Burlington Stores, Inc. (BURL) Q1 2023 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Stores, Inc. First Quarter 2023 Earnings Webcast. I would now like to turn the call over to David Glick, Group SVP, 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 2023 first quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer and Kristin Wolfe, our 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 June 1, 2023. 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 2022 and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now here is 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 first quarter results. Secondly, I will talk about our guidance for the second quarter. And finally, I will comment on the full year outlook. After that, I will hand over to Kristin to walk through the financial details of our first quarter results and our 2023 guidance. Then, we will be happy to respond to your questions. Okay. Let’s talk about our Q1 results. Comp store sales for the first quarter increased 4% versus our guidance of 5% to 7%. On a geometric stack basis, this represents 3% comp store sales growth versus 2019. As I will explain in a moment, we believe that this weaker-than-planned comp growth was driven by two external factors. We started the quarter very strongly. In fact, until mid-March, our comp growth was running in double-digits. As we have described on the last couple of calls, we have had a very strong focus on delivering great value in our assortment, expanding opening price points and offering great brands and value. This strategy has driven the improvement in the sales trend that we have seen since early Q4 and this strong momentum continued well into the first quarter. Our merchants and operators have done a nice job executing this value strategy. The slowdown in our sales trend that we saw in the first quarter coincided with two external factors. Firstly, the timing of tax refunds. These had run ahead of last year early in the quarter, but in March, they began to fall off. Refunds ended the quarter well behind last year’s levels and also below 2019 levels. The reason this is important is that tax refunds are the main delivery vehicle for important federal benefits programs like the earned income tax credit and the child tax credit. So, lower tax refunds are highly meaningful for lower-income customers. This is what happened in Q1. Based on our own historic experience, we estimate that lower tax refunds cost us about 1 point of comp growth in the quarter. I think you have probably heard very similar commentary from other retailers that serve lower-income shoppers. The second thing that happened, or didn’t happen, was weather. In the important weeks leading up to Easter, temperatures across the country were cooler than last year. Our warm weather businesses, which were doing well early in the quarter, softened versus the rest of the store in mid-March. So to summarize, we believe that the compound effect of lower tax refunds and cooler weather leading up to Easter was the primary driver of the sharp falloff in our trend in mid-March. Okay. Let me move on and talk about the more recent trend. On a geometric stack basis, we began to see a pickup in the second half of April and this momentum has continued into May month-to-date. This recent pickup reinforces our belief that the slowdown that we saw in mid-March was driven by external transitory factors. We are guiding and managing our business to a comp growth range of 2% to 4% for the second quarter. If the momentum that we have seen since mid-April is sustained, then this guidance may turn out to be conservative. If this current trend remains strong and our merchants and operators are ready and able to chase it, there is plenty of merchandise supply to support that chase. Overall, as we look ahead to Q2, we feel good. We believe that our strong focus on value and our strategies to support this are working. We need to stay very focused on these strategies and we will. As I have described, we believe that the slowdown in the trend that we saw in Q1 is explainable and attributable to transitory factors, factors that should now be behind us. With that said, we recognize that this is a very uncertain environment and we remain very concerned about the economic health of the lower-income customer. So, it makes sense to manage our business cautiously and be ready to chase a stronger trend. Let me move on to the rest of the year. As we communicated in March, our guidance for the full year is for 3% to 5% comp store sales growth. And based on this comp growth, we expect to drive 80 to 120 basis points of margin expansion. We are still comfortable with this guidance. We see plenty of risks and uncertainties, but we also see some potential tailwinds. Let me elaborate on three of these potential tailwinds. Number one, last year our industry was upside down with inventory and this drove huge promotional activity, especially in mass retail. We think that the soft sales trends that many retailers have reported in Q1 are likely to drive higher promotional activity in Q2, but we still anticipate that this promotional activity will be below last year’s levels. This year-over-year lower promotional activity should help our comp trend. Number two, last year we made the mistake of taking up retail prices in Q2 and Q3; this backfired. Our core customer was and is under significant economic pressure and those higher retails hurt us, especially in the face of the promotional activity that I have just described. This year, our values are sharpened, and again, this should help our trend. And number three, last summer there were some external headwinds, in particular, higher gas prices that hurt our customer and our trend. Gas prices are now much lower, and unless something happens to drive them back up, this should become a tailwind for us over the next few months. So based on these tailwinds, we feel very good about our full year guidance. The supply environment remains very strong and with our focus on value, we believe that we are well positioned. In our remarks this morning, we have deliberately focused on the drivers of Q1 performance and the near-term outlook for Q2 and the full year. We recognize that given all the economic uncertainty, investors are trying to understand how the year might unfold across retail. So appropriately, there is a strong level of interest in these near-term performance drivers. With that said, I would like to talk for a moment about our Burlington 2.0 initiatives. Over the last couple of years, even as we have been dealing with the pandemic and its aftermath, we at Burlington have been pursuing a comprehensive program to transform ourselves into a more flexible, nimble and efficient off-price business, with a much greater focus on delivering great value to our shoppers. We are not going to cover this in a lot of depth today, but let me say that I am very pleased with our progress. We have made a lot of changes and improvements in buying and planning, stores, supply chain and real estate. In upcoming quarterly calls, I will have more to say about these initiatives, but the one callout for today is the work we have been doing in merchandising. Over the last few years, we have significantly grown this organization. We have brought in tremendous talent at all levels and we have also promoted great talent from within. In parallel, we have been investing in and developing new tools, systems and processes to support and leverage this merchandising talent. Internally, we refer to this program as Merchandising 2.0 and it is designed to transform our buying and planning capabilities, enabling greater flexibility to respond to trends and providing clearer visibility through up-to-date and actionable business data and intelligence. We have just begun rolling out many of these new capabilities to the organization. We are excited and the merchants are especially excited about the impact that these will have on our ability to drive improved and more consistent performance and execution over the next several years. Now, I would like to turn the call over to Kristin, who will share more details on our first quarter financial results as well as our outlook for Q2 and the full year. Kristin?

