Good morning. My name is Julianne and I will be your conference operator today. I would like to welcome everyone to Burlington Stores' Second Quarter Fiscal 2022 Operating Results Conference Call. All lines have been muted to prevent any background noise. Following the speakers' presentation, there will be a question-and-answer session. I would now like to introduce David Glick, Group Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2022 second quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer and John Crimmins, Principal Financial Officer. Also on the call today is Kristin Wolfe, EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until September 1st 2022. We take no responsibility for inaccuracies that may appear in transcripts of this call by third-parties. Our remarks and the Q&A 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 2021 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's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover three topics this morning. Firstly, I will discuss our second quarter results. Then, I will review our outlook for the rest of the year. Thirdly, I will talk about the longer-term outlook. After that, I will hand over to John to walk through the financial details, and then we will be happy to respond to any questions. Okay, let's talk about our results. Comparable store sales for the second quarter decreased 17%. This was on top of 19% comparable store sales growth last year. During this call, when describing our comp trend, I'm going to use a three-year geometric comp stack. This is just like a simple three-year comp stack but accounts for the compounding effect from year-to-year. Given our large comp numbers last year, we think this provides a more meaningful indicator of our trend. This metric is defined in more detail in today's press release. In May, our three-year geometric comp stack was plus 4%. In June, it was flat, and in July, minus 7%. For Q2 as a whole, it was minus 1%. This was below our guidance for a positive low single-digit three-year geometric stack. These results are poor, and we are very disappointed. There were external factors that contributed to these results. And in a moment, I will describe these in detail. But before I do, let me say that no matter what external headwinds we face, we have to do better than this. On an absolute and on a relative basis, these comp results are well below our expectations. When you look at comp performance in our business, there is no mystery about what drives these numbers. It's about offering the best value in the categories, brands, styles and price points that the customer is looking for. This is how we executed our business in Q2. But when you look at our results, especially on a relative basis, it's clear that we did not move far or fast enough. Let me turn now to the external environment. We believe that there were two major factors that impacted our trend in Q2. First of all, the low to moderate-income customer is under significant economic pressure. The low to moderate-income customer is our core customer. Approximately 40% of the money spent at Burlington comes from shoppers with household incomes of less than $50,000. Low to moderate-income shoppers helped drive our extraordinary growth last year, and they remain an important part of our future growth plans. But right now, they are under severe economic stress. And versus last year, they have considerably less money for discretionary spending. The second factor that contributed to our weakening trend in Q2 was that promotional activity, especially among retailers that serve low to moderate-income shoppers. Third, the root cause of this is that there is a massive imbalance between inventory levels and sales across retail. The glut of inventory that started to emerge in Q1 turned into a tidal wave in Q2. In normal times, promotional activity tends to be limited to seasonal merchandise and styles that have not sold well. But what we are seeing right now is that there is such an imbalance between supply and demand that most retailers are having to aggressively clear inventory. Our customer proposition, the key reason to shop our stores is that we offer better value than other retailers. In Q2, this value differentiation was squeezed. Our customers are, as I described earlier, heavily focused on value. They have a lot of options about where to spend their limited funds and they cross-shop heavily looking for the best deals. For our customers, the top shopping destination for apparel and footwear is Walmart, followed by Target. The current level of promotional activity will not last forever. But while it does, it will create a very significant headwind for us. Let me draw these trends together for Q2. There were external factors that contributed to our trend in the quarter. The low to moderate-income customer is under economic stress and retailers serving these customers are burdened with promotions. These headwinds are real, but as an off-price retailer, we have advantages. The overall sales trend may be weak, so we can shift into the areas that the customer is buying and we can use the supplier balance to deliver great value in these categories. Again, this is what we did in Q2, but our results show that we did not move far or fast enough. We can do better. Before I move on to talk about the outlook, let me just comment on earnings. Despite the weak trend in Q2, our margins came in ahead of expectations. There were two reasons for this. Firstly, we managed our in-store inventories very close to plan. So we didn't have a lot of excess inventories. This meant that our markdowns were modest compared to many other retailers. We could have taken broader and deeper markdowns. This might have driven sales but not necessarily earnings. Instead, we focused markdowns on excess seasonal merchandise and ended the quarter very cleanly. The second factor that drove above plan earnings is that with the weak sales trend, we aggressively controlled our expenses. As a result, although we came in below our guidance for sales, our earnings were above the high end of our guidance range. Later in the call, John will provide more details on this. So what do we think happens next? I'm going to move on to the outlook, and I will split my remarks into the near-term outlook, i.e., the rest of the year and then further out. We believe that the current retail environment characterized by a weak sales trend and significant promotional activity is likely to be with us through the rest of the year. We also think that this promotional activity is likely to delay the emergence of any significant trade down shopper. Think about it, there is really no need to trade down when every major retailer is on sale. Based on these factors, we are lowering our guidance for the back half of the year. Our updated guidance is based on a minus 4% to minus 1% three-year geometric stack. This translates to a one-year comp range of minus 13% to minus 10% for the back half. As a reminder, our comp growth for the back half of 2021 was positive 10%. Our plan for the fall assumes significant pressure on merchant margin. We had originally planned for an increase in merchant margin in the back half, but we have now pulled back on this. As I said earlier, the most important driver of sales is the value that we put in front of the customer. We need to challenge every hanger in our assortment and make sure we are offering the best value. During this time, we will tightly control buying and liquidity, carefully managed inventories and aggressively pursue opportunities to drive down expenses. But, the net effect of all this is that we expect our results for the full year to be well below our normal expectations and well below what we believe we can accomplish over the next couple of years. Let me segue to talking about the next couple of years. Last year, actually on this call, we described the then current situation of strong consumer spending fueled by government stimulus and significant merchandise supply constraints, we described that situation as completely unsustainable. Let me say, we believe that the now current situation of weak retail sales trends and massive oversupply of merchandise is equally unsustainable. In the next few months, we will start to work on our plans for 2023. To support this process, we have started to sketch out scenarios for what the retail environment could look like in 2023. I'd like to describe the scenario that based upon what we know at this point, we think is most likely. Firstly, we believe the inventory overhang across the retail industry is likely to clear over the next several months. We expect that by early 2023, once this overhang has cleared, promotional activity will have declined significantly. Secondly, we anticipate that the supply environment will tighten somewhat. Many vendors have been hurt by the current imbalance and they are likely to pull back but with weak consumer demand, we think there will still be plenty of merchandise supply for the off-price channel. We also expect to carry attractive reserve inventory into 2023. Thirdly, we believe that in 2023, the expense environment is likely to have changed significantly, especially for freight rates. There are already some early signs of this. We also think it is likely that by then, the labor market will have softened, which could ease pressure on wage rates. Fourthly, we anticipate that the economy will have slowed. As this happens, inflation should moderate, thereby easing some pressure on low to moderate-income shoppers. And this slowing economy may also drive heightened consumer focus on value, driving trade down shoppers to our stores. Lastly, we think that several financially weak bricks-and-mortar retailers may have to close stores. These closures would free up potential market share and real estate. Forecasting the future is a very risky undertaking, especially after what we have lived through over the last three years. But, we believe the scenario, I've just described, isn't just possible, it's likely at some point in 2023. We are optimistic about next year. We expect to drive recovery in sales and earnings and start to get back on track towards our longer-term objectives. I would now like to turn the call over to John to provide more details on our Q2 results and our rest of year guidance.

