Burlington Stores, Inc. — Form 10-K Summary
Period clarification: The request identifies “2013 Q4,” but this filing is the annual report for the 52-week fiscal year ended January 31, 2015 (Fiscal 2014). Comparisons below are primarily with the 52-week year ended February 1, 2014 (Fiscal 2013).
Business context
Burlington operates an off-price retail business focused on branded apparel, footwear, accessories, home goods and coats. At year-end it operated 542 stores, including an internet store, in 44 states and Puerto Rico. It opened 24 stores and closed three during Fiscal 2014. More than 98% of net sales came from Burlington stores.
Financial and operating results
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Total revenue | $4,849.6 million | $4,462.0 million |
| Net sales | $4,814.5 million; up 8.7% | $4,427.5 million |
| Comparable-store sales | Up 4.9% | Up 4.7% |
| Gross margin rate | 39.7% | 39.1% |
| SG&A as a share of net sales | 31.6% | 31.4% |
| Net income | $66.0 million; diluted EPS $0.87 | $16.2 million |
| Adjusted net income | $138.6 million | $70.2 million |
| Adjusted EBITDA | $448.1 million | $383.7 million |
| Cash provided by operations | $302.3 million | $289.4 million |
Gross margin improved by 60 basis points, reflecting better merchandising execution, but product sourcing costs included in SG&A rose by about 40 basis points of sales. SG&A increased to $1,520.9 million from $1,391.8 million, including higher sourcing costs, incentive compensation and legal accruals. Management cites improved gross margin and lower interest expense as principal drivers of higher net income and adjusted results. Adjusted net income and Adjusted EBITDA are non-GAAP measures and exclude specified costs; they should not be treated as substitutes for GAAP results or cash flow.
Ending inventory increased to $788.7 million from $720.1 million, partly due to new stores and pack-and-hold inventory. Average inventory per comparable store declined 17.8%, and comparable-store inventory turnover increased to 4.9 turns from 4.0. Store payroll was 8.8% of net sales under the company’s revised definition; the prior-year comparison under that same definition was 9.1%.
Cash, debt and liquidity
Cash and cash equivalents fell to $25.3 million from $133.0 million; restricted cash was $27.8 million. Working capital declined to $26.6 million from $80.6 million. Operating cash flow was $302.3 million; investing activities used $216.5 million and financing activities used $193.5 million. Cash capital expenditures, net of landlord allowances, were $182.6 million.
Total debt, including capital leases, was $1,250.4 million at year-end. This included $1,161.5 million under the term loan and $63.3 million drawn on the ABL facility. The company reported $386.9 million of ABL availability. Interest expense declined to $83.7 million from $127.7 million. The August 2014 refinancing replaced senior notes and prior term loans with a $1.2 billion term loan, reduced ABL pricing and changed loan terms; the refinancing and related transactions contributed to a $74.3 million loss on extinguishment of debt. Term-loan borrowing rate at year-end was 4.25%; the debt is floating-rate and secured.
Management stated that cash from operations, existing cash and the ABL facility should be sufficient for expected requirements and planned capital expenditures for at least the next 12 months, while cautioning that this depends on performance and economic conditions.
Changes, outlook and material risks
- Fiscal 2015 plans called for approximately 25 net new stores and capital expenditures of $150–$160 million, net of approximately $40 million in landlord allowances. These are plans, not guaranteed outcomes.
- Management’s priorities include fresh merchandise and inventory turnover, the core female customer, customer experience, e-commerce, store expansion and margin improvement. The filing provides no formal earnings or comparable-sales guidance.
- Sales and income are seasonal, with a significant share typically generated from September through January. Weather, consumer spending, competitive discounting, inventory buying and markdown execution can affect sales and margins.
- Supply-chain disruption, vendor availability, labor costs, store-lease terms, technology or data-security incidents, and execution of growth initiatives are identified risks. The company also has substantial floating-rate debt; management estimated that a one-percentage-point rate increase on year-end floating debt, before interest-rate caps, would increase annual cash interest by about $12.3 million.
- In the California Song-Beverly customer privacy case, the court found the company in violation of state law in January 2015; the penalty remained to be determined. The company accrued $9.3 million of Fiscal 2014 expense and reported total legal accruals of $12.9 million. It could not estimate reasonably possible losses beyond accrued amounts and stated the penalty could be material.
- Fiscal 2014 net income includes the unusual debt-extinguishment loss and a $9.3 million litigation charge. Other income included a $3.2 million credit-card interchange settlement. The company does not anticipate cash dividends in the near term.
Important facts for investors to verify
- Confirm the reporting period: this is Fiscal 2014, not a 2013 quarterly filing.
- Review the full reconciliation of Adjusted Net Income and Adjusted EBITDA to GAAP results, including the exclusions and their tax effects.
- Track the final outcome, appeal or settlement of the Song-Beverly case and whether any penalty exceeds recorded accruals.
- Assess debt repayment, refinancing terms, covenant restrictions, ABL availability and sensitivity to floating interest rates.
- Compare planned Fiscal 2015 store openings and capital spending with actual execution, cash generation and inventory turnover.
- Note that the auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of January 31, 2015.