Burlington Stores, Inc. reported earnings and sales gains for the third quarter ended October 30, 2021 against the third quarter of 2019 but also said freight and supply chain challenges pressured margins in the period.
Michael O’Sullivan, CEO, stated, “We are very pleased with our third-quarter results. We continued to demonstrate our ability to chase the business and deliver great value to our customers. With Total Sales up 30 percent in Q3 and up 32 percent YTD, clearly, we are taking significant market share.”
O’Sullivan went on, “As predicted, freight and supply chain headwinds pressured margins in Q3. We fully expect these headwinds to moderate over time and, as they do, this should generate very attractive off-price buying opportunities as well as significantly lower expenses.”
O’Sullivan continued, “As the economy moves into a more inflationary environment, we think that shoppers will be even more attracted to our great values. Our value differentiation versus most other retailers has grown this year, as they have raised realized prices. If these higher realized prices are sustained then we believe that in the coming quarters we will have the opportunity to drive additional sales, to raise retails, or to do both.”
O’Sullivan concluded, “This year we have been very excited about the performance of our new stores, especially our smaller prototype. Based on this performance and on the tremendous market share opportunity that we see ahead of us, we have decided to accelerate the pace of our new store opening program.”
Fiscal 2021 Third Quarter Operating Results
(for the 13-week period ended October 30, 2021 compared with the 13-week period ended November 2, 2019)
- Total sales increased 30 percent compared to the third quarter of Fiscal 2019 to $2,300 million, while comparable-store sales increased 16 percent compared to the third quarter of Fiscal 2019.
- Gross margin rate was 41.4 percent versus 42.4 percent for the third quarter of Fiscal 2019, a decrease of 100 basis points. Merchandise margins increased 80 basis points, which was more than offset by a 180 basis point increase in freight expense.
- Product sourcing costs, which are included in selling, general and administrative expenses (SG&A), were $173 million versus $90 million in the third quarter of Fiscal 2019. Product sourcing costs include the costs of processing goods through our supply chain and buying costs.
- SG&A was 33.0 percent as a percentage of net sales versus 32.9 percent in the third quarter of Fiscal 2019. Adjusted SG&A, as defined below, was 25.3 percent as a percentage of net sales versus 27.4 percent in the third quarter of Fiscal 2019, an improvement of 210 basis points.
- Other Income and Other Revenue were $7 million in the aggregate versus $16 million in the third quarter of Fiscal 2019. This decline was primarily due to a non-recurring insurance gain of $8 million recognized in the third quarter of Fiscal 2019. This decrease had a 60 basis point negative impact on Adjusted EBIT margin in the third quarter of Fiscal 2021.
- The effective tax rate was 56.8 percent versus 19.2 percent in the third quarter of Fiscal 2019. This increase was primarily due to an $86 million loss on debt extinguishment charge related to the partial repurchase of its Convertible Notes, most of which is not tax-deductible. The Adjusted Effective Tax Rate was 25.5 percent versus 19.6 percent in the third quarter of Fiscal 2019, primarily driven by a reduced benefit from stock-based compensation and an increase in disallowed executive compensation.
- Net income was $14 million, or $0.20 per share versus $96 million, or $1.44 per share for the third quarter of Fiscal 2019. This decrease was primarily due to the $86 million loss on debt extinguishment charge noted above, or $1.22 per share. Adjusted Net Income was $93 million, or $1.36 per share versus $103 million, or $1.53 per share for the third quarter of Fiscal 2019.
- Diluted weighted average shares outstanding amounted to 68.2 million during the quarter compared with 67.2 million during the third quarter of Fiscal 2019.
- Adjusted EBITDA was $205 million vs. $192 million in the third quarter of Fiscal 2019, a decrease of 190 basis points as a percentage of sales. Adjusted EBIT was $140 million, flat versus the third quarter of Fiscal 2019, a decrease of 180 basis points as a percentage of sales. Excluding the decline in Other Income and Other Revenue, as described above, Adjusted EBIT margin declined 120 basis points versus the third quarter of Fiscal 2019.
Given the volatility in Fiscal 2020 results caused by COVID-19 and to assist with comparability, all third quarter and year-to-date Fiscal 2021 comparisons are made versus the third quarter and year-to-date Fiscal 2019. For a discussion of results for the third quarter and year-to-date of Fiscal 2021 as compared to the third quarter and year-to-date Fiscal 2020, refer to the company’s Quarterly Report on Form 10-Q for the quarter ended October 30, 2021, which will be filed with the Securities and Exchange Commission (the “SEC”).
First Nine Months Fiscal 2021 Results
Total sales increased 32 percent compared to the first nine months of Fiscal 2019. Net income increased 11 percent compared to the same period in Fiscal 2019 to $287 million, or $4.21 per share versus $3.84 per share in the prior period, an increase of 10 percent. Adjusted EBIT increased 49 percent, or $186 million compared to the first nine months of Fiscal 2019, to $561 million, an increase of 100 basis points as a percentage of sales. Adjusted Net Income of $402 million was up 44 percent versus the prior period, while Adjusted EPS was $5.89 versus $4.15 in the prior-year period, an increase of 42 percent.
Merchandise inventories were $1,060 million versus $1,004 million at the end of the third quarter of Fiscal 2019. Comparable store inventories decreased 24 percent, partially offset by inventory from the addition of 106 net new stores opened since the end of the third quarter of Fiscal 2019. Reserve inventory was 30 percent of total inventory at the end of the third quarter of Fiscal 2021 compared to 21 percent at the end of the third quarter of Fiscal 2019.
Liquidity and Debt
The company ended the third quarter of Fiscal 2021 with $1,726 million in liquidity, comprised of $1,185 million in unrestricted cash and $541 million in availability on its ABL Facility. The company ended the third quarter with $1,629 million in outstanding total debt, including $953 million on its Term Loan Facility, $645 million in Convertible Notes, and no borrowings on the ABL Facility.
Convertible Note and Common Stock Repurchases
During the third quarter, the company entered into privately negotiated transactions to repurchase approximately $160 million principal amount of the company’s outstanding 2.25 percent Convertible Notes. The total transaction value of approximately $242 million, included $91 million in cash and $151 million in stock and resulted in the issuance of 513,991 shares of common stock. After the completion of this transaction, approximately $645 million of the Convertible Notes remained outstanding.
In addition, during the third quarter, the company repurchased 512,363 shares of common stock for $150 million under its share repurchase program. As of the end of the third quarter, the company had $250 million remaining on its current share repurchase authorization.
Given the uncertainty surrounding the pace of the recovery of consumer demand and the ongoing pandemic, the company is not providing sales or earnings guidance for Fiscal 2021 (the 52-weeks ending January 29, 2022) at this time.
The company is updating the following Fiscal 2021 guidance items:
- Capital expenditures, net of landlord allowances, is now expected to be approximately $425 million;
- The company now expects to open 101 new stores, while relocating or closing 24 stores, for a total of 77 net new stores in Fiscal 2021;
- Depreciation & amortization, exclusive of favorable lease costs, is now expected to be approximately $250 million;
- Interest expense is now expected to be approximately $68 million; and
- The effective tax rate is now expected to be approximately 23 percent.
Photo courtesy Burlington Stores