Thanks, Michael, and good morning, everyone. I will start with some additional financial details, on Q2. Total sales in the quarter were down 10%, while comp sales were down 17%. Our three-year geometric comp stack was a minus 1%. In terms of earnings, the headline is that we faced gross margin pressure in Q2, but this was more than offset by productivity and expense savings elsewhere in the P&L. Comp sales came in below our guidance range, but our adjusted EPS came in above. For Q2, our adjusted EPS was $0.35 versus the guidance range of $0.18 to $0.31. That was the headline. Now let me provide more detail. The gross margin rate was 38.9%, a decrease of 320 basis points versus 2021 2nd quarter rate, of 42.2%. This was driven by a 110 basis point increase in freight expense combined with 210 basis points lower merchandise margin. About half the decline in merchandise margin was driven by higher markdowns and about half from a true-up to our shortage reserve. It's worth calling out that although our markdown rate was higher than last year, it was still significantly below 2019 and historical levels. Product sourcing costs were $157 million versus $146 million in the second quarter of 2021, increasing 130 basis points as a percentage of sales. This deleverage was due to higher supply chain and buying costs driven by higher supply chain wages and growth of our buying and planning team, respectively. Adjusted SG&A was $518 million versus $150 million in 2021, increasing 120 basis points as a percentage of sales, which was driven primarily by deleverage on occupancy expense. Adjusted EBIT margin was 2.1%, 610 basis points lower than the second quarter of 2021. Our guidance for Q2 had been for 610 to 670 basis points. We were able to achieve the high-end of our adjusted EBIT margin guidance, by offsetting the lower-than-expected comp sales and gross margin with expense savings, but in the context of our Q2 2019 adjusted EBIT margin. The second quarter of 2022 adjusted EBIT margin declined by 500 basis points versus that time period. Of this, about 450 basis points were driven by freight and supply chain deleverage. All of this resulted in diluted earnings per share of $0.18 versus $1.50 in Q2 of 2021. Adjusted diluted earnings per share were $0.35 versus $1.94 in the second quarter of 2021. At the end of the quarter, our in-store inventories were 5% below 2021 on a comp store basis and our reserve inventory was 52% of our total inventory versus 31% last year. In dollar terms, our reserve is more than double last year's levels. This increase was driven by our merchants taking advantage of great buying opportunities during the quarter. In Q2, we opened 11 net new stores, bringing our store count at the end of the quarter to 877 stores. This included 13 new store openings and two relocations. Now I will turn to our outlook. As Michael mentioned, we are updating our back half forecast based on a minus 4% to minus 1% three-year geometric stack. This implies a one-year comp range of minus 13% to minus 10% for the second half of fiscal 2022. Based on this range and on our expectation of a continuing heavy external promotional environment, our adjusted EBIT margin is expected to decline by 160 basis points to 80 basis points, which would generate adjusted EPS for the back half of $2.81 to $3.41. This would drive full year adjusted EPS of $3.70 to $4.30 and an adjusted EBIT margin decline of 410 basis points to 360 basis points. Breaking out the quarters, we are modeling Q3 at a one-year comp decline of minus 18% to minus 15%, which translates to minus 4% to a minus 1% decline on a three-year geometric stack basis. This range should lead to a Q3 adjusted EBIT margin decrease of between 360 basis points and 260 basis points into third quarter adjusted EPS of $0.36 to $0.66. We are modeling Q4 at a one-year comp decline of minus 9% to minus 6%, which for Q4 translates to the same three-year geometric stack that we are planning in Q3 of minus 4% to minus 1% decrease. Recall that our Q4 2021 comp comparison decelerated from 16% in Q3 to 6% in Q4. This comp sales range should lead to fourth quarter adjusted EPS of $2.45 to $2.75. I will now turn the call back to Michael.

