Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Burlington stores incorporated second quarter 2019 earnings results Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your touched on telephone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Mr., David Glick Senior Vice President Investor Relations and Treasurer, Sir you may begin.
Thank you operator, and good morning, everyone.
We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2019 second quarter operating results.
Our presenters today are Tom Kingsbury, our chairman and Chief Executive Officer, Marc Katz, Chief Financial Officer in principle.
Before I turn the call over to Tom I would like to inform listeners that this call may not be transcribed recorded or rebroadcast without our expressed permission a replay of the call will be available until September five 2019, we take no responsibility for inaccuracies that may appear in transcripts of this call by third parties, our remarks and acuity that follows are copyrighted today by Burlington stores.
Remarks made on this call concerning future expectations events strategies objectives trends or projected financial results are subject to certain risks and uncertainties.
Actual results may differ materially from those that are projected in such forward looking statements.
Such risks and uncertainties include those that are described in the company's 10-K for fiscal 2018.
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 discuss today are on a continuing operations basis.
Reconciliations of the non-GAAP measures, we discuss today to GAAP measures are included in today's press release now here is Tom.
Thank you David good morning, everyone.
We were very pleased with our second quarter results driven by a comparable store sales gain of 3.8%.
Total sales increase of 10.5%.
And a 10 basis point expansion in adjusted EBIT margin.
These results drove a 19% increase in adjusted earnings per share well ahead of our guidance.
We achieved this growth, while reducing our overall inventory levels.
Which were up 27% at the beginning of the fiscal year to down 2% at the end of the second quarter.
This significant improvement in our inventory position affords us the flexibility to be very opportunistic in what we believe is a very favorable buying environment.
Turning to highlights of the second quarter.
This was our 26th consecutive quarter of positive comp sales growth.
Our comparable store sales growth exceeded the high end of our guidance by 180 basis points.
And our new stores continued to perform well versus our underwriting model.
We leveraged adjusted SDMA by 30 basis points and expanded our merchandise margin by 30 basis points.
Our adjusted earnings per share grew 19%.
In comparable store inventory was down 7% at the end of the second quarter.
Our total sales increased 10.5%.
Driven by an acceleration in comparable store sales from the first quarter trend.
As well as the performance of our new and non comp stores, which contributed 115 million in sales for the quarter.
We opened seven net new stores during the second quarter.
And we continue to expect to opened 75 new stores this year.
As well as close or relocate 25 stores for a net addition of 50 stores.
We continue to feel very good about the current real estate environment.
As the availability of attractive locations remain very favorable.
Moving to category highlights our top performing businesses were home, including toys.
Beauty.
Missy sportswear, including better and active.
Athletic men's and kids shoes.
Childrens apparel.
Baby apparel and accessories and baby depot.
Regarding geographic performance.
The northeast and southwest performed above the chain average, while the west comp below.
We were very pleased with the progress we made managing our inventory.
As comp store inventories at the end of the second quarter were down 7%.
In addition.
Over the course of the second quarter comparable store inventory turnover improved 2%.
On top of last year's strong 11% improvement.
We believe we are in excellent position to take advantage of what we view as a very favorable buying environment.
Given where we ended the second quarter, we now expect comp store inventory to be approximately flat at the end of the third quarter in order to properly set up our cold weather Assortments as we have discussed previously.
We expect comparable store inventories to be down mid to high single digits at the end of the fourth quarter.
As well as for the foreseeable future.
Inventory, aged 91 days and older declined to record low levels as we focus on maintaining a fresh and exciting assortment for our customers.
Pack and hold an important tool in our off price model was pursued aggressively during the second quarter as we capitalize on great values available in the market pack and hold inventory represented 29% of our total inventory at the end of the second quarter versus 26% last year.
In addition, our inventory freshness metric inventory received in our stores less than 30 days old increase versus last year at the end of the second quarter.
We continue to bring value to our shareholders as we repurchased approximately $51 million of common stock during the second quarter and 174 million year to date through the end of the second quarter.
At the end of the quarter, we had 124 million remaining on the existing share repurchase authorization.
In addition, I am pleased to announce that our board approved an additional $400 million share repurchase plan, which is authorized to be completed over the next 24 months.
Before I move to our long term strategic priorities.
I wanted to update you on the tariff situation.
As we said on the last call only 6% of our receipts are direct imports and not all of them are subject tariffs.
Some of the recently implemented tariffs will be in effect on several merchandise categories. This fall.
Based on our current commitments, we do not expect a material financial net impact from these new tariffs as we have deployed strategies to offset these costs.
At the end of the day, whether a goods or direct imports are vendor stores, we will maintain our value equation that is critical to our model.
Finally, as we have seen with other supply chain disruptions in the past.
