how the year might unfold across retail, so appropriately there is a strong level of interest in these near-term performance drivers. With that said, I would like to talk for a moment.

about our Burlington 2.0 initiatives. Over the last couple of years, even as we have been dealing with the pandemic and its aftermath, we at Burlington have been pursuing a comprehensive program to transform ourselves into a more flexible, nimble and efficient off-price business.

with a much greater focus on delivering great value to our shoppers.

We are not going to cover this in a lot of depth today, but let me say that I am very pleased with our progress.

We have made a lot of changes and improvements in buying and planning, doors, supply chain and real estate.

In upcoming quarterly calls, I will have more to say about these initiatives, but the one call out for today is the work we have been doing in merchandising. Over the last few years, we have significantly grown this organization.

We have brought in tremendous talent at all levels.

and we have also promoted great talent from within. In parallel, we have been investing in and developing new tools, systems and processes to support and leverage this merchandising talent.

Internally, we refer to this program as Merchandising 2.0.

and it is designed to transform our buying and planning capabilities.

enabling greater flexibility to respond to trends and providing clearer visibility through up-to-date and actionable business data and intelligence derive closer intelligence and first

We have just begun rolling out many of these new capabilities to the organization.

We are excited and the merchants are especially excited about the impact that these will have on our ability to drive improved and more consistent performance and execution over the next several years.

Now, I would like to turn the call over to Kristin who will share more details on our first quarter financial results as well as our outlook for Q2 and the full year.

Now, I would like to turn the call over to Kristin who will share more details on our first quarter financial results as well as our outlook for Q2 and the full year. Kristin.

Thank you, Michael, and good morning, everyone.

I will start with some additional financial details on Q1.

Total sales in the quarter were up 11%, while comparable store sales were up 4%.

We are disappointed with this outcome.

We had planned and guided to stronger comp growth.

But as Michael said, we believe that our weaker comp in Q1 was driven by external headwinds.

lower tax refunds, and cooler weather. If we are right, then these headwinds are temporary and they should abate as we move into the second quarter.

The gross margin rate in Q1 was 42.3%, an increase of 130 basis points versus 2022's first quarter rate of 41%.

This was driven by a 150 basis point decrease in freight expense.

which more than offset a 20 basis point decrease in merchandise margins.

This lower merchandise margin was driven by higher markdowns, which in turn were driven by the sudden slowdown in the trend that we saw during the quarter.

Product sourcing costs were $187 million versus $157 million in the first quarter of 2022.

Increasing 60 basis points is a percentage of sales.

Higher buying and asset protection costs represented the majority of this deleverage.

Adjusted SG&A was $565 million versus $514 million in 2022, decreasing 20 basis points as a percentage of sales, driven primarily by lower store-related costs. The EBIT margin was 4.1%.

higher markdowns and lower sGNA leverage. This led to the lower than plan expansion of our operating margin in Q1.

All of this resulted in diluted earnings per share of 50 cents versus 24 cents in the first quarter of 2022.

Adjusted diluted earnings per share were 84 cents versus 54 cents in the first quarter of 2022.

At the end of the quarter, our in-store inventories increase by approximately 10% on a comp store basis thirty low uses their product page in links to our book videos forget that more

This is slightly higher than we had planned, again driven by lower comp sales and plans. As a point of reference, at the end of May, our in-store inventories are now flat to last year on a comp store basis.

At the end of Q1, reserve inventory represented 44% of our inventory versus 50% last year. As a reminder, our reserve inventory is still significantly ahead of pre-pandemic levels.

Up about 65% since 2019.

This reflects the fact that, compared with our history, we are making much greater use of reserve to chase off price buying opportunities and hold for later release.

During the quarter, we opened six net new stores, bringing our store count at the end of the first quarter to 933 stores.

This included 13 new store openings and 7 relocations or closures.

Now, I will turn to our Outlook.

for the full fiscal year 2023 and for the second quarter.

We are reiterating our full year sales and earnings guidance, which includes a comp sales outlook of up 3% to up 5%.

Based on this comp sales outlook, we still expect our adjusted EBIT margin to increase by 80 to 120 basis points.

This sales and margin outlook translates to an adjusted EPS range of $5.50 to $6.

This is consistent with the outlook we provided on our Q4 call in March.

As a reminder, this includes five cents of EPS from the 53rd week.