Thank you, John. Let me summarize some of the key points that we have covered this morning. We are disappointed with our Q2 sales performance. There were two major external factors that contributed to our Q2 trend, the low to moderate-income customer is under a lot of economic pressure. And during the quarter, there was a huge surge in promotional activity. We believe that these factors are likely to continue into the fall season. Our updated guidance assumes the sales trend will remain weak and that merchant margins will be pressured by high levels of external promotional activity. Our business is all about offering the best value on the categories, brands, styles and price points that the customer is buying. We can do a much better job on this. As we look ahead to 2023, we are optimistic. There are several factors that we think could drive a significant recovery in our sales and earnings and would start to get us back on track to our longer-term financial objectives. Now before I turn the call over to the operator for Q&A, there are a couple of additional topics that I would like to call out. Firstly, we recently released our latest corporate social responsibility report. On this call, we do not have time to discuss the content in any detail, but I would like to encourage investors to take a look at the report on our Investor Relations website. The report describes the huge progress that we have made over the past year on our major environmental, social and governance priorities. If there are any investors who have questions about any of these topics, or would like more information, then please contact our Investor Relations team. The final thing that I would like to do before moving to questions is to comment on our CFO transition. On this call, we have our new and our retiring CFO. Some might call that an embarrassment of riches. I would like to welcome our newly appointed CFO, Kristin Wolfe, who joined us a few weeks ago. Kristin comes to us with over a decade of off-price experience, serving in a variety of financial, strategic and operational roles. We are very excited to have Kristin as part of the team. Of course, on the flip side of the CFO transition, we will be saying goodbye to John Crimmins to retire this month. This is John's last earnings call, so please ask him some tough questions. Seriously, I would like to take this opportunity to thank John on behalf of the company and the Board for his hard work and commitment to the company over the years and to wish him all the best in his well-deserved retirement. With that, I would now like to turn the call over for your questions.

