Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Stores Incorporated Third Quarter 2020 Earnings Webcast Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Glick, Senior Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2020 third quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer; and John Crimmins, Chief Financial Officer. Before I turn the call over to Michael, 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 December 1, 2020. 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 2019 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 Michael. Michael O’Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us on this morning's third quarter earnings call. We are very glad that you could be with us. We are going to structure this morning's discussion as follows: First, review our third quarter results; Second, I will talk about the outlook for Q4; Third, I will describe how we are thinking about the post-pandemic world and what actions we are taking to prepare for it. After that, I will hand the…

Thanks, Michael, and good morning, everyone. Let me start with a review of the income statement. For the third quarter, total sales decreased 6%, while comparable store sales decreased 11%. As Michael described earlier, our comparable store sales improved significantly after our inventories recovered to more appropriate levels at the end of August. We believe this improvement was driven by our improved inventory position, the delay in back-to-school purchases, and the outstanding values offered to our customers from the great merchandise buys we were able to deliver in Q3. The gross margin rate was 45.0%, an increase of 260 basis points versus last year's rate of 42.4%. This improvement was primarily driven by lower markdowns and higher markup, which were partially offset by increased freight costs. We do not expect to be able to generate the same level of year-over-year gross margin improvement in Q4 that we were able to achieve in Q3. There are two reasons for this. First, while our clearance levels are down versus last year at the end of Q3, clearance inventory entering Q3 was extraordinarily low due to our aggressive Q2 clearance strategy. That significantly reduced our clearance markdowns in August, which we don't believe is repeatable in Q4. Second, while we significantly exceeded our planned sales in Q3, sales for Q4 remained very uncertain due to the impact of the pandemic, which would affect our inventory and markdown levels, depending on how sales play out during the holiday season. Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs, were $144 million in the third quarter of 2020 versus $90 million last year, increasing 360 basis points as a percentage of sales. As we indicated on last quarter's call, we had expected significant deleverage in product sourcing…

Thank you. [Operator Instructions] Our first question comes from Matthew Boss of JP Morgan.

Great. Thanks, and congrats on the improvement. Michael, maybe any additional color that you can provide on the components of comp store sales in the quarter, traffic, basket size, average unit retail? I think, it would be very helpful if you could add any color. Michael O’Sullivan: Sure. Well, good morning, Matt. Thank you for the question. I'm going to start by reading the actual data, and then I'll provide some editorial commentary. So, let's see. Traffic for the quarter was off by more than 20%. Our average basket size in units was up by more than 20%. Our average unit retail, so the average price per unit, was down about 10%. If you combine those items, the average transaction size in dollars was higher by about 10%, low double digits. And if you mix all of those variables together, of course, you get minus 11% comp decline for the quarter. So, that's the data. Let me sort of offer up some conclusions that I would draw from this data. The first point I would make is that the decline in traffic versus last year is disappointing. It improved as we came out of August, but it was still weak in September and October. I think, there are really two factors that drove that weakness. First, most obviously, if you like, we're in a pandemic. There are shoppers who just are not going to be comfortable coming back into a bricks and mortar environment until we get through this. We have very robust safety and social distancing programs in our stores, and we've marketed these. But we realized that despite those measures, realistically, traffic is going to remain depressed until we get through the pandemic. So, that's the point number one. Point number two, I think we have to acknowledge…

That's helpful. And then, as a follow-up. On the industry supply chain, so on the August call, you talked about delivery delays from vendors and how these then impacted your in-store inventory. I'm curious where we stand today and if these delays have dissipated. Michael O’Sullivan: Sure. Yes, it's a good question. That was a big part of the story on our last call. Let me chunk out my answer a little bit. I'll start with an update on our own internal supply chain, our own distribution centers. You'll recall that in August, we explained that along with many other retailers, we'd run into significant staffing issues in our distribution centers and that those issues had really hampered our ability to get in-store inventories up to planned levels as fast as we would have liked. The simple update here is that those issues have been resolved. In Q3, we took a number of actions, including higher wage rates and on-boarding incentives. And these actions worked. We've been very happy with how our distribution centers have been able to ramp up for peak holiday production in October and November month-to-date. And right now, obviously, we're at that peak processing level. So, that's the update on our own internal supply chain. But, the broader sort of industry-wide issues has not gone away. There are chronic delays in merchandise deliveries across the retail industry. I'm sure that you've heard this elsewhere. These delays are being driven by, I would say, a number of factors, including ongoing staffing issues at vendor distribution facilities, timing issues kind of associated with the surge of orders that took place following the lockdown earlier this year. And then, I would also say import delays, specifically related to congestion at the West Coast ports. Now, we took a number of steps in the third quarter to sort of navigate our way around these issues. Remember, we've seen this movie before in Q2. So, we were aware of the risks. Our planners and buyers, I think, did a very good job juggling purchase orders and delivery dates. So, at the end of the third quarter, our in-store inventory levels were pretty much right on plan, but down 20% on a comp store basis. The last point I would make is just stepping back, and Matt, I'm sure you realize this. There is potentially a very important silver lining in the delays I've just described. In the coming weeks, these delivery delays across the industry are likely to translate into off-price supply. This could become an attractive off-price buying opportunity. And that's actually one of the reasons why we pushed some of our reserve inventory purchases to later in the fourth quarter.

