U.S. markets closed

Edited Transcript of BURL earnings conference call or presentation 5-Mar-20 1:30pm GMT

Q4 2019 Burlington Stores Inc Earnings Call

New Jersey Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Burlington Stores Inc earnings conference call or presentation Thursday, March 5, 2020 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David J. Glick

Burlington Stores, Inc. - Senior VP of IR & Treasurer

* John D. Crimmins

Burlington Stores, Inc. - Executive VP & CFO

* Michael B. O'Sullivan

Burlington Stores, Inc. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* John David Kernan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* John Dygert Morris

D.A. Davidson & Co., Research Division - Research Analyst

* Kimberly Conroy Greenberger

Morgan Stanley, Research Division - MD

* Lorraine Corrine Maikis Hutchinson

BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research

* Matthew Robert Boss

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Roxanne Felice Meyer

MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Stores Q4 2019 Earnings Conference Call.

(Operator Instructions)

I would now like to introduce your host for today's conference call, Mr. David Glick, Senior Vice President, Treasurer and Investor Relations. You may begin.

--------------------------------------------------------------------------------

David J. Glick, Burlington Stores, Inc. - Senior VP of IR & Treasurer [2]

--------------------------------------------------------------------------------

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2019 fourth quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and John Crimmins, Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until March 12, 2020. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K for fiscal 2018 and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

Now here's Michael.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, David. Good morning, everyone, and thank you for joining us on this morning's fourth quarter earnings call. We would like to structure our discussion this morning as follows. First, I will begin with some brief comments on our fourth quarter results. Second, I would like to take a step back and talk about our strategy and the initiatives that we will be pursuing to support this strategy. My comments will build on many of the points that were discussed in our third quarter call last November. Third, using the strategy discussion as context, I will talk about the outlook for the next few years, and specifically, our sales and earnings guidance for fiscal 2020. I will then hand the call over to John to provide more details on our fourth quarter financial results and on our guidance for fiscal 2020. We will then be happy to respond to any questions that you may have.

Okay. Let's start with the fourth quarter. As reported in today's press release, we were pleased with our solid comparable store sales gain of 3.9%, which, together with strong performance from our new and noncomparable stores, contributed to a total sales increase of 10.5%. Adjusted EBIT margin expanded by 40 basis points, this drove a 15% increase in adjusted earnings per share ahead of our guidance.

In his comments later in the call, John will provide more detail on the main drivers of this margin expansion. In terms of specific businesses, our strongest growth came in toys and gifts. We were pleased with the performance of these seasonal businesses. We also made progress developing key underpenetrated categories, such as Home and beauty.

Let me move on now to talk about our strategy. I have been with the company for almost 6 months. I continue to be very impressed by our executive team, the merchant organization, the strong partnerships that we have built with our vendors, the flexibility of our supply chain and the quality of our stores' organization. All of these fundamental capabilities and functions are in very good shape and provide a strong platform for continued growth.

But as successful as we have been over the last 5 years, we are still a long way from, what I will call, our full potential as a business. Our sales productivity and our profit margins have improved over the years, but remain significantly behind relevant benchmarks. So over the past few months, I have been working with the executive team to develop, define and begin to implement our strategy to achieve this full potential.

The core premise of this strategy is that the off-price shopper cares, above all else, about great merchandise value. Every day, they provide feedback on what they like, what they don't like and how they define value. We can see this information and these insights in our daily sales reports. The off-price model has a major advantage over other retail formats, by buying near-in and opportunistically, we can respond to this feedback and adjust our plans and merchandise assortments, based on what the customer is actually telling us.

So to drive toward our full potential, our strategy is to even more aggressively execute the off-price model. We are an off-price retailer. The off-price sector is winning and we intend to become an even stronger off-price retailer. We have a great starting point and set of capabilities today in merchandising, supply chain, systems and stores. But there are numerous ways in which we can become even better at executing the model.

Over the past few months, we have developed and begun to implement detailed initiatives to support this off-price full potential strategy. For the purposes of this call, I'm going to simplify the discussion and group these activities into 5 buckets. Number one, actions to more effectively face the sales trend. These actions include holding and tightly controlling liquidity, planning our comp sales slightly more conservatively and making sure that our merchants and planners are well positioned to chase sales.

These actions will not only enable us to more effectively chase the trend, they will also allow us to take greater advantage of in-season opportunistic buys.

Number two, greater investment in our merchandising capabilities. This includes more headcount, especially in growing or underdeveloped businesses, training and coaching, improved tools and reporting and other forms of merchant support. These investments will improve our ability to develop vendor relationships to source the great merchandise buyers to more effectively chase the sales trend and to strengthen and expand key businesses.

Number three, operating with leaner inventories. We have too much inventory in our stores and have already begun to reduce these inventory levels. Our goal is to make every hanger count. Going forward, we will be carrying much less inventory. And within the racks, the customer will find a higher mix of fresh receipts and great merchandise values. This should lead to higher sales, faster turns and lower markdowns.

