Greetings, and welcome to the Burlington Stores Third Quarter Fiscal 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Glick, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s 2017 third fiscal quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, Chief Financial Officer and Principal. Before I turn the call over to Tom, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our express permission. A replay of the call will be available until December 5, 2017. 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 2016 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 Tom.

Thank you, David. Good morning, everyone. We are pleased to report strong third quarter results, driven by a solid 3.1% comparable store sales increase, which was on top of a strong 3.7% increase in fiscal 2016. Adjusted operating margin or EBIT expanded by 100 basis points, an outstanding result driven by increased merchandize margin, which combined with our overall strong sales increase of 7.1% drove a 37% increase in adjusted earnings per share, significantly ahead of our guidance. It is worth noting that the hurricanes that impacted Texas, Florida and particularly Puerto Rico resulted an 80 stores closed for at least one day. Our company policy is to remove those stores that are closed for seven or more days within a month during the quarter from our comparable store sales calculation. Accordingly, we removed one store for August, 19 for September and 12 for October. As of the end of November, we’ll still have eight stores closed that we believe will reopen in spring of 2018. Turning to highlights of the third quarter. This was our 19th consecutive quarter of positive comp sales growth. Our comp sales growth was in part driven by an increase in traffic, our 11th quarterly traffic increase out of the last 13 quarters. We delivered 100 basis point expansion in gross margin which drove 115 basis point increase in our adjusted EBITDA margin and 100 basis point increase in our adjusted operating margin. And our adjusted earnings per share grew 37%. Our new store performance was once again a highlight of our quarterly results. Our new and non-comp stores continued to outperform, contributing an incremental $60 million in sales in the third quarter. Note that this incremental sales contribution was negatively impacted by $17 million in lost sales from stores that were closed for seven…

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the third quarter by recording our 19th consecutive quarter of positive comparable store sales. In addition, we achieved strong contribution from new stores and expansion in adjusted EBIT margin, which combined deliver a 37% increase in adjusted earnings per share. Turning to a review of the income statement. For the third quarter, total sales increased 7.1%, and comparable store sales increased 3.1%, on top of last year’s strong 3.7% increase. For the quarter, our comparable store sales performance was driven by increases in traffic, average unit retail and units per transaction, while conversion was flat versus last year. The gross margin rate was 42.2% an increase of 100 basis points versus last year, driven once again primarily by lower markdowns, although higher IMU was again a contributor. As a reminder, as it relates to inventory shortage, we recorded 65 basis points of good news related to shortage in the fourth quarter of last year as last year’s result was significantly better than the prior year. This year, we are planning our full year rate to be only slightly below last year. Given that we accrue based on last year’s annual rate for the first three quarters, Q4 is not expected to be significantly different. As we stated on our Q2 call, we continue to expect a 20 basis point or $0.03 shortage headwind in Q4 of this year. Product sourcing costs, which are included in SG&A and include the cost of processing goods through our supply chain and buying costs, were essentially flat to last year as a percentage of sales. While we are not planning for product sourcing cost leverage in the near term, we are nevertheless very pleased with the continued productivity improvements in…

Thanks, Marc. In summary, we believe our results this quarter demonstrate the agility of our business model. We drove operating results well above our expectations, and we remain confident in our growth initiatives and store expansion plans. We are confident in our outlook and believe in our focus on evolving our off-price model and our ability to capitalize on the rapidly changing retail landscape. This positions us well to bring more great brands, styles and value to our customers and increased value for our shareholders. Again, I’d like to thank the store, supply chain and corporate teams for their contributions to our strong year-to-date results. Before I turn the call back to the operator, I’d like to take the opportunity to express our concern and appreciation for our associates and customers in Texas, Florida and Puerto Rico, whose lives were disrupted by the devastating series of hurricanes that severely impacted these regions. I’m still appreciative of the resilience and generosity of our associates in these impacted areas, who have helped get our stores and their communities back on their feet. I am proud of the recovery effort contributions not only provided by the company but also from our associates and customers across the country, who have given so generously to the Red Cross, The Salvation Army and other charitable organizations. With that, I’d like to turn the call over to the operator to begin the question-and-answer portion of the call. Operator?

[Operator Instructions] Our first question is from the line of Matthew Boss with JP Morgan. Please proceed with your question.

Great. Congrats on the nice quarter guys. So Tom, can you speak to product availability? I guess more so, what’s the best way to foot commentary from some national brands speaking to cutting back on off-price? And I mean, how should we think about leaner department store inventories and some sales shifting online? Just any way to size up the off-price business model? Do any of these have an impact multiyear?

