Burlington Stores, Inc. (BURL) Q1 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Stores Fiscal First Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, David Glick, Senior Vice President of Investor Relations and Treasurer.

Thank you, operator and good morning everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2022 first 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 June 2, 2022. 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 2021 and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now, here is Michael. Michael O’Sullivan: Thank you, David. Good morning, everyone and thank you for joining us. I would like to cover three topics this morning. Firstly, I will review our first quarter results. Secondly, I will discuss our outlook for Q2 and for the balance of the year. Thirdly, I will offer a few comments on the external real environment. And I will explain that while this environment may create near-term headwinds for us, we believe that it could drive longer term strategic benefits for our business. After that, I will hand the call over to John to walk through the financial details. Then we will be happy to respond to your questions. Okay. Let’s talk about our results. Comparable store sales for the first quarter decreased 18%. In Q1 of last year, we achieved 20% comp store sales growth. We had estimated at the time that the federal stimulus checks have driven 10 to 15 points of this growth. As we developed our plan for Q1, we knew we were up against this headwind. So we planned the quarter at a mid-teens comp decline. We viewed this as a baseline that we would be able to beat. In fact, we missed this plan. As I will explain, this was largely self-inflicted. The root cause of this sales miss was that in-store inventory levels were too low and unbalanced in February and March. We had deliberately planned inventories down in Q1, but this backfired on us as we faced late deliveries and receipt churn early in the quarter. Let me explain what we were trying to do. In the past 12 to 18 months, we have reduced inventory levels significantly, providing greater flexibility and driving faster terms, more freshness and lower markdowns. We believe that we still have room to turn faster. So we reduced inventory levels further in Q1. We are also mindful of the fact that during the quarter we will be lapping the federal stimulus checks. So we felt that these lower inventory levels would provide additional flexibility. As I say, this completely backfired. In February, we experienced significant receipt delays. These created big gaps in our assortment, especially in our fastest trending businesses. And these assortment gaps critically impacted our sales trend. In March, we moved quickly to take up receipt and inventory levels. By early April, our in-store inventories were back up and in line with last year. Since then, our comp trend has improved. During this call, when describing our comp trend, I am going to use a 3-year geometric comp stack. This is just like a simple 3-year comp stack, but it accounts for the compounding effect of growth from year-to-year. Given our very large comp numbers last year, we believe that this geometric stack provides a more meaningful indicator of our multiyear trend. This metric is described in more detail in today’s press release. In February, our 3-year geometric stack was minus 6%. In March, it was minus 2%. And in April, it was plus 5%. For Q1 as a whole, our 3-year geometric stack was minus 1%. Again, we are very unhappy with this result and we recognized that it was largely self-inflicted. Our trend in April suggests that if our inventories have been appropriate, since the start of the quarter and our comp performance could have been 6 points higher in Q1. One other point on this inventory issue and then I will move on. We have raised our inventory plans for the rest of the year so that in-store inventories will be in line to slightly higher than last year. We still believe that we have room to increase terms, but we will not go after this opportunity until global shipping issues and delays normalize. To be clear, inventory levels for the rest of this year are now planned to be in line to slightly above 2021, but this means they will still be well below historic levels. I am going to move on now to talk about Q2 and the outlook for the rest of the year. As I mentioned a moment ago, our 3-year geometric stack in April was plus 5%. Our May month-to-date trend has been consistent with April. That said, we think it is prudent to plan Q2 more cautiously than this trailing 2 months trend. So, we are planning Q2 based on a 3-year geometric stack in the low single-digits. This implies a 1-year comp decline of minus 15% to minus 13%. This range compares with 19% comp growth in Q2 of 2021. There are two reasons why we are being cautious in planning Q2. Firstly, we are concerned about the economic environment and especially about the impact of inflation on retail spending. Lower income customers are under significant economic stress and it is not clear that this will change in the next few months. The second reason for caution is that it seems to us as if many retailers are overinventoried and overbought. We think that this could lead to a very promotional environment later in the quarter. This kind of environment tends to hurt our business. Let me move on to our guidance for the full year. Our updated guidance for the full year is based on a 3-year geometric stack of 5% to 8%. This implies a 1-year comp decline of minus 9% to minus 6%. This is up against a full year comp growth in 2021 of 15%. Our updated full year guidance does assume an uptick in the trend as we get into form. While we remain concerned about the external environment, there are a couple of factors that we think could provide a tailwind for us in the back half of the year. Firstly, there has been a sea change in the availability of off-price merchandise. We do not know if this has been driven by overproduction by vendors, a decline in the sales trend at other retailers, a sudden catch-up of supply or all of the above. But whatever the reasons, the buying environment now is better than it has been for years. Our buyers are seeing great deals. We have taken this opportunity to build our reserve inventory. At the end of Q1, our reserve was double the level of last year. If this buying environment persists, then we would expect our assortment to be more compelling with even stronger values. We know that in an environment where the customer really needs a deal, a more compelling, value-driven assortment can drive an improved sales trend. We expect that the buys we are making now could begin to have an impact in late summer. The second factor that could cause our sales trend to be higher is if shoppers begin to trade down looking for value. Clearly, there is a lot of focus and concern about the lower income customer right now. Based on recent results, it feels like the retail industry is bifurcated. Those retailers that serve lower income customers are experiencing a weaker sales trend, while retailers serving higher income shoppers are seeing stronger sales growth. But we think it’s unlikely that the impact of inflation and the possible broader economic slowdown this year will be confined only to lower income shopper. We anticipate the high inflation, higher interest rates, falling stock market and a possible economic slowdown will at some point affect other income groups as well. If this happens, then we would expect to see a trade-down customer in our stores and this could drive stronger sales trend for our business in the back half of 2022. Let me recap. Our guidance for Q2 is based on a 3-year geometric stack in the low single-digits. And our updated guidance for the full year is based on a 3-year geometric stack of 5% to 8%. This guidance feels appropriate given the risks and uncertainties. As a reminder, our inventory levels are in line with last year and we have a very strong reserve position. So, if the trend turns out to be stronger, then we should be well-positioned to chase it. In a moment, John will provide more financial details on our Q2 and rest of year guidance. But before we go there, I would like to provide some high level commentary on what we think might happen in the retail industry through the rest of this year. As I described a moment ago, we believe that the economic environment is likely to worsen this year and that this could further undermine the trend across the retail industry. We anticipate that if this happens, it is likely to create headaches and challenges for us in the short-term, but we believe that this slowdown could provide longer term benefits for our business. Many investors will remember that last summer we began to callout that 2022 could be a very difficult and turbulent year across the retail industry. At the time, we characterized the strong trend across retail as something above sugar high, driven by a combination of government support programs and pent-up demand as the consumer emerge from the pandemic. This sugar high drove higher sales and for some retailers higher margins than they would otherwise have been able to achieve. This sales trend was always going to be difficult to anniversary. What we did not anticipate last summer was that there would be other factors that would further undermine retail spending, specifically, the impact of inflation on lower income shoppers and potentially fallout from a broader economic slowdown. The important point to make is the difficult and turbulent times in retail are almost always in the long run, good for off-price. Historically, this has been the cycle. Make no mistake, a slowdown in retail spending makes life difficult for us in the short-term. We are certainly feeling that. But as an off-price retailer, we can adapt to the new trend. We can benefit from the loosening of supply. And in the coming quarters, we may be able to drive our sales trend by appealing to the trade-down customer. In addition, we believe that difficult and turbulent times in retail sooner or later will drive further rationalization of full-price bricks-and-mortar stores. We do not know if or when this might happen, but if it does, then it could represent a very important strategic tailwind to the off-price retail channel. Now, I would like to turn the call over to John who will share more details on our first quarter financial performance as well as our outlook for fiscal 2022. John?