Number four, improving operational flexibility. Executing the off-price model is a team game. As the merchants and planners chase the sales trend and shift the assortment, based on what the customer is telling us, our key operating functions need to be able to support the downstream implications of this chase.

Over the last few months, I have been very pleased by how well our stores and our supply chain teams have responded to this challenge. For supply chain, this means absorbing sudden changes in the forecast and getting merchandise to the floor as fast as possible. For stores, it means flexing up or flexing down individual departments based on receipt flow and trend.

In 2020, we will be looking at ways to make our key operational processes even more nimble and effective. Number five, challenging expenses. As a company, we already have a strong expense management culture. This focus on tightly controlling expenses fits very well with my own preferences and experience. But even in this area, we have significant additional opportunities.

There are two main drivers of these. First, a more conservative approach to planning naturally forces even tighter expense control. When you plan a business at an annual 1% to 2% comp growth rather than 2% to 3% annual comp growth, this triggers a more difficult set of budget discussions.

In working through our detailed operating budgets for 2020, our executives and expense managers did a great job rebasing their expense plans to live within the tighter constraints imposed by the lower comp growth assumption. Obviously, this should put us in a much stronger position to drive operating expense leverage on any ahead-of-plan sales.

Second, as the executive team and I have worked on the details of our full potential strategy, we have identified areas of the business, business processes and operating norms, and frankly, things we have been doing for years, that we have begun to challenge. With the new and additional lens of our full potential strategy, we think we can find ways to drive higher efficiency, as well as increased flexibility in many of these areas.

Across the 5 buckets of activity that I have described, there are some actions that we have already begun to take, like building more of a sales pace into the business or reducing our inventory levels. These actions should start to have some very early beneficial impact in 2020. But there are other important items, such as greater investment in our merchant capabilities that will take much longer, have impact and to flow through to performance.

Overall, I would expect initial but modest benefits in 2020, a greater impact in 2021 and then more momentum in 2022. My intent is to use our quarterly earnings calls in May, August and November to provide detailed commentary on our business results and near-term outlook, and only where appropriate, to offer some very high level updates on the strategy.

But each year, we will use our March call to provide a more in-depth assessment and analysis of our off-price full potential strategy. At this point, I would like to turn to our 2020 guidance. As noted in today's press release, we are guiding to full year comp store sales growth of 1% to 2% and EPS growth of 8% to 10%. There are several specific points that I would like to call out.

Our comp guidance is slightly lower than we have provided in the past, this is rooted in our full potential strategy. As I discussed earlier, planning slightly more conservatively and then chasing the trend in season, actually puts us in a stronger position to drive momentum in our comp store sales growth.

Our plans also include much tighter management of inventory levels. At the start of February, our comp store inventory levels were down 15% versus last year. So we have started 2020 with very clean inventory levels and content. There will be some exceptions month-to-month, but overall, we expect average inventory levels to be down low double digits throughout the year. This tighter inventory control should drive faster turns and lower markdowns.

The 2020 budget also includes a significant step-up in the resources we are investing in our merchant capabilities. These investments are being offset by expense savings across a broad range of areas elsewhere in the P&L. Overall, we believe that our guidance is appropriate given the strategic posture of the company. But let me emphasize, if the sales trend is there, we will chase it.

Before I turn the call over to John, I would like to address 2 additional topics. First, beginning with our first quarter results, we will report our comparable store sales growth and our total sales growth percentages on a rounded basis. This practice is in line with how our off-price peers report their results.

Secondly, we made the decision recently to wind down our e-commerce operation. This represented about 0.5% of our total sales. In our business, which is a moderate off-price business, the nature of the treasure hunt and the average price point that we operate at mean that bricks-and-mortar stores have a significant, competitive and economic advantage over e-commerce.

We intend to focus our energy and resources on driving profitable sales growth in our bricks-and-mortar stores. We will also continue to aggressively expand and upgrade this store network through our new store opening and remodel programs.

I am now going to turn the call over to John, who will provide more detail on our fourth quarter financial results and on our 2020 sales and earnings guidance.

--------------------------------------------------------------------------------

John D. Crimmins, Burlington Stores, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Michael, and good morning, everyone. Let me start with a review of the income statement.

For the fourth quarter, total sales increased 10.5% and comparable store sales increased 3.9%. New and non-comp stores contributed an incremental $151 million in sales for the fourth quarter. Our Q4 comp store sales performance was driven primarily by an increase in units per transaction with AUR and conversion up slightly, while traffic was down slightly.

The gross margin rate was 42.1%, a 20 basis point increase versus last year's rate. Merchandise margins increased 40 basis points, which was partially offset by an increase in freight costs. The merchandise margin increase was driven primarily by an increase in markup, as well as a slight benefit from lower shortage. Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs were flat as a percent of net sales versus last year's rate.

Adjusted SG&A, excluding management transition cost was 22.5%, 20 basis lower than last year as a percentage of sales. This improvement was driven largely by strong sales growth, resulting in leverage on occupancy and marketing expense, as well as corporate cost.

