Burlington Stores, Inc. — Form 10-K Summary
Period clarification: The provided filing is for the 52-week fiscal year ended January 30, 2016 (Fiscal 2015), not 2014 Q4. The filing text does not provide a clear basis for treating it as a 2014 Q4 filing. Fiscal 2014, the principal comparison, ended January 31, 2015.
Business context and reporting period
Burlington is a U.S. off-price retailer of branded apparel, footwear, accessories, home goods and related merchandise. At year-end it operated 567 stores, including its internet store, across 45 states and Puerto Rico. The company reports one operating segment. More than 98% of net sales came from Burlington stores.
Financial performance
| Metric | Fiscal 2015 | Fiscal 2014 | Change or context |
|---|---|---|---|
| Total revenue | $5,129.8 million | $4,849.6 million | Up 5.8% |
| Net sales | $5,098.9 million | $4,814.5 million | Up 5.9%; comparable sales increased 2.1%, versus 4.9% |
| Gross margin rate | 40.0% | 39.7% | Up 30 basis points; markdown improvement was offset by higher sourcing costs |
| SG&A as a share of net sales | 31.3% | 31.6% | Improved 30 basis points |
| Income before tax | $238.9 million | $105.0 million | More than doubled |
| Net income | $150.5 million | $66.0 million | Diluted EPS was $1.99 versus $0.87 |
| Adjusted Net Income | $174.6 million | $138.6 million | Non-GAAP; up $36.0 million |
| Adjusted EBITDA | $484.0 million | $448.1 million | Non-GAAP; up $36.0 million |
Net income margin was approximately 2.9% of total revenue. Management attributed the earnings improvement principally to higher gross margin and lower interest expense and debt-extinguishment losses, partly offset by increased SG&A and income tax expense. Fiscal 2015 included a $0.6 million debt-extinguishment loss; Fiscal 2014 included $74.3 million.
Cash flow, debt and liquidity
- Operating cash flow was $327.5 million, up from $302.3 million. Investing activities used $194.7 million and financing activities used $137.2 million. Cash and cash equivalents declined $4.4 million to $20.9 million; restricted cash was $27.8 million.
- Capital expenditure cash spend was $201.8 million before landlord allowances and $160.0 million net of $41.8 million in allowances. The filing’s capital-spending forecast labels an estimate of $145–$150 million “during Fiscal 2015,” despite reporting actual Fiscal 2015 spending; the forecast period is therefore unclear.
- Total debt, including capital leases, was $1,304.9 million. This included $1,112.6 million under the term loan, $167.4 million drawn on the $600 million ABL facility, and $24.9 million of capital lease obligations. ABL availability was $335.4 million.
- Reported interest expense was $59.0 million. The company estimated approximately $51.3 million of cash interest payments for the following fiscal year. A one-percentage-point rate increase, after the interest-rate caps, was estimated to add $4.8 million in annual cash interest at year-end debt levels.
- Working capital was $18.6 million, compared with $26.6 million; management attributed much of the decrease to deferred-tax balance-sheet reclassification. The company said operating cash, existing cash and ABL capacity should fund expected requirements and planned capital expenditures for at least 12 months.
- The company repurchased 3.94 million shares for $200.4 million during Fiscal 2015 and had $199.6 million remaining under a new $200 million authorization. It said it did not expect to pay cash dividends in the near term.
Material changes and outlook
- Sales growth reflected $198.2 million from new and recently opened stores and $100.2 million from comparable sales, partly offset by $14.0 million from store closures and other adjustments. The store base grew by 25 net locations to 567.
- Inventory declined to $783.5 million from $788.7 million. Comparable-store inventory was down approximately 6%, and comparable-store inventory turns improved to 5.3 from 4.9.
- Management planned approximately 25 net new stores in Fiscal 2016 and described a long-term opportunity to reach 1,000 stores, subject to suitable sites and acceptable lease economics. Its priorities included improving merchandise freshness and inventory turnover, serving its core female customer, enhancing the store and online experience, and controlling markdowns and operating costs.
- During Fiscal 2015, Burlington began converting fragrance sales from a third-party leased-department arrangement to an owned category; it expected fragrances to be exclusively owned by the end of Fiscal 2016’s first quarter.
Risks, contingencies and unusual items
- Results are seasonal, with a significant portion of sales and operating income typically generated September through January. Weather, especially unseasonable temperatures, can affect demand and peak-season results.
- Key risks include intense retail price competition; buying and inventory execution; changing consumer preferences; vendor and overseas supply disruptions; real-estate availability; labor costs and staffing; cyber, payment-card and information-system risks; and substantial debt and floating interest rates.
- A California Song-Beverly credit-card privacy case had resulted in an adverse trial ruling. A settlement was preliminarily approved, with a maximum payment of $29.4 million; management expected claims-made terms to reduce the amount actually paid. Final court approval remained outstanding, and the filing states that rejection could return the cases to litigation. The company could not estimate reasonably possible legal losses above accrued amounts.
- Fiscal 2015 included a $3.5 million inventory shrinkage adjustment loss, compared with a $10.0 million shrinkage adjustment gain in Fiscal 2014. Long-lived-asset impairment charges were $6.1 million, up from $2.6 million.
- Adjusted Net Income and Adjusted EBITDA exclude specified costs and other items and are not substitutes for GAAP results. The filing reports an unqualified audit opinion and effective internal control over financial reporting as of January 30, 2016.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Fiscal 2015, not 2014 Q4. Fiscal 2015’s final quarter reported net sales of $1,540.8 million and net income of $98.8 million.
- Review the final status and cash cost of the $29.4 million maximum California settlement, as well as any further litigation developments.
- Assess debt service, ABL usage and availability, floating-rate exposure, and the effect of share repurchases on liquidity and leverage.
- Verify the Fiscal 2016 capital expenditure outlook, which is ambiguously labeled in the filing, and track planned store openings against actual results.
- Compare comparable-sales trends, inventory turnover, markdowns and margins, including the effects of weather and the fragrance-category transition.