Is Burlington the Best Off-Price Retailer?

Does Burlington beat TJX and Ross in the off-price retail race?

Mar 4, 2014 at 3:04PM

While the US economy has struggled to gain any significant momentum, retailers like Burlington Stores (NYSE:BURL), TJX (NYSE:TJX), and Ross Stores (NASDAQ:ROST) continue to entice shoppers with their discount prices. The huge discounts offered at these stores mean that consumers don't have to spend much in this tough economic environment. Before comparing Burlington to its peers, let's take a detailed look at the company.

What's cooking at Burlington?
In the third quarter, Burlington reported a loss of $16.9 million which widened from the comparable period's loss of $7.4 million. The loss per share stood at $0.05 while the loss in the previous year's third quarter stood at $0.02 per share. It attributed the increase in net loss to a reduction in income tax benefits of $6.5 million and an increased interest expense of $5.3 million.

Gross margin edged up 40 basis points to 39%, driven by improved merchandise margins. SG&A shrunk to 34.1% from 34.6% in the comparable period, thanks to lower advertising and occupancy costs.

Comparable sales and net sales increased by 3.9% and 10%, respectively. Adjusted EBITDA increased 28.3% to $62.5 million, up from $48.7 million in the comparable period. Sales growth and higher margins, coupled with lower SG&A, helped the company improve its EBITDA margin by 80 basis points.

Burlington wants to enhance its off-price business model by remaining liquid so that it can take advantage of market opportunities. In addition, the company is now working with more vendors to provide its customers with fresh styles and brands. It is also trying to improve its merchandise localization by getting the right products to the right stores at the right times.

Moreover, Burlington is also looking to expand its retail store base. It opened 18 stores in the latest quarter, mainly in New York, Ohio, and Arizona; this took its total store count to 521 stores which is in-line with its long-term goal of operating 1000 stores.

Apart from increasing its store base, Burlington is trying to optimize inventory levels at its stores. This will increase efficiency across its stores and cut its operating costs as well.

In the fourth quarter, Burlington will use much of its operating cash flow to pay off debt. The company expects comparable sales growth of 2% to 3% during the quarter. It expects its EBITDA margin to increase by 30 to 40 basis points.

The price-to-cash flow ratios for Burlington, TJX and Ross are 47.5, 15.7 and 14.1, respectively, while the industry has an average price-to-cash flow ratio of 15.8. Burlington has a high price-to-cash flow ratio because of its recent IPO.

Burlington's forward price-to-earnings ratio for the next year stands at 19.3, which is higher than those of TJX at 18.4 and Ross at 15.9; this makes Burlington slightly more expensive than its peers at this point in time.

TJX has done pretty well over the last few quarters, as the company's off-price model is attracting lots of shoppers. In the latest quarter, TJX's earnings per share jumped by 21% while its sales increased by 9%.

Just like other retailers, TJX is investing heavily in e-commerce, which is expected to be a key growth driver for the company in the years to come. The company is expanding its distribution networks for Marmaxx and HomeGoods, as the demand for its brands continues to increase.

Ross Stores also works on the same business model, which is why it has had success lately. In its latest quarter Ross witnessed an EPS jump of 12% while its sales climbed by 6%; this was attributed to the exciting, new products offered at the company's stores. The company also enhanced its store efficiency while maintaining leaner inventory levels. Ross expects its fourth-quarter earnings per share to end up somewhere between $0.97-$1.01.

Final thoughts
Burlington reported a loss in the third quarter as the company incurred high expenses due to its recent IPO. However, its climbing sales and comps portray a better picture of the future. The company is on the right track as it has been continuously increasing its sales, thanks to the large discounts offered at its stores. As the economy is still in the recovery phase the company's off-price business model will continue to generate revenue, especially from middle- and lower-income consumers. All in all, Burlington appears to be heading the right way. However, as I mentioned earlier, in comparison with its peers it's somewhat expensive at this moment. 

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