Tariffs have led to and could continue to present buying opportunities for off price.
And we have ample liquidity for the remainder of the year.
Now let me update you on our long term strategic priorities, which include focusing on driving comparable store sales growth.
Expanding modernizing and optimizing our store fleet.
An increase in our operating margins.
First with regard to driving comparable store sales growth our underlying strategies remain.
One enhancing our assortments as we continue to improve our execution of the off price model with particular focus on underpenetrated businesses too.
Building on our marketing initiatives to ensure we are continuing to engage both new and existing customers and three improving the store experience for our customers.
We made progress once again, expanding some of our key underpenetrated categories, such as home and beauty.
Home remains our largest category growth opportunity.
While we have made meaningful progress over the last several years.
Our 2018 home penetration at approximately 15% of sales is still well below our goal to achieve a penetration level of at least 20% overtime.
Our beauty business was one of our strongest businesses in the second quarter.
We continue to expect the beauty and fragrance businesses to expand in penetration overtime.
And these businesses are expected to be a key element within our holiday gift assortments.
We also continue to see opportunities in businesses, where there is market share up for grabs such as baby apparel.
Baby depot toys and footwear.
These categories outperformed this quarter.
As we've discussed in prior calls ladies apparel represents a significant long term sales opportunity.
As our penetration remains well below our peer group.
We believe we made progress in the second quarter, and our ladies apparel business as our heritage business sales trend improved and our Missy sportswear growth accelerated versus the first quarter.
While we have more work to do we do believe our strategy of distorting the growth in the more casual Missy sportswear categories, such as active and better casual while rightsizing. Our career businesses is the right direction for this business.
We continue to add to the quality of our vendor base.
We have very strong relationships across our network of approximately 5100 brands.
As these relationships are the foundation of our business model.
We take great pride in the quality of those partnerships and work hard on strengthening them further everyday.
We expect the number of brands, we carry to increase over time, as we deepen and expand our vendor relationships grow underpenetrated businesses and expand into new businesses.
In addition, our better and best as well as our branded penetration increased nicely in the second quarter as the buyer buying environment remains very attractive.
Looking at our marketing activities, we continue to be pleased with the ability of our messaging to connect with our customers across a wide range of marketing channels.
Our testimonial TV commercials.
Still resonate with our target consumer.
And we are targeting our media in line with our customers preferences, such as social digital and mobile.
I also wanted to provide an update on the private label credit card and loyalty pilot, we mentioned earlier this year.
We have been pleased with the initial findings from the pilots.
Which are consistent with our original expectations.
As a result, we have now rolled the program out to all of our stores with the exception of Puerto Rico, which is scheduled for the third quarter.
The rollout has gone smoothly and were encouraged by the potential of this program to drive loyalty and purchase decisions among our customers.
For example, since we began our plc. The pilot we have added significantly to our customer E Mail list, which will enhance our ability to engage with our growing customer base over time.
Improving our store experience continues to be a key growth initiative for us.
We are on track to remodel 28 stores in 29 team on top of the 39 Remodels, we completed in 2018.
The second growth initiative is expanding our store fleet.
We still expect to open approximately 75, new and 50 net new stores in 2019.
Which represents an increase over the store opening pace in both 2017 and 2018.
Given our plans for new stores Remodels and closures. We are on track to have 60% of our store fleet and our brand standard by the end of this year.
Up from just over 50% at the end of last year.
At the current rate of new store openings and Remodels, we would expect a significant majority of our stores to be in our brand standard within the next five years.
We ended the second quarter was 691 stores, yes, we are a national retailer that operates in 45 States plus Puerto Rico.
As we've discussed on previous earnings calls our seat points strategy is a critical tool that enables us to drive strong new store sales and EBIT performance versus our underwriting model.
We remain very confident that we can comfortably achieve our goal of 1000 stores over time.
We also remain focused on our third growth priority continuing to increase our operating margin.
Over the last six years, we expanded our operating margin by 420 basis points in average of approximately 70 basis points per year, including 50 basis points in 2018.
Despite the negative impact of rising costs in both wages and freight.
We now expect our EBIT margin to be flat to up 10 basis points for fiscal 2019, a slight improvement from our previous margin guidance.
We still believe we have significant operating margin opportunity over time to accomplish that objectives, we will execute the key strategies that we have deployed over the last several years.
Increasing total sales to leverage fixed costs, optimizing markdowns sustaining our inventory management discipline and maintaining an active profit improvement culture across all SDMA area.
Now I would like to turn the call over to Mark to review, our second quarter financial performance and updated outlook in more detail Mark.
Thanks, Tom and good morning, everyone. Thank you for joining us today.
As Tom mentioned earlier in the call. We ended the second quarter by recording or 26 consecutive quarter of positive comparable store sales.
