Burlington Stores, Inc. (BURL) Q1 2024 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Burlington Stores Inc. first quarter 2024 earnings and webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star-one. Thank you. I would now like to turn the conference over to David Glick, Senior Vice President. 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 2024 first quarter operating results. Unless otherwise indicated, our discussion of results for the 2024 first quarter exclude the impact of certain expenses associated with the acquisition of Bed, Bath & Beyond leases. 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 express permission. A replay of the call will be available until June 6, 2024. 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 2023 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 discussed 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 Q1 results. Secondly, I will talk about our Q2 guidance, and finally I will comment on our full year outlook. After that, I will hand over to Kristin to walk through the financial details of our Q1 results and our updated 2024 guidance, then we will be happy to respond to your questions. Okay, let’s talk about our first quarter results. I am going to start with total sales. We believe that total sales growth compared to other retailers is the best proxy indicator for what is happening with market share. Our total sales in Q1 grew by 11% compared to the first quarter of 2023. That was on top of 11% total sales growth versus Q1 of 2022. New stores are a key driver of this top line growth. In Q1, we added 14 net new stores and ended the quarter with 1,021 stores. We are on track to open 100 net new stores this year. The other driver of top line sales is comp store sales growth. Comp store sales for the first quarter increased 2% versus our guidance of flat to 2%. This 2% comp store sales growth was on top of last year’s Q1 comp store sales increase of plus-4%. As we described in our last earnings call on March 7, our February sales trend was softer than we had anticipated. We believe that this was attributable to disruptive winter weather, as well as the slower pace of tax refunds versus February of 2023. As we have discussed in the past, our core lower income shopper is sensitive to the timing of tax refunds, specifically refunds related to earned income tax credits. As you might expect, as tax refunds began to normalize, our sales trend improved as the quarter unfolded. In the March-April period combined, our comp sales increased a solid 4%. Because of the timing of Easter Sunday, it is very important to look at the comp sales trend for these two months combined. Similar to the fourth quarter, our regular price selling was particularly strong. For the quarter as a whole, our regular price comp growth was positive 4%, and for the March-April period, it was positive 6%. These growth rates more than offset a double-digit decrease in clearance sales. This level of regular price selling is very healthy. It shows that shoppers are responding well to the assortments and great values they are finding in our stores. Before I turn to our outlook for the second quarter and the full year, I would like to comment on our strong profit growth in Q1. Our EBIT margin increased a robust 170 basis points and our adjusted EPS was up 68% over last year. As Kristin will explain in a moment, this favorability was partially driven by expense timing, but even after adjusting for this, our margin and earnings performance was well ahead of our guidance. There were two major drivers of this strong margin expansion. Firstly, as I mentioned a moment ago, our regular price selling was very strong. This drove faster turns and lower markdowns. The second major driver was faster than expected progress on our supply chain efficiency initiatives. We are encouraged by the strong early results that we are seeing from this program. Okay, let me move onto the outlook for the second quarter. Our comp guidance for Q2 is flat to 2%. We recognize that based on our most recent trend, there could be upside to this forecast, but there are a couple of reasons to remain cautious. Firstly, we believe that our strong March and April trend was driven by the catch-up in tax refunds and we expect that at some point, this tailwind could abate. Secondly, our comp growth for each of the past two quarters has been plus-2%, so it feels reasonable to keep our guidance tethered to plus-2%. If our Q2 trends turn out to be stronger than this guidance, I am confident that we will be able to chase it. It is worth calling out that in the first quarter as the comp trend picked up rapidly in March and April, our merchandising and supply chain teams did a nice job ramping up receipt flow to chase these sales. To reiterate, our Q2 comp guidance is zero to 2%, but we hope to do better. Let me segue now to our outlook for the remainder of the year. At this point, we are maintaining our comp guidance for the full year at flat to 2%. That said, based on the strength of our first quarter margin and earnings performance, we are raising our full year margin and adjusted EPS. Kristin will provide further details on this in a few moments. Reflecting on our start to 2024, I am very pleased with our underlying sales trends and our margin performance. We are well positioned for Q2 and the rest of the year. I’m even more excited about the longer-term opportunity in front of us. As we have discussed before, over the next five years, we believe that we can grow our sales to $16 billion and our operating income to $1.6 billion - that is almost three times our 2023 operating profit. Now I would like to turn the call over to Kristin, who will share more details on our first quarter financial results, our outlook for Q2, and our updated full year 2024 guidance.