In the second quarter, for the reasons Michael detailed earlier, we are planning and guiding to a comp increase of plus 2% to plus 4%.

This would result in operating margin expansion of up 10 to up 50 basis points versus Q2 of 2022.

This translates to EPS guidance for the second quarter of 35 cents to 45 cents.

For the back half of fiscal 2023, this outlook assumes comp store sales of plus 3% to plus 6%.

EBIT margins to increase 100 to 150 basis points.

and EPS in the range of $4.31 to $4.71, an increase of 27% to 39% compared to last year.

I will now turn the call back over to Michael. Thank you, Kristin.

Before we open up the call to questions, I would like to summarize some key points from today's call. Firstly, we are disappointed with our Q1 results, especially given the strength that we saw early in the quarter.

But we believe that the weakening of the trend that we experienced in March was driven by two external factors that are now behind us.

Specifically, lower tax refunds and cooler weather leading up to Easter.

Secondly, we feel very good about our underlying strategies and our focus on delivering strong value to our customers.

And we are encouraged by the recent trend that we have seen in our business.

We are being cautious in how we are planning Q2, but we are ready to chase if the sales trend turns out to be stronger than guidance.

And lastly, we remain comfortable with our four-year guidance.

We see plenty of uncertainty and we remain concerned about the economic health of the low-income customer.

but we also see some potential tailwinds.

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

The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad.

You will be provided the opportunity to ask one question and one further follow-up question. We will now take a moment to compile our roster.

Our first question comes from the line of Matthew Boss from JP Morgan. Please go ahead.

Great, thanks and good morning. So Michael, could you elaborate or provide some additional commentary on the continued concern around the low-income consumer that you cited in your remarks? Do you see any improvement on the horizon and do you think you're seeing any signs of a trade-down customer in your stores?

Well, good morning, Matt. Thank you for the question.

We've said this before, but it bears repeating, the lower income shopper.

is a core customer for us. And historically, it's been a major driver of Agro's. That low income customer likes and needs the value that we offer. Now over the last couple of years,

A low-income consumer has really been on a rollercoaster in 2021.

The Federal Stimulus Program drove a surge in their spending and then last year they crashed back down to earth food prices, gas prices.

general inflation swallowed up from their disposable income. So since early 2022 the economic pressure on that customer has clearly been a major headwind for us.

Your question was, do we see any improvement on the horizon? Actually, we do, unless there's a major economic shock.

you know, like the federal government shutting down or defaulting on its debt. We think there are a couple of factors that could ease the pressure on the lower income customer over the next several months.

Let me start with what just happened in Q1.

you know, one of the major headwinds that we faced in Q1.

based in Q1 was low-attack sweet fun.

which as I described in the remarks tend to have a huge impact on lower income shoppers.

Now that impact should abate as we move out of tax refund season. And it's true, there are some headwinds like reduced SNAP benefits that are going to persist. But compared with lower tax refunds, the dollar impact of these is fairly small.

The other factor that could help is that over the next few months, we're going to be anniversarying the high gas prices of last summer. I mentioned this in the prepared remarks.

The lower income customer is very sensitive to higher gas prices. Those costs tend to represent a higher proportion of their household spending. Gas prices are now significantly lower than they were last summer. Again, unless some major event drives them back up.

And it seems likely that that could become a positive tailwind this year.

Let me move on to the other part of your question, which is about the trade down customer. I want to be careful not to overstate this, but yes, I do think that we're seeing some, let's call it early evidence. Let me move on to the other part of your question, which is about the trade down customer.

Let me move on to the other part of your question, which is about the trade down customer. I want to be careful not to overstate this, but yes, I do think that we're seeing some, let's call it early evidence of a trade down customer in our stores.

And there are two pieces of data that I would offer up to support that. Firstly, when we look at our stores based upon the income profile,

the trade area that they're in, we're seeing that stores in areas with higher household incomes are outperforming the rest of our chain.

Now, by the way, it's worth noting that that is the complete reverse of the historical pattern that we've seen over many years. Historically, our growth and performance has been driven by stores that are located with low to moderate income households.

And we believe that that reversal just reflects the stage of the economic cycle that we're in. And it suggests that we may, may be starting to see a trade down chopper.

Secondly, when you look inside our assortment, as you'd expect, we're seeing strength at our opening price points.

You know clearly for all the reasons we've talked about the need of the old customer appreciates those values

But we're also seeing strength at higher price points, especially on great branded merchandise. The middle price points that are the softest.

