Sirius XM Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2023

There are 10 speakers on the call.

Operator

Hello, and thank you for standing by. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Burlington Stores Incorporated Fiscal 2023 Third Quarter Earnings Conference Call. Thank you. I would now like to turn the conference over to David Glick, Group Senior Vice President, Investor Relations and Treasurer.

Operator

David, you may begin your conference.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference the call to discuss Burlington's fiscal 2023 Q3 operating results. Our presenters today are Michael O'Sullivan, to turn the call over to Michael, to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. To turn the call over to the operator for questions. A replay of the call will be available until November 28, 2023.

Speaker 1

We take no responsibility for inaccuracies that may appear in transcripts to conclude the call by 3rd parties. Our remarks and the Q and A that follows are copyrighted today by Burlington Stores. To turn the call over to Mr. President. Remarks made on this call concerning future expectations, events, strategies, objectives, trends to turn the call over to Mr.

Speaker 1

President, and Mr. President, I will now

Speaker 2

turn the call over to Mr. President, and Mr.

Speaker 1

President, and Mr. President, I will now turn the call over to Mr. President, and Mr. President, and Mr. President, to take your questions from those that are projected in such forward looking statements.

Speaker 1

Such risks and uncertainties include those that are described to turn the call over to Mr. President. Please note that the financial results and expectations we discuss today are on a continuing operations basis. To turn the call over to Mr. Michael.

Speaker 1

Reconciliations of the non GAAP measures we discuss today to GAAP measures are included in today's press release. To turn

Speaker 2

the call over to Michael.

Speaker 3

Thank you, David. To turn the call over to Eric. Good morning, everyone, and thank you for joining us. This morning, to We will share a few comments on our Q3 results and our forecast for the rest of the year.

Speaker 2

To take your questions.

Speaker 3

But then we are going to devote most of our remarks for talking about our longer range financial expectations. To provide some early thinking on the outlook for 2024.

Speaker 2

To begin the

Speaker 3

Q3 results. To turn the call over to Tom. Com store sales for the Q3 increased 6%. To This was the midpoint of our guidance range of 5% to 7%. During the quarter, we were very pleased with our back to school trend.

Speaker 3

To turn the call over to Eric. Our quarter to date comp growth through September was slightly ahead of our guidance range, to turn the call over to the operator. Of course, we have a very strong heritage in outerwear. To turn the call over to the operator. The warmer temperatures in October tend to have a more negative impact on us compared to other retailers.

Speaker 3

To Overall, given this unfavorability in weather as well as to turn the call over to the operator. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank

Speaker 2

you. To turn the call

Speaker 3

over to Eric. For the Q4, we are maintaining our previously issued to turn the call over to Steve. We are up to turn the call over to Eric. Our to turn the

Speaker 2

call over to Eric.

Speaker 3

Our guidance is for comp growth in the range of negative 2% to flat. To We are pleased that November is off to a solid start, but to turn the call over to the operator. To move on now and talk about our longer range financial model. To Some time ago, we had said that we would update our longer range model this year. To I am going to share the main headlines from this model and then I will discuss to take your questions.

Speaker 3

While any long range model is to turn the

Speaker 2

call over to Mr. President.

Speaker 3

Of course, subject to various uncertainties, we think it is important and helpful to ask for investors as well as vendors, landlords and other constituents to understand where we are headed. Okay. The main headline. To turn the call

Speaker 2

over to the operator. Over the next 5

Speaker 3

years, we expect to grow our total sales to turn the call over to approximately $16,000,000,000 This represents about 60% to take a look at our aggregate growth versus 2023. We project that our average growth rate to turn the call over to Steve. Thank you, Steve. To to take approximately $1,600,000,000 In dollar terms, this is almost to turn the call over to the operator for questions. To And as a percentage of sales, we expect our operating margin to be approximately to

Speaker 2

turn the call over to Ken. Thank you, Ken.

Speaker 3

To turn the call

Speaker 2

over to Mr. The assumptions that underpin

Speaker 3

this financial model can be grouped into 3 main buckets: to turn the call over to Eric to discuss our financial results. To begin. Starting with new store sales, over the next 5 years, to open approximately 500 net new stores on our current base to take

Speaker 2

a look at the next question

Speaker 3

and answer session. These will be comprised to take a look at our 25,000 square foot prototype located in busy strip malls. We feel very good about the economics of these stores. We also plan to relocate or downsize to introduce a substantial number of our older, less productive and oversized locations. To We anticipate 2 to 3 dozen of these store relocations and downsizes to take

Speaker 2

a look at

Speaker 3

the future. We have a high degree of confidence to conclude our ability to execute these new store openings and relocations. To As you would expect, our plans for 2024 are well advanced to And our new store pipeline beyond 2024 looks healthy. To There may be some lumpiness year to year, but still to turn the call over to Eric. We expect to achieve the aggregate number of net new openings that I have just outlined.

Speaker 3

To We anticipate that this new store opening program will be the most to turn the call over to Eric. To I'm going to move on to comp store sales growth. To begin. Looking at the next 5 years as a whole, we expect that our average annual to turn the call over to Tom. Thank you.

Speaker 3

To turn the call over to the operator. The starting point for this average annual mid single digit comp assumption is that prior to 2020, to

Speaker 4

turn the call over to our operator. Our average

Speaker 2

comp growth was in

Speaker 3

the range of 3% to 4%. To This comp trend was interrupted by the pandemic. And over the last to turn the call over to the operator for the Q and

Speaker 2

A session. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. To turn the call over to our operator. Thank you.

