Burlington is an underappreciated underdog, analyst explains

According to data released from the Federal Reserve Bank of New York, consumers have surpassed $1 trillion dollars in credit card debt, while a Deloitte survey illustrates American shoppers as planning to spend $567 on average during Black Friday and Cyber Monday shopping events. This spending estimate is a 13% increase from last year's holiday season.

More than ever, consumers are on the lookout for value as they try not to break the bank, putting certain retailers in a better position to capitalize on this trend than others. Bernstein Analyst Aneesha Sherman joins Yahoo Finance to discuss one of those retailers, Burlington Stores (BURL), and why she believes they are an "underdog" ready to pounce.

"Burlington is one of the few retailers across the landscape that has seen positive [comparable] store sales, and we've seen a lot of retailers report this morning, a lot of negative comp. store sales and we've seen that for the second quarter in a row now; the third quarter for some retailers," Sherman outlines. "But, Burlington, as well as other off-price retailers — TJX (TJX) and Ross (ROST) — are all seeing positive comps for three or four quarters in a row, which suggests they are gaining share."

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Video Transcript

- An underappreciated underdog. We certainly are seeing Burlington stores really buck the trend more broadly speaking in retail. How are they doing it? What's giving them the edge?

ANEESHA SHERMAN: The story of Burlington in the last two years has been a story of a retailer that's trying to turn around its business in the midst of a lot of demand side uncertainty and supply side uncertainty. And they've had several different misses and sentiment has been just very low over the past year.

So today's numbers were not a huge beat. They came mostly in line. It was a $0.01 beat, and they didn't change guidance. But because they didn't cut the guide, because the quarter to date performance looks pretty good and the expectations were very low. And on the call just now, the CEO was talking about effectively 30% year over year earnings growth for the next few years as this turnaround story starts to play out. So that's what people are banking on and that's what's driving the huge surge this morning.

- So some of the other thinking would be that a trade down would perhaps benefit Burlington. But is that actually the case right now?

ANEESHA SHERMAN: It is benefiting Burlington. Burlington is one of the few retailers across the landscape that is seeing positive comp store sales. And we saw a lot of retailers report this morning a lot of negative comp store sales. And we've seen that for the second quarter in a row now, the third quarter in a row for some retailers.

But Burlington as well as other off-price retailers, TJX and Ross, are all seeing positive comps for like, three, four days in a row, which suggests they are gaining share. And they are seeing some of that trade down volume as the middle income consumer that's squeezed is trading out of department stores and into off price.

- Initially, when you take a look at these inventory levels here of just about 8% on a year over year basis, what does that then tell us about the promotional activity, maybe the fact that promotional activity won't be as prevalent as we saw just about a year ago?

ANEESHA SHERMAN: I think it will be slightly lower than last year. I mean, if you remember, last year was the peak of promotional activity because everyone, all the brands, all the retailers had effectively over-ordered and gotten way too much supply and were just trying to clear it aggressively. So we had record levels of promotions last year. This is going to be a promotional holiday season. There's no mistaking that. But year over year, it will be slightly better.

So I expect demand to be lower this year than last year but margins to be slightly better because it will be slightly less promotional, though still heavily promotional in more than normalized levels.

- I mean, we're continuing to see the trend be that consumers are looking for deals. They're looking for discounts and trying to cut costs wherever they may. Is that something that they can expect for an extended period of time? And if so, what are the top companies that are positioned well to benefit from that?

ANEESHA SHERMAN: Yeah, I absolutely think so. I mean, last year, the lower income consumer was really struggling. This year, we've seen that middle income segment which those consumers were doing fairly well last year but inflation has finally caught up caught up to their household budgets, their COVID level spending is down, their credit card delinquencies are up, and they're looking for better deals.

So that's what we're seeing in some of these negative department store comps. And the positive off-price comps is we're seeing that gradual trade down. And I think we will see it for a couple more quarters. So in terms of what I would look for is I would look for these off-price names. TJX, Ross, Burlington, they're all going to be beneficiaries.

I mean, I call Burlington the underdog because it is doing slightly worse than TJX and Ross. It just has lower awareness. People still think of it as Burlington Coat Factory, which is what it used to be when we were young. But it is now an off-pricer and it's rebranding itself and in this turnaround. So I think it will continue to see trade down benefit.