Again, we think that the strength that we're seeing at higher price points may be early evidence of more want-to-deal or trade-down shoppers coming into our stores. So I guess I'd sum up, this is a long answer, but I'd sum it all up by saying we recognize that there are risks and uncertainties. So consumers under huge economic pressure.

But we also see some grounds for optimism. We believe that some of the big headwinds that have affected lower income customers will abate and others may even turn around and in the coming months turn into tailwinds.

And separately, we think there may be some early evidence that we're seeing a trade down shopper in our stores. Great. And then, Kristin, to follow up on your second quarter operating margin. So the comp guide makes sense based on the rationale that you cited, but the margin expansion is lower than expected.

Are there any drivers of this to explain and on the back half margins now implied to be up more than the front half? What are the drivers and just your confidence in achieving this plan?

Good morning, Matt. Thanks for the question. So for the second quarter, we're guiding a plus two to plus four comp growth and modeling 10 to 50 basis points of operating margin expansion.

The operating margin leverage really comes from two main sources, higher merchandise margin and lower freight. We do expect to continue to benefit in the second quarter from lower freight, particularly lower ocean freight costs versus last year. And our merchandise margins should be more favorable in the second quarter, but of course this will depend on sales in the quarter. There are some headwinds built into the second quarter margin guidance.

These include some transitory expenses and timing of certain expenses. These are collectively worth about 50 basis points and includes lapping one-time gains in Q2 of last year from real estate sales and insurance settlements and some timing of marketing expenses.

In addition, we also have potentially higher supply chain costs given the increased mix of true closeout merchandise as well as the lower AURs as we've expanded opening price points.

Those are really the key puts and takes from the second quarter margin. For the back half of fiscal 23, our guidance assumes comp store sales of plus 3% to plus 6% and adjusted event margins to increase 100 to 150 basis points. This is higher than the first half as you've noted in your question.

Like Q2, we expect leverage in the fall from higher gross margin, both from higher merchandise margin and lower freight costs.

And in addition, I noted the transitory expenses we're facing in Q2 that we do not expect to have in the fall. And depending on the sales comp, we should leverage on fixed expenses like occupancy in the fall. So in light of these factors, overall, we feel good about the second half guidance.

Great color. Best of luck. Thanks, Matt. Our next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Thank you, good morning. Michael, you mentioned that the weakness in the sales trend across retail in the first quarter may lead to more promotional activity in the second quarter. Can you elaborate on this a little and whether you believe this could hurt your sales in the second quarter?

Well, good morning Lorraine. Thanks for the question. We think, actually we realize that the slow down in traffic.

and in the trend that we saw in March.

was most likely also experienced by other discretionary retailers. I think that's coming through in some of the numbers that are being reported. We anticipate as we get further into the spring season, the sale softness is likely to lead to some increased promotional activity.

to what we would have expected and experienced pre-pandemic.

You know, those promotions are a headwind for us, of course, but they're really just part of the normal course of business and we should be able to compete just fine in that higher promotional environment. We think we've adequately reflected any headwind from this in our Q2 guidance. But let me contrast that or this situation with last year.

Last year, the imbalance between supply and demand was much more significant. There were many large retailers that were backed up with inventory that they had to clear. And this all came together at a time when we, at Burlington, were raising retail prices. So fast forward to this year. Yes, we're expecting some.

external promotional activity, but we think most retailers are in much better shape, much cleaner shape than they were last year. And this should mean promotions are lower and less widespread.

Secondly, we at Burlington are in a much better position in terms of our own values. As I've described, over the last few quarters, we've worked hard to sharpen our values. This is something we've been very focused on. And at this point, we feel like we're very well positioned. So to sum all this up, yes, we expect promotions to be a little bit more expensive.

to pick up in Q2. But we anticipate that the impact on our sales trend should be limited. And we believe that we've adequately factored that into our Q2 guidance.

My second question is about your new store opening plans. Last quarter you talked about a goal of 70 to 80 new stores this year. Is there any update to this, especially in light of some of the retail bankruptcies that have been announced? Do you think these will have an impact on the availability of real estate?

Thank you for the question. In our fourth quarter call in March, we described that we expect to open 90 to 100 new stores this year. That's a gross number. Once you pull out re-locations and closures, you get to the number.

of 70 to 80 net new stores in 2023. The short answer is that our plan for this number of openings has not changed.

