Q2 2023 Burlington Stores Inc Earnings Call
[music].
Thank you for holding and welcome everyone to the Burlington stores in fiscal 2023 second quarter operating results call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.
Your session if you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star what.
We ask that you limit yourself to one question and one follow up.
I will now turn the call over to David Glick Group's senior Vice President Investor Relations and Treasurer. Mr. Glick. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2023 second quarter operating results.
Presenters today are Michael O'sullivan, our Chief Executive Officer, and Krista Muhr, our 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 August 31, 2023.
We take no responsibility for in Accuracies that may appear in transcripts of this call by third parties.
Our remarks, and the Q&A that follows are copyrighted today by Burlington stores.
Remarks made on this call concerning future expectations events strategies objectives trends or projected financial results are subject to certain risks and uncertainties actual.
Actual results may differ materially from those that are projected in such forward looking statements.
Such risks and uncertainties include those that are described in the company's 10-K for fiscal 2022 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.
Secondly, I will share our outlook for the rest of the year.
And thirdly, I will talk about our new store opening program.
Then I will hand, the call over to Christian to walk through the financial details.
Okay, let's talk about our Q2 results.
Comp store sales for the second quarter increased 4% versus our guidance of 2% to 4%.
This represents a 3% comp store sales growth versus 2019 on a geometric.
Basis.
This was very similar to our trends in Q1 and it means that for the spring season as a whole our comp store sales growth was 4% on a one year and 3% on a full year geometric stat basis.
We are a little disappointed with these numbers.
As we came into 2023, we guided to 3% to 5% comp growth.
Yes to date on a full year basis, we are at the low end of this range.
I hope to do better.
As discussed previously we believe the key external factor negatively influencing our underlying sales trend is the health of the low income shopper.
Our core customer.
This demographic continues to be under significant economic pressure.
Increases in the cost of living which had a huge impact on this customers' discretionary spending last year.
Moderated somewhat but of course these costs still going up.
Add to that these lower income shoppers have been impacted by lower benefits and lower tax refunds in the first half of 2023.
So overall, while there has been some moderation in the headwinds facing this customer.
Discretionary spending is still significantly constrained.
Our strategy with this customer has been to focus on great value, especially at opening price points.
We are pleased with our execution of this strategy, we are driving strong tons and margins at these price points.
But this is an area, where we can and must continue to improve.
Is there any off price much will tell you showing value at opening price points is one of the most difficult things to do.
It's not just about price, it's about offering fashion quality and even a great brand at these low opening prices.
I feel much better about our values at opening price points now than I did last year.
But these values are really critical to our core customer. So we can get even better and sharper and all aspects of opening price point value.
As we have said before this economic cycle has been unusual in that while low income shoppers our core customers have been impacted by inflation.
Other demographic groups higher income groups have been relatively unscathed.
Coming into 2023, we thought it was possible that if the overall economy slowed down and we might see more trade down traffic in our stores and this could potentially.
Holly.
Some of the weakness among our lower income customers.
Our strategy going after these trade down Chavez has been to increase the mix of recognizable brands and to offer a great value across good better best price points within the assortment.
Our merchants have done a nice job executing the strategy. The mixed of recognizable brands is much higher now than last year and that values are significantly stronger.
Ken This is a strategy that we need to continue to push and improve.
Our good better best value strategy has been helped by the fact that there was a very strong availability of off price branded merchandise.
This strong supply environment means that not only have we been able to increase mix of recognizable brands at great value.
As Christian will describe later in the call. We have also been able to drive up our merchant margins.
Although we feel good about our execution of this strategy.
We have not seen as much trade down activity in our stores as we would've liked.
Thank you that the overall economy has not slowed down significantly.
Unemployment levels remain low.
We haven't seen some trade down traffic, but so far the impact of this on our trend has been lower than in previous cycles.
Let me move on now and talk about our outlook for the rest of the year.
It is important to start by pushing our year to date comp trend into context, with our expectations coming into the year.
Our comp guidance for the full year with 3% to 5%.
On a one year and similar 3% to 5% on a four year deal metrics tax basis.
This guidance was predicated on three things.
Number one improved execution, which we feel like we've achieved.
Number two some moderation in the impact of inflation on lower income households.
As described a moment ago.
And that had just been partially offset by lower benefit payments and tax refunds.
The lower income shopper is struggling.
Struggling.
And number three an increase in trade down traffic in our stores driven by a slowdown in the economy.
Again as described earlier.
World economy.
Not really slowed down.
Our actual year to date comp growth of 3% on a full year basis is that the lower end of our full year comp guidance range.
