Greetings, and welcome to the Burlington Stores' Second Quarter Fiscal 2017 Earnings 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. I would now like to turn the conference over to your host, David Glick, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Operator, and good morning everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's 2017 second fiscal quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, Chief Financial Officer and Principal. Before I turn the call over to Tom, 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 7, 2017. 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 2016 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 Tom.

Thank you, David. Good morning, everyone. We are extremely pleased to report strong second quarter results, driven by a solid 3.5% comparable store sales increase, which was on top of a very strong 5.4% increase in fiscal 2016. Adjusted operating margin or EBIT expanded by 140 basis points, an outstanding result driven by increased merchandize margin, which combined with our overall strong sales increase of 8.6% drove an 85% increase in adjusted earnings per share, significantly ahead of our guidance. Turning to highlights of the second quarter; this is our 18th consecutive quarter of positive comp sales growth. Our comp sales growth was in part driven by an increase in traffic, our 10th quarterly traffic increase out of the last 12 quarters. We delivered a 110 basis point expansion in gross margin, which helped to drive a 140 basis point increase in both our adjusted EBITDA margin and operating margin. And our adjusted earnings per share grew by 85%. Another highlight of our second quarter was the performance of our new stores. While we exceeded the comp guidance by 50 basis points versus the high-end, our total sales exceeded the high-end of our guidance by 90 basis points, which was driven by the better-than-expected performance of our new and non-comp stores. The continued strong performance of our new stores is a testament to the strength of our real estate and store operations team's ability to find and open attractive new sites. Moving to category highlights; our top performing businesses were all areas of home, beauty driven by bath, cosmetics, and fragrances, missy sportswear driven by better and active, men sports were also driven by better and active, men shoes and athletic shoes and handbags. In terms of geographic performance, the Southeast, Northeast, and Midwest were the best performing territories, while…

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the second quarter by recording our 18th consecutive quarter of positive comparable store sales. In addition, we achieved strong contribution from new stores, expansion in gross margin, and strong SG&A control, which combined, delivered an 85% increase in adjusted earnings per share. Turning to a review of the income statement; for the second quarter, total sales increased 8.6% and comparable store sales increased 3.5%, on top of last year's strong 5.4% increase, which followed five straight years of strong comp growth. For the quarter, our comparable store sales performance was driven by increases in traffic and units per transaction, while conversion and average unit retail were flat versus last year. The gross margin rate of 40.7%, an increase of 110 basis points versus last year was driven primarily by lower markdowns and a higher IMU. As with prior years, we took physical inventories in June, increasing the number of stores to 342, versus 210 last year. Our inventory shortage results in June were in line with our expectations, so there'll not be any change to our original shortage accrual assumptions. As a reminder, we recorded 65 basis points of good news related to shortage in the fourth quarter of last year, as last year's result was significantly better than the prior year. This year, we are planning for our full year rate to be only slightly below last year. Given that we accrue last year's annual rate for the first three quarters, Q4 is not expected to be significantly different. Accordingly, we continue to expect a 20 basis point or $0.03 shortage headwind in Q4 of this year. Product sourcing costs, which were included in SG&A and included the cost of processing goods through our supply…

Thanks, Marc. In summary, we believe our results this quarter demonstrate the agility of our business model. We drove both sales and earnings above our expectations. We are accelerating our new store growth. We remain confident in our outlook and believe in our focus on evolving our off-price model and our ability to capitalize on the rapidly changing retail landscape. This positions us well to bring more great brands, styles and value to our customers and increased value for our shareholders. Again, I would like to thank the store supply chain and corporate teams for their contributions to our strong year-to-date results. With that, I'd like to turn the call over to the operator to begin the question and answer portion of the call. Operator?

Thank you. [Operator instructions] And our first question today comes from the line of Ike Boruchow with Wells Fargo. Please go ahead with your question.

Hi, good morning everyone, and congrats on another really strong quarter.

Thanks, Ike.

Yes, so one for Tom, one for Marc. I guess, Tom, first question, you announced that you are increasing the number of the net new stores from 30 to 37, so how should we think about the forward-looking years? I mean what does this mean to the pace of new store openings going forward in your eyes?