Speaker 3

To turn the call over to Eric. We anticipate some continued variability year to year. To turn the call

Speaker 2

over to our operator. In some years, our comp growth

Speaker 3

may be below mid single digit and in some years, it may be above. To turn the call over to Eric. That said, we believe that the extreme pandemic era volatility is now behind us. To turn the call over to John. In fact, this is evident in our 2023 year to date conference.

Speaker 2

To turn the call over

Speaker 3

to Eric. As we look at the outlook for off price and for our core customer over the next 5 years, we think to turn the call over to Eric to discuss our financial results. To But there are strong reasons why we believe we can outperform this baseline over the 5 year period. To turn the call over to Eric. Firstly, since 2019, we have taken numerous steps to make our business more off price.

Speaker 3

These steps have included to strengthen our merchandising capabilities and making our operational to make sure that these are not unproven strategies. To They have driven the success of our off price peers over many years. To we recognize that over the last few years, we have introduced

Speaker 2

to take a look at the results

Speaker 3

and this has impacted our ability to achieve the level of execution

Speaker 2

to turn the call over to Mr.

Speaker 3

President. Also, we have been rolling out these changes At the same time, the external environment has been difficult. Since early 2022, to turn the call over to our operator. To take your questions. But let me get back to my main point.

Speaker 3

It is important to understand that to Leaving aside the short term challenges, the strategies we have been pursuing to become more off price to take your questions. Over the next few years, to turn

Speaker 2

the call

Speaker 3

over to Mr. President. We expect these strategies and our improved execution of these strategies to have a growing and positive impact on our results.

Speaker 2

To

Speaker 3

in addition, our new store and relocation programs to provide a helpful comp tailwind over time. This will not happen right away. In fact, as we ramp up our new store openings to turn the call over to John. In 2024, there will be some slight cannibalization of comp stores by the newer stores. But then as the new stores join the comp base, they typically outcomp the chain to turn the call over to Eric to discuss our financial results.

Speaker 3

Thank you. As more and more new stores join our comp base, to turn the call over to Eric. We believe this tailwind to comp growth could increase. One other point to note is that when we relocate to turn the call over to the operator. Thank you.

Speaker 3

This makes sense. To turn the call over to the operator. We are moving to a better, more up to date store in a busier location. To We expect that this could be an additional comp tailwind in the next few years to turn the call over to Eric.

Speaker 2

To turn the call over to Eric.

Speaker 3

Okay. I am going to move on now and talk about our operating margin.

Speaker 2

To turn

Speaker 3

the call over to Eric. Based on our latest 2023 forecast, we have lost about

Speaker 2

to turn the call over to Craig

Speaker 3

to review our financial results. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator. To turn the call over to Eric. This has been driven by higher supply chain costs, mostly labor rates and higher freight costs. To In the next 5 years, we expect to offset all of this 300 basis points and more, to take operating margin to approximately 10% in 2028.

Speaker 2

To turn the call over

Speaker 3

to Eric. Let me describe the key components of this expansion. To begin. Firstly, there are a number of savings opportunities that are unrelated to sales growth. To We estimate that these are worth about 200 basis points to

Speaker 2

turn the call over to Steve.

Speaker 3

And we expect to capture the majority of these savings over the next few years, to turn the call over to Steve to discuss our financial results. To turn the call over to Eric. There are 3 main sources of these savings: higher merchant margin, mostly lower markdowns to turn the call over to the operator for questions. Lower freight expenses partially from lower freight rates, but also driven by specific transportation initiatives to turn the call over to Eric to discuss our financial results. And lower supply chain expenses, again, driven by specific efficiency to take a look at the financial results and the financial results.

Speaker 3

There may be additional upside in supply chain to take longer than 3 years and we have therefore not included them in these savings estimates. To turn the call over to Eric. The second major source of margin expansion to introduce our next question and answer session. There are two forms of this, to turn the call over to our operator. By growing total sales at double digit rates, to take a look at the financial results.

Speaker 3

We expect to capture leverage on G and A costs, including buying and planning expenses and to discuss the cost related to corporate functions. In addition, if we grow comp sales at mid single digit rates, to take your questions. And we should be able to leverage store related fixed costs such as occupancy. To over the next 5 years, we expect to capture about 200 basis points of margin from these sources of sales leverage. To take your questions.

Speaker 3

Let me segue now to our initial thinking on 2024. To Although we believe that over the next 5 years, we can achieve average annual comp sales growth to turn the call

Speaker 5

over to our operator for questions.

Speaker 3

Thank you. Thank you. Thank you. Our next question comes from the line of to take your questions. There is a lot of economic, political and geopolitical uncertainty.

Speaker 3

To turn the call over to Eric. It is difficult to predict what this uncertainty might mean for our business. To turn the call over to Mr. President. In addition, over the past couple of years, we have implemented a lot of changes in our business and we think that it makes sense to be cautious to

Speaker 2

discuss the Q1 of 2019.

Speaker 3

So to For 2024, our initial forecast is for 2% comp growth. To With this 2% comp growth, we expect to capture about 50 basis points of operating margin expansion next year. To hand the call off to Kristian to discuss more financial details to turn the call over to our operator. To

Speaker 2

take your questions.

