Hello, and welcome to Burlington Stores, Incorporated Second Quarter 2024 Earnings Webcast and Conference Call. Please note that everyone has joined on mute to avoid any background noise. You will have the opportunity to ask questions to our presenters later on during the Q&A session. Thank you. I'd now like to turn the call over to David Glick, Group's Senior Vice President, Treasurer and Investor Relations. 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 second quarter operating results. Unless otherwise indicated, our discussion of results for the 2024 second 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 expressed permission. A replay of the call will be available until September 5, 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 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. On this morning's call, we would like to discuss our second quarter results and our guidance for the rest of the year. Then, we will be happy to respond to your questions. Okay. Let's talk about our Q2 results. I'm going to start with total sales growth. Our total sales in Q2 grew by 13% compared to the second quarter of 2023. That was on top of a 9% total sales growth versus the second quarter of 2022. New stores are a key driver of this growth. In Q2, we added 36 net new stores and ended the quarter with 1,057 locations. The other driver of top-line sales is comp sales growth. Comp store sales for the second quarter increased 5% versus our guidance of flat to 2%. This 5% comp sales growth was on top of last year's second quarter comp increase of up 4%. Let me move on now to profitability. In the second quarter, we expanded our operating margin by 160 basis points versus last year's second quarter. In a moment, Kristin will provide more details, but for now, let me call out the two primary drivers of this expansion. Firstly, our gross margin increased by 110 basis points. This was driven by faster inventory turns and lower markdowns. Secondly, we achieved 60 basis points of leverage in supply chain, driven by faster-than-expected progress in our supply chain efficiency initiatives. As Kristin will explain, our well-ahead-of-planned sales growth plus healthy margin expansion drove very strong earnings growth in the second quarter. Now, I would like to take a few moments to editorialize on our second quarter performance. Again, I will start with total sales. Of course, we are very happy with 13% total sales growth on top of 9% of total sales growth last year. This means that on a compound basis, our business is 24% bigger now than it was two years ago. Given the volatility and uncertainty of the last couple of years, we are very pleased with this growth. In Q2, we opened 36 net new stores, and we also relocated four of our older oversized locations. This means that for the fiscal year-to-date, we've opened 50 net new stores, plus 15 relocations. And for the year as a whole, we're on track to open 100 net new stores plus approximately 30 relocations. As discussed in the past, on average, we expect our new stores to run at about $7 million in sales in their first full year. I am pleased to say that our new stores are running ahead of this benchmark. We were also pleased with our positive 5% comp growth in Q2. Keep in mind that as we opened new stores, there is some cannibalization headwind on comp stores. Our positive 5% comp sales increase in the second quarter was despite this headwind. Another point to make as I dissect this 5% growth, we continue to see very strong performance in full-price selling. Our merchants are focused on offering really sharp value out of the gate at the initial ticketed price. This is driving faster turns and lower markdowns. This means that there is less inventory making it to the clearance rack. Our comp on clearance sales was down double-digits in Q2. Meanwhile, our comp on full-price selling was positive 7%. This was the driver of our 110 basis points of gross margin expansion in the second quarter. Stepping back a little, I was pleased with our execution in Q2. We have made a lot of changes and improvements to our business over the last few years in merchandising and in operations. We are still in the early innings of many of these programs. And to be clear, we have a long way to go in terms of achieving full potential off-price execution. But we are gaining traction and making some good progress. The other point to make is that over the past 18 months, the external environment has become more favorable. Two years ago, our core low-income customer was under severe economic pressure from the higher cost of living. Since then, it feels as if two things have happened. As inflation has moderated, the situation for lower-income shoppers has somewhat improved. In parallel, economic pressure and uncertainty has spread and broadened well beyond lower-income shoppers. There is now greater focus on value across demographic groups and income bands. This greater focus on value is helping our business. The factors that I have just described provide some grounds for optimism for the back half of the year, but as we've discussed before, our playbook is to manage our business cautiously and be ready to chase. We are maintaining guidance of 0% to 2% comp growth for Q3 and for Q4. Let me comment on each quarter separately. For Q3, there are a couple of reasons to be cautious in planning and guiding comp sales. Last year, we ran 6% comp growth in the third quarter. This was our strongest quarter of the year. Another point to make, and we have discussed this before, comp sales in the first half of Q3 are driven by back-to-school trends, but comp sales in the latter half depend critically on the weather. As the company that used to be known as Burlington Coat Factory, the weather in late September through October can have a huge impact on our Q3 comp growth. If the weather in Q3 is unseasonably warm, it will suppress our comp trend. We hope that our flat to 2% comp guidance in Q3 will turn out to be conservative. If the trend is stronger, then we will chase it. For Q4, we are also maintaining our flat to 2% comp guidance. Over the next couple of months, we will monitor the trend and get an early read on the fall season. Depending on this read, we may revisit and adjust our Q4 plan. We will talk more about this on our third quarter call in November. Again, as an off-price retailer, our playbook is to wait, read the trend and then chase. Now, I would like to turn the call over to Kristin, to share more details on our second quarter results and our outlook for the rest of the year.

