2023-03-07 13:52:50 ET
Summary
- BURL is a compelling long for FY23/24 due to several underlying tailwinds and a conservative guide.
- The 2.0 strategy for the Off-price model is still in its infancy but I expect it to have long-term benefits on margins.
- Management has stated its commitment to revenue growth in 2023 by guiding for a 3-5% increase in comparable sales for the full fiscal year and a 5-7% increase in 1Q23.
Thesis
As I see it, Burlington Stores (BURL) is a compelling long (Buy) for FY23/24. This is because it stands to benefit from improved freight costs, optimization in inventory purchasing, customers purchasing more value/cheaper goods, and improved execution. With these expected tailwinds, I find management guidance to be rather conservative, as such I think there is possibility for consensus EPS to be revised upwards as BURL performs better than expected. If BURL were to outperform as I expect, then, the forward PE that BURL should be trading at is much lower than the 33x forward PE today (which might spook some investors as it is relatively high against history). Also, given the setup of the stock valuation against a very possible "beat and raise" narrative for FY23, I think there are plenty of opportunities for an investor to trade the quarterly earnings (i.e., buy before earnings if share price or valuation is based on management conservative guide).
Aside from the near-term things, I think what is important is the 2.0 strategy (unlock full potential of the Off-price model) is still in its infancy. Despite my confidence in the strategy's efficacy, I cannot deny that FY22's challenging headwinds have obscured any positive effects from the 2.0 strategy. That said, over the long-term, I expect the 2.0 upgrade to have a significant impact on BURL's per-square-foot production efficiency, inventory management (in terms of turnover), and cost management. Eventually, this should all lead to higher profits. Overall, I anticipate these significant changes will result in faster top-line growth and enhanced operating margins, paving the way for robust EPS expansion.
4Q22 results
EPS for 4Q22 at BURL were $2.96, which was above the consensus estimate of $2.73, thanks to an increase of 500 basis points in sequential comparable sales. An enhanced selection and rising foot traffic contributed to the impressive comps. High margins were a direct result of the combination of strong revenue growth and favorable freight market conditions, which allowed the company to leverage its fixed costs. In comparison to other companies in its industry, I found BURL's 4Q22 results to be particularly impressive. For comparison, TJX Cos ( TJX ) EPS in-line with consensus, while Ross Stores ( ROST ) saw its comparable sales decline.
Comp growth
Management was optimistic about the company's sales outlook, citing an uptick in month-over-month comparisons across the board in the fourth quarter and a continuation of this stronger trend into February 2023. Specifically, BURL saw an increase in both conversion and basket size as well as an increase in traffic. Looking ahead, management has stated its commitment to revenue growth in 2023 by guiding a 3-5% increase in comparable sales for the full fiscal year and a 5-7% increase in the 1Q23. I think what is important to note is that management also highlighted the fact that the 1QTD trend is outpacing their target level of 5-7%. The latter is what gave me confidence that BURL could actually beat guidance.
Supply situation
According to management, the supply environment was robust in 4Q22, with fantastic opportunities to stock up on branded goods as they flooded stores and were stashed away in warehouses. Management described the improved purchasing climate as a return to pre-covid levels, and that in 2023, the purchasing climate is going to be a largely stable purchasing climate. In addition, BURL expressed optimism about the company's future by highlighting the positive effects of the investments they had made in their purchasing department and the stronger relationships with vendors. All in all, it seems like major headwinds appear to be dissipating, which reinforces my view that BURL's setup going forward is very appealing.
Margin
Within a few years, BURL believes it can return to its margin levels prior to the pandemic. It is important to note that in 2023, the management's focus will be on increasing sales as opposed to increasing profits. What this means is that price increase against consumers may not happen as aggressive in order to avoid driving away customers. The second factor that might impact margin, in my opinion, is a sticky supply chain expense that is hard to deflate. However, I am encouraged that management is working to improve the efficiency of the company's distribution centers. This is a lengthy process that will require sustained effort and patience, but should provide structural cost advantages moving forward. What is important is all these are non-structural issues that can be fixed or will go away eventually. As such I expect a rise in margin due to improvements in freight rate normalization, merchant margin, and the ability to leverage fixed costs against retail overhead.
Guidance
While FY23 guidance was lower than expected, I think this is a good move because it shows management is being cautious in light of last year's execution misstep. For a few reasons, I find the guide to be rather conservative. To begin, it appears that management is relying on an extrapolation of growth from 4Q22 even though current quarter (1Q23) performance exceeds that of 4Q22. Keep in mind that growth is likely to accelerate sequentially through FY23 thanks to the tailwinds I mentioned above (and management comments). Second, despite the robust anticipated growth in comparable sales, normalizing freight costs, and cutting discounts, management appears to be downplaying how much margin can expand in my opinion.
Conclusion
In conclusion, I believe that BURL is a compelling investment opportunity for FY23/24. The company's 4Q22 results exceeded expectations, and management's optimistic outlook on sales growth for 2023 reinforces my view that BURL's setup going forward is very appealing. With the tailwinds of improved freight costs, inventory purchasing optimization, and customers buying more value/cheaper goods, I anticipate that BURL will outperform its current valuation, and there is potential for consensus EPS to be revised upwards.
For further details see:
Burlington Stores: A Compelling Long For FY23/24 With Underlying Tailwinds