Adjusted EBIT, excluding management transition cost, increased 14% or $35 million to $297 million. This translated to a strong 40 basis point increase in rate for the quarter. Depreciation and amortization, excluding favorable lease cost, increased $4 million to $55 million. Net interest expense, it decreased by $2 million versus last year's fourth quarter to $11 million.

The adjusted effective tax rate was 23.8% for the fourth quarter versus last year's fourth quarter adjusted effective tax rate of 22.2%. Combined, this resulted in adjusted net income, excluding management transition costs of $218 million, a 13% increase versus last year.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased approximately 376,000 shares of stock for $83 million. We have $399 million remaining on our share repurchase authorization.

All of this resulted in diluted earnings per share of $3.08 versus $2.70 last year. Adjusted diluted earnings per share were $3.25 versus $2.83 last year, which excludes a $0.04 of management transition costs, which was not reflected in our guidance. The $3.25 per share result represented an $0.08 beat versus the high end of our original guidance, with $0.07 of that beat, a true operating beat and $0.01 of the upside, attributable to a tax benefit related to share-based compensation.

Turning to our balance sheet. At quarter end, we had $403 million in cash, no borrowings on our ABL and had unused credit availability of approximately $502 million. We ended the period with a total debt of approximately $1.0 billion and a debt-to-adjusted EBITDA leverage ratio of 1.1x.

On February 26, 2020, we completed the repricing of our senior secured term loan facility, which lowered our applicable interest rate margin by 25 basis points from LIBOR plus 2.00% to LIBOR plus 1.75%, which is expected to result in approximately $2.4 million in annualized interest savings.

Merchandise inventories were $777 million versus $954 million last year. This decrease was due primarily to a 15% decrease in comp store inventory levels, as well as a decrease in pack and hold inventory, which was 26% of total inventory at the end of fiscal 2019 compared to 30% at the end of fiscal 2018. Top store inventory turnover improved 13% for the fourth quarter. Moreover, we were pleased with our inventory content and freshness. Inventory aged 91 days and older at the end of the fourth quarter was down versus the prior year at record low levels.

During the quarter, we added 1 net new store, including 1 relocation and 2 store closures, ending the period with 727 stores. In fiscal 2020, we expect to open 80 new stores and close or relocate 26 stores. This translates to 54 net new stores planned to be opened in fiscal 2020. This projected store count factors in the closure of our e-commerce business, which has historically been counted as one of our stores.

Our average new store in fiscal 2020 will be 39,700 square feet, the first time, our average new store will be less than 40,000 square feet. In terms of our fiscal 2019 full year performance. Total sales rose 9.3% and included a comparable store sales increase of 2.7%, following a 3.2% comp store sales gain in fiscal 2018. Gross margin was 41.8%, flat as a percentage of sales versus fiscal 2018, which included the offset of a 20 basis point increase in freight.

Merchandise margin for fiscal 2019 was up 20 basis points versus the prior year. Product sourcing costs were flat as a percentage of sales versus last year. As a percentage of net sales, adjusted SG&A improved 20 basis points to 25.5%. Expense leverage was driven mainly by strong sales growth, which resulted in expense leverage on occupancy, marketing and corporate expenses.

Adjusted EBIT increased by 12% or $73 million to $674 million, representing a 20 basis point increase in rate for fiscal 2019. Depreciation and amortization, excluding favorable lease cost increased by $19 million to $210 million. Net interest expense declined $6 million to $49 million.

The adjusted effective tax rate was 20.1% as compared to last year's adjusted effective tax rate of 18.8%. Combined, this resulted in net income of $465 million, an increased 12% versus last year, and adjusted net income of $499 million, exclusive of management transition cost versus an adjusted net income of $443 million last year.

Diluted earnings per share were $6.91 versus $6.04 last year. Diluted adjusted net earnings per share were $7.41 versus $6.44 last year. This excludes a $0.06 impact of management transition costs incurred during the third and fourth quarters of fiscal 2019. Our fully diluted shares outstanding were 67.3 million shares versus 68.7 million last year.

Cash flow provided by operations increased $252 million to $892 million for fiscal 2019, driven by higher net income and changes in working capital. Net capital expenditures were $269 million for fiscal 2019.

Now I will turn to our outlook. As a reminder, as Michael discussed in his prepared remarks, going forward, we will be rounding comp store and total sales percentage changes for fiscal 2020. For the 2020 fiscal year, we expect total sales growth in the range of 8% to 9% as compared to fiscal 2019 on top of last year's total sales increase of approximately 9%. This includes an approximately 0.5% decrease related to the closure of our e-commerce business, as Michael discussed earlier in the call.

Comp store sales to increase in the range of 1% to 2% for fiscal 2020, on top of last year's approximately 3% increase. Depreciation and amortization, exclusive of favorable lease amortization, to be approximately $235 million. Adjusted EBIT margin rate to be approximately flat versus last year.