We are disappointed with this year to date trend, but given the commentary that I have just provided.
This trend makes sense.
We are now planning the full season based on 2% to 4% geometric comp stat.
The midpoint of this range is what we have achieved to date.
This means that we are narrowing our full year guidance versus 2022 from a range of 3% to 5% to a range of 3% 4%.
In a moment Kristen will break out the guidance for Q3, and Q4 and she will explain that we were applying the same logic the same 2% to 4% geometric stack for both quarters.
Again, a year to date comp trend is the midpoint of this range.
Kristian will also discuss earnings implications of this comp guidance.
But before we go there I would like to provide a brief update on our new store opening program.
We are by far the smallest of the major off price retailers and as discussed previously we believe that we have a significant opportunity to increase our store count.
Also as discussed previously we have.
Very excited about our smaller store prototype.
For a number of historical reasons, our stores have always been much larger than our peers and they have tended to be less well traffic.
<unk> and less desirable locations.
As a result, our.
Sales productivity per square foot.
And our individual store economics are in theory through our off price peers.
In addition to adding new stores, we have an opportunity to relocate and downsize many of our older and less productive locations.
Our stated goal has been to open in excess of 100, net new stores a year, but given the lack of real estate to pay the ability over the last few years, we have struggled to hit this number.
As we announced in March this year, we expect to open between 70 and 80.
Stores.
I'm glad to say that the supply of great real estate locations has opened up significantly over the last several months driven especially by the winding down of bed Bath and beyond.
There are two main implications of this that I would like to discuss.
Firstly, we have acquired 62 store leases directly from bed Bath and beyond.
It is unusual for us to acquire leases from another retailer even in the bankruptcy.
We would typically wait until the store locations revert back to the landlord.
The benefit of acquiring leases directly is that we get to cherry pick the locations that we're most interested in.
The downside is as soon as we acquired lease we stopped paying rent even though it may take six to nine months to prepare the location and open the store.
In a moment Christian will provide details on these expenses.
Given the timing we do not expect these stores to have a material impact on our net new store count or on a total sales this year.
These stores will largely benefit us in 2024.
Secondly in addition to these 62 stores there are many other former bed bath and beyond locations that may be of interest to us once they are returned to the landlord and the bankruptcy process.
So as we look at our pipeline of store locations, yes, now much more confident in our ability to open the number of new stores that we would like in 2024.
At this point it is too early to provide specifics on our 2024, new store opening program, we will do that at a later time.
Now I would like to turn the call over to Kristin.
Thank you Michael and good morning, everyone.
I'll start with some additional financial details on Q2.
Then I will move onto our outlook for the rest of the year.
Total sales in the quarter were up 9% while comp.
Comparable store sales were up 4%.
This means that for the spring season, as a whole our comparable store sales advanced 4% on a one year basis and 3% on a four year geometric stack basis.
The gross margin rate in Q2 was 41, 7%.
An increase of 280 basis points versus 2020 key second quarter gross margin rate of 38, 9%.
This was driven by merchandize margin improvement of 150 basis point.
130 basis point decrease in freight expense.
The higher merchandise margin was driven by higher markup, lower markdown and by lower storage expense versus Q2 of last year.
The higher Mark that reflects the very strong off price buying environment that Michael described earlier.
Product sourcing costs were 183 million versus $157 million in the second quarter of 2022 inch.
Increasing 50 basis points as a percentage of sales.
Buying expense and supply chain costs contributed to this deleverage.
Adjusted SG&A was $587 million versus $518 million in 2022 <unk>.
Increasing 90 basis points as a percentage of sales.
Largely in line with our expectation driven primarily by the timing of marketing spend.
Higher store related costs and higher corporate expense.
The bed Bath <unk> beyond leases had a 10 basis point negative impact on adjusted SG&A in the second quarter.
Adjusted EBIT margin was three 1% 100 basis points higher than the second quarter of 2022.
Excluding the impact of the recently acquired bed Bath <unk> beyond later adjusted EBIT margin would have been 110 basis points higher than the second quarter of 2022.
All of this resulted in diluted earnings per share of 47% versus 18% in the second quarter of 2022.
Adjusted diluted earnings per share were 60% versus 35 in the second quarter of 2022.
The bed Bath and beyond related expenses had a 3% negative impact on the adjusted earnings per share in the quarter.
At the end of the quarter, our in store inventories increased by approximately 1% on a comparable store basis.
At the end of Q2 reserve inventory represented 45% of our inventory versus 52% last year.
In 2022, we had built up our short day reserve inventory due to the lingering supply chain delays, which are not impacting us. This year. Therefore, we are able to carry a lower level of reserve inventory, while still taking advantage of a very strong buying environment.
