Q3 2024 Burlington Stores Inc Earnings Call
Hello, and welcome to the Burlington stores, Inc. Third quarter, 'twenty 'twenty four earnings webcast and conference call.
Please note that this call is being recorded after the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time. Please press star followed by number one on your telephone keypad. Thank you.
Speaker Change: Now like to hand, the call over to David Glick Group's senior Vice President Investor Relations and Treasurer, you May now begin.
David Glick: Thank you operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2024 third quarter operating results.
David Glick: Our presenters today are Michael O'sullivan, our Chief Executive Officer, and Christian <unk>, our EVP and Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Play of the call will be available until December three 2024, we take no responsibility for inaccuracies that may appear in transcripts of this call by third parties.
Speaker Change: Our remarks, and the Q&A that follows are copyrighted today by Burlington stores.
Speaker Change: Remarks made on this call.
Speaker Change: Concerning future expectations events strategies objectives trends or projected financial results are subject to certain risks and uncertainties.
Speaker Change: 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 2023 and in other filings with the SEC all of which are expressly incorporated herein by reference.
Speaker Change: Please note that the financial results and expectations. We discuss today are on a continuing operations basis reconciliations.
Speaker Change: <unk> so the non-GAAP measures, we discuss today to GAAP measures are included in today's press release.
Michael O'sullivan: Now here's Michael.
Michael O'sullivan: Thank you David.
Michael O'sullivan: Good morning, everyone and thank you for joining us.
Michael O'sullivan: I would like to cover four topics this morning.
Michael O'sullivan: Firstly, I will discuss our third quarter results.
Michael O'sullivan: Secondly, I will review our fourth quarter outlook.
Michael O'sullivan: Thirdly, I will share some comments on our longer term model and specifically our new store program.
Michael O'sullivan: And lastly.
Michael O'sullivan: I will describe our preliminary thinking on our sales and earnings growth outlook for 2025.
Michael O'sullivan: Then I will pass the call to Kristen.
Kristen: The financial details.
Kristen: Okay.
Kristen: With our Q3 results.
Kristen: Total sales increased 11% in the third quarter on top of 12% sales growth last year.
Kristen: The major driver of this growth is our new store opening program.
We continue to be very pleased with the performance of our new stores.
Kristen: And we are excited by the strength of our new store pipeline.
Kristen: I will talk more about our new store program in a few moments.
Kristen: Comp store sales for the third quarter increased 1%.
Kristen: This was on top of 6% comp growth in the same period in 2023.
Kristen: Our comp sales trend in the third quarter was impacted by significantly warmer temperatures than last year.
Kristen: After stripping out the impact of these warmer temperatures.
Kristen: Underlying comp store sales growth was very healthy.
Kristen: To explain and illustrate this I am going to provide more context on our Q3 comp performance than I normally would.
Kristen: In the past I have described Q3, that's having two very distinct sales drivers.
Kristen: For the first half of the period the trend is dominated by back to school selling.
Kristen: Typically this loss through the second week of September.
Kristen: After that the trend it depends critically on the weather.
Kristen: With the temperature for the remainder of the quarter as cooler than last year and that helps to drive positive comp growth.
Kristen: On the other hand, if it is warmer than last year.
Kristen: <unk> is a headwind to comp.
Kristen: At Burlington, we are particularly sensitive to warmer weather in Q3.
Kristen: Many shoppers still think about us as Burlington coat factory.
Kristen: In October our cold weather businesses represents almost a quarter of our styles.
Kristen: It is significantly higher than our peers.
Kristen: Let me break down our comp performance in Q3.
Kristen: In the first six weeks of the quarter our quarter to date trend was up 6%.
Kristen: We were very happy with our back to school performance.
Kristen: Then from mid September onwards, the trend dropped off significantly.
Kristen: This was driven by much warmer temperatures than last year.
Kristen: I am going to illustrate this impact with a couple of data points.
We track and internally report the sales trend for cold weather categories.
These include all the areas that you might imagine.
Kristen: Police and so on.
Kristen: For Q3 as a whole these categories represent about 15% of sales.
This mix is much slower in August then as I described a moment ago.
Kristen: This mix expands to almost a quarter of our business.
In Q3.
Kristen: Comp store sales trends for these categories was down and the negative teens.
Kristen: Meanwhile, our comp trend and known cold weather categories, which represent 85% with our business in Q3 was up 4%.
Kristen: In other words, the impact of warmer weather was worth three points of comp.
Kristen: If you strip out this impact and our underlying comp trend in Q3 was positive 4%.
Kristen: This is consistent with the trend that we've seen since March of this year.
Kristen: I should add that this analysis, probably understates, our underlying trend in Q3.
Kristen: Unseasonably warm temperatures do not just impact the comp sales trend for cold weather merchandise.
It also they're also a drag on overall traffic coming into the store, which affects every business.
Kristen: Anyway, even leaving aside this additional point, we are very encouraged with our underlying comp sales trend.
Kristen: In addition to the strong underlying trend I was also very pleased with our margin performance in Q3.
80 basis points of margin improvement on 1% comp sales growth.
As Christian will describe later in this call.
Kristen: This was a very high quality increase driven by higher merchant margin and.
Supply chain savings.
Kristen: I would like to make one other point about Q3 early in the quarter. When we saw strong back to school selling we were careful not to.
Overreact to this.
Kristen: One of the advantages of a conservative plan.
Kristen: Is that it makes it easier to keep tight control liquidity and receipts.
Kristen: This means that in the back half of September we were able to react quickly to the unseasonably warm temperatures.