Well, Ike, our decision to increase the number of net new store openings in 2017 is primarily a function of the opportunity to capitalize on the availability of high quality attractive sites. And that's what is driving the pace of our openings. I want to emphasize it is not that we are chasing store count. We go at it deal-by-deal, and when the environment is as attractive as it is currently, we have the financial strength and flexibility to take advantage of the opportunities. Having said that, let me walk you through some additional factors. As I mentioned in my prepared remarks, remember, we have only 600 stores while our two largest competitors have over a 1,000 and 2,000 stores respectively in the U.S. We're a national retailer, but are far smaller than our competitors in terms of the number of stores, and our store density by market is much lower. We still have a significant amount of white space in most of the markets that we compete in. In addition as I have stated many times before, the size of our new stores continues to shrink, opening up significantly more opportunities than was available to us before. There are many more sites becoming available in the 45,000 sq ft range than there were over 60,000 sq ft. And given that we've significantly reduced our inventory levels per store, we are more comfortable operating smaller stores, and the fact is there are significant number of retail store closings that are adding to the number of attractive sites in off-mall high traffic retail hubs. Our success over the last several years has made us a more attractive tenant, so developers are seeking us out. So, we remain very confident in our ability to ultimately operate 1,000 stores. Another key point to consider is that we are more aggressively closing and relocating stores that do not fit our brand profile any longer. While we are opening 37 net new, we are closing or re-locating approximately 11 stores in 2017. And finally and most importantly, we are accelerating our store openings because of the strength and performance versus our underwriting model and plan. Year-to-date, our new and non-comp stores are 30% ahead of plan. So that maybe a long list of answers, but to summarize our store base is small versus our peers. Real estate opportunities are plentiful. We believe our new store underwriting model and attractive performance validates this decision to open new stores.

Got it and it's super helpful. Thanks, Tom. And then, Marc, just a quick follow-up, so, pretty significant EPS beat even ex the tax benefit. Maybe you can just walk us through the components of the beat in the quarter? Specifically, gross margins are up really, really nicely. Product sourcing cost leveraged against that's now two quarters in a row. Just conservatism aside, is there any reason we shouldn't expect more the same going forward on those two line items? How do you we think about that?

All right. So, I think there were three parts to your one question there, Ike. Will try and get these in order here buddy. What I'll do is I'll start with the EPS beat, Ike. And then, I'll go into more color on margin and product sourcing. So as far as the EPS beat, it's $0.22 beat as you said, $0.15 came from true EBIT improvement in our operating performance we would like to call it. Seven was the change in accounting, we had guided $0.02 and it came in at 9. So, specifically related to the $0.15 beat, this was one of those quarters where just every line of the P&L came out favorable in terms of our guidance. Sales, you know, is obviously driven off of total sales, we had guided a 7.7% increase at the high-end, came in at 8.6%. We got some strength -- they are not only in our comp stores but in our new and non-comp stores as well. So that was great to see. From a gross margin point of view, we ended the first quarter so clean. We were expecting good news in our merchandized margin rate, but the 110 basis points did exceed our guidance as well. So between sales and gross margin rate, that was worth $0.06 of the beat. The leverage in product sourcing cost as you mentioned that was worth another $0.02 of that $0.15 and from an SG&A point of view, we beat it by $0.05 and that was just related to our strong cost control across many lines of P&L. The team just continues to embrace our profit improvement culture here and almost all areas of sales, support contributed to that. The final $0.02, Ike, was spread across other income, depreciation and lower share count. So…

Got it. Thanks so much everyone and congrats.

Thanks, Ike.

Our next question is from the line Matthew Boss, JP Morgan. Please proceed with your question.

Thanks. Congrats on a great quarter, guys.

Thank you, Matt.

Thank you, Matt.

So, my first -- Tom, if you broke down the category performance, you mentioned home, beauty, Missy, men's, athletic, and handbags as continued strength. What drove the overall 300 basis points of improvement versus the first quarter? And more so, how best to think about the apparel business in the second quarter? And does this represent additional back half opportunity in your view?

Well, the areas of strength we highlighted on first quarter call continue to perform at similar trend to Q1 such as home, beauty, Missy sportswear, men's, and athletic shoes, and handbags. But, higher comp this quarter was largely driven by an improvement in the apparel businesses across men, women, and children. In addition, we continue to be very pleased with the momentum demonstrated in the second quarter in athletic shoes; the athletic shoe category across men's, women's, and kids. Given the opportunity we still have in ladies apparel, we recently added a 70mm focus on moderate tops. And the Active categories, we believe have additional opportunities for growth. So really the things we talked about in the first quarter, they were still very, very strong. And the apparel business kicked-in in the second quarter to obviously improve our trend significantly.

