Burlington Stores, Inc.

Q3 2021 Earnings Conference Call


spk_0: good day ladies and gentlemen when a welcome to burlington stores third quarter twenty twenty one or news conference call at this time overtook up in lines on a listen only mode later will conduct the question and answer session and as such as will be given at that time to ask a question you need depressed or than one and your telephone as very my either this call a be record it if anyone should require operator assistance please press star than zero now like the time the call over today we click senior vice president and best the relations and treasurer please go ahead
spk_1: thank you operator and good morning everyone we appreciate everyone's participation in today's conference call to discuss burlington's this bull twenty twenty one third quarter operating results our present through today or michael sullivan are cute executive officer and john criminal chief financial officer before turn the but michael i would like to inform listeners that this fall may not be transcribed reported or broadcast without are express permission a replay the call will be available until november thirtieth twenty twenty one we take no responsibility for in accuracies that may appear in transcripts of this tall but there parties or remarks and the queue and a that follows are copyrighted today by burlington stores remarks made on this fall concern future expectations of advance strategies objectives trends are projected financial results are subject to certain risks and uncertainties actual results may differ materially from those that are projected and such forward looking statements such risks and uncertainties for those that are described in the company's ten k for fiscal twenty twenty and another filings with the fcc all of which are expressly incorporated herein by reference please note that the financial results and expectations we discuss today for under continuing operations faced
spk_2: reconciliation for the non gaap measures we discuss today to get measures are included in today's press release now appears michael
spk_1: thank you david
spk_3: good morning everyone and thank you for joining us
spk_1: our usual approach on the schools is to structure hour mark in a chronological order starting with a review of the most recent quarter then moving on to the next quarter and the year ahead and finally commenting on the longer term outlook
spk_3: today we going to take a slightly different approach rather than chronologically we will cover these topics in order of their importance to our long term shareholder value
spk_1: i will begin with a longer term expectations the timeframe for these remarks will be the next five years then i will move near in and talk about twenty twenty two we think that twenty twenty two is going to be very unpredictable that said we believe it could provide the ideal setup for our business
spk_3: finally i will comment on al que three results and the outlook for the rest of the year
spk_1: okay the longer term
spk_3: there were two aspects of the longer term that i would like to talk about
spk_1: number one the macro economic and competitive environment
spk_3: and number two progress we're making on our buildings and two point oh strategy on the macroeconomic and compared been environment let's start with the customer
spk_1: for many years there has been a growing consumer focused on value it is possible that we are entering a period a prolonged period of consumer price inflation across the whole economy
spk_3: we believe that in inflationary periods consumers cried down not up
spk_1: in an environment of rising prices we think shoppers will be even more attracted to the great value that we offer
spk_3: our business is a third big are now than it was in twenty nineteen one reason for this is that our value differentiation that is other retailers has grown the delta between the price of an item at burlington and the price of a line item had a full price store has never been greater
spk_1: lena inventories in the full price channel have driven higher realized prices it is not clear if be higher prices will be sustained if they are sustained then in the coming quarters we think that we may have the opportunity to capture additional market share to take up our retail prices or to do both if on the other hand retailers return to more promotional habit
spk_3: and be hi i realized prices in the full price channel will come down
spk_1: if that were to happen then we think it would trigger yet another wave of consolidation of marginally profitable full price bricks and mortar stores
spk_3: when we anticipate that the second scenario a return to a promotional environment and a decline in realized prices is the more lightly but it's gonna take some time to see how this plays out
spk_1: but in either scenario we think that the long term implications for burlington a very favorable i would like to talk now about the progress we're making on burlington two point oh
spk_3: the color of this strategy is to make our business as flexible as possible so we can trade the sales trends
spk_1: take advantage of supply opportunities and deliver great value to our customers so far this year we have chased from a calm plan a flat to an actual year to date comp of eighteen percent versus twenty nine team
spk_3: in addition to control we are very excited about our new store performance especially our smallest or prototype and twenty twenty one we have opened one hundred and one new stores
spk_1: this translates to seventy seven net new stores after the closures and be locations
spk_3: our new stores are performing extremely well and i'm excited to announce that we have decided to accelerate our new store opening program
spk_1: in twenty twenty two we expect to open about one hundred and twenty new stores
spk_3: which of the closures and relocations should yield about ninety net new stores
spk_1: beyond twenty twenty two we now expect to open one hundred and thirty to one hundred and fifty new stores each year
spk_3: about thirty of these will be rid of patients of all the stores to newer smaller five prototype locations so overall from twenty twenty three onwards we expect to open one hundred to one hundred and twenty net new stores each year today we have just over a hundred stores so in the next five years this program will drive a very exciting transformation of our chain moving closer in i would like to talk now about twenty twenty two
spk_4: we think that there are three factors that could make twenty twenty two a very good year the burlington but all three factors a difficult to predict
spk_3: firstly sales this year old retailers have benefited from one time items like stimulus checks and pent up demand
spk_1: as we get into twenty twenty two and let these items it seems likely that com friends across when tail will fall off sharply
spk_3: on the other hand it is possible that rising wage rates or further government spending will offset this decline we have to be ready for either scenario
spk_1: secondly pricing
spk_3: as i said a moment ago we don't yet know if higher realized prices at full price retailers will be sustained
