Good day, ladies and gentlemen, and welcome to the Burlington Stores Incorporated Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Mr. David Glick, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2018 fourth 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 March 14, 2019. 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 2017 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. In the fourth quarter, our Adjusted EPS exceeded our guidance despite sales coming in below our expectations. Our comparable store sales increased 1.3%, total sales gained 7.4% and adjusted earnings per share were up 28% versus the prior year. Our fourth quarter comparable store sales result was not up to our standards, and we will discuss that in more detail in a few moments. That said, for the fiscal 2018, the company did achieve solid financial results, and we remain highly focused on executing the strategies that have driven consistent comparable store sales and increased EBIT margin results over the past several years. Turning to highlights of the fourth quarter, this was our 24th consecutive quarter of positive comp sales growth and was achieved on top of comparable store sales increases of 5.9% and 4.6% respectively in the fourth quarters of 2017 and 2016. Once again, we achieved record low levels of Inventory aged 91 days and older and improved our comp store inventory turnover by 2.5%. Our adjusted earnings per share grew 28% in the fourth quarter, and we opened three new stores bringing our 2013 total to 68 gross and 46 net new stores, the highest number of new store openings in our history. Moving to highlights of the fiscal 2018, our comparable store sales increased 3.2% on top of last year's increase of 3.4% marking our eighth consecutive year of positive comparable store sales growth. Our adjusted EBIT margin increased 50 basis points more than offsetting higher wage and freight pressure, on top of last year's 90 basis point increase. Our adjusted earnings per share grew 46% significantly ahead of our original guidance and we made significant strides strengthening our balance sheet and returning capital to shareholders, as we repurchased 219…

Thank you, Tom and good morning everyone. Thank you for joining us today. We ended the fourth quarter by recording our 24th consecutive quarter of positive comparable store sales, and delivered a 28% increase in adjusted earnings per share. First, I will turn to review of the income statement. Due to the 53rd week in fiscal 2017 our results represented for the 13 weeks ended February 2, 2019 versus the 13 weeks into January 27, 2018. All of our results are presented on this fiscal basis with the exception of comparable store sales, which we present on a shifted basis, comparing similar calendar weeks, which are the 13 weeks ended February 2, 20 19 versus the 13 weeks ended February 3, 2018. For the fourth quarter, total sales increased 7.4% and comparable store sales increased 1.3% on top of last year's 5.9% increase. New and non-com stores contributed an incremental $173 million in sales for the fourth quarter. Our Q4 comparable store sales performance was driven by increases in units per transaction and conversion, while traffic in AUR were down slightly. While traffic was down slightly in Q4, we have increased traffic in 13 out of the last 16 quarters. The gross margin rate was 42% flat as a percentage of sales versus last year. Excluding negative 20 basis point impact of freight on the fourth quarter, gross margin was up 20 basis points. In addition, we saw physical inventories in 330, stores in January and our shortage results were in line with our expectations. Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs, were flat as a percent of net sales. Supply chain costs were 10 basis points higher as a percentage of sales versus last year, due to increased receipt…

Thanks, Marc. In summary, we believe our results this quarter and in fiscal 2018 demonstrate once again the flexibility and strengthening foundation of our business model. We drove financial results in fiscal 2018 well above our original guidance and expect the execution of our strategic initiatives and store growth plans to enable us to continue our growth. We remain laser focused on refining 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 customers and increase values -- value for our shareholders. I'd like to thank the store, supply chain and corporate teams for their contributions to our solid fiscal 2018 results. Before I turn the call over to the operator to begin the question-and-answer portion of the call, I'd like to take a moment to say a few words about Bob LaPenta, who is retiring from the Company on May 1st. Many of you have worked with Bob over the last several years in his role running Investor Relations and as our Treasurer. But not all of you may know is that Bob has dedicated most of his professional life to Burlington, having spent over 34 years at the Company in a variety of finance roles. Bob has been instrumental in helping guide the Company through our take private transaction, the financial crisis, the IPO process through several debt refinancing and ultimately help strengthen our balance sheet and dramatically improve our credit rating. Bob will leave the Company and our balance sheet in a great place and we wish Bob nothing but the best for a fantastic retirement. At this point, operator, we are ready for the question-and-answer session portion of the call. Operator?