Thank you Michael, and good morning everyone. Okay, let’s now move onto the details of our first quarter results. Total sales grew 11% and comp sales grew 2%, both at the high end of our guidance. Our adjusted EBIT margin expanded 170 basis points versus last year, and adjusted earnings per share increased 68% compared to last year, both significantly ahead of guidance. The drivers of the better than expected margin expansion in Q1 were a much higher gross margin, improved expense leverage in supply chain, and a timing shift of approximately $9 million of expenses. Let me walk through the details. The gross margin rate for the first quarter was 43.5%, an increase of 120 basis points versus last year. This was driven by a 90 basis point increase in merchandise margin due to strong regular price selling, which generated faster inventory turns and lower markdowns. Freight expenses leveraged 30 basis points primarily due to lower freight rates and cost savings initiatives. Product sourcing costs were $183 million versus $187 million in the first quarter of 2023, decreasing 100 basis points as a percentage of sales. Eighty basis points of this favorability came from supply chain. There were two drivers of this supply chain leverage. First and most significantly, we made faster than expected progress on our distribution center productivity initiative, and secondly we benefited from the timing of receipts between Q1 and Q2. Adjusted SG&A costs in Q1 were 60 basis points higher than last year. This was partly driven by $6 million of dark rent and other expenses related to the Bed, Bath & Beyond leases. Excluding these expenses, adjusted SG&A deleverage was 40 basis points, driven primarily by increased investments in store payroll. Q1 EBIT margin was 5.7%, 170 basis points higher than last year compared with guidance for an increase of 20 to 60 basis points. Our adjusted earnings per share in the first quarter was $1.42, which was well above the high end of our range of $0.95 to $1.10. This result and the guidance range exclude approximately $6 million of pre-tax expenses associated with the Bed, Bath & Beyond leases. At the end of the quarter, our comparable store inventories were 6% below 2023, while our reserve inventory was 40% of our total inventory versus 44% last year. We are very happy with the quality of the merchandise and the values that we have in reserve. During the quarter, we repurchased $63 million in common stock. As of the end of the first quarter, we had $442 million remaining on our share repurchase authorization that expires in August of 2025. In the first quarter, we opened 14 net new stores, bringing our store count at the end of the quarter to 1,021 stores. This included 36 new store openings, 11 relocations, and 11 closings. We continue to expect to open 100 net new stores in fiscal 2024. Now I will turn to our outlook for the full fiscal year, the second quarter, and the back half of the year. We are increasing our full year earnings guidance and maintaining our comp sales outlook of flat to up 2%. In addition, due to slightly later timing of new store openings, we are making a modest adjustment to our expected total sales growth to an increase of 8% to 10% for the full fiscal year, just below our original guidance of 9% to 11%. Based on our strong first quarter financial performance, we are increasing our margin and adjusted earnings per share guidance for the full fiscal year. We now expect our full year adjusted EBIT margin to increase by 40 to 60 basis points, up from our original guidance for an increase of 10 to 50 basis points. This updated margin outlook now translates to an adjusted earnings per share range of $7.35 to $7.75, up from our original guidance of $7 to $7.60. For the second quarter, we are guiding to a comp increase of flat to plus-2% and a total sales increase of 9% to 11%. This would result in operating margin expansion of up 30 to up 50 basis points versus Q2 of 2023. This translates to earnings per share guidance for the second quarter of $0.83 to $0.93, which includes an approximately $0.09 negative impact from the timing of expenses from Q1. Consistent with prior quarters, this guidance excludes expenses associated with the recently acquired leases from Bed, Bath & Beyond of approximately $0.03. For the back half of fiscal 2024, this outlook assumes comp store sales of zero percent to plus-2%, total sales to increase 7% to 9%, and EBIT margin to be flat to an increase of 30 basis points, and earnings per share in the range of $5.10 to $5.40, an increase of 7% to 13% compared to last year. I will now turn the call back to Michael.

