Burlington Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2017, the 53-week year ended February 3, 2018; comparator fiscal 2016 was 52 weeks. Although the request identifies “2016 Q4,” the supplied filing is the 2017 annual report, not a 2016 quarterly filing.
Business context
Burlington is an off-price retailer of branded apparel, footwear, accessories, home goods and related merchandise. It operated 629 stores, including an internet store, across 45 states and Puerto Rico at year-end. More than 99% of net sales came from Burlington-operated stores. The company opened 43 stores and closed six during the year, excluding relocations.
Financial performance and position
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Total revenue | $6,110.0 million | $5,591.0 million |
| Net sales | $6,084.8 million; up 9.3% | $5,566.0 million |
| Comparable-store sales growth | 3.4% | 4.5% |
| Gross margin rate | 41.5% | 40.8% |
| SG&A as a share of net sales | 30.6% | 31.0% |
| Net income | $384.9 million | $215.9 million |
| Diluted earnings per share | $5.48 | $3.01 |
| Adjusted EBITDA (non-GAAP) | $696.1 million | $584.6 million |
Net margin was 6.4%, compared with 3.9% in fiscal 2016. Management attributed improved results principally to stronger merchandise margins and lower expense ratios; the increase in net income also benefited substantially from a one-time tax-reform benefit.
- Cash flow: Operating cash flow was $607.3 million, versus $615.9 million. Investing activities used $262.2 million and financing activities used $293.4 million. Cash increased $51.7 million to $133.3 million.
- Investment: Capital expenditures, net of landlord allowances and insurance recoveries, were $213.4 million. Fiscal 2018 planned capital expenditures were approximately $250 million, net of expected allowances and recoveries.
- Liquidity: Working capital deficit was $47.0 million, improved from a $96.3 million deficit. The company reported $455.8 million available under its $600 million asset-based credit facility, with no outstanding borrowings at year-end. Restricted cash was $27.8 million.
- Debt: Total indebtedness was approximately $1.127 billion, including $1.109 billion under the term loan facility and $21.9 million of capital lease obligations. The term loan was repriced and extended to November 2024; its year-end borrowing rate was 4.06%. The company reported approximately $55 million of minimum debt service for fiscal 2017.
- Other obligations: Contractual commitments included $2.992 billion of operating lease payments and $854.4 million of purchase commitments. The filing also reports $64.9 million of insurance reserves and $60.0 million of letters of credit.
Material changes versus the prior year
- Net sales rose $518.7 million: $274.0 million from new and non-comparable stores, $184.9 million from comparable-store growth, and $82.1 million from the extra fiscal week, partly offset by closed-store and other adjustments.
- Gross margin improved 70 basis points, primarily on stronger merchandise margins. SG&A improved 40 basis points as a percentage of sales, while depreciation and amortization increased to $201.1 million from $183.6 million.
- Comparable-store sales growth moderated to 3.4% from 4.5%, although comparable-store inventory decreased approximately 7% and inventory turnover rose to 4.6 turns from 4.2.
- Inventory increased to $752.6 million from $701.9 million, reflecting new stores and increased pack-and-hold inventory.
- The effective tax rate fell to 10.3% from 35.2%. The Tax Act contributed an estimated one-time $93 million deferred-tax remeasurement benefit; adoption of share-based payment accounting also reduced the effective rate by approximately 440 basis points and increased EPS by $0.23.
- Fiscal 2017’s extra week and weather-related disruptions affect year-over-year comparisons. The extra week contributed $82.1 million of net sales.
Outlook, commentary and risks
- Management planned 35–40 net new stores in fiscal 2018, including approximately 60 gross openings and 20–25 relocations and closings; it stated a longer-term goal of reaching 1,000 stores and opening at least 30 net new stores annually.
- Management expected operating cash generation, existing cash and the ABL facility to fund expected needs and planned capital expenditures for at least the next 12 months, while cautioning that weaker sales might not be fully offset by cost savings.
- Management’s priorities include fresh merchandise and inventory productivity, improving the store and online customer experience, growing e-commerce, selective category expansion, store growth and remodels, and expense leverage. No specific earnings or comparable-sales guidance is provided in the supplied filing text.
- Weather-related incidents affected 82 stores, with 19 temporarily closed for at least seven days and eight still temporarily closed at year-end. Reported losses were $23.1 million; $11.7 million of insurance proceeds had been received and an $8.9 million receivable was recorded.
- Key risks include retail competition and pricing pressure; seasonal demand and weather; merchandise availability and inventory/markdown execution; store expansion and lease economics; supply-chain and import disruption; cybersecurity and payment-data risks; labor costs; and substantial debt and floating-rate exposure. A 1-percentage-point interest-rate increase was estimated to raise annual cash interest expense by $3.2 million after the interest-rate caps.
- The company reported ordinary-course litigation, including labor, consumer and privacy matters, but said it could not estimate reasonably possible losses beyond recorded accruals. Management did not expect resolution to materially affect results, financial position, liquidity or capital resources.
- The company repurchased 3.0 million shares for $282.5 million during fiscal 2017 and had $217.2 million remaining under its $300 million authorization. It did not anticipate paying cash dividends in the near term.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2017 ended February 3, 2018, not “2016 Q4.”
- Assess earnings quality by separating recurring operating performance from the approximately $93 million one-time tax benefit, the 53rd week, and weather-related costs and insurance recoveries.
- Review comparable-sales trends, inventory aging and turnover, markdowns, and the growth and profitability of new stores and e-commerce.
- Evaluate debt service, floating-rate exposure, lease commitments and capital needs alongside the company’s cash and ABL availability.
- Monitor whether planned store openings and approximately $250 million of fiscal 2018 capital expenditures can be funded while sustaining margins and liquidity.
- Track the final accounting for tax reform, ongoing legal matters and insurance claims; the filing states that certain tax-reform amounts were provisional and litigation loss ranges were not estimable.