Good day, ladies and gentlemen, and welcome to the Burlington Stores Incorporated Third Quarter 2018 Earnings Webcast Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call may be recorded. I would now like to turn the conference over to David Glick, Vice President of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2018 third 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 expressed permission. A replay of the call will be available until December 5, 2018. 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 2017 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 were very pleased with our third quarter results, driven by a comparable store sales gain of 4.4%, total sales increase of 13.7% and an 80 basis point expansion in adjusted EBIT margin. These results drove a strong 73% increase in adjusted earnings per share well ahead of our guidance. We remain highly focused on executing the strategies that have driven consistent comparable store sales and increased EBIT margin results over the past several years. Turning to highlights of the third quarter. This is our 23rd consecutive quarter of positive comp sales growth. Our total sales growth exceeded the high-end of our guidance by 170 basis points, driven by above planned comparable store sales and an outperformance in new and non-comp sales. We leveraged SG&A less product sourcing costs by 60 basis points and expanded our gross margin by 20 basis points, which drove an 80 basis point increase in our adjusted EBIT margin and our adjusted earnings per share grew 73%. As a reminder, our comparable store sales increase of 4.4% lines up the comparable calendar weeks, specifically the 13 weeks ended November 3, 2018 versus the 13 weeks ended November 4, 2017. We continue to believe this is the most accurate representation of our comparable store sales performance and is the basis in which we plan and manage our business. Once again, a key driver of our results with the outstanding performance of our new stores. Our total sales increased 13.7%, 170 basis point above the high-end of our sales guidance. Our strong sales growth was driven by an acceleration in comparable store sales from the second quarter trend, as well as the strong performance of our new and non-comp stores, which contributed $128 million in sales for the quarter. As a…

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the third quarter by reporting our 23rd consecutive quarter of positive comparable store sales. In addition, we achieved strong contribution from new and non-comp stores and expansion in adjusted EBIT margin, which combined delivered a 73% increase in adjusted earnings per share. Next, I will turn to a review of the income statement. Due to the 53rd-week in fiscal 2017, our results are reported for the 13 weeks ended November 3, 2018 versus the 13 weeks ended October 28, 2017. All of our results are reported on this fiscal basis with the exception of comparable store sales, which we report on a shifted basis, comparing similar calendar weeks, which are the 13 weeks ended November 3, 2018 versus the 13 weeks ended November 4, 2017. For the third quarter, total sales increased 13.7% and comparable store sales increased 4.4% on top of last year’s 3.1% increase. New and non-comp stores contributed an incremental $128 million in sales for the third quarter. As Tom mentioned earlier, we did lose $17 million in sales in the third quarter of 2017, due to weather-related store closures. We did recoup those stores sales in this year’s third quarter, which was a contributor to the significant increase in non-comp sales. Our Q3 comparable store sales performance was driven by increases in traffic, units per transaction and conversion, while AUR was down slightly. We have seen traffic increases in 15 out of the last 17 quarters. As of today, we have reopened all, but one store that closed during the 2017 due to weather-related issues. We expect that store, which is located in Puerto Rico, to reopen in the first quarter of 2019. Gross margin rate was 42.4%, an increase of 20…

Thanks, Marc. In summary, we believe our results this quarter demonstrate once again the flexibility in the strengthening foundation of our business model. We drove financial results above our guidance and expect the execution of our strategic initiatives and store growth plans to enable us to continue our consistent performance. We remain confident in our outlook and remain highly focused on refining our off-price model and our ability to capitalize on the rapidly changing retailing landscape. This positions us well to bring more great brands, styles and value to customers and increase value for shareholders. Again, I would like to thank the store, supply chain and corporate teams for their contributions to our strong third quarter results. Before I turn the call over to the operator, I wanted to congratulate our organization being recognized by the Great Place to Work Institute for the second consecutive year as one of the best workplaces for women, as well as best workplace in retail. To receive these awards for two years in a row illustrates that we are continuing to make progress toward our goal of creating an environment, where everyone matters and feels welcome. Finally, we are winding down our annual campaign, where we raise money in support of the Leukemia & Lymphoma Society effort to find a cure for blood cancers. We are very pleased that we met our $4 million fundraising goal, bringing our total contribution over the last 17 years to more than $36 million. We take great pride in all of these accomplishments. With that, I’d like to turn the call over to the operator to begin the question-and-answer portion of the call. Operator?