Thank you Kristin. Let me recap four key points that we’ve discussed this morning. Firstly, we are pleased with our sales growth in Q1: 11% total sales growth for the quarter, 2% comp sales growth for the quarter, and 4% comp sales growth for March-April combined. Secondly, we are very pleased with our Q1 margin and earnings results. These were driven by higher merchandise margins from strong regular priced selling leading to faster turns and lower markdowns, and also driven by faster than expected progress on our supply chain initiatives. Thirdly, we are maintaining our flat to 2% comp guidance for Q2. We recognize that given our recent trend, this may be conservative, but we are very well positioned to chase. Finally, we are raising and updating our full year earnings guidance to reflect our strong, ahead of plan Q1 results. With that, I would now like to turn the call over for your questions.

Thank you. The floor is now open for questions. Your first question comes from the line of Matthew Boss with JP Morgan. Your line is open.

Great, thanks, and congrats on a nice quarter.

Thanks Matt.

Michael, could you elaborate on the progression of your comp sales trend through the first quarter, walk through some of the factors, such as tax refunds that may have impacted the trend, and then could you comment on what you’re seeing so far in May?

Good morning, Matt. Thank you for your question. I will provide the month-by-month comparable sales numbers. In February, we saw a decline of 2%, followed by a 1% increase in March, and an 8% increase in April. To better understand these figures, it's important to adjust the March and April numbers for the timing of Easter. Like many retailers, our stores were closed on Easter Sunday. This year, Easter fell in March, while last year it was in April, resulting in one less selling day in March and one additional selling day in April. This difference in selling days can account for three to four percentage points in comp sales within each month. When adjusted for Easter's timing, we observed a strong improvement in March compared to February, and this momentum carried into April. We believe the primary factor driving this monthly trend was the timing of tax refunds. As we've mentioned before, our core lower-income customers are particularly affected by the timing of tax refunds, especially earned income tax credits. In February, those refunds were delayed compared to last year, but they eventually caught up at the end of March, correlating with the increase in our sales trend. Additionally, we made a conscious decision this year to introduce our seasonal merchandise later in the quarter than we did last year. This allowed us to respond more effectively to early season trends at both the business and store level. By delaying the flow of merchandise, we could adjust its mix and allocation based on actual sales data, which contributed to quicker inventory turnover, reduced markdowns, and improved sales. Regarding May's performance so far, we are pleased with the sales trends this month. The second quarter has started off well, though we acknowledge there is still much time left in the quarter.

Great, and then maybe a follow-up for Kristin, just on your first quarter margin and the expense shift. Could you just provide any additional color on the expenses that shifted out of the first quarter and why, and then excluding the shift, could you just walk through the drivers of operating margin upside that you saw in the first quarter?

Matt, good morning. Yes, thank you for the questions. Overall, we had a strong first quarter with margin expansion of about 170 basis points compared to last year. This expansion includes a benefit from the timing of expenses, amounting to around $9 million, or about 40 basis points, shifting from Q1 to primarily Q2. After considering the timing of the expenses, our adjusted EBIT margin for Q1 improved by 130 basis points compared to the same quarter last year, exceeding our guidance of 20 to 60 basis points. Let me provide more detail on the expense shift. There were three main drivers. The first was in the supply chain, accounting for approximately $3 million. This was primarily due to the timing of receipts, with some expected to be processed in Q1 now shifting to Q2, along with start-up expenses related to our new New Jersey distribution center opening in the second quarter as planned. The second factor affecting expense timing was freight, with about $2 million in freight expenses moving from Q1 to Q2 due to receipt timing. Finally, there were around $3 million in SG&A items, including the timing of marketing spend and some benefit expenses, that shifted from Q1 to Q2, along with an additional $1 million in miscellaneous SG&A expenses moving from Q1 to the fall. In total, we saw $8 million shift from Q1 to Q2, and $1 million moving from Q1 into the fall. After accounting for these expenses, our EBIT margin, as mentioned, expanded by 130 basis points, driven primarily by three factors: a 90 basis point increase in merchandise margin due to faster inventory turns and lower markdowns; 70 basis points of leverage in supply chain expenses, excluding the timing shifts; and 20 basis points of leverage on freight. These were partly offset by deleverage in SG&A, particularly related to store payroll and higher depreciation owing to increased capital expenditures.