In addition, we achieved strong contribution from new and non comp stores and expansion in adjusted EBIT margin, which combined delivered a 19% increase in adjusted earnings per share well ahead of our guidance.
Next I will turn to review of the income statement.
For the second quarter total sales increased 10.5% and comparable store sales increased 3.8%.
On top of last year's 2.9% increase.
New and non comp stores contributed an incremental 115 million in sales for the second quarter.
Our Q2 comparable store sales performance was driven primarily by an increase in units per transaction with traffic and conversion up slightly.
Ooh AR was down in the quarter.
The gross margin rate was 41.4% flat versus last year's rate.
Excluding the negative 30 basis point impact of freight in the second quarter merchandise margin was up a solid 30 basis points.
Driven primarily by lower markdowns and lower shortage.
We recognize the modest margin benefit from our shortage results as we took physical inventories and approximately 70% of our stores in June similar to last year.
We continue to expect freight to be up approximately 20 basis points for the year, which implies that the pressure from freight will begin to moderate in the third and fourth quarters, given the 30 basis point headwind, we faced in the first six months of fiscal 2019.
Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs were 10 basis points lower as a percent of net sales.
Adjusted SDMA was 26.6% 30 basis points lower than last year as a percentage of sales.
This improvement was driven largely by strong sales growth and expense leverage due to disciplined expense management and profit improvement initiatives.
Other income and revenue was 7 million 3 million lower than last year, and 20 basis points lower than last year as a percentage of sales.
Insurance gains recorded in the second quarter of 2018 accounted for the decrease.
We are expecting to record insurance gain in the third quarter of fiscal 2018 of approximately $3 million, which roughly offsets the second quarter decline in other income in revenue.
This gain was previously contemplated in our full year guidance.
Adjusted EBIT increased 13% or 13 million to $118 million.
Strong sales growth leverage on fixed expenses disciplined expense management and profit improvement initiatives led to a 10 basis point expansion in rate for the quarter.
Depreciation and amortization expense exclusive of net favorable lease amortization increased 5 million to $52 million.
Interest expense decreased by $1 million versus last year's second quarter to $13 million.
The adjusted effective tax rate was 12.8% for the second quarter versus last year's second quarter, adjusted effective tax rate of 17.1%, which excludes the impact of the fiscal 2018 second quarter revaluation of deferred tax liabilities, resulting from changes to New Jersey State tax law.
Combined this resulted in adjusted net income of $91 million, a 16% increase versus last year.
We continue to return value to our shareholders through our share repurchase program.
During the quarter, we repurchased approximately 301000 shares of stock for $51 million.
As Tom mentioned earlier in the call our board of directors authorized an incremental 400 million dollar share repurchase plan.
This is incremental to the 124 million remaining on our previous authorization at the end of the second quarter.
All of this resulted in diluted earnings per share of $1.26 versus one dollar three last year.
Adjusted diluted earnings per share were $1.36 versus $1.15 last year.
$1.36 per share result represents a 21 cents beat versus our top end guidance.
This feat was split between 13 cents of true operating outperformance and eight cents due to greater than expected impact from the accounting for share based compensation.
Turning to our balance sheet at quarter end, we had $97 million in cash.
$97 million in borrowings on our ABL and had unused credit availability of approximately $429 million.
We ended the period with total debt of approximately $1.1 billion and a debt to adjusted EBITDA leverage ratio of 1.3 times.
Merchandise inventories were $824 million versus $844 million last year.
This decrease was due primarily to a 7% reduction in comparable store inventory at the end of the second quarter of fiscal 2019.
Pack and hold inventory was 29% of total inventory at the end of the second quarter compared to 26% last year.
Comparable store inventory turnover improved 2% for the second quarter.
In addition, we were very pleased with the content of our inventory.
As referenced earlier in inventory, aged 91 days and older at the end of the second quarter was down versus the prior year at record low levels, while our inventory freshness was up versus the prior year.
Cash flow provided by operations increased $63 million to $229 million driven by higher net income.
Net capital expenditures were $141 million for the first six months of fiscal 2019.
During the quarter, we opened 10, new stores relocated one store and closed two stores ending the period with 691 stores.
For fiscal 2019, we still expect opened 75, new stores and close or relocate 25 stores.
Resulting in 50 net new stores for the year.
In terms of our year to date performance total sales rose, 8.9% and included a comparable store sales increase of 1.9%.
Following a 3.8% comparable store sales gain in the first six months of last year.
Gross margin was 41.2% representing a decrease 10 basis points versus the first six months of last year, primarily due to a 30 basis point increase in freight.
Merchandise margin for the first six months of 2019 was up approximately 20 basis points versus the prior year.