Thanks, Michael and good morning, everyone. I will start with some additional financial details on Q1. Total sales in the quarter were down 12%, while comp sales were down 18%. Our 3-year geometric comp stack was minus 1%. The gross margin rate was 41.0%, a decrease of 230 basis points versus 2021’s first quarter rate of 43.3%. This was driven by a 150 basis point increase in freight expense combined with an 80 basis point decrease in merchandise margin. Product sourcing costs were $157 million versus $141 million in the first quarter of 2021, increasing 180 basis points as a percentage of sales. Higher supply chain costs represented about two-thirds of the deleverage. The drivers of these higher costs were driven primarily by higher supply chain wages. Adjusted SG&A was $513 million versus $518 million in 2021, increasing 300 basis points as a percentage of sales. Adjusted EBIT margin was 3.1%, 780 basis points lower than the first quarter of 2021. Our plan for Q1 had been for a 750 basis points decline. The shortfall relative to our plan was driven by lower-than-expected comp store sales. Put into the context of our Q1 2019 EBIT margin, the first quarter EBIT margin declined by 410 basis points versus that time period, driven by 530 basis points of combined freight and supply chain deleverage. The merchandise margins for the first quarter were still 260 basis points higher than the first quarter of 2019 reflecting the progress we have made in terms of inventory reduction and faster inventory turns. All of this resulted in diluted earnings per share of $0.24 versus $2.51 in the first quarter of 2021. Adjusted diluted earnings per share were $0.54 versus $2.59 in the first quarter of 2021. At the end of the quarter, our in-store inventories increased by approximately 2% on a comp store basis, reflecting the aggressive actions taken by our merchandising team to rebuild our comp store inventories. Our merchant team was able to take advantage of a great off-price buying environment to build our reserve inventory. At the end of Q1, reserve represented 50% of our inventory versus 35% last year. In dollar terms, this is almost double last year’s levels. We are very pleased with the great values that we have put away in reserve. During the quarter, we opened 26 net new stores bringing our store count at the end of the first quarter to 866 stores. This included 33 new store openings and seven relocations or closures. Now I will turn to our outlook for the full fiscal year 2022 and for the second quarter. As Michael mentioned in his comments, the macro conditions affecting all of retail make it very difficult to plan and forecast sales. Because of these conditions, the range in the outlook we’re sharing today is wider than it would be under different circumstances. We are updating our full year comp sales outlook to a decline of minus 9% to minus 6%, which, as Michael explained, is based on a 3-year geometric stack of plus 5% to plus 8%. Based on this updated comp outlook, we now expect our EBIT margin to decline by 200 basis points on the low end of this comp range and by 130 basis points at the high end. This sales and margin outlook translates to EPS of about $6 at the low end of this range and about $7 at the high end. In Q2, we expect a comp decline of minus 15% to minus 13% compared to last year’s Q2 comp of 19%. As Michael mentioned earlier, this is based on a low single-digit 3-year geometric stack. This would result in operating margin de-leverage of 670 basis points to 610 basis points versus Q2 of 2021. This margin de-leverage versus Q2 2021 is driven by higher freight expenses and supply chain expenses as well as SG&A de-leverage on the comp store sales decline. This translates to EPS guidance for Q2 of $0.18 to $0.31. For the back half of fiscal ‘22, this outlook anticipates comp store sales of minus 2% to plus 3%, with an expectation that Q4 comp sales will be stronger than Q3. I will now turn the call back to Michael. Michael O’Sullivan: Before we move on to questions, let me summarize some of the key points that we have covered this morning. Coming into Q1, we anticipated a difficult sales trend as we lapped the impact of the stimulus payments from last year. We planned accordingly, but we missed this plan because our inventory levels were low and unbalanced early in the quarter. This issue was largely self-inflicted. Once we got our inventories in shape in early April, our trend improved significantly. That said, our sales trend remains weak, and we’re concerned about economic headwinds. We are planning Q2 based on a 3-year geometric stack in the low single digits. And we have updated the full year based on a 3-year geometric stack of 5% to 8%. We anticipate that 2020 could be a disruptive and turbulent year across retail. If this happens, then it would create challenges for us in the short-term. But our assessment is that in the past, disruptive and turbulent times in retail have almost always in the long run, being good for the off-price channel. At this point, I would like to turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.