Thank you, Michael, and good morning, everyone. Let me start with our second quarter results. Total sales grew 13% and comp sales grew 5%, both well above the high end of our second quarter guidance. Our adjusted EBIT margin expanded 160 basis points versus last year. The drivers of this margin expansion were higher gross margins, higher-than-planned supply chain savings and leverage on above-planned comp sales. Let me walk through the details. The gross margin rate for the second quarter was 42.8%, an increase of 110 basis points versus last year. This was driven by a 90-basis point increase in merchandise margins due to strong regular price selling, which generated faster inventory turns and lower markdowns. Freight expenses leveraged 20 basis points, primarily due to lower freight rates and cost savings initiatives. Product sourcing costs were $192 million versus $183 million in the second quarter of 2023, decreasing 60 basis points as a percentage of sales. This was entirely driven by supply chain expense leverage, from continued progress on our distribution center productivity initiatives. Adjusted SG&A costs in the second quarter were 10 basis points higher than last year, driven by planned higher investments in store payroll. Q2 adjusted EBIT margin was 4.8%, 160 basis points above last year. We had guided to 30 basis points to 50 basis points of improvement. Our adjusted earnings per share in Q2 was $1.24. This was a 98% increase over last year and was well above the high end of our guidance range of $0.83 to $0.93. These results and the guidance that we provided exclude approximately $3 million of pre-tax expenses associated with the Bed Bath & Beyond leases. At the end of the quarter, our comparable store inventories were up 4% above 2023. Our reserve inventory was 41% of our total inventory. We are very happy with the quality of the merchandise and the values that we have in reserve. During the quarter, we repurchased $61 million in common stock. At the end of Q2, we had $380 million remaining on our share repurchase authorization that expires in August of 2025. Now, I will turn to our outlook for the full fiscal year, as well as for the third quarter and fourth quarter of fiscal 2024. Based on our strong performance in the second quarter, we are increasing our full year fiscal 2024 guidance for comp sales, total sales, adjusted EBIT margin, and adjusted earnings per share as follows. Comparable store sales are now expected to increase 2% to 3%, with total sales to increase 9% to 10% for the full year 2024. This revised full-year guidance factors in our year-to-date comp store sales as well as our guidance for comparable store sales to increase 0% to 2% for the balance of fiscal 2024. We now expect our full year adjusted EBIT margin to increase by 50 basis points to 70 basis points. This is up from our most recent guidance for an increase of 40 basis points to 60 basis points and up from our original guidance for an increase of 10 basis points to 50 basis points. This updated margin outlook now translates to an adjusted earnings per share range of $7.66 to $7.96, up from our most recent guidance of $7.35 to $7.75 and up from our original guidance of $7 to $7.60. Included in this updated guidance is an expected ocean freight headwind of approximately $0.10 impacting the back half of the year, which reflects the rapid increase in ocean container rates since we last updated our guidance in late May. For the third quarter, we are guiding to a comp store sales growth of flat to plus 2%, and a total sales increase of 10% to 12%. This would result in operating margin expansion of up 60 basis points to up 80 basis points versus Q3 of 2023. This translates to earnings per share guidance for the third quarter of $1.45 to $1.55. We do not expect any incremental expenses associated with the leases we acquired from Bed Bath & Beyond last year. For the fourth quarter of fiscal 2024, this outlook implies comp store sales growth of flat to plus 2%, total sales to increase 5% to 7%, EBIT margins to range from a decrease of 80 basis points to a decrease of 50 basis points, and earnings per share in the range of $3.55 to $3.75. Please keep in mind that the 53rd week shift has a significant negative impact on Q4 in terms of total sales, adjusted EBIT and adjusted earnings per share.