That's great. And then just a follow-up for, Marc, can you help us dig deeper into the comp metrics in the second quarter? So traffic remains positive. But the flat AUR I think was the best performance in almost two years. Is that sustainable? And can you just talk about drivers of the improvement?

Sure -- sure, Matt. So I think as you mentioned that our comp store sales performance was driven by an increase in traffic and units per transaction. Conversion in AUR were flat for the quarter. I'll tell you we feel absolutely great about traffic increases in 10 out of last 12 quarters. And Matt, I know you know this, but just in case if anybody new to the story just listening, our proxy for traffic is in fact traffic based on traffic counters in our stores. When we quote traffic, it's not transactions. Yes, this was the first time in many quarters AUR was flat. I wanted to make sure that we are clear that the different was when we talked about AUR being down slightly in the past, I don't want you think that it moved from like down mid singles to flat. So, it was down low singles that moved to flat. But it did in fact move that way. We think some of the things that caused that movement come from the combination of a higher better, best penetration with slightly higher full-price sales versus marked down sales in the quarter. And then, finally, Tom called out Missy and men's sportswear categories that outperformed and that was a lot driven by better and best growth being pretty significant there. So that's what helped us in Q2. As we think about AUR going forward, Matt, one thing that's worth pointing out is we don't have a strategy to move AUR from X to Y. Right? We have a lot of merchandizing strategies here to grow traffic and comps. And AUR is really a byproduct of those merchandizing strategies. So all of those merchandizing strategies, some have upward pressure on AUR and some have downward pressure on AUR. Downward pressure is going to continue to come as we disproportionately grow home and beauty. Right? Downward pressure is going to come as we continue to strive pass value on to our customers. Right? Then what's upward pressure. Increases in better and best penetration is going to have upward pressure. One of things I just mentioned [indiscernible], you know, the potential for higher full-price sales versus marked down sales will have upward pressure there. And that's how we kind of see it playing out.

Great. Best of luck.

Thank you.

Thanks, Matt.

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

Good morning everyone. Thanks for taking my question and congrats on outperforming your peers again.

Thanks, John.

So, just wanted to go back to the gross margin question for the back half of the year, can you help us understand what your assumptions are for IMU and marked downs embedded for Q3 and Q4, given you seem to have momentum on both line items right now?

Yes, obviously, we are going to continue to see gains in our reported margin less our product sourcing cost. The one thing that we would like to do is stick to the full year, John. So for the full year, we're now seeing 70 to 80 basis points of increase in EBITDA margin. Seventy of that we see coming from reported margin less product sourcing costs with the other 10 coming from -- we at the high-end of our sales, we'll pick it up in SG&A. Obviously, we expect both to continue to drive that net 70 basis points, it's the one call out since you brought up margin that we just wanted to remind everybody is related to the shortage. We were pleased with the shortage results that we got, where from here on out we only see minor improvements in our shortage rate because of how low we ended last year. So we're not going to see the big dips versus the other quarters, and when you look at Q4 versus the prior year, we had the 65 basis points of good news, that's where we see the headwind in Q4.

Okay, that's helpful. And then, follow-up question on inventory, comp store inventory reduction and churn performance has been pretty incredible and obviously a big boost to cash, I'm just wondering are you bumping up against any limits of reducing this as you invest in new categories like home and beauty?

No. We really feel confident we can continue to reduce our comp store inventories by mid to high single-digits for the foreseeable future. As we build the home business and as we build the beauty business, we are going to take inventory away from some of the apparel areas, which we feel we can turn even faster. We do have an opportunity even though we have done a really nice job increasing our turns, we just feel that that that's something we can continue to do, and as we get better at executing the off price model, our sell-throughs continue to improve, and we really feel that is something that we're going to see in the foreseeable future in terms of growth, in terms of turnover.

Thank you, best of luck.

Thanks, John.

Thanks, John.

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

Thank you, good morning.

Hello, Lorraine.

I was hoping for an update on wage pressures, what you are seeing out there for the back half on the upcoming years and what the potential offsets of any pressure might be?

Sure, Lorraine. I'll take that question. So, baked into our 2017 guidance for wage pressures about $14 million and that is split evenly between our stores and distribution centers. Just for the timing of that, that is more heavily weighted to the fall. So that $14 million was plus two in Q1-Q2, plus five in Q3-Q4. We are going to continue to look at this on a year-over-year basis like we've done for the last couple, and that is really a market-by-market review. At the end of the year, taking a look at where we are, in what markets do we need to become more competitive in race, and in what markets are we in pretty good shape. I will tell you taking that approach over the last couple of years, our non-exempt payroll continues to decline in our stores. So we feel pretty good about that. Don't have a number for '18 in terms of what it's going to be worth, certainly there's going to be something there, but we'll continue with our profit improvement culture to look for offsets.