Net interest expense to approximate $45 million and effective tax rate of approximately 21%. Capital expenditures, net of landlord allowances, expected to be approximately $400 million. This results in adjusted earnings per share guidance in the range of $7.97 to $8.12, an expected increase of 8% to 10%. This outlook excludes an expected $0.16 negative impact from management transition costs.

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 $1.26 per share last year. This outlook excludes an expected $0.04 negative impact from management transition costs.

With that, I will turn it over to Michael for closing remarks.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, John. In summary, we are pleased with our solid results for Q4 and fiscal 2019. These results demonstrate that we are in a strong position as a business, and that we have a great platform for growth.

But despite these results, we believe that we still have a long way to go to achieve our full potential as a business. We have an amazing team here at Burlington, and it has been remarkable to watch this team over the last few months, develop and start to mobilize behind our full potential strategy. I am very excited about what we are going to achieve together over the next several years.

Before I turn the call over to the operator for your questions, I would like to make a few comments about the coronavirus.

The situation is evolving very rapidly and there are a lot of unknowns. Our guidance for the first quarter does not, and cannot, incorporate a full set of risks that we, along with other retailers, may be exposed to in the coming weeks. That said, we are taking steps to prepare as best we can for a range of possible outcomes.

Our #1 priority in these preparations is to ensure the safety of our associates and our customers. Secondarily, we will manage our business, so it can flexibly respond to whatever situation we are faced with.

With that, I would like to turn the call back to the operator to open it up to questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Our first question comes from Matthew Boss with JPMorgan.

--------------------------------------------------------------------------------

Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

--------------------------------------------------------------------------------

Great. Congrats on a nice quarter and thanks for all the detail. So Michael, you described in detail how the approach you're taking will set the company up to better chase the sales trend going forward. Maybe could you elaborate on what happens if the external environment were to weaken and sales trends were to slow?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Well, Matt, thank you for your question. Yes, you're right. In my remarks, I described how the actions we're taking, controlling liquidity, running with leaner inventories, planning comp growth slightly more conservatively and carefully managing expenses, I described how these actions could put us in a better position to flex up and chase the sales trend if the trend is there. By taking this approach, we can more effectively execute the off-price model, and that should help us to drive our sales momentum and profitability over time. But the advantage of the off-price model is not just in chasing the upside. The off-price model is also advantaged versus other retail formats when it comes to absorbing the downside. There will be times when the external sales trend will weaken. There could be macroeconomic, political, weather, numerous other external issues that could cause consumer confidence, consumer spending to soften. When this happens, it affects all retailers. The difference with off-price is, if we can carefully control our liquidity and tightly manage our inventory and expenses and plan our comp sales somewhat conservatively, then we'll be in a better position to absorb and recover from any downturn in sales.

Maybe the best way to sum this up, I think, is to say that the off-price model, when it's managed, provides the flexibility to chase the sales trend up or to absorb and recover from a decline in the sales trend. It's able to do that because it doesn't suffer from the same long lead times and rigidities that other retail formats suffer from.

--------------------------------------------------------------------------------

Matthew Robert Boss, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

--------------------------------------------------------------------------------

That's helpful. So John, and then can you help us walk through the components of your 2020 guide? Maybe specifically, if you could help break down the growth between gross margin expansion, SG&A leverage and share repurchases? And then just any help with the margin rate puts and takes in your first quarter guidance, I think, would be really helpful.

--------------------------------------------------------------------------------

John D. Crimmins, Burlington Stores, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Sure, Matt. Thanks for your question. So let me start with our full year guidance. So as you know, we're taking a little bit more conservative approach in terms of planning the top line with our comp sales at 1% to 2%, total sales at 8% to 9%, which includes our 54 net new stores and the wind-down of our e-com business, which is going to hurt us by about 0.5%. We planned our inventory and expenses to be consistent with these sales assumptions. As Michael said, in our prepared remarks, we believe this more conservative approach is going to give us a chance to chase more opportunistic buys. So if the sales trend is there, we're going to chase it, and we hope that would drive incremental sales, which in turn, would drive more favorable leverage from a markdown and from an expense standpoint. But back to the assumptions in our guidance. From a gross margin perspective, we expect to get some merch margin expansion as we would expect our inventory strategy to drive lower markdowns.

In addition, we do expect a little bit of improved leverage on freight, partially driven by the elimination of our e-com shipping costs. As Michael discussed earlier, we're making investments in our business, some of which will be in our merchandising capability and in our supply chain, which we include in our product sourcing costs. So we do expect some deleverage in product sourcing costs this year as we spend in advance of the expected benefits. We do expect a little bit of leverage on SG&A at a 2% comp. But we'll have some deleverage this year in other income, while we're lapping significant insurance recoveries in 2019 and in depreciation as we've accelerated our CapEx both this year and last year, primarily driven by investments in stores and in supply chain to support our planned growth. All this nets out to an EBIT margin rate, it'll be approximately flat to last year. So for a quick recap, gross margin, less product sourcing cost, which include some investment nets to some slight leverage, SG&A provide slightly more leverage. The total of the 2 are offset by deleverage in other income and depreciation, resulting in a flat EBIT margin rate for the year.

