Greetings, and welcome to the Burlington Stores First Fiscal Quarter 2016 Operating Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Bob LaPenta, Vice President and Treasurer. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s first fiscal quarter 2016 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, our Chief Financial Officer. Before I turn the call over to Tom, I’d 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 for seven days. 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 year 2015, and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now, here is Tom.

Thank you, Bob, and good morning, everyone. We had a great start to fiscal 2016, both our top and bottom line results surpassed the guidance we provided on our year-end call. Our positive operating performance, which included growth across all key financial metrics continues to reflect the disciplined execution of our off-price model. We firmly believe that our customers are responding to our presentation of trend right product, compelling brands in everyday value, which is leading to increased traffic and transactions at our stores. We remain excited about our business prospects, as we begin the second quarter. We expect to further enhance our execution of our off-price model and deliver consistent growth in 2016 and for many years into the future. Let me share with you some highlights of the first quarter. Total sales increased 8.4% and comparable store sales rose 4.3%. For the first quarter, we now have reported 13 consecutive quarters of positive comp sales. In addition, we reported comp increases in 22 of the last 25 quarters. Top performing businesses were better and moderate, missy sportswear, home, beauty, youth apparel, and shoes across all categories, including ladies’, men’s, kids and athletics. In terms of territories, the Northeast and the West were our strongest and the Midwest and Southwest were the weakest on a relative basis. In addition, we’re pleased to report the following accomplishments. Comparable store inventory decreased by 9% at quarter end. This contributed to a 7% faster comparable store inventory turnover. Inventory aged 91 days and older continue to decline versus the prior year. We increased the percentage of nationally recognized brand, as well as better product. Pack and hold as a percent of total inventory was 28% versus 26% a year ago. We ended the quarter with not only higher pack and hold levels,…

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We are pleased to begin the year with solid momentum as evidenced by our strong first quarter performance, which handily surpassed our sales and adjusted net income guidance. We also continued to further enhance value for our shareholders by repurchasing our shares for the fourth quarter in a row. Turning to a review of the income statement. For the first quarter, total sales rose 8.4% and comparable store sales increased 4.3%, which follows five consecutive years positive comp growth in our first quarter. In terms of comp metrics, our comparable store sales performance was driven by increases in traffic, units per transaction and conversion, while average unit retail was down versus the prior year. We have now experienced traffic increases in six out of the last seven quarters. Our gross margin rate was 40.1%, an increase of 35 basis points versus last year. This benefits from higher initial markup will partially offset by an increase in markdown rate and a slight increase in the shrink accrual versus the first quarter of last year. Product sourcing costs, which include cost to process goods through our supply chain and buying costs, both of which are reported in selling, general and administrative expenses increased 20 basis points to last year’s percentage of sales. Selling, general and administrative expenses, exclusive of product sourcing costs, improved 60 basis points to 26.7%, primarily driven by leverage in occupancy and advertising spend. The quarter also benefited from the deferral of approximately $2 million of expenses, originally planned for the Q1 that will now happen in Q2. Other revenue and other income increased $1.5 million from last year to $10.4 million, driven by a $2.5 million benefit from New Jersey Grow Credit as a result of…

In summary, we’re well-positioned to drive growth throughout 2016, as we continue to maximize the potential of our off-price model. We believe we have the right initiatives in place to maintain our positive momentum and capitalize on the opportunities ahead as we expand underpenetrated categories, grow our footprint and deliver great brands and great values to our customers. We ended the quarter with lean inventories and significant open to buy, which positions not to take advantage of the many in-season deals on fashion and branded merchandise we see in the marketplace. I’d like to thank our store and corporate teams for their hard work and dedication that have been key to our performance. And now, I’d like to turn the call over to the operator to begin the question-and-answer portion of the call.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Hey, guys, good morning and congrats on a great quarter.

Thanks, Ike.

So we know you guys had some execution issues last year in Q1 that you just lapped, the flow through this quarter looked great. Just curious how meaningful the proper execution in those key Easter categories was to delivering those results? And then, are you confident with your ability to continue to drive similar results for the remainder of the year, or now that we’ve lapped that should we naturally see more a normalized step down in momentum, especially as it seems the environment just continues to get choppy out there? Thanks.