Hi Matt. I’ve been asked that question now for almost nine years, and I know there’s always this concern about product availability. So I’m glad you asked that question. So while a few brands might moderate in terms of supply from time to time, overall, our top brands remain good partners. We continue to grow our business. We don’t see any issues. In terms of product availability, supply has never been better. Really interesting, the shift to online that you mentioned is actually a benefit to us in terms of product availability. We are finding that brands would rather clear product by selling to us and let us invisibly sell their clearance through our stores rather than run clearance sales on their websites that might damage their brand integrity. As you heard in our prepared remarks, pack and hold is 15% of our inventory versus 12% last year, driven by a higher amount of better and best brands. I think that number speaks for us in terms of the current availability of brands at great values. Matt, we’re in the market every week working to open new vendors. We open them up every week and absolutely getting access to new brands. We continue to upgrade our vendor base as we added 1,300 new vendors and eliminated a similar number in 2016. And we carry about 5,000 vendors and expect that number to increase. So in summary, really, there’s a lot of product available, and we’re encouraged by what we’re seeing in terms of the quality of the product that we’re getting.

Great. And then just a follow-up. I think a clear point on the call seemed to be your enthusiasm around the gifting opportunity. I guess can you just elaborate on steps that you’ve taken and how best to size up the overall opportunity this year in the fourth quarter, with gifting just versus the strategy and investment that you made a year ago?

Okay. As I said in prepared remarks, we have a lot – we’ve made a lot of progress on our gifting strategy and in de-weathering our business. We haven’t really shared the sales opportunity in gifts, but we do see it as a difference maker in the fourth quarter. Something we did a little differently this year is deliver more receipts in October in order to set up gifts in all doors in the beginning of November. We just thought we needed more supply as we went into the fourth quarter, building products earlier than we did last year. And we really feel that overall, this will benefit us for the fourth quarter. You’ll see gifts included in our holiday TV campaign as we seek to be a holiday gift destination for existing as well as potential new customers. What’s really encouraging is, I went to about close to 25 stores last week, and our in-store execution, the quality of the merchandise that our buyers are bringing in really was exciting to see, very – concept consistency from store to store. And we invite all of you to go out and look at our great gift presentation that we have in those stores currently.

Great. Best of luck.

Thank you.

Our next question is from the line of Ike Boruchow with Wells Fargo. Please go ahead with your question.

Hey, good morning everyone. Thanks for taking my question. First question is for – I guess, for Marc. So Marc, I think you said hurricane impact, lost sales, $17 million in Q3, $25 million in Q4. Just making sure I have that right. And then are there any additional P&L impacts that we should keep in mind that go along with those lost sales?

Hey, good morning Irwin. Thanks for joining us this morning. Let’s just take a step back. I want to talk about weather-related events in general. So typically, when we experience a few days where a store is closed, what we oftentimes see in the weeks following the event is, call it a bounce back, call it replenishment activity, but we tend to get more business than what we really lost during the closure. And we believe that was the case for the majority of the 80 stores that were closed due to these weather-related events. Unfortunately, this hurricane season had a more devastating impact and, as we said, resulted in the 19 stores closed for seven or more days in September and then 12 of those 19 stayed closed through October. So we believe those more extended closures do result in lost sales. And that’s what equated to the $17 million in Q3, and those were the stores that we removed from comps. So you have that right. In terms of additional P&L impact, we did incur about $1.1 million of weather-related expenses that were not offset in the third quarter because we did not meet our insurance deductibles. There’s about another $1.1 million on top of the flow-through from the $17 million. So as I shift to Q4 now, at the end of the Q3, we mentioned we had 12 stores that remained closed. To be honest with you, Irwin, as of today, we still have 12 that are closed. We do think that four will reopen by the end of November. So we expect to have eight stores closed for the entire fourth quarter. Six of those are in Puerto Rico and then two additional. And that’s the $25 million in lost sales for Q4. As far as the P&L impact for Q4, we did not lower our Q4 guidance because we believe that we can offset the EBIT loss and the $25 million through reductions in SG&A and insurance recoveries. So that’s why we kept our guidance the same for Q4, EPS point of view.