Kristen: So despite the sudden slowdown in the sales trend in September and October.
Kristen: At the end of the quarter, our selling inventory on a comp basis was down 2% versus last year.
Kristen: I've talked about this in the past.
Kristen: As an off price retailer. It is important not just to chase the sales trend when it is strong but should we act quickly when it softens.
Kristen: I am very happy with how our teams reacted in Q3.
Kristen: Because of these actions our inventories are clean and current and we are in great shape as we enter the critical holiday selling period.
Kristen: This is a good segue to our Q4 guidance.
Kristen: For all the reasons that I have described we are optimistic about holiday in Q4 as a whole.
Kristen: For November month to date sales up running ahead of plan.
Kristen: With that said the big sales weeks are still ahead of us.
Kristen: And as you've probably heard from other retailers the holiday calendar, specifically the number of days between Thanksgiving and Christmas is relatively compressed this year.
Kristen: Given these factors we are maintaining our previously issued guidance range of flat to 2% comp growth in Q4.
Kristen: I would like to pivot now and talk about our long term model.
Kristen: A year ago, we shared our financial goals and assumptions for the next five years.
Kristen: The headline from that discussion was that by 2028, we expect to grow total sales to about.
$16 billion and operating income to $1 $6 billion.
Kristen: Overall, we feel very good about the progress that we're making towards these goals.
On our Q4 call in early March we will get into more specifics and provide a scorecard at unite and some commentary on key metrics and assumptions.
Kristen: But I would like to take a few moment today to provide an update on one of the most important drivers of this long range model.
Our new store opening program.
Kristen: Including a handful of stores that we opened this month.
We have now opened a gross total of 147 new stores this year.
This is comprised of 116, new stores and 31 relocations.
Kristen: Older oversight existing stores.
After factoring in 15 store closures, we are now projecting that we will end 2024 with 101 net new stores.
Kristen: Almost all of the stores that we've opened this year are our 25000 square foot prototype.
Kristen: And most of these stores are in busy strip malls with national co tenants.
We are making rapid progress in transforming our chain.
As we have disclosed previously on average and we expect new stores to run at about $7 million in sales volume in the first full year.
Kristen: It is early but our 2024 new stores are running well ahead of expectations.
Also as we have disclosed in the past.
Thanks, Joe.
Kristen: Relocations.
Kristen: And average sales lift of 10%.
Kristen: I am pleased to say that our 2024 relocations are running well ahead of it.
Expectation.
Kristen: Again, it is early but these run rates, we enforce our confidence and our excitement and our new store program over the next several years.
Kristen: Separately I would like to comment on our new store pipeline.
Kristen: We typically build our new store pipeline.
Kristen: Gentrifying attractive potential new store locations and working directly with individual landlords to secure and lease.
Thanks.
Kristen: I would anticipate that this will continue to be our primary approach going forward.
Kristen: But in the past couple of years, we have been able to supplement our new store pipeline by selectively acquiring existing leases from retailers that are going through a bankruptcy process.
Kristen: This approach has allowed us to move into centers that we might not have otherwise been able to access.
Kristen: Of course as you would expect.
Kristen: Carefully evaluate the detailed economics of these locations before making any big.
Kristen: In 2023, we picked up 64, former bed Bath and beyond locations through this process.
Kristen: And this year, we have picked up or are working on a few dozen locations from other troubled retailers.
Kristen: We are excited about the quality and the whole economic potential of the stores.
Kristen: Adding these deals to our existing pipeline and with the prospect of more opportunities ahead, we are very well positioned to open 100, net new stores in 2025, as well as meet or even exceed our 500 net new store opening goal for the period.
Kristen: Thousand 24 through 2028.
Kristen: That is all I plan to say today about our long range model.
Kristen: We will come back in March and provide a more comprehensive update on progress towards our goals.
Kristen: In a moment I will hand, the call over to Kristin, but before I do let me talk about our outlook for 2025.
Kristen: We think that there is a lot of uncertainty in the year ahead.
Kristen: It is difficult to forecast what will happen with the economy and with consumer spending.
Kristen: And add to that the potential impact of tariff changes in the tax code and other factors.
As we have discussed before in general we believe that uncertainty and disruption 10 could be good for off price versus other forms of retail.
Kristen: In addition, there are a number of very exciting internal improvements and initiatives that we believe will help us to drive sales and earnings in the next few years.
Kristen: As we look forward, we feel very optimistic.
Kristen: But when it comes to planning our business.
Kristen: Know that the best pasture for us is to plan conservatively and be ready to chase.
Kristen: That is what we have done this year.
Kristen: This table has worked well for us.
Kristen: So I anticipate that our 2025 outlook will be for total sales growth.
Kristen: High single digits, driven by 100, net new stores and comp sales growth of flat to 2%.
Kristen: We would expect some modest operating margin expansion at the high end of this comp range.
Kristen: We will update this initial outlook and share more details in our Q4 call in March.
Kristen: Now I would like to.
Kristin: Over to Kristin.
Kristin: Thank you Michael and good morning, everyone.
Let me start with our third quarter results.
Kristin: Total sales grew 11% on top of 12% total sales growth in the third quarter freeze for any Q&A.
Kristin: Comp sales grew 1%.
Kristin: This was on top of 6% last year.
This result was at the midpoint of our guidance range.
Kristin: Our adjusted EBIT margin expanded 80 basis points versus last year.
Kristin: The drivers of this margin expansion are higher gross margin.
Kristin: Leverage on supply chain costs.
Kristin: Let me walk through the details.
Kristin: Gross margin rate for the third quarter was 43, 9%.