Thank you, Kristin. Let me recap four key points that we've discussed this morning. Firstly, we are pleased with our sales growth in Q2; 13% total sales growth for the quarter, 5% comp sales growth for the quarter. Secondly, we are happy with our Q2 margin and earnings results. These were driven by higher merchandise margins from very strong regular price selling, 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 the third and fourth quarters. We recognize that given our recent trend, there may be upside in the back half. If the underlying trend is stronger, then we will take it. Finally, we are raising and updating our full year earnings guidance to reflect our strong ahead-of-planned second quarter results. With that, I would now like to turn the call over for your questions.

Hello, everyone. We are now opening the floor for question-and-answer session. Thank you. I'd now like to call over Matthew Boss from JPMorgan. Your line is now open.

Thanks, and congrats on a really nice quarter.

Thanks, Matt.

So, Michael, maybe to kick-off, near term, could you speak to back-to-school sales trends, maybe just the overall importance to your business? Or how best to think about the impact of back-to-school, what it maybe had on results as you exited the second quarter? And anything you can share on August trends, I think, would be great.

Well, good morning, Matt. Thank you for the question. Back-to-school selling is very important to our business at this time of year. And in fact, maybe it would be helpful if I define what back-to-school really means for us. At Burlington, back-to-school categories include apparel, accessories and footwear, but they also include juniors and young men's. There are other specific categories within the footwear business. In addition, there are other areas of the store, especially in accessories and in home where we go after back-to-school and back-to-campus opportunities. I should also call out that as a company, we index much higher with younger shoppers and young families than many of our competitors. So, the businesses that I've just listed represent a relatively high penetration of our store. Anyway, that all adds up to saying that back-to-school is a very important business driver for us. Now, in terms of timing, back-to-school as an event really starts in early July and then continues through early September. And of course, the timing depends on the region. Now, as an aside, I would say that as part of merchandising 2.0, we have gotten much better at planning and managing the timing of back-to-school receipt flows based on the specific timing of back-to-school in different regions. Anyway, to answer your question, we were very pleased with our back-to-school trends in July. Comp sales growth, the categories that I described a moment ago were stronger than for the rest of the chain. And that helped to support our overall sales trend as we closed out the quarter in July. On the last part of your question, how are things going in August? Our back-to-school categories have continued to perform well. I would say, obviously, we're three-and-a-half weeks in at this point. We're happy with our overall trend. We've made a solid start to Q3. But with that said, let me add just one note of caution. Back-to-school will wind down pretty soon. So, although we're happy with how the quarter started out, it would be unwise just to extrapolate off that solid start.

That's great color. And then maybe just to follow up, Michael, on your mix of better brands initiative. So, you called out earlier this year the potential to increase the mix of better brands as a comp driver. Was this a key driver in second quarter comps? Or how should we think about this as a potential comp driver in the second half of the year?