That’s great color. Best of luck.

Thanks Matt.

Thanks.

Hey, good morning everyone. Great print. Two questions. First for Michael, if we could kind of unpack the low end consumer a little bit more. I know you guys have a lot of ties there, and likely you’ve spoke about that a little bit. We’ve heard a lot of noise and volatility in that consumer. It looks like you guys bucked that trend pretty nicely in the quarter, so I guess my question is what exactly are you seeing with that cohort of the consumer base today, and then what exactly did you guys do to help perform there?

Good morning, Ike, and thank you for your questions. To begin with, we find it difficult to interpret the current external environment, but we believe all income groups, not just lower-income consumers, are experiencing economic pressure. While this may not be a comprehensive analysis, we categorize consumers into two main groups: need-a-deal shoppers, typically lower-income individuals with larger families, and want-a-deal shoppers, who generally have slightly higher incomes and more financial options. Both groups shop for off-price goods. The need-a-deal shopper especially seeks value at entry price points and on moderate brands, which we have highlighted as crucial to our business. Addressing your concerns about lower-income consumers, we think the noise surrounding these issues may be exaggerated. Currently, such concerns seem to refer to past conditions rather than present realities. In 2022, we witnessed lower-income shoppers struggling due to rising living costs and the cessation of pandemic-related benefits. However, we have observed that over the past five quarters, discretionary income for this demographic appears to have stabilized. While this consumer base remains vulnerable, as indicated by delayed tax refunds in February, inflation has decreased, and real incomes for lower-income individuals do not seem to be contracting as they did in 2022. We are not suggesting a significant improvement in their circumstances yet—there is no clear rebound—but our evaluation indicates that the situation does not seem to be deteriorating. To explain our strong performance in March and April, I believe two main factors are at play. First, the catch-up of tax refunds during that timeframe provided lower-income shoppers with some additional funds. Over the past few years, this demographic has come to recognize Burlington as a valuable destination, so it is natural for them to turn to us when they have extra money to spend. The second factor pertains to higher-income shoppers, driven by a trend of more customers trading down to our stores. In 2022, moderate to high-income shoppers appeared somewhat shielded from inflation's effects, perhaps due to surplus savings. However, we believe this group is now also feeling financially strained, which we view positively, as it leads them to shop off-price in search of value.

Got it, very helpful. Then Kristin, if I can sneak one more in, you referenced the supply chain efficiencies in the quarter benefiting you. Can you just unpack that a little bit more? What exactly are those drivers that led to some of that upside in the first quarter, and then I guess a follow-up to that is, is there more to come there, is this just a one-time thing in the first quarter, is there possibly more efficiencies to come? Thanks.

Good morning, Ike. That's a great question. We are pleased with the progress we are making in reducing supply chain costs relative to sales. Excluding the expense shift I mentioned for Q2, supply chain leveraged 70 basis points, which exceeded our expectations. As I’ve mentioned before, we have several productivity initiatives in place that aim for significant cost savings. These include process improvements and industrial engineering enhancements that streamline operations, minimize handling, decrease the time needed to process merchandise, and ultimately cut labor costs in our distribution centers. In the first quarter, we found that we are realizing these savings a bit sooner than we initially anticipated. Regarding your follow-up question about future improvements, yes, we believe there is potential for around 400 basis points of EBIT margin growth over the next five years, using 2023 EBIT of approximately 6% as a baseline. We estimate that about half of this, 200 basis points, can be achieved independently of sales, with a substantial portion coming from ongoing supply chain efficiencies, along with reductions in freight costs and higher merchandise margins. We believe we made solid progress in the first quarter concerning all three of these areas, especially in supply chain.