An increase of 70 basis points versus last year.
Kristin: This was driven by a 50 basis point increase in merchandise margin due to.
Kristin: Strong regular price, selling which generated faster inventory turn and lower markdown.
Kristin: And also due to higher markup from better buying.
Kristin: Freight expenses decreased 20 basis points in the quarter.
Kristin: Yes.
Kristin: Product sourcing costs for $210 million.
Kristin: Versus $200 million in the third quarter of 2023.
Kristin: Decreasing 50 basis points as a percentage of sales.
Kristin: This was entirely driven by supply chain expense leverage.
Kristin: And from continued progress on our distribution center productivity initiatives.
Kristin: Adjusted SG&A costs in Q3 were 40 basis points lower than last year.
Kristin: When excluding approximately $10 million in expenses associated with the acquisition of bed Bath <unk> beyond leases in the prior year.
Kristin: Adjusted SG&A de Levered by 10 basis points.
Q3, adjusted EBIT margin was five 6%.
Kristin: 80 basis points above last year.
Kristin: We had guided to 60 to 80 basis points of improvement.
Our adjusted earnings per share in Q3 with $1 55.
Kristin: At the high end of our guidance range.
Kristin: And represents a 41% increase versus the prior year.
Kristin: Last year Q3, 2023 results exclude approximately $10 million of pre tax expenses associated with bed Bath <unk> beyond leases.
Kristin: At the end of the quarter, our comparable store inventories were down 2% versus the end of the third quarter in 2023.
Kristin: As we pulled back on cold weather merchandise receipt in reaction to the unfavorable Q3 weather.
At the end of the quarter, our reserve inventory was 32% of our total inventory versus 30% of our inventory last year.
Kristin: We are very pleased with the quality of the merchandise and the values that we have in roads there.
Yes.
Kristin: During the quarter, we repurchased $56 million in common stock.
Kristin: At the end of Q3, we had $325 million remaining on our share repurchase authorization that expires in August 2025.
Kristin: Before I turn to guidance I would like to briefly touch on our longer term supply chain strategy.
Kristin: As we've discussed previously.
Kristin: Going forward, we would like to own rather than lease new distribution centers.
Kristin: This will enable us to design these facilities to support the flexibility and efficiency that our off price model required.
We have a new 2 million square foot DC under construction in Savannah, Georgia that is on target to be opened in 2026.
Kristin: We intend to own the facility.
Kristin: As a reminder, as previously discussed we expect our Capex in 2024, and 2025 to be around 7% of sale.
Kristin: Higher than our historical levels.
Kristin: This is driven by our new store opening program.
Kristin: And our investment in new distribution centers.
Kristin: In addition, we may also explore opportunities to take ownership of an existing leased distribution center.
Kristin: It is it is possible that this might make sense for one or two of our existing lease DC.
Kristin: And we would only pursue opportunities.
Kristin: Where the economics work.
Kristin: These opportunistic buy versus lease deals are not factored into the capex levels that we have discussed previously.
Kristin: Now I will turn to our outlook for the fourth quarter of fiscal 2024.
Kristin: We are maintaining our fourth quarter 2024 guidance for comp sales.
Kristin: Total sales.
EBIT margin and earnings per share.
Kristin: We are guiding comparable store sales to be flat to up 2% with total sales to increase 5% to 7% for the fourth quarter.
Kristin: We expect our fourth quarter adjusted EBIT margin decreased by 50 to 80 basis points.
Changed from our previous outlook.
This margin outlook sales translate to adjusted earnings per share range of $3 55.
To $3 75.
Kristin: And it's important to note as we discussed on our last quarter's earnings call that the 50 <unk> week calendar shift has a negative impact on Q4, our total sales adjusted EBIT margin and adjusted earnings per share.
Kristin: For fiscal 2024.
After factoring in our actual Q3 results.
Kristin: In Q4 guidance.
Kristin: This outlook implies comp store sales growth of approximately 2%.
Kristin: Total sales to increase 9% 10%.
And EBIT margins to range from an increase of 60 basis points.
Kristin: 70 basis points.
Kristin: Finally, factoring in Q3 actual.
Kristin: Full year 2024 adjusted earnings per share is now expected to be in the range of $7 76 to.
Kristin: The $7 96.
Michael O'sullivan: I will now turn the call back to Michael.
Thank you Chris.
Michael: Before I turn the call over to questions I would like to emphasize three key points from today's call.
Michael: Firstly, we feel very good about the underlying comp trend that we achieved in the third quarter.
Michael: Our comp trends after factoring out cold weather categories was around 4%.
Michael: This was consistent with our trend since March of this year.
Michael: We're also very pleased with our pumpkin performance in Q3.
Michael: We achieved 80 basis points of leverage on 1% comp growth.
Michael: Secondly, we believe that we are well positioned as we enter the key holiday selling period in Q4.
Michael: We are managing our business cautiously.
Michael: On our underlying sales trend in the third quarter and on the strength of our holiday Assortments.
We are optimistic about our prospects.
Michael: Thirdly.
Feel very good about the progress we are making towards our longer term financial goals.
We will talk more about this progress in our year end call in March.
Michael: We are especially pleased with our new store opening program.
Michael: The early performance of our 2024 stores has been strong.
Michael: And now our new store pipeline for 2025 and beyond looks very good.
I would now like to turn the call over for your questions.
Michael: Okay.
Thank you. So much we are now opening the floor for question and answer session. If you'd like to ask a question. During this time. Please press star followed by number one on your telephone keypad kindly limit your questions to one question and one follow up your first question comes from Matthew Boss from Jpmorgan Your.