Product sourcing costs were approximately flat as a percentage of sales versus last year.
As a percentage of net sales adjusted SGN, a improved 10 basis points to 26%.
Expense leverage was driven mainly by disciplined expense management and our active profit improvement culture.
Adjusted EBIT increased by 5% or 11 million to $236 million, representing a 30 basis point decrease in rate for the first six months of 2019.
Depreciation and amortization expense exclusive of net favorable lease amortization increased by 10 million to approximately 103 million.
Interest expense declined 2 million to approximately 27 million.
The adjusted effective tax rate was 15.4% as compared to last year's adjusted effective tax rate of 17.2%.
Last year's adjusted tax rate excludes the impact of the fiscal 2018 second quarter revaluation of deferred tax liabilities, resulting from changes to New Jersey State tax law.
Combined this resulted in net income of $162 million, an increase of 6% versus last year.
And adjusted net income of $177 million versus an adjusted net income of $166 million last year.
Diluted earnings per share were $2.40 versus $2.23 last year.
Diluted adjusted net earnings per share were $2.62 versus $2.41 last year.
Our fully diluted shares outstanding were 67.5 million shares versus $68.9 million last year.
Now I will turn to our updated outlook.
For the 2019 fiscal year, we now expect total sales growth in the range of 8.8% to 9.3%.
As compared to fiscal 2018 on top of last year's total sales increase of 10.7%.
Comparable store sales to increase in the range of 2% to 3% for the third and fourth quarters of fiscal 2019.
Resulting in a full year fiscal 2019 comparable store sales increase of 2% to 2.5%.
On top of last year's 3.2% increase.
Depreciation and amortization exclusive of favorable lease amortization to be approximately $210 million.
Based on our second quarter performance adjusted EBIT margin expansion is now expected to be flat or up 10 basis points.
Interest expense to approximate $52 million.
And effective tax rate of approximately 20% to 21%.
Capital expenditures net of landlord allowances are expected to be approximately $310 million.
Based on our year to date 2019 performance. This results in an updated adjusted earnings per share guidance in the range of $7.14 to $7.22.
This outlook excludes an expected five cents negative impact from management transition costs.
And for the third quarter of 2019, we expect total sales growth in the range of 8.5% to 9.5%.
On top of last year's total sales increase of 13.7%.
Comparable store sales to increase between two and 3%.
On top of last year's 4.4% comp increase.
Sect of tax rate of approximately 20% to 21%.
And adjusted earnings per share in the range of $1.37 to $1.41.
This compares to $1.21 per share last year.
This outlook excludes an expected to set negative impact from management transition costs.
With that I will turn it over to Tom for closing remarks.
Thanks Mark.
I want to briefly address a few additional topics before we go into the Q and a portion of the call.
First as we indicated in this mornings earnings press release.
We are very pleased to have launched our first corporate social responsibility report.
We recognize that our long term success is supported by our commitment to act in socially responsible and sustainable ways.
We have made meaningful progress in these areas for several years.
And now we are in a position to share their progress publicly with our stakeholders today.
I am very proud of the progress we have made on the SP front, including.
The reductions we have made in our cotwo emissions and our energy consumption.
Earning numerous workplace awards, including Great place to work awards as well as Fortune Awards for best workplaces for women diversity in retail.
Our extensive philanthropic activities, including nearly $10 million raised in 2018 for great causes such as the leukemia and lymphoma Foundation.
Well, we are among the largest corporate donors and lastly, further strengthening our governance.
We acknowledge that this is a long term process and we are committed to continuously improve.
We plan to update our stakeholders with our progress each year with an updated CSR report.
Secondly, this is my last earnings call as Burlington's, Chief Executive Officer.
I want to thank all of our associates for their strong support over the last 10 plus years.
Which have been the most rewarding years of my long retailing career.
I am really proud of what the Burlington team has accomplished.
Together, we have assembled an incredible foundation from which the organization will continue to build.
Since going public in 2013, we have.
Recorded positive comparable store sales in all 24 quarters.
Opened 188 net new stores.
On track to convert over 60% of our store fleet to our brand standard by the end of 2019.
Expanded our EBIT margin over 400 basis points and most importantly increased our equity market capitalization from just over $1 billion at the at the time of our IPO to well over $11 billion today.
That said.
We still have many opportunities ahead of us.
We have significant potential to grow underdeveloped merchandise categories to drive comparable store sales.
We can expand our store base to at least 1000 stores.
And we have more EBIT margin expansion potential.
Based on the strength of our team and our incoming CEO Michael Sullivan.
The future for Burlington is very bright.
As we discussed on previous earnings call.
Michael starts with us on September 16th.
Many of you have asked us what if any strategic changes he may make as CEO .