And our next question comes from Ike Boruchow of Wells Fargo.

Hey. Good morning, guys. Thanks for all the information. That was super helpful. I guess a couple of questions. The first one is about if we could talk about the operating margins. I guess it sounds like there's aspects to the Burlington 2.0 that should help drive margins higher over time, but I think there's also some expense headwinds. You guys are alluding to supply chain and product sourcing cost sounded like a big one that can offset some of these gains, especially in the near term. Just how should we think about the different factors and their impacts on margins? And then, I have a follow-up after that. Michael O’Sullivan: Well, good morning, Ike. Good to hear from you. I think, I'll break down the question into two different time periods. In the short term, what are our expectations for operating margins, specifically in 2021? In a moment, I'm going to ask John to address that. But first, let me talk about the longer term, what is the operating margin opportunity for Burlington over the next several years? Internally, as we've modeled the impact of Burlington 2.0, we've identified and sort of zeroed in on three main drivers of margin improvement. And, we believe that these three drivers represent the lion's share of the margin gap versus our peers. The first is sales. Of course, the higher sales, productivity drives leverage. The steps that we're taking to drive sales are the things that we've talked about, in particular, controlling our liquidity so we can chase trends and take advantage of opportunistic buys and heavily investing in merchandising capabilities, so we can deliver even stronger value across all categories and in particular, develop under penetrated categories. That's the first lever. The second lever is gross margin. We believe that we…

Sure. Thanks, Michael, and good morning, Ike. Obviously, we still got a lot of work to do on our plan for next year. But I think we can share a little color kind of how we're thinking about it as we put it together this year. Usually, when we start to build an annual plan, we're going to set objectives based on what we want to achieve compared to the current year. But since 2020 has been such a unique unusual year, we're going to look back to 2019 as the base year for our 2021 plan. So, we'll focus on how 2021 is going to differ from 2019. Again, normally, one of the first assumptions that you'd lock in on would be comp sales growth. But we still have the pandemic going on. It seems to be getting worse before it's likely to get better. We're optimistic that there may be an end in sight. But yes, it's going to continue to impact all of retail, and that's going to make -- sales is likely going to be a little bit of a roller coaster as it's been this year. So, this means we're going to have to plan conservatively and then we're going to look to flex to the business trends that as we see them develop. Now, the good news on that is we've had some pretty good practice at doing that this year. So, that means we're going to have conservative comp assumptions. Whenever you have conservative comp assumptions, it's going to be difficult to drive operating margin expansion. And it's going to be even more difficult in 2021 because we're building a plan from a base year of 2019. So, if you think about it, we will have experienced two years of fixed expense inflation…

Got it. And then, just one quick follow-up on AUR. I think, you guys talked about lower AUR in the quarters. Can you help -- can you expand on that a little bit? It sounds like you expect this to continue into '21. Just a little bit more detail on that topic would be great.

Sure, Ike. Yes. First, let me kind of talk about what we saw in the third quarter a little bit in AUR. Yes. I think that the biggest driver of this, our mix of merchandise. Consumers are interested in different things now than they were prior to the pandemic. Our strongest merchandise category is right now things like casual, apparel, active, athletic, basics, essentials, palm merchandise, all the ones that you think of when people are not back to their normal lives. On average, these have a lower AUR than the merchandise categories that haven't been as strong. So, we kind of traded off sales in these lower AUR categories, and we're not -- we're seeing not as strong sales in things like career where structured apparel, tailored clothing, the more dressy categories. And in general, more dressy tends to means higher price; and in general, less dressy tends to mean lower price. So that's one of the drivers. The second driver would be our pricing. We've been working across all our merchandise categories to have sharper, more competitive pricing. As Michael has been talking about, we believe that in off-price, the most effective way to drive sales is to offer the best possible merchandise value. That's what the customer really cares about. The last couple of quarters, that's what our merchants have been focused on, offering great value, and it's been working. As Michael mentioned, the number of units per basket rose by more than 20% in the quarter, and we think that's directly related to the better values that we've offered. Looking ahead now, we think the merchandise mix might at some point shift back in the other direction when the pandemic's over. You'd certainly expect trends to go back to some degree of normal, maybe a different new normal. But, at some point, people will have a desire to dress up a little more again. If that does happen, then we'd expect that mix impact in our AUR. It may come back the other way. But, if it does happen, there's a good chance that that potentially good news would be offset by the downward pressure on AUR as we continue to execute the Burlington 2.0 strategy, looking to drive sales by offering that great merchandise value at great prices. So, that would likely mean our AUR would stay below historical levels, netting the two together as we look forward.