spk_1: this will play out in twenty twenty two
spk_3: if these higher prices are sustain even as supply loosens up than we think we will have a tremendous opportunity to drive sales or to take up retails or to do both and if there is a general rising inflation across the whole economy and this opportunity could be even greater
spk_1: thirdly we do not know if the issues with global supply chains will ease and twenty twenty two
spk_3: if they do then this could have a huge beneficial impact on of pride supply and it could also drive significantly lower rate and supply chain expenses we don't have great visibility on any of these three items no one does
spk_1: but in the situation our playbook is always the plan our business conservatively and be ready to chase
spk_3: so our initial buying and operating plans for twenty twenty two are anchored on amid single digit comp decline
spk_1: this is not a protection of what we think will happen we do not have enough visibility for a reliable prediction you should think of the minus five per cent comp as a baseline a starting point for the chase and twenty twenty one our baseline with a flat comp
spk_3: yet to date we have trade sales eighteen points about the baseline
spk_1: as for our margins so much depends on freight and supply chain expenses again we concede that we do not know how these will play out we think that these expenses should start to come down and twenty twenty two but we don't know if when and how much this will happen
spk_3: in a moment john will share our margin estimates assuming that these costs remain at their current levels through mid twenty twenty two and then again to moderate i'm going to wrap up my remarks with a few comments on al que three performance and al que four outlook
spk_1: as described in today's press release com growth in two three with sixteen percent we estimate that warmer weather from late september onwards reduced our come by about three point
spk_3: in other words we believe that our underlying whether adjusted come in history with about nineteen percent for queues for we are currently projecting our comp performance to be in the low double digit
spk_2: our month today comp is running well ahead of this what really matters is the next forty five with
spk_3: if the sales trend is stronger than we are ready to trace it we move on now to talk about inventory levels comp install inventories were down twenty four percent at the end of two three
spk_1: this means they were slightly above our plan coming into the quarter our plan was for install inventories to be down in high twenties
spk_3: the other promising news is that at the end of two three reserve infantry was thirty percent of total him and three vs twenty one percent and twenty nine team
spk_1: it is usually the case that you drain your reserve in been in the third quarter
spk_3: you pull good voucher preserve to get prepared for holiday in fact we built hours of in the tree into three reserve receipts thing to three increased one hundred and seventy four percent but his the same period in twenty nineteen
spk_1: we were able to make some great opportunistic buys during the quarter
spk_4: it is too early to extrapolate that we think that over the coming months we are likely to see a very favorable buying environment as other retailers cancel late deliveries
spk_1: one final point on inventories at end of que for we are planning in store and increase to be down in the mid thirty percent range
spk_3: we believe that we can end the year more cleanly than we haven't passed and their best there by transition more effectively to the spring season
spk_5: i would like now to turn to call over to john to walk us through the financial details thanks michael and good morning everyone
spk_6: i'm going to follow a similar approach to michael i'll start by talking about our longer term financial prospects then i will move in nearer in and make a few comments about twenty twenty two and then finally i will finish up with additional collar on a cute three results in a corner
spk_5: expectations for the fourth quarter on the longer term as michael described we're very excited to announce that we will be accelerating or new store opening program we are now planning to open ninety net new stores next year and then from twenty twenty three onwards we expect to open between one hundred and one hundred twenty net new stores every year
spk_7: combining this faster pace of openings with a conservative cop assumption should generate average annual top line sales growth over the next five years in the low double digit percentage rouge
spk_5: over this period and with these sales growth assumptions we also believe that we can achieve two hundred to three hundred basis points of operating margin expansion we have made very good progress on march an expansion this year that this is the masked by higher rates and supply chain expenses
spk_4: we expect that some of these expenses will moderate overtime
spk_3: but we also believe that we have the opportunity to drive further leverage especially in occupancy class and operating expenses
spk_6: this combination of sales growth in march and expansion should drive average annual earnings growth in approximately the mid teens
spk_3: this growth estimate does not include any additional benefit from using available cash flow to repurchase shares or to pay down debt thereby reducing interest expense
spk_4: the numbers i'd describe our annual average is for the five year period
spk_5: we anticipate significant variability of these results year to year
spk_4: in addition as you know we may not plan our business each year with this level of girl our model is to begin each fiscal year with a more conservative plan manage the tories and expenses accordingly and then chased the trend and take advantage of ahead of clan sales
spk_3: if we execute this model successfully then you would expect to achieve the annual average performance metrics that i just described let me move on to make a few comments about twenty twenty two
spk_5: is michael described next year is very unpredictable in terms of top sales and bottom line or it's
spk_3: we look forward to the day when we can return to providing traditional guides but we're clearly mad at that point yet
spk_5: for twenty twenty two would you not have enough his ability to provide meaningful guidance for a year we are entering our initial buying an operating plants or five percent prompt decline
spk_6: think of this is the baseline that we are using the set up our merchants and operators so he could chase the tribe and take advantage of merchandise supply opportunities
spk_3: i'm
spk_5: given what we know at this point
spk_4: we would expect a five percent off decline it drive operating march march and been language of about one hundred and fifty basis points this is face on the assumption that frightened supply chain expenses remain at their current levels through emit twenty twenty two and then begin to moderate
spk_5: this estimate also assumes no material increase in retail prices and no other significant cost inflation
spk_3: the reference using the same assumptions we would expect a flat car to drive about sixty basis points of operating mark margin day leverage