Awesome, thanks again.

The next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

Thank you, good morning. Michael, your off-price peers have talked about increasing their mix of brand as a way to drive comps. In March, you said this might be an opportunity for you as well. Do you have any update on this, and also I’m curious if you see any risks to this strategy.

Good morning, Lorraine, it's great to hear from you. Yes, we see an opportunity to enhance our brand mix and elevate our assortments. We're already seeing some success with this approach in areas like sportswear, and we plan to focus more on this opportunity in the latter half of the year. Let me take a moment to discuss the role of brands in our business and address your question about the risks or limitations of this strategy. In the off-price sector, brands matter, but the most crucial factor is value. Brands are just one aspect of value. Elements such as fashion, quality, and price also significantly influence the customer's perception of value. You might have a strong brand, but if the fashion, quality, or price are off, customers won't buy it, and it will end up on clearance. Additionally, the importance of brands in defining value varies by category and customer price sensitivity. That's why our merchants invest considerable time in planning and styling the entire rack while implementing our good-better-best strategy. Brands are significant, but they are just one part of the overall picture. It’s worth mentioning that this might be different for other retailers according to their customer profiles. Now, with that context in mind, let’s discuss where we see opportunities. As I mentioned earlier, in this economy, we believe that all shoppers are now more value-conscious. We excel at catering to low-income shoppers who seek deals, and we intend to continue serving this important segment effectively. However, we believe we can also enhance our sales by attracting trade-down or slightly higher-income shoppers. When these customers enter our stores, they tend to be attracted to great deals on better brands, so as the year progresses, you’ll see more of those brands featured in our offerings. Of course, we will pursue this selectively in areas where it makes sense and where brands truly matter. To wrap up, we see this as a combined strategy; we will pursue trade-down opportunities while still delivering for our core price-sensitive customers.

Thank you, and then Kristin, the margin performance in the first quarter was much better than we expected. Obviously the balance of fiscal ’24, including 2Q, is not calling for that kind of increase in EBIT margins. What was unique about the first quarter that enabled such strong flow-through, and why aren’t we seeing the same outlook for the balance of the year? Also, what should we expect in 3Q and 4Q?

Good morning, Lorraine. Thank you for your question. We experienced strong margin performance in the first quarter. Lower clearance levels and quicker inventory turnover significantly contributed to our merchandise margins, and we also achieved better supply chain leverage than anticipated. Regarding the second quarter, there are a few points I want to highlight. Firstly, we have about $9 million in expenses that were moved from the first quarter, with $8 million shifting to the second quarter. This change will have roughly a 30 basis point negative impact on the EBIT margin for Q2. Additionally, our new distribution center in New Jersey is set to begin operations this quarter, which may result in some minor deleverage in our supply chain due to start-up and training expenses. However, we anticipate that this will be more than compensated by the productivity initiatives I previously mentioned, though it may moderate supply chain leverage in Q2. As for the second half of the year, we do expect a 53rd week. Our growth in total sales for the fall is projected to be between 7% and 9%, which is slightly lower than our full-year guidance of 8% to 10%. The 53rd week will have the most significant effect on Q4 sales growth, as we will be trading a week in November for one in January compared to Q4 last year. We will provide more details on our margin guidance for Q3 and Q4 during our call in August. For now, as you consider projections for Q3 and Q4, please note that total sales growth for Q3 should outpace that of Q4 due to the influence of the 53rd week, which will affect the relative margin improvement for Q3 compared to Q4.

Thank you.

The next question comes from the line of John Kernan with TD Cowen. Your line is open.