Thank you. [Operator Instructions] Our first question comes from Matthew Boss of JPMorgan. Your line is now open.

Thanks, and congrats on a great quarter, guys.

Thanks, Matt.

Thanks, Matt.

So, Tom, your same-store sales acceleration versus 2Q was pretty impressive on both a one and two-year stack basis. I guess, are the receipt flow issues that you spoke to last quarter should we think of those as largely behind us at this point? And maybe any color on category performance and maybe an update on ladies apparel, would be helpful?

Okay. Thanks, Matt. Yes, I’m pleased to report the receipt flow issues we experienced last June are decidedly behind us. I think that was evident in our third quarter comp sales results. Overall, we were very pleased with our third quarter comps, as I mentioned in my prepared remarks, a lot of strong categories were ones that have been consistently performing well for us, including home, beauty and athletic shoes and apparel. In addition, it appears we are gaining share in some more recent additions to our outperforming list, including baby apparel, baby depot and toys, which is really exciting. Finally, men’s and ladies sportswear also were strong. As it relates to your question on ladies apparel, missy sportswear driven by better and active continues to outperform for us. As for the balance of ladies apparel, what we refer to as heritage ladies apparel, these areas didn’t hold us back from putting up a strong overall comp for the quarter. We all recognize that at 22% of our total sales, there’s a big opportunity for us to capitalize on from a penetration standout point, given our peers at closer to 30% of total sales. As I mentioned in my prepared remarks, we now have two SVPs in ladies apparel. We believe that adding more leadership and specialization will improve our ladies apparel business over time, but it is a work in progress.

Great. And then Marc, maybe just a follow-up. Can you provide any additional color maybe to help break down 3Q’s gross margin build and just touch on the drivers and how best to think about product sourcing costs going forward?

Sure, Matt. In terms of gross margin, our merchandise margins were up 40 basis points, and that was primarily driven by a lower markdown rate. We did pick up a little bit in IMU, but the lower markdown rate was the big driver there, and that more than offset the 20 basis points of freight headwinds that we had guided to. It always another quarter we experienced nice comp store turnover improvement unit 6%. And once again, as we mentioned in our prepared remarks, our inventory aged 91 days and over continues to hit record low levels. And our freshness, our goods zero to 30 days old continues to be at very high level, so we feel good about that. The last thing on gross margins probably worth pointing out, Q3 did represent a pretty difficult compare based on what happened in the two prior years. And we had picked up 100 basis points in Q3 of 2017 and 140 in Q3 of 2016. Product sourcing, Matt, you’re right, did edge up a little bit up 20 basis points, really was due to the higher receipt volumes that were impacted by that holiday gifting product acceleration that we spoke to when we pulled receipts out of Q4 into Q3, obviously, processing more receipts because of that. And then in addition, we did experience an increase in merchandise moving in and out of our DC storage locations and that’s for our pack and hold and our short-stay goods. We just had more movement in and out, and I don’t expect that same level to happen next quarter.

Great. Congrats again.

Thanks, Matt.

Thank you. Our next question comes from Ike Boruchow of Wells Fargo. Your line is now open.

Hey, good morning, everyone, Tom, Marc, and David, congrats on another good quarter.

Thank you.

Thanks, Irwin.

I guess, first one, Tom. So, I think we see you accelerate a lot of the holiday gifting product into Q3 and mentioned you had some good momentum in the gift business. I believe you had a pretty good gifting business in holiday last year. Maybe some color on how you’re strategizing to make that business even more important this holiday?

