Burlington Stores, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Burlington Stores Inc. Fourth Quarter 2022 Earnings Webcast. I would now like to turn the call 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 2022 Fourth Quarter Operating Results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer, and Kristen Wolfe, our EVP and 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 9th, 2023. 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 2021 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 discussed today were on a continuing operations basis. Reconciliations of the non-GAAP measures we discussed today to GAAP measures were included in today's press release. Now, here's Michael. Thank you, David.

Good morning, everyone, and thank you for joining us. I would like to cover three topics this morning. Firstly, I will discuss our fourth quarter results. Secondly, I will talk about our 2023 guidance. And finally, I'll offer some comments on our longer-term outlook. After that, I will hand over to Kristin to walk through the financial details of our fourth quarter results and our 2023 guidance. Then we will be happy to respond to any questions. Okay, let's talk about our Q4 results. ComStore sales for the fourth quarter decreased 2%. This was on top of 6% comparable store sales growth last year. As we have done on previous calls, Today, when we are describing our comp trend, we will use a three-year geometric stack. This metric is defined in more detail in today's press release. Our three-year geometric stack was positive 4% for the fourth quarter. As we shared on our Q3 call, our three-year geometric stack for November was flat to the prior year. As the quarter progressed, our sales trend improved sequentially. On a one year basis and a three year basis, our comp growth in both December and January was positive, with January stronger than December. We believe that there were two drivers of this improvement in our trend. Firstly, we took a number of actions in the back half of last year to sharpen our values. We described these in some detail on our November call, so this morning, I'm just going to summarize a couple of points. Number one, we backed off our original plan to raise prices. The consumer and promotional environment changed rapidly last year, and it became clear that this was not the right time to be raising prices. Instead, in the fourth quarter, we sharpened our values on fresh receipts, and we aggressively used markdowns to drive faster turns on existing inventory. We focused especially heavily on expanding opening price points in our assortment. Number two, we significantly raised receipt plans and inventory levels in our strongest businesses and focused this open-to-buy on great opportunistic deals. The off-price supply environment was very strong in Q4, and we were able to take advantage of some incredible buys, especially on branded merchandise. We flowed many of these receipts to stores to fuel the stronger trend, and we also tucked away some of these goods in reserve for later release. These actions worked. Stoppers responded to our sharper values, expanded opening price points, and great branded buys. This led to a significant improvement in customer conversion and in average transaction size. In other words, stoppers liked the values that they found when they walked into our stores. In Q4, We also saw an improvement in traffic. This points to the second driver of our stronger trend. We interpret this improvement in traffic as a sign that the macro headwinds may have started to abate. In particular, although inflation is still elevated, we are beginning to lap the significant spike that occurred in late 2021 into early 2022. Let me move on now and talk about the outlook for the year ahead. As we said in November, we anticipate that in 2023, the economy will slow down and that inflation will continue to fall. We expect the inventory overhang across retail to diminish, and this should lead to less promotional activity. If the external environment unfolds, as I have just described, we believe that this could have three major implications for Burlington. First, the economic slowdown should create a greater consumer focus on value, potentially driving some trade down activity from middle and higher income groups. Second, Our value differentiation versus other retailers could grow as promotions moderate, and this should be a tailwind for traffic, conversion, and transaction size. And third, we expect that the external expense environment will improve compared to last year. We are already seeing this start to happen with freight rates. There is one other factor that is important to call out, and this one is specific to Burlington. We executed poorly in 2022, and this hurt our trend. Once we corrected these mistakes late in the year, we saw an improvement. Obviously, in 2023, we will be lapping these issues and we expect to drive stronger results. These are the major reasons why we feel optimistic about 2023. But with all that being said, we recognize that there are some uncertainties and potential headwinds ahead. In particular, we remain concerned about the lower income customer, our core customer. In 2022, this customer group bore the brunt of the impact of inflation on real household incomes. We think the impact of inflation will moderate this year, but there are other factors that could hurt this customer, such as a rise in unemployment and the ending of expanded SNAP benefits. Putting all these factors together, we are guiding full-year comp sales growth in the range of positive 3% to positive 5%. We believe that there may be upside to this range and we are managing our business to chase potential upside. Given this comp range, we expect to be able to drive 80 to 120 basis points of margin expansion in 2023. As we said in November, we believe we can get back to pre-pandemic margin levels within the next few years. but there are two reasons to be cautious on our 2023 margin. Firstly, our number one priority as we developed our budget and operating plans for 2023 was to drive sales. This means keeping our values as sharp as possible. Given the strong supply environment, we expect an increase in merchant margin, but this is balanced by the need to pass along great value to our customers to drive the trend. The second reason to be cautious relates to expenses. As described earlier, we expect the external expense environment, specifically freight rates, to improve in 2023. But it is difficult to predict how significant an impact this might have over the full year. As Kristen will explain, in Q4, we incurred higher supply chain expenses as we pushed more aggressively into great, opportunistic, off-price buys. This merchandise drives sales and value, but it is typically more difficult and expensive to process. For the last couple of years, we have been taking actions to make our distribution centers more off-price and more efficient. but we still have work to do, and this work will take time. So let me sum up our 2023 guidance. We are planning and managing our business to support positive 3% to 5% comp growth, but we are ready to chase the trend if it is stronger. As for operating margin, we believe that we can get back to pre-pandemic operating margins within the next few years. For 2023, we are planning 80 to 120 basis points of expansion on three to 5% comp growth. I would like to move on now and talk about our new store opening plans for 2023. We continue to be very pleased by the relative performance of our new stores especially our new store format. In 2023, we are planning to open 90 to 100 gross new stores. After relocations and closures, this should yield 70 to 80 net new stores. This is lower than we would like and reflects the current lack of high quality real estate locations. as well as supply issues within the construction industry. That said, we believe that this situation could be about to change. Over the next couple of years, we think that there could be a wave of consolidation in bricks and mortar retail. And we anticipate that this could drive a significant increase in the number of high quality new store locations. So once we get through 2023, we believe that we can grow our new store program such that we will open 500 to 600 net new stores over the following five years. Before I hand over to Kristin, let me make some high level comments about the longer term outlook for Burlington. As I said earlier, we were optimistic about 2023. But looking further out, we also see reasons to be bullish about the longer term. There are two factors in particular that I would like to highlight. Firstly, we anticipate that the external environment for full price retail will remain difficult and uncertain over the next few years. We expect that many traditional retailers may struggle. This should drive strong off-price merchandise supply and, as I mentioned a moment ago, may lead to additional bricks and mortar retail consolidation. In this environment, we believe that off-price retailers have a major opportunity to take share. Secondly, here at Burlington, over the last two to three years, we have been busy. investing in our business to transform ourselves into a stronger off-price retailer. For example, we have invested in our merchandising capabilities, we have made major changes in our stores organization to be more flexible and off-price, and we have changed our new store prototype to be more productive and efficient. As I acknowledged in November, some of these initiatives are a work in process. But the overall strategic direction is clear. We are working to transform ourselves into a stronger off-price retailer. So as we look beyond 2023, we are very excited. We believe that the combination of these factors, firstly, the potential dislocation and consolidation of traditional retail, and secondly, the transformation of Burlington into a stronger off-price retailer, could drive significant growth in sales, earnings, and shareholder value over the next several years. I would now like to turn the call over to Kristin to provide more details on our Q4 results and our 2023 guidance.