Michael hasn't started yet and has not had the chance to work with the team, let's give them a chance to start and get to know the company.
During the hiring process.
Michael was much aligned with the views of our board in terms of the future direction of Burlington.
We see Michael as helping us implement our current corporate strategies.
In summary.
We believe our results this quarter represent a solid improvement over the last two quarters.
We drove financial results above our guidance and believe the execution of our strategic initiatives.
And store growth plans will enable us to deliver more consistent performance going forward.
We remain confident in our outlook, we remain highly focused on refining our off price model.
In our ability to capitalize on the rapidly changing retail landscape.
This positions us to bring more great brands styles and value to customers and increased value for our shareholders.
Again, I'd like to thank the stores supply chain and corporate teams for their contributions to a strong second quarter results.
With that I'd like to turn the call over to the operator to begin the question and answer portion of the call operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telephone. If your question has been answered or you extremely result from the queue. Please press the pound key again, that's star then one to ask a question.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up our first question comes from Matthew Boss with Jpmorgan. Your line is now open.
Great Congrats on a great quarter, and a tough backdrop and Tom Congrats congrats on an incredible Ron.
Thank you.
Thanks, Matt Thanks, Matt.
I guess first Tom from your prepared remarks and in April .
Supported by our recent shacks it sounds like Youve made encouraging progress and improving the ladies apparel business in the second quarter.
Can you give us some color on what drove that improvement and where you stand on the category into the back half of the year.
Yes, Matt we did make some progress in ladies apparel.
In the second quarter.
We were pleased with the improvement as I mentioned in trend that we made across our various heritage businesses.
In our Missy sportswear growth did accelerate in the second quarter.
In our better sportswear and active businesses were very strong.
And we believe we have adjusted our receipt plans appropriately and are well positioned for the fall season.
In addition, we have significant in season opened to buy in ladies apparel and have added merchant headcount to increase market coverage in Missy sportswear.
So I do believe we are taking the right steps for this business.
But let's be clear as I mentioned on the last call. We don't expect to improve our ladies apparel penetration in 2019, particularly given the challenges we experienced in the spring season.
We're likely to see the penetration of ladies apparel go down in 2019, given the first half performance as well as the growth of other businesses.
This is a rebuilding process. So we think ultimately will enable us to take advantage of the opportunity in Missy sportswear, we still believe ladies apparel overall as a long term penetration opportunity for us.
I think the second quarter, clearly demonstrated that we don't need to increase our ladies apparel penetration to achieve our sales objectives.
We have significant sales opportunities.
This year and beyond in a number of underpenetrated categories, such as home and beauty as well as those market share opportunities I mentioned in my prepared remarks, such as baby apparel Baby depot toys and footwear.
All of these areas performed well in the second quarter as our off price model allows us to pivot quickly.
So hopefully that's some good color for you.
Absolutely and then just a follow up Mark can you can you walk us through the components of your Twoq earnings be maybe versus internal plan drivers behind the operating margin raise to flat to up 10 basis points for the year.
Just any additional color on the underlying components of the raised fiscal year guide I think would be really helpful.
Sure Matt Good morning, So in terms of the B eight cents came from lower tax rate due to the accounting for share based compensation. So so we'd like to back it out and really look at what what was our true operating be nurture operating beat was 13 cents.
So we start with sales at the high end of our comp sales guidance of 2% we came in at three eight.
So the gross margin impact on the higher sales drove about eight cents and then do it was nice after we took our June physical inventories, we really picked up another penny from some lower shortage.
Which was nice to see.
In terms of the rest of it we really came from lower product sourcing costs and in SGN, a really made up the rest.
We were really pleased to be able to to get 30 basis points of leverage on that three eight comp.
As far as our full year guidance, Matt before I mean, the quarter. Our high end was $7 in a penny we beat by 21 cents. So like we'd like to do it. So it's a full pass through store a year now at the high end is $7.22.
So we think about the sales supporting that spring came in at a one nine comp and Weve got fall at two to three so that results in within our full year comp guide, 2% at the low end 2.5 at the high end.
As far as I guess, the EBIT EBIT components. So you can understand how it plays out we're still expecting for the year merge margin to be up 40 basis points freight is we mentioned on the call a 20 basis point headwind product sourcing also a 10 basis point headwind.
And that should result in loaded margin of up 10 basis points.
Little different here on the other SGN a line at the low end of sales other USG today that a five basis point headwind and we're now saying it the high ended at two five comp we should be flat.
And then really we took the other lines of the piano the depreciation in the other revenue. Other income line you put those together, it's the same as SGN a minus five at the low end flat on the high end.
And then Thats going to result, hopefully in our EBIT flat to up 10.
Congrats again best of luck.
