Good day, ladies and gentlemen, and welcome to the Burlington Stores Incorporated Second Quarter 2019 Earnings Result Earnings 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 is being recorded. I would now like to introduce your host for today's conference, Mr. David Glick, Senior Vice President, Investor Relations and Treasurer. 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 2019 second quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; 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 5, 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 2018 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 were very pleased with our second quarter results driven by a comparable store sales gain of 3.8%. Total sales increase of 10.5% and a 10 basis point expansion in adjusted EBIT margin. These results drove a 19% increase in adjusted earnings per share, well ahead of our guidance. We achieved this growth while reducing our overall inventory levels which were up 27% at the beginning of the fiscal year to down 2% at the end of the second quarter. This significant improvement in our inventory position affords us the flexibility to be very opportunistic in what we believe is a very favorable buying environment. Turning to highlights of the second quarter. This was our 26th consecutive quarter of positive comp sales growth. Our comparable store sales growth exceeded the high end of our guidance by 180 basis points and our new stores continue to perform well versus our underwriting model. We leveraged adjusted SG&A by 30 basis points and expanded our merchandise margin by 30 basis points. Our adjusted earnings per share grew 19% and comparable store inventory was down 7% at the end of the second quarter. Our total sales increased 10.5% driven by an acceleration in comparable store sales from the first quarter trend, as well as the performance of our new and non-comp stores, which contributed $115 million in sales for the quarter. We opened seven net new stores during the second quarter, and we continue to expect to open 75 new stores this year, as well as close or relocate 25 stores for a net addition of 50 stores. We continue to feel very good about the current real estate environment as the availability of attractive locations remain very favorable. Moving to category highlights. Our top performing businesses were…

Thanks, Tom. And good morning, everyone. Thank you for joining us today. As Tom mentioned earlier in the call, we ended the second quarter by reporting our 26th consecutive quarter of positive comparable store sales. In addition, we achieved strong contribution from new and non-comp stores and expansion in adjusted EBIT margin, which combined, delivered a 19% increase in adjusted earnings per share, well ahead of our guidance. Next, I will turn to review the income statement. For the second quarter, total sales increased 10.5% and comparable store sales increased 3.8% on top of last year's 2.9% increase. New and non-comp stores contributed an incremental $115 million in sales for the second quarter. Our Q2 comparable store sales performance was driven primarily by an increase in units per transaction, with traffic and conversion up slightly. AUR was down in the quarter. The gross margin rate was 41.4% flat versus last year’s rate. Excluding the negative 30 basis point impact of freight in the second quarter, merchandise margin was up a solid 30 basis points, driven primarily by lower markdowns and lower shortage. We recognized a modest margin benefit from our shortage results as we took physical inventories in approximately 70% of our stores in June, similar to last year. We continue to expect freight to be up approximately 20 basis points for the year, which implies that the pressure from freight will begin to moderate in the third and fourth quarters, given the 30 basis point headwind we faced in the first six months of fiscal 2019. Product sourcing costs, which include the costs of processing goods through our supply chain and buying costs, were 10 basis points lower as a percent of net sales. Adjusted SG&A was 26.6%, 30 basis points lower than last year’s percentage of sales. This…

Thanks, Marc. I want to briefly address a few additional topics before we go into the Q&A portion of the call. First, as we indicated in this morning’s earnings press release, we are very pleased to have launched our first corporate social responsibility report. We recognize that our long-term success is supported by our commitment to act in socially responsible and sustainable ways. We have made meaningful progress in these areas for several years and now we are in a position to share that progress publicly with our stakeholders today. I am very proud of the progress we have made on the ESG front, including, the reductions we have made in our CO2 emissions and our energy consumption. Earning numerous workplace awards, including a Great Place to Work Awards, as well as Fortune Awards for best workplaces for women, diversity and retail. Our extensive philanthropic activities, including nearly 10 million raised in 2018 for great causes such as the Leukemia and Lymphoma Foundation, where we are among the largest corporate donors, and lastly, further strengthening our governance. We acknowledge that this is a long-term process and we are committed to continuously improve. We plan to update our stakeholders with our progress each year with an updated CSR report. Secondly, this is my last earnings call as Burlington's Chief Executive Officer. I want to thank all of our associates for their strong support over the last 10 plus years, which have been the most rewarding years of my long retailing career. I am really proud of what the Burlington team has accomplished. Together, we have assembled an incredible foundation from which the organization will continue to build. Since going public in 2013, we have, recorded positive comparable store sales in all 24 quarters, opened 188 net new stores, on track to…

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

Great. Congrats on a great quarter in a tough backdrop. And Tom, congrats on an incredible run.

