Bullish options flow was detected in BURL stock on December 2, 2019 after a flurry of bullish analyst activity in the wake of the company’s quarterly report.
On November 26, 2019, Burlington Stores, Inc. (NYSE: BURL), announced its results for the third quarter ended November 2, 2019.
Michael O’Sullivan, CEO, stated, “We are pleased with our third quarter results, driven by a solid 2.7% comparable store sales increase, which was up against our most challenging comparison of the year, a 4.4% quarterly comparable store sales increase in Fiscal 2018. Overall we generated an 8.6% sales increase, which resulted in a 90 basis point increase in Adjusted EBIT margin, and a 28% increase in Adjusted EPS, well ahead of our guidance. In addition, our disciplined inventory management continued through the third quarter, as our comparable store inventory decreased 4%, enabling us to continue to take advantage of the abundant values available in the marketplace.”
Fiscal 2019 Third Quarter Operating Results (for the 13 week period ended November 2, 2019 compared with the 13 week period ended November 3, 2018)
Total sales increased 8.6% to $1,775 million, while comparable store sales increased 2.7%. New and non-comparable stores contributed an incremental $116 million in sales during the quarter. New and non-comparable store sales were negatively impacted by $9 million in lost sales from 7 stores temporarily closed during the third quarter of Fiscal 2019.
Gross margin rate was flat vs. last year’s rate at 42.4%. Merchandise margin increased 30 basis points, which was offset by a 20 basis point increase in freight costs and a 10 basis point negative impact attributable to inventory write offs at the temporarily closed stores. Product sourcing costs, which are included in selling, general and administrative expenses (SG&A), were 20 basis points lower as a percentage of sales vs. the Fiscal 2018 third quarter. Product sourcing costs include the costs of processing goods through our supply chain and buying costs.
SG&A increased $46 million to $584 million for the third quarter of Fiscal 2019. As a result of our adoption of the new Lease Accounting Standard, favorable lease costs, initially recorded as a result of purchase accounting that occurred in 2006, are now included in SG&A. In prior periods, these costs were included in depreciation and amortization.
Adjusted SG&A, defined as SG&A less product sourcing costs and favorable lease costs, as a percentage of sales decreased 40 basis points to 27.3%. This decrease was driven by strong sales growth and leverage on store related and corporate costs, as well as marketing expense. Note that Adjusted SG&A excludes $1.3 million in management transition costs incurred during the third quarter of Fiscal 2019.
Other Income and Revenue increased by $7 million, or 40 basis points, driven primarily by $8 million in insurance gains recorded in the third quarter of Fiscal 2019, offset by the timing of $2 million in proceeds from the sale of tax credits in the third quarter of last year. Insurance gains in Fiscal 2018 were primarily recorded in the second and fourth quarters of Fiscal 2018.
The effective tax rate increased 270 basis points to 19.2%. The Adjusted Effective Tax Rate was 19.6% vs. last year’s Adjusted Effective Tax Rate of 17.2%.
Net income increased 26% to $96 million, or $1.44 per share vs. $1.12 last year, and Adjusted Net Income increased 25% to $104 million, or $1.55 per share vs. $1.21 last year. Adjusted Net Income and EPS exclude the previously anticipated $0.02 charge per share for management transition costs. This increase in Adjusted Net Income was driven primarily by higher sales growth, merchandise margin improvement, leverage on product sourcing costs and SG&A, and insurance gains.
Fully diluted shares outstanding amounted to 67.2 million at the end of the quarter compared with 68.6 million at the end of last year’s third quarter. The decrease was primarily the result of share repurchases under the Company’s share repurchase program, discussed in more detail below. From the end of the third quarter of Fiscal 2018 through the end of the third quarter of Fiscal 2019, the Company has repurchased approximately 1.7 million shares of its common stock under its share repurchase program.
Adjusted EBITDA increased 19%, or $31 million higher than last year’s third quarter. Adjusted EBIT increased 23%, or $27 million above the prior year period, to $141 million. The 90 basis point increase in Adjusted EBIT as a percentage of sales was primarily driven by the same factors noted above that drove Adjusted Net Income growth. Note that Adjusted EBITDA and Adjusted EBIT exclude the impact of $1.3 million in management transition costs incurred during the third quarter of Fiscal 2019.
First Nine Months Fiscal 2019 Results
Total sales increased 8.8% over the first nine months of Fiscal 2018, which included a comparable store sales increase of 2.2% on top of last year’s 4.0% comparable store sales increase. Net income increased 12% over the prior year period to $259 million, or $3.84 per share vs. $3.35 last year. Adjusted EBIT increased by 11%, or $38 million above last year, to $377 million, representing a 20 basis point increase as a percentage of sales vs. the prior year period. Adjusted Net Income of $281 million was up 13% vs. last year, while Adjusted EPS was $4.17 vs. $3.62 in the prior year period. Note that all year to date results exclude the impact of $1.3 million in management transition costs incurred during the third quarter of Fiscal 2019.
Merchandise inventories were $1,004 million vs. $1,057 million last year. The decrease was due primarily to a 4% decrease in comparable store inventory at the end of the third quarter of Fiscal 2019, as well as a decrease in pack and hold inventory, which was 15% of total inventory at the end of the third quarter of Fiscal 2019 compared to 18% at the end of the third quarter of Fiscal 2018.