Thank you Matt.
Thank you and our next question comes from Arren Boruchow with Wells Fargo. Your line is now open.
Hey, good morning, everyone, Tom Mark, David and and timing congrats on a great quarter, and Tom Big well deserved congratulations to you for the hard work and success of Burlington over the years.
Thanks Bye.
And also I guess first question for you I won't talk about inventory. So I guess the inventory levels came in a little better than expected can you. Just maybe help me understand how you are able to drive the inventory down while you also delivered such a strong comp in the quarter.
Yes.
No with our comp store inventory down, 7% that was a bit better than our expectations.
That helped drive our total inventory levels below last year.
Which obviously is a significant improvement from where we were at the end of the fourth quarter in the first quarter.
Really there is two factors that enabled us to work down our inventory levels without hurting our topline.
First recall that we said on our first quarter call that while inventory levels were higher than we would have liked.
We did feel good about the categories in the content of that inventory.
So the pack and hold and short stay that we released combined with our available our available liquidity.
Joe strong comp store sales for the quarter.
Secondly, we had a more consistent receipt flow in the second quarter this year.
As you may recall from our second quarter call last year after a strong first quarter.
In May last year, we didnt have consistent receipt flow, which led to a tough month in June last year. This year, we delivered fresh receipts each week and it really paid off for us.
Got it and then as a follow up from Mark.
Hey, Mark can you give us some color on the freight line I think you mentioned 30, bips headwind in the quarter and.
You maintain the freight headwind the 20 thats for the year at just kind of curious how to think about the back half are you seeing any kind of moderation in freight rates spot rates seem to be indicating just kind of curious any color you can help us on that line item.
Sure we'd happy to so yes, both Q1 and Q2 of this year, we experienced 30 basis point headwinds in freight.
The big driver in Q2 is something that we call the freight capitalization year, which obviously requires some explanation.
So what we do is we capitalized freight and when we bring in inventory and then we release it to the PNM now as we turn inventory.
And as you think about how our inventories changed through from Q1 to Q2, even from the beginning of the year to Q2, our total inventories at the end of Q1 were up 14% and at the end of Q2, we were down 2% right comp store inventories at the end of Q1 up five into Q2 down seven so as you think about that drastic change in inventory position that really resulted in us releasing a significant amount of that capitalize freight to our PNM. So so that was really the the big driver of the 30 basis points in Q2.
In terms of fall in the back half yet we I think like a lot of other folks did experience some positive developments in our contract negotiations.
Thats both for intermodal land over the road, we have for the most part finalize those contracts at this point for US we ruined August through July .
And we have seen some good news there so given that we are certainly expecting free to moderate in the back half and Thats why we still are expecting 20 basis points for the year.
We could get a little opportunity of if fuel prices were to hold there could be a little opportunity on that or when but.
At this point, it's still 20 basis points for the year.
Thanks, Mark and congrats again everybody.
Thanks, Thank you.
Thank you and our next question comes from Lorraine Hutchinson with Bank of America Merrill Lynch. Your line is now.
Thanks, Good morning.
I wanted to follow up on the tariff comments that you made that you spoke about wanting to maintain a value for your customer.
Do you think about this in relation to competitors pricing or do you expect to hold prices, where they are on a like for like basis as you navigate a lot of change going on with.
Trade.
While our goal would be to.
Offer value relative to all the people we compete with you now.
That's that's been critical to our success overall.
And what we're trying to do is.
No offset some different strategies to offset any increase in.
In the end tariffs.
You know one thing good about being off price.
And we have a very liquid inventory position, we are buying more closeouts in pack and hold.
And we think we can we will see that our that in our pack and hold percentages versus last year and even at the end of the second quarter were 29 versus 26.
We're also working hard with our partners with our direct import vendors to find offsets in our buys.
But one thing we're not going to be a leader in raising prices. That's something we're definitely not going to do and we look at the total landscape competitive landscape to to see what the prices are to determine.
What kind of values, we can deliver to our customers.
So we've already taken some steps to.
Obviously mitigate any kind of tariff impact.
Great and Tom Thank you.
Thank you.
Thank you.
And our next question comes from Kimberly Greenberger with Morgan Stanley . Your line is now open.
Great. Thank you and ill add my congratulations as well to add great quarter end and Tom great career to yield.
Thank you a couple of years ago you identified.
Actually two years ago, you you did a great job of identifying.
A number of opportunities in the real estate market and since then you had to accelerate your new store openings from what was that sort of mid single digit level to 7% or just over that for the last couple of years.
As I'm sure you're your team has already made great progress on the 2020 and new store opening plan do you see an ongoing opportunity to continue your store openings at this level.
Oh absolutely.
We we've identified.
