On Dec. 9, "off-price retail stores" chain Burlington Stores (NYSE: BURL) came out with its Q3 2014 earnings announcement and 10-Q. The company performed well so far on the top line and profitability front. However, not everything is well with the company. Let's take a look to see what's going with Burlington Stores.
Excellent top and bottom line expansion
Burlington Stores saw its year-to-date sales increase 7.6%. Comparable store sales at its established stores grew 4.2% year-over-year. Moreover, the company opened 18 stores year-over-year. Excellent management execution and a desirable product assortment contributed to the revenue increase. Burlington Stores also saw its year-to-date net loss shrink 39% compared to the same time last year. Expense controls and a decrease in interest expense due to long-term debt refinancing contributed to the shrinkage in net loss.
Free cash flow deficit expanded
While Burlington Stores did well with its top and bottom lines, it was a different matter with its free cash flow. Burlington Stores free cash flow deficit expanded a whopping 95%, going to negative $76 million from a negative $39 million the same time last year. A 35% increase in capital expenditures contributed heavily to the free cash flow expansion. Hopefully, the holiday season will make this retailer free cash flow positive for the year.
What's the long-term picture?
These figures are pretty consistent with its long-term fundamental performance. Revenue and net income expanded 13% and 37% over the past year and a half while free cash flow declined 71% during that time.
However, sometimes it's about playing the expectation game. Burlington stores gave its shareholders an 87% total return vs. 20% for the S&P 500 over the past year and a quarter (see chart below).
Balance sheet is overleveraged
Long-term debt creates interest which chokes out profitability and cash flow. One of the biggest reasons that the company turned a net loss this year is its massive amount of interest expense. Burlington Stores possesses so much debt that it registers a stockholder's deficit, which means its overall liabilities exceed its assets. However, the company is making strides by reducing long-term debt 5% since the same time last year. Refinancing reduced interest expense a great deal. Burlington Stores operating income did exceed interest expense by 11 times vs. only 7 the same time last year. The rule of thumb for safety lies at 5 times or more.
The company possesses cash amounting to $29 million on its balance sheet date. I prefer companies with cash amounting to 20% or more of stockholder's equity. Since the company has no stockholder's equity this ratio is incalculable for Burlington Stores.
Burlington Stores operates in a highly competitive environment. If the subpar fundamental performance continues then shareholder return may suffer. According to Morningstar this company trades at P/E ratio of 95 vs. 19 for the S&P 500 making it highly overvalued. Right now your investment funds are best served elsewhere.
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