Michael: Line is now open.
Matthew Boss: Great Thanks, and good morning.
Matthew Boss: So maybe Michael.
Matthew Boss: Just to kick off on your cold weather businesses and the sensitivity to warmer weather that you stated in your remarks, you said that the weather impacted your <unk> comp by 300 basis points does this include the impact from Hurricane and then just looking forward do you see risks in the fourth quarter, if the weather were to be unseasoned.
<unk> warm or just any additional color on November maybe fourth quarter to date trends I think would be really great.
Matthew Boss: Well good morning, Matt. Thank you for the thank you for the question.
Speaker Change: Before I answer your question I would like to make a comment about our cold weather businesses.
Speaker Change: I realize that and listening to our prepared remarks today.
Speaker Change: Investors might get the mistaken impression that our strong position.
Speaker Change: In cold weather merchandize that somehow somehow a problem it is absolutely not.
Speaker Change: That we are one of the first retailers that shop this thing called <unk>.
They need outerwear is a huge strength for us and a source of competitive advantage.
Speaker Change: Outerwear business is a great business, we are very good assets and we will continue to look for ways to build and strengthen that business.
Speaker Change: But with that said.
Speaker Change: Of course, we know that that will be temperature variations from from year to year, especially especially in a transitional months like October.
Speaker Change: But there is variations tend to even out over time.
Speaker Change: After after October like the one we've just had where temperatures were well above the long term average the odds are very good that the temperature next October will be cooler than this year.
Speaker Change: And that's likely to be a tailwind to our comp in 2025.
If that happens then we'll probably call that out on this call next year and you can be sure that we will not be complaining about it.
Speaker Change: The key thing with cold weather categories is to be ready for those fluctuations and to manage the business flexibly. So we can react up or down.
Speaker Change: I should also add that as an off price retailer there is a silver lining for us.
Speaker Change: Years like this where.
Speaker Change: We had the season to date has been unusually warm.
Speaker Change: Likely that in the coming weeks, we will see a lot of terrific buying opportunities in outerwear. So we can put into reserve.
Speaker Change: And bring out next year, so with all that as a practice let me let me address your specific question.
Speaker Change: The three points of comp that we discussed in the prepared remarks relate exclusively to the impact of warm temperatures.
Speaker Change: Separately, we estimate that major hurricanes in Q3 impacted our comp by about an additional point.
Speaker Change: It's not hard for us to estimate that we can look at local stores that were affected by the hurricanes, we can quantify the impact on net sales.
Speaker Change: During the hurricane period and during any subsequent power outage.
Speaker Change: Anyway. The bottom line is if you strip out the warmer temperatures and the hurricane impact than our third quarter comp growth would've been 5%.
Speaker Change: No.
<unk>.
Speaker Change: <unk>.
Speaker Change: Our rationale for not calling out that hurricane impact in the prepared remarks is that we recognize.
Speaker Change: Does that that affects all retailers already sold retailers with a presence in those areas.
Speaker Change: In contrast, the reason that we called out the warmer temperatures will the impact of warmer temperatures is that for all the reasons. We've described.
Speaker Change: Warmer temperatures at this time of year differentially affect us versus other retail companies.
Maybe just wrapping up on the <unk>.
Speaker Change: Last part of your question about weather risk in Q4.
Speaker Change: Of course.
Speaker Change: That might be unfavorable or favorable weather in Q4, it's hard to predict but there are a couple of reasons why we're comfortable with that risk firstly.
Speaker Change: As I said in the remarks, the quarter is off to a good start with November month to date running ahead of plan.
Speaker Change: And secondly, it's important to understand that as we get further into the quarter cold weather selling becomes less important relative to holiday selling and gift giving.
Speaker Change: In other words for the next five to six weeks.
Speaker Change: Customer could come into the store looking for outerwear, but at this point, they're more likely to be looking for toys or guests so holiday merchandise.
Speaker Change: Our early selling in those businesses has been strong so we're optimistic about Q4.
Speaker Change: Great and then a follow up for Christine if you could just elaborate on your comments about inventory levels exiting the third quarter, if theres any imbalance with outerwear inventory tied to the slower <unk> sales trend or just any residual markdown risk to consider in the fourth quarter.
Speaker Change: Good morning, Thanks, Matt regarding inventory levels, we were very pleased with how we manage inventory during the third quarter as Michael described our merchants were careful not to overreact to the strong back to school selling in the first half of the quarter, we reacted quickly to the warmer temperatures in the <unk>.
Speaker Change: <unk> challenging sales trends and pulled back on receipts and as a result, as I mentioned, we ended Q3 with comp store inventories down 2% our.
Speaker Change: Our inventories are clean and current and we do not have a major markdown liability heading into the fourth quarter.
Speaker Change: Finally, as it relates to reserve inventory, our penetration increased to 32% of total inventory versus 30% last year.
Speaker Change: We're very happy with the great buys we were able to make we feel good about our reserve, especially the content and values.
Speaker Change: And finally I should add as Michael just mentioned this flow start to outerwear could perhaps translate to great buying opportunities in the category later in the season.
Matthew Boss: That's great color best of luck, thanks, Matt Thanks.
Speaker Change: Your next question comes from Ike <unk> from Wells Fargo. Your line is now.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Two for me Michael first I guess I was wondering if you could share you've helped us out in the past with comments on the health of the low income consumer.
Speaker Change: Dollar stores have been struggling this year, but this doesn't seem to have affected your business. I guess, just what are you seeing in your customer research your underlying trends within that segment would be great.