Thank you. And our next question comes from John Kernan of Cowen.

Good morning. I hope everyone's ready for Thanksgiving and the holiday season. I have a question for Michael and then one for John, if I can. So, just first, Michael, what's your assessment of merchandise availability? I think, everyone's interested in what you're seeing right now, but also on the longer term outlook, some of the publicly -- public vendors have talked about taking a more conservative approach going forward as it relates to inventory going into the off-price channel. Are you concerned that this is constraining to your growth overall? Michael O’Sullivan: Good morning, John. Good question. John, you've followed off-price retail for a long time. So, I think, you'll know that availability has always been the age-old question in off-price, certainly if you go back -- if you would go back 30 years and the concern has always been that off-price retailers will run out of supply. Clearly, that has not happened. Off-price has achieved huge growth over that period. Let me talk about the reasons why. But before I do -- let me address the short-term availability first, and then I'll talk about longer term. Short-term availability, I would say that the quick answer is that in the short term, overall, the availability of off-price merchandise has been and continues to be very strong. We're pleased with the opportunities that we're seeing. We're happy with the assortments and the values in our stores. Now, that's not to say that there aren't some gaps, some brands, some categories where we'd like more supply, there always are. That's the nature of off-price. It's always -- the off-price supply is always a little lumpy. But overall, I would characterize availability now -- right now as very good. But, I think, the more important part of your question was the longer…

All right. Thanks, Michael. Second question is for John, just on the 25,000-square-foot prototype. It seems like a big opportunity. Interested in hearing more about the thinking and the financial planning that led to the smaller format. And then, in particular, any early information or expectations around productivity, profitability and then, the potential store numbers over time?

Well, sure, John. Thanks for your question. Good question. John, you've been following us since the beginning. So, I don't think I have to tell you that we've got a pretty good history of continually reducing the amount of inventory we've had in our stores. It's been going on for many years now. And as we've been doing that, we've been able to reduce our store size each year for the last however back -- however far back you want to go. To the point, at this year, our average store size is just under 40,000 square feet. So, this has really been kind of a learning opportunity for us. We've been continually reducing the box size, operating with leaner inventories and learned quite a bit on the operating side. And then, now, we've got our Burlington 2.0 off-price full potential strategy, where one of the main principles is to run with even leaner inventories. So, this leaner inventory is -- and the confidence that we have in that is, I guess, you'd call it an enabler really of how much farther we think we can take our smaller box size. We've been really pleased with the initial progress we've seen as we started to work on these initiatives. So, this stuff altogether just gives us added confidence in our ability to do this and a little bit of a clearer path to further in-store inventory reductions. So altogether, kind of higher confidence and better visibility to how we can get to this 25,000 square-foot prototype. So, while this stuff has been going on, particularly in the past year, our real estate team, our store design, inventory planning and store operations teams have been working on actual prototype for the 25,000 square-foot store. And we feel really good about the detailed merchandising and operational plans that they've been developing. So, we're really excited about the potential that we see for the smaller stores. In terms of the actual store-level economics and our opening plans, I'm going to wait until our next call in March to get more specific on that. But, we do believe the smaller prototype offers potential for higher sales productivity and better expense efficiency. And we think that over time, it's likely to become a central element of both our new store and our existing store relocation plans as we kind of sort through our portfolio.

Our next question comes from Lorraine Hutchinson of Bank of America.