Well, again, thanks for the question, Matt. Yes, as we described earlier this year, we do see an opportunity to increase our mix of better brands. And actually, we see an opportunity more generally to elevate our assortments. We've been shifting in that direction for a while now and we've seen good selling on those better brands, and we've seen good selling at higher price points. We believe that increasing the mix of better brands accomplishes two things. Firstly, those brands themselves drive increased trade-down traffic to our stores. Trade-down shoppers are looking for better, more recognizable brands. Secondly though, those brands also help to validate and reinforce the whole store. Even if a shopper does not buy the specific item, the fact that they see the brand, reinforces the off-price value proposition. It provides a halo, if you like, to our business. So, in the coming months, you will see a higher mix of better brands in our runs. That said, I don't want to overstate this opportunity. I see this as an evolution rather than a revolution. Our brands have always been important to us, but our merchants understand that brands are really just one reference point the customer uses to assess value. Quality, fashion and price are also important, and depending on the category, their relative importance can vary a lot. For example, brands are very important in sportswear, but much less important in juniors where the latest styles and fashions are critical. Another point to make is our merchants are very good at building the assortment to offer great value across price points and it's critical in doing that, it's critical to manage brands within the context of our good-better-best assortment strategy. One last point to make on this. Better brands carry a lower markup. As we increase the mix, it puts pressure on gross margin, and that impact is built into our guidance, it hasn't changed since our last call. As Kristin mentioned earlier, we are making a small adjustment to our gross margin guidance for the back half, but that adjustment is related to higher ocean freight rates rather than the mix of better brands.

Best of luck. Congrats again.

Thank you, Matt.

Our next question comes from Ike Boruchow from Wells Fargo. Your line is now open.

Hey, good morning, everyone. I actually have two questions for Kristin. Kristin, first question is on the supply chain. It's encouraging to see another quarter of supply chain leverage in the P&L. Can you maybe walk us through some of the drivers of that leverage, specifically, what kinds of operational improvements have you made? And then, I think one of your peers has actually talked about more automation and technology in their DCs. Just kind of curious, have these types of initiatives also been part of your program? Would love for some more color there.

Hi, Ike. Sure. Good morning. We continue to be pleased by the faster-than-expected progress we're making in driving productivity gains and cost savings in supply chain. As we shared in the prepared remarks, supply chain leveraged 60 basis points in Q2. And this was despite the start-up of a new distribution center in the second quarter and the receipt shift that we talked about from Q1 into Q2, we referenced this on last quarter's call. We do have a number of productivity initiatives. These are more within the four wall process improvements that streamline our DC operations, reduce touches, reduce steps, reduce time to process and ultimately save labor dollars in the DC, and we're harvesting these savings a little bit faster than we'd originally planned. On previous calls, we had described supply chain productivity improvement as driving potentially 100 basis points of the 400 basis points of margin improvement we laid out last year in our long-range model. And we'll see how the rest of this year plays out, but expect supply chain to continue to drive leverage in the back half. And in getting to the second part of your question, longer term, probably beyond the long-range model we've laid out, we do have an opportunity to drive incremental leverage as we modernize our supply chain with new larger, much more automated DCs that we expect to open. As I mentioned, we recently opened a new DC this year and we have another much larger DC under construction, which we expect to open in 2026. And with these new DCs, we have an opportunity to design DCs for off-price and with much, much more automation. So, as we expand this additional capacity, there also may be an opportunity to go back and look at modernizing some of our existing legacy DC network as well. But again, the benefits of this are longer term, not necessarily baked into the long-range model that we shared. So, the CapEx to support these new DC investments is embedded in our long-range model. And I think you said you had a follow-up for me as well.

Yeah. I was going to switch over to freight, if that's okay. Just elaborate the second half ocean freight headwinds? I think you called out in the prepared remarks. What's driving it? How long, how impactfully negative will that be? And I guess, how does this impact domestic freight if at all? Because I know you talked about ocean, and can you still kind of lever domestic freight in the third and fourth quarter? Is that changing as well?

