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Burlington Stores Inc  (NYSE:BURL)
Q4 2018 Earnings Conference Call
March 07, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Burlington Stores, Incorporated Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. David Glick, Vice President of Investor Relations. Sir, you may begin.

David J. Glick -- Vice President, Investor Relations

Thank you, operator, and good morning everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2018 fourth quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, Chief Financial Officer and Principal.

Before I turn the call over to Tom, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our express permission. A replay of the call will be available until March 14th, 2019. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the Company's 10-K for fiscal 2017 and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

Now here's Tom.

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Thank you, David. Good morning everyone. In the fourth quarter, our adjusted EPS exceeded our guidance, despite sales coming in below our expectations. Our comparable store sales increased 1.3%, total sales gained 7.4%, and adjusted earnings per share were up 28% versus the prior year. Our fourth quarter comparable store sales result was not up to our standards and we will discuss that in more detail in a few moments. That said, for the fiscal 2018, the Company did achieve solid financial results and we remain highly focused on executing the strategies that have driven consistent comparable store sales and increased EBIT margin results over the past several years.

Turning to highlights of the fourth quarter. This was our 24th consecutive quarter of positive comp sales growth, and was achieved on top of comparable store sales increases of 5.9% and 4.6% respectively in the fourth quarters of 2017 and 2016. Once again, we achieved record low levels of inventory aged 91 days and older, and improved our comp store inventory turnover by 2.5%. Our adjusted earnings per share grew 28% in the fourth quarter and we opened three new stores bringing our 2018 total to 68 gross and 46 net new stores, the highest number of new store openings in our history.

Moving to highlights of the fiscal 2018. Our comparable store sales increased 3.2% on top of last year's increase of 3.4%, marking our eighth consecutive year of positive comparable store sales growth. Our adjusted EBITDA margin increased 50 basis points, more than offsetting higher wage and freight pressure, on top of last year's 90 basis point increase. Our adjusted earnings per share grew 46%, significantly ahead of our original guidance and we made significant strides strengthening our balance sheet and returning capital to shareholders, as we repurchased 219 million of our stock and paid down $150 million on our term loan.

As a reminder, our comparable store sales increase of 1.3% for the fourth quarter, lines up the comparable calendar week, specifically the 13 weeks ended February 2nd, 2019, versus the 13 weeks ended February 3rd, 2018. It is important to note that the fourth quarter represented our most difficult one in two-year quarterly comparisons of 5.9% and 10.5% respectively. Despite the difficult comparisons, we are nevertheless disappointed that our comparable store sales results were below our guidance.

That said, our sales shortfall was not broad based and was focused in two areas of our business, cold weather and heritage ladies apparel. In fact, comp store sales excluding these categories exceeded the high end of our comp sale guidance as these two areas negatively impacted our comps sales by over 200 basis points.

Next, I will provide more color on the performance of these two areas, as well as the corrective actions we are taking moving forward. We were disappointed that our cold weather businesses underperformed the chain, comping down 3.8%. As you know, for a number of years now, we have been strategically planning down our cold weather category penetration as we strive to de-weather our business. We believe it has more important to build a more stable long-term foundation for our total business.

While we plan the cold weather categories conservatively for the fourth quarter, sales in these categories did fall short of our expectations. In addition, our cold weather pack and hold levels coming into the season in hindsight were too low. We did chase the business following the strong start in October and early November. Unfortunately, when we got back into a better inventory position in mid to late December, temperatures were significantly warmer than last year. As you've seen from our increased pack and hold levels at the end of this year's fourth quarter, we have taken steps to ensure we will have higher and more appropriate levels of cold weather pack and hold for next year.

We continue to face challenges in our heritage ladies apparel business in the fourth quarter. We experienced merchandise content issues in these areas, as well as being inadequately positioned in certain categories and classifications. Missy sportswear, driven by better and active, once again outpaced our overall trend, but candidly, also fell short of our expectations. I will discuss our ladies apparel strategy in more detail later in my prepared remarks.

In terms of our monthly performance, our comp store sales increased 2% during the key two-month holiday period, November and December. However, similar to some other retailers, we had a drop off in our sales trend in January. Once again, a key driver of our fourth quarter performance was our new stores. Our total sales increased 7.4% as our new and non-comp stores contributed $173 million in sales for the quarter.