Thank you, Michael and good morning everyone. I will start with some additional financial details on Q1. Total sales in the quarter were up 11%, while comparable store sales were up 4%. We are disappointed with this outcome. We had planned and guided to stronger comp growth. But as Michael said, we believe that our weaker comp in Q1 was driven by external headwinds, lower tax refunds and cooler weather. If we are right, then these headwinds are temporary and they should abate as we move into the second quarter. The gross margin rate in Q1 was 42.3%, an increase of 130 basis points versus 2022’s first quarter rate of 41%. This was driven by a 150 basis point decrease in freight expense which more than offset a 20 basis point decrease in merchandise margins. This lower merchandise margin was driven by higher markdowns, which in turn were driven by the sudden slowdown in the trend that we saw during the quarter. Product sourcing costs were $187 million versus $157 million in the first quarter of 2022, increasing 60 basis points as a percentage of sales; higher buying and asset protection costs represented the majority of this deleverage. Adjusted SG&A was $565 million versus $514 million in 2022, decreasing 20 basis points as a percentage of sales, driven primarily by lower store-related costs. Adjusted EBIT margin was 4.1%, 100 basis points higher than the first quarter of 2022. Adjusted EBIT margin was below the low end of our guidance, primarily due to the lower sales versus our guidance. To sum up, the lower-than-planned sales drove higher markdowns and lower SG&A leverage. And this led to the lower-than-planned expansion of our operating margin in Q1. All of this resulted in diluted earnings per share of $0.50 versus $0.24 in the first quarter of 2022. Adjusted diluted earnings per share were $0.84 versus $0.54 in the first quarter of 2022. At the end of the quarter, our in-store inventories increased by approximately 10% on a comp store basis. This is slightly higher than we had planned, again driven by lower comp sales and receipts. As a point of reference, at the end of May, our in-store inventories are now flat to last year on a comp store basis. At the end of Q1, reserve inventory represented 44% of our inventory versus 50% last year. As a reminder, our reserve inventory is still significantly ahead of pre-pandemic levels, up about 65% since 2019. This reflects the fact that compared with our history, we are making much greater use of reserve to chase off-price buying opportunities and hold for later release. During the quarter, we opened 6 net new stores, bringing our store count at the end of the first quarter to 933 stores. This included 13 new store openings and 7 relocations or closures. Now I will turn to our outlook for the full fiscal year 2023 and for the second quarter. We are reiterating our full year sales and earnings guidance, which includes a comp sales outlook of up 3% to up 5%. Based on this comp sales outlook, we still expect our adjusted EBIT margin to increase by 80 to 120 basis points. This sales and margin outlook translates to an adjusted EPS range of $5.50 to $6. This is consistent with the outlook we provided on our Q4 call in March. As a reminder, this includes $0.05 of EPS from the 53rd week. In the second quarter, for the reasons Michael detailed earlier, we are planning and guiding to a comp increase of plus 2% to plus 4%. This would result in operating margin expansion of up 10 to up 50 basis points versus Q2 of 2022. This translates to EPS guidance for the second quarter of $0.35 to $0.45. For the back half of fiscal 2023, this outlook assumes comp store sales of plus 3% to plus 6%, EBIT margins to increase 100 to 150 basis points and EPS in the range of $4.31 to $4.71, an increase of 27% to 39% compared to last year. I will now turn the call back over to Michael.