Great, thanks. So Michael, maybe to start larger picture, clearly, the environment has completely changed versus a year ago. What do you think this means for the Burlington 2.0 strategy and also for the longer-term opportunities in your business? Michael O’Sullivan: Good morning, Matt, thanks for the question. I think that my answer is going to sound a little counterintuitive, and I recognize given our disappointing Q1 results, I need to offer this answer with a huge dose of humility. But we think that the external conditions that we’re seeing now and that we’re likely to see in the upcoming quarters could present a major opportunity for our business. Now last year, there were several investors who asked me to describe what would an ideal environment look like for our business in 2022. And you should file this on the – be careful what you wish for because my response was that the best scenario for us would be, number one, a dramatic slowdown in the sales trend across retail, leading to significant expansion of off-price supply with really great buying opportunities, and also leading to downward pressure on expenses, especially in freight rates. And then secondly, a much sharper consumer focus on merchandise value. Look, we’re not completely in this scenario yet, but there are signs that, that could be where we’re headed. I think you can see aspects of this scenario and what’s going on right now. And if the full economy starts to slow down in the coming months, then this could lead, we think, to a further weakening in the sales trend across retail a further increase in supply, downward pressure on expenses and a heightened focus on value. Now last year, at the time I was describing that scenario, I can see it that those conditions would also make life difficult for us for a period of time. But we’re not immune to an economic difficulties. But we know that we can adapt, and we know we can take advantage of these circumstances in a way that other retail models cannot. Everything we’ve been doing on Burlington 2.0 is aimed at improving our ability to offer great value to our customers and making us more flexible, so we can react to changes in trend or supply. So again, again, I say this with some humility given our Q1 results, but we believe that the current conditions in the upcoming quarters could present a big opportunity for us.