Thank you.

Thanks, Matt.

I guess first, Tom, from your prepared remarks and it's supported by your recent checks, it sounds like you've made encouraging progress in improving the Ladies Apparel business in the second quarter. Can you give us some color on what drove that improvement and where you stand on the category into the back half of the year?

Yes, Matt. We did make some progress in Ladies Apparel in the second quarter. We were pleased with the improvement, as I mentioned in trend that we made across our various heritage businesses. And our Missy sportswear growth did accelerate in the second quarter. In our better sportswear and active businesses were very strong, and we believe we have adjusted our receipt plans appropriately and are well positioned for the fall season. In addition, we have significant in-season open to buy in Ladies Apparel and have added merchant headcount to increase market coverage in missy sportswear. So I do believe we are taking the right steps for this business. But let’s be clear, as I mentioned on the last call, we don’t expect to improve our Ladies Apparel penetration in 2019, particularly given the challenges we experienced in the spring season. We are likely to see the penetration of Ladies Apparel go down in 2019 given the first half performance, as well as the growth of other businesses. This is a rebuilding process, so we think ultimately it will enable us to take advantage of the opportunity in missy sportswear. We still believe Ladies Apparel overall is a long-term penetration opportunity for us. I think the second quarter clearly demonstrated that we don’t need to increase our Ladies Apparel penetration to achieve our sales objectives. We have significant sales opportunities this year and beyond in a number of under penetrated categories such as home and beauty, as well as those market share opportunities I mentioned in my prepared remarks, such as baby apparel, baby depot, toys and footwear. All these areas performed well in the second quarter as our off price model allows us to pivot quickly. So hopefully that’s some good color for you.

Absolutely. And then just a follow-up. Marc, can you walk us through the components of your 2Q earnings beat, maybe versus internal plan, drivers behind the operating margin raise to flat to up 10 basis points for the year. Just any additional color on the underlying components of the raised fiscal year guide, I think would be really helpful.

Sure, Matt. Good morning. So in terms of the beat [ph] $0.08 came from lower tax rate due to the accounting for share based compensation. So we like to back it out and really look at what was our true operating beat, and our true operating beat was $0.13. So we start with sales, the high end of our comp sales guide was the 2%, we came in at a 3.8%. So the gross margin impact on the higher sales drove about $0.08. And then it was nice after we took our June fiscal inventories, we really picked up another $0.01 from some lower shortage which was nice to see. In terms of the rest of it, we really came from lower product sourcing costs and SG&A, really made up the rest. We were really pleased to be able to get 30 basis points of leverage on that 3.8% comp. As far as our full year guidance, Matt, before, I mean, the quarter, our high end was at $7.01. We beat by $0.21, so, like we'd like to do it. So it's a full pass through, so a year now at the high end is $7.22. If you think about the sales supporting that, spring came in at 1.9% comp and we've got to fall at 2% to 3%. So that results in - within our full year comp guide, 2% at the low end, 2.5% at the high end. As far as I guess the EBIT components, so you can understand how it plays out. We're still expecting for the year, merch margin to be up 40 basis points. Freight as we mentioned on the call, a 20 basis point headwind, product sourcing, also a 10 basis point headwind, and that should result in loaded margin of up 10 basis points. A little different here on the other SG&A line, it's the low end to sales other SG&A, a 5 basis point headwind and we're now saying at the high end of that 2.5% comp we should be flat. And then really we took the other lines of the P&L depreciation and the other revenue, other income line. You put those together, it's the same as SG&A, minus 5 at the low end, flat on the high end, and then that's going to result hopefully in our EBIT flat up 10.

Congrats again. Best of luck.

Thanks, Matt.

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

Hey. Good morning, everyone, Tom, Marc, David and congrats on a great quarter. And Tom, big, well deserved, congratulations to you for the hard work and success at Burlington over the years.

Thanks, Irwin.

And also, Tom, I guess first question for you, I want to talk about the inventory, so I guess the inventory levels came in a little better than expected. Can you just maybe help me understand how you're able to drive the inventory down while you also delivered such a strong comp in the quarter?

