Burlington Is A Hold Into Earnings

Summary

• BURL reports earnings Wednesday.
• The retailer is growing revenue at a strong pace, while maintaining profit margins.
• BURL could buy up leftover merchandise at a discount if competitors continue to falter.
• At 19x EBITDA the stock is fairly valued. I rate BURL a hold into earnings.
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Source: Barron's

Burlington Stores (NYSE:BURL) reports earnings Wednesday. Analysts expect revenue of $2.2 billion and EPS of $3.2. The revenue estimate implies double digit growth Y/Y. Investors should focus on the following key items.

Strong Top Line Growth

Traditional retailers have reported stagnant to declining revenue growth this earnings season. For the month of January, retail sales through department stores fell 4% Y/Y, yet rose double digits through non-store retailers. Several traditional retailers have had to offer discounts to drive traffic into stores. Retailers like Target (TGT) and off-price retailers like Burlington have been winning in a tough retail environment.

In its most recent quarter Burlington reported revenue of $1.77 billion, up 9% Y/Y. Comparable sales grew 2.7%. If revenue grows by double digits for the upcoming quarter, then it likely portends Burlington had a strong holiday season. When traditional retailers struggle, it could potentially benefit Burlington; the company could be better positioned to purchase leftover merchandise at steeper discounts. Retailers with stale inventory after the holiday season could find it beneficial to partner with Burlington to help sell down that inventory.

Retailers like Macy's (M), Bed Bath & Beyond (BBBY) and L Brands (LB) are culling under-performing stores and closing flagship locations. Meanwhile, Burlington is broadening its reach. For the last nine months, the company increased its store count by over 60 to around 726. Burlington's expansion could be a bullish signal for the off-price retailer.

Solid Margins

Burlington serves its core female customer that is both brand-conscious and price-conscious. This allows the company to manage inventory and contain costs. Last quarter Burlington achieved a gross margin of 42.6%, consistent with results from the prior year period. On a dollar basis gross profit was $759 million, up 9% Y/Y. SG&A expense of $584 million rose 8% Y/Y. SG&A was 32.8% of revenue, the same as the year earlier period.

As a result, Burlington achieved EBITDA of $175 million, up 9% Y/Y. Its EBITDA margin was 9.8%, in line with prior-year results. About 10% of the company's SG&A expense was made up of corporate costs. Such costs may not necessarily grow in lockstep with revenue. Containing corporate costs could be where the leverage lies within Burlington's business model. If the company can benefit from scale, then it could potentially drive its EBITDA margins higher. Rising margins could be a sea compared to other retailers that face eroding margins from heavy discounting and rising spending needed to improve their digital platforms.

Solid Liquidity

Burlington has cash on hand of $147 million. Its free cash flow ("FCF") through the first nine months of the year was $217 million. A strong holiday season could increase Burlington's liquidity. The company has less than $1 billion in debt that appears manageable given its current FCF.

Conclusion

Burlington appears to have the recipe for success in the retail space. The stock has likely benefited from the melt up in broader markets. At 19.0x last 12 months EBITDA BURL appears to be fairly valued. I rate the stock a hold.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.