Thank you. [Operator Instructions] Our first question comes from Matthew Boss of JPMorgan. Your line is now open.

Great, thanks. So Tom, maybe any additional color on why comp store sales came in below your guidance that you could provide. Some are like colder weather and heritage and ladies apparel were the primary culprits, but anything you could add would be helpful?

Sure, Matt. I know that you are aware of the tough compares we faced in the fourth quarter. So let's put those to the side and just focus on the other issues. As I said in my prepared remarks, our sales shortfall was not broad based as it really focused in two areas of our business. Excluding those two categories, our comps would have been above our guidance. That said, we were disappointed in the performance of our ladies apparel and cold weather businesses, and will give you some additional color on each of these businesses. Frankly, we've been talking about ladies apparel now for too many quarters. We have taken a step back and reevaluate our approach. While we've been doing, we hasn't generated the results we expect. To move the needle to increase the penetration of ladies apparel, we have to get outsized growth in missy sportswear, more than we have been getting. So we've decided to really go after the missy sportswear business much more aggressively and plan the heritage business more conservatively. We believe this process will take multiple quarters to get the results we think that we candidly were owed. Now specific to the fourth quarter. We did struggle again at ladies heritage apparel. We have one category that was clearly off trend that we just need to fix period. In addition, as I just said, we plan -- we'll plan overall heritage ladies apparel conservatively, while we address the category, classification and content issues in these businesses. As I've stated before, by having two GMMs in ladies pro, one solely focused on missy sportswear, we believe that will add to the specialization oversight necessary to capitalize on this over -- opportunity over time. Now cold weather. As we've done for several years now, we have strategically planned cold weather down again in an effort to build a more stable long-term foundation for our business. Second, we didn't have enough pack and hold as we began the season, which made it difficult to react to a strong sales trend in October and early November. We've modified our approach to next year. We increased our pack and hold cold weather by significantly, which we'll use to increase our in-store inventory levels going into fourth quarter next year. And we're going to plan cold weather less conservatively than we had over the last couple of years. Obviously, we sell lot of cold weather product in general and we just feel that we've been too conservative over the last couple of years.

Great. And then just a follow-up for Marc. So, on the 2019 guide, any additional detail on the headwinds you're facing, maybe how the incremental cost impact merch margin, product sourcing and SG&A. I think it would be helpful in understanding why the EBIT expansion this year in the outlook is less than prior years? And then maybe last, just any larger picture, any change to the SG&A leverage point would be great?

Okay. Good morning, Matt. A lot there, all important stuff. We'll start with the headwinds. Then I will move into the geography and SG&A algorithm. The headwinds, 22 basis points of incremental headwinds in 2019, it's driven by things that we've talked about before, freight, wages and stock-based compensation ,and new for this year, as we've discussed is the lease accounting standard. In terms of freight rate now, Matt, we're forecasting 22 basis point headwind in 2019. We believe spring is actually going to run higher than that and then we're going to moderate somewhat in fall and the primary driver there is really contract rates that we have in effect through spring that we're counting on being able to negotiate lower in fall. From a wage point of view, we continue to be pleased with our wage competitiveness strategy. Once again, in 2018, our market-by-market approach to wages resulted in another reduction in our non-exempt turnover rate versus the prior year. In the net other metric, we look at that open positions percent remained at a very low level. This was actually the third year in a row that we had a reduction to our non-exempt turnover. So it makes us just feel very comfortable with our market-by-market approach. I think I may have stated on the last call, the headwinds this year for wage pressure is going to be $21 million and that does reflect both the stores and the distribution center. So that's $12 million in the stores and $9 million in the DCs, and of course the DC number, Matt, as you know is in product sourcing cost. Stock-based compensation is going to be $11 million higher than last year, but the incremental piece of that is another $2 million higher than it was in 2018.…

That's great color. Best of luck guys.