Our first question comes from Matthew Boss from JPMorgan. Please go ahead. Your line is open.

Great. Thanks. So Michael, maybe taking a step back, what are your thoughts on the relative performance that we've seen from the major off-price retailers? Or said differently, comps for these retailers have historically trended together versus the wider gap that we've seen year-to-date today. So what do you think is driving this divergence in your view?

Good morning, Matt. Thanks for the question. We closely monitor our peers as there's a lot to learn from them. We've analyzed our year-to-date performance, and here's our assessment. The data indicates a clear divergence. Looking at year-to-date performance on a three-year geometric stack basis, one of our off-price competitors is up in the mid-teens, another is in the mid-single digits, while we are at minus 1%. We are not satisfied with this outcome. There are two main factors explaining this difference. Firstly, the customer mix varies significantly among these retailers, which can impact performance. Last year, our relative success was driven by low-income shoppers, who benefited more from stimulus checks, providing us with a stronger advantage compared to our peers. This year, however, those shoppers are struggling, contributing to our weaker trend. This demographic challenge won't last forever; inflation will eventually ease, allowing low-income customers to recover. Importantly, this demographic is large and growing, and they prefer brick-and-mortar retail. The exact impact is uncertain, but there is a second important factor, which we can control. Once we account for customer mix differences, what remains is our execution relative to others. I don’t mean just operational execution; while there are areas for improvement in operations, they aren’t affecting our relative performance. Instead, I’m referring to merchandising execution. When a customer visits our store compared to our peers, what they see will influence where they decide to shop and spend money. Other retailers facing weak sales trends have limited options, but as an off-price retailer, we can adjust our merchandise to align with what customers are buying and leverage supply opportunities to provide exceptional value. In Q2, we did execute on this approach, but our results indicate we didn't move the needle enough—our peers performed better. This brings me to two key implications: one short-term and one long-term. In the short term, for the latter half of the year, we need to evaluate every aspect of value in our assortment, ensuring every hanger counts. For the long term, we recognize that we can improve our execution of the model. Last year, we excelled at driving sales when customers had money, but this year’s challenge is that low-income customers have less to spend. The only way to improve our performance is by providing great value, which is a skill we need to strengthen. Over the past couple of years, we've invested in merchandising to enhance our execution, and I am confident that as these improvements take effect, we will close the gap with our peers. However, I agree that our Q2 comp results demonstrate that we still have work to do.

Thanks. That's great color. My second question is more focused on the multi-year. So with 2022, clearly, it's turning out to be a tough year across retail, I guess, have the challenges from this year affected your thinking about longer-term opportunities?