See points, where we know we can handle Burlington store and.
We're obviously marching down that path overall.
The other just continues to be more and more store closures also that gives us confidence that theres going to be locations for us overall, but.
I'm very very confident that.
We're going to continue to open stores at the pace.
That were currently opening stores.
A thousand stores is definitely in our reach beyond that we'll we'll have to evaluate the opportunities but.
We feel we just feel good about.
The availability the good locations that are available to us and we have a really great team in place that really helping us really.
Performed very well relative to our underwriting models.
Terrific and my follow up question Mark history yield.
I know in the second quarter last year, there was a great degree of volatility in the month to month comp.
And against those opportunities, you've obviously executed well here in the second quarter I'm wondering if you can look forward to or remind us in Q3 last year did you have.
A great deal of variability in your month to month comp or 10 months seasonally consistent with one another.
And are you running in that 2% to 3% comp guidance range that you gave for Q3 this year already in August . Thanks.
Sure. So just as a reminder, we ran out of four four comp in Q3 of last year and in Kimberly I would say no. It wasn't like Q2, where we we had a real a decrease in the month of June I would tell you. We were very pleased with every month in Q3 of last year and then as far as where we are third quarter to date, we are really not going to comment on that on this call will be happy to talk about it on our third quarter call.
Thanks, Mark and good luck.
Thank you. Thank you.
Thank you and our next question comes from John Kernan with Cowen. Your line is now open.
Good morning, Thanks for taking my question, Tom Congrats on an epic Ron asked since the IPO in 2013 and best of luck.
It just wanted to.
Get a feel for how you.
I thought that the environment was shaping up in the fourth quarter. It sounds like you've got improved inventory receipts relative to where they were last year you got a pretty good view of what the buying environment looks like there was some variance in the fourth quarter last year in terms of the overall environment and just wondering what what you think the biggest opportunities aren't in a quarterly so almost 50% of your EBIT for the year. Thank you.
Well.
There's always a lot of product availability there has been the entire time that.
I've been at Burlington, that's never been that's never been an issue.
We just think for the fourth quarter.
We.
We underperformed last year, hopefully we can.
We can we can do better but we are confident in our two to three guide that we that we've articulated.
We just had.
Big opportunity and gifting.
We really didnt do well in cold weather last year and now we're setting up the.
Fourth quarter by ensuring that we have the right level.
Of cold weather inventory as we go into November that's that that's a key overall home performed very well in the fourth quarter as a percent of total and obviously, we have a we have a big opportunity opportunity there. So.
You know again, we're confident in our guide of two to three and.
We think we've already put in a lot of good things that are going to help us hit those numbers.
Got it and then and maybe back to the real estate at topic, just the new brand standards. These stores obviously.
Look much improved they're much smaller.
From an overall square footage footprint can you just give us.
Where you think this can go as a percentage the overall store mix in the next few years and just maybe any of the four wall operating metrics of these stores versus the legacy stores. Thank you.
Well, we think the brand standards as you know we're going to continue to improve that every year.
Over the last three years as we've added 300 stores I believe to our our brand standard and.
They.
We're marching towards.
The significant majority of our stores being at the at the brand standard and it's really the mission what we're pursuing I don't know Mark you want to comment on the aggregate Jed. So we've said we'll be at the brand standard over 60% of our stores will by the end of this year and as Tom just said overwhelming majority by the end of 2023.
We havent given any four wall numbers or any.
Direct numbers as it relates to brand standard versus non brand centric only to say fair to assume our brand standard stores out comp our non brand standard stores.
Got it thanks, guys best of luck.
Thank you.
Thank you and our next question comes from Dana Telsey with Telsey Advisory Group. Your line is now.
Congratulations everyone on what a great quarter, and Thats nice progress and tanks data you one such great accomplishment.
Tom. Thank you can you as you look back and think about the 10 years or so that that this transition and the improvement process has been going on if you were to look across at the next 10 years and we are sitting all sitting here at the conference call as we going to do and you will be listening what do you think would be the biggest changes where do you think the operating margin could get and what could be different than the expectation is that channel as a customer how do you think about it.
Well I don't really want to look out 10 years because to be honest with you.
And I really don't want to obviously.
Save anything really in the future I mean that is something that we.
Don't like to do but.
I believe we're going to continue to open stores.
We do have still a lot of white space. So I would to obviously see a large larger store count.
Over over the next 10 years for sure.
Weve articulated many times that we we do have a gap in operating margin.
We've been closing that gap.
You know.
Every year pretty much.
And so Weve already stated Weve already stated that.
Again, our stores our stores.
The size of our stores.
We're comfortable with the size that we currently have over probably will get smaller we will continue to turn our inventories faster.