Thank you, Kristin. Before we open up the call to questions, I would like to summarize some key points from today’s call. Firstly, we are disappointed with our Q1 results, especially given the strength that we saw early in the quarter. But we believe that the weakening of the trend that we experienced in March was driven by two external factors that are now behind us, specifically, lower tax refunds and cooler weather leading up to Easter. Secondly, we feel very good about our underlying strategies and our focus on delivering strong value to our customers, and we are encouraged by the recent trend that we have seen in our business. We are being cautious in how we are planning Q2, but we are ready to act if the sales trend turns out to be stronger than guidance. And lastly, we remain comfortable with our full year guidance. We see plenty of uncertainty, and we remain concerned about the economic health of the low-income customer, but we also see some potential tailwinds. At this point, I would like to turn the call over to the operator for your questions.

Our first question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Great. Thanks and good morning. So Michael, could you elaborate or provide some additional commentary on the continued concern around the low-income consumer that you cited in your remarks? Do you see any improvement on the horizon? And do you think you’re seeing any signs of a trade-down customer in your stores?

Good morning, Matt. Thank you for the question. We’ve said this before, but it bears repeating. The lower-income shopper is a core customer for us, and historically has been a major driver of our growth. That low-income customer likes and needs the value that we offer. Now over the last couple of years, the lower-income consumer has really been on a roller coaster. In 2021 the federal stimulus program drove a surge in their spending, and then last year they crashed back down to earth as food prices, gas prices and general inflation reduced their disposable income. So since early 2022, the economic pressure on that customer has clearly been a major headwind for us. Do we see any improvement on the horizon? We do, unless there is a major economic shock like the federal government shutting down or defaulting on its debt. We think there are a couple of factors that could ease the pressure on the lower-income customer over the next several months. Let me start with what just happened in Q1. One of the major headwinds that we faced in Q1 was lower tax refunds, which, as I described in the remarks, tend to have a huge impact on lower-income shoppers. Now that impact should abate as we move out of tax refund season. It’s true there are some headwinds like reduced SNAP benefits that are going to persist, but compared with lower tax refunds the dollar impact of these is fairly small. The other factor that could help is that over the next few months we’re going to be anniversarying the high gas prices of last summer. I mentioned this in the prepared remarks. The lower-income customer is very sensitive to higher gas prices. Those costs tend to represent a higher proportion of their household spending. Gas prices are now significantly lower than they were last summer and again, unless some major event drives them back up, that could become a positive tailwind this year. Now let me move on to the other part of your question, which is about the trade-down customer. I want to be careful not to overstate this, but yes, I do think that we’re seeing some early evidence of a trade-down customer in our stores. There are two pieces of data that I would offer to support that. Firstly, when we look at our stores based upon the income profile of the trade area that they are in, we’re seeing that stores in areas with higher household incomes are outperforming the rest of our chain. By the way, that is the complete reverse of the historical pattern that we’ve seen over many years. Historically, our growth and performance has been driven by stores located in low- to moderate-income households. We believe that reversal reflects the stage of the economic cycle that we’re in, and it suggests that we may be starting to see a trade-down shopper. Secondly, when you look inside our assortment, as you’d expect, we’re seeing strength at our opening price points. Clearly, for all the reasons we’ve talked about, shoppers appreciate those values. But we’re also seeing strength at higher price points, especially on great branded merchandise. It’s the middle price points that are the softest. Again, we think that the strength at higher price points may be early evidence of more one-time or trade-down shoppers coming into our stores. So I’d sum up by saying we recognize that there are risks and uncertainties; the consumer is under huge economic pressure. But we also see some grounds for optimism. We believe that some of the big headwinds that have affected the lower-income customer will abate and others may even turn into tailwinds in the coming months. Separately, we think there may be some early evidence that we’re seeing a trade-down shopper in our stores.