Good question. It's essential to distinguish between short-term challenges and long-term structural factors. When I joined Burlington three years ago, my belief was that the off-price model, with its emphasis on value, trend responsiveness, ability to leverage supply disruptions, and resilience against e-commerce, provides us with a competitive edge over other retail models. Additionally, within the off-price sector, I identified opportunities for Burlington to enhance our execution of this model. That has been the aim of Burlington 2.0. Fast forward to today, in 2022, that strategic vision remains unchanged. The inherent advantages of the off-price model compared to other retail channels still hold true. The enhancements we are implementing, like a stronger buying organization and a more adaptable operating model, will ultimately improve our execution of the off-price strategy. Of course, I must acknowledge that we've encountered significant challenges over the past three years, including the effects of inflation on our core customers and a surge in promotions. However, it's crucial to understand that these challenges are temporary. The past couple of years have been atypical. Eventually, long-term trends will resurface, especially the advantages of the off-price model and the benefits from the improvements we are making to the business. I remain very confident that we will achieve our long-term goals and objectives.

Thanks. Best of luck.

Thanks, Matt.

Our next question comes from Ike Boruchow from Wells Fargo. Please go ahead. Your line is open.

Hey. Good morning everyone. Michael, one for you, I'd be interested to know what you think is happening with pricing across the current retail industry when you kind of look at it some of your competitors and other soft line players out there? And then, what might be the implication for price increases at Burlington when you kind of factor those things in?

Hi good morning, Ike. It's funny, of all the topics discussed over the past year I think this is the one that's seen the greatest evolution. A year ago, a combination of stimulus spending, pent-up demand, tight merchandise supply meant that most major retailers were achieving higher realized prices than they had in years. So there were very few promotions and margins were very strong across the industry. I have to say, I think those days are over. Now most retailers have too much inventory. And they have to take very significant markdowns and realized prices have really plummeted. My view is this is a huge overcorrection. Once the inventory bubble passes, which may take some time and I think pricing across the industry will get more rational again. So let me talk about what that means for us. We talked a little bit about this, I think, on the call in May. The thing that we really care about Burlington isn't price, it's markup. If merchandise availability means that we can buy goods at lower cost, then that should allow us to drive markup without necessarily raising prices. Now our original plan had been to take advantage of the opening up of supply to increase our markup in the back half of the year. But as you can tell from our guidance and based on the factors we've discussed, we're much more cautious about this now. As long as the external environment remains heavily promotional, we think we're going to have to pass along some of this markup to the customer. But that said, once the bubble passes, we'll revisit that. And we expect that we would recover some of that markup.

Got it. Thanks. Thank you, Michael. Second one for John. John, first off, congratulations, best of luck with retirement. I'm not going to give you a hard one. But on the EPS performance in the second quarter, it was better than the guide despite the comp miss. Could you just kind of talk us through the puts and takes of the performance during the second quarter?

Yes, thank you, Ike, for the kind words. That's a great question. The second quarter had many variables at play. The best way to explain this is by going through our financials. As mentioned earlier, our gross margin declined by about 320 basis points, with 210 basis points of that attributed to a decrease in merchandise margin. Approximately half of that decrease was due to markdowns, which were still significantly better than in 2019. The remaining drop in merchandise margin resulted from an adjustment to our shortage accrual based on the results of our physical inventory taken in June. We also experienced a 110 basis point rise in freight expenses compared to last year, noting that most of last year’s freight rate increases happened in the third and fourth quarters, making for a challenging comparison. However, we expect things to improve in the latter half of the year. Product sourcing costs also declined by about 130 basis points, half of which came from supply chain issues and half from ongoing investments in our merchandising team. Despite managing expenses quite rigorously this quarter, we are still investing in our Burlington 2.0 initiatives, which have contributed to some productivity gains. Regarding SG&A, we faced a similarly challenging comparison in the second quarter but performed slightly better than anticipated due to those productivity gains. SG&A declined by around 120 basis points, which was better than we expected given the minus 17% comparable store sales. Additionally, we had a combined decline of about 30 basis points from depreciation expense and other income. Notably, we recorded about $4 million in gains from real estate sales, which is a non-recurring item that aided our results this quarter. Overall, these factors accounted for the 610 basis point decrease in our operating margin. We also had some unexpected positive news in net interest expense, earning $3 million in interest income related to a tax refund that offset our interest expenses in the financial results.

