Burlington Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2013, the 52 weeks ended February 1, 2014. The prior fiscal year ended February 2, 2013 and comprised 53 weeks. Although the request metadata says “2012 Q4,” this filing covers fiscal 2013; it reports quarterly results, including the fourth quarter, but is not a 2012 quarterly filing.
Business context
Burlington is an off-price apparel and home retailer operating 521 stores, including an internet store, across 44 states and Puerto Rico. More than 98% of net sales came from Burlington Coat Factory stores. The company completed its IPO in October 2013; Bain Capital retained a controlling interest.
Financial performance and liquidity
| Metric | Fiscal 2013 | Prior comparable period |
|---|---|---|
| Total revenue | $4,462.0 million | $4,165.5 million |
| Net sales | $4,427.5 million, up 7.2% | $4,131.4 million |
| Net income | $16.2 million | $25.3 million |
| Adjusted EBITDA | $383.7 million, up 15.6% | $332.0 million |
| Adjusted net income | $70.2 million, up 17.9% | $59.6 million |
| Comparable-store sales | Up 4.7% | Up 1.2% |
| Gross margin rate | 39.1% | 38.8% |
| Selling and administrative expenses / net sales | 31.4% | 31.8% |
| Operating cash flow | $289.4 million | $452.5 million |
Net income margin was approximately 0.4% of net sales. Fourth-quarter net income was $63.6 million versus $67.9 million in the prior-year fourth quarter; the prior quarter contained 14 weeks versus 13 weeks in fiscal 2013.
Cash and cash equivalents were $133.0 million at year-end, up from $43.3 million. Working capital was $80.6 million, down from $104.8 million, partly reflecting $58.0 million of Holdco Notes classified as current after a subsequent redemption notice. Inventory increased to $720.1 million from $680.2 million, while comparable-store inventory per store declined 9.2% and turnover improved to 4.0 turns from 3.6.
Total debt, including capital leases, was $1,428.2 million. It included $828.8 million of term loans, $450.0 million of 10% Senior Notes, $126.1 million of 9.00%/9.75% Holdco Notes, and capital leases. No ABL borrowings were outstanding; reported ABL availability was $456.2 million. The company reported compliance with debt covenants, with a 3.5 consolidated leverage ratio and 4.2 interest coverage ratio. Capital expenditures were $126.7 million net of landlord allowances; operating cash flow less this reported spend was approximately $162.7 million.
Changes and unusual items
- Net sales rose 7.2%; growth reflected new and non-comparable stores and 4.7% comparable-store sales growth. Comparisons are affected by the prior year’s extra week.
- Gross margin improved through merchandising execution, in-season buying and lower shrink. Selling and administrative expenses improved as a percentage of sales, though supply-chain, buying and incentive costs increased.
- Net income fell despite stronger operating measures, principally because of higher interest and tax expense, debt-extinguishment losses, debt-amendment and advisory-termination costs, and stock-option modification expense. Fiscal 2013 included $16.1 million of debt-extinguishment losses, $23.0 million of debt/advisory-related costs and $10.4 million of stock-option modification expense.
- The company raised $236.9 million net from its IPO. Proceeds from the 2013 Holdco Notes had funded a $336.0 million special dividend to pre-IPO shareholders; the company later redeemed $221.8 million of those notes. It called a further $58.0 million for redemption in April 2014, with an expected approximately $3.7 million related extinguishment loss.
- Reported GAAP EPS for common stockholders is distorted by the former Class L preferred return and pre-IPO capital structure. The filing presents pro forma common EPS of $0.22 basic and diluted for fiscal 2013.
Outlook, commentary and risks
Management planned approximately 25 new stores in fiscal 2014 and estimated approximately $190 million of capital expenditures, net of about $40 million in landlord allowances. Priorities included improving inventory freshness and turnover, serving the core female customer, enhancing store experience and e-commerce, and leveraging operating costs. Management stated that operating cash, existing cash and the ABL were expected to fund requirements and planned capital expenditures for at least the next 12 months, while cautioning that sales declines might not be fully offset by savings.
Key risks include intense retail price competition; consumer demand, fashion and weather variability; seasonal dependence on September–January sales; inventory buying and markdown execution; store lease renewals and expansion economics; vendor and import/supply-chain disruption; distribution-center and information-system outages or data breaches; and substantial debt, interest-rate exposure and restrictive covenants. A one-percentage-point rate increase was estimated to add about $8.3 million in annual pre-tax interest expense before interest-rate caps. The company also disclosed wage-hour, consumer/privacy and other litigation; it did not believe unrecorded losses would materially affect financial position, but acknowledged possible material effects on results in the periods resolved.
Governance and ownership warrant attention: Bain Capital beneficially owned approximately 74% of common stock, and the company used NYSE controlled-company exemptions. The company did not anticipate cash dividends in the foreseeable future. Deloitte issued an unqualified opinion on the financial statements; the auditor was not engaged to opine on internal-control effectiveness. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the fiscal-period comparison for the prior year’s 53rd week and the 14-week prior fourth quarter.
- Review the bridge between GAAP net income and Adjusted EBITDA/Adjusted Net Income, including whether excluded costs recur.
- Track debt balances, scheduled maturities, cash interest, covenant headroom and the outcome of the announced Holdco Notes redemption.
- Assess whether comparable-store growth, gross margin improvement and inventory turnover persist as the company expands.
- Evaluate the execution and funding of the 25-store plan and projected $190 million capital program against cash generation and lease commitments.
- Review potential legal, tax and self-insurance exposures, as well as governance and share-sale implications of Bain Capital’s control.