Burlington Corrects Earlier Shortfalls as Focus on Promotion and Inventory Fuels Q4 Strength
We plan to raise our $204 per share fair value estimate for narrow-moat Burlington Stores BURL by a low-single-digit percentage after digesting fourth-quarter earnings that trumped our forecast, more than offsetting a mildly lower fiscal 2023 profit outlook than we anticipated. The stock edged down by a low-single-digit percentage on the print, leaving shares fairly valued.
In the fourth quarter, Burlington posted a 2% comparable sales decline and $2.96 in adjusted EPS, above our 8.5% anticipated dip and $2.54 implied estimates, respectively. For Burlington, its first-half mishaps of raising prices on its cash-strained lower-income consumer base, conservatively planned inventory levels that were further hurt by receipt delays in key categories, and muted response to trends were rectified through pricing action (markdowns, expanding price points) and inventory investment. The fruits of these efforts are still yielding gains, as management expressed that sales momentum persisted into February. On a macroeconomic level, management noted that moderating inflation helped boost traffic, while diminishing freight rates helped support a 90-basis-point improvement to fourth-quarter gross margins (to 40.7% from 39.8%). We anticipate further leverage from moderating costs, as well as continued apparel supply and demand imbalances in the full-price channel (as consumers are shifting spending to services over goods and trading down), which should optimize purchasing from vendors for the off-price retailer.
On the backdrop of improved operating conditions and a slowing economy, guidance for 3%-5% comparable store sales growth (versus our 3% outlook) seems reasonable, but $5.50-$6.00 in adjusted EPS lags our $6.61 preprint estimate (a byproduct of opportunistic, though more costly, off-price purchasing). Despite the hit to profits, we think Burlington is well positioned to benefit from consumer trade down.
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