As a point of comparison, our reserve inventory is still significantly ahead of pre pandemic levels up nearly 90% since 2019.
This reflects the fact that compare with our history, we are making much greater use of reserve to chase off price buying opportunities and.
Hold for later relief.
During the quarter, we opened six net new stores, bringing our store count at the end of the second quarter to 939 stores.
This included nine new store opening and three relocations or closures.
Now I will turn to our updated outlook for fiscal 2023. Please note that the following guidance excludes costs associated with the leases on 62 stores recently acquired from bed Bath <unk> beyond <unk>.
These expenses, primarily dark rent will negatively impact the third and fourth quarters of fiscal 2023 by 11.
And nine cents per share respectively.
Together with the <unk> impact incurred in the second quarter. This translates to an expected full year negative impact from bed Bath <unk> beyond lease acquisition of 23 cents per share.
As Michael described based on how these store leases were acquired we immediately incur expenses for these stores, while we are remodeling and converting.
Revenues and profit from these stores will largely benefit us in fiscal 2024.
Of course, this timing was factored into our detailed financial assessment of these lease acquisition.
These store locations have strong pro forma economics and are in locations or strip mall, where we would otherwise have a difficult time, finding a suitable new store opportunity.
So we are very excited to be adding these store locations to our network.
We are updating our full year sales and earnings guidance as follows. We now expect full year fiscal 2023 sales to increase 11% to 12%.
Which include our comp sales outlook of up 3% to up 4%.
Based on this comp sales outlook, we expect our adjusted EBIT margin to increase by 80 to 100 basis points.
And our adjusted earnings per share to be in the range of $5 60.
To $5 90.
Which compares to our previous guidance of $5 50.
To $6 issued back in March.
As a reminder, this guidance exclude the impact of the $21 million of expenses relating to our acquisition of <unk>.
Bath <unk> beyond leases and.
And includes five of earnings per share from the 50 <unk> week.
As Michael mentioned, we are planning, a 2% to 4% increase for the fall season on a four year geometric stack basis.
The midpoint of this range is what we've achieved year to date.
So for the third quarter, we are guiding to a one year comp sales increase of plus 5% to plus 7%.
On a four year geometric stack basis translates to 2% to 4% increase.
Based on this comp sales outlook, we expect operating margin expansion of 170 basis points to 220 basis points.
Versus Q3 of 2022.
And adjusted earnings per share guidance to be in the range of 97.
Two $1 12.
For the fourth quarter, our updated full year outlook implies comp store sales of negative 2% to flat, which again is based on a plus two to plus 4% four year geometric comp stat.
Based on that outlook on a 13 week basis, we expect Q4, adjusted EBIT margin to be flat to up 40 basis points and.
And adjusted earnings per share guidance to be in the range of $3 10 to $3 25.
When including the five benefit from the 50 <unk> week.
We expect adjusted earnings per share for the fourth quarter to be in the range of $3 15.
With $3 30.
I will now turn the call back to Michael.
Thank you Kristen.
Before we open up the call to questions I would like to summarize some key points from today's call.
Firstly for the spring season, as a whole we achieved 4% comp growth on it.
One year basis.
This represents.
A 3% geometric comp stack.
We are already a little disappointed with these results.
We are happy with our major strategy, but coming into the year. We had hoped that external factors would be more favorable.
In particular, it is clear that the low income shopper, our core customer is still struggling.
Secondly, looking forward to the second half of the year, we are adjusting our guidance to lineup with our year to date trends.
The midpoint of our guidance range for Q3 and Q4.
Is that 3% gave metrics that comp.
Same as a year.
To date trend.
Thank you your underlying trend is stronger and we are ready to chase it.
Thirdly, we are very excited about the opportunities that have opened up to expand our new store and store relocation programs.
We are by far the smallest of the major off price retailers and historically our stores have been physically larger.
Yes.
Cora economics.
The increased supply of attractive real estate locations gives us more confidence in our ability to achieve our new store opening targets over the next few years.
At this point.
I'd now like to turn the call over to the operator for your questions.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad again Thats star one on your telephone keypad.
Ask that you please limit yourself to one question and one follow up.
Matthew boss with Jpmorgan Your line is open.
Thanks, Good morning, and congrats on a nice quarter.
Thanks, Matt.
So Michael larger picture, maybe compared to broader retail the big three off price retailers reported healthy same store sales year to date.
I guess, what's your assessment of how off prices performing relative to other retail channels and any commentary on the relative performance among the major off price retailers.
Hello, Good morning, Matt Thank you for that.