This is Tom, I’ll take that one. So obviously, our first quarter comps were driven a good – first quarter comps were driven based on good execution, and we really made some strong, strong progress in a lot of the businesses we called out last year. Our Ladies Shoe business was very, very strong in the first quarter. Our Handbag business outperformed the company average, and our Ladies Dress business was slightly below the chain average. And the other business that was very good as I called out in the prepared remarks was the Youth Apparel business, that was very strong, and that’s indicative of strong execution for the Easter time period overall. We feel that our guidance reflects how we feel about the business going forward. And we feel that as long as we continue to execute our off-price model and we get great values and great bands, we should continue to perform at a very nice level regardless of what’s happening out there. And a lot of times, it benefits us when the business is choppy out there, because there’s more opportunities for us to get more product and more brands and better value. So overall, we feel very good about our first quarter results then we made some good progress on the things that held us back a little bit last year.

That’s great. Congrats, guys.

Thanks, Ike.

Thanks, Ike.

Our next question comes from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Please proceed with your question.

Thank you. Good morning.

Hi, Lorraine.

I wanted to focus on the second quarter for a minute. Are you able to take advantage of some of the great deals out there on summer goods and sell them within the quarter? And then what are the specific initiatives are in place to lap last year’s strong performance?

Well, we – we’ll talk about the second quarter obviously when we have our earnings call in August. But one thing I can say is that the May – the month of May has gotten off to a really solid start. Obviously, we still have a lot of the quarter to go. But so far it’s been a solid performance overall. What are we doing to lap it is, while we’ve been doing all along and that’s really scouring the market, being in the market every single week to buy product and get the best brands that we can on the floor, get the best values on the floor overall, and we’re reacting to the business everyday to your question about are we looking for shorts and tees and everything, yes, of course, we are. We do that every week. There will be a point in time where we won’t be looking for that, and we will, but we will be looking for shorts and tees that we can pack and hold for spring of 2017. So – but we just continuously buy every single week and we make decisions based on the types of weeks and supply we want, as to whether now we’re going to deliver to our selling floor, or we’re going to put it in pack and hold. But the key to our business in general is our agility and our ability to manage our receipts and our inventories, as you saw, we were down 9% in comp store inventory, our turns are much faster, is getting goods every buying goods every single week.

Great. Thank you.

Thank you.

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Great. Thank you. Really great to start the year. I wanted to ask about free cash flow, Marc, I may have missed it, but could you just remind me the free cash flows during the first quarter? And as we think about leverage coming down, I think that you’ve indicated you expect to reduce leverage over time through growth in EBITDA, and obviously you started to return capital to shareholders via stock buyback. If you can look out one, two, three years, Marc, do you have sort of a bridge on how you’re thinking about the pacing of the leverage ratio, how much based on your guidance for this year do you expect it to come down by the end of 2016? And then if you have a, maybe a three-year target or experience, any sort of a more medium to longer-term outlook you could give us on the leverage that would be great?

Sure. And Kimberly, this is Bob. Let me weigh in on that. So we haven’t given targets on our leverage. We ended last year at 2.7, we ended Q1 at 2.6 not by paying down debt by just growth in EBITDA. And so I think, the way we’re looking at it, we’re just going to fund the needs of the business for us with free cash flow. And then we’ll opportunistically look at debt pay down or share repurchase quarter-by-quarter, we’ll share that activity with you at the end of the quarter on the call just like we did this quarter. I think it’s reasonable to expect as we continue to grow EBITDA, you’ll see that that leverage ratio come down. But more than that we really haven’t made any long-term strategic decisions that we can share. But I think it’s safe to say, you could expect to see it continue to decline just based on the EBITDA growth.

Great. Thank you, Bob. And, Tom, my follow-up is just on Q1. The execution obviously was reflected in a very nice comp here. We’ve heard from other retailers that they experienced a great deal of volatility sort of month-by-month in the first quarter. I’m wondering if you saw that as well, or if may be your business happen to perform in a bit more of a steady manner? Thanks so much.

