It has been about a month since the last earnings report for Burlington Stores (BURL - Free Report) . Shares have lost about 1.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Burlington Stores due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Burlington Stores Q2 Earnings & Sales Beat, View Up
Burlington Stores, Inc. continued with its positive earnings and sales surprise streak for the third straight quarter, when it reported second-quarter fiscal 2018 results. The impressive performance prompted management to lift fiscal 2018 sales and earnings view.
The company delivered adjusted earnings of $1.15 per share that outpaced the Zacks Consensus Estimate of 97 cents and surged significantly from 72 cents reported in the prior-year period. Higher sales, margin expansion, cost control, share repurchase activity and lower tax rates led to the improvement.
Excluding the impact of recent changes to New Jersey state tax laws, adjusted earnings surged 51.4% to $1.09 per share.
Burlington Stores long-term strategies include enhancement of assortments with primary focus on underpenetrated categories, particularly home and beauty, in order to make business less weather prone. With regards to the company’s marketing endeavors, it is experiencing favorably results from its multichannel engagement strategy.
Moreover, it is gradually expanding its store fleet and believes that there is room to increase the store count to 1,000 from current 651 stores. Further, the company intends to improve operating margin and lower the gap of the same compared with its peers by augmenting sales, optimizing markdowns, effectively managing inventory and focusing on SG&A expenses.
Net sales came in at $1,498.6 million, increasing 9.9% year over year. The reported figure surpassed the consensus mark of $1,492 million. New and non-comparable stores contributed $94 million to sales. Other revenue came in at $6.1 million, up 6.1% year over year.
We note comparable store sales (comps) rose 2.9% in the quarter, following an increase of 4.8% in the preceding quarter. The company had registered comps growth of 3.5% in the year-ago period. Deceleration in comps growth rate did raise concern. Nevertheless, this was 22nd straight quarter of comps growth.
Gross margin increased about 70 basis points to 41.4% buoyed by improved merchandise margin, partially offset by rise in freight costs. Management expects freight costs to be up roughly 20 basis points for the year. Adjusted operating income increased 23.9% to $104.7 million, while adjusted operating margin (as a percentage of net sales) grew 80 basis points to 7% on account of higher gross margin and expense leverage.
Adjusted EBITDA was up 19.5% to $152.1 million, while adjusted EBITDA margin, as a percentage of sales, expanded 80 basis points to 10.1%.
During the reported quarter, Burlington Stores opened four net new stores and plans to open 43 net new stores in fiscal 2018, up from prior guidance of 35-40. This comprises 67 gross new stores and 24 store relocations and closures.
The company remains on track to remodel 34 outlets, of which 30 is likely to be completed by the end of the third quarter and the remaining is expected to be concluded in the early part of the final quarter.
Management also informed that the company acquired three Toys R Us locations during the quarter under review and is also evaluating other sites.
Other Financial Aspects
Burlington Stores ended the reported quarter with cash and cash equivalents of $89.6 million, long-term debt of $1,155.7 million and shareholders’ equity of $153.3 million. Net capital expenditures for the first half of fiscal 2018 were $114 million. For fiscal 2018, the company projects net capital expenditures of approximately $275 million.
Merchandise inventories increased to $843.9 million from $727 million last year on account of inventory associated to 51 net new stores opened since the end of the second quarter fiscal 2017 and back to school receipt acceleration into the quarter under review attributable to the calendar shift from the 53rd week in fiscal 2017.
During the quarter, the company bought back 310,796 shares worth $47 million. At the end of the reported quarter, the company still had $107 million remaining under its share buyback program. On Aug 15, the company authorized the buyback of up to an additional $300 million of shares to be accomplished through August 2020.
For fiscal 2018, management expects total sales to increase in the band of 10.1-10.6%, excluding the impact of 53rd week in 2017. Comps growth is anticipated in the range of 2.9-3.4% compared with the prior year’s growth of 3.4%.
The company had earlier projected total sales to increase in the band of 9.7-10.5%, with comps growth in the range of 2.6-3.4%.
The company now envisions fiscal 2018 adjusted earnings in the range of $6.13-$6.20 per share, up from its earlier projection of $5.90-$6.00.
Adjusted earnings — excluding the estimated impact of 2017 Tax Reform, the accounting for share based compensation, and the revaluation of deferred tax liabilities, is expected to come in the band of $4.94-$5.01 per share.
Management anticipates adjusted operating margin to expand 30-40 basis points. Burlington Stores projects interest expense of approximately $60 million for the fiscal year, marginally up from $58.8 million in the prior year.
The company expects third-quarter sales to increase in the band of 11-12% with comps growth of 2-3% compared with 3.1% increase witnessed in the year-ago period. The company forecasts adjusted earnings in the range of $1.00-$1.04 per share compared with 70 cents reported in the year-ago period.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, Burlington Stores has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Burlington Stores has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.