Burlington Falls On Weak Guidance

Summary

• BURL reported solid earnings, yet the stock fell on weak guidance.
• The company continues to report strong revenue growth and stable margins.
• Broader markets are down due to falling oil prices and coronavirus fears.
• Price discovery in broader markets could cause BURL's 13x EBITDA multiple to contract. Sell BURL.
• This idea was discussed in more depth with members of my private investing community, Shocking The Street. Get started today »

Source: Barron's

Burlington Stores (NYSE:BURL) reported quarterly revenue of $2.21 billion, Non-GAAP EPS of $3.25, and GAAP EPS of $3.08. The company beat on revenue and Non-GAAP EPS but missed on GAAP EPS. The stock is down in the low-single-digit percentage range post-earnings. I had the following takeaways on the quarter.

Strong Top-Line Growth

It has been tough sledding for traditional retailers this earnings season. Retail sales have been declining through physical locations, yet growing through online channels. Off-price retailers have been winning in this environment. Burlington's core customer is female, cost-conscious, and brand-conscious. The company has served its core customer base for years and has gotten quite good at it. The economy likely is not as strong as lawmakers would have you think. More consumers could like for bargains, playing into Burlington's hands.

The company's revenue of $2.2 billion was up 11% Y/Y. This was a phenomenal performance. Holiday sales were also solid, which helped the company generate comparable sales growth of 3.9% during the quarter. An increase in units per transaction drove comparable sales. AUR conversion rose slightly, while traffic fell off slightly. The fact that average units per transaction and AUR were able to offset the decline in traffic was key. Several retailers have engaged in heavy promotions in order to drive traffic into stores. Declining traffic could become a metric to watch for Burlington by the second half of the year.

J.C. Penney (JCP), Macy's (M), L Brands (LB), Bed Bath & Beyond (BBBY) and others have been culling underperforming stores in order to become more efficient. Meanwhile, Burlington is expanding. The company expects to add 54 net new stores in 2020 and this includes the closure of its e-commerce business. This implies that among bricks and mortar stores, Burlington could become even more dominant this year. Increasing the store count could be a bullish signal.

Margins Ticked Down Slightly

Heading into the quarter Burlington's gross margin was flat. This quarter, the company reported a gross margin of 42.3%, down about 30 basis points versus the year-earlier period. The company experienced increasing freight costs for most of 2019, which could have hurt margins this quarter. On a dollar basis, gross profit was $935 million, up by double digits Y/Y.

SG&A expense was $595 million, up 12% Y/Y. As a percentage of revenue, SG&A expense ticked up about 20 basis points versus the year-earlier period. The fallout was that EBITDA of $339 million rose 10% Y/Y. EBITDA margin was 15.4%, down about 10 basis points versus the year-earlier period. Burlington was able to keep its EBITDA margin steady in a tough retail environment. A double-digit increase within the retail space is hard to come by in this environment. It could be difficult for traditional retailers to compete with off-price retailers with competitive prices and healthy margins.

Light Guidance

Burlington's guidance for Q1 was less than what analysts had expected. The company expects total sales of growth of 8% to 9% and EPS in the range of $1.29 to $1.34:

For the first quarter of 2020, we expect total sales growth in the range of 8% to 9% on top of last year's total sales increase of approximately 7%. Comp store sales assumed to increase between 1% and 2% on top of last year's approximately 0% comp store sales result. Effective tax rate of approximately 15% and adjusted earnings per share in the range of $1.29 to $1.34, this compares to a $1.26 per share last year. This outlook excludes an expected $0.04 negative impact from management transition cost.

Consensus was for revenue growth around 10% and EPS of about $1.45. Revenue growth in the high-single-digit percentage range would still be considered stellar vis-a-vis other retailers. However, Burlington's revenue growth and earnings will likely not be as stellar as previously expected.

On a positive note, Burlington has unrestricted cash of $400 million. Having solid liquidity is important in a tough retail environment. Its debt of $1.0 billion is about 1.2x trailing EBITDA. Burlington's debt appears very manageable given its robust EBITDA. In my opinion, Burlington's solid liquidity and low debt give it a competitive advantage in case the retail sector continues to falter. It could compete if the retail wars turn into a battle of the balance sheets.

Conclusion

Burlington appears to be operating in a sweet spot pursuant to the retail space. BURL is off over 5% since the earnings release. Broader markets are also down due to the sharp decline in oil prices and lingering fears over the effects of the coronavirus. More price discovery could lead to broader markets much lower. BURL trades at 13x trailing EBITDA, but its multiple could contract. Sell the stock.

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.