Great. And then, Kristin, to follow up on your second quarter operating margin. So the comp guide makes sense based on the rationale that you cited, but the margin expansion is lower than expected. Are there any drivers of this to explain? And on the back half margins now implied to be up more than the front half. What are the drivers and just your confidence in achieving this plan?

Good morning, Matt. Thanks for the question. For the second quarter we’re guiding a plus 2% to plus 4% comp growth and modeling 10 to 50 basis points of operating margin expansion. The operating margin leverage really comes from two main sources: higher merchandise margin and lower freight. We do expect to continue to benefit in the second quarter from lower freight, particularly lower ocean freight costs versus last year. And our merchandise margin should be more favorable in the second quarter, but of course this will depend on sales in the quarter. There are some headwinds built into the second quarter margin guidance. These include some transitory expenses and timing of certain expenses. These are collectively worth about 50 basis points and include lapping one-time gains in Q2 of last year from real estate sales and insurance settlements and some timing of marketing expenses. In addition, we also have potentially higher supply chain costs given the increased mix of true closeout merchandise as well as the lower AURs as we’ve expanded opening price points. Those are really the key puts and takes on the second quarter margin. For the back half of fiscal 2023, our guidance assumes comp store sales of plus 3% to plus 6% and adjusted EBIT margins to increase 100 to 150 basis points. This is higher than the first half, as you’ve noted. Like Q2, we expect leverage in the fall from higher gross margin both from higher merchandise margin and lower freight costs. And in addition, I noted the transitory expenses we’re facing in Q2 that we do not expect to have in the fall. And depending on the sales comp, we should leverage fixed expenses like occupancy in the fall. So in light of these factors, overall, we feel good about the second half guidance.

Great color. Best of luck.

Thanks, Matt.

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

Thank you. Good morning. Michael, you mentioned that the weakness in the sales trend across retail in the first quarter may lead to more promotional activity in the second quarter. Can you elaborate on this a little and whether you believe this could hurt your sales in the second quarter?