We had positive comps every single month within the first quarter. But candidly, our performance built over time. April was stronger than March, and March was stronger than February. So we felt – we just saw it building as we are progressing through the first quarter overall.

Yes, just to add on that Kimberly, April was our strongest month as Tom said and the first day of fiscal April was up against Easter last year. So you actually had an extra day in the month.

Thanks so much Marc.

Yes.

Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great quarter, guys.

Thanks, Matt.

So two questions. Can you talk about the trend in IMU and then how just – how to think about gross margin as the year progresses? And just larger picture how you’re thinking about competitive positioning in the back-half?

Let me take the IMU trend, and you take it.

Yes. So the big driver in our gross margin in Q1, Matt, as you called out was IMU. And really, we just attribute that to a better buying, and it was better buying across all buy type whether it was upfront, pack and hold, closeouts, in-season production. Every one of those buy types had stronger IMU just due to better buying. So we’re very excited about it. And we continue over the course of the year that the story is similar to what we said last time. We expect product sourcing cost to increase this year just based on adding to merchandising headcount and based on the units that are going to be flowing through our supply chain in more expensive lanes, i.e., put the light in fragile. And we fully expect our reported margin to offset that in net over the course of the year to have 30 to 40 basis points of expansion.

Great. And then just a follow-up, so 10% of your stores, I believe are in the smaller format, and I mean looking through the K, I think roughly 40% of your stores are up for a lease renewal the next three years or so. Can you talk to drivers of the higher productivity and more so, how this structurally ties to the longer-term SG&A and EBITDA targets?

Yes, let me talk to Matt, the issue that you talked about the leases coming due that we have in the K. I want to make sure that you’re clear on something. Most of our leases contain an initial 10-year period and then have multiple five-year options. The terms for the options are locked in with the initial lease, right? So in other words, it’s pretty negotiated contract rents. These options come up, they’re not fair market value rents. So when the initial lease period comes up, we have options. We can look at renewing terms that are favorable or under current market rates, but then we can relocate or negotiate new terms. So it really gives us tremendous flexibility. But since those rates are locked in, I think you can understand why the majority of our leases are going to be renewed. To give you a little bit more granularity on the stores, we had 117 stores up for renewal in our K that I think you alluded to 48 of those are in 2016. In out of the 48 in 2016, 44 of those stores have already been renewed. We think we’ve got roughly 15 to 20 of those stores as potential remodel candidates down the road. Only four of those stores are being closed and two of those are MJMs, one of those closure is actually going to be a relo, so just to try to give you a bit more flavor on how that works.

Got it. So next I guess my follow-up would be – so of the percent of your stores that are in the smaller format, how should we think about that smaller format as a percent of the total maybe five years from now?

I think you should assume all news stores that we open are going to be in that smaller format.

Yes, we’re really comfortable with stores in the 40,000 to 50,000 range. Last year, as I said in prepared remarks, so this year, as I said in the prepared remarks, the average is around 51,000 square feet, it will be less than 50,000 square feet in terms of the new stores that we will open in 2017. But we’re going to continue to reduce our comp store inventories over time. We’re very comfortable with having reductions of mid to high single-digits. So we’re going to be able to operate in the smaller box even as we grow our home business and our beauty business, because the inventories, our cost of inventories are going to come down in our apparel areas, just because we really feel we have – we still have more inventory than we would like, but we’re just going to reduce it over time. We’re going to reduce the inventories incrementally, but we really feel very good about operating in a smaller box versus what we had historically.

That’s great. Best of luck.

Thank you.

Our next question comes from the line of John Kernan with Cowen and Company. Please proceed with your question.

Hi, this is David Buckley on for John Kernan. Thanks for taking our question and congrats on a great quarter.

Thank you.

Thank you.

I wanted to just touch on for a minute how the purchasing environment has shifted from the beginning of this year into Q2? Are you guys still seeing great buying opportunities and have you seen an increase in the level of competition for this inventory?

