Good day, and thank you for standing by. Welcome to the Burlington Stores Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference may be recorded. [Operator Instructions] I’d now like to hand the conference over to David Glick, Group Senior Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2021 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 express permission. A replay of the call will be available until March 10, 2022. 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 2020 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 is Michael. Michael O’Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. On this morning’s call, we are going to provide a lot of detail on our Q4 results and our 2022 outlook, but that is not where we would like to start. We realize that on these types of calls, it can be often be difficult to see the forest for the trees. They tend to be so much focused on short-term issues, but it can sometimes be very hard…

Thanks, Michael, and good morning, everyone. I’ll start with some additional financial details on Q4. Total sales in the quarter grew 18%, while comp sales increased 6%. As Michael said, our comp growth was up 16% in November, but then it started to drop off in December. The gross margin rate was 39.8%, a decrease of 230 basis points versus 2019’s fourth quarter rate of 42.1%. This was driven by a 260 basis point increase in freight expense, which more than offset a 30 basis point increase in merchandise margin, driven by lower markdowns. Product sourcing costs were $159 million versus $89 million in the fourth quarter of 2019, increasing 210 basis points as a percent of sales. Higher supply chain costs represented most of the deleverage. The drivers of these higher costs were consistent with what we have discussed in prior quarters. Adjusted SG&A was $578 million versus $499 million in 2019, decreasing 50 basis points as a percentage of sales. From an expense point of view, the timing of the slowdown in December could not have been worse. By then, we were staffed for holiday based on a low double-digit comp, we pulled back once we got through holiday, but by then, we had incurred significant expense. Adjusted EBIT margin was 9.2%, 410 basis points lower than the fourth quarter of 2019. All of this resulted in diluted earnings per share of $1.80 versus $3.08 in the fourth quarter of 2019. Adjusted diluted earnings per share were $2.53 versus $3.21 in the fourth quarter of 2019. At the end of the quarter, our in-store inventories were down about 30% on a comp store basis. This was consistent with our strategy of finishing the year with much cleaner inventories. Separately, during the quarter, our buyers began to see a…

[Operator Instructions] Our first question comes from Matthew Boss with JPMorgan.

Great. Thanks. So first, Michael, on your full year baseline comp plan, could you provide any color on how you arrived at this plan? How you’re thinking about possible risks and also potential upside drivers to the comp plan for this year? Michael O’Sullivan: Good morning, Matt. Thanks for the question. I think what I’ll do is, split my answer between the full year plan, and then separately, I’ll comment on the first quarter plan. For the full year, our starting point was to look at the three-year stacked comp. I think most investors are familiar with this approach. Historically, we’ve averaged about 3% comp growth per year. So over a three-year period, the stack comp would be 9%, 3 plus 3 plus 3. To hit a three-year stack comp of 9% this year means that our 2022 comp would need to be minus 6%, just mathematically. In other words, take the 15 comps we’ve just reported, which is a two-year stat at minus 6, you get 9%. Now of course, we recognize that, that’s just a starting point. Just because our three-year stack has been 9% historically, doesn’t mean it will be 9% this year, but there are several things that could cause our comps to deviate from history. There are factors that could make it higher. There are certain factors that could drive some upside here, for example. If recovery in traffic accelerates as the pandemic recedes or it’s possible that higher wage rates will mean that sales actually remain quite resilient even as we lap stimulus. And there’s also the possibility that inflation may drive trade-down customers. So there are things that could drive our performance to be better. There are also factors that caused some risk. Again, the impact of inflation could go the other way.…