spk_5: and a three percent car to generate flat operating margins vs twenty twenty one i would now like to talk about a two three performance in interview for outlook as a reminder er two three results are being compared to the third quarter of this will join a team total sales and a quarter blue thirty percent for cop sales increase sixteen percent is michael mention we estimate that unseasonably warm weather and october in some of our most important regions negatively impacted our cops sales growth by about three points during the quarter
spk_4: the gross margin rate was forty one point four percent
spk_5: a decrease of one hundred basis points versus twenty nine teams that quarter rate of forty two point four percent this was driven by a one hundred eighty basis point increase in prayed excess which more than offset and eighty basis point increase in merchandise marking driven by law markets
spk_3: fuck sourcing costs one hundred seventy three like impresses ninety million in a third quarter twenty nineteen increasing two hundred fifty basis points as percentage of sales
spk_4: i are supply chain costs represented most of the do average
spk_5: the drivers of these higher cost were consistent with what we have discussed in private quarters
spk_4: adjusted as today was five hundred eighty one million versus four hundred eighty six million in twenty nineteen decreasing two hundred and ten basis points as a percentage of sales
spk_6: and other income another revenue were down by a million were sixty basis points as be compared to the third quarter of fiscal year nineteen which benefited from eight million dollars of insurance recoveries adjusted even larger with six point one percent one hundred eighty basis points lower than the third quarter of twenty nine nineteen
spk_5: excluding the not operating other income and revenue t leverage are just it either march and declined one hundred and twenty basis points
spk_6: said another way
spk_5: during que three we drove three hundred and ten basis points of operating margin expansion a merchant margin and operating expense leverage on or sixteen percent car but this was more than fully offset by four hundred and ninety basis points of did leverage and pray products sorting costs and a comparison to nonrecurring other income and cute rate of apply nike all this resulted in deluded earnings per share of twenty cents versus a dollar forty four and the third quarter of twenty nine p driven primarily by an eighty six million dollar debt extinguishment charge related to the partial redemption of convertible notes
spk_6: adjusted deluded earnings per share for a dollar thirty six vs a dollar fifty three in the third quarter of twenty eight team
spk_1: during the quarter we'll and forty met new stores bring our store count with the end of the third quarter to eight hundred and thirty two stores
spk_4: this included fifty six new store openings if teen relocations in one closure
spk_3: in the floodwater we have opened an additional it new stores and we expect to close to stores as a result we should in the year with eight hundred and thirty eight stores
spk_5: now i will turn to our outlook for que for
spk_1: we are projecting car sales growth be cute for to be in a low double digit percentage range the expecting the extraordinary freight and supply chain expense headwinds he continued through to for this means that are low double digit code projection should translate it to hunt
spk_5: pity basis points of the luggage and operating margin during the quarter with this outlook for queue for we now expect a full you're operating margin to be flat versus twenty nineteen it is important to reinforce the point that this means that for the full year we will have so of about three hundred sixty basis points of the leverage and prayed and supply chain expenses
spk_8: with three hundred sixty basis points of offsetting favorability and other areas of the piano specifically much higher merchant margin and significant leverage on seen a expenses
spk_3: with that i would likely to the cob back to michael for closing remarks
spk_1: thank you john
spk_3: before we opened up the question i would like to recap and reinforce them key points that we have made this morning firstly we think that are longer term prospects are extremely bright
spk_1: so we have decided to put our foot on the gas and we are accelerating our new store program secondly we believe an inflationary price environment could drive great a traffic to ask or once we to see how this plays out
spk_3: what we think that it could offer us the opportunity to take share take up retails or he do both thirdly we anticipate that twenty twenty two will be very unpredictable i'll play but is the plan and manage our business so we can aggressively case the very significant sales margin and supply opportunities and we believe might emerge finally al que three trend remained very strong we chased que hundred and eighty million dollars in sales above our original plan are we still ended the quarter with instore been trees and reserve in the trees in great shape
spk_9: we are very well positioned for the fourth quarter i would like now to tend the call over to the operator real questions
spk_10: thank you can ask a question you need to depressed star than one of your telephone to withdraw your question please press the pound key we ask that you please limit yourself to one question and one follow up please stand by while we compiled a q in a roster first question comes on the line of matthew path with jp morgan carolina south open
spk_2: great bank and i really appreciate on the color
spk_3: so maybe first for my call on your long term unit growth prospects michael kidd you just to drivers behind the decision to accelerate his rant of new store openings what gives you confidence to expand the program now well good morning matt and thanks for your question i'm it is you know i'm at the beginning of this year
spk_1: we raise our long term potential still count to two thousand stores
spk_3: and it's really think that time we've been looking at the pace of our new store openings how many stores we should open each year there are there are three factors that lead into our decision to accelerate the pace this the first his financial i'm i'm sure many of the analysts on the school have already done the math you're looking at a press release this morning
spk_11: to estimate new still productivity and and what what you see with those numbers is and you stole productivity this year has been extremely strong
spk_3: and we know that this is partly due to the same tailwind that have given our compress all of this year but even if you adjust for those tailwind and new stores are still running well ahead of our internal hurdles and you know the reference point of the hundred or so stores that we opened it's yeah just over half ah
spk_1: are under thirty thousand square feet
spk_3: so it's performance really gives us a lot of confidence in our new smallest or prototype sets up the first that reason financial secondly the second factor is is strategic and know i talked about this in in my earlier remarks i went i went beat a dead horse but year to date you know our business is almost a third bigger than it was in twenty nine team