Speaker 4

Thank you, Michael, and good morning, everyone. To turn the call over to Eric. I will start with some additional details on the Q3. Total sales growth in the quarter was 12%. To turn the call over to Eric.

Speaker 2

This was slightly lower than we

Speaker 4

had expected, driven by later opening dates for new stores during the quarter, to turn the call over to our operator for the Q1 to 977 stores. For the full year, to turn the call over to Bob. We now expect to open approximately 80 net new stores. Our comp sales growth in Q3 to was 6%, which was the midpoint of our range of 5% to 7%. To turn the call

Speaker 5

over to Chris. As Michael described, we

Speaker 4

were very pleased with our comps trend through September. It then softened due to unseasonably warm temperatures in to turn

Speaker 2

the call over to Tobler. As a

Speaker 4

point of reference, at this time of year, cold weather merchandise categories such as outerwear to represent about 25% of our business. Many shoppers still think of us as Burlington Coat Factory. To turn the call over to Eric. So as you would expect, our comps trends strengthened when the weather finally turned cooler at the start of November. To turn

Speaker 2

the call over to our operator.

Speaker 4

Our adjusted EPS in Q3 was $1.10 which was near the high end of our range to turn the call over to Mr. President of the to conclude approximately $10,000,000 of expenses associated with the Bed Bath and Beyond stores that we acquired earlier this year. To turn the call over to the operator. As a reminder, these expenses are mostly dark rent for the period between the acquisition of the leases to turn the call over to the operator for questions. The gross margin rate for Q3 was 43.2%, to turn the call over to our operator for questions.

Speaker 4

Thank you, An increase of 200 basis points versus last year. This was driven by a 150 basis point increase

Speaker 2

to turn the call over to the operator. Thank you, and good morning everyone.

Speaker 4

Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone.

Speaker 4

To turn the call over to the operator. Thank you. These costs have been a headwind all year. But as we have discussed, we have identified and developed to take a number of specific initiatives to drive efficiency savings and labor productivity improvements in our distribution centers over the next few years. To turn the call over to the operator for questions.

Speaker 4

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 4

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 4

To turn the call over to Eric. Excluding those expenses, the slight SG and A deleverage was driven by a deliberate decision to increase staffing levels in our stores. We were not happy with the service levels in our stores last year and the increase in store payroll is intended to address this. To turn the call over to our Q4 guidance and our initial plans for 2024 include this additional store payroll. To turn the call over to our operator.

Speaker 4

Thank you. Q3 adjusted EBIT margin was 4.8%, 2 10 basis to take a look at the numbers for the quarter compared with guidance of 170 basis points to 220 basis points. To begin with the Q4. Again, this excludes Bed Bath and Beyond costs worth 40 basis points. To

Speaker 2

turn the call over

Speaker 4

to the operator. Thank you. Turning to Q4, as Michael mentioned, we are maintaining our guidance for the Q4. To turn the call over to the operator. This guidance is based on comp sales of negative 2% to flat versus last year.

Speaker 4

To turn the call over to the operator. We expect that this comp range should lead to a Q4 adjusted EPS of $3.10 to turn the call over to the operator to review our financial results. Thank you, sir. Our first question comes from the line of John Franzrebren,

Speaker 5

and I'll be your

Speaker 2

conference operator today. At this time,

Speaker 4

I would like to turn the call over to the operator to review our financial results. Thank you, sir. Our first question comes from the line of John Franzrebren, who will provide an update on our financial results. Thank you, to turn the call over to our operator. Thank you.

Speaker 4

Q4 adjusted EPS is expected to be in the range of $3.15 to $3.30 to share some additional details on our long range financial model.

Speaker 2

To turn the call over

Speaker 4

to Bob. These additional details may be useful to understand our underlying assumptions in developing this model.

Speaker 2

To turn the call over to Eric.

Speaker 4

Starting with new stores. We expect to average about 100 net new store openings a year over the next 5 years. To turn the call over to Eric. As we have described previously, we expect new stores to open at about 70% of our average store volume. To introduce our new stores joined the comp base about 15 months after opening and then they typically out to comment the chain for several years.

Speaker 4

As a reminder, our underwriting hurdles for new stores to require that they be EBIT accretive in their 1st full year, with the relevant performance total being based on our 2019 EBIT margin. To turn the call over to our operator. Over the next 5 years, we also expect to relocate a substantial number of our older, to turn the call over to our operator for questions. Thank you, Steve. Thank you, Steve.

Speaker 4

Thank you. Thank you. Thank you. Thank you.

Speaker 5

Thank you. Thank you. Thank you. Thank you.

Speaker 4

Our next question comes from the line of Chris with Citi.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Our next

Speaker 4

question comes from the line of Chris with Citi. Thank you. To take a look at the comp list and improve profitability. The comp list averages about 10%. To turn the call over to the operator.

Speaker 4

The new store is usually close to the old location within a half mile, but it's typically in a better to take a closer look

Speaker 2

at our business and busier center.

Speaker 4

Our goal when we relocate a store is to retain the existing customer to turn the call over to Eric to discuss our Q1 results. As Michael described, to turn the call over to Bob. We expect that our new store openings together with mid single digit comp sales growth should drive low double digit to

Speaker 2

take a look at our total sales growth over the

Speaker 4

next 5 years. Now let me review our long range assumptions for operating margin. To turn the call over to the operator. We have identified savings opportunities unrelated to sales leverage that are worth about 200 basis points. To turn the call over to our operator.