Good morning, Lorraine. Thanks for the question. We realize that the slowdown in traffic and in the trend that we saw in March was most likely also experienced by other discretionary retailers. I think that’s coming through in some of the numbers that are being reported. We anticipate as we get further into the spring season, the sales softness is likely to lead to some increased promotional activity versus where we are now. Retailers will want to clear their spring merchandise and make way for summer receipts. Now that clearance process we regard as natural and similar to what we would have expected and experienced pre-pandemic. Those promotions are a headwind for us, of course, but they are really just part of the normal course of business, and we should be able to compete just fine in that higher promotional environment. We think we’ve adequately reflected any headwind from this in our Q2 guidance. But let me contrast that with last year. Last year the imbalance between supply and demand was much more significant. There were many large retailers that were backed up with inventory that they had to clear. And this all came together at a time when we at Burlington were raising retail prices. So fast forward to this year, yes, we’re expecting some external promotional activity, but we think most retailers are in much better shape, much cleaner shape than they were last year. This should mean promotions are lower and less widespread. Secondly, we at Burlington are in a much better position in terms of our own values. Over the last few quarters we worked hard to sharpen our values. This is something we’ve been very focused on. At this point, we feel like we’re very well positioned. So to sum this all up, yes, we expect promotions to pick up in Q2, but we anticipate that the impact on our sales trend should be limited, and we believe that we’ve factored that into our Q2 guidance.

Thanks. My second question is about your new store opening plans. Last quarter you talked about a goal of 70 to 80 new stores this year. Is there any update to this, especially in light of some of the retail bankruptcies that have been announced? Do you think these will have an impact on the availability of real estate?

Again, thank you for the question. In our fourth quarter call in March, we described that we expect to open 90 to 100 new stores this year; that’s a gross number. Once you pull out relocations and closures, you get to the number of 70 to 80 net new stores in 2023. But the short answer is that our plan for this number of openings has not changed. On your point about retail bankruptcies, yes, we think these bankruptcies are likely to have a significant impact on the availability of attractive new store locations. The bankruptcy process is typically complicated and can take a long time, so it’s hard to get specific. But we’re confident that these bankruptcies will strengthen our new store pipeline. We have an ambitious program for the expansion of our store network and the relocation of some of our older, more tired and less productive stores. This new store pipeline is really going to help us to execute on this program over the next several years. The final point to make is that we have a very strong real estate team that has a lot of experience dealing with retail bankruptcies. Many of our most successful and productive stores today were once Circuit City, Toys "R" Us, Sports Authority or Linens ’n Things locations. Some of our best stores were created from carved-up Kmart or Sears locations. My point is that we have a team with a lot of experience in assessing the suitability and evaluating the potential economics of locations that emerge from these types of bankruptcies and then negotiating for or going after those.

Thank you.

Our next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Hi, good morning. Hi Kristin, David. I guess, first question, really just big picture on merchandise availability. Clearly, off-price merchandise has been pretty strong for the last couple of quarters. Michael, do you have any concerns? Are you seeing any signs that this may be tightening in any way? And then I do have a follow-up for Kristin.

Good morning, Ike. The headline is that the availability of off-price merchandise remains exceptionally strong. Our merchants have been making some great buys and we really haven’t seen any real tightening of supply. When I contrast this to the back half of last year, I would say the main difference is the drivers of availability may have changed. Last year the retail industry was awash with inventory, mainly because vendors and retailers had ordered too much. When they originally placed those orders back in late 2021, they were facing huge supply chain delays and constraints, so they built a volume and time cushion into those orders. Then, as supply chain constraints unraveled, everything showed up all at once. So there was far too much supply in the back half of 2022. This spring we’re still seeing plenty of off-price availability, but I think the root cause is different. Rather than being driven by too much supply, it is being driven by too little demand. Customers are pulling back, sales trends have softened, and because of this we’re still seeing great merchandise coming into the off-price channel. Whatever the root cause, in this environment the key thing for us is to manage and control the buying process so we get the very best deals. We’re not really worried about availability right now; we’re focused on control. Our buyers know that our liquidity is an extremely valuable currency in this environment, and we need to make absolutely sure that every hanger on the rack deserves to be there.

Got it. And then a follow-up to Kristin, just on the comp characteristics: could you dig into the components of comp growth — traffic, conversion, transaction size — and especially give some color on average ticket price, what you saw in Q1 and maybe expectations for Q2? Thank you.

