Burlington Department Stores: Beat and Growth Expected Next Quarter (NYSE:BURL)

Investment action

We recommended a buy rating for Burlington Stores (NYSE:BURL) when I wrote about it in June, as I gained more confidence that BURL can achieve its long-term goals given its encouraging 1Q24 results and underlying momentum. Based on me Current outlook and analysis recommend a buy rating. BURL continues to report solid growth momentum with accelerating comparable store growth (CSG) that leads me to believe that management’s guidance is too conservative. My expectation is that BURL will beat its 3Q24 guidance and raise its FY24 guidance, which should drive a positive P/E valuation.

Review

BURL reported 2Q24 earnings last week, where the business posted retail sales growth of 13.4%, beating Street estimates by 210bps. Retail sales growth was supported by 5% CSG. Gross margin also came in better than Street expectations at 42.8% vs. 42.3%, the pace mainly driven by ~90bps of freight margin expansion, largely due to lower markdowns as well as ~20 bps of carry benefits. This translated into an EBIT margin of ~90bps (4.7% vs. Street estimate of 3.8%). Looking ahead, management has raised its FY24 EPS guidance, now awaiting an adjustment. EPS of $7.66-$7.96 (vs. $7.35-$7.75 previously), and within guidance, management incorporated an expectation of 2 to 3% FY24 CSG.

Overall, there is not much to complain about this set of results as BURL continues to grow as I expected. The uncertain macro environment continues to put pressure on consumer spending, as seen from various discretionary companies voicing their concerns. This is music to BURL’s ears as it benefits from consumer value awareness and persistent discount moves. I note that BURL is not the only one to benefit as other value retailers are also seeing this benefit so this is a tailwind in the industry.

Coming back to BURL’s performance, there are no signs of weakness at all. CSG was up 5% on a reported basis, which represented a 2-year CSG stack of 9%. This is noteworthy as it was a 300 bps acceleration from 1Q24 which saw a 2-year CSG stack of 6%, indicating that underlying demand has gotten even better (further reinforcing my point that BURL demand momentum remains robust). Importantly, the reported CSG of 5% included 2 points of headwinds, meaning that the like-for-like CSG is actually 7%, implying a 2-year CSG stack of 11%, which is the highest on record ever since 2Q17 (excluding the COVID period). I strongly believe that CSG will continue to remain at this very robust level in the near term for a few reasons:

1. Consumer confidence remains low, indicating they are still very value-conscious and should continue to drive downsizing movements (which BURL is already seeing from middle- to high-income cohorts).
2. Strong 2Q24 CSG was mostly organic (management noted no tailwinds); CSG was driven by increased traffic and stable average transaction value.
3. July saw very strong CSG growth amid back-to-school trends, and that momentum continued through August (management noted a strong start).
4. Easier CSG sequential comparison as the winds ahead of the clearing are completely reduced by mid-September, implying the potential for CSG acceleration.
5. Relatively light comps for 3Q24 (vs. last year) as October last year was adversely affected by warm weather

Anyway, to answer your question, we were very pleased with our July back-to-school trends. Comp sales growth, the categories we described a moment ago were stronger than for the rest of the chain. And that helped support our overall sales trend as we ended the quarter in July. And on the last part of your question, how are things going in August? Our back-to-school categories continued to perform well. I’d say obviously we’re 3.5 weeks in right now. We are pleased with our overall trend. We started Q3 well. call 2Q24

With BURL already targeting an average of 3.5% for 1H24 and no signs of demand slowing at all, I continue to believe management is cautious in its FY24 guidance. For reference, management’s FY24 guidance implies 4Q CSG coming in flat at 2% (based on 3Q24 0 to 2% CSG), which seems like a very low bar to hit. First, it’s very likely that 3Q24 will perform as well as 2Q24, if not just slightly lower, as discussed above. Which means the implied guidance for 4Q24 is much lower. Second, 4Q24 will see a lighter comp base of 2% CSG in 4Q23, meaning 4Q24 CSG is up ~400bps from 3Q24 (3Q23 CSG was 6%). In other words, 4Q24 CSG should do better than 3Q24 CSG if there is no major change in underlying demand. Third, BURL should see an acceleration in demand as retailers focus on stocking higher quality brands through early purchases during the holiday season, even higher amplification of branded assortments vs. 2/3Q24. This should help BURL capture more trading demand.

ASSESSMENT

Therefore, I think there is a very good chance that BURL will see the forward PE multiple exceed where it is trading today (30x) as it continues to report solid CSG and beat its 3Q24 guidance. If that happens, my expectation is that management will raise its FY24 guidance, and that should trigger a consensus to improve its earnings estimates. With the narrative being sold by: great execution + favorable macro condition + beat and build momentum, the market is likely to continue to rerate BURL multiples upwards (already on a solid uptrend from ~27x in June to 30x today).

Additionally, BURL is expected to grow the fastest compared to Ross Stores ( ROST ) and TJX Companies ( TJX ), which are expected to grow in the mid-single digits. And I think this growth premium should translate into positive fund flow in that investors looking to invest in this space will likely allocate capital to BURL because of the growth premium.

Risk

Depending on how quickly the consumer spending environment recovers – more discretionary spending and trading movement, which will result in BURL losing share of wallet – BURL may not be able to report the strong CSG I expect . In this case, the stock story is less attractive than BURL and the market may not attach a premium multiple to the stock.

Final thoughts

My recommendation remains a Buy rating for BURL as it continues to show strong growth momentum driven by robust CSG and favorable macro conditions. I think BURL can beat its guidance for 3Q24, and when it does, we should see a strong upward move in multiples.