Great. Thanks for the question. It's a very good question. So, as I mentioned, we factored in about $0.10 of higher ocean freight in our back half guidance, and this ocean freight negatively impacts merchandise margin. And so, on ocean freight, we do have some contracted capacity at favorable ocean freight rates, but the spot market rate, as you know, increased significantly since we reported in Q1 in May. And we do have some exposure to the spot market even though the majority of our containers are contracted. So, we're hopeful this ocean freight, the spot market is a transitory pressure point and we're starting to see ocean freight spot rates come down modestly. But of course, there are always risks here and this is difficult to predict. And turning to the second part of your question on domestic freight, on the other hand, domestic freight continues to be a source of modest leverage. We saw domestic freight leverage in Q2, as we negotiated favorable rates. Diesel fuel rate has also been slightly favorable here. So, on domestic freight, we expect to continue to see modest leverage in the back half of the year on that.

Got it. Thanks so much.

Thanks, Ike.

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

Thank you. Good morning. Michael, can you elaborate on what you're seeing in terms of the health of the consumer? You talked previously about the potential for trade-down traffic in your stores. Is that what's driving your comp? And any other call-outs in terms of consumer behavior?

Good morning, Lorraine. It's great to hear from you. Thank you for your question. During our last call in May, I mentioned that the external environment and consumer health were difficult to assess. At that time, we were seeing mixed signals about discretionary spending trends. However, over the last few months, the situation appears to have become clearer. We believe there are two main developments. First, the economic pressures and uncertainties that began affecting lower-income shoppers two years ago have now extended to other income groups. This shift seems to have significantly increased the emphasis on value among consumers. Recent earnings reports from various retailers indicate that those offering the best value are performing well and boosting comparable sales. As a result, it seems that value-conscious customers are increasingly shopping in our stores. The second development is that although the challenges for lower-income customers persist, there are signs that the situation may be improving. This demographic remains fragile, but as inflation decreases, their circumstances appear to be getting better. Our own data supports this trend. Two years ago, our comparable sales in lower-income areas lagged behind the rest of the chain, but now those stores, which we closely monitor, are performing in line with the chain average. This year, they have shown a mid-single-digit gain in comparable sales in Q2, suggesting some recovery among lower-income shoppers. To summarize, we notice some positive indicators for our business, with consumers increasingly focused on value and lower-income shoppers starting to bounce back from the high inflation of 2022 and 2023. However, I would like to caution that there are numerous risks that could impact consumer behavior in the latter half of 2024 and into next year. In conclusion, we feel optimistic about our business, but it's wise to remain cautious.

Thanks. And, Michael, my follow-up question is about the second quarter. Just curious if there were any unusual tailwinds to the comp trends that might not carry over into the fall.

Yeah, it's a good question. I think the only thing like that I would point to was weather in Q2. I know the rule among retailers is that we only mention weather when it's unfavorable, but I'm going to violate that rule and say that I think the weather has probably helped most apparel retailers in Q2. In May and June, temperatures across the United States warmer than last year. And I suspect that most apparel retailers benefited from that in their seasonal businesses, especially in categories like shorts, short-sleeve tops, sandals and swimwear. I would estimate that this strong seasonal performance was worth 1 point to 2 points of comp to us for the quarter. And again, to be clear, that benefit cannot have been unique to us. It must have affected other retailers as well. So, your question was about specific drivers that might not carry over to the fall season. Apart from weather, there were no other factors or tailwinds that I would describe that way. There were no other factors or tailwinds that were unique to the second quarter. Now, of course, it is possible that the weather will be favorable in the fall if temperatures are unseasonably cold. But I guess other than the Farmers' Almanac, we have no visibility into that at this point.

Thank you.

Thanks, Lorraine.

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

Good morning. Congrats on the momentum. Couple of questions here. Kristin, first one on your back half earnings guidance. Looks like there's margin improvement year-over-year in Q3, quite a bit of it, but margin deterioration in Q4 year-over-year. Can you walk us through the factors that are driving this? I would assume the 53rd week has an impact, but how do we think about gross margin and SG&A profile in Q3 and Q4?