Well, there is a – there is just a lot of inventory out there that we can take advantage of. As far as increase in competition for the product, I think it’s about what it always has been in general. It’s just with the softness in some of the other retail sectors. We really feel there’s going be a consistent constant flow of product that we can take advantage of. We turned on a lot of deals every day, because there are so many deals out there. So the quality, selectivity continues to improve. It’s what we experienced in terms of our pack and hold that came out of the fall season. So high supply, we can be a little bit pickier in terms of what we bring in, but there will be a steady flow.

Okay, great. Thanks. And just one follow-up, within your Home business, can you guys just talk on how many vendors you’re working with now compared to last year and how you see that growing throughout this year? Thank you.

Well, we really feel that we’re going to be growing our vendor base there, just based on the fact that we are growing the business significantly. And there’s a lot of opportunity for us to have more vendors from our West Coast office overall. But it’s going to grow over time. We’re not – we really haven’t spoken about each individual and how many manufacturers we have. But it’s going to grow. It’s definitely going to grow. It’s just going to grow in concert with how we’re planning on growing the business.

Okay, great. Thank you.

Thank you.

Our next question comes from the line of John Morris with BMO Capital Markets. Please proceed with your question.

Hi. Good morning. This is actually Brandon Cheatham on for John Morris. Impressive results considering some of the spring weather headwinds that we experienced. I was wondering if you could comment on the comp this quarter compared to what you would expect of a normal spring weather pattern, and if there was any variation by region? Thanks.

Well, we did talk about the regions in our prepared remarks overall.

Yes. The Northeast and the West outperformed and the Midwest and Southwest underperformed.

Right. So we can mitigate any kind of weather patterns and we’ve been working really hard on that overall. We talked about that in our fourth quarter call. The more we build our Home business, the more we build our Bath and Body business, the more we build our Shoe business, the more we build those business as a percent of total relative to apparel, we can mitigate the changes in the weather pattern.

And the variations by regions kind of sustained month-to-month as well?

Yes, it was pretty consistent month-to-month.

Okay. Thank you.

Thank you.

Our next question comes from the line of Pam Quintiliano with SunTrust. Please proceed with your question.

Great. Thanks so much for taking my question, guys, and congratulations on really a fabulous execution.

Thanks, Pam.

Thanks, Pam.

So just a few questions for you. As we think about home and that ramp from a 11% to get closer to that 20%, how do you see that progression happening? I’m assuming a lot more doors are – a lot more vendors are talking to you now that their senior commitment to it, and how the performance has been? And if you could just remind us how the margin profile has been in the home modification as well?

Okay. While we see the pattern of home growing incrementally, we’re not going to get to 20% overnight. And we went from 9.5% penetration to a 11% from 2014 to 2015. We see a better steady pattern of growth overall. And we’re – the vendor community is really embracing us in terms of our home business, but they’re really embracing us in total in all categories they enjoy doing business with us. But with the growth that we have in home, obviously there’s lot of people that want to get on Board and help and support us to help us grow that business, because it is such a growth business for us going forward. As far as margin goes, all our margins are within our businesses are comparable. The only business that has less margin is Baby Depot as we’ve talked about before.

That’s very helpful. And then that actually leads me to my next question, which was just an update on the men’s suiting and Baby Depot. And how we should think about the space devoted to both of those, especially in your smaller format locations?