spk_4: you know that suggests to us to the customer is way responding very well to the great value that we that were offering and at were taking significant market share
spk_3: i'm a gag gift that confidence that as we open more stores over the next few years will be will be swimming with the tide will be taking share and be other major of price retailers have two to three times the number of stores that we have to this feels like a a an opportunity that's really unique to bennington
spk_1: i'm the third factor in making this decision was operational that we have earlier this year we put together
spk_4: an internal cross functional team to look at what would it take to significantly accelerate our store expansion that that that cross functional team included will states stores supply chain merchandising planning i t am and and other areas and based on the plans and actions that
spk_10: that team developed am we feel very comfortable that we can support ah the faster pace of about things that we described in the remarks at obviously if with new stores at you have a pipeline at noon loot new location goes out over the next two to three years or so we can we can look at that pipeline of after say we're very happy with the number
spk_12: a and the quality of store locations that we see ahead of us so you can tell whether excited by this opportunity
spk_6: great and then maybe just a follow up for john on the multiyear top and bottom line growth targets are you laid out on the nepal could you to share with that more of the building blocks to get to those levels that sounds gross margin expansion in heap yeah growth
spk_5: on good morning matt you're happy did work tickets rather than my detail on on that i'm the top line is pretty straightforward really if you combine the new store program and the were talking about with conservative low single digits percent annual comp increase his get you to a low double digit percent annual sales growth not that i mention done with this basis of or models and more confident that we can achieve this average annual growth
spk_3: vivian a margins let's let's just can revisit went up with markets this year for the full year was expecting freight and product sourcing costs to deliver by about three hundred sixty basis points but as i just said him and my remarks
spk_13: we're projecting operating margin to be approximately flat vs twenty nineteen so in other words we've really driven three hundred sixty basis points of favorability and other areas and that comes from higher much margin driven by lower markdowns entire leveraging operating expenses
spk_3: looking forward there may be some additional march march margin opportunity but because we seen such a significant increase this year we have an issue assumed any further improvement there in our model priests or occupancy yeah we expect to capture additional leverage as we migrate towards are smaller and store prototype but we do see up to to drive further efficiency on store in supply chain expenses we think that overtime freight expenses will decline from this year's historically high levels does not necessarily all the way back to pre pandemic levels of we're assuming that supply chain expenses would probably be a bit sticky here but they too will moderate to sunday agree as we speak flows become more predictable and reliable
spk_5: when you combine all these different factors together we think that we can capture the two hundred to three hundred basis points of operating margin next five years that that we called out
spk_3: of course the could be additional headwinds to move against us but it could be tailwind step that move in our favor yeah that could impact individual years during the period but on average we think these things shit judy than out over time
spk_9: and if we were to cheat significantly higher than the low single digits average cops with model for this period we would expect to drive more operating margin expansion have you combine the low double digit projection for anyone topline growth with a margin expansion of two to three hundred basis points of the next five years then you get to the mid teens earnings for that that i described in my prepared remarks
spk_14: thank you
spk_4: next question comes on the line of i watch out with last part of your linus how open
spk_3: what the fuck up there a couple questions up my first question is on on supply chain can get stuck a little bit me more about the issues are and how they're specifically affecting your company and and gets for example of what impact has as it's had on store level inventory levels and then i'll follow
spk_1: i'm yeah i'll take that the morning i think it's a great question i know that's been
spk_11: it's been a lot of reporting and some concerns about about inventories are so i think it might be helpful tip to draw a distinction merchandise availability and apply on the one hand and and the timely delivery of receipts on the other hand i'm your firstly the availability of much
spk_3: knight has been continues to be very good ah yeah cause you know there are certain categories and brands where might be constrained but that's always true
spk_15: it was not price retailer went we're not dependent on a single crack category or brand which were very good at moving money from businesses well as either a week trend or poor supply to business as well as strong sales and good supply opportunity that's off price that kind of what we do
spk_1: i'm yeah i think the date that the cute three you know provide the pretty good illustration of their second que three we chased sixty percent congrats on an original plan a flat and that represents about two hundred and eighty million dollars of ahead of can sales but i've been scoring the qui levels still ended two three
spk_3: go ahead of plan and at the same time we were able to build up hours of imagery and it's a we were very happy with supplying cute way and we continue to be happy we think as a good chance to supply is about to get even better
spk_1: i'm so that that supply but but let me let me move on and talk a little bit about about receipts specifically the timely delivery of receipts you know if i just described when you look across the whole store we really have not had an issue with much nice availability this year we we found great much spent our open to buy when i have been challenges and we've had these challenges along with everyone else
spk_3: it in a timely delivery of receipts and in other words with good showing up late and it isn't the vendors felt that the problems are global and yeah very widespread but it has created inefficiencies in our transportation and supply chain network your i want ironically those headwinds become stronger
spk_11: the more you try to chase the business and respond to the trend setter that definitely been a challenge and it's cost us money but but we've been able to get the goods that we need and we've been very happy with the inventory levels in astoria so so to recap you're looking back the bell ability and supplying have been very good and we think are gonna get better but navigating them