Thank you. Good morning. So, Michael, you spoke about traffic declines in the quarter. How concerned are you that shopper behavior may have changed during the pandemic? Do you think some of the business that has moved to online won't come back to bricks-and-mortar? Michael O’Sullivan: Hi, Lorraine. Yes, I think, it's a very good, very important question. There's no doubt we could all see that e-commerce has grown significantly because of the pandemic. And my guess is that some of the share gain will be permanent. I think, some of this share shift would likely have happened anyway over the next few years, but the pandemic accelerated it. And I don't think -- as I said in my remarks, I do not think that as we get through the pandemic, shopping patterns will just go back completely to the way that they were. No, I actually think that that share shift though, that share gain by e-commerce is going to have the effect of critically undermining full-price bricks-and-mortar retailers, especially mall-based retailers. It seems likely that that will drive a wave of rationalization and store closures in the retail industry. I think, we're just really seeing the start of that. The most important question for us is where do these customers go when a physical department store or a specialty retailer store closes? Now, for sure, some of that business will go online permanently, as I said in my prepared remarks. That seems especially likely for more affluent, time-starved shoppers, if you like. But, our hypothesis is that many of the more value-oriented shoppers will find their way to off-price. If we can offer them great assortments at great values, then I actually think we can grow and take market share once we get through the pandemic. Now, the underlying premise of what I've just said is that we can satisfy these value-oriented shoppers more effectively and more competitively than e-commerce. And actually, I've had this conversation with many of the investors on this call. We operate an $11, $12 average unit retail business with a very broad fashion assortment. It is economically and strategically very difficult for an e-commerce business to compete with us at these price points in the categories where we compete. The other point that I would make is that this isn't just a conceptual argument. It's actually what has been happening for several years now. E-commerce has been growing for some time. And the full-price bricks-and-mortar department store and specialty store channels have been shrinking for some time. Meanwhile, off-price retail has been growing and taking share. We at Burlington, for example, have been growing our top line in the high single digits each year for the last several years. So, bringing it all back together, we believe that in the aftermath of the pandemic, we could see an acceleration of the trends that I've just described and not a reversal of them.

Thanks. And then, for John, I appreciated the breakdown of product sourcing cost that you gave in the comments. I was just curious, what proportion of these costs do you think might be permanent?

Yes. Okay, Lorraine. Thanks for the question. So, it's complicated. So, I'll kind of go through some of the stuff I said on the call and then maybe put it in kind of a go-forward context as well. So, let me just start reminding what's in product sourcing cost. For us, that includes all the cost of our supply chain and all the cost of our merchandising operations. And as I said in the -- in our prepared remarks that overall, the product sourcing costs all together delevered by 360 basis points during the third quarter. So, supply chain drove 280 bps of that deleverage. About 100 basis points or $16 million of that we consider to be temporary COVID-related costs. And in this bucket, we'd include the temporary recruiting costs and wage incentives that we had to use to get our DCs properly staffed quickly to get our store inventories back to appropriate levels, along with some costs related to the safety protocols that we've put in place to protect our DC associates. About 70 basis points of the supply chain piece of the deleverage were related to the wage increases that we've had to do, actually since the third quarter. We had some wage increases that we had planned for this year and actually put in place earlier in 2020. But then, we had some incremental costs. It was in response to changes in the DC labor market during the pandemic as the market became so much more competitive. So, the adjustments we've made, we think have been successful in getting our DCs properly staffed. And we believe our DC labor rates are now properly positioned. But, of course, this piece, it's a permanent wage increase. So, that is going to be part of our expense structure as…

Thank you. And our last question comes from Kimberly Greenberger of Morgan Stanley.

Great. Thank you. And thank you so much for all the detail today. It's been extremely helpful. Michael, I wanted to just reflect back on the Burlington 2.0 strategy that you laid out roundly a year ago and particularly focused on the inventory journey, because this year has obviously brought an unprecedented opportunity, let's say, to maybe accelerate what you had thought might be a three or four, or I'm not sure, maybe even a five-year journey toward ever more efficient levels of inventory in store with faster turns. COVID perhaps accelerated the journey. And I'm wondering if you can reflect on that and if you can share with us the way you're thinking about the impact of 2020 on that inventory journey. And do you think in some ways that it's accelerated your learnings; your insight and it will allow you to get to those leaner in-store inventories with faster turns maybe a year or two in advance of those original targets? Thank so much. Michael O’Sullivan: Good morning, Kimberly, nice to hear from you. You're right. Actually, I joined Burlington just over a year ago. So, I just celebrated my one-year anniversary. And maybe I should start out by saying it's been a heck of a year. But it's -- joking aside, let me sort of address the progress that we've made over the past 12 months versus what my expectations might have been back then. The first thing I'd say is that I'm very pleased. The thing I'm most pleased about is that we have -- at Burlington, I feel like we have a very clear direction. We have a what I'm going to call a transformational strategy. It's a strategy that's well understood and has a huge amount of support and traction within the Company. So,…

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Michael O'Sullivan for any closing remarks. Michael O’Sullivan: Thank you, everyone, for joining us on the call today. We appreciate your questions. We look forward to talking to you again in early March to discuss our fourth quarter results. Meanwhile, I know that it's going to feel different and maybe a little subdued this year, but I would like to wish you and your families a very happy Thanksgiving. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.