Good morning, John. Thank you for the question. It's an excellent question. There are four main factors that influence our margin outlook for the second half of the year, so I'll break these down. First, as you mentioned, Q3 and Q4 have distinct total sales growth plans influenced by the 53rd week in the calendar and the timing of new store openings compared to last year. To clarify about the 53rd week, I mean how the calendar shifts rather than simply the extra week. We're currently about one week ahead of last year when looking at the quarters year-over-year. For comparable store sales, we make adjustments and align the weeks, but for total sales growth, there is an effect on sales and earnings for the quarter. The shift resulting from this 53rd week means that in Q4, we lose a high-volume week in November and gain a low-volume week in January. Consequently, this results in lower total sales growth in Q4 compared to last year, leading us to guide a total sales increase of 5% to 7% for the fourth quarter. In contrast, we are expecting a total sales increase of 10% to 12% for Q3. Q3 benefits from the 53rd week shift and also from a higher number of new store openings this year in the third quarter compared to last year. This difference in total sales growth due to the calendar shift and timing of new store openings positively impacts Q3 and negatively affects Q4. That's the main distinction between Q3 and Q4. As I mentioned, there are four factors overall. The other three are challenges for the second half. First, our guidance for the second half comp is conservatively flat to up 2%, which is below our year-to-date trend and provides less leverage on fixed expenses. Secondly, we don't expect the same benefits from lower clearance levels in the back half as we did in the first half of the year, limiting merchandise margin expansion opportunities. Lastly, the increased ocean freight costs we discussed earlier represent a $0.10 or $9 million pre-tax impact, which equates to about 20 basis points of margin headwind in the second half. The only adjustment to our previous guidance for the second half is that $0.10 negative impact from ocean freight. These are the key factors influencing our margin guidance for Q3 and Q4.

Got it. That's very helpful for the model. David or Kristin, just as it relates to the balance sheet, cash flow and share repurchases, you've given guidance for CapEx to be elevated in the next few years. I'm assuming around the 7% of sales level as you fund the unit growth, but how should we think about share repurchases and potential impact on the balance sheet? What's the optimal level of cash in the balance sheet?

Sure, I appreciate the question. We're still finalizing our budget for next year, so it's a bit early to provide specific details. However, our aim is to consistently return capital to shareholders through buybacks whenever possible. Excluding the pandemic years, we have maintained a steady track record in this area. As we've indicated before, the first few years of our five-year plan are projected to have elevated capital expenditures at around 7% of sales. This year, we anticipate $750 million in capital expenditures. While it’s still early, you can likely expect a similar 7% of sales for next year's capital expenditures. In the latter part of our five-year plan, we expect capital expenditures to average in the mid-single-digit range as a percentage of sales. To clarify why we're increasing capital expenditures this year and next, we are opening significantly more stores, with a net increase of 80 in 2023 and a projected net increase of 100 this year. We also have additional closures and relocations, leading to a higher gross number of new stores compared to previous years. Furthermore, we’ve signed a lease for a 2-million square foot distribution center in the Southeast, which is double the size of our largest existing distribution center. The capital expenditures for this facility will peak this year and next. We have included a purchase option for the land and buildings in that agreement, as we consider our distribution centers as strategic infrastructure that we prefer to control rather than lease. Based on our high-level outlook for capital expenditures, we plan to exercise the option to purchase the land and buildings for the Southeast distribution center. As would be expected, these larger, more automated distribution centers also require a greater investment. I realize this is a lengthy explanation, but we believe our conservative leverage ratios and cash flows, along with consistent liquidity levels from recent years, provide us with a comfortable position. We also feel we have adequate cash flow to invest in growth while simultaneously returning capital to shareholders through buybacks. You can anticipate a similar pace for buybacks next year as we've seen in 2023 and 2024.

Got it. That makes sense. Thank you.

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, can you speak to the performance trends that you saw by merchandise category in the second quarter?