spk_6: a seat blow has been an issue and frankly it's been expensive fact that we've done it
spk_1: that's that's how i would rather
spk_3: about i'm super helpful than this quick follow up on retail prices like you were alluding to just what do you see happening with items across the industry to do you think high prices are sustainable and nanny and do believe you guys can raise prices of the something the company is done in the past sky curious how you frame all that up yeah that's a great question i am yeah i think i think the city the situation has really evolved over the last few months and actually continues to evolve i i i see two things going on right now i'm your first late
spk_11: i'm full price retailers this year
spk_1: have been getting much higher realized prices and it it's clear why that is because of much leaner in been friends now an initially i have to say i was skeptical on this
spk_3: my view was that as soon as supply loosened up
spk_4: promotions would come back and then the higher prices would thus come back down
spk_3: but now i'm not sure i'm at your these retain retainer the clearly enjoying the scum the margins so so maybe and i want to underline the work maybe the environment will be less promotional going forward
spk_1: yeah maybe these retailers will control arab countries more tightly as they can preserve the high margins that billion on the move or peter i'm underlining to work maybe i'm we we really need to see what happens as supply constraints seeds do we go back to promotions or not
spk_4: i'm but if the environment really impressed promotional thankful with i think that could be great for us and it when we talk about value and offering value to customers our reference points for value is the pricing at full price stores
spk_1: so if that reference point moves up if if those that those higher realize prices were become permanent the that that to be a huge opportunity either to drive sales or to drive arjun or to do both and and friendly that decision might depend upon a specific category that were talking about that but i think we'll have plenty of opportunities that
spk_15: if that get that reference prop price is permanently higher i'm a way that's one thing that's going on
spk_11: the other thing that's going on and and this this is with a instead over the last few months the prospects it feels like the prospects for generalized price inflation across the economy have really grown you know if i said in my mouth it isn't just in the sectors that we compete and it's also or it's also food it's gas prices it
spk_1: the cost of living am i can we have to see what happens over the next couple of quarters
spk_3: that but we believe that environment of rising prices we could do very well our value proposition is already very strong but it but it would become even stronger and i environment and and again we think this could prevent us with an opportunity to gripe high sales and higher margins now with it when you look back at the transcripts to this call you'll see that there are a lot of it's and why just said lot of maybe even a lot of this up
spk_1: so we don't really know how this will play out we think that these trends and could be very favorable to us or for us but but at this point it makes sense to be cautious than a a little patience and you know that said we are making some adjustments in of we've we've we've looked at our fast to a very fast turning their muscles and we started to push
spk_3: prices up in those differences we've looked at businesses where we think our pricing may be sharper than it needs to be and we've been testing some higher we house and so far the things we've we've we've tested the prices we pushed up it's worked it's it's work well but but it's fairly modest at this point and the
spk_1: other thing is that as you'd expect were also watching competitors very closely you our merchants visit and part of the schools all the time that there are no there are no trade secrets with krysten that their prices displayed on the ticket
spk_16: i'm and and actually by looking at the clearance rack you can also see if as high prices are working or if they're describing markdowns and the i guess i would face up by saying what we're mindful in a list that we are the third largest of price could tell us so clearly it wouldn't make sense for us to take the lead on weight when we can
spk_9: prices thoughts were not proud if if we see something and we believe something is working as way nothing to stop us from from falling
spk_17: i can
spk_3: thank you
spk_6: i'm next question comes on the line of lorraine hutchinson with bank of america your line is now open
spk_3: thanks good morning am i wanted to follow up on that free and supply chain pressure as john are you see any sign of eating here and when do you think it's reasonable to see that or is it possible that this is a more permanent situation
spk_6: well the morning rain and thanks requests a good question and yet his heard me say and in the last couple of calls that we think that this record breaking prayed expenses that we've seen that so far the shares are mostly temporary
spk_5: we still believe that it's driven by an imbalance in supply and demand and we we think that over time it it should correct itself tell your we think that's the case but like everyone else your we don't really know when that's going to happen and we certainly haven't seen anything yet that would indicate that things are are starting to improve
spk_1: and as we said previously we think that some of this far higher supply chain expenses that we've seen this year's particularly the wage rate piece are going to be more permanent but we expect the wage incentives and the operating in efficiencies we'd seen this year
spk_5: are going gonna get better at him as the supply chain situation improves again if we just don't have good visibility into when any of this stuff is it was going to actually happened but yeah let's just consider the other side of
spk_3: suppose it is it doesn't work out that way
spk_5: suppose that these i are expenses yeah are mostly here to stay with they become a permanent part of the expense case we could go all the way that happens is in in and inflationary scenario
spk_6: and so i'd refer to let michael it was was just talking about
spk_3: if costs are permanently higher than we would expect that prices would rise prominently across all a retail
spk_18: it's young with the most retailers would be able to absorb the costs and so that would certainly apply to us as well