Question.
I think the first thing I would say is.
I agree with you.
Off price.
Off price looks like maybe it's starting to pull away from traditional retail.
On a one year basis.
Year to date comp performance for the major off price retailers.
It has been in the mid to high single digit range.
Positive mid to high single digit range, whereas for department and specialty stores.
It looks like it's mostly been negative.
I don't think that Thats too surprising it feels like perhaps we're starting to revert to the longer term structural trends.
Before the pandemic where off price.
Over many years gained share at the expense of other bricks and mortar retail.
I think by just asking maybe that's one where well go going back to.
Second point I would.
Make though is that within off price that continues to be a fair.
A significant divergence in relative comp performance between the off price change, especially when your comparable on a on a multiyear basis. When you look at the numbers, we have Burlington, we're at the lower end of that performance range.
I think the fact or the perhaps best explains relative performance is the difference in core customer profiles between the different retailers.
Those those differences didn't really matter historically, but in the last 18 months.
Lower income shoppers have been differentially impacted by the higher cost of living and by the scaling down of pandemic Ara benefits our strength.
To announce strengthens with shoppers who are younger.
Other income and more restaurant pretty diverse in the longer term.
This is a really great core customer.
Since early 2022.
These factors have already been struggling when you look at when you look at other discretionary retailers that serve lower income customers I think you see the same pattern.
We will perform differentially well in 2021.
And then we've all performed differentially poorly since early 2022, and I think that correlates with the spending power of lower income shoppers.
So let me wrap up my answer by making one final point I highlight that our off price peers are doing well being.
Encouragement.
Burlington to point out it was all about becoming more off price.
The strong performance of our peers demonstrates if you'd like the office the possible and off price.
But right now we're facing strong customer headwinds, but and we have been since early 2022, but those headwinds are not going to last and the strong performance of our peers gives me confidence in off price.
But it also suggests that we have a big opportunity once the discretionary spending.
At our core customer begins to recover from this inflationary cycle.
That's great color, maybe Michael just to follow up on your back half guidance. So the logic of basing the forecast on the year to date multiyear comp trend it makes sense and it seems as if you've de risked the guide, but relative to some other retailers that actually raised the back half and <unk> assumption.
Are there any specific concerns that are causing you to be more cautious.
Yes.
Really.
The factors that drove our thinking on the updated guidance number one.
Our year to date comp trend.
On a full year basis is 3%.
It was 3% in Q1.
3% in Q2, so it feels reasonable to reset guidance for Q3 and Q4.
Just on this year to date four year stock trend.
Q3.
Last year was our weakest quarter.
That logic means that mathematically our Q3, one year comp guidance is 5% to 7% again consistent with the multiyear trend we've seen year to date.
I should also add that we are we're very happy with our sales trend August month to date.
And that trend gives us further confidence in.
<unk> okay.
Of course, we're only three weeks into the quarter.
The second factor that drove our thinking on our back half guidance is that we know that if the trend turns out to be stronger.
And we can chase it.
My assessment is that we always perform better when we plan cautiously and then chase.
That puts us in a stronger position to respond to what the customers telling us and in this environment, where where availability is exceptionally strong.
No we can find great merchandise to support a stronger trend.
And your question you asked whether there's anything specific any specific concerns we have that are making us cautious.
The direct answer is no.
Of course, there are risks be impacted student loan repayments. So.
Unpredictable weather in October .
We don't have any special insight and intelligence into those.
And housekeeping on guidance was was much more straightforward, it's based on year to date trend and confidence that we can chase the trend if it turns out to be stronger.
Okay.
Great color best of luck.
Thank you.
Okay.
Alright, Perugia with Wells Fargo. Your line is open.
Hey, good morning, Thanks for taking my question actually I have two questions for Christian both on the new stores I guess, firstly can you provide any detail on your expectations in terms of new store economics, and I guess in particular as you are opening more stores over the next few years, how should we be modeling.
Things like new store volumes.
Four wall margins margin impact of the stores just things like that would be helpful.
Great. Thanks, Hi, good morning, I. Appreciate the question I'll first speak to new store sales volumes, and then speak to the margin impact from new stores.
On sales for modeling purposes, you should assume that on average new stores will have sales volumes of about 70% of an average store in their first full year. This equates to about $7 million in sales and then these new stores will then slightly outperformed the chain in terms of comp growth for the first few years.
On the margin side, well there may be a handful of exceptions, but we typically only approve a new store location. If we believe it will be accretive to our overall operating margin in year, two and the hurdle. We use here is based on our 2019 operating margin and of course, it's not just about operating margin. We also apply an IRR hurdle.