Thanks, Matt.

Thank you. And our next question comes from Ike Boruchow with Wells Fargo. Your line is now open.

Hey, good morning everyone. And Bob, if you're there in the room, congrats on the retirement. I guess...

Thanks a lot.

Tom, so first question for you on the inventory. So just can you explain a little bit more of the inventory per store increases you're seeing now, and I think you said that should continue in Q1 and just why exactly that should transition back to mid-single digit declines? And then into next year, I think you said we should be back to mid-to-high single digit per store decline, just kind of understand -- trying to understand what's going on from an inventory perspective right now?

Okay, Ike. Yes, our comp-store inventory and our turnover, both up low-single digits. Those were numbers that candidly didn't meet our expectations. Basically it came down to missing our sales plan. If we did not miss our sales plan in the fourth quarter, our inventories would have been more in line with the historical numbers. As I said in the prepared remarks, on maintaining our discipline of planning comp store inventories down mid-to-high single digit is critical for us. We can and should turn our inventories faster, which should eventually result in lower markdowns going forward. Obviously, we are starting the year a little bit higher as I just stated than we would have liked. What our good days, 91 days and older are at record lows, so, not -- this won't be a real hangover as we go into the first quarter or as we've entered the first quarter. So we are also planning the first quarter sales conservatively as I mentioned. So starting higher, having a more conservative sales plan, we're going to end up at the end of the first quarter similar to how we ended the fourth quarter overall. Let me try to give you some color, because we really feel confident that the second and fourth quarters will be more in line with how we've performed previously, but the third quarter, we're going to plan -- we're going to plan it up slightly, because we want to be really well prepared in cold weather as we get into the fourth quarter. So we don't experience the decline in cold weather as we did this year. So this is -- this is going to be sort of a sawtooth in terms of comp store inventory this year, but we think it's the right thing to do to run the business and we should get good results, but after 2019, through our disciplined inventory management that we've done for a long time now, we're going to get back to mid-to-high single digits. We think it's an imperative.

Got it. Thanks, Tom. And then so to dovetail that into the inventory for Q1, Marc, appreciate the color on the quarter-to-date, and I understand your rationale there, but the implied guidance I think is for EBIT margins to be down. Just kind of curious, is there any gross margin pressure that we should expect in Q1? Is there any markdown pressure from the inventory, just how should we be thinking about the gross margin line?

Sure. Just to take a step back on the Q1 guidance and make sure everybody is clear on to the two different things that we have going on in Q1 right now that really resulted us in being more conservative in having that wider range versus our typical two to three. First again, as a number of retailers have pointing out, tax refund quantities, delays, have created a choppy sales environment. And not only the total amount of refund dollars impact our business, it's the timing, it's the type of refund, i.e., the different credits that are there and how they apply to our customer base. All of that weighs in and creates noise. Secondly, a really big deal for us. As you know, a differentiator for us is our special occasion dress up businesses, and you know how we over penetrate in youth. Easter is a really important holiday for us. In this year, having a three-week delay in timing is just adding more complexity to forecasting sales. As we think about it, as we look at daily sales, for example, we view Easter as a six-week period. So in last year at this time, we were in week two of that Easter period. This year it hasn't started yet. So when you put all that together with the tax refunds, it really just kind of results in us having less clarity to our overall business than we'd like to have and that's why we're guiding the zero to two. So in terms of your margin question, obviously that guidance implies a lower total sales base. So there is overall deleverage. It's going to come with that. As I mentioned to Matt earlier, freight is going to be higher in springs, and now with a lower sales base in Q1, I mean, I would expect freight to be probably at least a 25 basis point headwind in Q1. From a merch margin point of view, due to the inventories and where we ended last year, no, I would not expect to decrease the merch margins. We are still expecting our merch margins to be up in Q1. I don't think they're going to be up as much as that full year guide I just gave, but we do expect them to be up. We've talked about aging. Our inventories at the end of every quarter and year-end are appropriately valued. So we feel good about how we came out. In the markdowns, we think we're going to need to take in the quarter are baked into our guidance.