Speaker 4

Thank you, and good morning everyone. We believe that we can capture most of these savings in the next few years. In addition, over the next 5 years, to turn the call over

Speaker 2

to Bob. We expect about 200 basis points of

Speaker 4

expansion, driven by the leverage on total sales and on comp sales growth. To turn the call over to the operator. This means that if sales perform in line with our projections, then we anticipate that our operating margin over the next to turn the call over to the operator for questions. 5 years should increase to approximately 10%. The pace at which this to discuss the progress we've made in the past.

Speaker 4

One other point to call out is that in order to support new store growth to turn the call over to Eric to discuss our financial results and the expansion of distribution center capacity. We are planning to increase our CapEx spending. To turn the call over to the operator. We expect CapEx to run at about 7% of sales for the next few years before dropping back to around 5% of sales. To take your questions.

Speaker 4

We expect to generate a lot of cash in the next 5 years, sufficient to fund the growth needs of the business,

Speaker 2

to take your questions.

Speaker 4

Let me wrap up with some additional details to And how we are thinking about 2024. We are in the midst of our 2024 budgeting process, but right now to turn the call over to our operator. Our working assumption is for top line growth of about 11%. This is driven by 2% comp store sales growth to turn the call over to our operator to discuss our Q4 financial results. We also expect about 30 store relocations in 2024.

Speaker 4

To turn the call over to the operator. As described earlier, in 2024, with 2% comp sales growth, we expect to to capture about 50 basis points of margin expansion. We have more work to do, but we feel good about our detailed plans for going after these savings. To turn the call over to the operator. As a reminder, we typically generate 10 basis points to 15 basis points of operating margin leverage to take a look at the outlook for each point of comp ahead of the sales plan.

Speaker 4

Of course, the comments that we have made today regarding our 2024 plans to take a look at the financial results. I will now turn the call back to Michael. To

Speaker 2

take your questions.

Speaker 3

Thank you, Kristen. To

Speaker 2

turn the call over to Eric.

Speaker 3

Let me summarize the key points that we have discussed this morning. To begin. First of all, briefly on Q3, given the softness across retail to turn the call over to the operator. Thank you. We are pleased with our Q3 comp and earnings performance.

Speaker 3

To Meanwhile, November is off to a solid start and this gives us confidence to turn the call over to our operator for questions. To turn the call

Speaker 2

over to the operator. Secondly, and more

Speaker 3

importantly, we have spent most of these remarks talking about the longer term outlook. The last few years have been extraordinarily volatile and unpredictable, to But that volatility has started to wane. We are very bullish about the prospects to turn the call over to our operator for our business. We expect to grow our top line sales by about 60% in the next to take your questions. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Good morning

Speaker 2

everyone. To

Speaker 3

We also see significant opportunity to recover and drive our operating margin to Compared to 2023, we expect our operating margin to turn the call over to Eric to discuss our financial results. Lastly, for 2024, we are developing our initial plans to turn the call over to our operator. Based on 2% comp store sales growth and 50 basis points of operating margin expansion. To If the underlying sales trend turns out to be stronger, then we will be ready to chase. To turn the call over to Eric.

Speaker 3

And if we achieve sales above plan, then we would expect additional operating margin expansion. To with that, I would now like to turn the call over for your questions.

Operator

Question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Speaker 6

Great. Thanks and really appreciate all the additional color. To So Michael, on your initial comp sales assumption for 2024, which to take your questions. Is that comp assumption being driven by specific concerns about the outlook next year? Or should we think of it just to turn the call over to Eric to discuss our financial results.

Speaker 3

Well, good morning, Matt. Thank you for the question. To The direct answer is that it's a bit of both. There are valid reasons to be cautious and to make sense to manage our business this way. Clearly, there's a lot of concern and anxiety among analysts to ask questions about the external environment, the economy, retail sales and especially about the low income consumer.

Speaker 3

To add to that. There's obviously a lot of uncertainty about the political and geopolitical environment. We're not economic It's difficult for us to assess all those risks and to calibrate the potential impact on our business. We also know that many of to take the improvements that we've made over the past few years, especially the new tools and processes that we've rolled out in merchandising, will take time to to gain momentum. They are going to have a significant impact, but that impact is likely to build over time.

Speaker 3

The last thing I'll say is that when we came into 2023, we had bigger expectations for the strength to take a look at our sales trends this year. Our business has gotten stronger this year. Our comp is running at positive 5% to We'd actually hoped for a little bit more. I think that those higher expectations hurt us In some parts of our business, we may have over planned sales. And then when the trend turned out to be a little weaker, to It made it harder for us to pull back.

Speaker 3

In retrospect, it might have turned out better for us if we planned our business a bit more cautiously this year. Yes. So putting all those things together, given all the uncertainty, given the changes we've made in our business, given some of the lessons from this year, We think a 2% comp growth assumption is an appropriate one at this point for our budget for 2024. Yes, we hope the trend is stronger. We're very confident that if it is, we'll be able to chase it.

Speaker 6

To Great. And then to follow-up, Kristen, could you share any more details of the 200 basis points of margin opportunity to take a moment to address the question and answer session. And maybe just more specifically, any additional color that you can provide on the 50 basis points to take a look at

Speaker 2

the numbers

Speaker 6

that you think you can capture in 2024 would be great.