Great. And then maybe to follow-up, Michael, larger picture – and you touched on it in your first remark there. The larger picture, as we think about the consumer impact of price inflation across the economic backdrop. What impact do you think this could have on your business in terms of traffic and spending levels? And in particular, how you think it may impact or have a potential negative impact on the low-income shopper? Michael O’Sullivan: Yes. It’s a question we’ve been thinking a lot about. We believe that the higher inflation that we’re seeing right now could create a risk to our business, but also it could create a big opportunity. Let’s start with the risk. It’s not hard to articulate the risk. In the coming months, it’s possible that consumers and especially, low-income consumers, as you referenced, will be squeezed as we lap stimulus payments. And at the same time, general price inflation begins to bite, especially on sort of the central items like food and gas. I should point out that a possible mitigant to that is, again, especially among low-income consumers, is that wage rates have also been going up. So we don’t really know how all that will play out, but we recognize that there is a risk. Now as I mentioned a moment ago, there’s also a potential opportunity for us. Usually in times of economic stress when consumers are under pressure, their natural and rational reaction is to focus even more heavily on finding great value. Higher inflation affects everybody. As a value leader at Burlington, we should be well positioned in that situation, and we think we might benefit from a trade-down customer. In my experience tells me that, that is actually what has happened historically. The record shows – I think the record shows that off-price retail has done very well in times of economic stress, but again, we don’t know. Will there be a trade-down customer, when might this grade down happen. So we’re being cautious, and we’ll see what happens.

It’s great color. Thanks for all the detail. Best of luck. Michael O’Sullivan: Thanks, Matt.

Our next question comes from Ike Boruchow with Wells Fargo.

Hey, good morning, Michael, John, David. I guess a question first for Michael and a follow-up for John. Michael, in the past, I think you’ve been fairly cautious, even maybe skeptical about raising retail prices in the off-price space. I guess just bigger picture, what’s changed? And what gives you the confidence that Burlington can start to potentially take some AURs up this year? Michael O’Sullivan: Well, good morning, Ike. Thanks for the question. Yes, you’re right. In the past, I have been very skeptical about price increases. I recognize that in the past couple of quarters, the environment has really changed. If I go back to last summer, my view was that the main driver of higher prices at that point was the sudden growth in consumer demand during a period of constrained supply. So when demand exceeds supply, you get higher prices. But usually, demand and supply move back into equilibrium over time and prices fall back. But since then, I think what’s happened is, we’ve seen just a very rapid and I think somewhat unexpected increase in price inflation across the whole economy, and it doesn’t look like it’s going to end anytime soon. And I think that inflation is going to mean that some of the higher costs we’ve seen, such as higher wage rates are here to stay. Now for retailers, that’s going to mean not just a transitory increase in the cost base, but a permanent increase in their cost base. And the only way to absorb those costs is for retailers to keep prices elevated and also raise prices further. Given that all retailers face this issue, it’s likely to mean that there will be higher retails across the whole industry. Now moving on to what does this mean for us? And actually,…

Got it. Thanks, Michael. And then, John, just real quick. I guess in November, you guys shared a multiyear earnings. Just kind of curious, how does higher pricing and then, of course, higher freight and supply chain expenses affect the model that maybe you described a couple of months ago?

Good morning, Ike. Thanks for your question. Good question. So let me just share how we’re thinking about that. Compared to 2019, as you know, our freight expenses delevered by 170 basis points this year. We’ve talked a lot previously about the global and industry-wide issues around freight. So I’m not going to get into that again. But we do think that over time, these costs should improve. We don’t think they’re going to return all the way to – back to kind of pre-pandemic or historical rates. So it’s still kind of difficult to estimate where that’s going to end up, but we think that some of it may be 50 basis points of the deleverage could become a permanent part of our expense base. On the supply chain side, again, we’ve been talking about that throughout the year. Compared to 2019, we had deleverage there of about 200 basis points. Some of this was higher wage rates, which we expect to be permanent, but some of that deleverage was driven by temporary incentives and inefficiencies that we don’t expect to be permanent. Again, it’s really difficult to kind of forecast or estimate, but we’ll be disappointed if we don’t recapture 50 to 100 basis points of the overall supply chain deleverage. We’re going to have to see how things evolve before we have confidence in where these numbers are landing. But if our numbers are right, that would mean that these items would represent 150 to 200 basis points of deleverage or permanent expense structure. Now obviously, we’re not going to accept that neither will any other retailer. We along with all the other major retailers are going to look for ways to recapture this margin. So one of the important levers in recapturing this margin is going…

Thank you.