Got it. And a follow-up. Maybe some color about – I think last year on the Q3 call, you gave us some out year color. Anything on 2018? There’s a lot of moving parts that impacted this year. There’s a 53rd week, stock-based comp, wage pressure, et cetera. So is there any chance you can help us understand some of these factors into 2018 plans and bottom line growth?

Sure. I got to start that one with the caveat that we have not finalized our financial plans for 2018, so things could change. Obviously, we’ll discuss it in detail on our year-end call. But with that said, we have done a fair amount of work on 2018, so I’ll share with you some color as it stands today. In terms of the headwinds, we’re going to continue to see wage pressure in both the stores and the DCs. As you know, we take a market-by-market approach to analyze our competitiveness, and we have completed that review for 2018. And it looks like wage pressure is going to be similar in 2018 as it was in 2017, so similar wage pressure. The two other headwinds are stock-based comp expense and depreciation. Stock-based comp will continue to be a headwind, but we expect that increase to moderate relative to the increase we saw this year in 2017. Depreciation, on the other hand, is going to work the other way. That’s going to increase at a faster rate in 2018 than in 2017, and that’s based on our higher capital spend this year. And by the way, 2018, the best proxy for 2018 capital is 2017. With that said, with the headwinds, we continue to be impressed by all of our sales support teams who continue to embrace our profit improvement culture. And we find ways to become more efficient, really creative ways that really helps with the offsets here. And at the end of the day, we still view ourselves as a growth company. We believe we can deliver a double-digit increase in EPS despite these headwinds. But to your point, Irwin, just to keep in perspective a lot of the ins and outs that are happening this year, we would recommend you start with our all-in number for 2017, back out the 53rd week, back out the accounting change for stock-based comp, and right now, those two together about $0.24, and then that will give you what we refer to as a base 2017 EPS. Then to that, apply a mid-teens EPS increase from that 52-week number. And then the final step would be to add the same number as last year for the accounting change for stock-based comp, which is $0.20.

Got it. Its very helpful. Thank you so much.

Our next question is from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Great. Thank you so much. Congratulations on a really fine third quarter. Marc, I wanted to follow up with you on your comments regarding the closed stores for the fourth quarter. Can you quantify the negative impact of the $25 million lost revenue on EBIT or EPS? It sounded like you said you’d be able to offset that lost impact on – with SG&A savings and insurance proceeds. I just want to make sure I heard that correctly.

You did hear it correctly, Kimberly, and yes, it’s $25 million in lost sales. I think you could figure out the EBIT flow-through on that, but you absolutely heard it right. We obviously knew these eight stores would be – or felt very strongly back in even September that they’d be closed for a while. So we kind of put some plans in place to make sure we can offset that EBIT loss. And we think between – we feel very confident between reductions in SG&A and insurance recoveries come through to offset that EBIT loss.

Great. Thank you so much. And then in terms of gross margin, you had a very nice lift obviously at gross margin here in the third quarter. Normally, we don’t see that kind of a result on a 3% comp. So there’s clearly something going on well internally to drive that level of improvement. I’m wondering if you can just comment on the improvement in merchandise margin. And I think you mentioned that IMU was also better. What’s driving those two?

Sure. I’d tell you, it was the third quarter in a row we really need to credit our merchandising team for how well they managed receipts. We mentioned our comp store inventories were down 2%. I think we explained that, and our comp store turnover increased 10%. One of the things, as we started the quarter out, at the beginning with our goods aged 91 days and older kind of at record low levels, and then we ended Q3 really the same way, goods aged 91 days and older at record low levels. So just the merchants doing a phenomenal job, turning faster, keeping aged inventory down. And the 100 basis point improvement that was – by far, the biggest piece of that was a lower markdown rate. We did get some help from a higher IMU, as you mentioned, and that higher IMU comes across all buy types. So really, we think a function of just the maturity of our buying team and how well they’re buying.

Yes. I just want to sort of piggyback on what Marc is saying. Our merchant team has come a long way in terms of understanding how to execute the off-price model. Obviously, Jennifer Vecchio has helped us a lot in that regard. And as we get better, we’re able to obviously – our selectivity of product gets better, and our markdowns get lower, and we’re able to take advantage of a little bit of more mark-on.

Terrific. Thank you.

Thank you.

Our next question is from the line of Lorraine Hutchinson with Bank of America. Please go ahead with your question.

Thank you, good morning. Marc, I just wanted to follow up – I wanted to follow up on the guidelines that you gave for 2018. At the end, you said add back $0.20 for the stock-based comp. Does that mean that you think the tax rate will look similar in 2018 as it did to 2017?