We opened three new stores during the fourth quarter of 2018, which were the three former Toys R Us locations that we opened in November. Our final store opening comp for 2018 was 68 gross new stores. With the seven stores that we closed at the end of the fourth quarter, our final net new store comp was 46 stores.

Given our robust new store pipeline, we expect to open approximately 75 gross new stores in 2019 and close or relocate approximately 25 stores, meaning our net new store count for 2019 is expected to be 50 stores. Once again, setting a new record for us, for store openings in the fiscal year. We continue to feel very good about the current real estate environment as site availability of attractive locations remains very favorable.

As mentioned previously, the Toys R Us bankruptcy contributed three new stores in the fourth quarter of 2018. In addition, at least 34 former Toys R Us sites are part of our 2019 and 2020 new store pipeline. With additional potential opportunity beyond that, we now view the Toys R Us real estate opportunity overtime as at least as significant as the Sports Authority liquidation, which yielded 32 former Sports Authority locations, with four more stores still in the pipeline.

Moving to category highlights. Our top performing businesses were home, gifts, including toys, beauty, athletic shoes, men's and ladies sportswear, driven by athletic apparel and baby apparel and baby depot. Regarding geographic performance, the Southwest, Southeast and West performed above the chain average, while the Northeast and Midwest comped below.

Moving to inventory management. During the quarter, our comparable store inventory turnover improved 2.5%. Although, we ended the quarter with comp store inventories up 1.8%, comparable store inventory levels came in higher than we expected due to lower than expected sales results. Had we achieved our sales plan, our comp-store inventory would have declined approximately 3%.

Our long-term inventory management philosophy continues to be to reduce our comp store inventory levels mid-to-high single digits for the foreseeable future. We still believe we can turn our inventories faster, which should yield margin benefits over time. That said, I want to walk you through how we see 2019 unfolding by quarter. First, as it relates to Q1, based on our inventory starting point and our conservative sales plan, we believe the comp store inventory increase at the end of the first quarter of fiscal 2019 will be similar to the fourth quarter of fiscal 2018.

By the end of the second and fourth quarters of fiscal 2019, we do expect comp store inventories to be at a more normalized level, down mid-single digits. We are strategically planning comp store inventories for the third quarter of fiscal 2019 up low-single digits, so we can intensify our fourth quarter opening cold weather in-store inventory position and avoid the cold weather sales shortfall we experienced this past fourth quarter. Again, I want to emphasize that as we exit fiscal 2019, we expect our comp store inventories to be down mid-to-high single digits and for that to continue for the foreseeable future.

Inventory aged 91 days and older, once again reached record low levels. The buying environment remains very favorable and we are very pleased with the extensive assortment and amazing values that we are able to purchase and put away in pack and hold in short stay inventory. As you may have noted in our press release this morning, our total inventory levels were higher at the end of the fourth quarter than what is typical for us. This is a direct result of the very strong buying environment, as our pack and hold as a percent of our total inventory was 30% versus 25% a year ago.

Our pack and hold increase was driven by higher levels of cold weather, which will help rectify the cold weather shortfall we experienced this past December, as well as increased levels of youth, baby depot, baby apparel and active apparel across all zones. We feel very good about these inventory investments as these pack and hold buys are overwhelmingly branded and better and best products and over 70% are with our top 100 vendors.

In addition, our short stay inventory levels which reflect purchases at great values that we temporarily store in our distribution centers and allocate to the stores over the course of a few months were also meaningfully higher than last year at the end of the fourth quarter. Our short stay inventory increase is primarily driven by accelerating tariff impacted receipts prior to January 1st. We continue to bring value to our shareholders as we repurchased approximately $59 million of common stock during the fourth quarter and $219 million for all of fiscal 2018. At the end of the fourth quarter, we had $298 million remaining on the existing share repurchase authorization.

Now let me update you on our long-term strategic priorities, which include focusing on driving comparable store sales growth, expanding, modernizing and optimizing our store fleet and increasing our operating margin. First, with regard to driving comparable store sales growth, our underlying strategies remain: one, enhancing our assortments as we continue to improve our execution of the off-price model with particular focus on underpenetrated businesses; two, building on our marketing initiatives to ensure we are continuing to engage both new and existing customers; and three, improving the store experience for our customers.