On average new stores have a very attractive IRR.
We've shifted our new store openings towards a greater mix of the smaller prototype locations. We've seen an increase in both sales productivity as measured by sales per square foot, but also operating margin per store. The smaller prototype locations. They have superior economics to our order oversized stores. So.
With that said, though it's important to point out that when you segment and our overall store base.
Still the case and approximately 80% of our stores.
Our larger than 30000 square feet and about half of our stores are larger than 45000 square feet. So we still have a lot of oversized and less productive stores in our chain. That's one of the reasons why we're very excited about the expansion of our new store opening program.
Got it and then I guess staying on the topic of new stores Kristen.
Curious if you've done any analysis on the degree to which the new stores kind of cannibalize your existing stores.
Yes.
Typically as the number of store openings increase will that create a headwind to comp growth. How do you think about cannibalization.
Actually it's a good question, it's something we've looked at of course.
As you indicated we know that as we open new stores, we cannibalize older existing stores to some degree the cannibalization effect is relatively modest though when you compare with the incremental sales volumes at our new store generates.
I can share some additional data here over the last four years, we've opened about 250 net new stores. These stores represent about 30% of our 2023 year to date sales and we estimate that this group of stores has cannibalized sales in our existing stores by about 3% to four percentage points.
2019 in other words, new stores have represented a headwind of about a point of comp each year since 2019, but again the incremental sales from new stores has far outweighed the cannibalization impact and.
I think the last part of your question was getting at what happens as we ramp up new store openings.
Of course, we anticipate that that comp headwind.
We'll increase it is very likely it could exceed a point of comp each year over the next couple of years, but again, the total sales benefit will be significantly higher.
Got it very helpful. Thanks.
Okay.
Lorraine Hutchinson with Bank of America. Your line is open.
Thank you good morning, Kristen you said in your prepared remarks that shortage was favorable in the second quarter, which is very different to the broader trend across retail can you talk through the reasons for this improved shortage.
Good morning, Lorraine, Thanks for that question.
Youre right in the prepared remarks, I noted our storage expense was lower on a year over year basis. This was because of the adjustment we made to our shortage accrual in the second quarter of last year based on that quarter physical inventory last year's adjustment was a function of a higher accrual in Q2 as well as a catch up accrual in Q1.
Last year this had a negative impact last year and the anniversary of this accrual is what drive some gross margin leverage in the second quarter of this year.
So that said, we had inspected expected and improvement in our shortage results based on this quarter's physical inventory. Unfortunately, we did not see the benefit we were expecting as the retail industry wide shrink challenges continue and just have not abated.
So while we did see a year over year shrink benefit in Q2 as compared to the <unk>.
Significant headwind, we incurred last year. It was just not as much of a benefit as we expected. Unfortunately, our improvement in merch margin taking out the impact of the strength.
Change still enabled us to have a strong merch margin performance in the quarter and then ill just last point would acknowledge that we continue to take steps to control shortage and continued to make significant investments in shortage control initiatives. We believe based on these continued investments we can mitigate the higher shrink rate over time.
Thank you and then my second question is for Michael about the bed Bath stores can you provide any more details on these stores what kind of process did you go through to select the locations and also what kind of financial hurdles did you apply.
<unk>.
Well good morning Lorraine.
We looked.
Look very closely at all of the available bed Bath and beyond stores.
As I'm sure you know there were several several hundred stores, we had a large internal team of people real estate experts and legal and finance experts supported by the data.
Yes, typically retail bankruptcy the majority of store leases revert back to the to the landlords in fact, it's using a preference to deal with the underlying landlord.
That said, it's not uncommon in a bankruptcy process for many locations to be picked off before then.
Retailer has a strong interest in a particular location then it makes sense.
To acquire it directly rather than to wait.
Yes.
There were several specific criteria that we used to identify the bed bath and beyond stores that we were most interested in.
These included nonfinancial and financial criteria.
Financial criteria public things like strategic factors for example.
The site in a strategically important location market.
It also comes with competitive and I would say location specific factors for example, do.
Do we like the demographics.
Area and what do we think of the co tenants.
And then thirdly, we looked at whether or not the site would still likely be available to us. If we just waited for it to revert to the landlord.
We then having looked at those nonfinancial factors, we didn't lay it on all of the financial analysis that you would expect we looked at rent levels, including the dark rent that we would incur before the stores open.
We looked at expected sales volumes for the store projected operating margins capex requirements and perhaps most importantly, when we looked at the expected rate of return those things out our hurdle.
So based on all those factors we identified.
The stores that we were most interested in acquiring directly from bed Bath and beyond I would say that the Sally.
