Burlington Stores Faces Challenges as Low Income Shoppers Struggle to Keep Up
Low income shoppers continue to face economic pressure as the recovery from the pandemic remains uneven. This is evident in the performance of retailers like Burlington Stores Inc (NYSE:BURL), where the core customer base consists of younger, lower income, and more ethnically diverse shoppers.
According to CEO, Michael OSullivan, lower income shoppers have been disproportionately impacted by the higher cost of living and the scaling down of pandemic-era benefits. This has resulted in a differential performance among discretionary retailers that serve this customer segment. While these retailers performed well in 2021, they have struggled since early 2022 due to the reduced spending power of lower income shoppers.
Impact on Burlington Stores Inc's Performance
The challenges faced by low income shoppers are reflected in Burlington Stores Inc (NYSE:BURL)'s financial results. In the second quarter of 2023, the company achieved a 4% comp growth on a one-year basis, representing a 3% geometric comp stack. While the company is happy with its major strategies, it acknowledges that external factors have not been as favorable as anticipated. The low income shopper, who is the core customer for Burlington Stores Inc (NYSE:BURL), is still struggling.
Future Prospects and Challenges
Despite these challenges, Burlington Stores Inc (NYSE:BURL) remains optimistic about the future. O'Sullivan points out that the strong performance of off-price retailers in general indicates a shift in consumer preferences towards value-oriented shopping. Burlington Stores Inc (NYSE:BURL), being an off-price retailer, sees this as an opportunity to capitalize on the trend. The company's focus on becoming more off-price through its Burlington 2.0 strategy aligns with the changing consumer behavior.
However, the impact of student loan repayments on low income shoppers remains uncertain. O'Sullivan acknowledges that the direct impact of student loan repayments could reduce discretionary spending among customers who have student loans. On the other hand, there could be an indirect impact as a broader population of shoppers, including those who don't currently shop at Burlington Stores Inc (NYSE:BURL), may become more value-oriented due to the financial burden of student loan repayments. The overall net impact of student loan repayments on Burlington Stores Inc (NYSE:BURL)'s business is difficult to predict.
Financial Performance and Strategies
In terms of financial performance, Burlington Stores Inc (NYSE:BURL) has seen improvements in certain areas. The company's shortage expense was lower on a year-over-year basis in the second quarter of 2023. However, the expected improvement in shortage results based on the quarter's physical inventory did not materialize due to ongoing shrink challenges in the retail industry. Despite this, Burlington Stores Inc (NYSE:BURL) continues to invest in shortage control initiatives to mitigate higher shrink rates over time.
On the gross margin front, Burlington Stores Inc (NYSE:BURL) experienced a year-over-year increase driven by higher merch margin and lower freight expenses. The buying environment has been favorable, leading to improved markup and lower markdowns. Additionally, lower shortage accruals contributed to the gross margin leverage. The company also managed its operating expenses tightly, resulting in better-than-expected performance in adjusted SG&A and product sourcing costs.
Taking Advantage of Opportunities
Bed Bath & Beyond has been in the news recently, not only for its financial struggles but also for the opportunities it presents to other retailers. One such retailer is Burlington Stores Inc (NYSE:BURL), also known as Burlington Coat Factory, which has recently acquired 62 leases from Bed Bath & Beyond as part of its new store opening program.
Burlington Stores Inc (NYSE:BURL) has been looking to expand its store count for the past few years. The company's goal has been to open over 100 net new stores annually, but due to a lack of real estate availability, it has struggled to achieve this target. However, with the recent winding down of Bed Bath & Beyond, the supply of great real estate locations has opened up significantly, providing Burlington Stores Inc (NYSE:BURL) with a unique opportunity.
Acquisition of Store Leases
The acquisition of 62 store leases directly from Bed Bath & Beyond is a departure from Burlington Stores Inc (NYSE:BURL)'s usual practice of waiting for store locations to revert back to the landlord in bankruptcy cases. By acquiring leases directly, Burlington Stores Inc (NYSE:BURL) can cherry-pick the locations that best suit its expansion plans. This gives the company more control over its store openings and allows it to choose the most attractive and strategic locations.
While the acquisition of these leases will result in immediate rental expenses for Burlington Stores Inc (NYSE:BURL), the company expects the stores to have a more significant impact on its net new store count and total sales in 2024. This means that customers can expect to see new Burlington Stores Inc (NYSE:BURL) opening their doors in the coming years, offering a wider range of products at discounted prices.
Future Expansion Plans
In addition to the 62 leases acquired, there are also other former Bed Bath & Beyond locations that may become available to Burlington Stores Inc (NYSE:BURL) once they are returned to their landlords through the bankruptcy process. This provides Burlington Stores Inc (NYSE:BURL) with a pool of potential new store locations over the next two to three years. While there may be other retailers interested in these locations as well, Burlington Stores Inc (NYSE:BURL) is feeling bullish about the opportunities they present.
The expansion of Burlington Stores Inc (NYSE:BURL)'s new store opening program is not only good news for the company but also for consumers. With more stores opening, customers will have greater access to the retailer's wide range of products, including clothing, home goods, and accessories, all at discounted prices. This expansion also means more job opportunities for store managers, store associates, and delivery and distribution teams.
Conclusion
In conclusion, low income shoppers continue to face economic pressure, which has impacted their spending power and discretionary spending. Burlington Stores Inc (NYSE:BURL), with its focus on becoming more off-price, aims to cater to value-oriented shoppers. While the challenges faced by low income shoppers persist, the company remains optimistic about its future prospects and is actively managing its business to adapt to changing market conditions.
Overall, Burlington Stores Inc (NYSE:BURL)'s acquisition of 62 leases from Bed Bath & Beyond is a significant development in its new store opening program. It provides the company with a clear path to achieving its goal of expanding its store count and reaching more customers. With the growing availability of attractive locations, Burlington Stores Inc (NYSE:BURL) is poised for continued growth and success in the years to come.
This article first appeared on GuruFocus.