Okay. That’s great color. And then just a follow-up on inventory supply, as it sounds like this is another situation that has also drastically changed, could you just elaborate on the buying environment today? What categories and types of merchandise are you seeing what do you think is driving this increase in supply? And do you think it will last? Michael O’Sullivan: Yes. So it’s a good question. As I said in the prepared remarks, there has been a complete sea change in terms of merchandise availability. We’re seeing availability now in categories where supply has really been on trend for a long time. And we’re seeing brands that we haven’t seen for a couple of years. As this increase in supply has been pretty broad-based, seasonal basics, apparel, home accessories we’ve been able to make some great deals. Now when you buy a large amount of merchandise in a short period, it can’t all flow to stores at once. So, many of those deals have gone into reserve. And we will release those over the next few months. On the part of your question about what’s driven the increase in supply, I suspect it’s a number of things. I think that many retailers and vendors overordered and overproduced versus what they are now seeing in their sales trends. Also, I think that retailers and vendors probably built in a cushion to their orders to account for shipping delays and those shipping delays have now eased, so they have too much merchandise. And finally, the mix of merchandise that the consumer is buying has really shifted. And I think that’s taken some vendors by surprise. So there are some categories where there is now what I would call a glut of supply. I think the final part of your question was, will it last? And we don’t know. If the economy weakens, then we could see even more merchandise sustainability. The other complicating factor though is the COVID situation in China. It’s hard to know what impact the recent shutdowns there could have. But they could create shortages later in the year. That’s possible. But on the other hand, if vendors overcompensate then they could add to merchandise availability, we will have to see.

It’s great color. Best of luck. Michael O’Sullivan: Thanks, Matt.

Our next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning. Michael, I’m curious how you’re thinking about AURs within your own business. I think compared with some of the other retailers, you’ve been a little bit more cautious on taking up your retail, I guess, in light of the much weaker sales trends that you’re seeing right now, how are you thinking about AURs for yourself and for your peers? Michael O’Sullivan: Yes. Good morning, Ike, thanks for the question. As you say, we’ve been quite wary about taking up at retail prices. Our view has been that well, our view with the retail prices rose across the industry last year, mainly because consumer demand exceeded supply. And our concern was always what happens when that reverses. And that’s kind of what’s happening now, the supply of merchandise in most of the categories we compete in has now outgrown demand. So sooner or later, we would expect that, that will pressure retail prices. And in the earlier comments, we made the point that at the end of Q2, so the end of the spring season, we think that the retail environment could get a lot more promotional as retailers try and clear their spring merchandise. But with that said, we also recognized that the underlying costs of products are now permanently higher, some of those higher freights and supply chain costs aren’t going away. And for us that means that retail has even promoted prices – even promoted retail prices, are unlikely to ever go back to their 2019 levels. So we think that means that there is now a permanently higher price umbrella. And that’s why we see some potential to hedge up our own prices even in this environment. Now we’ve developed – I think on the last call, we explained that we’ve developed a plan to raise retails really in the back half of 2022. And that plan is very carefully focused on businesses where we believe we have – where we have that opportunity. But we recognize in this environment, there are risks. So we’re going to be careful, and we’re going to make adjustments to the plan as we go along. There is one other point that I think is worth making at, I think we should – it’s probably a good idea to change the vocabulary on this topic. Our primary motivation here is not to take up retail prices. Our primary motivation that Burlington is to take up merchant margins, if we can increase merchant margins, then that will offset higher freight and supply chain expenses, raising retail prices is just one way, the most obvious way, to drive up merchant margin. But there are two other important levers that our merchants are focused on right now. Firstly, as off-price supply – off-price merchandise supply has opened up, we started to see better deals. In other words, we’re paying less for goods. In some situations, we will plan to pass on some of that value to consumers. But in other situations, we may use it to capture margin. Secondly, we’re making changes to the merchandise mix, largely based on what the customer is telling us. The customer is shifting in terms of the type of merchandise that they are interested in buying. And many of those changes will also naturally drive a higher margin. So let me wrap up. Yes, we believe there is an opportunity – we still believe there is an opportunity to raise retails, but we’re going to be careful, and we’re going to make sure whatever we do, we still offer a really differentiated value versus other retailers. And at the same time we’re going to aggressively go after other opportunities to drive up higher merchant margin.