Got it. Thank you.

Our next question comes from Lorraine Hutchinson from Bank of America. Please go ahead. Your line is open.

Thanks. Good morning. So the updated guidance represents a pretty significant revision. It would be really helpful if you could share more of your thinking on how you arrived at the sales guidance and also any major call outs in terms of margin or expense assumptions. And if you view this guidance as conservative?

Hi, Lorraine, it's Kristin here. I've actually been working closely with Michael and John on developing the guidance. So let me jump in, and I'll try to respond to your question. On sales, a couple of points to call out. First, we've missed our sales guidance for the last three quarters. We need to start hitting or better still beating the guidance we give. So we think this guidance may be conservative, but this deal is appropriate. I'd also mention the sales trend is very difficult to project right now. The reason our guidance is more conservative than our year-to-date trend is we believe the promotional activity we saw pick up in mid-June will continue into the fall. And another point I'd add is our August month-to-date geometric comp stack is running in line with this guidance. Of course, there are a couple of factors. We haven't built these in that could help us if inflation slows and if gas prices continue to decline, those things could help. And then if promotional activity elsewhere slows down, we may start to see that trade down shopper in our stores. In terms of the margin and expense side of the guidance, as John mentioned, we're forecasting EBIT margin decline of 160 to 80 basis points in the fall. Gross margin will improve slightly. This is really due to freight driven by some moderation in import costs and less pressure to accelerate delayed receipts compared to what we saw last year. But merchant margin is now planned lower than last year. And as Michael mentioned in his remarks, much lower versus our previous expectations due to the promotional environment. And I'll also call out that the fall plan doesn't include productivity gains that will help us continue to leverage expenses, particularly in supply chain and stores while we continue to invest in the growth of our business. And both supply chain and stores in the fall of last year saw onetime hiring expenses that will not be necessary this year. Lastly, comparing Q3 and Q4, the margin decline in the third quarter is expected to be more significant. This is really due to weaker comp sales in Q3. But also in Q4, we are lapping peak freight and supply chain cost pressures from last year. So let me finish up by saying, yes, we do think this is a conservative plan, but this feels appropriate given the environment and the way we're managing the business.

Thanks. My second question is about inventory levels. Given the weak sales outlook, how are you feeling about your inventory levels? And if the sales trend turns out to be a little stronger, are you confident that you'll be able to respond?

Good morning, Lorraine, it's Michael. Let me try and answer that. I'll start with inventories, and then I'll talk about our ability to chase if the trend is stronger. On inventory, I think it's important to draw a distinction between in-store inventory and reserve inventory. In-store inventory is basically what we have for sale. If you think about sales turns, markdowns and margins, this is the inventory that matters. If we have too much of this inventory, then it will turn slowly, and we'll take markdowns. In Q2 our plan was to manage our in-store inventories in line with last year. And that's what we did. I was pretty happy with the execution of our inventories. We ended the quarter very cleanly and we ended with in-store inventories on a comp basis, just slightly below 2021 levels, but we're pretty happy with that. Turning to reserve inventory. Reserve inventory is much higher than last year, and that's deliberate. Reserve is largely driven by opportunistic buys. In other words, merchandise where we've gotten a great deal and that we're storing for at least in a future month or even next season. The sell-through and the gross margin characteristics of reserve inventory tend to be much better than other types of buy, we manage what goes into reserve carefully to make sure that's the case, and we're pretty happy with our reserve position. Let me finish up though on the last part of your question. How confident are we that we can chase sales? I'm more confident about that now if the sales trend is strong than I have been for two years. This is one reason why we're comfortable with the conservative plan. If the customer ends up wanting to spend more, I'm comfortable we can chase it. And we can either accelerate releases from reserve, and we know we have a good reserve balance or we can go into the market and buy fresh receipts, and we know there's plenty of supply in the market. Now neither of those things was true last year, supply was much more difficult this time last year. But now it's freed up, it really puts us in a good position to chase if the sales trend is stronger.