Speaker 4

Yes. Good morning, Matt. Thanks for the question. To As you said and we said in the prepared remarks, we do expect to capture about 200 basis points of margin expansion in the next few years, unrelated to sales leverage. To take your questions.

Speaker 4

There are really 3 main sources of these savings. First is higher merchandise margin. This is mostly driven by lower markdowns. And while we have made meaningful progress increasing merch margins, but we continue to believe we have opportunity to turn faster to take a look at the numbers and reduce markdowns further. The second area is in lower freight expenses.

Speaker 4

These savings in freight are driven by lower freight rates to provide an update on our financial results as well as specific transportation initiatives that we have to optimize outbound and inbound processes to provide efficiencies throughout our transportation. We've made good progress on freight. By the end of this year, freight will be to Less than 100 basis points higher than 2019 levels, and we believe that we can recover more of this in the next few years. To turn the call over to Kevin for questions. Thank you.

Speaker 4

As you know and as we've talked about, we've significantly increased the level of closeout or to

Speaker 5

turn the call

Speaker 2

back over to Andrew. True off price size, these

Speaker 4

all require more time to process in distribution centers. We've also substantially increased our use of reserve inventory.

Speaker 2

To turn the call over to Bob. So we've had a significant number of

Speaker 4

learnings and we're focused on numerous efficiency initiatives to 1, reduce labor hours in processing these buys to more efficiently manage the flow of goods in and out of reserve and lastly, to minimize the number of touches to turn the call over to the next question. And finally, as it relates to the last part of your question, as it relates to 2024, we expect 50 basis points of EBIT expansion on a 2 comp. And as we said in the prepared remarks, we're still in the midst of the budgeting process. We have more work to do. But at this to point, we have good line of sight and fairly detailed plans for going after this 50 basis points of margin expansion, and it includes a combination of leverage from these three items we talked about, merch margin, freight expenses and supply chain.

Operator

Thank you. To your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Speaker 7

To Hey, good morning. Couple of questions. First, thank you everyone for the information on the long range financial model, very helpful. I guess, if I just take a step back, to be interested if there's any commentary on where you think the biggest risks are in the model when you look at it? And I guess maybe specifically, are there any major risks They could undermine the financial projections that you guys have, whether it's revenue or margin or just anything there would be helpful.

Speaker 3

To Good morning. Good morning, Ike. Yes, it's a good question. It's something I've thought a lot about. To Let me I'm going to describe and editorialize 3 to take a look at the risks in the model.

Speaker 3

I'll start with the long term or structural risks. To This is my 3rd decade in off price retail. And as long as I've been in the industry, there have always been some to be eclipsed by some new innovative business model or perhaps some new technology. Now of course, to It's important that we always be alert to those kinds of structural risks. But I have to say that I'm extremely skeptical.

Speaker 3

To I see nothing out there that seriously threatens the long term growth of off price. So at this point, I'm really not that worried about long term or structural or strategic risks. The second bucket is short term risk. These are things that can happen to take a look at the outlook for the Q1. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Our next question comes from the line of to make a sharp economic slowdown or some other major disruptive event. I'm much more wary of those short term risks to take a look at the longer term structural, any longer term structural threats. These short term factors are by to take a question from the line of Alex. The implication for us is that we need to be flexible. If we can plan cautiously to take your questions.

Speaker 3

And if we tightly control liquidity, inventory levels and expenses, then we'll be in much better shape to react to whatever to And that's really the core principle behind Burlington 2.0. But as I say, I do worry about those short term risks. The 3rd bucket of risks is internal, in other words, our own execution. To As I said in the script, we've introduced a lot of change in a short period of time and together with to take a look at the future. Yes.

Speaker 3

I think it's

Speaker 4

to it's impacted our ability to

Speaker 3

achieve the level of execution we would have liked. But here's the thing, the changes that we've made to take our proven strategies. We recognize that it may take time to get the momentum and it may take time to get the consistent execution that like but we know that these strategies work. We know that most of that upside is still ahead of us. So Anyway, I guess just sort of summing up my answer.

Speaker 3

Long term or structural risks, we need to watch them, but candidly, I wouldn't be too concerned. To be much more concerned about the short term risks. We need to plan sales cautiously, then be ready to react and to chase. To And then lastly, internal risks. We've made a lot of changes, but their impact in my view is only a question of timing.

Speaker 3

We're confident to turn the call over to Steve for questions. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you.

Speaker 7

Got it. Thanks, Michael. And then I have one follow-up for Kristen regarding Linde stores. Progress to Have you made an opening the Bed Bath stores you guys acquired last quarter? And can you remind us how these stores impact net store

Speaker 3

to take your questions.

Speaker 4

Hi, Ag. Good morning. Thanks for the question. To quickly, as a point of clarification, we were able to acquire 2 additional leases from Bed Bath and Beyond. So the total is now 64 leases through the bankruptcy to turn

Speaker 2

the call over to

Speaker 4

the operator. And as a quick reminder, we prioritize these leases based on non financial and financial criteria. To So the non financial criteria included strategic factors like the location, the specific market, to As well as competitive and site particular site specific aspects, the strip sensor, the co tenancy, the demographics. And then on the financial side, we ensure that these new stores met our financial hurdles, taking into account rent to take

Speaker 2

a look at the levels, including the dark rent, we incur before store

Speaker 4

would open, the expected volumes, operating margins, the CapEx and to take your questions. So we're pleased that we will open approximately half of these 64 stores we acquired in fiscal 2023 And we'll open the other half in early 2024. Now because we're incurring occupancy costs in these locations, to take your questions. We prioritize these stores. We're pushing to get them open as quickly as possible.