Got it. That’s super helpful. And then maybe just one follow-up for John, just looking at the model, can you, John, maybe walk us through the assumptions that are embedded in the updated full year guidance that you’ve given, I think you originally had assumed that freight and supply chain expenses could moderate in the back half of the year. Is that still the assumption we should use? And any other assumptions that you can call out would be great?

Well, first of all good morning, Ike. Thanks for the question. So I’ll try and explain how we’re thinking about the full year guide. So first, obviously, we’re taking a little more cautious approach we’ve certainly seen a slowdown in discretionary spending with some of our core customers. So let me explain our comp store sales plan. I think it’s pretty simple. Our trend over the last 2 months has averaged a mid-single-digit 3-year geo comp. And as Michael was describing earlier, we think the sea change in product availability, the potential for trade down, some of the executions issues that we had in Q1 that are behind us and lapping some of the execution issues we had in the second half last year creates a little bit of a tailwind for us going into the second half of the year. And that gives us reason to expect an uptick compared to our first half. Our full year guide of minus 9% to minus 6% comp is based on a 3-year Geo stack of 5% to 8%. Now also remember we have easier comp sales and margin compares in the second half of the year, this coupled with the dramatically improved buying environment and the potential for some pricing adjustments that we’ve worked in. should help us show a strong comp improvement on a 1-year basis during the year and operating margin improvement, especially in the fourth quarter. On the cost side, as you know, our biggest drivers is de-leverage and freight and supply chain been talking about that for a while. And we’ve been talking about a couple of different scenarios that could develop in the second half of the year. The first was that supply chain and freight costs would begin to moderate in the second half as the supply-demand imbalance kind of worked its way back to a more natural or normal balance. We haven’t really seen any dramatic improvement in that direction yet. We still expect it will happen over time, but we’re not assuming much improvement in the second half of the year. Our second scenario assuming that freight supply chain costs didn’t begin to improve that this would be part of a broader inflationary environment. And obviously, that’s happened probably faster and more dramatically than most people were expecting a few months ago. We’ve previously said that in an inflationary environment, we’d be confident in our ability to raise prices while maintaining our value proposition. We still thing this is true but we are dealing this very carefully. We are aware of the degree to which today’s inflation has affected the buying power, especially for our lower income customers. But as Michael just said, there is another way that we’re able to offset cost headwinds that doesn’t rely on taking up retail prices that does raise much margins. And that’s the fantastic buying opportunities that are out there now where we can get some really terrific deals we plan to pass some of this on to consumers, but we also plan to use some of it to drive margin. So to sum it up, besides the change in the sales range we gave in today’s outlook, there are two other changes to our full year outlook. We now see the supply chain and freight cost de-leverage a little higher than last year. We have been assuming a small improvement. We’ve also increased our planned merchant margin for the full year, building in some upside for realization of some pricing and the other market opportunities. So the net result of the changes is a little better flow-through than what we had called out in our previous outlook. When we said that we would expect the operating margin de-leverage of 150 basis points at a mid-single-digit comp decline. Today, we’re saying 130 basis points of de-leverage at the high end of our full year comp range, which is minus 6%.

Great. Thanks, guys. Bye-bye. Michael O’Sullivan: Thanks, Ike.