Thank you.

The next question is from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Great, thanks. Good morning. I'll add my congratulations as well for a very fine result this quarter.

Thanks, Kimberly.

Thanks, Kimberly.

I think you talked about a 13% above-plan result from your new stores, and I'm wondering if -- have you been seeing this consistently or is this an acceleration in performance from your new stores? And then if you could talk about the drivers of this improvement, is this better or higher underwriting standards, better site selection, better inventory buying, marketing, there may be many contributing factors, I'm just wondering if you can sort of tilt back again on this for us. Thanks.

Okay. We've been pleased with our performance versus underwriting model for a few years now, and it's getting even little bit better than we had been performing previously. So yes, there is a little bit of a ramp up, and again gives us all kinds of confidence in terms of adding new stores. It's really -- we've really put a lot more analytics behind our site election process over the years. That's really helped us out a lot. The sites that we're going into are better that we can now open up 40,000 to 50,000 square foot box versus over 60,000 square foot box. That's helped us a lot in terms of also getting better sites, but I think it's really rooted in the fact that we have more analytics behind it, we've identified key points where we should have stores overall, but yes, we are very pleased in terms of how our new stores are performing.

Great, thanks.

Hi, thank you. Our next question comes from the line of Brian Tunick with Royal Bank of Canada. Please go ahead with your question.

Hi, this is Dylan on for Brian, thanks for taking our question. First, wanted to ask about your branded better or best goods, can you remind us where the penetration for those are currently in the product mix? And then, are your conversations with vendors changing at all, I know a number of key vendors have been pretty vocal about intentions to lower sales for the off-price channel, but also on the other hand, department stores, so competitors increasing private label penetration clothing stores. So, how do you see this environment playing out for your better and best good availability and your access to maybe desirable brands?

Okay. I'll take that. First of all, we don't really give our penetration of better invest, and that's just something we haven't given; all I can tell you though to give you some color on it is that it's been improving, you know, penetration continues to grow every single quarter and every single year. Our relationships with our manufacturing community has never been better; people are very interested in terms of helping us grow our business overall, and there's plenty of availability as I mentioned in our prepared remarks, we are really thrilled at all the opportunities that we have, sure, handful of manufacturers have stated that they're going to sell less of the off-price, but we deal with over 5,000 vendors. So we have a lot to choose from, and we have an opportunity even to grow the number of brands we have in our assortments currently. We're below our competitors, but we continue to add a lot of vendors akin to edit vendors, but there's plenty of product, plenty of manufacturers to choose from, and we're not inhibited by some comments by some of the manufacturers to sell less of the off-price, because there is plenty of product to choose from.

Great, thank you.

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

Hi, guys. This is actually Brandon Cheatham on for John. Let me also add my congrats on a great quarter.

Thanks, Brandon.

If I could piggyback on the real estate opportunity, you mentioned the decision was driven by the availability of quality centers, could you kind go into what your ideal center is and some of the analytics that you look at, do you look at competitors in the area, or say, department stores closing, would you want to be in, say, a strip center nearby?

Our preferred location is really in strip center. That's where we see there's more traffic. I don't know anybody how tough the mall businesses have been overall. So, to answer your first question is really -- the preferred is high quality strip centers. That's what that's where we want to have our stores overall. And our real estate decisions are basically made on let the demographic make sure the demographics are in line with who our customer is. And so that's really -- that's most of the science that we have behind it. We look for density, population density, we look for household income, we look at co-tenants who's in there, ethnicity et cetera. So, those are the things that really help us in terms of choosing the right sites.

And if I could follow-up on the availability of product, does that kind of change your approach to pack and hold, should we think about that going forward?

No, there's plenty of product available, plenty to pack and hold. Our pack and hold levels at the end of the quarter were about the same as they were in the prior year. We don't really target how much pack and hold we have. We usually let the deal speak for themselves, and that's how we determine pack and hold, but we really -- we don't want to drive the pack and hold numbers to a really high number, because we want to have opened up by flexibility to chase goods in season. So we're comfortable right now with the level of pack and hold we have and -- but there's plenty of product to put in the pack and hold, and that comes to us every single day.