Speaker 4

And of course, prioritizing these stores to submit some of our non Bed Bath and Beyond store openings slipped into next year. Thus, our overall net new store count for the year is to take a look at the high end of our original plan. Now this group of stores will also enable us to open that 100 net new stores to make it in 2024. And then the last point I want to make is it's important to call out there are many other former Bed Bath and Beyond to take a look at stores that have reverted to the landlords, and it's likely we'll pursue many of these stores with the landlords over the next couple of years, and these to see stores would form an important part of our normal new store pipeline.

Speaker 7

Great. Thanks so much. Good luck.

Operator

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Speaker 4

To take your questions.

Speaker 5

Thank you. Good morning. I wanted to ask a question on the long range model. You described 3 drivers of earnings growth, new stores, comp growth and margin expansion. To take a look at the comp sales growth is lower like in the low single digits, would the model still generate significant earnings growth?

Speaker 4

Good morning, Lorraine. I'll take that question. As you said, our long range model has 3 drivers of earnings growth: to introduce our next question and answer session. Now of course, to maximize shareholder value and to achieve our full potential, we will to aggressively go after all three of these drivers. We believe that we have significant opportunity in each of them, to But I'll spend just a minute to your question on comp sales growth.

Speaker 4

We expect over the next several years, to turn the call over to Eric. Off price retail will continue to take share from other retail formats. This will come as new store growth and as comp sales growth. To Now we've improved and we've invested in our business over the last few years to make the assortments in our stores as compelling as possible to make sure we are offering great value and we are very confident that these improvements are going to drive significant to comp sales growth over the next several years. That is what is in our long range model.

Speaker 4

But yes, to. Hypothetically, you are correct in your question. Even with low single digit comp growth, our business has significant earnings power driven by new store growth to take your questions. And operating margin expansion that's unrelated to comp growth that we've talked about. But I just want to underscore one last point here.

Speaker 4

We believe and we expect that we're going to drive significant comp sales growth over the next several years. So even though it may be true that we can drive earnings growth to take a look at the low single digit comp, we would not be happy with that performance as that would not be full potential. Thank you. And then I wanted

Speaker 5

to ask a follow-up question to Michael. I'm curious what you're seeing in terms of customer trends. To take your questions. Are you seeing any improvement or deterioration in the low income consumer and also any increase in terms of trade down consumers in your stores.

Speaker 3

Good morning, Lorraine. To As you know, in 2022, this Shopper really struggled with the combination of lower benefits and higher inflation. Yes. I would say as the cost of living went up last year, money that those shoppers might have spent at Burlington had to be used instead to pay for to take a look at higher grocery bills or higher rent or higher gas prices. Now turning to this year, inflation is to So I would say the situation has improved.

Speaker 3

The cost of living hasn't gone down, but at least it stopped going up or at least to stop going up by as much. And I think we may be seeing some early evidence that the low income customer is actually starting to recover, at least starting to recover

Speaker 2

to take a look at the outlook from the shock of last year.

Speaker 3

One point I would make about this customer is that they go shopping when they have a true need. We think that's why our business did so well during back to school. Every year, kids get bigger and they go back to school, there's a true need.

Speaker 2

To you have to buy them clothes

Speaker 3

and supplies. So this low income customer comes out to shop during back to school And it felt like this year, they had a little more money to spend, certainly versus last year. And I think that's consistent with the point

Speaker 2

to take a look at the numbers that they may be feeling a

Speaker 3

little less economic pressure than they were in 2022. Add to that, I do think our teams did a very nice job delivering great to take a look at the value on opening price points going back to school, not just and by opening price points, I mean, merchandise that isn't just cheap, but it has great fashion and quality to take a look at the value. Let me move on and talk about the trade down customer. Because I think and obviously, the trade down customer tends to be a little higher income, moderate to higher income. And then more of a want a deal rather than a need a deal shopper.

Speaker 3

I would say that customer has definitely contributed to our 5% comp growth year to date. We really leaned into that shop. We've increased the proportion of better and more recognizable brands in the assortment And we've adjusted our mix of good, better and best. And this has worked well for us this year. There were also there were specific categories to take a look at the shopper, our accessories business, parts of our home business, parts of our ladies apparel business.

Speaker 3

Yes, we've chased and fueled some really nice trends in those categories by delivering a higher mix of recognizable brands and elevated assortments. Our expectation coming into this year was that the economy would slow down and that would cause shoppers to become more value to be conscious and therefore we see more trade down traffic in our stores. And that has happened, perhaps not to the extent we would have liked, but it to It has happened. As we look forward to 2024, we think it's possible that we'll see more of that trade down. To If that happens, I think we're in very good shape to take advantage of it.

Speaker 3

The off price supply environment continues to be very good,

Speaker 4

Thank you.

Speaker 3

Thank you, Duane.

Operator

Your next question comes from the line of John Kernan from TD Cowen. Please go

Speaker 1

ahead. Excellent. Good morning, Michael, Kristen and David. Thanks for the detail. Michael, it sounds like you're happier with the level of the execution you achieved this year versus last year.