Now our guidance also assumes share repurchases similar to the amount we repurchased in FY '19, which was $300 million. And finally, our tax rate includes the same EPS benefit from the impact of share-based comp that we saw in 2019, which is about $0.46. As we've talked about previously, we can't really control this, and it's very difficult to forecast or plan the share-based comp impact on our tax rate, so what we'll do is update you on this factor each quarter as we've done this year. As for our first quarter guidance, both our EPS growth rate of 2% to 6%, and our EBIT margin rate for Q1 will be less than our full year expectations as we delever in product sourcing cost and SG&A during the quarter, as we begin some of the incremental investments we've mentioned in support of our full potential strategy during the first quarter, which is our smallest sales quarter of the year. And finally, just a reminder, as Michael mentioned earlier, our guidance does not include any adjustment for the risk we and other retailers face, as the coronavirus situation continues to evolve.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Ike Boruchow with Wells Fargo.

--------------------------------------------------------------------------------

Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [7]

--------------------------------------------------------------------------------

Michael, first question, in the prepared remarks, you mentioned the coronavirus. I'm just curious, it's coming up a lot in these conference calls. Can you provide any additional color on the possible impacts that this may have on the business? I guess, I'm just wondering, if you think the bigger impact might be on supply or on demand of the business?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

Well, Ike, thank you for your question. I'd say, the honest answer is that we really don't know what impact the coronavirus might have on the retail industry or on our business. The situation is evolving very quickly, and now we're watching it unfold along with everyone else. We're fortunate, though, in the sense that we don't have any overseas operations, and we directly import very little of the merchandise that we sell. And for now, we've seen no impact at all. But of course, there is a risk that the situation will worsen, and that could affect either supply or demand. As we thought about this, there are a range of possibilities, a wide range of possibilities on what could happen over the next few weeks and months. So like any responsible company, we're preparing, as best as we can, for multiple different scenarios. In those preparations, I would say, our #1 priority by far is the safety and well-being of our employees and our customers. We'll be guided by whatever the relevant agencies and the relevant authorities tell us. But we'll take whatever steps are necessary to protect employees and customers.

Secondarily, as far as the business is concerned, we'll make sure that we are as flexible as possible so we can navigate the business through whatever issues that we need to. That means, tightly controlling liquidity, inventory and expenses. As I said a few moments ago, the off-price model is -- it's more resilient and more flexible than other retail models, that does not mean that we're not exposed to external risks and shocks. But it does mean that we should be able to more rapidly react to and recover from whatever situation we face.

--------------------------------------------------------------------------------

Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [9]

--------------------------------------------------------------------------------

Got it. And then just a second question, if I may. On the e-commerce. The shutdown is not a big surprise, but I guess, could you provide more color on what drove this decision of yours? And will there be any kind of savings from this shutdown? Was there any type of crossover traffic between e-commerce and stores, just wondering if there's a little bit more color you could share?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

Good question. Let me address that. There were really 3 factors that went into the decision to shut down our e-commerce operations. Firstly, we're a moderate off-price retailer. I would underline the word moderate in that sentence. Our average unit retail is about $12, that's the average price per unit in our stores. Now in e-commerce, when you fully account for the costs of merchandising, processing, shipping, accepting returns, it's very difficult, impossible to make money at those price points in the businesses that we compete in. There are also very significant constraints on recreating the off-price treasure hunt in an online environment. So that's sort of reason number one. Secondly, and this isn't just a conceptual argument, the data shows that over the last several years as e-commerce, in general, has grown, bricks-and-mortar moderate off-price retail has continued to power ahead and to gain share. You can see that just in our own results. Our top line growth in the last 3 years has averaged about 8% per year driven by our bricks-and-mortar stores, and we're clearly taking market share. And of course, we expect, we anticipate e-commerce is going to continue to grow in many sectors of retail. But in the moderate off-price business, we believe growth is going to be driven by physical stores. The third point to make is that we, at Burlington, we're the smallest of the 3 major off-price retailers, and we have significant potential for further growth in our bricks-and-mortar network. We have about 720 stores today. Our off-price peers each have double or triple that. So our focus is to drive increased sales through our existing bricks-and-mortar stores and through our new store opening program and our store relocation program.

On the other parts of your question, given that it was only 0.5% of sales, the impact of the shutdown of e-commerce on our overall sales and earnings is not material. And as for the crossover traffic between e-commerce and stores, we think we have other, more cost-effective ways to engage with customers digitally, and thereby, drive traffic to our stores.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

The next question comes from John Kernan with Cowen.

