Burlington Stores, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2013 Q1, this filing reports the three months ended May 3, 2014 (fiscal 2014 first quarter), compared with the three months ended May 4, 2013. Amounts below are in millions of dollars unless otherwise stated.
Business context and reporting period
Burlington operated 523 retail stores, including an internet store, in 44 states and Puerto Rico. It sells branded, off-price apparel, footwear, accessories and home merchandise. The company cautions that its business is seasonal and first-quarter results are not necessarily indicative of the full fiscal year.
Financial results and liquidity
| Metric | Quarter ended May 3, 2014 | Prior-year quarter |
|---|---|---|
| Total revenue | $1,135.9 | $1,073.0 |
| Net sales | $1,128.3 | $1,065.0 |
| Comparable-store sales growth | 2.7% | Not stated here |
| Gross margin as % of net sales | 38.1% | 37.3% |
| Selling and administrative expense as % of net sales | 30.8% | 30.8% |
| Net income (loss) | $11.8 | $(5.6) |
| Diluted earnings (loss) per common share | $0.16 | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $92.3 | $79.6 |
| Adjusted net income (non-GAAP) | $18.6 | $6.1 |
| Cash from operating activities | $46.9 | $95.7 |
| Cash used in investing activities | $(45.9) | $(29.7) |
| Cash used in financing activities | $(64.5) | $(6.7) |
Gross margin improved by 80 basis points, which management attributed to improved execution; this more than offset an approximately 30-basis-point increase in product-sourcing costs. Net income turned positive, while interest expense declined $7.8 million to $26.6 million. Adjusted EBITDA and adjusted net income are company-defined non-GAAP measures; the filing describes their limitations and provides reconciliations.
Cash and cash equivalents were $69.5 million at May 3, 2014, down $63.5 million during the quarter; restricted cash was an additional $32.1 million. Working capital was $92.7 million, versus $104.9 million at May 4, 2013. Merchandise inventory was $707.6 million, down from $727.2 million a year earlier; comparable-store inventory turnover rose to 4.2 turns from 3.6.
Total debt, including capital leases, was $1,367.5 million; long-term debt net of current maturities was $1,366.4 million. Debt included an $825.4 million secured term loan, $450.0 million of 10% senior notes due 2019, $69.2 million of Holdco notes due 2018 and $23.0 million of capital leases. The company had no ABL borrowings and reported $508.2 million of availability. It was in covenant compliance; reported leverage and interest-coverage ratios were 4.0 and 3.8, respectively.
Material changes versus the prior-year quarter
- Revenue rose 5.9%; net sales increased $63.3 million, reflecting $40.3 million from newer/non-comparable stores and $28.1 million from comparable-store sales, partly offset by closed stores and other adjustments.
- Net income improved by $17.3 million, supported by stronger gross margin, lower interest expense and reduced debt/secondary-offering costs; higher selling and administrative expenses and income taxes partly offset the improvement.
- Operating cash flow fell $48.8 million, primarily due to a smaller increase in accounts payable, lower income taxes payable and lower accrued bonuses. Capital expenditures increased, including spending on the new corporate headquarters and stores.
- Cash declined year over year from $102.7 million. The comparison also reflects prior-year financing activity and a $336.0 million special dividend paid in 2013; no dividend was paid in the current quarter.
- Debt was lower than the prior-year balance, following redemptions of Holdco notes, including $58.0 million in April 2014. The April redemption and a required $4.0 million term-loan payment generated a combined $3.7 million debt-extinguishment loss.
Outlook, commentary, risks and unusual items
- Plans: Management planned 23 net new stores for the remainder of fiscal 2014, after opening two in the quarter. Fiscal 2014 capital expenditures were estimated at approximately $180 million, net of about $40 million of landlord allowances. No formal earnings or sales guidance is stated in the provided filing text.
- Liquidity outlook: Management expected operating cash flow, existing cash and the ABL facility to cover expected needs and planned capital expenditures for at least the next 12 months, while cautioning that this depends on performance and economic conditions.
- Operating priorities: Management cited fresher merchandise, inventory reduction and faster turnover, better store execution and customer experience, e-commerce growth, disciplined store expansion, markdown optimization and operating leverage.
- Key risks: Economic weakness and consumer spending, weather and seasonality, competition and margin pressure, merchandise sourcing and delivery, interest-rate exposure, substantial indebtedness and covenant restrictions, and availability of suitable store locations. A 1-percentage-point rate increase on the reported floating-rate debt would add approximately $8.3 million in annual cash interest before considering interest-rate caps.
- Commitments and contingencies: Operating lease payments included $209.2 million for 17 stores and two warehouses committed to open. Letters of credit totaled $40.9 million. Legal reserves were $1.8 million; the company said excess potential liabilities were not expected to have a material effect, but gave no assurance.
- Unusual items and subsequent event: The quarter included the $3.7 million debt-extinguishment loss, $0.4 million of secondary-offering costs, and $0.8 million of stock-option modification expense. A secondary offering closed May 6, 2014, after quarter-end: selling stockholders sold 12.0 million shares plus 1.8 million under option; the company received no proceeds.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is a 2014 first-quarter filing, not a quarter ended in 2013.
- Assess whether comparable-store sales growth and gross-margin improvement persisted, particularly given the increase in product-sourcing costs and the seasonal nature of the business.
- Track operating cash flow, working capital, capital expenditures and cash balances against the store-opening and headquarters investment plans.
- Review debt maturities, interest-rate exposure, covenant headroom and the sustainability of reported covenant ratios; distinguish GAAP results from adjusted non-GAAP measures.
- Confirm the post-quarter secondary offering’s effect on shares held by selling stockholders and verify that the company received no proceeds, as disclosed.