Got it. Thanks everyone.

Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Your line is now open.

Thanks, good morning.

Good morning.

Good morning.

You spoke in the prepared remarks about significant opportunity to increase operating margin, but either it seems like 2019 is somewhat on hold. I just wanted to ask about any potential offsets that you may have for this year and then if you could just talk about, and maybe flush out your longer-term operating margin goals? That would be very helpful.

Yes. Good morning, Lorraine. I guess, it started out with -- we feel pretty good about 420 basis points of expansion in the last six years. And I'd remind you, our guide last year was 20 to 30 and we picked up 50. So we do have a conservative start, its zero to 10 this year. We don't have a goal. We just think that we still have significant opportunity to expand our margins. And Lorraine, it's going to be the exact same game plan that we've run for the last six years that garnered the 420, right. We're still going to drive top line, top line sales and our under-penetrated categories as Tom has talked about. Tom has been through in detail, but how we're going to plan our comp store inventories which will continue to learn to -- in turnover improvements and a lower markdown rate and we're still going to maintain profit improvement as the number one goal and objective for all of our sales support teams here. So we still believe we have meaningful opportunity with our peer group, and I think our history shows we're doing a pretty good job narrowing that gap.

Operator, we're over time, but we'll take one more question.

Thank you. And our final question comes from Kimberly Greenberger of Morgan Stanley. Your line is now open. Kimberly, please check your mute button.

Thank you so much. Sorry about that and excuse the cold here. I wanted to ask about the ladies merchandising challenges, and I'm wondering, Tom, do you think there are any brand issues there? Is there an issue with inventory availability, for example, or maybe a lack of trend I'm just wondering, the color you provided earlier was very helpful. But if there's any additional insight you have that would be helpful. And the second leader in that group, how are you thinking about the ramp and the past forward for the category? Thanks.

Well, first of all, there isn't any -- there aren't any brand issues to speak of. It's more, as I mentioned, I think we've been going about it the wrong way. Yes, we really feel that we need to just distort the missy sportswear business, the better business, the active business. Businesses that are really good and we need to continue to -- we need to plan the heritage businesses much -- more conservatively, because we have -- we haven't been trending well there overall, but there were category issues. One category, which just really off the trend and that hurt us in the heritage business. And we had some classification issues where we didn't maximize some key classifications during the fourth quarter overall. So most of the things that have occurred have been really self-inflicted and strategically we weren't really going at it the way we think we need to go after it in the future. Hopefully, we can get it turned around quickly, but it's going to take awhile. I mean, it's going to take some time in order to reposition all the businesses for success. So -- and that can just -- it's not going to be immediate. This is going -- it's going to take time, but overall, we're still committed to hit the penetration levels that we should have in that business.

Great. And then just one follow-up on the store fleet. The color you gave was really helpful. I'm wondering, how many stores here at the end of 2018 were in the brand standard, and at the end of 2019, what do you expect there? And is there a store profit differential that you can share with us in terms of the newer sized fleets on the under 60,000 stores, you gave us some sales metrics. I'm just wondering if you have any profit metrics you might like to share. And before I forget, congratulations to Bob on a very, very nice career, and I will miss you.

Thank you.

Kimberly, that's going to go right to his head -- right to his head, Kimberly. It'll take us two days to get past that. All right. Fiscal 2018 meets brand standard store count 353 out of the base of 675. And our expectation with the 75 gross new stores and the 28 remodels that Tom talked about, we're looking to end 2019 around 456 on a base of 725. And we don't give operating margin stats on brand standard stores, but fair to assume, our brand standard stores out comp our chain average.

Thank you so much.

Hey, operator.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Tom Kingsbury for any further remarks.

Thanks everyone for joining us today. We look forward to speaking with you when we report our first quarter results in late May. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.