Our next question comes from Lorraine Hutchinson with Bank of America.

Thank you, good morning. Michael, I have a question about supply. How is the buying environment right now? It looks like your reserve inventory grew really significantly in the fourth quarter. Can you just talk a little bit more about this? Michael O’Sullivan: Sure. Well, good morning, Lorraine. Actually, I’m glad you asked about this. I feel like I spent quite a bit of time on the call talking about how shipping delays hurt us in the fourth quarter. The flip side of that is that silver lining, if you like, is that the shipping issues happened across the retail industry, and they’ve created a really strong buying environment for off-price. We had hoped, we have predicted that, that may happen. Over the past couple of months, our buyers have been able to take advantage of some really terrific buying opportunities, and those – these opportunities have covered four merchandise that we will pack away until later this year and even late arriving spring merchandise and actually, a good size of the increase that happened towards year-end was actually screen merchandise that we’re going to flow to stores over the next few months. We feel very excited about the value and the content of our reserve inventory. Now we’re always very careful about what we allow into our reserve inventory. There are strict controls and strict criteria on what we’re prepared to store away in reserve inventory, but we feel really good about what we have in terms of value and content. Now I think it’s pretty important to point out that, that inventory is going to be important, if, as we hope, we’ll face a stronger trend in 2022. Leaving aside the reserve inventory, we’ve also been seeing a lot of good deals for in-season merchandise that we can close stores right away. My assessment is that coming out of 2021, many retailers and vendors feel quite bullish about the outlook. They may turn out to be right, and I hope they are, but if they’re not, if the trend is not as strong as they had planned, then this is likely to generate a lot of very strong off-price supply. And again, we can use that to fuel any ahead of planned sales.

Thank you. John, it’s been a year since you’ve increased your new store target, and we heard today that you’re continuing to accelerate the store opening cadence. How is the program going? How are these new stores performing? And then how should we think about the impact of this performance on the future outlook?

Good morning, Lorraine. Thanks for the question. Really appreciate this one. So let me start just by reviewing kind of what’s happened since we did announce our 2,000 store target on last year’s fourth quarter call. As we walked through earlier, we finished 2021 with 840 stores after opening 101 new stores, relocating 17 and closing 5. So we added 79 net new stores to the fleet. Of those new stores, 48 of those were in the 30,000 square foot or smaller – new small store prototype. So it’s still early, but overall, we’ve been very pleased with the performance of these stores – of all of our new stores, but especially, the small format stores. Today, we announced that we plan to open 120 new stores, adding 90 net new stores to our fleet during 2022. We expect about 80 of those stores that we open will be in the 30,000 square foot or smaller format. So as we said previously, you should expect that longer term, over the next five years, 75% of the stores that we open will be in the small format. So as we continue to add more of the small store prototypes of the fleet, there are a few things that we’re going to expect to see. We’re going to see our sales funds, as we open these stores, start at about 70% to 80% of the chain average as they open, but we would expect comp store sales growth that’s going to be faster than the rest of the chain for several years after opening. We would think better operating margins. We require operating margins for all of our new stores to be accretive to company’s operating margin in year two, and then we’d expect these stores to grow faster than the rest…

Thank you.

Our next question comes from John Kernan with Cowen.

Good morning, everyone. Thanks for taking our questions here. I have a couple of questions for John. First, how are you feeling about wage rates in stores given the levels of inflation we’re seeing the competition for labor? And how should we think about the level of wage growth for stores and DCs you’re baking into the 2022 outlook? And I’ll just have a quick follow-up.

