Burlington Stores, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended May 2, 2020, compared with the three months ended May 4, 2019. The request metadata says “2019 Q1,” but the filing is for fiscal 2020 Q1.
Business context
Burlington is an off-price retailer with 736 stores in 45 states and Puerto Rico at May 2, 2020. COVID-19 led the company to close all stores, distribution centers and corporate offices effective March 22; all remained closed at quarter-end. By May 29, approximately 400 stores and the distribution centers had reopened, and management expected most remaining stores to reopen by mid-June. Results for this seasonal quarter are not necessarily indicative of the full year.
Financial performance and liquidity
| Metric | Q1 fiscal 2020 | Q1 fiscal 2019 |
|---|---|---|
| Net sales | $798.0 million | $1,628.5 million |
| Total revenue | $801.5 million | $1,634.2 million |
| Net income (loss) | $(333.7) million | $77.8 million |
| Diluted earnings (loss) per share | $(5.09) | $1.15 |
| Gross margin as a percentage of net sales | 2.0% | 41.0% |
| Cash flow from operations | $(271.7) million | $54.2 million |
- Sales fell 51.0%, primarily because stores were closed for much of March and April. February comparable-store sales increased 3%; March and April stores were excluded from comparable-store calculations due to closures.
- Cost of sales included $271.9 million of inventory markdowns tied to aging inventory and extended closures. SG&A decreased in dollars to $485.1 million from $517.4 million, but increased to 60.8% of sales from 31.8% as sales contracted.
- Cash, cash equivalents and restricted cash rose $1.085 billion to $1.495 billion, primarily from financing proceeds; operating activities used cash. Cash and cash equivalents at May 2 were $1.488 billion, with $6.6 million restricted.
- At May 2, reported debt was $2.308 billion, including current maturities and finance lease obligations. Long-term operating lease liabilities were $2.371 billion; total operating lease liabilities were $2.640 billion. ABL availability was $150.9 million.
- Working capital was $867.9 million, compared with a $114.0 million deficit at May 4, 2019. Capital expenditures, net of landlord allowances, were $56.7 million.
Material changes, financing and unusual items
- To bolster liquidity, the company drew $400 million on its $600 million ABL facility and issued $805 million of 2.25% convertible notes and $300 million of 6.25% secured notes, both due 2025. The convertible notes’ initial conversion price is approximately $220.18 per share; conversion could result in share dilution.
- The Term Loan Facility was repriced in February, reducing its LIBOR margin from 2.00% to 1.75%. Interest expense increased to $14.7 million from $13.4 million, partly due to new borrowing.
- The income tax benefit was $205.4 million, including a $62.5 million benefit related to CARES Act net operating loss carrybacks. The company said it was evaluating other potential CARES Act benefits.
- The company recorded $1.9 million of long-lived asset impairment charges, primarily for seven stores, and a $10.4 million litigation accrual included among its non-GAAP reconciliation items. It reported a $37.9 million fair value liability for its interest-rate swap.
Outlook, management commentary and risks
Management said the pandemic’s effects on operations, customer traffic, spending, liquidity and cash flows remained highly uncertain, and did not provide a clear sales or earnings forecast. It believed cash, reopening-related operating cash generation and ABL availability would be sufficient for at least the next 12 months, while cautioning that further closures or weak sales could undermine that expectation.
- Fiscal 2020 capital expenditures were estimated at approximately $260 million, net of about $40 million in landlord allowances. The company planned 38 net new stores, subject to reopening conditions and other uncertainties.
- Management suspended share repurchases in March, deferred rent through landlord agreements, curtailed most merchandise buying, reduced compensation temporarily and furloughed most store and distribution-center associates while continuing their medical benefits.
- Key risks include the duration and recurrence of COVID-19 disruptions, reopening and customer demand, inventory markdowns, supply-chain disruption, economic weakness, competitive pricing, substantial debt and lease commitments, and potential further impairments or tax valuation allowances.
- The company reported $455.2 million in purchase commitments for goods not yet received. It also disclosed wage-and-hour litigation, including a certified FLSA collective action; management could not predict the outcome or reasonably estimate any reasonably possible loss above the amount accrued.
Most important facts for investors to verify
- Whether store reopenings and customer traffic recover as anticipated, and whether further closures occur.
- Whether the $271.9 million inventory markdown adequately reflects aged and seasonal inventory exposure.
- Whether operating cash flow improves enough to support liquidity needs, debt service and lease payments.
- Actual ABL availability and borrowing conditions, and the terms, dilution potential and servicing costs of the new notes.
- Whether planned capital spending and store openings proceed, and whether litigation or asset impairment costs increase.