Yes. With our comp store inventory down 7%, that was a bit better than our expectations. That helped drive our total inventory levels below last year, which obviously is a significant improvement from where we were at the end of the fourth quarter and the first quarter. Really, there was two factors that enabled us to work down our inventory levels without hurting our top line. First, recall that we said in our first quarter call that while inventory levels were higher than we would have liked, we did feel good about the categories and the content of that inventory. So the pack and hold and short stay that we released, combined with our available liquidity, drove strong comp store sales for the quarter. Secondly, we had a more consistent receipt flow in the second quarter of this year. As you may recall from our second quarter call last year, after a strong first quarter in May last year, we didn't have consistent receipt flow, which led to a tough month in June last year. This year we delivered fresh receipt each week and it really paid off for us.

Got it. And then a follow-up for Marc. Hey, Marc, can you give us some color on the freight line? I think you mentioned 30 bps headwind in the quarter and you maintain the freight headwind at 20 bps for the year. I'm just kind of curious how to think about the back half. Are you seeing any kind of moderation in freight rates, spot rates seem to be indicating? So I was just kind of curious any color you can help us on that line item?

Sure, we’re happy to. So yes, in both Q1 and Q2 of this year, we experienced 30 basis point headwinds in freight. The big driver in Q2 was something that we call a freight capitalization here, which obviously requires some explanation. So what we do is, we capitalized freight when we bring in inventory and then we release it to the P&L as we turn inventory. And as you think about how our inventory has changed from Q1 to Q2, even from the beginning of the year to Q2, our total inventories at the end of Q1 were up 14%. At the end of Q2 we were down 2%, right. Comp store inventories at the end Q1 up 5% end of Q2 down 7%. So as you think about that drastic change in inventory position that really resulted in us releasing a significant amount of that capitalized freight to our P&L. So that was really the, the big driver of the 30 basis points in Q2. In terms of fall in the back half, yeah, we - I think like a lot other folks did experience some positive developments in our contract negotiations, that’s both for intermodal and over the road. We have for the most part finalized those contracts. At this point for us, we run August through July, and we have seen some good news there. So given that we are certainly expecting freight to moderate in the back half and that’s why we still are expecting 20 basis points for the year. We could get a little opportunity if fuel prices were to hold, there could be a little opportunity on that Irwin, but at this point its still 20 basis points for the year.

Thanks, Marc. And congrats again, everybody.

Thanks.

Thank you.

Thank you. And our next question comes from Lorraine Hutchinson with Bank of America Merrill Lynch. Your line is now open.

Thanks. Good morning. I wanted to follow-up on the tariff comments that you made. You spoke about wanting to maintain a value for your customer. Do you think about this in relation to competitors pricing or do you expect to hold prices where they are on a like-for-like basis, as you navigate a lot of change going on with trade?

Well, our goal would be to offer value relative to all the people we compete with. That's been critical to our success overall. And what we’re trying to do is offset some different strategies to offset any increase in tariffs. One thing good about being off price and we have a very liquid inventory position, we are buying more close-outs in pack and hold, and we think we can – we’ll see that in our pack and hold percentages versus last year even at the end of the second quarter where we’re 29% versus 26%. We’re also working hard with our partners, with our direct import vendors to find offset in our buys. But one thing, we’re not going to be a leader in raising prices, that’s something we’re definitely not going to do. And we look at the total landscape, competitive landscape to see what the prices are, to determine what kind of values we can deliver to our customers. So we’ve already taken some steps to obviously mitigate any kind of tariff impact.

Great. And Tom, thank you.

Thank you.

Thank you. And our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.

Great. Thank you. And I’ll add my congratulations as well to a great quarter and Tom, a great career to you.

Thank you.

Tom, a couple of years ago, you identified - a few years ago, you did a great job of identifying a number of opportunities in the real estate market, and since then, you had accelerated your new store openings from what was sort of mid single digit level to 7% or just over that for the last couple of years. I am sure your team has already made great progress on the 2020 new store opening plan. Do you see an ongoing opportunity to continue your store openings at this level?

Absolutely. We’ve identified C-Points where we know we can have a Burlington Store, and we’re obviously marching down that path overall. You know, that just continues to be more and more store closures also that gives us confidence that there's going to be occasions [ph] for us overall. But I'm very, very confident that we're going to continue to open stores at the pace that we're currently opening stores. 1000 stores is definitely in our reach. Beyond that, we'll have to evaluate the opportunities. But we feel, you know, we just feel good about the availability, the good locations that are available to us and we have a really great team in place that's really helping us really perform very well relative to our underwriting models.