Thank you.

Our next question comes from John Kernan from Cowen. Please go ahead. Your line is open.

Good morning. John, congrats on your retirement. Kristin welcome.

Yes. Thanks, John.

So the full year operating margin embedded in the updated guidance. It obviously quite significant deleverage versus 2019. How confident are you that you can get back to that 2019 margin structure? And any detail on gross margin and SG&A rate is appreciated. Thank you.

Good morning, John. It's Michael. I will address that question. In the upcoming months, we will be developing our budget for 2023 and updating our long-range plan. Following that, we should be able to outline a clearer path and timeline for improving our margins. For now, at a high level, taking the upper end of our updated guidance suggests that the EBIT margin for the full year 2022 is approximately 420 basis points lower than in 2019. The reasons for this EBIT margin decline are clear. Of the 420 basis points of contraction, 370 basis points stem from increased freight and supply chain expenses. The remaining line items, including merchant margin and store costs, contribute about 50 basis points to the decline. Within that category, there are both positives and negatives, but the largest factor is expense deleverage from a minus one comp over three years, which is significant. When we update our long-range plan later this year, we will focus on four main areas, and I am confident we will find value in each. The first area is freight and supply chain. As I mentioned, 370 basis points of the 420 basis points of deleverage since 2019 is attributed to these costs. We do not expect to recover all of those costs, as some, like the higher wage rates in the distribution center, will be permanent. However, other cost drivers, such as freight rates and fuel costs, should decrease over time, and there are early signs that this is beginning to happen. The second area we will focus on is sales. We have discussed the reasons for this year's sales decline, particularly how inflation has impacted low-income customers and led to extraordinary promotional levels. We believe these factors are temporary, so we anticipate a sales rebound once inflation stabilizes and the inventory situation improves. Moreover, the long-term enhancements we are making in merchandising should support our future sales growth, which will also leverage fixed expenses. The third area we will examine is markup. As Kristin mentioned, we initially planned to increase our merchant margin in the latter half of the year through higher markup due to an improved supply situation allowing us to lower costs. However, given the current environment, we're being more cautious about this approach. Once external promotional activities start to ease, we will definitely revisit this issue. Finally, the fourth area we will investigate is markdowns. In 2022, our markdown rate will still be significantly lower than in 2019 but higher than 2021 levels. We have given back some of the progress we made last year, which explains our below-plan sales trend. High external promotions have required our response, but we are confident in our ability to manage inventory more quickly going forward. Thus, we expect to derive value from this fourth area as well. In conclusion, we believe we can achieve margins that exceed 2019 levels, and we remain committed to this goal. Besides the four items I mentioned, there are additional strategies that we believe will enable us to reach double-digit margins over time, including reduced occupancy costs through a more efficient store prototype and substantial operational improvements in efficiency and productivity.

Thank you for your detailed comments. I have a follow-up question regarding freight and supply chain expenses. These costs surged in the latter half of last year, creating approximately a 200 basis point challenge to gross margin during that period. You mentioned earlier that there are indications some of these expenses are beginning to ease. We can see that spot rates for ocean and trucking are declining. Will we see any benefits from this easing in the third or fourth quarter, or is this primarily a story for 2023?