Good morning, Ike. In the first quarter, traffic was up modestly. It started strong but then meaningfully decelerated in mid-March. Typically, lower traffic is not driven by anything happening within the stores; it’s driven by external macro factors. This drop-off in traffic really supports our hypothesis that external factors were the primary driver of the weakening comp trend in mid-March. The biggest drivers of the first quarter comp were higher conversion and higher units per transaction. Again, this data supports our belief that our strong values are resonating with the consumer. Once a customer comes into the store, she is more likely to buy and she’s buying more. For the quarter, AUR was down modestly. This lower AUR reflects our strategy of expanding our opening price points. We expect our AUR to be down somewhat throughout the year as we focus on strong values, and this lower AUR does pressure our supply chain expenses, as I mentioned, and we’ve built this into our guidance.

Great. Thanks so much.

Thanks, Ike.

Our next question comes from the line of Alex Straton from Morgan Stanley. Please go ahead.

Great. Thanks so much for taking my question. My first one is really for Michael on the assortment strategies and the buying organization. It definitely sounds like you’re happier with the level of execution than maybe you were last year. Could you provide some additional color on what has changed and also updates on some of the investments you’re making in the buying organization? I do have a follow-up for Kristin after that.

Good morning, Alex. In the back half of last year, we spent a lot of time analyzing the drivers of our performance and redirecting and refocusing our assortment strategies to deliver much stronger and sharper value to the customer. I feel very good about the progress we’ve made since then. If I look at the time frame between October and mid-March, the improvement in our sales trend was quite significant. On previous calls, we’ve shared details on some of the strategies that we’ve been pursuing. Just to call these out at a high level, we’ve seen a significant expansion of our opening price points really focused on the value-seeking customer. Secondly, a focus on recognizable brands to attract the one-time or trade-down shopper. Thirdly, a more aggressive approach to shifting liquidity to stronger trending businesses. And then lastly, a much more disciplined approach to pulling back on weaker trending businesses. Overall, I feel like we’ve executed well against those strategies. Now we need to stay focused, very focused, and we will. The other point to make is that although we are pleased with the overall execution, there are always opportunities for improvement. That’s the nature of the business. There will always be some areas where we make mistakes or where we make a buy that we shouldn’t have made or price a buy at a level that’s too high. At Burlington, I think culturally we’re very good at recognizing and owning our mistakes and then correcting and learning from them. I think that’s very important. But let me address your question about investments we’ve made in our buying and planning organization. In the last few years, we’ve significantly grown this organization. Our merchandising headcount is about 50% bigger than it was in 2019. We’ve brought in tremendous talent at all levels, and we’ve promoted great talent from within. As I mentioned in the prepared remarks, in parallel with that headcount growth, we’ve been investing in and developing new tools, systems and processes to support and leverage this merchandising talent. All of that program supports Merchandising 2.0. Historically, the tools, processes and systems that have supported the merchants at Burlington have been very rigid, somewhat department-store like, especially with regard to visibility to data and responsiveness to in-season trends. Merchandising 2.0 is designed to transform our buying and planning capabilities, enabling greater flexibility to respond to trends and providing clearer visibility to up-to-date and actionable business intelligence. This year, we are rolling out many of those new capabilities to the buying and planning organization. We are very excited, and as I have said, the merchants are extremely excited about the impact those capabilities will have in terms of driving improved performance and execution over the next few years. So yes, we are pleased with how our merchandising organization has performed over the last couple of quarters, but we still think we have a lot of upside and opportunity ahead of us.

That’s super helpful. Thanks so much. Maybe one more for Kristin on inventory and specifically reserve. I think you said that it was about 44% of inventory at the end of the quarter, and I think that compares to 50% or so last year. Should we be at all concerned about reserve inventory being below last year, or how should we think about that in general? Thanks a lot.