Okay, thanks. So I mentioned in our prepared remarks, we did move $67 million in holiday gifting product into October to accommodate the 53rd-week calendar shift and strengthen our setup. We’re really pleased with the trends in customer response so far to our gift assortment. I was out on the West Coast couple of weeks ago, went to over 20 of our stores and I was very impressed in terms of the content I saw and the presentation I saw in the store. But with that said, I was very glad to see our solid execution in our gift assortment, because as you know, we’re up against a very challenging comp in the fourth quarter from last year, a plus 5.9%. While cold weather categories did comp below the chain last year, we have once again planned them conservatively this year due to weather variability and our continued desire to de-weather our business. We’ll need solid execution in home, beauty and gifting given our tough compare.

Got it. And then just a second question. Marc, on the P&L, I think historically, you’ve given some color on the 3Q calls for the out year. So maybe on 2019, I think, we’ve heard from some of your competitors pressures from things like wages and freight and even more recently the lease accounting standards changes. Any chance you could help us understand how some of those factors may impact Burlington in 2019?

Yes. Sure, Irwin. I’ll start with the caveat that we have not finalized our 2019 financial plan at this point. So, obviously, things could change. We will discuss in more detail on our year-end call in March. But what we can share with you some of our initial findings as we’ve worked through it, especially as it relates to headwinds you called out. Before we get into 2019, let’s set the stage for 2018 and just make sure that we have the right 2018 baseline and we’re talking apples-to-apples. You may recall, when we had that one-time $0.06 tax benefit in Q2 of this year related to a change in New Jersey tax law, and we had spoken about that on our Q2 call. So that’s one item. The second item is the one you brought up on the new lease accounting standard. I mean, that’s going to have an obvious balance sheet implication for us, but it’s also going to result in an incremental $5 million of OpEx for us, which equates to about $0.06 negative impact on 2019. And as it relates to that new standard, these are non-cash timing adjustments that are primarily due to two things. One, tenant improvements, which are dollars that we receive from our landlords. That’s being spread over a longer period of time than what we’ve been able to do historically. And the second is the expensing of certain payroll versus being able to capitalize it in the past. So those are the two drivers of that $5 million. So if we assume that we land at the high-end of our guide for 2018 at $6.37, we believe a $0.12 reduction is appropriate to get to about $6.25 to have proper comparability for next year. In terms of the headwinds for 2019,…

Thanks, Marc. Really helpful.

You got it.

Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Your line is now open.

Thank you. Good morning. I just wanted to confirm first…

Hi, Lorraine.

Hi. I just wanted to confirm first that the 8% to 9% fourth quarter sales growth is on a comparable week basis and doesn’t include the headwind from the 53rd-week?

That is correct.

Okay, thanks. And then, as we look at gross margin for the fourth quarter, I know where – there were some shortage headwinds last year. Is there anything, any other items that we should think about as we’re thinking about gross margin for 4Q and then even into next year?

No, I mean, we’re still going to take somewhere in the neighborhood of 382 to 400 physical inventories in Q4 similar to the inventories we took in July, we expect those to be on plan. But that’s the one unknown that will happen, but other than that nothing atypical.

Thank you.

Thank you. Our next question comes from Kimberly Greenberger of Morgan Stanley. Your line is now open.

Great. Thank you. Really nice quarter here, guys. Congratulations.

Thanks, Kimberly.

I wanted to ask about new stores. The new store productivity this year is consistently come in above our forecast. And I’m wondering if you can talk about the drivers there. Is it simply better site selection? Is it competitor store closures that are giving you a larger market share opportunity? And the 68 gross new stores you opened this year was a really nice acceleration from 2017. Any preliminary outlook for how we should think about store openings in 2019? Thanks.

I’ll talk first and then I’ll let Marc if he wants to add some color to it. I think, the reason we’re doing well in our new stores is what I said multiple times and it’s really our C-Point strategy strategy that we’ve been working with since 2015. Our site selection process is more robust and we’re going into obviously better locations. Yes, I’m sure there’s some transfers from some of the closures as we mentioned with Toys “R” Us, our baby business has been good, our toy business has been very good. So there is some transfer from that. But I think, overall, I think we’re doing well in new stores, because we really have a clear understanding of what we want those stores to look like, where we want to be located, want to make sure that the content our merchants work really hard to make sure we have the right content for all of our new stores. As it relates to 2019, we’ll be happy to give that information on our fourth quarter conference call when we have a little bit better idea and it’s more – it would be a little bit more concrete than to talk about right now.