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

Thanks. Good morning. Michael, my question is about the inventory issue that you had in the first quarter. I’m just curious if there is any additional context on why you planned inventories the way you did? And what went wrong? And then also, just curious if the shipping delays that you saw in February have gotten any better? Michael O’Sullivan: Well, good morning, Lorraine. Good to hear from you. Yes. As I said – actually, as I said in the prepared remarks, we are very disappointed about Q1. We know we should have done better. And we recognize that we were the architects of our own downfall in the quarter. But with that said, let me offer a more full-bodied explanation of what happened and what we were trying to do. And I think the best starting point is that we believed, rightly so turned out, that 2022 would be a difficult and unpredictable year in retail. And as you have heard us say in the past, our strategy for dealing with uncertainty and our playbook, if you like, is to be as nimble and flexible as possible. And that’s really a core principle behind Burlington 2.0. So, with that in mind, when we planned 2022, we tried to do three things. First of all, we planned sales conservatively. Now we are happy that we did this. It’s clear it was the right thing to do. It looks like many other retailers were more optimistic. And as a result, they are now over-bought and over-inventory, and we are not. That means that we have a bit more flexibility to respond to buying opportunities. And secondly, in addition to spending conservatively, we planned our liquidity very tightly. For example, this means that we still have open to buy for the second quarter and the rest of the year. And again, that just gives us more flexibility given the current external environment. Now the third thing we did, and this is the one that goes to the heart of your question, we have planned our inventories conservatively. We believe we can turn faster. And these plans were, again, intended to increase our flexibility. Now, as I said in the remarks, this did not work. In fact, instead of providing flexibility, these leaner inventories meant that we were exposed when the receipts did not show up early in Q1. This was a mistake and [indiscernible]. Let me move on to the last part of your question, have the receipt delays improved since February, the answer is yes, they have. The situation has completely changed. Just a few months ago, many vendors we are living hand to mouth. Their warehouses were empty, and they were literally just in time, waiting for merchandise to get through the ports. Now, a few months later, domestic warehouses are full. And in many cases, they are backing up. So, in this situation, the vendors really want to get the goods or as soon as possible. So, as you would expect shipping delays have fallen off dramatically.

Thanks. And just a follow-up question for John. John, you talked about some of the freight pressures you are seeing, any other main margin drivers to call out versus 2021 and then also versus 2019 levels? Thanks.

Good morning Lorraine, thanks. It’s a good question. So, I will start with Q1, and then I will try and give you a little color on the way we are thinking about Q2 and the full year margins as well. So, yes, as I said a little earlier in the call, our – for Q1, our EBIT climbed by 780 basis points. And that missed the outlook that we had given by about 30 basis points. That was pretty much all related to the more deleverage on our expense base by our comp sales coming up short of our mid-teens baseline plan. About 230 basis points of the deleverage versus last year was in gross margin. And 150 of that would be related to freight, 80 basis points on the merch margin side. Product sourcing costs delevered by 180 basis points. And again, that was about 120 bps supply chain and 80 basis points related to our continued investments in our merchandising team. So, the rest of the leverage, another 370 basis points, was just deleveraged on all other costs driven by the pretty large decrease in comp sales. When you compare it to the first quarter of 2019, EBIT declined 410 basis points, which was entirely driven by 530 bps of combined freight and supply chain deleverage. In fact, the merch margins for the first quarter were still 260 basis points higher than the first quarter of 2019. And that’s a reflection of the progress that we have made turning inventory faster and operating with smaller inventories in our stores. So, moving on to the second quarter, we said today, we expect operating deleverage of 670 basis points, 610 basis points on our comp range of minus 15% to minus 13% compared to last year’s plus 19% comp. Compared to Q2 of 2019, that would mean deleverage of 500 bps at the high end of the range, the minus 13% comp. And the majority of that will be driven by freight and supply chain deleverage. We do expect to have some merchant margin growth in that but that’s pretty much going to be offset by the deleverage on all other expenses of that negative comp level. And then finally, for the full year, as I mentioned earlier, we are expecting our operating margin rate to be a little better than what we said in the last call. 150 basis points of operating margin deleverage at mid-single digit comp decline was our previous outlook. Now, we are saying that the minus 6% comp, we are expecting 130 bps of operating margin contraction. So, a couple of things that changed there. First, we anticipate higher gross margin rate, resulting from better merch margin driven by the combination of a great product availability, which drives cost down and some selective price increases, as I mentioned earlier, partially offset by a little higher than expected freight and supply chain costs including some higher domestic freight fuel cost than what we had anticipated as we developed our plan. So, again, at the minus 6% comp, high end of our range, our EBIT margin would be 7.3%. So, compare that to a 2019 operating margin of 9.2% and its deleverage of 190 basis points. We expect the deleverage story for the full year is going to be very similar to what we talked about in Q1 and what I just said we kind of expect in Q2, significant deleverage caused by freight and supply chain costs some additional deleverage on the fixed cost base and all of that deleverage partially offset by substantial gross margin growth. So, that’s kind of the whole picture.

