Burlington Stores, Inc. — Form 10-Q Summary
Period clarification: The supplied filing covers the quarter ended August 1, 2020, not 2019 Q2. Comparatives are the quarter and six months ended August 3, 2019. Amounts are in U.S. dollars.
Business context and reporting period
Burlington operated 739 off-price retail stores in 45 states and Puerto Rico as of August 1, 2020. The company temporarily closed all stores effective March 22, 2020, amid COVID-19, began reopening stores May 11, and had substantially all stores reopened by the end of Q2. Results were heavily affected by the closures and the uncertain pace of recovery.
Financial performance and liquidity
| Metric | Three months ended Aug. 1, 2020 | Six months ended Aug. 1, 2020 |
|---|---|---|
| Total revenue | $1.012 billion, down 39.1% year over year | $1.814 billion, down 45.0% year over year |
| Net sales | $1.010 billion, down 39.0% | $1.808 billion, down 45.0% |
| Net income (loss) | $(46.8) million; diluted EPS $(0.71) | $(380.5) million; diluted EPS $(5.79) |
| Gross margin | 45.8%, versus 41.4% | 26.4%, versus 41.2% |
| Adjusted EBITDA | $(8.8) million, versus $170.3 million | $(456.4) million, versus $338.3 million |
| Operating cash flow | Not separately presented for the quarter | $(473.0) million, versus $229.4 million provided |
Q2 gross margin improved year over year partly because markdown reserves recorded in Q1 reduced clearance markdowns later in Q2. First-half gross margin fell sharply due primarily to $271.9 million of aged-inventory markdown reserves recorded in Q1. Sales in reopened stores declined 14% during Q2; management cited low inventory and delayed replenishment as contributors to weaker sales late in the quarter.
At August 1, cash and cash equivalents were $1.077 billion, plus $6.6 million of restricted cash. Working capital was $660.0 million, compared with a $151.7 million deficit a year earlier. The cash increase was substantially supported by financing, rather than operating cash generation. Investing cash outflow was $134.1 million; financing cash inflow was $1.281 billion.
Total debt, including finance lease obligations and net of financing discounts and costs, was $2.165 billion, compared with $1.005 billion at February 1, 2020. The balance included the term loan, convertible notes, secured notes, ABL borrowings, and finance leases. The company had $250 million outstanding on its $600 million ABL facility and $120.4 million available under it. Long-term operating lease liabilities were $2.390 billion; an additional $47.9 million of deferred rent was included in other current liabilities.
Material changes and unusual items
- Revenue and earnings were severely affected by pandemic-related store closures. Q2 net loss contrasted with prior-year net income; the first half swung from net income to a substantial net loss.
- To strengthen liquidity, Burlington drew $400 million on its ABL facility in March and repaid $150 million in Q2; it issued $805 million of 2.25% convertible senior notes and $300 million of 6.25% secured notes in April.
- The convertible notes mature in 2025 and have an initial conversion price of approximately $220.18 per share. Conversion could dilute shareholders, subject to the note terms.
- The CARES Act supported a tax benefit; the company estimated a $221.2 million federal tax refund from NOL carrybacks. The estimate was recorded in other assets.
- Q2 and first-half SG&A included approximately $37 million of COVID-related and store-reopening costs. The company also accrued approximately $19.6 million, plus employer payroll taxes, to settle two wage-and-hour matters, subject to court approval.
- Long-lived asset impairment charges were $3.0 million for the first half. Management cautioned that further impairment or valuation-allowance changes could result from the pandemic.
Outlook, management commentary, and risks
Management said it believed available cash, cash expected from reopened-store operations, and the ABL facility would fund expected needs and planned capital expenditures for at least the next 12 months. It also warned that further outbreaks, renewed closures, weak traffic or consumer spending, and operating disruption could materially affect results, liquidity, and cash flows. No specific sales or earnings forecast was provided.
For fiscal 2020, management estimated capital expenditures of approximately $260 million, net of about $40 million in landlord allowances, and planned 36 net new stores (approximately 62 gross openings and 26 relocations or closures). It described a conservative approach to inventory, expenses, and capital spending, with plans to pursue opportunistic buying and rebuild inventory as conditions allowed. The share repurchase program was suspended; the company did not anticipate near-term cash dividends.
Other risks include competition and promotional pricing, inventory availability and markdowns, seasonality and weather, substantial debt and debt-service requirements, lease and purchase commitments, and uncertainty over the timing and extent of pandemic recovery. The filing states that disclosure controls and procedures were effective as of August 1, 2020.
Important facts for investors to verify
- Whether reopened-store traffic and sales recovered after Q2, and whether inventory replenishment improved following the late-quarter weakness.
- How much liquidity is available after considering restricted cash, ABL borrowing-base limits, outstanding letters of credit, and cash burn.
- The timing and receipt of the estimated $221.2 million tax refund and any effect of tax-law or estimate changes.
- Debt service, refinancing and covenant capacity, plus potential dilution or cash settlement under the convertible notes.
- Whether deferred rent, the wage-and-hour settlement, $955.6 million of purchase commitments, and planned capital expenditures affect future cash requirements.