Thanks, good morning Michael, Kristin, David. Nice job on the top line and the margin flow-through. Kristin, let’s just keep it on the margin theme here. It looks like freight was a margin driver in Q1. Will freight continue to be a margin tailwind for the rest of the year? Is there any chance it becomes a headwind as you get further into the year, and then just a quick follow-up for David after that.

Great, good morning John. Appreciate the questions. We were pleased with the 30 basis points of leverage we saw in freight in the first quarter. About 10 basis points, as I described, was due to the timing of receipts, but the majority of the leverage was due to favorable freight rates and specific transportation-related cost savings initiatives we have. We do expect to continue to see freight leverage this year. We’re unlikely to get all of the way back to FY19 freight expense, as we’ve previously discussed, but we recently finalized our latest round of domestic freight contracts, and we’re pleased with where we landed. Freight should continue to drive expense leverage through all of 2024, and in addition diesel fuel rates have begun to become a modest tailwind here.

Got it, thanks. David, just on the balance sheet in today’s release, the convertible notes, it looks like they become a current liability in Q1. What’s the plan on retiring these? Just wondering also if there’s any impact to the stock repurchase program or share count - sometimes the accounting for converts can be pretty tricky to model.

Thanks, John, I appreciate your question about the convertible notes. Before I address it directly, I want to mention our liquidity. We feel confident about our current liquidity situation. We ended the quarter with $742 million in cash, had no borrowings on our ABL, and about $1.5 billion in total liquidity. Additionally, we are comfortable with our total debt levels and expect that as our EBITDA grows, our leverage ratios will continue to improve, following the positive trend we've observed in recent years. Regarding the 2025 convertible notes, they became a current liability at the end of this quarter, with $156 million outstanding that mature in April 2025. As a reminder, we executed an amend and extend convertible transaction in 2023 with the intention of reducing our total converts on the balance sheet. We extended $297 million in new convertible notes to December 2027, while allowing the $156 million of 2025 notes to reach maturity. Given our strong liquidity, we are comfortable retiring this principal amount next April, and we discussed this strategy with the rating agencies before completing the transaction. Concerning buybacks, since finalizing the convertible transaction last year, we have repurchased around $164 million in stock from Q4 of last year to Q1 of this year. We stated in our last earnings call that we view last year's buyback level of $232 million as a reasonable target for this year, and as noted in the press release, we have $442 million remaining on our current share repurchase authorization. We understand that our shareholders value a consistent approach to buybacks, and given our strong liquidity and expected cash flow generation, we intend to continue share repurchases consistently in both 2024 and 2025, assuming our financial performance aligns with our plans.

Got it, thanks.

Thanks John.

The next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open.

Good morning and thank you for taking our question. Michael, several retailers have recently announced that they’re reducing or sharpening their price and value equation. What impacts could these lower prices have on Burlington, and what is your strategy or reaction?

Well, good morning Brooke. Thank you for the question. You’re right - it does feel like a number of retailers have recently talked about reducing, sharpening or rolling back their prices. As an off-price retailer, relative value is critically important to us, so we pay close attention to what competitors are saying. That said, there are a few reasons why I think we are in pretty good shape. Firstly, many retailers raised their prices over the last few years. Now that the consumer is pushing back, it’s not that surprising that some retailers are having to roll their prices back. In contrast, we have not raised prices; in fact, our average retails are lower now than they were two years ago. The reason for that is that our core customer has been under significant economic pressure since the end of 2021, so we’ve had to stay very, very sharp on value. In other words, I feel like we’re already starting from a very strong value position. Secondly, our merchants are in our competitors’ stores every week: off-price, department stores, specialty stores, ecommerce websites and other retailers. They’re looking through the assortments, the styles, the prices. They’re looking at what’s working and what’s not, and what’s left in the clearance rack. As I mentioned a moment ago with merchandising 2.0, we have better visibility than we’ve ever had before into what’s on our floor and how well it’s turning. That means that we can respond very quickly if we need to make an adjustment. The third and final thing I’d say is that the guidance that we’ve discussed today already builds in some room in case we need to reduce mark-up later this year in order to make our values even stronger. It’s worth calling out that the Q1 gross margin that we’ve reported today at 43.5% is a historic record for the first quarter for Burlington, it’s even higher than Q1 of 2021. We’re driving those margins by turning faster and taking fewer markdowns. We think we may have more favorability there, but within our guidance, we have left room in case we need to further sharpen our value and pass along that favorability to shoppers.