Understood, thanks. And I just wanted to follow-up, Marc, do you have any color on the comp by month here in the third quarter and whether or not you saw acceleration in October exiting Q3?

I would just say that we were comfortable with every month in the quarter.

Thank you.

Thank you. Our next question comes from John Kernan of Cowen. Your line is now open.

Good morning, everyone. Congrats on another strong quarter.

Thanks, John.

Thanks, John.

So it seems like we’re going to get some type of announcement on tariffs fairly soon. How do you think this is going to affect your vendors in the off-price industry in general? And do you face any potential higher cost from a sourcing perspective?

I’ll take that one. John, first, we only import directly 5% of our receipts. And clearly, not all of the receipts are in tariff-impacted categories and not all are imported from China. So the 5% is relatively low percentage of direct imports relative to most other retailers. Overall, if prices go up, we’ll continue to maintain a relative pricing advantage. If we see retails increase in the full price channel, we’ll maintain our value spread. Maybe potentially based on a disruption in the marketplace that could be a benefit for off-price, we usually do better when there is a disruption overall. But we’ll deal with whatever we have to. Our goal and everybody and the company’s goal and, especially our merchant’s goal is to make sure we’re delivering great value to our customers, desired brands that they want and great values overall. So – but it is what it is and we’ll just have to deal with it as it comes to us.

Got it, thanks. And then, Marc, just one housekeeping question. Is the double-digit EPS growth that you’re talking to for 2019, is that off the $6.25 number? Is that up to $6.30?

Correct.

Okay. Thank you.

Thank you. Our next question comes from Dana Telsey of Telsey Advisory Group. Your line is now open.

Good morning, and congratulations on the very good result. Just expanding on…

Thanks, Dana.

Just expanding on the freight issue, if you think about some of the declines in spot rates for freight, does that at all – in 2019, would you see that at all have easing the impact of freight costs, is there any opportunity? And then when you talk about stores and new store productivity in Toys “R” Us, the Sears’ boxes that are available, obviously, you wouldn’t want that size, but if they’re slivers of those boxes that could be an opportunity for openings in 2019 and perhaps also at good rents, how do you see that opportunity? Thank you.

Okay, Dana, I’ll start off with the freight question, and then I’ll turn it over to Tom. Yes, I mean, in terms of freight, we’ve looked at everything as it relates to the next year, and we had 20 basis points of headwind this year. We’re primarily contract rate-driven. And based on what we see in the rate increases flowing into next year and then our expectations for that fuel and everything from spot rates to our East Coast, West Coast mix and everything else, we still believe that we’ve got 20 basis points headwind that’s coming at us. We’d love for it as we get through the year to not be as impactful. But based on all the data points we have at this point, we’re looking at another 20 basis point headwind.

I’ll take the Sears question. Obviously, we’re more interested in going into power centers, group centers overall. But we have taken advantage of some of the Sears closures, where we’ll take a piece of the building and somebody else would take another piece of the building and they’ll divide it up. And it will appear that our store is more of a storefront building versus a mall-based building, but we’re opportunistic in all of our real estate reviews. I think Kmart is probably more of an opportunity for us, because they’re in very good locations. We’d have to carve up the box based on the current size of our box as we desire. But I would say, that’s probably more of an opportunity than Sears just because it’s more in the locations where we want to be, where we think we can be most successful. So..

Thank you.

…overall, I mean, there’s just a lot of opportunity out there for real estate.

Thank you.

You’re welcome.

Thank you. Our next question comes from Michael Binetti of Credit Suisse. Your line is now open.