Now on your point about retail bankruptcies, yes, we think these bankruptcies are likely to have a significant impact on the availability of attractive new store locations. The bankruptcy process typically is complicated and can take a long time. So it's hard to get specific, but we're confident.

that these bankruptcies will strengthen our new store pipeline. We have an ambitious program for the expansion of our new store network and the relocation of some of our older, more tired, and less productive stores.

So I think this new store pipeline, this stronger new store pipeline, is really going to help us to execute on this program over the next several years.

The final point to make is that we have a very strong real estate team that has a lot of experience dealing with retail bankruptcies.

Many of our most successful and productive stores today will once upon a time, Circuit City, Toys R Us, Sports Authority, Linens and Things, some of our best stores were created from carved up Kmart or Sears locations.

My point is that we have a team with a lot of experience in assessing the suitability and evaluating the potential economics of locations that emerge from these types of bankruptcies and then negotiating for or going after those.

is that we have a team with a lot of experience in assessing the suitability and evaluating the potential economics of locations that emerge from these types of bankruptcies and then negotiating for or going after those. Thank you. Thanks, Roy.

Our next question comes from the line of Ike Boruchtow from Wells Fargo. Please go ahead. Ike Boruchtow Hey, good morning Michael, Chris, and David. I guess first question, really just a big picture on merchandise availability. Clearly off-price merchandise has been pretty strong for the last couple of quarters. I guess Michael, do you have any concerns or are you seeing any...

real tightening of supply. You know, when I contrast this to the back half of last year, I would say that the, when supply was also very good, I would say that the main difference is that the drivers of availability may have changed. Last year, the retail industry was awash with inventory, mainly because

vendors and retailers had just ordered too much. So when they originally placed those orders back in, you know, the late 2021, they were facing huge supply chain delays and constraints. So they built a volume and a time cushion into those orders. Then of course, as the supply chain constraints unraveled, everything showed up all at once.

but it was far too much supply in the back half of 2022. This year, this spring, we're still seeing plenty of off-price availability. In other words, we're seeing a similar outcome, but this time I think it's different. I think instead of being driven by too much supply, it's being driven by too little demand. The customer's pulling back, sales trends have softened, and because of this...

focused on control. Our buyers know that our open to buy our liquidity.

is an extremely valuable currency in this environment and we need to make absolutely sure that every hangar on the rack deserves to be there.

Got it. And then follow up to Kristin, just on the comp characteristics, did you kind of dig into the components of comp growth, traffic, conversion, transaction size, and especially would love some color in particular on average ticket price, what you saw in Q1 and maybe expectations for Q2.

Thank you. Good morning, Ike. Thanks for the question. In the first quarter, traffic was up modestly. It started strong, but then meaningfully decelerated in mid-March. That's typically lower traffic is not driven by anything happening within the stores. It's driven by external macro factors.

And this drop off in traffic really supports our hypothesis that external factors were the primary driver of the weakening comp trend in mid-March. The biggest drivers of the first quarter comp were higher conversion and higher units per transaction. Again, this data supports our belief that our strong values are resonating with the consumer.

Once she comes into the store, she is more likely to buy and she's buying more.

For the quarter, AUR was down modestly. This lower AUR reflects our strategy of expanding our opening price points. We expect our AUR to be down somewhat throughout the year as we focus on sharp values. And this lower AUR does pressure our supply chain expenses, as I mentioned, and we built this into our guidance. We expect our AUR to be down slightly throughout the year as we focus on sharp values.

Great, thanks so much. Thanks Mike. Our next question comes from the line of John Kernan from TD Cowan. Please go ahead. Your line is open. Please go ahead. Your line is open.

Johnny there

Okay operator, let's go to the next question. Our next question comes from the line of Alex Stratton from Morgan Stanley . Please go ahead. You may be need a

Great, thanks so much for taking my question. My first one is really for Michael on the assortment strategies in the buying organization. It definitely sounds like you are happier with the level of execution than maybe you were last year. Could you just provide some additional color on maybe what has changed and also updates on some of the investments you are making in the buying organization? I do have a follow-up for Kristen after that.

Yeah, good morning Alex. Thanks for the question. You know, in the back half of last year we spent a lot of time tearing apart the drivers of our performance.

and redirecting and refocusing our assortment strategies to deliver much stronger and sharper value to the customer. Yeah, I feel very, very good about the progress that we've made since then. And if I look at the timeframe between October and mid-March, the improvement in our sales trend was quite significant.