Sure. Well, good morning, Brooke. On category performance, the strength, I would say was fairly broad-based across the quarter. Our comp growth in both apparel and in home was in line with the overall chain, so mid-single digit. And other than that, the only other call-outs were that we saw strong sales trends in our seasonal classifications. I kind of referenced that earlier when I was talking about the weather. We also saw strong sales trends in our back-to-school business in July. And then again throughout the quarter, we saw strong sales trends in beauty and in accessories.

Great. And then, as a follow-up, Kristin, can you elaborate on the drivers of the comp growth? How did trends fare by geography? And what trends did you see regarding traffic and basket?

Sure. Good morning, Brooke. From a geographic or regional perspective, the comp strength was really broad-based. All regions comp positively. Looking at the top-performing regions, that was the Southwest and the Northeast in the quarter. And then, you asked about the drivers of comp growth. Q2 comp was entirely driven by higher transactions as both higher traffic and conversion, both were higher. Our average basket was flattish, slightly higher AUR, offset by slightly lower units per transaction.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke.

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

Perfect. Thanks so much for taking the question. I've got one for Michael, and then one for Kristin. So maybe just for Michael, I think other retailers have talked about attracting younger shoppers. And I think in a prior answer, you mentioned that Burlington over-indexes to this demo compared to peers. So maybe can you elaborate like what tells you that? And can you talk about this opportunity generally as well as what you guys are doing to successfully attract the shopper?

Good morning, Alex. Thank you for your question. At Burlington, we have always had a strong position with younger customers and young families, stronger than most of our competitors, which is evident in our customer research and our business mix. We consider younger shoppers and young families a core customer group. When you visit our stores, you can see this reflected in our merchandise. We showcase a wide selection of juniors, young men's, kids' apparel, accessories, and footwear, which outpaces many of our rivals. Regarding your question about attracting these customers, we recognize the importance of this segment and do not take them for granted. Young shoppers and families will be crucial for our growth in the coming years, and we understand they are financially challenged, so offering value is essential. Our merchants focus on delivering great value by providing fashion, quality, and brand selection at competitive prices through a varied assortment. I've previously mentioned the positive trends we've observed in our back-to-school and back-to-campus sales recently. Overall, I'm pleased with our success and the strong trends we're witnessing with this customer group.

Great. That's super helpful. Maybe for Kristin, super helpful comments in an earlier question on the puts and takes on the back half broadly by major line items. I'm just wondering how has that changed or has anything changed meaningfully compared to your view three months ago? It seems like sales hasn't, but maybe back half EPS is a little bit lower. So, just trying to understand those dynamics and what's driving that. Thanks a lot.

Good morning, Alex. Thank you. To address the last part of your question first, the only update in our guidance for the second half is the additional ocean freight challenges we mentioned. It's important to note that the 53rd week and the higher sales growth in the third quarter compared to the fourth quarter significantly impact the leverage on SG&A and fixed costs, creating a notable difference. Gross margin comparisons are more challenging in the fall than in the spring, and this hasn't changed from three months ago. We lack the same opportunity for lower clearance levels we experienced in the spring. The change we are seeing is the ocean freight headwind. Looking at the profit and loss for the second half, we anticipate some modest leverage in supply chain costs in the back half, likely more in the third quarter than in the fourth quarter. With our guidance of flat to 2% comparable sales, we expect slight deleverage in SG&A and depreciation.

Thanks a lot. Good luck, guys.

Thanks, Alex.

Thanks.

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

Thank you very much. Great job to the entire team at the company. Kristin, I have a two-part question about inventory. Firstly, comp inventories have increased for the first time in about four quarters. In relation to the forward comp guidance, could you explain the 4% increase in comp inventory compared to the guidance for the third quarter? Additionally, total sales are up 13%, which suggests that inventory might actually be slightly below what is needed. Can you help clarify these two aspects? Secondly, Kristin, the convertible notes for 2025 and 2027 are now in the money. Can you explain the accounting treatment for these and their potential dilutive effect on EPS? Thank you.