Okay. Thanks, John. So well, I guess, let me start, you probably heard us talk about this before. We manage our labor closely by monitoring the local markets where we operate stores, in the same thing of faster distribution centers. As each competitive market changes, we respond by making adjustments to be sure that we’re competitive and we’re able to properly staff our operations. Last year, as we discussed during the year, the DC labor market became ultra competitive in the second half of the year. And so we responded with a combination of permanent wage increases and temporary incentives that allowed us to maintain our desired staffing levels at our distribution centers. We also saw increased wage pressures in our stores, particularly during the fourth quarter. So we responded similarly with a combination of permanent increases and temporary incentives. So as of the end of the year, we think we’ve kept up with the wage escalation that took place last year. And of course, we’re going to incur the full year impact of those adjustments this year, but we’ve included that in our plans for the year. We’ve assumed that wage pressures are going to continue to accelerate in 2022 in our planning assumptions and in the outlook that we shared. So while we think we use reasonable assumptions, there’s always some risk that wage escalation may happen faster than we’ve anticipated, that it’s certainly a volatile environment. And we’ve got what we think are reasonable assumptions, but we don’t know what’s going to happen. But it is more pressure than we planned for, a couple of things might be in our favor. We’d likely see some sales benefit as many of our customers would have more income available if wages are going up higher than we expect. And it probably means that inflation is continuing, which could indicate a larger opportunity for us to raise retails to cover those additional costs.

Got it. A lot of moving pieces there. Follow-up for John or David that the CapEx plan you shared for FY 2022, it’s $725 million. It’s roughly double FY2021. Can you walk us through the step up? Is this 7% or so level of sales, what we should model going forward? Thank you.

Thanks, John. I’ll take that one. This is David. Yes, I understand how that can look like a big step up. So let me kind of walk you through what’s happening. So we did spend about $318 million in 2021. Our plan – the original plan at the beginning of the year was $470 million. Obviously, it came in lower. Some of that spend that was originally planned for 2021 has moved into 2022. Why? It’s caused by delays related to the disruption in the global supply chain. So it wasn’t totally unexpected. In fact, some of the shift was for materials that we planned and order early, anticipating that there might be delayed, but it allowed us to be comfortable we could receive them well before they’re needed. So if you look at 2022, without those timing shifts, we would have expected a CapEx spend of about $600 million, and that is a step up from our original plan in 2021. So what is that driven by? We’re opening 120 stores versus 101, so increased investment in our new store development process. We’re adding supply chain capacity and processing capability to support our accelerated growth. Remember, 28% sales increase versus 2019. So we need to keep pace with our supply chain. And there’s several other initiatives that we believe will help drive productivity and efficiency across our business. So I think the way to think about it going forward, a rough $600 million is a good – to be using as a model going forward, but hopefully, that…

Very helpful. Thank you, guys.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Great. Thank you. Good morning. Michael, I wanted to start with just circling back to some of the points you made when you were answering Lorraine’s question. Can you just remind us of all of the levers that you’ve got at your disposal to adjust to current sales trends in your stores, both as we work our way through the first quarter and the full year 2022? And just comment on the degree of usability of your reserve inventory to feed your spring business. Any other levers that you’ve got at your disposal to chase upside in sales trends should the opportunity arise? And then the levers that you use as well to manage the risk on the downside, if trends prove more challenging. Thank you. Michael O’Sullivan: Yes. Good morning, Kimberly. Thanks for the question. I think – actually, I think you know this, but I think that question kind of goes to the essence of Burlington 2.0. We’re not the biggest retailer. We’re not the most sophisticated retailer, but we have to be the most flexible retailer. That’s kind of what Burlington 2.0 is all about. And the way we achieve that flexibility is to plan our business conservatively, but then be ready to chase and make sure that we have levers that are closer to chase. I feel like over the last two years, the whole company has been focused on that concept, Burlington 2.0, planning conservatively and chasing. And in the – if I think about merchandising in particular, our merchants start with a conservative buying plan, and then we chase based upon the strength of the trend. And in terms of individual levers, reserve inventory has certainly become important to us because you can see how that gives you ammunition to chase, but we also…

Great. Thank you so much. And John, I just wanted to circle back on your response on the store productivity. Those new smaller stores are hitting north of $300 in sales per square foot – sales per gross square foot, which is really impressive, particularly in light of the either the legacy fleet and where they are on productivity. I missed the way you characterized the sort of incremental margins or the new store margins on those locations as they’re hitting that level. Are those accretive to overall company operating margins such that the growth of those smaller format stores has the effect of actually raising Burlington’s operating margin over time? Thanks.