On previous calls, we've shared details on some of the strategies that we've been pursuing. So just to call these out at a high level, we've seen a significant expansion of our opening price points, really focused on the need of the customer. Secondly, a focus on recognizable brands.

you know, to go after sort of the want-to-deal or trade-down customer. Thirdly, a more aggressive approach to shifting liquidity to stronger trending businesses. And then lastly, a much more ruthless approach to pulling back on weaker trending businesses. So overall, I feel like we've executed well against those strategies.

or we make a buy that we shouldn't have made, or we price a buy at a level that's too high. Now at Burlington, I think that culturally, we're very, very good at recognizing investing up to our mistakes and then correcting and learning from them. I think that's very important. But let me take a step back and address your question about investments we've made in our bond.

and within. As I mentioned in the prepared remarks, in parallel with that hate count growth, we've been investing in and developing new tools, systems and processes to support and leverage this merchandising talent. All of that programs are merchandising 2.0.

have been very rigid, somewhat department store like, I would say, especially with regard to the visibility, to data and responsiveness to in-season trends. Merchandising 2.0 is really designed to transform our buying and planning capabilities.

to enable greater flexibility to respond to trends and to provide clearer visibility to up-to-date and actionable business intelligence. This year we're rolling out many of those new capabilities to the buying and planning organization. We're very excited and as I said in the remarks, the merchants are extremely excited about the impact that those capabilities are going to have.

in terms of driving improved performance and execution over the next few years. The main message to take away from my answer is that yes, we're pleased with how our machine-naging organization has performed over the last couple of orders, but we still think we have a lot of upside and a lot of opportunity ahead of us.

That's super helpful. Thanks so much. Maybe one more for Kristen on inventory and specifically reserve. I think you said that it was about 44% of inventory at the end of the quarter. And I think that compares to 50% or so last year. Should we be at all concerned about reserve inventory being below last year or how should we think about this?

2019 our first quarter comp store inventories are actually down about 10% So we're still running leaner and turning faster versus our 2019 baseline Secondly reserve is made up of great buys that we're holding until the until the season or the next season

We buy reserve opportunistically. So the level of reserve we carry at any time will typically fluctuate depending on the supply. But there's a factor here that's important to note. Last year, given some of the receipt delays that we had experienced, we brought some goods in earlier than we normally would have. Now that these receipt delays are behind us, this is freeing up some of the reserve capacity and putting a little downward pressure on the...

reflection of the merchandise supply or the buying environment. And lastly, finishing up on reserve, it's important to reiterate that our reserve levels are still about 65% higher than they were pre-pandemic. This really represents a strategic and structural shift in our business as we're more focused on great off-price opportunistic buys. Thanks a lot, good luck. Thanks, all.

That's true.

Our next question comes from the line of John Cernan from TD Calon. Please go ahead.

All right, good morning, Michael, Kristen, David. Have a couple questions for Kristen. Firstly, on the Merch Marketing Q1, just given the sales slowdown and more focus on where you are, lower AURs, I suppose I'm a little surprised.

that Merch Marchin was only down 20 basis points. Are there any other drivers you can share in terms of the Merch Marchin performance?

So good morning, John . Thanks for the question. Overall, our merchandise margin was below last year and our internal plan. And this was really driven by the higher markdown through the change in the sales trend that we saw during the quarter, as we described in the prepared remarks. But you'll also recall our markdowns are artificially low because our stores were under-invented.

too specific on the merch margin breakdown, I do want to share that due to this strong buying environment, we did see higher year over year markup, while still passing along strong values to our customers. So we feel good about our inventory position exiting the quarter. We think it's seasonally appropriate and we're well positioned to deliver great value. Got it.

Maybe shifting to freight. I think 150 basis points of

Is there any other color you can add on this? How should we think about freight margin recapture in the rest of the year, both on gross margin and SGA?

Is there any other color you can add on this? How should we think about freight Margin recapture and the rest of the year both on gross margin and S.G.A. Great

So, as you know, external freight rates are moderating, particularly ocean freight. This is the primary driver of the Q1 freight favorability, which was 150 basis points lower than last year, as you noted. And to put this in perspective, in Q1 of 2022 freight expenses were about 270 basis points higher than Q1 of 2019.