Thanks.

Our next question comes from John Kernan with Cowen.

Good morning Michael, John and David, just a couple of questions about the macro environment and your customer. Michael, in your remarks, you referenced the low-income consumer being under economic pressure, that’s intuitive given the inflationary environment. How should we think about that – the relative importance of that demographic to your business? Are there any stats you could share with us? Also curious on just detail on what you are seeing with that customer, how their traffic conversion and basket levels are trending? Michael O’Sullivan: Sure. Well, good morning John. I would say, compared to many retailers, I would characterize our core customer demographics as younger, more ethnically diverse and larger family size and low to moderate income. And I would say that we were got those as wonderful demographics. This segment of the population is growing and understands value. And in many ways, populate that customer group represents everything that’s growing in America. So – and in fact, for many years, I think low to moderate income shoppers have been the growth engine, not just for us but for value retail as a whole, especially bricks-and-mortar value retail. Of course, as you say, this customer the low-to-moderate income customer is under a lot of pressure right now, that makes sense. In 2021, certainly in proportion to their income, these shoppers were big beneficiaries of government support programs, stimulus checks, child benefit, extended unemployment – and those programs have now gone. That alone would have made 2022 a difficult year. But if you layer on top of that, retail price inflation for essential items like food and gas is now running at extraordinarily high levels. And again, those items represent a disproportionate share of household budgets for those shoppers. So, it’s not difficult to see why the customer is under significant economic stress. Now, what can we share, well, we see this in our own data. The vast majority of our stores are in trade areas that have average how household income below $75,000, so the vast majority of our stores. And in 2021, our stores that are in low to moderate income areas had, by far, the strongest increase in comp sales across our chain. And this year, quite surprisingly, this year, they have shown biggest deceleration. Now in the short-term, we don’t expect that the economic conditions to these consumers is going to improve in the short-term. But we do think it’s a big opportunity for us. These shoppers need value now more than ever. And in the coming quarters, we think we can do a much better job of delivering that value. Let me wrap up my answer by reinforcing the point that these customers are the future yes, right now, they are facing headwinds, and those headwinds are likely to persist for the next few quarters. But this is a large demographic group, and these customers are coming back. In the coming years, we believe that this will again be a major source of growth for value retail, especially bricks-and-mortar value retail.

Got it. Maybe just one other follow-up question, again, related to the consumer. Are you seeing any evidence of a trade-down customer in the store? Do you think that trade down business is likely to be a meaningful sales driver over time? And is there any built – any of that built into the second half guidance? Michael O’Sullivan: Yes, it’s a good question. I don’t think we have seen much of a trade-down customer so far. But we do think that in the back half of this year, that could change – and that’s why we are actually a little more optimistic about the back half of the year, and we have got in an element of that to our guidance. Yes, a moment ago, I said that it makes sense that the lower income customer is struggling. But we don’t believe that that’s – this is where the economic stress is going to end. I think it’s possible that we are only in the opening stages of this economy. We don’t have a crystal ball, but it seems likely to us that high inflation, higher interest rates, falling stock market and a potential recession, it is going to affect a much broader set of consumers at some point. And when those consumers are squeezed, we think that they, too, will be looking for value and that they may break down. And historically, that is typically what has happened. Whenever there has been a broader economic slowdown, it hasn’t just affected low income shoppers, it’s also affected the mid-low and some higher end shoppers. In that situation, everyone cares about value. So, again, we don’t know when this might happen, but if it does, then we believe that it may help drive our sales trend.