Yes. That doesn’t assume any changes in the tax rates. We think that’ll be – it’s really more of a function of where is your stock price going to be and how we do think our associates are going to execute on options that they have. So it’s a tough thing to really try to pin down. The modeling that we’ve done right now tells us that, that number that’s available in terms of what’s going to invest and options that can be exercised is very similar to last year. And we make assumptions on what we think the stock prices are going to be. And right now, as we’ve laid it out, we do think that 2018 is going to be very close to 2017. If that changes at all, we tie the plans downs and finalize those, we’ll let you know. But for right now, our best proxy for 2018 is the 2017 number of $0.20.

And then the mid-teens earnings growth rate, does that include any buyback? Or would that be incremental?

That would be incremental.

Thank you.

Thanks, Lorraine.

Our next question is from the line of John Morris with BMO Capital Markets. Please proceed with your question.

Thanks. My congrats as well to everybody. Quick question off the bat here, Marc. The improvement in traffic, was that actually positive traffic? I just want to get that clarification.

Yes, traffic’s up 11 out of the last 13 quarters, John.

Okay, good. That’s significant. The remodel program, maybe a little bit more color there on what your learnings are so far. Maybe – I don’t know if you all have store-level ROI numbers for how that’s tracking or if you could give us a little bit of a feel for the success there with this smaller store format, whether it’s remodel or some of the new openings. And maybe tell us, with the remodels next year at least initially look similar to the numbers – very impressive numbers that we’ve had this year, and what’s the potential that we see across the chain?

Okay. Yes, as far as the number of remodels in 2018, I think your best proxy there is 2017. So the 34 is right. We are tracking the 34 remodels that we completed this year right now. So we’ll be able to give you true color as to what lift we get from those, John, hopefully by the Q4 call or the Q1 call. What I will tell you just historically as we’ve done remodels, we do see a sales lift there, and we do generate an IRR. It is not near as high as what we got on a new store. As we’ve said, our new stores, our IRRs far exceed our cost of capital. And while, again, we do get a sales lift in our remodels, we typically generate an IRR that’s a little shy of our cost of capital.

On the remodel comment, obviously, we’re on a mission to really – over the next five years to have the majority of our stores at our brand standard. I mean, just if you think about it, this year with 48 new stores, gross new stores and 34 remodels, that’s 82 stores that were changed or new, and we ended with 629. So if you look at that, that’s a pretty big percentage of our store base overall. But you’ll see a continuous effort on our part to continue to improve our portfolio of stores. And when we do a remodel, we’re going to – we’re taking the size of the store, rightsizing the store. And that’ll happen to adjust to our new model that we’re operating in, between a 40,000 and 50,000 square foot store.

Great, Tom. Good luck for holiday. Thanks.

Our next question is from the line of Brian Tunick with RBC Capital Markets. Please proceed with your question.

Good morning this is Bilun Boyner on for Brian. Thanks for taking the question. So as you look at Q4 to holidays, I know you highlighted you’re excited about gift-giving opportunities, including home and beauty. But for cold weather product buys, how are you planning those versus last year? And then in terms of market share gains, how do you expect the environment to be with all the liquidation sales going on, especially in the mid-tier department stores type?

Can you ask the question again about the product? What were you saying about what product?

Cold weather, cold since weather.

But what about cold weather product?

How are you planning those compared to last year and maybe your expectations for the weather, whether or not…

We always go – okay, thank you for clarifying that. I didn’t – I couldn’t hear you. Cold weather, we always plan conservatively, to be honest with you, just because of the fact that we’re working hard on de-weathering our business. We really feel that gifts are really critical in that pursuit overall. Yes, we just go into every season looking at it conservatively. It’s hard to predict what the weather is going to be, and we would just – we just prefer to react to the business as it emerges or be a little short overall. But in terms of market share, I may have to just look at our total sales. I mean, it appears that we are gaining market share, and obviously, we’re guiding to a strong total sales number in the fourth quarter overall. So we really feel that based on our new stores and our comp performance, that yes, we will continue and we have gained market share quarter-by-quarter.

Okay. Thanks very much.

Our next question is from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed with your question.

Thanks. Good afternoon everyone. I had two questions. First, on the Northeast, over the last many quarters, it’s been a standout positive market for you. So I was curious if the weakness you called out this quarter, you think is just related to weather and whether cold weather product, which you said was an underperforming category across the chain, was especially an issue in this market. My second issue is just on the pack and hold inventory. Those numbers had been coming down year-over-year for a number of quarters, up this year. Anything you can tell us just about the complexion or characterization of what’s in pack and hold and where you saw specific opportunity? Thank you.