Speaker Change: Well good morning.
Speaker Change: Thank you for the question.
Speaker Change: Yes, as you know.
Speaker Change: The lower income customers, a very important customer to us we tend to index.
Speaker Change: Much higher among this demographic than our retail peers.
Yes, we're very focused on offering great value to that customer and I would say that where we have more tuned in now more tuned in than we ever were before and to what is happening with that customer demographic.
Speaker Change: I can't really comment on what's happening with dollar stores that business is so different to when I was given that focus on <unk>.
Speaker Change: <unk>, but instead, let me describe what we are seeing.
Speaker Change: With the with the data we have around the lower income customer.
I think that we track very closely is the performance of our stores based on the demographics of their local trade area. So we segment App stores based upon the demographics of political trade area and we look at that sales trend some of our highest volume and most productive stores are in lower income.
Trade areas and.
Speaker Change: Two years ago in 2022, those stores were underperforming the chain now because they are relatively high volume that had a big impact on our overall comp trend.
Fast forward to today.
Speaker Change: Our stores and lower income trade areas are outperforming the chain.
Speaker Change: Based on comments that we've heard from other discretionary retailers that are focused on lower income customers.
Speaker Change: We think that may be part.
Speaker Change: The general trend.
Speaker Change: We think that customer is looking for great value and maybe for the first time since 2021.
Speaker Change: It looks like that real incomes.
Speaker Change: Finally edging up.
Speaker Change: I should also add that in that analysis of store performance by trade area demographics.
Speaker Change: We are seeing healthy performance in other income bands as well.
Speaker Change: And we see that as evidenced that shoppers from market to hiring some guidance, maybe maybe trading down but coming back to the lower income customer as we've discussed previously.
Speaker Change: That customer really bore the brunt of cost of living increases in 2022. Unlike other income groups. Those shoppers don't have savings or that capacity that they can use to cushion the impact of higher rental grocery prices.
Speaker Change: So in 2022 that customer had to pull back sharply on discretionary spending.
Speaker Change: Over the past year or so what we're seeing is that as that will incomes have stabilized and started to pick back up.
Speaker Change: They are spending more and we think thats, helping to support the strength.
Speaker Change: All of our all of our underlying trend.
Speaker Change: Got it Super helpful. And then maybe follow up for Christian on margin expansion can you maybe give us additional color on the drivers of the margin in Q3 and maybe some just some details on the Q4 guide.
Speaker Change: What's embedded in your plan for Q4 margin.
Speaker Change: Great. Good morning, Thanks for the question.
Speaker Change: Start with the third quarter, we were pleased to deliver the 80 basis points of operating margin expansion, especially on a 1% comp I'll provide a little bit more color on those drivers within the gross margin line merch margin was up 50 basis points. This was driven by lower markdowns as we had strong regular price selling.
Speaker Change: Faster turns we also got a bit of help from higher Mark up Kevin by better buying and then in gross margin rate as a percentage of sales also improved by 20 basis points.
Speaker Change: Moving down on product sourcing costs, as we mentioned supply chain leveraged by 50 basis points. This was driven by our continued progress on our efficiency initiatives. These are primarily productivity improvement in distribution centers.
Speaker Change: And then excluding the impact of bed Bath <unk> beyond leases last year, adjusted SG&A was higher by 10 basis points due to deleverage of fixed costs on a 1% comp and the balance of the P&L de levered by about 30 basis points, including depreciation and other income.
Speaker Change: That is kind of the third quarter, if we turn now to the fourth quarter, we're maintaining our previously issued guidance. So that was a 5% to 7% total sales growth of flat to 2% comp growth and a 50 to 80 basis point decline in EBIT margin and there are several drivers of the lower projected EBIT.
Speaker Change: Margin in Q4 that I want to talk through.
Speaker Change: First we have a few transitory headwinds in gross margin in the fourth quarter. There is some incremental ocean freight cost in merch margin that we referenced on last quarter's call with the exposure to the spot market.
Speaker Change: And clearance levels are expected to be more similar to last year's levels that will provide less merch margin benefit and we've seen year to date.
Speaker Change: Secondly, we're accruing a higher year over year shortage rate compared to last year. We will of course true this up with our physical inventory at the end of the fiscal year.
Speaker Change: Thirdly, we are lapping the cost savings in our supply chain that we started to benefit from in the fourth quarter last year. So there are less supply chain productivity benefits, we expect in Q4 and the final point on the fourth quarter as is as we discussed on last quarter's call. There is an impact for us with the 50 <unk> week calendar shift.
Speaker Change: We're about one week ahead of last year, when we compare the quarters year over year. So for comp store sales, we shift or we adjust for the SME lineup the weeks.
Speaker Change: Total sales growth has an impact on sales margin and earnings essentially we lose a high volume higher margin week in November and then we gain a lower volume lower margin week in January and this translates into lower total sales growth in Q4 versus last year and we experience.
Speaker Change: More fixed cost deleverage. So those are really the drivers of Q4 EBIT margin outlook, but one final note I want to make I wouldn't extrapolate that Q4 margin trend into 2025, there are several transitory and timing factors impacting EBIT margin in Q4 and as we shared in the prepared remarks, we will.
Speaker Change: Modest operating margin expansion and 25 on a two comp.
Speaker Change: Awesome. Thanks, so much guys.
Speaker Change: Thanks.
Speaker Change: Your next question comes from Lorraine Hutchinson from Bank of America. Your line is now.
Lorraine Hutchinson: Thank you good morning, Michael I realize there's a lot of external uncertainty, but what impact do you think the policies of the new administration might have on your business over the next few years and how are you preparing for that.