Rigorous process and we have.
Very happy with the stores that we came away with.
Also make the point.
That many other former bed bath and beyond stores will now revert to the landlords.
Slightly that we will pursue many of those stores again directly with the landlords.
Over the next couple of years those locations with just one part of our normal new store pipeline.
Sure I'll leave this question, though there probably is one point of clarification that I should I should make.
We may be able to open some.
All of the newly acquired bed Bath and beyond stores this fiscal year.
Would expect given the fact that we.
Incurring occupancy costs on those locations, we have an incentive we will push to get them open as soon as possible, but in prioritizing those stores. It may mean, letting some of our known bed Bath and beyond openings slip to early next year.
So that's the reason, we're saying that we don't expect these newly acquired bed Bath and beyond stores to have a material impact on us.
Net new store count or on our total sales in 2023. These stores are willing in a largely benefit us in 2024.
Thank you.
Thank you.
John Kernan with TD Cowen Your line is open.
Good morning, everyone.
Have a couple of model questions for Kristen.
Just first on Q2, the comp growth for the quarter was at the high end of the guidance operating margin was also well ahead of the 10 to 50 basis points. You had originally guided to EPS was ahead of guidance can you walk us through the main drivers of the margin beat versus your expectations.
Hi, John Good morning, Thanks for the question I'll start by saying, we're pleased with our margin pharmacy. This quarter, what really drove our year over year margin increase was on the gross margin line that increased 280 basis points more than offsetting any SG&A and product sourcing costs deleverage we incurred.
Largely as expected in the quarter.
The gross margin leverage was driven by 150 basis point increase in merch margin and then in 130 basis point decrease in freight expense.
And as Michael noted earlier, the buying environment is very favorable that really helped our markup and that was the biggest driver in terms of our merch margin. In addition, we benefited from lower markdowns as well as the lower shortage accrual as I described in answer to a previous question.
The freight decline was driven by both lower ocean freight costs and lower domestic freight costs, including favorable fuel rates going forward, we expect freight savings to primarily come from the domestic freight line as we've largely anniversary the decline in ocean freight at this point.
The balance of the P&L, including product sourcing costs and adjusted SG&A was better than we expect that as our operating teams to manage expenses very tightly during the quarter.
Got it I guess.
A follow up for you Chris.
Apart from the adjustments of the comp guidance in the second half are there any other.
Factors affecting the EBIT margin and <unk>.
Earnings guidance for the full year for fiscal 'twenty three.
And just on that note it doesn't look like the Q2 earnings.
Well it through to the full year guidance just helpful will be helpful to understand your thinking here.
Thanks, John It's a good question, let me talk you through the puts and takes.
As Michael described we believe it's prudent to plan our back half sales at the plus two plus 4% four year comp stack. This is aligned with our multi year to date trend and then we now of course, if the trend turns out to be stronger we can effectively chase that.
But this updated sales outlook results in a reduction in our fall sales and earnings plan full year total sales growth moderate from 12% to 14% to 11% to 12% and overall full year comp range narrows to 3% to 4% from 3% to 5% <unk>.
Even the low end full year comp of 3% is maintained versus our original guide that's really a function of rounding.
The reduction in our second half sales and earnings plan offset the earnings beat we saw in Q2. So as a result after excluding the impact of the bed Bath <unk> beyond lease acquisition costs. As a result, we're essentially maintaining the low end of our original comp sales and EBIT margin plan and then tight.
And the range of our adjusted EPS guidance.
Got it. Thank you thanks John .
Alex Stratton with Morgan Stanley Your line is open.
Great Good morning, Michael Chris and Thanks for taking the question and for all the helpful detail So far.
I just quickly wanted to dig in on the brief comment you made on student loans can you just speak to how you think about the impact of student loan repayments on your consumer going forward and then I have a follow up thanks.
Hi, good morning, Alex.
You for the question.
Yes, it's a good question frankly, it's difficult to know.
What feedback impact of student loan repayments will be.
The way we've been thinking about it is that there's a.
As a direct impact and an indirect impact on us.
Frank Bakker offset each other.
And what I mean by that is.
The direct impact is that.
There is a subset of our customers who have student loans.
And when the student loan repayments top back up in October assuming that they will.
And those customers will be effective they will have less money in their pockets and that that could impact.
The impact of discretionary spending including that Theyre spending at Burlington.
That's not a good thing.
The indirect impact is that there is a much broader population of shelters.
Maybe don't chocolate Burlington today, who will also be affected by student loan repayments.
Maybe those stockholders will become more value oriented.
In my early remarks, I talked about the potential trade down shoppers in our stores.