Yes, John, thanks. I'll take that question. So yes, as I said earlier, during the second quarter, supply chain and freight together cost about 170 basis points of deleverage, freight was 110, and supply chain another 60. As you know, costs in both of these areas increased much more significantly in the second half than last year. So the impact on this quarter's compare is more difficult than we would expect it to be for the second half of the year. We think it will be a little bit better for us in the second half of the year. What we're seeing overall, I think, is similar to what we've heard and what you probably heard from other retailers. As you mentioned, for ocean freight, clearly, spot rates have been improving. We are taking advantage of that where we can and when we can now, spot rates are improving in a meaningful way. And we anticipate that this trend is going to continue over the next two quarters and into next year, it's going to help us a little bit in Q3 and Q4, but we expect it to be much more help going into next year and beyond. For domestic freight, there's been some improvement. But so far, it's been less impactful and offset by high fuel prices. But longer term, we think there's going to be much more meaningful movement there, just haven't really seen that much of it yet. For supply chain costs, we do expect some improvement in the second half of the year. You remember last year, we had significant non-recurring incentives and hiring costs as we struggled to get our DCs fully staffed and operating at full capacity. I guess within the supply chain, we should also kind of mention the wage side of it. We have seen that wage inflation has slowed, the availability of labor has improved significantly since last year, but still a bit of a challenge. We think wages will likely remain at current levels. But we do anticipate some overall softening in the availability of labor, which should help overall staffing costs some of that maybe a little bit of that in the second half of this year and then looking forward.

Thank you.

Our next question comes from Kimberly Greenberger from Morgan Stanley. Please go ahead. Your line is open.

Thank you, and congratulations to Kristin and John on your well-deserved retirement. I wanted to follow up, Michael, on your earlier comments regarding the agility and adjustments made this quarter and year-to-date, particularly when consumer buying patterns changed. It seemed you anticipated quicker and more significant adjustments for the season. Can you share your observations on the agility we've experienced so far this year? Specifically, where do you see opportunities to enhance responsiveness going forward? Will this improvement come from better systems or enhanced reporting to the merchants? What steps are needed to align the merchant and planning teams so that our business can respond more effectively in the future?

Good morning, Kimberly. This isn't really fair as you're supposed to direct the tough questions to John, not me. However, I'll do my best to respond. To begin with, let's reflect on what we have accomplished over the past few years. We have invested in our merchandising team, increasing our headcount by about 35% since 2019. Additionally, we have been reworking our planning and buying processes, along with our reports and tools, to enhance all aspects of buying. This is crucial because it serves as the backbone of our off-price strategy. Merchants face a challenging balance when deciding how to allocate our budget, which categories, styles, and price points to focus on. I believe that making these judgements improves with experience over time. It's important to note that we implemented all these steps in the first quarter. When I compare our performance to that of our off-price peers, I recognize that while we made these improvements, they also succeeded and outperformed us. So, while I mentioned in the script that we need to account for customer differences, the relative execution of our merchandising remains an area with room for improvement. We still have a journey ahead of us. However, as I stated in the script, given the talent we've hired and the adjustments we're making, I am confident we will achieve our goals over time. Last year showed that we had significant capability in adapting to trends and serving customers when they had purchasing power. This year presents a different set of challenges, and I believe we can certainly enhance our performance.

Sounds good. Thanks so much.

Thank you.

Our last question will come from Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

This is Greg Sommer on for Chuck. I wanted to ask, how are you balancing the current better buying environment and the possible to even better buys down the road in the second half? And when should we expect to see those buys get reflected in merchandise margins? Is that a second half now or more in 2023?

Yes. No, it's a good question. We've been very careful right now. And I would say, actually throughout Q2 we're very careful to hold back on buying. Right now, this is a buyer's market. And a buyer's market, patience is really what gets rewarded. So we're being very, very careful about how we're spending our open to buy, making sure that we're really waiting until the deal is as good as it can possibly be. And that applies to reserve just as much as inventory that we're flowing to stores. I would say that in Q2, the buying environment was excellent. And I think it's quite likely in the back half, it could be even more excellent. I think, again, it relates to all the things we've talked about, the massive oversupply of inventory, et cetera. But it means that the buying opportunity is very good. Let me make one final point. When you have external promotions like we're seeing right now, it's so important that we get the very best deal when we're out there buying, because we have to compete against those promotions, it can be done, and that's the value of the off-price model. But that's another reason why we're just very careful when we're buying right now.

Okay. Thank you.

Thanks.

We are out of time for questions today. I would now like to turn the call back over to Michael O'Sullivan for closing remarks.

Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in late November to discuss our third quarter results. Thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.