Yes. Thanks. That’s – it’s a good question because there’s actually two different benefits that we can get from the stores and the small format stores and the waiting can be a little bit different depending on the stores. So first of all, any of the stores that we open, smaller format or the other stores, one of our financial hurdles is for them to be accreted as company’s EBIT in that year two, which is the base year of underwriting. And then for all of these stores, but particularly for the smaller stores, we expect kind of our sales maturation process and an operating margin optimization process that drives improvement greater than the rest of the fleet for the first few years, let’s say, and so that we kind of get the combination of benefits. Either it’s going to be a higher EBIT margin than we would have expected because of the operating efficiency of the smaller store or in some cases, the operating margin may be similar to some of our other stores as we open them, but we’ll have had access to a stronger retail node and are going to be in a position that we’re very excited about the sales opportunity in the store. So it’s kind of a blend of those things both benefits from these smaller formats for us.

Very clear. Thank you so much.

You’re welcome.

Our last question comes from Roxanne Meyer with MKM Partners.

Great. Thank you. Good morning. My question is around home. Prior to the pandemic, you had ambitions to grow that home business. And clearly, the pandemic has hurt the potential for home, given the supply chain delays that disproportionately impacted. I was just wondering if you could give us an update on how you’ve been able to expand category breadth. How you think about growth this year, maybe particularly in the first half, given supply chain constraints? And just how you’re thinking about the trajectory of the home business longer-term? Michael O’Sullivan: Sure. Roxanne, I’ll take that. Yes, home is a really important business for us and a huge strategic opportunity for us. It’s interesting. If I look at Q4, by far, the bigger slowdown in Q4 in terms of business was home. It fell off significantly in Q4, and that is directly attributable to the shipping issues and delays that we discussed earlier. But if I step back from Q4 and talk about the full year, even with the slowdown in Q4, our comp across our home business was well over 30%. It compares with the chain at 15%. Our home merchants and planners did an outstanding job last year. And we had shipping issues all year, it’s just we ended up with this crunch in Q4. To answer your question about how is the penetration of home grown since 2019. In 2019, our home businesses were about 17% of our total sales. In 2021, and again, this includes the slowdown in the fourth quarter, but in 2021, our home business was 20% of our overall sales, so a pretty decent increase in penetration in that period of time. And obviously, if we hadn’t had the shipping issues in Q4, it would have been higher than that, so a lot of progress. And in terms of this year and the coming years, again, we still think we have a huge amount of opportunity. Now that opportunity, we’re going after it. Yes, by expanding categories, by deepening vendor relationships, but more than anything else, we’re going after it by strengthening the talent that we have, especially in our merchandising group. And when I look at the talent we were able to hire and promote last year, I think we’ve made really, really great progress.

Great. Thanks for all the color and best of luck this year. Michael O’Sullivan: Thanks, Roxanne.

That concludes today’s question-and-answer session. I’d like to turn the call back to Michael O’Sullivan for closing remarks. Michael O’Sullivan: Before we hang up, I would like to take this opportunity to thank everyone at Burlington for their hard work throughout 2021. As a token of this appreciation and for the second year running, we’ve awarded a special thank you bonus to the majority of our store, supply chain and corporate associates in recognition of their hard work and commitment in 2021. Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in late May to discuss our first quarter results. Thank you for your time today.

This concludes today’s conference call. Thank you for participating. You may now disconnect.