It's possible, but at the end of the moratorium on student loan repayments could trigger more trade down activity and Conversely that would be a good thing.
So the answer is we don't know, it's very difficult to predict what the overall impact will be.
I feel like we planned our business and we're managing our business. So I think.
I think we're in a pretty good position to react to no matter what happens.
Thanks for that Michael maybe Christian I think you mentioned freight as a benefit to the quarter briefly and in the prior question can we just revisit that maybe whereas for Sam for you know, how we should think about that factor heading into the back half. Thanks, a lot alright.
Alright, good morning, Alex Thanks for the question Yeah, as we called out we made good progress on freight as external freight rates really moderated by the end of this year, we would expect to recover about half of the freight deleveraged. We've seen since 2019. Our teams have worked hard to renegotiate our freight contracts and take advantage of the softening freight market.
At both on <unk> and domestic freight.
And our outlook does factor in more favorable domestic contracts that we've made of course diesel fuel prices could move that number around so we'll see how that shakes out. Additionally, we are continuing to optimize our inbound and outbound transportation processes and are actively focused on several initiatives that drive transportation efficiency.
Well I'll say, we don't think we will get all the way back to 2019 freight as a percent of sales, but there should be more opportunity to close that gap further beyond 2023.
Thank you good luck.
Thanks Al.
Chuck Grom with Gordon Haskett Your line is open.
Hey, good morning, Thank you very much.
Maybe you guys could speak to real estate opportunities.
Beyond 2023, I think you're targeting 70 to 80 stores.
Next year, maybe a little bit of color on how much the enterprise can handle.
Over the next couple of years 'twenty four 'twenty five and then one near term follow up would be just CAD.
Category color in the second quarter I Wonder if you could talk about.
All the areas and particularly touch on the home business.
Sure.
Chuck Thanks for the question.
Yes.
<unk> said in the prepared remarks.
We're very pleased with the pullback that's often beyond leases.
That we've been able to acquire over the last few months as you know over the last few years.
We've been trying to get up to 100 net new stores a year.
The 62 leases, we've acquired from bed Bath and beyond together with our existing pipeline.
Potential new store locations, but it gives us some quite a lot of confidence that we're going to be able to achieve that goal next year.
Now as you would expect as you as you ramp up new store openings that puts pressure on things like our while our operating teams.
Make sure that you have a bench of store managers and store associates. It also puts pressure on our.
Our delivery and distribution teams you need to make sure that you can obviously deliver merchandise to those.
Those new stores and we feel like we've gone through we've done our homework and we're prepared for that for next year.
So we feel good about that.
You also in your question we're getting at.
What are the opportunities beyond this year and beyond 2024.
I'd say that in addition to the 62 leases that we've acquired from bed Bath <unk> beyond <unk>.
Also a very attractive pool of additional store locations that will go back to the landlords from bed Bath and beyond.
And they should.
Provide us with a pool of new store locations over the next two to three years I would say.
Obviously there'll be other retailers interested in those locations to we know that but.
But nevertheless, as an expanding supply.
Brito locations, which is great.
Also I should add that although we're talking a lot about quite often beyond their light it could be other retail closures and bankruptcies and there have been smaller retail closures and bankruptcies. So far this year. So we actually are feeling very bullish about the pool of potential locations.
I guess I'd sort of sum up by saying, we have the clearest visibility right now into 2024, and we're very confident we're going to be able to expand our new store program next year.
As we look further out beyond 2024, we have slightly less visibility, but we are.
Have a growing confidence that there'll be an increased availability of attractive locations for at least a year or two after next year.
And then just category.
Alright.
Yeah could you just provide some color on.
Category color in the second quarter and also I'm also curious.
How does your stores and higher income markets performed in the quarter. So two part question is excellent.
I think I'll take the.
Okay.
The tighter credit <unk> question first.
In the <unk>.
In the second quarter.
Our beauty accessories, and footwear businesses were our strongest businesses.
The.
I think that's sort of been reported by other retailers so not.
Too much to call out there I think those are the businesses the customer.
Are they buying right now and I think our merchants did a very nice job facing into those businesses.
In terms of the comparison of home versus apparel.
Our home business was weaker than our apparel business on a one year basis, but I think that's a little bit of an unfair comparison in our home business has grown so strongly over the last three or four years.
If you look at on a full year basis, our home business is well ahead of our apparel business. So it depends on the basis of comparison.
Let me I think the last part of your question was was higher income.
Stores in higher income locations.
We had we had talked a little bit about this earlier in the year, we regularly slice and dice our stores to understand underlying performance and the degree to which.