Hi, good morning, good morning Lorraine.
Speaker Change: I think thats, what they might call it $64000 question.
Speaker Change: But the headline I think as it is.
Speaker Change: Very difficult to predict.
Speaker Change: If I think about it there are some policies that I could absolutely imagine might help our business.
Speaker Change: Especially policies that enhance the rail incomes or the discretionary spending power.
Speaker Change: Our core customers for example, lower taxes on overtime pay or on tips or higher child tax credit or policies that bring down the cost of energy.
Speaker Change: And of course as a separate item if corporate taxes are reduced.
That would be very helpful to our business in terms of earnings and cash.
Speaker Change: We are a domestic U S retailer, we don't have foreign subsidiaries.
Speaker Change: Our earnings are all in the United States, So lower corporate taxes would have a huge impact.
Speaker Change: Now of course, there are also risks and potential headwinds for example.
Speaker Change: If inflation were to pick up again or if there were an economic slowdown and then there are policies such as tariffs or types of immigration controls or reductions in federal programs, where the potential.
Speaker Change: It will impact I think really depends on the scale of the policy.
Speaker Change: Example on tariffs.
Speaker Change: We don't we don't know how significant those will be what categories that will apply to or even which countries. I think we just have to wait and see the details before we make an assessment, but maybe I should just make a general comment my experience has been that whenever there is significant uncertainty or disruption in the external environment then.
Speaker Change: While that can be a headwind on a headache for everyone, including us in the short term.
Speaker Change: Certainty and disruption is often very good for off price retail in the end.
Speaker Change: The reason why uncertainty disruption often work out well for off price is that the.
Speaker Change: The off price business model when its well executed is better able to handle the uncertainty and respond to whatever happens.
Speaker Change: The implication for us is that we need to execute our business well in other words.
Speaker Change: Conservatively maintain flexibility and be ready to react if we do that then there may be some bumps along the road, but I believe that things will work out well for us.
Speaker Change: Thank you and then Christian can you provide any additional details on how youre thinking about the outlook for 2025 and your remarks.
Speaker Change: Some of the possible comp range of flat to plus two in the modest margin expansion at the high end I'm curious about your confidence in the level of margin expansion and what the major drivers of expansion are likely to be.
Speaker Change: Thanks, Lorraine. It's a good question first I'd caveat that what we've shared with you is our preliminary plan for fiscal 'twenty, five and that could change obviously if conditions change over the course of the next few months and as Michael just described there really do remain a lot of unknowns, whether it's fiscal policy.
Thereafter, the health of our core customer et cetera, but that said given what we know today, we've got a lot of work on our preliminary budget for next year and we can share some high level thinking first on a flat to 2% comp we would expect high single digit revenue growth driven by 100 net new stores.
Speaker Change: And while we would of course drive to do better than that planning our comp sales in our expenses on the conservative comp range gives us flexibility to react to our business to effectively chase and to flow through any upside as well as more effectively manage any downside risk.
Speaker Change: And as a 2% comp we would expect to get some modest operating margin improvement, perhaps 20% to 30 basis points.
Speaker Change: Similar to 2024, we expect most of the same drivers, including merch margin improvement and continued benefit from supply chain productivity initiatives.
Do you want to acknowledge that.
Operating margin expansion is a bit less than where we started fiscal 2024 and there are just a couple of reasons for that.
Speaker Change: First we captured supply chain cost savings at a faster pace than we had expected in our long range plan we shared this.
Speaker Change: Last year, we spoke to driving 100 basis points of supply chain cost savings over the first three years in our long range plan.
Speaker Change: We'll likely recognized about half of that around 50 basis points in fiscal 2024. So the balance we expect over fiscal 'twenty five and 'twenty six.
Speaker Change: And secondly, we're being a bit more cautious on freight for next year, we have made very good progress.
Speaker Change: On freight this year. So we want to plan conservatively here based on uncertainty certainly around tariffs and what impact that could have on freight rates next year.
Speaker Change: So ultimately we expect the margin improvement on a 2% comp to come from incremental merchandise margin improvement from faster turns and lower markdowns and additional supply chain efficiencies. These will be offset by some deleverage in store costs like occupancy on the 2% comp.
Speaker Change: I also want to call out that for every 100 basis points of comp above the 2% comp we would expect 10 to 15 basis points of incremental EBIT margin.
Speaker Change: Of course, our final caveat these assumptions could change as the external environment evolves, but I did want to give a sense of our assumptions at this stage as we've done historically.
Speaker Change: Thank you.
Omar: Thanks Omar.
Speaker Change: Your next question comes from John Kernan from TD Cowen. Your line is now open.
Speaker Change: Good morning, Congrats on the continued margin expansion.
Speaker Change: Thanks, John and Michael maybe another 64000 dollar question here, you've been at Burlington for five years.
That's a long time for a CEO in this sector. These days, there's been a number of CEO turnover announcements recently, including them on one of your off price peers. How are you thinking about your own.
Michael O'sullivan: <unk> frame in the role and how you are feeling about the executive team.
Speaker Change: At Burlington overall.
Speaker Change: Well good morning, John.
Speaker Change: That's $264000 question that's great.
Speaker Change: The direct answer to your question is that.
Speaker Change: I'm not going anywhere.
On the young man and I'm not thinking of retirement.
Speaker Change: 100% committed to Burlington.
Speaker Change: But maybe I should just take a minute to expand on that answer.
In 2023 to 22028 long range plan.