But in the first quarter of 23, we've recaptured more than half of this due leverage. The Q-1 23 freight crosser are about 120 basis points higher than 2019. Our teams have worked really hard to renegotiate our freight contracts and take advantage of a softening freight market for both ocean and domestic freight. And so for the balance of the year, we expect continued leverage due to improved ocean freight rates.

And finally, through our contracting process, the spring freight rates came in modestly better than we had forecast, and this is built into our guidance. We don't.

All right, thank you. Thanks, sir. Our next question comes from Alina Chuck Grom from Gordon Haskett. Please go ahead. Hey, good morning. Thanks for all the color this morning. Michael Zornig, can you give us some update on some other aspects of Burlington 2.0. You touched on merchandising and you're prepared remarks. I'd like to give you some.

more flexible. You know, it's very important in the off-price model to be able to chase sales, not only at a top-line level, but also within the assortment, you know, if footwear is doing well to expand footwear, if home is doing well to expand home, etc. And also to pull back in certain areas based upon trends.

We've also had a lot of focus on getting receipts out to the floor. Let's make sure we get receipts out in a rapid way as possible. And we've introduced multiple new processes to make our stores more efficient. That's all been during a time over the last couple of years where the labor market's been very tough. So we've had to sort of make all those changes while facing headwinds in terms of labor availability.

We've also been developing a number of improved tools and systems to help drive efficiency and consistency in stores. Now, some of those systems improvements, which are gonna be very important to us, obviously have a slightly longer lead time. We've also been developing a number of improved tools and systems to help drive efficiency and consistency in stores.

And, you know, I think the most important of those systems upgrades, we're probably going to be piloting in the back half of this year, but probably won't roll out till next year. So, we've made a lot of progress. We've done a lot of things. I'm very happy with what we've been able to do in stores. Then we move on to real estate. So, new stores. You know, we've ramped up our new store opening program.

with a focus on our new, smaller store prototype. You know, we're very happy with the relative economics of that prototype, and that's allowed us to ramp up the number of new stores over the last couple of years. And as I said in my remarks, this year we expect to open 70 to 80 net new stores. Now we'd like to open more, and we hope in 2024 and 2025, some of the availability that we're seeing from bankruptcies, from retail bankruptcies, will give us.

that have large warehouses and distribution centers has been tough and also, frankly, you know, receipt volatility has made efficiency tough. But there are a number of actions that we've been taking, some of which we've been able to execute in the short term. For example, you know, making adjustments to shift schedules or work problems.

step back and sort of sum up with an overall assessment. Well, when I look across the organization, I'm very happy with the progress that we've made on our Berlin to 2.0 initiatives, especially given the external environment in the last couple of years. I feel like we've moved fast. And because of that, I'll conceive we've made some mistakes. But the changes that we've made are gonna make us so much more effective off price retailer. And they're really gonna drive our success in the next few years. Coming up tomorrow.

That was very helpful. Thank you. And then my follow-up is for Kristin. Could you talk about your degree of competence in your back-app guide, particularly after missing some of the numbers here in the first quarter? And then can you help us out on the sequencing of both comps and margins? I think you set up over 100 basis points, 150 basis points on EBIT. Before I get started, I want to say a few specific things.

just a sequencing of comps and margins in both the third and the fourth quarter. But you know what, Chuck, let me, let's break that question into two. Why don't I start off with the sales confidence? And then maybe Christine can address a margin and an expense outlook. So on sale, you know, we, well, first of all, we recognize we can see that the environment this year is very uncertain.

There are lots of things that could happen recession, banking crisis, government shutdowns, et cetera. But given what we know at this point, I think there are a few things that sort of give us confidence in our back-knife guidance. We would say there were really three things in particular that allowed us to sort of triangulate.

on our full year guidance. Number one, our comp in Q1, even though we were disappointed with that comp, we just reported a 4%. Now, our full year guidance is three to five. So the reasons I described in the remarks, we think that that 4% was partly driven by transitory headwinds. If you just script out the tax refund impact, we think it would have been a 5%.

So again, just based upon the first quarter trend, we feel like we're moving in the right direction to hit our full year comp guidance of three to five. Second thing to triangulate on that three to five was, you know, when we look ahead here, we feel like we're up against some things from last year, we're anniversarying some negative things from last year, in particular,

The very, very high promotional activity in mass retail that happened really from mid Q2 onwards throughout the summer and into the fall. You know, the mass retail is now in much better shape in terms of control of their industries. So we're not expecting the same level of promotional activity and we think that'll help us.