As we continue to improve our execution of the off price model and our commitment to.
Our commitment to mid to high single digit decreases in comp store inventories for the foreseeable future.
So.
I just think over the next 10 years, you're just going to see.
Very very.
Nice improvement in terms of being a.
Really strong off price retailer.
And then this quarter it seemed like there was changes that accelerated whether it's the women side, what did what changed internally that drove the acceleration. This quarter was anything particular that a change in process people what drove the the big uptick.
Well I think it's.
The inventory that we had going into.
Going into the second quarter was really in the rate categories, even though the inventory levels were higher than we would have liked.
They were really in the right product categories. So that helped US we were prepared us early.
As I mentioned before we had a much better receipt flow in general last year.
We had a we had a tough June .
Sales performance because of the lack of flow of product that we had but I think it's.
I think most of it is.
Is that and you know we have the right goods at the right time and.
That led to really strong performance.
Thank you and our next question comes from John Morris with D.A. Davidson. Your line is now open.
Thank you good morning, good morning, everybody, let me add my congratulations as well to.
First the comment also on a great quarter, but.
Tom It's it's been great more mill steel.
Thanks, John .
Mhm wanted I wanted to ask two quick questions first of all.
In the prepared remarks regarding the tariffs I think you all had said.
You've got some strategies in place to offset some of the tariff costs.
Im just wondering if you can give us a read qualitatively on what those might be but.
But also flipping it around and you did say that you are seeing great opportunity in terms of the disruption out there on the full price area I'm, just wondering if you're already starting to see.
Some of the benefit side I know, it's hard to measure, but you know in terms of opening up new brands or new relationships really kind of both sides of the equation. Thanks.
Well as I mentioned before we're really looking to offset some of the Taros bye.
Increasing our our levels of pack and hold and Closeouts.
Two because those are obviously some of our more productive categories. As we've mentioned many times before and we're working with our partners.
With our direct imports and see if there's any offsets that we can we can have their overall.
Yes, I think that any disruption in the marketplace produces product for the off price market as Weve said.
Will there be other vendors available because of that you know maybe.
I don't really want to get into that kind of detail overall, but we've already seen some we've already seen.
Product.
Availability increased because some manufacturers move goods up for them.
Other people may have cancelled goods.
And it and put it led to more availability. So we're seeing a now we think we'll continue to see it and.
We really feel that we have.
We have the right strategy is in place.
To offset any tariffs.
Operator, I will now your question, Yes, sorry go ahead John Sergeant.
Well I was just a quick follow up if I may on the private label credit card.
You mentioned some of the benefits that you are seeing in terms of adding.
New customers for the E mail less but I am wondering other now that you're rolling it out other benefits that you've seen with the pilots that you think you will accrue.
That could accrue to the business. Thanks.
Well first of all that was a pilot we just rolled it out.
We really don't have a lot of information the one definitive things. We've seen is an increase in our E mail.
List, so thats really.
That's really what we've seen so far and we will update two will update you on the plc.
And every quarter.
Operator, one more question please.
Thank you and our final question comes from Michael Binetti with Credit Suisse. Your line is now open.
Hi, This is Casey gotten on for Michael Thanks for squeezing us in here and let me also add my congrats on a great quarter and Tom.
Congratulations on all the success.
Thank you.
Mark on operating margins I think your guidance implies some pretty modest operating margin expansion in the fourth quarter, maybe closer to something like flattish.
Compared to your third quarter guidance, implying something closer to like 30 to 50 basis points can you talk through some of the puts and takes for white your operating margin expansion might moderate as we go into the fourth quarter any big factors that we should be thinking about there.
Yes actually in I would tell you that it's it's actually incorrect, which you said we're at core quarter for us were expecting especially on the gross margin line.
To be able to get some nice expansion and Thats, a big piece of whats going to bring our arm merge margin ended at 40 basis points for the year in a lot of that is based on what happened in 18 in 2018, we experienced gross margin expansion every quarter other day in Q4.
So in Q4, we think we have an opportunity then be of course, we think we have a sales opportunity since we were up against the 1% comp. So we actually believe that in Q4, we're going to have more expansion there and that's going to be a big driver of of as I said getting is home to that merch margin number.
Got it and so on Thats on the gross margin side, I guess any dynamics or changes, we should thinking about nashi M&A going into that just.
It's not huge dollars. This gene as you think about wages, I mean with $21 million wage impact for the year. Obviously, that's the heaviest in Q4 with all the folks so so thats one piece of it.
But other than that.
No nothing to call out.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Tom Kingsbury for any closing remarks.
Thanks, operator.
Thanks for joining us today I really appreciate your support over the many years that I've spent at Burlington I hope everyone have a has a great holiday weekend. Thanks again bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.