Speaker Change: We've laid out I think fairly ambitious growth coupled 500 net new stores.
Speaker Change: 60% higher sales and a tripling of operating income.
Speaker Change: I intend to be around to hit those financial targets and I should add that those growth numbers are not just are just the beginning for Burlington.
Speaker Change: Potential well beyond 2028.
Speaker Change: Leaving aside the numbers, though on a personal level I feel really basket in driving our business to its full potential and in the specific initiatives that will get us there and we're doing some tremendously exciting things in merchandising localization supply chain store environment, and without new store and store relocation programs and plans.
The right hand, working with my team to support and help drive those specific programs. So lastly, let me let me talk about the team I don't mean to brag, but I genuinely feel like I've assembled a team here at Burlington.
Speaker Change: Cross the company, we've been able to bring in tremendous talent.
Speaker Change: It's especially true at the senior level, we have a huge amount of off price experience.
Speaker Change: But we've also successfully brought in functional and category expertise and experience from other retail environments add to that.
Speaker Change: We have a very strong and experienced base of long tenured and homegrown Burlington talent now.
Speaker Change: Whenever you put together a new team like that it can take a little bit of time to gel, but over the past.
Speaker Change: 12 to 18 months I've seen a real maturation in that group.
Speaker Change: I think our senior leaders are operating very effectively as a team.
Got it. Thank you that's good to hear and then Christine can you share.
Speaker Change: Some more details on the supply chain savings initiatives you spoke to some of the eastern response to arrange question.
We can see in the model.
Speaker Change: <unk> strong leverage on expenses throughout this year, but how do we think about the basis point opportunity.
Speaker Change: To supply chain expenses in 'twenty five and beyond.
Speaker Change: Good morning, John I appreciate the question.
Speaker Change: We're really pleased that supply chain deleverage recapture is running ahead of schedule.
Speaker Change: As I just described in an earlier question, we estimate that supply chain productivity improvements.
Speaker Change: Target driving potentially 100 basis points of the 400 basis points of margin improvement, we outlined in the long range plan.
Speaker Change: Again in Q3 supply chain leveraged 50 basis points as our efficiency initiatives helped drive cost savings in D. C.
Speaker Change: We have a number of productivity initiatives, we're working on in PC operations are redesigning how merchandise flows within the D. C automating select processes, ultimately, reducing touches and time to process merchandise and saving labor dollars in D C.
Speaker Change: And as I mentioned, a few moments ago looking ahead into Q4, it's important to keep in mind that we will be lapping the quarter last year. When we first started to drive meaningful cost savings in our supply chain.
In Q4 of last year, we leveraged supply chain expense by 40 basis points and this was a real turning point for us on the expense line a year ago. So we would expect to show more modest leverage on supply chain in Q4 of this year.
Speaker Change: We will probably in 'twenty, four selling product sourcing leverage of around 50 basis points better than last year. So we're about halfway there to the 100 basis points Golan embedded in our five year plan.
Speaker Change: And then longer term beyond 2028, we do have an opportunity to drive incremental leverage as we modernize our supply chain with new larger and much more automated dcs that we expect to open to support our growth.
As I mentioned, our southeast DC in Savannah, Georgia is slated to open in 2026, and it's a great example of this.
Speaker Change: And with new Dcs, we have an opportunity to design these distribution centers for off price and with more automation.
Speaker Change: That's very helpful. Thank you.
Yeah.
Speaker Change: Thanks, Tom.
Speaker Change: Your next question comes from Roche from Goldman Sachs. Your line is now.
Speaker Change: Good morning, and thank you for taking our question Michael can you provide an update on our strategy to increase the mix of better brands within the Burlington assortment.
Good morning Brook, Thanks, Steve for the question.
Speaker Change: I think I'm going to reframe your question slightly.
Speaker Change: Rather than just focusing on better brands.
Speaker Change: I would say that for the last couple of years.
Speaker Change: We've been working to elevate our assortments and thereby deliver.
Speaker Change: Deliver even better value to the customer businesses like <unk>.
Speaker Change: Hey, sportswear or footwear.
Speaker Change: That means a higher mix of better or recognizable brands.
But in other areas like home or juniors.
Speaker Change: It's more about the quality or the design or the fashion that together with price.
Speaker Change: Those are all drivers of value.
Speaker Change: And the importance of each driver it depends on the business and also depends on the customer which is why our book.
Speaker Change: Very hard to make sure that we are.
Speaker Change: And great value, but within the context of a good better best assortment.
Speaker Change: Now as we've discussed before this isn't a new strategy when you boil it down.
The strategy is and always has been to offer a great value to shelters.
Speaker Change: Elevating our assortment in terms of brand mix fashion design and quality is more of it.
Speaker Change: It's more of an evolution rather than a revolution.
There is no significant hit to much in margin here in fact as Christian described in.
Speaker Change: In the prepared remarks in Q3.
Speaker Change: Due to an increase in merchant margin driven by lower markdowns and higher markup.
Speaker Change: Further with our strong underlying sales trend, we see that as evidence that our elevation strategy is working.
Speaker Change: Great and then just for Kristen tariffs have been mentioned a few times on today's call can you speak in more detail on how you're thinking about tariffs should they be implemented and the potential impact on burlington's business.
Speaker Change: Good morning, Brian.
Speaker Change: Very good question, it's one that's pretty difficult to answer at this point, yes, Michael talked about next year's uncertainties, including the announced on tariffs, but I can provide some tariff data and some history to put this in context. So our direct import exposure, where we are directly paying the tariff to import goods into the.