Speaker 1

Are there additional opportunities, particularly as you look at the margin improvement opportunities?

Speaker 3

Well, good morning. Good morning, John. Thank you for the thank you for your question. To Let me start by let me start my answer by contrasting this year with last year. In 2022, The external environment was very difficult.

Speaker 3

Business would have been tough no matter what, but we compounded that tough environment to turn the call over to Eric to discuss our financial results. Thank you. And I would say we definitely learned from those mistakes. This year in 2023, to The external environment has gotten a lot better and our own execution has significantly improved. That said, there's still plenty of room for improvement.

Speaker 3

To I would say one of the core strengths of Burlington is that we're fairly humble and self critical, and our teams are very focused on learning and improving to take our own execution of the off price model. So let me talk about opportunities, and I'll start with merchandising. To Yes, there are some businesses where we've done really well year to date. Some of our CentiCore businesses, some of our home categories have shown very strong performance. We've delivered great value in these businesses and the customers responded.

Speaker 3

We planned and managed those businesses cautiously and then we chased And that worked really well. There are other categories where performance has not been as strong. In some of those underperforming areas, we may have over planned sales. So we bought in certain styles and fashions, But then the trend shifted and because we'd over planned sales, it was difficult for us to react. Now those types of mistakes will happen, especially to be in fashion businesses where the trend can shift quickly.

Speaker 3

But the bottom line is that we need to plan cautiously and be much more agile. To I'm pretty confident. I'm very confident that in those businesses, we're going to perform a lot better in 2024. To That's also why I'm very excited about the new merchandising 2.0 processes and tools that we've rolled out this year. To They're really going to help us be more nimble, more agile, and they're really going to make a difference over time.

Speaker 3

Let me move on and talk about to Improvements and changes that we've made in other areas, operational areas. To discuss some of the work that we've been doing in supply chain to drive efficiency and flexibility. So to I'm going to focus just a few comments on stores. There are some aspects of store operations where we've made huge progress in the last few years. In particular, to take your questions.

Speaker 3

There's to take a look at the numbers that we have in place. And that matters. It's really helped us to drive inventory turns, to And it's really contributed to the lower markdowns we've been able to achieve. Now part of that is stores have also gotten much more nimble of flexing the sales floor based upon receipts. We flex up businesses that are doing well.

Speaker 3

We flex down businesses that are not. Now there are other aspects of store performance to where we know we can do a lot better, speed of checkout, sales store recovery, asset protection, scheduling staff, payroll allocation. To Burlington 2.0 is not just about buying great merchandise. It's also about delivering those great values in a neat, clean and controlled environment. We've strengthened our leadership team in stores.

Speaker 3

I'm really excited about the team that we have. We've already begun to see some improvement, to But I think that we have a lot more opportunity ahead of us, a lot more to come.

Speaker 1

All right. Thanks for all the detail on Burlington 2.0. Just a to follow-up for Kristen. Can you walk us through the gross margin and SG and A puts and takes for Q3 and also the Q4 implied guidance?

Speaker 4

To Sure. Good morning, John. Overall, for Q3, we're pleased with the EBIT margin performance in the quarter, increasing 2 to take a look at the numbers of 10 basis points over last year, that's after excluding those Bed Bath and Beyond expenses. And as I shared in the prepared remarks, merchandise to turn the call over to Steve. Margin was the primary driver here, increasing 150 basis points.

Speaker 4

This was really due to lower markdowns, to take a look at the financial results, followed by freight, which leveraged 50 basis points. And these line items came in largely as we had expected. To take a look at the Q1 of 2019. SG and A also came in about what we expected, 10 basis points higher than last year, primarily due to the investments we made in store payroll. Now I'm excluding the approximately $10,000,000 of Bed Bath and Beyond worth about 40 basis points in SG and A.

Speaker 4

To And in Q3, the upside in our EBIT margin versus our guidance was primarily driven by product sourcing costs coming in a bit lower than we had planned. To As far as Q4 is concerned, directionally, the margin dynamics will be similar to Q3. To We expect merchant margins to be up as well as continued freight leverage. However, we do expect this gross margin leverage to be partially offset by SG and A deleverage due to two factors: 1, investment in store payroll as we did in the 3rd quarter And then secondly, the fact that we are up against an incentive comp accrual reversal that benefited the 4th quarter last year by about 50 basis points.

Speaker 1

All right. Best of luck.

Speaker 3

Have a great day, Greg. To Thank you.

Operator

Your next question comes from the line of Alex Stratton from Morgan Stanley. Please go ahead.

Speaker 8

To Perfect. Thanks so much. Congrats on a great quarter. My first one, I think, is for really Kristen. Can you perhaps break down the drivers of Growth in the quarter maybe by traffic, basket, etcetera.

Speaker 8

And then I have a quick follow-up. Thank you.

Speaker 4

Sure. Good morning, Alex. To The 3rd quarter comp was driven by an increase in both traffic and conversion, which translates of course to our comp being driven by an increase in the number of to turn the call over to our operator. We did see higher units per transaction, but this was largely offset by lower AURs. To As a result, our average transaction size was flattish.

Speaker 4

I would add here that this is a familiar pattern we've seen all year. Our comp year to date has to turn the call over to Eric. Consistently been driven by higher traffic and conversion, I. E, the number of transactions. And this is a trend that we've seen pretty much across the Off Price to turn

Speaker 2

the call back over to the operator.

