Burlington Stores: What To Look For On Earnings Day

Burlington Stores: What To Look For On Earnings Day

Burlington Stores (BURL) is days away from reporting third quarter results. The earnings release, scheduled for November 24, will follow what most would consider a challenging second period for the off-price retail space. Back then, a combination of outdated inventory earlier in the quarter and uncertainty around fiscal stimulus later in the three-month period caused comps at Burlington and its key peers to be well short of impressive.

This time, analysts are expecting revenues to dip 13% YOY, a substantial improvement over last quarter’s nearly 40% decline. Adjusted EPS of $0.16, if delivered, would represent a welcome return to profitability and the early innings of a bottom-line recovery into 2021.

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Credit: company’s website

What to keep an eye on

I will probably approach Burlington’s earnings day from two different angles: the results of the quarter and the outlook for the holiday season.

In regards to recent performance, I expect the retailer’s top line to have benefited from a number of factors. These include store re-openings, replenished inventories and a possible revenue mix shift away from home merchandise (still not one of Burlington’s strengths, see pie chart below) to apparel and footwear.

I will also be curious to see if Burlington’s margins will remain resilient. Last quarter, I was pleasantly surprised to see the company’s gross margin expand by over four percentage points YOY, quite a feat considering the sharp decline in profitability reported by peers TJX Companies (TJX) and Ross Stores (ROST). The key variable here will likely be how aggressive on pricing Burlington has been in adjusting its inventories for the Fall and holiday seasons.

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Source: investor presentation

Beyond the results of the third quarter, I will be interested in seeing the management team’s narrative for the fourth period. Last time, a resurgence in COVID-19 cases in the US in late June was probably one of the major factors dragging down sales. Coincidently, the pandemic has returned with full force in the northern hemisphere at the turn of the most recent quarter.

This (possibly last spike in COVID-19 cases before the vaccine) could paint a bleaker picture for Burlington Stores in the holiday period, especially as some states begin to shut down once again. As far as short-term risks to owning the stock ahead of earnings, another wave of store closures ranks high on my list.

On the stock

I maintain my views that BURL is a decent “back pocket” alternative within an off-price retail subsector that I continue to appreciate. In my view, the space will likely thrive compared to specialty and department stores, given a long-enough time horizon and despite possible head-fake recoveries over the next few months. For instance, the stock has been up an impressive 19% so far in November, but I do not think that rally corrections are out of question.

ChartData by YCharts

When it comes to picking off-price retail stocks, I would probably start with TJX. I believe that the Framingham, Massachusetts-based retailer is better established and more diversified than its peer. In addition, as I pointed out in my sector face-off article, Burlington’s balance sheet does not look particularly strong relative to those of its top competitors.

I could change my mind and give BURL some consideration, should the company deliver industry-leading results in the third quarter and an upbeat outlook for the holiday period. Until then, I will continue to monitor this stock, but from a safe distance.

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Disclosure: I am/we are long TJX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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