--------------------------------------------------------------------------------

John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

--------------------------------------------------------------------------------

On the full potential strategy, I'm just wondering how big of a change this strategy is for the company in total. How difficult you think it will be to get the organization moving in this direction?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [13]

--------------------------------------------------------------------------------

Thank you, John. It's good to hear from you. It's a very good question. I think I would answer that by saying, as you look at Burlington over the last 10 years, certainly over the last 5 years, that the company has developed and evolved as an off-price retailer. All the major elements that I described in my prepared remarks, liquidity, chase, inventory turns, opportunistic buys, merchant capabilities, these have all been part of the language here for a long time. They're all critical components of the off-price model. All we're really doing now is committing the business to much more aggressively executing this model. In other words, our full potential strategy is a more aggressive, enhanced, stepped up version of the same strategy that the company has been pursuing for many years.

Now it's true that we are making some significant changes, but those changes feel very natural. In fact, I would say that there's a lot of excitement and energy in the organization behind this full potential strategy. One of our senior executives here at Burlington is a football fan, I should be clear, an American football fan, of course. Anyway, his description is that, he says that over the last 5 years, we've been running the same plays. These plays have worked well for us and have driven some very nice results. But now, we're making some improvements to these plays, and we also have some very interesting new plays. So as a team, we're feeling very good about the opportunity here to raise our game. Look, I'm on shaky ground when it comes to American sports metaphors, but I think that's a good description of how the organization feels right now about our full potential strategy. There's a lot of energy and excitement here about what we can achieve.

--------------------------------------------------------------------------------

Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [14]

--------------------------------------------------------------------------------

Got it. Looking forward to seeing some of these new plays. Just as a follow-up to that, have you tried to quantify the financial impact of the full off-price potential strategy? Is it possible to grow the sales productivity towards the $400 per square foot level that your peers operate and move the operating margin closer to 13%?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [15]

--------------------------------------------------------------------------------

That's a good direct question. And actually, I'd like you to ask me that question again in a couple of years. Because right now, I don't know enough to offer a meaningful quantification of our full potential strategy. Instead, let me offer up a couple of things that we do know, things that I am confident of. Firstly, we know that there are a lot of improvements that we can make in how well we deliver value to our customers and how effectively we execute the off-price model. Of course, it will take time for all of the initiatives that I've described to take hold, but we're excited about our strategy, and we're confident that we'll have a major impact on our performance. Secondly, we also know that there's a very significant sales productivity and profitability gap between us and our off-price peers. Now for sure, there are some structural differences between us and those companies. But still, this data provides a useful reference point. It gives us confidence that if we improve our execution of the off-price model, then we should be able to drive significant improvements in our financial results.

The final point that I'd make is that progress never happens in a straight line. We're confident in our strategy. And we know what we need to do, but things will go wrong, we will make mistakes, and there will be external factors that will temporarily get in the way. As we move forward with our full potential strategy, we need to overcome and navigate those issues. But this is the right direction of travel, and it should, over time, drive stronger financial performance.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from the Lorraine Hutchison with Bank of America.

--------------------------------------------------------------------------------

Lorraine Corrine Maikis Hutchinson, BofA Merrill Lynch, Research Division - MD in Equity Research and Consumer Sector Head in Equity Research [17]

--------------------------------------------------------------------------------

Michael, I was hoping to get your assessment of the fleet. And then, as you think through the long term, what's your potential for store count over the years?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [18]

--------------------------------------------------------------------------------

Well, Lorraine, thank you for your question. Our kind of new store opening program has been very successful. We've increased it significantly over the last several years. As John mentioned in his prepared remarks, in 2019, we opened 76 new stores. We closed 24 stores for a net addition of 52 stores. Now as you'd expect, the stores that we're closing are older and less productive. So the program represents a significant upgrade as well as expansion. And as John also mentioned, I won't go back over the numbers, but as John also mentioned, in 2020, we'll be following a very similar pace of activity. So we're excited about the potential to add new stores. We think there's plenty of runway there. We're also going to be experimenting with our prototype, looking at opportunities to make that more flexible. As John mentioned, we've been on a run now for the last several years of making the prototype a bit smaller, we'll continue to push the envelope there. So overall, we think that there's plenty of additional opportunities to expand the store base.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Kimberly Greenberger with Morgan Stanley.

--------------------------------------------------------------------------------

Kimberly Conroy Greenberger, Morgan Stanley, Research Division - MD [20]

--------------------------------------------------------------------------------

Michael, thank you for sharing your full potential strategy. This has been a very helpful call. I wanted to just ask about the strategy. And I appreciate the glide path that you offered with some modest benefits here this year, more progress next year and far greater impact by 2022. I'm wondering if you could help us understand which of the 5 or maybe 2 or 3 of the 5, you would start to see modest benefit from? And I would imagine that particularly item number two, investing in the merchandising team, I would imagine that those will be some expenses that will perhaps ramp earlier maybe than some of the benefits, I think you alluded to that earlier. So what would be -- which elements of the strategy would you expect to -- sitting here a year from now, will you expect to be able to say, we made progress on x and y, while we invested on a and b? That would be helpful.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [21]

--------------------------------------------------------------------------------

Sure. Yes. Well, Kimberly, that's a good question. As an executive team, we've actually spent quite a bit of time sort of working through the timing and pacing of the strategy. We want to make sure that we're biting things off in digestible chunks, and that we can make progress on the things that are the closest in, that would be easiest to sort of start with. And as we work through the various initiatives, I would say that they fell into 3 segments: Number one, initiatives that we're moving forward with right away; number two, initiatives that we need to test or to pilot or it will take a little bit longer to get underway; and then number three, initiatives that, frankly, we need to study a bit more. They're not for implementation in 2020, but maybe in 2021.