That’s really helpful. For Kristin, can you elaborate on that point on the expectations for merchandise margin as you move throughout the year, given some of the puts and takes on mark-on versus the year-on-year trend on regular priced selling relative to clearance from last year? Thank you.

Sure, that's a great question. We definitely experienced an increase in merchandise margin during the first quarter due to lower clearance, quicker inventory turnover, and reduced markdowns. Looking ahead, we believe there’s potential for continued faster inventory turnover, which would lead to lower markdowns. While we may not have as many opportunities for mark-up, we are optimistic about improving our inventory turnover. Currently, we turn inventory a bit slower than some competitors, so we see this as a chance to enhance our merchandise margin. This aligns with our goal of achieving 200 basis points of margin improvement that is not reliant on sales, which I mentioned earlier. A higher merchandise margin is an essential part of that, stemming from faster inventory turnover.

Great, thanks so much. I’ll pass it on.

The next question comes from the line of Alex Straton with Morgan Stanley. Your line is open.

Great, thanks for taking my questions. Just firstly, I wanted to dive into new store openings. As you open up new stores, do you think you’re attracting new customers to Burlington; and then if you are, who do you think you are taking these customers from?

Good morning, Alex. That’s a great question. As we mentioned earlier, total sales growth in Q1 increased by 11% compared to Q1 of 2023, building on an 11% rise from Q1 of 2022. This shows that we are successfully attracting new customers to our stores. Burlington has a long history, and most of our new locations are in areas where we’re already established, so while some of our shoppers are entirely new, many have shopped with us in the past, possibly being brought in by family members years ago. What’s exciting is that when they visit our stores now, it feels like a completely different experience—almost like a new Burlington—which effectively makes them new customers for us. Regarding where these customers are coming from, there isn’t a single source. Generally, we observe that certain retail segments, like department stores and specialty stores, are facing challenges and losing market share. While we don’t have specific data, it’s reasonable to assume that we are capturing some of that lost market share. However, we operate in a vast and competitive market that includes off-price stores, department stores, specialty retailers, e-commerce, and more. Our customer surveys indicate that our shoppers frequently explore various options for the best value. This suggests that if we provide the best value, we can attract market share from a broad spectrum of competitors.

Great. Maybe just a second one for me, but on the flipside - store closures. It looks like you relocated or closed a lot of stores in the quarter. Can you just provide more color on what was going on there, and then how many additional stores do you think you ultimately need to close or relocate? Thanks a lot.

Great, good morning, Alex. I’ll take that one - it’s Kristin. It’s a good question. We did close or relocate a number of stores in the first quarter. On a net basis, we opened 14 new stores, but we opened 36 gross new stores in the first quarter, which means we closed or relocated 22 stores on our base of a little over 1,000 stores. For the year, we plan to close or relocate approximately 40 stores, and we plan to open about 140 gross new stores. This means we’re moving out of approximately 40 older, oversized stores that tend to be in secondary or tertiary centers. We’re moving into higher traffic centers that tend to trade more broadly across income demographics, and this year is really representative of what we plan to do over the next several years as leases expire and new locations in these higher traffic centers become available. We expect to close or relocate about 150 to 200 stores over the next five years.

Thanks so much. Good luck.

Thank you.

The next question comes from the line of Adrienne Yih with Barclays. Your line is open.