Hey, guys, thanks for all the help of the questions here. Just one quick one on the near-term and I have a follow-up. But as you look at the fourth quarter guidance, it seems like you guys are baking in a pretty big deceleration in the EBIT margin improvement story, and I know you like to err on the side of conservatism. But I think the back out math says we’re going to be down 20 basis points, compared to an improvement of about 80 basis points year-to-date. You did mention some of the margin pressure from moving product around and out of DC should get better going forward. I’m just wondering, if you could help us think about the puts and takes that you guys are embedding as you look at the fourth quarter and the lands on that implied guidance?

Yes. Sure, Michael. All your numbers are right. The key though – and by the way, our Q4 guidance hasn’t changed all year. But the biggest factor in that really has to do with the 53rd-week calendar shift. And you’re talking about a total sales increase that’s projected only 8% to 9% versus year-to-date, we’re running 12.1%. So that’s a huge driver there. The other two things on the SG&A front to keep in mind is the investment in wages is the highest in Q4, so that’s going to have the biggest impact. And then based on our ramp-up in CapEx and the timing of our spend in CapEx as it ramped up through the year, we really expect depreciation to delever in Q4 as well.

Okay, helpful. Thank you. I guess then just bigger picture, you helped us some comments on next year with some of the line items that were the big ones that the peer group has pointed out. But I guess as we kind of just backup and think, you guys – we frequently talk about the Burlington story catching up to the margin gap between you guys and your closest off-price peers. As you look at that gap, excluding the freight wage pressure, how do you think about how much control you have on timing as far as pulling those levers that close the gap you had with TJ or to Ross on a multi-year basis to help you continue to drive margin upside in the medium-term if those specific line items remain a cost pressure for a couple of years?

Yes, Mike, I guess the way it is…

I guess, you have lot of control over it, right?

Yes. I guess, the way I’d add to that is, in terms of our EBIT margins, we picked up 370 basis points over the last five years, and we’ve just guided this year to pick up another 40 to 50 and we feel real good about that. The game plan, we’re going to continue to run is going to be the same game plan that we run today, right? So we worry about what we can control. And so as you think about the gross margin side, this model is rooted in value. So as you think about your different margin levers, it’s – IMUs not going to be a huge contributor there, but we know that we can turn faster. So we’re going to continue to plan our comp store inventories down mid to high singles. We strongly believe we can turn faster, that’s going to result in a lower markdown rate. And then, obviously, we’re doing everything in our power and Tom talked a lot to it to drive our top line and driving our top line and increasing our sales productivity is another major driver in helping us close that gap. And the last thing I’d say on SG&A is the number one goal and objective for everybody that works within sales support here at the company as a profit improvement goal. And we’re all looking for ways to become more efficient, I think, always having a list of projects we’re implementing and a list of projects to be analyzed that that’s what helps this offset a lot of these other cost to come through. So it’s going to be the same game plan going forward that we run.

We have time for one more question.

Okay. Thanks, that’s really helpful.

Thank you. And our last question comes from Brian Tunick of Royal Bank of Canada. Your line is now open.

Good morning. This is Bilun on for Brian. I wanted to ask about the smaller store strategy and store pressures. This is another quarter of nice contribution from new stores and not that some of these smaller and/or refreshed stores are more mature, I believe three to four years old and still performing really well, would it be possible for you to share with us maybe some more metrics around them, maybe the comp outperformance or the sales lift you’re seeing from this smaller and/or refreshed stores? Thank you.

Just in general, we continue to be very pleased with our new store performance for both in terms of hitting their underwriting models, not just from a sales point of view, but from a – an EBIT margin point of view as well. And the stat that we give is typically one that we give at year-end, and we’ll be happy to give it at the end of this year too. But I think what you’re referring to is at the end of 2017, we gave a stat comparing our 2014 and 2015 new store cohorts and how they performed versus the balance of the chain, it just so happened, they exceeded the comp average by 240 basis points and their EBIT margin expanded by over 200 basis points more so than the chain. And we’ll update that for the newest round of cohorts at the end of this year.

Thanks very much.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Tom Kingsbury for closing remarks.

Thanks, everybody, for joining us today. We look forward to speaking with you when we report fourth quarter results in early March. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.