Now the things that really you're getting at are in that first bucket. And they're the obvious things. The stronger sales pace. We're starting -- we're already in a stronger sales chase right now, planning the business more conservatively, controlling liquidity much more tightly than we have in the past. So that's something we're doing out of the blocks. Leaner inventories, making sure that our inventories are -- the content of our inventories is as high quality as possible and that we're turning as fast as possible. Again, out of the blocks, where that's a key initiative that we're moving forward on. Also, within that first bucket, we're making investments in the merchant team. So we are moving forward on that. But I think the benefits of that will come later because, obviously, it takes time to build head count, to build talent and to actually have an impact on the business.

Now the other things -- the things that fall into the other buckets, the initiatives we need to test or to pilot and the initiatives we need to study for later implementation, I won't get into those for competitive reasons. But they're all designed to help us more effectively and fully execute the off-price model. They're all under that umbrella and includes initiatives in merchandise planning and supply chain, stores, loss prevention, real estate, marketing and other areas. But overall, I feel like, as an executive team, we feel good about the amount of activity that we have going on in 2020. And as I said in my remarks, we think there'll be some early beneficial impacts this year, and that will cascade over time in a way that you mentioned in your question.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Michael Binetti with Crédit Suisse.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

The -- I guess, the -- I want to ask you another way, that 15% comp inventory reduction is one of the big standouts. Michael, I think John mentioned that there was some investments that start to flow in, in the first quarter. But you also mentioned that the inventory initiatives are an area where I thought you said you'd see results a little more quickly versus some of the other initiatives you mentioned, that'll pay off more over time. How does that factor into the first quarter guidance? And can you help us understand how much some of those investments you did mention impact the guidance for the first quarter? So we can maybe think a little bit more about the underlying trends in the business as you start the new strategy here.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [24]

--------------------------------------------------------------------------------

Sure. Well, the -- let me, sort of answer your question more broadly. The faster inventory turns in our business should drive lower markdowns and actually should drive lower operating expense. So we've included some portion of that in Q1 and then more as we get through the year. The -- now the reason why we feel we can turn faster is, we've been carrying a lot of inventory over time. And compared with our peers, we turn more slowly. We carry more inventory. And that's why we're very confident that we can turn the business faster than we have. We also believe that as we reduced inventories, by doing that, we'll actually increase the mix of fresh receipts in the rack, and that will help to drive sales, especially as we chase the business, if the trend is there. So John, I don't know if you'd add anything else to that in terms of...

--------------------------------------------------------------------------------

John D. Crimmins, Burlington Stores, Inc. - Executive VP & CFO [25]

--------------------------------------------------------------------------------

I think the only thing I'd say is, if you look at our full year guidance, what we tried to do this year was ensure that the incremental investments that we're making in the business over the course of the year would be mostly offset by expense savings that we've also built into the plan. And Michael talked in his opening remarks about our planning process being a little more rigorous this year, and we had some difficult discussions and all of our expense managers managed to hit our expense targets for the year, which has allowed us to make some of these incremental investments over the course of the year. They have a little bit of a bigger impact in the first quarter, partly because it's our smallest sales quarter and just the timing of how the expenses kick in.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Got you. And if I could follow that, you mentioned that, I think, traffic was slightly down in the quarter. I know there's a lot of new initiatives coming up. Obviously, we see the comp inventory, you started to pull back, and there's a lot going on in stores. But with the traffic down in fourth quarter, generally, traffic across off-price has been positive for several years, how do you -- Michael, how do you frame the traffic you saw in the quarter versus that industry trend? And how you think about the comps in the business going forward? And again, we understand there's a lot going on in stores in the fourth quarter.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [27]

--------------------------------------------------------------------------------

Yes. No, I think it's a fair question. It's actually -- since I've been at Burlington, one of the things that I've realized is our business, for lots of legacy reasons, our business -- the traffic in our business tends to be more affected by the weather than I would say our peers. And we never use that as an excuse. Actually, we are very happy with our comp performance for Q4. And what it tells you is, because it was a very warm winter, our traffic into our stores was lighter. But the traffic that came into our stores, like what they saw and bought more of it, and that's what really drove that comp. That's how I interpret those numbers.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from John Morris with Davidson.

--------------------------------------------------------------------------------

John Dygert Morris, D.A. Davidson & Co., Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Congratulations on the great quarter, and thanks for that clarity, Michael and John. Question on the -- probably a little bit more about where you see the opportunity with the merchant team. And it sounds like you've said that there's the potential to increase the team. I'm wondering if you can share with us to what degree, I guess, in terms of ads, has that already started? And particularly within the merchandising, where is the opportunity?