Well, Baby Depot was improving, albeit we didn’t comp in the first quarter. We cut the negative in half from 2015. But we thought we put a lot of really good things in place to ensure that we do have growth in the future. Is it going to come in 2016? I’m not sure. But I think as we get into 2017, it will start comping overall. And we thought it would comp quicker, but it’s a very complex business and there’s a lot of product that needed to be put in place. But we’ve also changed our presentation store to help the business overall, but we’re rallying behind it as a company. We really feel it’s an important business for us and it’s a key driver even though it may turn slower and the gross margin may be less and the dollar per square foot is less. But we really feel, it brings people into our company into our stores overall. So it’s a real focus for us overall. The square footage in Baby Depot is going to be probably maintained. We’ll look to and our new stores maybe have some we’ll have fixtures that will obviously improve the dollar per square foot overall. But we’re staying really close to that business and we want to really grow that business in the future. As far as tailored men’s, it’s an important business for us also. We feel good about that business going forward and it’s the differentiator for us like Baby Depot, as it brings people into our stores, and we really feel good about to be in the destination for dress-up product in general. We have – historically have over indexed that in those businesses. So it’s an important business. We’re going to continue to grow and all apparel though will have reduced us the square footage going forward, because we’re going to continue to reduce our inventories in apparel to focus and put more inventory in those categories that I mentioned before.

Will there be an outsized reduction, I guess in the Baby Depot and the Tailored Men’s relative to the other classifications?

No, there will not be…

Okay, great.

There will be a slight decrease.

Thank you so much. Best of luck.

Thank you.

Thank you, Pam.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi, everyone.

Hi, Dana.

Hi, Dana.

Hi, Dana.

Congratulations on the terrific results.

Thank you.

Thank you.

Can you talk a little bit about the buckets of SG&A and how you’re managing the wage increases? And just also opportunity from the real estate closures that are out there, whether it’s the Sears boxes or others that you see and how those occupancy costs may differ? Thank you.

Let me start with the wages. And I think, as you know, we’ve got – baked into 2016, $7 million of increase is related to the hourly wages, and we anniversaried last year’s decision to go to $9 an hour, which impacted February through June. We’ve been incorporated all the minimum wage increases across the – I believe, it was 14 states to go into 10. And then we performed market-by-market review, really our store ops and HR team set down with market-by-market and said, where do we need to be? In some cases, they went to 10, in some cases they went beyond 10, we feel good about that decision, and we’re happy with where we are based on that. Obviously, we’re able to cover that. I think your question probably is a little bit more long-term as well. And if we think about wages, we had headwinds in 2015 and we had them in 2016 and given what – what’s happened in some state. There’s clearly going to be headwinds in 2017 through 2022. We’ll see how many other states jump in. But all we really do and now we really focused on thing is being as aggressive as we can with our profit improvement culture and constantly looking for ways, we become as efficient as we can possibly be in. Moving forward, we’ll look to offset incremental costs just as we as we did in 2015 and 2016.

As far as real estate goes, we’re opportunistic like we are when we buy product from our manufacturers. And we’re looking – we’re looking at different thing, nothing really concrete at this point that I can really talk about any kind of specific economics. But we look at everything that comes available to see whether or not the economics are right, so we can add it to our fleet.

Thank you.

Thanks, Dana.

Thank you. Due to time constraints, our final question will come from the line of Brian Tunick with Royal Bank of Canada. Please proceed with your question.

Hi, good morning. This is Dylan [ph] on for Brian. Thanks for taking our question. I guess we just wanted to ask about beauty and this fragrance category and he strategy going forward. You called it out as one of the best categories in the quarters, so it seems like the initial transition to in-house operation went well. So could you talk about a little bit more on the – how you see the category growing, maybe in terms of sales penetration over time, or the number of vendors you could possibly work with again over time?

Okay. Beauty, as we said many times is a very, very large opportunity for us in general. And we really haven’t talked about sales penetration. All I can tell you is going to become more and more important over time and really ties into our entire gift giving strategies and it’s really a good category, the candidly we were underdeveloped in that business for a long time and our merchant team has really worked hard to really build it. And we think we’re going to continue add more vendors. We’re going to add more product categories. We’re going to add even better quality products, better brands, et cetera. So we’re going to continue to grow that business and it’s going to become much more meaningful as we progress through the year of 2016 and beyond.

Great. Thanks very much.

Thank you.

Thank you.

We have reached the end of the question-and-answer session. Mr. Kingsbury, I would now like to turn the floor back over to you for closing comments.

Well, thanks again for joining us today and for your interest in Burlington Stores. We’ll speak to you again in August for our second quarter call, and have a great day and a great Memorial Day weekend. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.