Good morning Alex. It’s a good question. Let me offer a few points to contextualize the inventory data. First, we have more inventory in our stores than we had last year as we were under-inventoried early in 2022. However, if you compare to 2019, our first quarter comp store inventories are actually down about 10%. So, we are still running leaner and turning faster versus our 2019 baseline. Secondly, reserve is made up of great buys that we are holding until the season or the next season. We buy reserve opportunistically, so the level of reserve we carry at any time will typically fluctuate depending on supply. But there is a factor here that’s important to note. Last year, given some receipt delays that we experienced, we brought some goods in earlier than we normally would have. Now that these receipt delays are behind us, this is freeing up some reserve capacity and putting a little downward pressure on reserve levels. The implication is that assuming we continue to see great buying opportunities this year, the level of our reserve might trend down slightly relative to last year. At the end of Q1, our reserve levels were about 11% lower than last year, and this is more of a reflection of that timing point rather than a reflection of the merchandise supply or the buying environment. Lastly, it’s important to reiterate that our reserve levels are still about 65% higher than they were pre-pandemic. This represents a strategic and structural shift in our business as we are more focused on great off-price opportunistic buys.

Thanks a lot. Good luck.

Our next question comes from the line of John Kernan from TD Cowen. Please go ahead. Your line is open, please go ahead.

John, are you there? Operator, let’s go to the next question.

Our next question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead.

Hey. Good morning. Thanks for all the color this morning. Michael, I was wondering if you can give us an update on some other aspects of Burlington 2.0. You touched on merchandising in your prepared remarks. I wonder if you could give us some updates on real estate and supply chain fronts.

Sure. Good morning, Chuck. Let me provide some headlines in terms of the progress we have been making with Burlington 2.0 initiatives. I will break it into stores, real estate and supply chain. In terms of stores or store operations, we have done a lot over the last few years to make our stores more flexible. It’s very important in the off-price model to be able to chase sales at a top line level and also within the assortment. If footwear is doing well, expand footwear; if home is doing well, expand home; and also to pull back in certain areas based on trends. We have also focused on getting receipts out to the floor as rapidly as possible. We have introduced multiple new processes to make our stores more efficient, and we have been doing this during a time when the labor market has been very tough. We have also been developing a number of improved tools and systems to help drive efficiency and consistency in stores. Some of those systems improvements have a slightly longer lead time. The most important of those systems upgrades we are probably going to pilot in the back half of this year and likely won’t roll out until next year. So, we have made a lot of progress and I am very happy with what we have been able to do in stores. In real estate, we have ramped up our new store opening program with a focus on our new smaller store prototype. We are very happy with the relative economics of that prototype and that has allowed us to ramp up the number of new stores over the last couple of years. As I said earlier, this year we expect to open 70 to 80 net new stores. We would like to open more and we hope in 2024 and 2025 some of the availability emerging from retail bankruptcies will give us the opportunity to open more. On supply chain, there are a number of things we have been working on to increase flexibility and efficiency. Again, we have been working on those things in an environment where the labor market, especially in areas with large warehouses and distribution centers, has been tough, and receipt volatility has made efficiency challenging. Some actions we have executed in the short term include adjustments to shift schedules and work processes. Others have longer lead times, such as systems changes and automation. We are happy with the progress we have made, but there is much more we can do and our supply chain teams are very focused on those opportunities. Overall, I am very happy with the progress on Burlington 2.0 initiatives, especially given the external environment in the last couple of years. We have moved fast, we have made some mistakes, but the changes we have made will make us a much more effective off-price retailer and will drive success in the next few years.

That’s very helpful. Thank you. And then my follow-up is for Kristin. Could you talk about your degree of confidence in your back half guide, particularly after missing some of the numbers here in the first quarter? And then can you help us out on the sequencing of both comps and margins? I think you said up over 100 basis points, up to 150 basis points on EBIT, but just a sequencing of comps and margins in both the third quarter and the fourth quarter?