As far as the Northeast goes, it was really simply just weather related. It was obviously warmer than the prior year. There’s nothing fundamentally wrong with our Northeast performance. And you’re right, it’s been doing very well. But like every other retailer, the cold weather product underperformed, and in the Northeast, we obviously had a tougher performance overall. The level of pack and hold, I mean, we went from 12% to 15% and is really because there’s a lot of deals out there that we could advantage of, especially in high-quality products and in better and best brands. So we’re – again, we don’t really target what level of pack and hold we want to have. It’s really dictated based on the deals that are out there and what we can take advantage of. And we happened to see a lot of good deals, so we took advantage of it during the third quarter. But again, we’re just not going to target the level of pack and hold, and we’re just going to let the quality of the deals speak for themselves.

Great. Thank you so much.

Thank you.

Our next question is from the line of John Kernan with Cowen and Company. Please proceed with your question.

Good morning. This is Krista Zuber on for John. Thank you for taking our questions. First, just if you could give us a little bit of insight as to how you feel about the merch margin opportunity in 2018 Particularly since your gross margin seems to be at a multiyear high, just wondering if you set any sort of target for sort of further expansion potential there.

No, at this point, I wouldn’t give any specifics on merch margin expansion in 2018 other than just to remind you, as we look at the 400 basis points to 600 basis points of opportunity between us and our peers, it is split pretty evenly between gross margin and SG&A. So in saying that, that would imply that we continue to expect healthy increases in our merch margins for the – at least until we close that gap.

Okay, great. And then just one sort of housekeeping on sort of cash flow. Just any sense of what we should be thinking about for debt payment in 2018? Again, thank you for the guidance on the debt repricing and the lowered payment on interest expense there. Thank you.

So, we’re very pleased with the repricing and extension that we did in November. As Marc mentioned earlier, we expect to see a $2.8 million cash shave in interest expense annually going forward. In terms of debt repayment, we did reset the mandatory amortization payments, which is 1% of the $1.17 billion [ph] so will be paying back about $12 million a year going forward that’s required now with the new amend and extend. Beyond that, we’ll continue to evaluate what’s more accretive, debt paydown or share repurchase. And we’ll adjust accordingly when we think it’s more appropriate to do either. And none of that’s built into any of the future guidance we give you, and we’ll share with that each quarter as we go.

Operator, we have time for one more question.

Yes. The question will be coming from the line of Dana Telsey with Telsey Advisory Group.

Good morning everyone. Thank for getting me in and congratulations on the very good results. One of the things we’ve been noticing is some creative new product additions that you’ve been having, like the preowned luxury vintage, I think, that you highlighted on your website earlier. As you think about these other categories, how is that doing? Is there opportunity for more different types of product? And with the enhancement and expansion of beauty and what you’re doing with home, how do you see that merchandise margin opportunity playing out? Do new categories give you further merchandise margin opportunity? Thank you.

We’re always looking for other categories to do business. That’s obviously important part of our overall model. We really haven’t given out specifics in terms of things that – specific things on the e-commerce site overall. So – but we’re always in the hunt. We’re always in the hunt for things that we can do to accelerate our business overall. Not really going to talk about anything that’s on the horizon in terms of what we’re doing obviously for reasons you probably could expect, Dana, and we’re not going to talk about our long-term strategies or overall strategies. But all I can tell you is we’re going to continue to look for ways to do more business and look for categories that can help us build our business. As far as the margin opportunities, in the new categories such as beauty, most of them are really in line with our overall margins in terms of the rate that we have right now. I don’t know, Marc, if you want to talk to that at all.

No. I think you said it well. Dana, our merchandise margins as we look across categories – though other than Baby Depot. Baby Depot clearly is our lowest-merchandise margin category. Other than that, they really don’t run that different. So as we drive beauty, as we drive home, everything seems to work for us in what we’re trying to do here. It’s very consistent gross margins other than Baby.

Thank you.

Thank you.

Thank you. I will now turn the floor back to Tom Kingsbury for closing remarks.

Well, thanks, everyone, for joining us today. Happy Thanksgiving to all of you and your families. Enjoy the holidays, and happy shopping. We look forward to speaking with you when we report our fourth quarter results in March. Thanks again.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.