Great, thank you.

Thank you.

Our next question is from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed with your questions.

Thanks. Good morning. I had two quick ones. First, just following up on the branded better invest penetration; Tom, could you talk about is there any specific category or categories where you're seeing that increase more pronounced than others? And then just secondly, for your stores that are in malls co-located with some of these large department stores that are closing, are you seeing any impact your business with a mall store or -- to the downside if traffic is falling in that mall or maybe if you're picking up market share to the upside? And then for stores that are near to in a strip center by a mall that might have a close the department store, you know, what kind of impact are you seeing on those stores? Thanks very much.

Sure. I'll take the first one and then Mark can take the second one. Better and best is really across the board in terms of where we see in the growth, as I mentioned, in prepared remarks we had a very strong performance in ladies, in men's better product, but it's really -- it's pretty pervasive and as we've talked about before, as we're locating our stores in better locations, we've been able to increase our business with customers and make over $75,000 a year. So, we're cleaning up our stores. We're getting better locations. We're adding more better and best product, and it's tracking the different customer. Marc?

Yes, sure. As far as the closing question, Lindsey, I think we've talked about before; we start really good about our ability to test the 2016 the Macy's closings and the impact that had on our stores. That we forget about and just to remind you, post-liquidation stores that were either co-located or within half-a-mile from that closing actually saw a modest drop. And that's because our thoughts are just overall traffic into those centers were down. The stores that we had that were between 0.5 and five miles away from the closing saw pickup. They actually did see a slight pickup. Net-net, when we put it all together, it was a very, very small pickup, but it was really immaterial in total. In terms of 2017 there's just so many closings throughout the channel it's really difficult to kind of parse out the impact and be able to put your finger on it. We really don't believe that the 2017 closings are acting any differently than the 2016 instead, just much more difficult to test. At the end of the day, to state the obvious, you think about the long-term, these ongoing store closings just represent that much more share that's up for grabs and we're going to remain focus on what we control running a great store experience and executing our model.

Great, thank you.

You bet.

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

Good morning and congratulations on the performance.

Hi, Dana.

As you saw the progression of the quarter, did comps at all vary or was there anything to note? And if you're thinking about the back to school season, anything that you're seeing there different than last year? And with that better and better penetration, I've been noticing the brands that you've been getting which is very impressive, do you see that ever capture going in the stores and what percent of the business could that be? Thank you.

Well, to talk about the comps, the monthly comps during the second quarter, they're all healthy, they're all healthy. They were -- we had obviously a strong quarter overall. As far as -- we are not going to talk about back to school right now, obviously we'll talk about that when we do our third quarter call. As far as better and best, we just think that's going to continue to grow. In terms of penetration overall, I don't see a ceiling in terms of that, but we're also very mindful. We're very mindful of making sure that we have the right balance between good, better, and best, because we really feel that's the best way to maximize the business when you have that right balance of inventory.

Operator, we have time for one more question.

Yes, that question is coming from the line of Bob Drbul with Guggenheim Securities. Please proceed with your question.

Hi, guys. Good morning, congratulations.

Thanks.

I was just wondering on the store -- on the comp store sales, is there a big disparity between your best performing stores and your worse performing stores? And then, I guess the second question within that is with some of the new stores that you are opening, the percentage of total sales being generated from your new formats, where does that stand today, and what's the latest thinking on when you know, like the majority of your stores will be in the newer format?

Sure, Bob. I could start with that. Certainly, I mean certainly we have stores that perform at the high-end, and we have stores that are more difficult. We don't look at it so much at that level of detail. We look at it more by region, and I think one of the things that we talked about in terms of overall performance is that 26 out of 27 of our regions had a flat or positive comp, which we feel good about. We really only had one region that was down, and that was in Texas. As far as the last part of your question, I think -- was the brand standard question, so Tom…

One of the things I mentioned is we are continuously working on our portfolio. This year we have 48 new stores and remodeling 34 stores. There is 82 stores that added to the brand standard overall, and we ended last year with 592. And we are just going to work our way through the portfolio. It's really a high priority for us. We really feel within the next five years or so, the majority of our stores will be at our brand standard overall, but it's something that's -- a mission of ours is to continue to improve our stores; the new stores and remodeling stores.

Thank you.

Thank you.

Thank you. I will now turn the floor back to Tom Kingsbury for closing remarks.

Thanks for joining us today. We look forward to speaking with you when we report third quarter results in November. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.