Share Repurchase Activity
During the third quarter, the Company repurchased 223,009 shares of its common stock for $43 million. As of the end of the third quarter, the Company had $482 million remaining on its current share repurchase authorization.
Full Year Fiscal 2019 and Fourth Quarter 2019 Outlook
For Fiscal 2019 (the 52-weeks ending February 1, 2020), the Company now expects:
Total sales to increase in the range of 8.8% to 9.1%, on top of a 10.7% increase in Fiscal 2018; this assumes comparable store sales to increase in the range of 2% to 3% for the fourth quarter of Fiscal 2019, resulting in a full year comparable store sales increase of 2.1% to 2.4% on top of the 3.2% increase during Fiscal 2018;
Depreciation and amortization, exclusive of favorable lease costs, to be approximately $210 million;
Adjusted EBIT margin to be up approximately 10 to 20 basis points vs last year;
Interest expense of approximately $51 million;
An effective tax rate of approximately 20%;
To open 51 net new stores, and invest approximately $310 million in Capital Expenditures, net of landlord allowances; and
Based on third quarter results, Adjusted EPS in the range of $7.28 to $7.33, utilizing a fully diluted share count of approximately 67.3 million, as compared to Fiscal 2018 net income per share of $6.04 and Fiscal 2018 Adjusted EPS of $6.44. This outlook excludes an expected $0.05 per share impact of management transition costs.
For the fourth quarter of Fiscal 2019 (the 13 weeks ending February 1, 2020), the Company expects:
Total sales to increase in the range of 9% to 10%;
Comparable store sales to increase 2% to 3%;
An effective tax rate of approximately 24%; and
Adjusted EPS in the range of $3.12 to $3.17, which assumes a fully diluted share count of approximately 67.1 million, as compared to Fiscal 2018 fourth quarter net income per share of $2.70 and Fiscal 2018 fourth quarter Adjusted EPS of $2.83. This outlook excludes an expected $0.03 per share impact of management transition costs.
Burlington Stores expects to open 51 net new stores in FY19 and expects to invest approximately $310M in capital expenditures, net of landlord allowances.
On November 27, 2019, Nomura Instinet analyst Michael Baker raised his price target for Burlington Stores to $252 from $220 and reiterates a Buy rating on the shares. While the company’s results were “somewhat mixed,” there was no step back in the margin growth outlook due to ongoing investments, Baker tells investors in a research note. He continues to see a backdrop for higher potential earnings power.
MKM Partners analyst Roxanne Meyer raised her price target on Burlington Stores to $250 and kept her Buy rating after its Q3 earnings beat and raised FY19 guidance. The analyst also cites the company expressing that it has no plans to “deviate” from its current growth strategies, intending to direct its investments only to boost the effectiveness of its buying organization. Meyer adds that while Burlington Stores’ FY20 growth guidance for revenue and earnings was set below FY19, there is opportunity for upside on comps and margins.
Morgan Stanley analyst Kimberly Greenberger said Burlington Stores “impressed” with its Q3 earnings beat and that new CEO Michael O’Sullivan demonstrated his deep industry knowledge with a strategic update that highlighted a shift more toward a chase strategy, but no implicit change to the low-double digit EPS algorithm. The strategic enhancements under O’Sullivan give Greenberger greater confidence, said the analyst, who raised her price target on Burlington shares to $243 from $225. She keeps an Overweight rating on the stock.
Cowen analyst John Kernan raised his price target on Burlington Stores to $245 from $225 following Q4 results. The analyst feels guidance may be conservative and leaves room for upside. He said investors can expect more all-time highs for the stock in 2020 due to prospects for EBIT margin expansion relative to peers. Kernan reiterated his Outperform rating on Burlington Stores shares.
DA Davidson analyst John Morris raised his price target on Burlington Stores to $260 and kept his Buy rating after its Q3 earnings beat driven by a “solid” 2.7% comp growth and SG&A leverage. The analyst further cites the management’s plans to continue to “chase sales” with opportunistic buying, improve product assortment to reduce the need for markdowns, and invest in boosting the “already strong” merchandise team. Morris believes that Burlington Stores remains well positioned heading into Q4, raising his FY19 and FY20 EPS views by 11c and 7c to $7.34 and $8.20.
Loop Capital analyst Laura Champine raised her price target on Burlington Stores to $240 and kept her Buy rating after its Q3 earnings beat and given her view that its below-consensus Q4 guidance is “conservative”. The analyst believes that the company’s momentum is being sustained given the 5% decline in inventories with 9% sales growth during Q3 and the same-store sales comparison next quarter that will be 310bps easier sequentially.
On November 29, 2019, RBC Capital analyst Kate Fitzsimons raised her price target on Burlington Stores to $244 and kept her Outperform rating after its Q3 earnings beat and raised FY19 guidance. The analyst notes that while the initial outlook for FY21 under the new CEO O’Sullivan could land “conservatively”, she believes that the guidance for lower rate of growth was “largely anticipated”. Fitzsimons adds that the commentary of the new CEO’s suggests that the company can make “meaningful progress in narrowing its productivity and margin gap to peers”, citing its accelerating Q3 comps and expanding margins.