Terrific. And my follow-up question, Marc its for you. I know in the second quarter last year there was a great degree of volatility in the month-to-month comp, and against those opportunities you've obviously executed well here in the second quarter. I'm wondering if you can look forward or remind us in Q3 last year, did you have a great deal of variability in your month-to-month comp or were the months fairly consistent with one another? And are you running in that 2% to 3% comp guidance range that you gave for Q3 this year already in August? Thanks.

Sure. So just as a reminder, we ran a 4.4% comp in Q3 of last year. And Kimberly, I would say, no, it wasn't like Q2 where we had a real decrease in the month of June. I would tell you, we were very pleased with every month in Q3 of last year. And then as far as where we are third quarter today, we're really not going to comment on that on this call, be happy to talk about it on our third quarter call.

Thanks, Mark, and good luck.

Thank you.

Thank you.

Thank you. And our next question comes from John Kernan with Cowen. Your line is now open.

Good morning. Thanks for taking my question. Tom, congrats on an epic run since the IPO in 2013 and best of luck.

Thank you.

Just wanted to get a feel for how you thought that the environment was shaping up into the fourth quarter. It sounds like you've got improved inventory receipt relative to where they were last year. You've got a pretty good view of what the buying environment looks like. There was some variance in the fourth quarter last year in terms of the overall environment. And just wondering what you think the biggest opportunities are in a quarter that's almost 50% of your EBIT for the year? Thank you.

Well, there's always a lot of product availability. There has been the entire time that I've been in Burlington that's never been an issue. We just think for the fourth quarter, we underperformed last year, hopefully we can do better, but we're confident in our 2% to 3% guide that we've articulated. You know, we just have big opportunity in gifting. We really didn't do well in cold weather last year. And now we're setting up the fourth quarter by ensuring that we have the right level of cold weather inventory as we go into November. That's the key overall. Home performs very well in the fourth quarter as a percent of total, and obviously we have a big opportunity there. So again, we're confident in our guide of 2% to 3%, and we think we've already put in a lot of good things that are going to help us to get those numbers.

Got it. And then maybe back to the real estate topic, just a new brand standard, these stores obviously, look much improved, they are much smaller from an overall square footage footprint. Can you just give us where you think this can go as a percentage of overall store mix in the next few years? And just maybe any of the four-wall operating metrics of these stores versus the legacy stores? Thank you.

Well, we think the brand standard is - we're going to continue to improve that every year. Over the last three years we've added 300 stores, I believe to our brand standard. And they - we're marching towards - the significant majority of our stores being at the brand standard. It's really the mission what we're pursuing. I don't know, Marc, do you want to comment on...

Yeah, I think John, so we've said we'll be at the brand standard over 60% of our stores by the end of this year, and as Tom just said, overwhelming majority by the end of 2023. We haven't given in any four-wall numbers or any direct numbers as it relates to brand standard versus non-brand standard, only to say, fair to assume, our brand standard stores out comp are non brand standard stores.

Got it. Thanks, guys. Best of luck.

Thank you.

Thank you. And our next question comes from Dana Telsey with Telsey Advisory Group. Your line is now open.

Congratulations, everyone, on what a great quarter and such nice progress and Tom...

Thanks Dana.

Thanks.

Congratulations to you on such great accomplishments. Tom, as you look back...

Well, thank you.

As you look back and think about the 10 years or so that this transition and the improvement process has been going on, if you were to look across at the next 10 years, and we are sitting, all sitting here at the conference call, as we're going to do and you'll be listening, what do you think would be the biggest changes? Where do you think the operating margin could get? And what could be different than the expectations, as a channel as a customer. How do you think about it?

Well, I don't really want to look out 10 years to be honest with you. And I really don't want to obviously state anything really in the future. I mean, that's just something that we don't like to do. But I believe we're going to continue to open stores. We do have still a lot of white space. So I would obviously see a larger store count over the next 10 years for sure. We've articulated many times that we do have a gap in operating margin and we've been closing that gap every year pretty much. And so, we've already stated that. Again our stores - our stores, the size of our stores, we're comfortable with the size that we currently have, but we probably will get smaller, we'll continue to turn our inventories faster as we continue to improve our execution of the off price model and our commitment to - our commitments to mid high single digit decreases in comps from inventories for the foreseeable future. So I just think over the next 10 years, you're just going to see very, very nice improvement in terms of being a really strong off price retailer.