U S is relatively small and much lower than many retailers in 2024, we expect to have directly imported about 8% of our merchandize and of those direct imports. The majority is from China. So let's call that about 7% of our merchandise has direct tariff exposure to <unk>.
Speaker Change: China, so well over 90% of our buys our merchandise, where we are not directly paying the tariff.
Speaker Change: And as an off price retailer with a flexible buying model, we do have the ability to negotiate the price they pay and to mitigate that impact and most importantly, we will ensure we continue to provide value and provide value to the customers and sustain our value gap I E savings versus fall.
Speaker Change: Full price retailers.
Speaker Change: And as we did in 2018, the 2019 timeframe, we will look for strategies to offset incremental tariffs will work with vendor partners on the cost side as well as examining our sourcing and where we source from and we managed as well during the last iteration of tariffs and we actually saw our merch margin was up in both fiscal.
Speaker Change: 2018, and 19 and.
Speaker Change: And finally, and most importantly, as Michael described earlier tariffs will likely later could lead to disruption, which is ultimately good for off price manufacturers may build up inventory levels to get out in front of terrorists or production in various categories could move from one country to another <unk>.
Speaker Change: It's a disruptions do create buying opportunities for off price.
Speaker Change: Ultimately, we acknowledged there is tremendous uncertainty around tariffs, but our off price model is flexible in terms of what we buy and where and our direct import penetration is low so.
Similarly, we see that as a positive as we face this potential issue.
Speaker Change: Great. Thanks, so much I'll pass it on thanks, Chris.
Speaker Change: Your next question comes from Alex Chang from Morgan Stanley. Your line is now.
Alex Chang: Thanks, Paul maybe for Michael taking a step back.
Speaker Change: <unk> two <unk> initiatives argue most excited about right now and how will those show up in Burlington financial profile over time.
Speaker Change: Well.
Speaker Change: Good morning, Alex.
Speaker Change: Thank you for the question I really like this question.
Speaker Change: Let me talk a little bit about well first of all there are many important initiatives going on across the company and merchandising stores.
Speaker Change: Supply chain real estate and <unk>.
The.
Speaker Change: So to answer your question, maybe I should just highlight two specific initiatives that we've recently rolled out.
Speaker Change: And that I expect will have a big impact over time.
Speaker Change: Firstly in 2023, we completely refreshed and updated.
Speaker Change: The suite of reports that I am not since used to analyze sales trends.
Speaker Change: Then in the first half of this year. So quite recently, we followed that up and rolled out a new in season trending process at that allows merchants and planners.
Speaker Change: The more frequently and rapidly react to what they're seeing in those sales reports.
Hey, can we forecast sales and they can move open to buy dollars into businesses that are trending and they can pull money out of areas that are not trending.
Speaker Change: Yes to some degree of course, they have always been able to do that.
Speaker Change: To some degree, but the new reports are more accurate and up to date and they provide our merchants with better visibility to support fleet that we've put in process and add to that the new process enables greater frequency and speed and making those changes.
Speaker Change: So I think those improvements, we're already helping us to more rapidly and effectively chase or pull back based on the trend.
Speaker Change: Secondly in the summer.
<unk> turned on.
Speaker Change: New store level sales.
Speaker Change: And allocation algorithms to more effectively risk.
To respond to trends at the individual store class level, and thereby drive greater customization of the assortment by store.
Speaker Change: Now those localization algorithms are based on machine learning and over time.
Speaker Change: We're going to optimize the allocation of proceeds based on store class level selling.
Speaker Change: That will take some time for that effectively build but it should drive stronger sales faster turns and lower markdowns.
Speaker Change: I think that the two initiatives I've just described to provide a good a good illustration of what we're trying to do with Burlington to point out.
Speaker Change: Know that when it comes to processes systems tools and execution, we are behind our off price peers.
That's just another way of saying, we have huge opportunity and upside and we're very focused on that upside panel narrowing that gap versus our peers.
Speaker Change: Two initiatives that I've described I think are good examples of how we're going to do that.
Speaker Change: That's really exciting thanks for sharing that maybe one more near term question for Christine can you just provide some color on comp trends in the quarter as it relates to regular price versus clearance selling.
Alex Chang: Alex Good morning, Yeah. Thanks for the question I acknowledge that this is a benefit to merch margin in Q3, but let me provide just a little more detail our regular price selling continues to be very strong in the third quarter regular price sales once again outpaced our trend.
Alex Chang: Price selling did a three comp increase in Q3 200 basis points above our overall trend.
Alex Chang: <unk> to benefit from our approach of chasing the business operating with leaner inventories driving faster turns and thereby incurring lower markdowns, which translates to higher merchandise margin and we really do see this as further validation on our March to point, our initiatives our growth and maturation of our merchandising team.
Alex Chang: And strong inventory control.
Alex Chang: And I believe I mentioned this on the earlier question, but it's worth reiterating in regards to Q4 clearance levels are projected to be more similar to last year's levels, which will provide less merch margin benefit in Q4 than we've seen year to date.
Operator, I think we're at a time you can turn the call back to Michael.
Speaker Change: Thank you. So much we are now done with the Q&A session I would now like to hand back over to Michael O'sullivan for final remarks.
Michael O'sullivan: Well, let me, let me close the call by thanking everyone for your interest in Burlington stores.
Michael O'sullivan: We look forward to talking to you again in March to discuss our fourth quarter 2020 for fiscal results.
Like to wish everyone, a happy Thanksgiving and thank you for your time today.
Speaker Change: Thank you for attending today's call you may now disconnect have a wonderful day.
Speaker Change: [music].
Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yeah.