Great, thank you very much, and let me add my congratulations. Great start to the year. Michael, can you comment on the drivers of comp growth in Q1 traffic AUR, UPT, and then how those transition through the quarter and into the May quarter to date? Then Kristin, my follow-up is on the deleverage that you mentioned on Q1 on store payroll. We’re hearing from some other retailers that there’s some stability in turnover and maybe average ROE rate gains are slowing. What drove this, and are you expecting that same deleverage through the rest of the year? Thank you very much.

Good morning Adrienne. I’ll actually take both of your questions. The first was on the components of comp. The primary drivers of first quarter comp were both traffic and conversion. Together, the increase in total transactions, that’s what really drove the comp in the quarter. Higher conversion is great because it tells us when she comes in our store, she sees the content and value that she likes, and we see that in conversion. AUR was down slightly in the quarter due to mix of business and our continued focus on opening price point, and units per transaction were up slightly. Traffic and conversion improved as we moved through the quarter, as you would expect. I think both metrics were stronger in the March-April period than in February. Then your second question was on store payroll. It’s a good question. We mentioned it in the prepared remarks - excluding Bed, Bath & Beyond dark rent expenses, SG&A deleverage was 40 basis points, and that was driven primarily by increased investments in store payroll. As a reminder, in early 2023, we thought we had opportunity to improve our customer shopping experience and improve store condition to ensure stores were neat, clean, easy to shop. To address this opportunity, we made a purposeful investment in store payroll beginning in the back half of last year, and we’ll lap this payroll investment in the fall of this year. Typically, you can expect that we see SG&A leverage at around a 3% comp. I think the last part of your question was around store wages, and we tend to take a market by market approach. We plan for, obviously, the legislative increases, but we also plan for competitive and market related wage increases, and we’re seeing stability there, and our approach of market by market seems to be working.

Fantastic. Thank you so much, and best of luck.

Thanks Adrienne.

Thank you.

Hi, good morning everyone, and congratulations on the results. In regards to real estate, two questions. Any update on the Bed, Bath & Beyond stores that you took - are they all open now, how are they doing, and are all the one-time Bed, Bath & Beyond expenses behind you? Then just secondly, I saw that you picked up some of the 99 Cents Only leases in the bankruptcy auction. Any update or detail on those stores, and are they likely to open this year?

Good morning Dana. Yes, thanks for these questions. It’s still early, but we feel very good about the Bed, Bath & Beyond stores. As a reminder, we expect that on average, new store sales volumes will be about $7 million in the first full year, and we expect that these Bed, Bath & Beyond stores as a group will achieve or beat that expectation. Of the 64 Bed, Bath locations, we opened 32 last year in fiscal 2023. The majority of those were in the fourth quarter. In the first quarter this year, we opened 20 Bed, Bath & Beyond stores, and we expect to open the remaining 12 in the second quarter, although it’s possible we could have a few stragglers that fall into Q3. As far as the dark rent cost, in Q4 of 2023 associated with Bed, Bath were about $6 million, and in all of 2023, fiscal 2023, that cost was about $18 million. In the first quarter of this year, in ’24, those Bed, Bath & Beyond dark rent costs were $6 million, and for Q2 we have modeled in the guidance we expect about $3 million of Bed, Bath & Beyond dark rent expense. After that, it should be largely behind us. I think your second question was on 99 Cents Only - yes, it’s a good question. We evaluated over 370 store locations that became available in the 99 Cents Only bankruptcy. We really scrutinized these, but really very few of these sites had the characteristics we’re looking for - we’re looking for busy strip malls, national co-tenants, strong traffic, and sales potential, nor did many clear our new store financial hurdles, so based on our analysis, we’ll likely secure just a handful of these locations. If we secure these stores, they’ll join our pipeline in ’25 or even ’26. In August, we’ll plan to offer a more detailed update as some of the negotiations are still ongoing there. Thanks for the question.

Thank you.

There are no further questions at this time. Mr. Michael O’Sullivan, I turn the call back over to you.

Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in August to discuss our second quarter 2024 fiscal results. Thank you for your time today.

This concludes today’s conference call. You may now disconnect.