spk_1: in an inflation berm place in every situation we'd certainly be able to raise prices while continuing to maintain our bash proposition and in this scenario that your are value proposition would likely be even more important to our customers thanks and then i'm even pretty proactive it up paying down debt that you added that the share repurchases quarter what can we expect in terms of capital allocation going our it yeah john and or i'll take that question that thanks lorraine that's a good question yes and we have a down at a considerable amount of data of the last year and and they can maybe help thought that provide death recap of our debt pay down as well as our our debt outstanding and and leverage ratios of if you go back to the either that endemically borrow at four hundred million on our a blm we raised about one point one billion and and and public market that aren't that you're given are strong recovery of the last year we have been able to a down about a hundred sixty million added the one and half billion we are out during twenty twenty now we pay down or a the out that to zero as it as you may recall we executed a nickel corner i yelled notes and we recently repurchased achieve in yeah ask where hundred sixty million a convertible notes south so where does that leave us we about at one point six billion in in total gross debt over nine hundred fifty million on our timeline and a little under six hundred fifty million in in our convert sand on a net that basis given them all point two billion unrestricted cash reality in the for that's about four hundred million south what all those numbers me i i i think it just leaves us at a much more comfortable place from a leveraged perspective and it out you look at out on a trailing twelve month basis help splitting your tap was operating leases are gross leverage is down to one point six times bros that to a bitter and our net debt ratios doubt that point four and we
spk_9: would expect to continue to reduce those leverage ratios so you're given that progress it and reducing our levers we were comfortable resuming are or share repurchases during the past quarter we were purchased around hundred fifty million dollars stock and that leaves us two hundred fifty million remaining on our authorization
spk_19: so what do we do from here you know we're going to evaluate it through the lens we always do
spk_1: first and foremost forget invest in our growth and secondly ah your will utilize excess cash and and the most a creative way for our shareholders and that's what will continue to do thank you our next class then comes from a line of john cornyn what cowan your line is now open
spk_20: the might actually you take my question
spk_6: my god john david thanks raleigh guidance through next year
spk_5: that's quite a bit more than we're getting for many your peers across the sector
spk_21: i guess john new store gross now a bigger part of the narrative the help of he could provide just some high level modeling assumptions randy store for activate particularly given the new star prototype
spk_1: never heard that
spk_3: ten thanks john be happy to do that so let's start with i should think about sales volume for a new stores a on average we expect new stores have initial sales volumes that are around seventy to eighty percent of our chain averages they open up and obviously the be some variability pretend each store but if use this average to be a reasonable assumption that the for modeling actually this year we're seeing a a slightly stronger performance and that as a new stores are outperforming their plans in they're being driven by the same tell tell when's would have helped help us deliver our spawn comes to performance
spk_6: so i'm from from there we should anticipate comp store sales growth for the new stores
spk_3: that's faster than the chain for several years after opening which would be consistent with what we now seem to last several years
spk_5: across that the next five years you should expect more than seventy five percent of our new stores will be less than thirty thousand square feet to really move into the to the smaller store format in a in a big way
spk_6: in terms of profitability and capital returns and you can rely on what we've continued to say we've been saying and fast can either margins for each store are expected to be treated to the company in their second year and each store is expected to deliver return on a desert capital it's also creates and
spk_3: companies are return on invested capital in twenty nine team or average sales per store is that ten million dollars with the growth and we'd seen this year or twenty twenty one average sales be stores going to be north of eleven million dollars for snorts you sales of a new store
spk_5: is seventy five percent of our average that means that at the store should do over eight million and then comp about the chain average for several years
spk_3: so from a productivity perspective in our twenty five thousand thirty thousand square foot stores
spk_1: yeah we're expecting over three hundred hours of flight on a gross square foot basis and in four hundred dollars a slut and the sounds face of so big step forward and productivity at the store levels
spk_6: and even as we're paying a little more rent per foot and then it is better high traffic locations
spk_5: this level of productivity
spk_3: combined with a smaller footprint in the lower operating expense structure or should really help us to drive operating margin expansions while growing the top line faster and delivering will terrific returns that we expect them stores so you are really excited about are just was but we're also excited about the relocation opportunity that we asks that the net new store numbers that be laid out today next five years include an average of thirty realized per years in most cases easy going to be moved from oversized boxes with low sales productivity
spk_1: many of them older and the needed sniff at least refreshing
spk_5: at moving into that fresh new highly productive smaller boxes with lower actually costs the relocations for us usually result in a pretty healthy cells list and improved for a while profit got out like productivity it's plan includes a giving i get my life follow ups just thank you for a lot happened since the last call on august could you just walk us through what changed and it you for outlook
spk_22: versus the outlook he gave us in alaska thank you
spk_5: oh okay peruggia three thanks so up for queue for your we said we're we're comfortable up with with our sales for actually running ahead of our
spk_3: low double digit sales forecast am but they're still out some risk in some really big weeks in front of us as we move into december i'm on the margin front
spk_23: it it just really comes down to one to be a bit more conservative on are either forecast are implied outlet for to for yeah
spk_9: mean if you look at probably gave last quarter was was them around two hundred basis points to now on a low double digit cough were forecasting down about two hundred fifty this is points though i would remind you that we're still maintaining our are flat even margins where casting a four year
spk_24: get the the reason for this the the the reality that were deal with it said the cost pressures and supply chain and freight in wages to to some degree along with the volatility of timing receipts
spk_25: did just really difficult to forecast with any precision so what we we really wanted to recognize the difficulty forecasting these expenses and and add a bit more conservatism just to protect against us the volatility that that's that be safe got it thank you
spk_1: i'm next question comes on the line of kimberly greenberger with morgan stanley your line is now open