Speaker 8

That's super helpful. Can you also provide commentary on your inventory levels exiting the quarter? Thank you.

Speaker 4

To Great, thanks. Yes, our comp store inventory was relatively flattish, up about 2%. Total inventory was down 8%. To Now the biggest driver of that decrease was lower reserve inventory and lower in transit. And I can provide just a little bit of color on each of these.

Speaker 4

To First on reserve. In the Q3 last year, we significantly built up reserve inventory. To take your questions. One of the key reasons for doing that was that we were concerned about industry wide supply chain disruption and delays in Q4. So we brought goods in early and we staged them in reserve.

Speaker 4

Now this year, the environment is very different and there's to take your questions. So no need to bring in receipts in early. And in addition, again, because of those supply chain delays last year, we had an unusually high level to take a look at the numbers of inventory. This inflated our overall inventory levels. This year, our in transit inventory is much lower and at a more normalized level.

Speaker 4

To take your questions. Our supply chain teams are doing a great job moving goods quickly through the DCs and flowing products to stores. To Our reserve penetration as a percent of inventory at the end of the 3rd quarter was essentially flat to last year, 30% versus 31%. And I'll just add that we feel really good about the content of this inventory and the availability of reserve buys remains quite strong.

Speaker 1

Operator, last question.

Operator

Your last question comes from the line of Brooke Roach. Please go ahead.

Speaker 9

Good morning and thank you for taking our question. I was hoping you could elaborate on the drivers of what gives you confidence in delivering a 2% comp result in 2024 relative to the more cautious outlook embedded in the 4th quarter outlook, understanding that you have to deliver the 5% year to date. Just trying to understand the more cautious outlook for Q4 and then the improvement into next.

Speaker 3

Good morning, Brooke. I'll take that. Of course, most retailers to do not give guidance for the year ahead until they get through Q4. And as Kristen said in her remarks, our to guidance, our formal guidance for 2024. We'll be informed by developments over the next few months.

Speaker 3

Of course, it will. To We need to get through Q4 to really before we're ready to give final guidance. Nevertheless, let me sort of I think it's helpful at this point to share our initial thinking and that's what we've tried to do in terms of putting that 2% comp growth out there. To So let me explain why we think that that's an appropriate assumption at this point. Now we recognize that next year there's lots of to take a question from the line of John Kerry from Morgan Stanley.

Speaker 3

Please go ahead. Thank you. Thank you. To But with all that said, there are three reasons why we think a 2% comp growth is appropriate. The first and we've touched on some of these during to show some signs of improvement.

Speaker 3

Now, I know analysts are worried about the economy next year and they're worried to talk about that customer for next year, but frankly, that customer was already went through a lot in 2022. So I think with the cost of living if the cost of living continues to grow at a slower pace, I think that customer will continue to they'll feel released, and I think they'll continue to recover. Secondly, as I said earlier, we've also seen some to take a quick break down from our business, we're getting really good turns on recognizable brands at higher price points. To take a look at some specific merchandise categories, it's clear that we're attracting that trade down customer. And let's supposing that the economy does slow down next Yes, I think we'll likely see more of that trade down customer.

Speaker 3

And then the third thing I'd say to When we look within our own business this year, there were things this year that we could have done better. In every to take a look at the quarter so far this year in Q1, in Q2 and in Q3. There were businesses where I know we could have done better, and I mentioned some of those a little bit earlier. So there are lessons that we're taking away from this year that we can apply to next year. So if I put those three things together, we feel pretty we have some confidence in the 2% comp growth to take a look

Speaker 2

at the assumption at this point.

Speaker 9

Great. And then for Kristen, can you elaborate on your capital allocation priorities beyond the step up in CapEx that was identified in the prepared remarks. What contribution potential do you see to the long term to the long range model from share buyback? And how are you evaluating the potential near term cadence of buybacks given your confidence in the Burlington 2.0 plan?

Speaker 3

To Yes,

Speaker 1

I'll take that one, Chris, and thanks, Brook, for the question. Our first priority always is to invest in our growth, and we talked about that In the prepared remarks, the reasons why we're stepping up CapEx. But that said, we expect to generate sufficient cash flow in our 5 year plan to return excess cash to shareholders. You probably noted that In the Q4, we did in fact step up our excuse me, in the Q3, we did step up our buybacks versus the Q2, about double the previous quarter. We don't guide to buybacks, but you probably also noted in our release today, we had over $600,000,000 in cash to extend $1,400,000,000 in liquidity.

Speaker 1

So we're in a really strong liquidity position. So our expectation is that we'll continue to return cash to shareholders at appropriate levels. We're cognizant of our current valuation. As you heard today, we're confident in our future growth and margin prospects. We had over $700,000,000 remaining on our existing share repurchase authorization as of the end of the Q3.

Speaker 1

And as we always do, we'll update you to turn the call back over to Michael O'Neill.

Operator

To turn the call back over to Michael O'Sullivan for closing remarks.

Speaker 3

To Let me close by thanking everyone on this call for your interest in Burlington Stores.

Speaker 2

To turn

Speaker 3

the call over to Mr. President. We look forward to talking to you again in March to discuss our Q4 and full year 2023 fiscal results. Thank you for your time today and Happy Thanksgiving.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Sirius XM Q3 2024
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