Okay. Thank you.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Okay. Great. Thanks so much. Good morning and thanks for all the detail today. Michael, how are you feeling about your merchandise assortment now speaking to both quality and quantity. And based on your earlier comments, it sounds like you are in a position to chase now here in the second quarter and in the back half of the year. Assuming I heard you right on that, as you chase now, are you starting to get delivered on time, or are you still experiencing significant delays in your inventory receipts? Michael O’Sullivan: Well, good morning Kim. So, the first part of your question, how are we feeling about the assortment right now, in terms of quantity, the overall level of inventory, I would say we feel very good. Our industry right now just a little bit higher than last year. And last year, as a reminder, in the second quarter, we made 19% comp. So, I feel pretty good about our entry level right now. The quality and the content, I feel good about the quality of the content of our inventory and our assortment. But I would say that we recognize there is actually huge opportunity to take it from good to great. We actually think that – there is a lot of opportunities to make our assortment much better than it is. The starting point is good, but I think we can make it much better. And the reason I say that is there are a couple of things that have happened in the past month or so – the first is, I really do think it’s become clear that the customer has shifted in terms of the categories that they are buying right now. And some of this is intuitive. Last year, the hottest trending categories were home, active apparel, casual apparel basics. This year, the customer has pivoted. They are interested in dressier, classifications, back to office, career-wear, much more structured apparel, woven versus mix. And we had anticipated some of that, but it’s happening to an even greater extent than we anticipated. So, I think we have an opportunity to shift our assortment more in that direction. And then secondly, the other thing that’s really happened over the past couple of months is just this point about merchandise availability has opened up, and there are really great deals out there. Now as I mentioned in response to an earlier question, when you see great deals out there, you can’t just buy everything and flow it to stores straight away. You need to sort of flow into stores over a period of time. So, it takes a while for it to bleed into your assortment. But over the next few quarters, I really think we are going to have greater value in our assortment, much more compelling values. So, we are very excited about that. Now, the second part of your question, I think was about are we in a position to chase. And I think the answer is yes, we feel really good about the case right now, partly because obviously, our inventory level is already at a pretty good point. But secondly, we have a lot of merchandise in reserve that we can pull on. And then, as I say, much nicer availability in terms of going out there now and buying merchandise that we can flow to stores has also improved. So, we feel good about our ability to chase in the second quarter of the sales and runs ahead. And on our timely deliveries of receipts, Again, that’s completely changed during the last couple of months, the situation in terms of the amount of merchandise that’s now in the country, and that’s been imported into the country over the past few months, means that domestic warehouses are pretty full. And as a result, our vendors are shipping on time because they want to get those goods out of their warehouse three months or four months ago, their warehouses were acting and they are waiting for goods to come out of the port. So, as I said, that’s completely changed in the couple of months.

Very helpful. Thanks. Michael O’Sullivan: Thanks Kim.

Our last question comes from Chuck Grom with Gordon Haskett.

Thanks very much. Most of my questions have been asked, but I just have one question for you, Michael, just given your experience in the industry. When you look back at other periods of consumer duress, maybe 2008 or I am sure there is other times in the history of off-price. How long of a lag was it before you saw that middle-income customers start to trade down? It looks like right now, you are in a little bit of an air pocket where you are not getting the trade down, but your current consumers starting to pull back a little bit. So, just curious your perspective on the timing. Michael O’Sullivan: Sure. Yes, it’s a good question, Chuck. We have been thinking about that. I would say that obviously, the previous economic slowdown as the most – maybe the most applicable is the financial crisis in 2008. But I would say that the one difference between what happened then and what’s happening now is in 2008, the financial crisis kind of came as a shock to the whole economy all at once. Like, in September of 2008, it was kind of – it was felt across the whole economy. And then that sort of then led into what happened in 2009 and 2010. So, like here in 2022, this is a little bit different and that the inflation impact, please to begin with is being felt more by low-income customers. They are the ones facing immediate shock because when you look at the cost of gas prices and food, those items represent such a big share of their wallet that the big increases we have seen in those areas are really hitting those customers most of all. But as I said in my earlier remarks, we don’t think it’s going to stop there. I think the impact on the overall economy is coming. It’s ahead of us. Now, we could be wrong, but that seems to us to be likely. And therefore, it seems to me that the trade-down customer, which might be more evident back in 2008 and more evident earlier, might take a little bit longer this time around. But we don’t really know, but that’s how I would compare it with previous economic slowdowns.

Great. Thanks very much. Michael O’Sullivan: Thanks Chuck.

And now – I would now like to turn the call back to Michael O’Sullivan for any closing remarks. Michael O’Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in late August to discuss our second quarter results. Thank you for your time today.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.