Our sales trends are.
Correlating with store characteristics or locations or demographics.
And in the last 12 months, we've seen stronger comp performance.
Stores that are located.
And relatively higher income areas versus lower income areas.
Thats notable because it's the opposite of what we've seen historically.
That said consistent with sort of the external macroeconomic environment. Since early 2022, lower income customers, who matter a tougher time than other income groups. So it's not surprising that the ROI.
The performance of our stores that are in.
Higher income versus lower income areas.
It is stronger now obviously compared with peers, we have a smaller mix of stores in there.
Higher income areas in our store base tends to skew much more heavily towards low to moderate income areas. So yes, we believe that those lower income stores.
We're going to come back over time and performed very strongly once we're through this cycle, but right now.
The stores in higher income areas are out comping, the stores and lower income areas.
Great. Thank you.
Thanks, John .
Adrian <unk>.
Barclays. Your line is open.
Great. Thank you very much.
My first question can you discuss the traffic trends during the quarter.
And then relative to your basket, whether that you want to break it down to AUR and <unk> that would be great.
And then my second question is.
Each of these kind of Burlington to point.
The three big areas merchandising the distribution centre right investments in there and then Christian you kind of talk and alluded to the store.
So our progress maybe on the first two is where.
Where are you in that journey it sounds like the merchant teams are performing.
Delivering the productivity that you want but if you could also give me an update on kind of the investments you've made in getting those Dcs to act as sort of off price infrastructure for you. Thank you very much.
Thank you Adrianne.
Christian why don't you take the question on basket size and then I'll take the question on billings from two point our investments it sounds great. Good morning, Adrian So overall growth in transaction is really what drove the comp for the quarter, primarily higher traffic, but also higher conversion. We also saw gains and higher units per transaction how are you.
<unk>, but that was largely offset by lower AUR says, we've expanded opening price points.
<unk> discussed.
Perfect and then on the second part of your question I'm going to guess.
I would take a broad approach to this I think it's probably worth.
First of all.
Just just stating the key elements of volume from two point out selling from two point I was all about providing the strongest value that we can by executing the off price model more effectively.
Chasing the trend based upon what the customers, telling us and focusing on off price opportunistic buying.
And then from an operating point of view getting.
Those receipts after the floor in a timely and cost effective way, providing a flexible store environment.
And driving improved new store economics by reducing the size of the store.
We'll look bits of data to point out.
We think about it internally, we think about that as sort of four main buckets of activity or investment if you like.
The first is merchandising, which I'll come back to your second new store operations.
This real estate and the fourth is supply chain.
On merchandising we've been from since 2019, we've been strengthening our merchandising capability that is really as a core element of burdensome to point out.
Now since 2019, we've invested in growing the merchant team and then we've also invested in new tools systems and processes that merchant something we call merchandising to point out we began rolling out those those new tools earlier this year and the reception from the merchants as Ben has been terrific.
Now do I think that theyre, having in those tools and having an impact in helping us to improve our execution.
Maybe.
I actually feel very good about our execution this year.
And maybe those tools are starting to have an impact impacts, but I think most of the most of the benefit is yet to come I think over the next couple of years I really think we can recent drive much greater value to the investment out of the investments that we've made in merchandising.
Let me move on to store operations.
We've done a number of things in the last few years to make our stores more flexible. So we can chase sales will pull back based upon the trend and we've also had a lot more focus on getting more seats out to the floor now.
We faced some headwinds because wage wages have gone up over the last four years have been labor shortages in some markets.
Hasnt necessarily going as smoothly as we would like but again I feel pretty good about the progress that we've made that we're much more flexible in our stores now than we were back in 2019.
The third bucket real estate I'm, not going to talk a lot about because I feel like we've already covered it in some depth today, our real focus with real estate is to open more stores and to open them using a much more economically advantaged format, which is a smaller store format and we're pleased with the progress we're making there and then on supply chain.
Again, there are a number of things that we've been doing over the last few years in freight and supply chain to get our.
Supply chain and transportation system, much more flexible much foster and moving goods I can't we run into some serious headwinds just in terms of the freight constraints the higher freight rates et cetera.
This year, we've made some real progress in driving down the freight costs. Obviously, we've been helped by that in terms of what's happening externally.
And we're also working very hard to drive down supply chain costs, that's going to take a little bit longer and I think we have some we have some good initiatives underway to sort of drive progress there in the next year or two.
Thank you that is incredibly helpful and best of luck.
Thank you.
This concludes the time allotted for the Q&A session I will now 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 you for your time today.
This concludes today's call. We thank you for your participation you may now disconnect.
Yes.
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