Let me break that into two. I will start with sales confidence and then Kristin can address the margin and expense outlook. On sales, first of all, we recognize the environment this year is very uncertain. There are lots of things that could happen — recession, banking crisis, government shutdowns, etc. But given what we know at this point, there are a few things that give us confidence in our back half guidance. There are three main factors we used to triangulate on our full year guidance. Number one, our comp in Q1, even though we were disappointed with that comp, was 4%. Our full year guidance is 3% to 5%. For the reasons I described, we think that 4% was partly driven by transitory headwinds. If you strip out the tax refund impact, we think it would have been 5%. So based upon the first quarter trend, we feel like we are moving in the right direction to hit our full year comp guidance of 3% to 5%. The second thing is when we look ahead we are up against some things from last year. We are anniversarying the very high promotional activity in mass retail from mid-Q2 onwards through the summer and fall. Mass retailers are in much better shape in terms of inventory control, so we are not expecting the same level of promotional activity and we think that will help us. The other item we are anniversarying is higher gas prices from last summer. Gas prices are lower now, so as we move over the next few months that could be a tailwind. The third triangulating factor is our own actions last year, specifically the decision to raise retails in Q2 and Q3 of last year which hurt us. We are in much better shape now with a stronger focus on value. So again, there is plenty of uncertainty out there but we feel pretty good about our full year guidance of 3% to 5% comp. Kristin?

Sure. For the back half of fiscal ’23 in the fall, EBIT margins are planned to increase 100 to 150 basis points. Similar to the first half of the year, we expect higher gross margins both from higher merchandise margin and from lower freight costs, particularly domestic freight in the back half of the year. In addition, the transitory expenses that hurt us in Q2 we do not expect to have in the fall. Given the sales comp we are planning for the fall, we should also get leverage on fixed expenses like occupancy. Those are the main puts and takes for the fall on the margins side.

Okay. Great. Helpful color. Thank you.

Thanks, Chuck.

Our next question comes from the line of Mark Altschwager from Baird. Please go ahead.

Good morning. Thank you. Curious how you would assess your performance this quarter relative to the other major off-price retailers? Thanks. And then I have a quick follow-up.

Thank you, Mark. Let me start by saying we feel like we are lucky in our business. We have very successful analogs — companies that have been in the off-price business for a long time that demonstrate what’s possible. Of course, there are differences between each of us, especially when it comes to the demographics of our core customers. Our core customer tends to skew lower-income, younger, higher ethnicity, larger family size and more urban; we love this customer. They have been a major driver of our growth over many years and they will be again. The other major difference is that we are newer to the off-price business and less mature. Our peers have been executing and refining the off-price model for decades; compared to them we are a relative latecomer. That lack of maturity shows up in our systems, processes and sometimes in our execution. But that is why we are focused on the Burlington 2.0 program. We are the smallest, least productive and least profitable of the major off-price retailers today, and we believe the off-price channel will continue to take share over the next several years. As that happens, we at Burlington have a tremendous opportunity to drive growth in sales and profitability. The last year has had its challenges for sure, but we think the longer-term outlook is very exciting.

Thank you. Attraction of younger shoppers has been a theme among some of your competitors. Can you frame up the opportunity you have there and perhaps other demographics to broaden Burlington’s reach?

Yes. I think it’s a very good question. Let me start on younger shoppers. We have always had a stronger share of younger customers compared to department stores and also compared to our off-price peers. When you walk into our stores you can physically see the customer base and the assortment tends to skew younger. We have stronger penetration in kids, juniors and young men’s, and our shoppers aren’t just younger — they tend to be lower income, more ethnic and more urban. Those are core strengths for Burlington and, over the long term, they are growing segments in the United States. Given where we are in the economic cycle, those consumers are struggling right now, but over the long term that’s an attractive set of demographics to have. To broaden our reach, to get to our long-term goal of 2,000 stores, we need to operate in a range of different store locations and attract a wide range of demographics beyond our core group. There are a number of things we are doing to improve the customization of our assortment by store to appeal to a broader demographic mix. We are aware of this need and we will work on it over the next several years.

I would now like to turn the call 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 August to discuss our second quarter results. Thank you for your time today.

Thank you. Ladies and gentlemen, this does conclude today’s call. Thank you for your participation. You may now disconnect.