After a Good Quarter, Is It Time to Bet on Burlington Stores?

Post-IPO investors in off-price retailer Burlington Stores (NYSE: BURL  ) have had little to cheer about, as the company has generally struggled to remain above its first-day close. However, Burlington's share price came to life in March, popping more than 15%, after it reported better-than-expected results for its fourth quarter.Among the positive data points was a solid comparable-store sales performance, in contrast to the anecdotally weak quarter turned in by the retail sector at large. So, is it time to bet on Burlington?

What's the value?
Burlington is an off-price retailer of branded apparel at steep discounts to traditional retailer pricing, a model that has been perfected by larger competitors, like TJX (NYSE: TJX  ) and Ross Stores (NASDAQ: ROST  ) . While the company started out as a coat seller, it has diversified its product mix over the past few years to create a better overall growth trajectory. Currently, there's a focus on women's wear-to-work apparel and accessories categories that cater to the desires of its target audience of middle-aged, brand-conscious women. Burlington's efforts to entice shoppers with a better assortment have paid off nicely with higher comparable-store sales growth over the past three fiscal years.

In fiscal year 2013, Burlington posted solid financial results, highlighted by a 7.1% top-line gain that was aided by higher comparable-store sales and a steady expansion of its store network. More notably, the company's profitability improved significantly, producing a double-digit increase in adjusted operating income; this was due mainly to lower inventory markdowns and greater per-store productivity, a likely consequence of its ongoing store refresh program. The net result for Burlington was stronger cash flow and an ability to better fund its growth ambitions, including a prospective 5% addition to its overall store base in FY 2014.

Still chasing the leaders
Unfortunately, Burlington is still weighed down by a couple of factors, starting with an average store size that is roughly twice as large as the average store size at TJX and Ross Stores. This is a source of inefficiency that leads to higher operating costs, as evidenced by its relatively lower operating margin. In addition, the company has a hefty debt load, the lingering byproduct of a leveraged buyout orchestrated by investment firm Bain Capital in 2006.

As such, investors would be wise to stick with the leaders of the off-price retail sector, TJX and Ross Stores. Both retailers continue to add to their store networks, even after strong growth trajectories over the past few years. More important, both companies have anecdotally been taking market share from their traditional retailing rivals, a positive development that has led to higher volumes of customers and less of a need to engage in margin-busting promotional campaigns.

TJX, the larger of the two, reported solid results in FY 2013. Performance was highlighted by a 6% top-line gain that was helped by higher comparable-store sales as well as net store openings across its geographies. Despite a highly efficient organization, as evidenced by its double-digit operating margin, the company continues to find areas for improvement, which produced a slight pickup in profitability during the period. The net result for TJX was higher cash flow to fund both store growth and the return of capital to shareholders.

Meanwhile, Ross Stores generated a virtually identical performance to TJX. It posted a 5.2% top-line gain that similarly benefited from higher comparable-store sales and a continued expansion of its stores around the country. Like TJX, Ross Stores uses a bare-bones store format and an efficient purchasing operation to underprice its traditional retail competitors. The result is a growing stream of customers who have helped to fuel consistently higher sales and operating profit for the company as well as steady capacity expansion. While customers have benefited from low product prices, the biggest beneficiaries have been the company's shareholders, who have enjoyed a steadily rising stock price and 20 straight years of dividend increases.

The bottom line
With an improved operating model and better product focus, Burlington Stores is looking more and more like a worthy challenger to the off-price retailing kings.  However, with a large net debt load, the company is still at a disadvantage to its cash-rich competitors when it comes to the ability to quickly source inventory at deep discounts, the lifeblood of the off-price retail industry. As such, until the company whittles its debt down, investors should stick with the proven leaders, TJX and Ross Stores.

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