spk_3: great think so much on i wanted to follow up on ah ah michael on your inventory comments on you mention when you were talking to inventory but that you think there is a good chance that supply is about to get better and i just wondered if you could expand on that for us
spk_4: sure our good morning kimberly a good to hear from you i'm yeah so so i the i feel like the congestion
spk_1: and the delays in in global supply trains and transportation systems have been had been fairly well reported
spk_4: er yeah i've lost count of the number of ships that awaiting off the coast of southern california at that point and that it could tag it seems like it just keeps hitting new records everyday and that that the containers some of the containers on on those ships have merchandise that vendors
spk_1: and retailers had ordered with the expectation that they would be delivered for the holiday period the holiday selling period
spk_4: or or for the full season
spk_1: and it's clear that some of that much nice is not going to get here on time
spk_24: yeah frankly that hasn't landed by now it's already too late and that there's no point of for retailer there's no point in taking receipt of holiday merchandise in january for example gives hope our expectation is that that much that should find himself such find it's way into the office channel and and we think that's slightly to to be a big opportunity especially for our reserve imagery now ago i mention that with started to see some early signs of that
spk_11: it it's too but i think it's too early to projects where that's gonna lead but but you know our hunch is that the next couple of months could be could be a very good buying opportunity drop price
spk_3: fantastic michael in it sounds like you feel really good about the inventory position here for holiday i just wanna make sure that i understand you correctly on not on and then i i just wanted to follow up quickly if i could on the thirty thousand square foot stores are it sounds like you're seeing and well above plan result hold on it in particular this year and am i wondered if new care to share how those stores in particular those smaller stores as a subset of your new locations how there are delivering on annual volume of fear think so much
spk_5: how can i have take the first part of that kimberly on for the imagery levels intellect john respond on on what returning with the are two types but but on on the a holiday inventory levels and you know at this point of he was sitting in the third week of november
spk_3: so i'm i'm in a good position to judge i'm i'm very confident that we will happy imagery in our stores and that we have enough receipts on the way to stores to support our sales protection and that oh double digit number now it's sales which run well ahead of low double digits then we might start to see some guy
spk_5: gaps in some very high trending businesses that but that just means for the sales in those businesses were very very strong so so it's a high costs problem it's a yeah i think that risk to us right now in some ways is that failed out hate our expectations and not that we are that we have an issue with that with infantry betrayal receipts and then john you wanted to about the ah this more get fucked her turkcell so the first of all as far as our the performance of all of our stores the sheriff you're not surprisingly the running well but the way that we had done plan them as we underwritten them
spk_3: yeah i think everybody in retail has a strong tell and this year so ah yeah that that's certainly big part of it but it it also does give us some confidence to see the new stores which include a large percentage of smaller stores
spk_24: not not as big as what we're we're moving toward
spk_9: a bit but yet they did there are performing the way we would expect them to form understanding that we we have these are kind of tell when bit behind us and within the group of a smaller new stores were very pleased with their performance and yards become less about the size
spk_26: and more about the strength of the trade area if you're looking an individual store as the we've we've got some ah some of the small form and stores that are really blown out of the water and then you know that others that are are are performing well but overall and ya as far as proof of concept we're very pleased with what be seen from the smallest ones have gotten so far great to hear and thanks for all of the eye color on the long term strategic outlook it's really helpful thank you my food blog
spk_1: our next question comes on the line of michael been that he with credit suisse your line is now open
spk_4: hey guys thanks for all the to nail alla repeated gonna journey it's a very helpful to a think through the twenty two and and longer term and ugly limited funds for john but i think if you know
spk_3: important it is a huge on for a fine line a pretty hard line between first happened second half next year is that is that really laughing stimulus than in the costs rolling in says that obviously we are we understand from your language today per se really top and second half closer to that algorithm that you that you spoke to fiddle for the longer term and then michael what was really it is you think about that a you are in retail come at what it really is the governor to raising that to you today you know the i think when you dollar store competitors said the raid into a dollar twenty five years of price competitors are a eight
spk_5: yeah you rgb point to the value in your stores been historically wide versus the full price channel do you need to be that wide at an odd you think about whether you share game to come from continuing to widen that relative value spread versus the better operations a scene from you in the stores moving to hire traffic locations a you know
spk_27: operating the in soaring and tories better are you gauge we made weapon value spread widely too far based on your comment that it's it's pretty wide right now
spk_3: or it's up some i got a of i'll start with the have that of us in on the a kind of time and cost pressures on next year it
spk_5: it so yeah as it said before we go really really don't have a crystal ball here your what we can see today is yeah we will seen anything that indicates that improvement a particular the freight side
spk_3: japan has started ah
spk_28: so yeah it's a modeling assumption that were using it's not
spk_3: something that we get that their we have this inside information that's it yeah so i'd but i think it's a fair way to think about next year that if you didn't see an improvement for the first half and you started to see some improvement in the second half that's really as deep as are thinking goes there so it and it's based on yeah if that improvement ah does start to happen yeah that's the that's the impact that would see him on or margins if it doesn't start to happen it goes back to the comments that we had he had this may be more of an inflationary environment and a may be more going to take priced and them with mild so of debt that's kind of that dog the way we think about how we modeled to two scenarios for next year