The other thing that will anniversary I mentioned in the remarks is higher gas prices. The last summer gas prices were much higher than they are now. So as we move over the next few months, as long as gas prices stay where they are, we think that will be a tailwind. And then the third thing that we use to triangulate on that 3-5 for the fall-year guidance was that we're up against their own mistakes from last year. And in particular, the decision we made to raise retail in the sort of...

second and third quarter of last year, you know, as we described, especially on our third and fourth quarter call, we feel like that really hurt us. We're in much better shape now, much, much stronger focus on value. So, again, I'll go back to what I said at the beginning of my answer. There's plenty of uncertainty out there, but we think, we feel pretty good about our four-year guidance of the 3-to-5 comp. But let me pass it over to Christian just to comment on the margin aspects of that.

Sure. So for the back half of fiscal 23 for the fall, as you noted, we're, EBIT margins are planning to increase 100 to 150 basis points. And similar to the first half of the year, we do expect higher gross margins, both higher merchandise margins and but also lower freight costs, lower freight costs, particularly on the domestic side in the back half of the year. In addition, the transitory expenses that we, that hurt us in Q2, we obviously don't have in the fall.

And given the sales comp, we are planning for the fall. We should leverage on fixed expenses like occupancy. So those are the big puts and takes for the fall on the margin side. Okay, great. Helpful color. Thank you. Thanks, Trin.

Our next question comes from the line of Mark Altsweyer. From Beard, please go ahead. Good morning. Thank you. Curious how you would assess your performance this quarter relative to the other major off price retailers? Then I'm quick follow up. Let's go.

Well, thank you Mark. It's a good question. I think let me start by saying that, we feel like we're lucky in our business. We have two very successful analogues, companies that have been in the off-price business for a long time.

You know, if companies, if you like, that demonstrate what's possible, what full potential looks like.

Now of course, there are differences between each of us, especially when it comes to the demographics of our core customers. Our core customer tends to skew lower income, younger, higher ethnicity, larger family size, more urban. We love this customer. They've been a major driver of our growth over many years and they will be again. But...

our peers have been executing and refining the off-price model for decades. We haven't. Compared to them, we're a relative latecomer to the off-price business and that lack of maturity shows up in our systems processes and sometimes in our execution.

But look, that's why I'm here. That's why the whole executive team is here. That's why Burlington is an exciting place to be, exciting place to invest with the smallest least productive and least profitable of the major off price retailers. We believe that the off price retail channel will continue to take share of the next several years.

And as that happens, we at Burlington feel like we have a tremendous opportunity to drive growth in our sales and profitability. So, yes, the last year was how it challenges for sure, but we think the longer term outlook is very, very exciting.

Thank you. And attraction of younger shoppers has been a theme among some of your competitors. Can you frame up the opportunity you have there and with perhaps other demographics to broaden Burlington's reach? Yeah, I think it's a very good question. Let me stop on the younger shoppers.

We've always had a stronger share of younger customers compared to department stores, but also compared to our off-price peers. When you walk into our stores, you can physically see the customer base and the assortment to queue younger. We have a stronger penetration of kids.

of the kids business, juniors, young men, and our shoppers aren't just younger, they tend to be, obviously we've talked this morning about the fact that they tend to be low-income, they tend to be more ethnic, they tend to be more urban. Those are the demographic segments, not only are they of course strengths of Burlington.

that they are over the long term growing segments in the United States. And as I said earlier, given where we are in the economic cycle, those consumers are struggling right now, but over the long term, that's in a tractive set of demographics to have strength in. Let me expand to the second part of your question. Are there other...

Can we expand and broaden our demographics? You know, we, in order to get to our two thousand stores, which is the long term goal for Burlington, we need to be able to operate in a range of different store locations in a cracked, a wide range of demographics, even though the core group that I just described, our younger, more ethnic,

urban, etc. Even though that's a large segment of the population, we still need to be able to operate effectively in other areas. So there are a number of things that we're doing in our business to sort of improve what I would say is the customization of our assortment by store, and therefore to appeal to a broader demographic.

not only the need-to-deal customer, but the want-to-deal customer. So I feel pretty good about our ability to do that over time, but it's definitely something that we're aware that we need to work on over the next several years. I would now like to turn the call over to Michael O'Sullivan for closing remarks.