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [30]

--------------------------------------------------------------------------------

Yes, thank you, John. Yes, as I described in my prepared remarks, the core premise of our full potential strategy is that the off-price customer cares above all else, about great merchandise value. So that's where we need to invest. The key enabler of delivering great merchandise value to our customers is the strength of our merchandising capabilities. Those are critical to building vendor relationships, sourcing great merchandise and to developing new and existing businesses. Now we're lucky, we have a terrific merchant and planning team today. But over the next few years, we're going to be investing heavily to further strengthen that group. And the plan includes several important elements. Number one, significant investment in growing our own. This means more training, coaching and professional development for our merchants and planners so they can become even more effective. They can develop their skills and capabilities, and they can build their careers at Burlington. Secondly, a major increase in merchant and planning headcount at all levels of experience and seniority, so we can add more coverage and depth across categories and vendors. And that's going to include growth in all of our major buying offices, New Jersey, New York and Los Angeles. Thirdly, investments and improvements in our merchandising systems, IT tools and reports. The merchandising and IT teams have done a very good job over the last several years, upgrading and updating our systems. We believe we can further enhance those systems to enable our full potential strategy and actually, to drive competitive advantage. And then fourthly, there's a whole bunch of other programs that we're working on to leverage the capabilities that we have and to provide greater operational support, if you like, to our merchant group.

Now I would say that we've already ramped up, significantly ramped up activity across all 4 of those buckets, it's already started. And that activity is going to continue for the next few years. In my earlier comments, all I really meant was it will take time for those investments to significantly pay back as we sort of expand existing businesses and develop new businesses. But we're certainly already well underway with increasing the investment.

--------------------------------------------------------------------------------

David J. Glick, Burlington Stores, Inc. - Senior VP of IR & Treasurer [31]

--------------------------------------------------------------------------------

Operator, we have time for one more question, one more question.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Last question comes from Roxanne Meyer with MKM Partners.

--------------------------------------------------------------------------------

Roxanne Felice Meyer, MKM Partners LLC, Research Division - MD & Senior Research Analyst for Specialty Retail [33]

--------------------------------------------------------------------------------

I have a question regarding the change in inventory strategy that you have and how you think about pack-and-hold as part of that strategy going forward. And second, I'm just wondering if you can comment on the performance of new store performance over the last year, relative to prior classes.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [34]

--------------------------------------------------------------------------------

Sure. So Roxanne, on the pack-and-hold question. We mentioned in today's press release that pack-and-hold inventory had declined from 30% of total inventory a year ago to 26% at the end of Q4. But I would caution you not to read too much into that. Last year's number was somewhat inflated because we had bought merchandise ahead of the tariff deadlines that we had back then. And this year's number of 26% is more in line with historical levels. I would say two other things. One is it's important to understand that pack-and-hold inventory is -- it's comprised of opportunistic buys. So by definition, the level can fluctuate based on the opportunities that the merchants see. So it's hard to predict it quarter-to-quarter. Secondly, I would also say that we like pack-and-hold inventory. And I think it's possible that over time, we're going to want to grow our pack-and-hold strategically. That's more of a longer-term burn. But I think I just wanted to get across there that we believe in pack-and-hold as an important way of bringing in great merchandise value to our inventory.

--------------------------------------------------------------------------------

John D. Crimmins, Burlington Stores, Inc. - Executive VP & CFO [35]

--------------------------------------------------------------------------------

So I'll take the new stores performance question. So we continue to be very pleased with the performance of our new stores from a sales perspective and from a profitability perspective. They've continued to perform in line with, or better than, our underwriting models. As we said previously, our new stores have been and are going to continue to be a driver of our comp store sales growth and operating margin expansion. So let me just kind of walk you through a few nuggets, if you will.

So it starts with -- we have some pretty rigorous financial hurdles for all of our new stores. First of all, they're underwritten to be EBIT accretive in their second year, and they're underwritten to be accretive to the company's ROIC, so return on invested capital, obviously. And we're pleased that, on average, our recent store cohorts have been outperforming their underwriting models. Second, the newer cohorts, the stores that have opened in 2015 through 2017 that are past to their year 2, which is our underwriting based year, have been nicely out-comping the chain in 2019. We also had EBIT margin increases that handily exceeded the EBIT increase for the chain. So we think we're seeing is an indication of a longer maturity curve than we used to see in our newer stores going back several years. And that's particularly encouraging since we underwrite them to be accretive to the company's EBIT in year 2.

--------------------------------------------------------------------------------

Michael B. O'Sullivan, Burlington Stores, Inc. - CEO & Director [36]

--------------------------------------------------------------------------------

Thank you for joining us on the call today. We appreciate your questions. We look forward to speaking with you at again end of May to discuss our first quarter results. Thank you very much.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. And have a wonderful day.