spk_4: and then michael your question on what's the what of the governor's on on a you are taking up retail bank it's a it's a really good question
spk_3: and i think it's important
spk_1: it's a point to understand the and off price
spk_3: what really matters is sort of the restaurant when the price and what what i mean by that is when the customer walks in the store when when a customer walks in the or priced all that walking into that stalkers are expecting a deal they're expecting that the values to be great and actually we encourage that says that when you look at a price
spk_11: ticket of burlington it shows our price but it shows a compare it to a comparable christ and that compare a price is based upon the out did that the door price at another retailers the with they let even by this price the burlington it what it would have cost you have you been to this other place sets out to that that's kind of what of what your
spk_3: right customer proposition well he is so bring that back to your question then and how should we think about the differentiation in our prices the suit the competitors if the competitive move up prices that gives us an umbrella to move up prices to did no doubt about that i'm a bit where else is the customer gonna go
spk_29: and that did the uncertainty that we have and as the to be them whipping and a patient has is because those higher realize prices at full price stores you got to be sure that they're they're gonna stay where they are they going to stay high before you start moving up your own prices of every i've been in retail that's a pretty long time
spk_16: time and am i would say a over the years the department stores have been very very promotional
spk_9: so so you'd have to believe now that that's going to stop that they're going to stopping promotional
spk_24: so so if that were to happen if it very word case that department stores were going to stop promoting and they were gonna hold onto those high realize prices then yes we could move up our prices but it eventually this is just a short term thing and their higher realized prices are being driven by the fact that we happen to have supply can integrate this year
spk_30: rembrandt we've added actually as supply loosens up next year they realized fight it will come down then it would have been a mistake it had we raise their prices so so that that's the reason we had a taking out this will play out in the next couple of quarters i think that we won't have to wait long but that's that's really the key driver for us now everything other issue that me
spk_31: ancient in the script about what what happens if inflation across the whole economy takes off well that that happens then obviously we're all raising prices for that that's that's a different tribe right thing for that that our our time
spk_3: thanks lot and help
spk_1: thank you
spk_3: final question will come from the line of adrian yet we're barclays yolanda south open good afternoon and out good morning and thank you again for all the detail of couple quick questions here michael can you talk about reproductive health of your core target customer on the to convert reminders what the target household income is on knowing that you know about fifty percent is and us households are under seventy five k and the what percent of your customers are non credit or cash buyers and then i follow up it's for john it's on the structural wage inflation embedded in the long range plan on if we were sharing of fifteen minimum going to seventeen on and it's some color they're playing you very much yeah adrian of i'll start with they i'm the first question that the our customer weeping think customer we we think our customers very healthy right now we think i'm in a city when you look at the at our homes you know throughout this year
spk_1: we have very good about them about the trend that we've been with to sustain
spk_3: he had the underlying yeah the customer is clearly am responding very well for the values that we often own terms of how our custom the differs from other retail customers nathan we know about customers
spk_32: they they shot at every retailer cause our customers as the of pride customer has more than anything about about about bout you
spk_5: and the the way they find value in a crush on a lot so we know that we have a huge overlap
spk_3: with other retailers customers which is why i say you know if if other retailers raise retails with republican have a chance to take market share or all right around retails because we know that that that there is cross off in between us and and and other retailers now get wants your question more specifically up our customer tend to skew younger larger family size more moderate income and then i think those customers right now as i retire at a be a a a pretty healthy and and the spend like the thing he sells friend of embrace gone if i project forward to next year and just sort of add a thought about on
spk_5: if inflation really does take off in this economy
spk_6: we actually think we may have a lot of new customers coming up your customers who are cramps on slightly higher incomes but they can squeezed by higher price inflation so that the reason why we feel somewhat optimistic that if there is inflation across the economy consumers a different income levels are going to be more interested than ever
spk_3: the bounty that we offer yeah
spk_5: okay so i'll take the a weight party you you piece i got your question they so some so first will just reminder your we've we've used this kind of market by market analysis where we make way too chestnuts as we see that they're necessary
spk_3: we've been using for several years we're pleased with the way that's been working at this year yeah for dealt much different than we we had had planned at the start of the year we made some very significant changes on the gc side to remain competitive
spk_30: the and a true that we can attract the
spk_0: the work is that we need to operate on or distribution centers must which are and to jersey in california very competitive market so we brought wages have quite a bit there and that's the part of the our supply chain costs that we refer to as being a yahoo the secure that's no permanent part of or or wage base and course it's included in our outlook
spk_11: is it and a modeling or on the store side it's going a little bit of a different story hasn't been ah
spk_33: quite as
spk_3: to mit has been nearly as competitive as the dc situation although in the second half of the year and we have seen it get a little bit tighter and we had to make some adjustments will bit higher than what we had expected at the start of the year to remain competitive that it's very different kind of market by market not so he was still very comfortable with her our market by market approach so i would say you we've we've taken a big step forward them we would normally have a single year as far as piece by market with adjustments and them modeling do it for
spk_0: where'd you with my old and what what are you an assumption for what we expect we'll need to do to continue to remain competitive and it's yeah it it's informed by you what we've learned about crushed

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