And then this quarter, it seemed like there was changes that accelerated, whether it's the women's side, what changed internally that drove the acceleration this quarter, was anything particular, that a change in process, people? What drove the big uptick?

Well, I think it's the inventory that we had going into the second quarter was really in the right categories. Even though the inventory levels were higher than we would have liked, they were really in the right product categories. So that helped us. We were prepared as early. As I mentioned before, we had a much better receipt flow in general last year. We had a tough June sales performance, because of the lack of flow of product that we had. But I think it's - I think most of it is that and we had the right goods at the right time and it led to a really strong performance.

Thank you. And our next question comes from John Morris with D.A. Davidson. Your line is now open.

Thank you. Good morning, everybody. Let me add my congratulations as well to - first to Tom and also on a great quarter. But Tom, it's been great and we'll miss you.

Thanks, John.

I wanted to ask two quick questions. First of all, in the prepared remarks regarding the tariffs, I think you all had said, you've got some strategies in place to offset some of the tariff costs. I am just wondering if you can give us a read qualitatively and what those might be. But also flipping it around and you did say that, you’re seeing great opportunity in terms of the disruption out there on the fall price area. I am just wondering if you're already starting to see some of the benefits, I know it's hard to measure, but, in terms of opening up new brands or new relationships, there's really kind of both sides of the equation. Thanks.

Well, as I mentioned before, we're really looking to offset some of the tariffs by increasing our levels of pack and hold and close-out to - because those are obviously some of our more productive categories as we've mentioned many times before. We're working with our partners, with our direct imports to see if there is any offsets that we can have there overall. Yeah, I think that any disruption in the marketplace produces products for the off price market as we've said. Will there be other vendors available because of that? Maybe, I don't really want to get into that kind of detail overall. But we've already seen some - we've already seen product availability increase, because some manufacturers move goods up and other people may have canceled goods, and it led to more availability. So we're seeing it now, we think we'll continue to see it and we really feel that we have the right strategies in place to offset any tariffs.

Operator, we'll take one more question. Sorry

Go ahead John.

Well, I was just, - just a quick follow-up, if I may, on the private label credit card. You mentioned some of the benefits that you're seeing in terms of adding new customers for the e-mail list. But I'm wondering now that - now that you're rolling it out, other benefits that you've seen with the pilot that you think you'll accrue that could accrue to the business? Thanks.

Well, first of all, that was a pilot. We just rolled it out. We really don't have a lot of information. The one definitive thing we've seen is an increase in our e-mail list. So that's really what we've seen so far and we'll update you on the PLC fee [ph] in every quarter.

Operator, one more question, please?

Thank you. And our final question comes from Michael Binetti with Credit Suisse. Your line is now open.

Hi. This is Casey Catton [ph] on for Michael. Thanks for squeezing us in here and let me also add my congrats on a great quarter and Tom congratulations on all the success.

Thank you.

You know, Marc, on operating margins, I think your guidance implies some pretty modest operating margin expansion in the fourth quarter, maybe closer to something like flattish compared to your third quarter guidance, implying something closer to like 30 to 50 basis points. Can you talk through some of the puts and takes for why your operating margin expansion might moderate as we go into the fourth quarter? Any big factors that we should be thinking about there?

Yes, actually, and I would tell you that it's actually correct what you said. We were at - fourth quarter for us, we're expecting especially at the gross margin line to be able to get some nice expansion, and that's a big piece of what's going to bring our merch margin in at 40 basis points for the year. And a lot of that is based on what happened in '18, in 2018 we experienced gross margin expansion in every quarter other than Q4. So in Q4, A, we think we have an opportunity. Then B, of course we think we have a sales opportunity since we were up against the 1% comp. So we actually believe that in Q4 we're going to have more expansion there and that's going to be a big driver of - as I said, getting us home to that merch margin number.

Got it. And so and that's on gross margin side, I guess any dynamics or changes we should be thinking about on SG&A going into fourth quarter?

I mean, it's not huge, those SG&A as you think about wages, I mean was $21 million wage impact for the year. Obviously, that's the heaviest in Q4 with all the folks. So that's one piece of it. But other than that nothing to call out.

Thank you, ladies and gentlemen. This concludes our question-and-answer session. I would now like to turn the call back over to Tom Kingsbury for any closing remarks.

Thanks, operator. Thanks for joining us today. I really appreciate your support over the many years that I've spent at Burlington. I hope everyone has a great holiday weekend. Thanks again. Bye.

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.