Good morning, Adrienne. Thank you for your question regarding inventory. You mentioned the connection to comp growth, and I want to clarify things further. At the end of Q2, comp store inventories showed a 4% increase compared to last year. However, this figure can be misleading due to the 53rd week calendar shift, which, when adjusted, brings that 4% increase down to 2%. Additionally, when looking at Q2 as a whole, comp store inventories were actually down by 5% to 6% on average across the stores during the quarter. This discrepancy arises because we were building our back-to-school inventory for July, aiming for readiness rather than reflecting the sales trend. We experienced a faster turnover in Q2, which presents an opportunity for leaner inventory levels. Looking ahead, we believe there is still potential to further reduce store inventories and promote faster turnover, although the progress we’ve made so far has been more modest. Now, I’ll turn it over to David or Daniel.

Yeah. Hey, Adrienne, it's Daniel. So, on the converts, we use the if-converted method of accounting, and that means that we assume the principal is paid in cash and that any amount above par is settled in stock. So, from a quarter-to-quarter share count perspective, if the converts are in the money, which both the '25s and '27s are, and as a reminder, the strike on the '25s is $220 and the strike on our 2027s is $206, will include any dilution in the share count. So, to answer your question, for the second quarter, the converts added about 163,000 shares to our diluted share count. So, just to round out my answer, so obviously, the 2025s mature in April next year, at which point in time will net share settle, meaning that we'll pay the principal in cash and then we'll issue any additional shares to cover the premium if there is one. So, as David mentioned earlier, we've been consistently buying back stock. So, we'd expect to continue to do so and be able to mitigate any potential dilution at that time. I mean, you'll know, for example, this quarter, we repurchased about 270,000 shares. So, we more than offset the dilution from the converts.

Fantastic. Very helpful. Thank you very much.

Our next question comes from the line of Dana Telsey with Telsey Group. Your line is open.

Hi, good morning, everyone, and nice to see the results. I have one for Michael and Kristin. Michael, how do you think about the potential for international expansion and what the opportunity could look like? And then, Kristin, in terms of labor availability and wage rates, what are you seeing there along with the investment that you've been making in store payroll relative to deleverage? Thank you.

Good morning, Dana. Thank you for your question. Regarding international expansion, I believe that the off-price retail model has significant potential in various overseas markets. I am convinced that people everywhere appreciate a good deal. Therefore, it makes sense for our larger off-price competitors to broaden their international reach, as they have the expertise and resources to pursue these opportunities. Once those rivals exhaust their expansion possibilities in the United States, they can leverage their international investments to maintain growth and enhance shareholder value. However, at Burlington, we are in a different situation. We have fewer than 1,000 stores in the U.S., while our competitors have two to three times that number. This indicates that we still have considerable potential for expansion domestically. Our primary focus must be on maximizing the full potential of our core U.S. business. Perhaps in the future, it will make sense for us to allocate resources to international ventures, but for now, our complete emphasis and resources need to be directed at our domestic operations.

Great. And then, Dana, on your second question around store labor and wage rates, as well as investments in store payroll, so first on wage rates, we've certainly absorbed meaningful wage rate increases over the last few years, particularly in DCs, but also in stores. In terms of distribution centers, we're comfortable with where we are. They are located in very competitive labor markets for DC workers in New Jersey and California and our wages are appropriate and competitive. And for stores, our philosophy has been and remains to be to approach wages on a market-by-market basis. So, we build in incremental dollars, obviously, to cover legislative wage increases, but also competitive wage increases in select markets, and this is how we address this. And then, on the investment in terms of store payroll, you may recall that in the third quarter of 2023, we made a deliberate investment in store payroll to improve service levels and improve store conditions. We're pleased with that investment and those results as we've seen improvement in customer service scores. So, from a financial impact standpoint, we'll have fully lapped this investment in the third quarter.

Thank you.

Thanks, Dana.

That concludes the question-and-answer session. Mr. O'Sullivan, I turn the call back over to you.

Thank 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 November to discuss our third quarter 2024 fiscal results. Thank you for your time today, and please enjoy the holiday weekend.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.