We are making good progress in expanding some of our key underpenetrated categories, particularly home and beauty. In addition, we are very encouraged by the continued progress in developing our gift business, including Toys, which were strong contributors to the fourth quarter. These growth categories, home, beauty and gifts continue to expand disproportionately, helping us to build a long-term sustainable foundation for our Company.

With regard to home, we had another strong quarter in this key strategic business, which still represents our largest category growth opportunity. We ended 2018 with home penetration at approximately 15% of sales, which represented 100 basis point penetration increase over 2017 level. We continue to believe we can achieve a penetration level of at least 20% over time. We see significant opportunities to expand our branded portfolio in home, and are targeting several key underdeveloped and new categories to further penetration increases in 2019 and beyond.

Our beauty business outperformed in the fourth quarter and we expect this category to increase in penetration for years to come. The beauty and fragrance businesses were key elements of our holiday gift strategy, which were important sales drivers in the fourth quarter. Ladies apparel remains a significant sales opportunity as our penetration remains well below our peer group. Unfortunately, our ladies apparel penetration level in 2018 remained at approximately 23% of sales.

We have a number of learnings based on our 2018 performance. We are highly focused on change in the trend in this business by further distorting growth in the missy sportswear business. We'll look for this accelerated growth in missy sportswear to offset some of the drops in our heritage businesses.

One Heritage business was clearly off of trend and those content issues need to be fixed. In the near term, we will plan overall heritage ladies apparel conservatively, while we address the category, classification and content issues. As we have discussed previously, we believe having two SVPs in ladies apparel, will ultimately add the specialization and oversight necessary to accomplish this objective so that we can capitalize on the significant penetration opportunity over time.

In addition to home, beauty and ladies apparel, we see our sales penetration opportunity in baby and toys. As it relates to baby, this includes baby depot, baby apparel and baby accessories. These businesses were very strong performance in the fourth quarter, trending above our expectations. Clearly, the disruption in this business is caused by the Toys R Us bankruptcy and has created an opportunity that we have begun to capitalize on, and we see additional opportunity for outpaced growth over the next few years.

Moving on to our vendor base. We continue to improve the quality of our brand portfolio, driven by the growth of our merchandising team, excellent product availability and the vendor community increasingly committed to grow with Burlington. We now carry over 51,000 brands today, a slight increase over last year. And as we grow underdeveloped categories and enter into new businesses, we would expect that number to increase over time.

Turning to our marketing initiatives. We saw strong engagement in our messaging across all customer touch points. We are building upon the momentum of our successful TV testimonial campaign, featuring real customers highlighting why they love shopping at Burlington. We believe our holiday TV campaign, highlighted by our gift and toy adds, really resonated with our customers. Whether in direct, digital or in-store channels, our toy and gift messaging told the story of our expanded assortment in these categories, highlighting the great values available to our customers.

In terms of new marketing initiatives, we are pleased to announce that we are piloting a private label credit card in a loyalty program, which will launch by the end of the first quarter in approximately 140 of our stores. There will be more to come as we learned from our initial program and refine our approach to this initiative. We believe this initiative has the potential to strengthen customer loyalty, expand our customer base and grow market share.

In addition to our private label credit card and loyalty pilot, we continue to be focused on finding efficient and effective ways of reaching our customer, where she spends her time, increasing our efforts in digital channels to break through the clutter and ensure our message is being heard. When combined with the continued success of our television campaigns and direct to consumer efforts, we see a multi-channel marketing strategy that will help us build our brand and drive traffic to our stores in 2019 and beyond.

Improving our store experience continues to be a key growth initiative for us. We made significant progress in 2018 modernizing our store fleet. Completing the remodels for 39 of our stores, which included five stores that were closed in 2017 due to weather-related issues, we will continue our remodeling program with 28 remodels planned for fiscal 2019.

The second growth initiative is expanding our store fleet. As discussed earlier, given the favorable real estate environment, we plan to open approximately 75 gross and 50 net new stores in 2019, which represents a meaningful increase over the store opening pace in both 2017 and 2018.

We ended fiscal 2018 with 675 stores, yet we are a national retailer that operates in 45 states plus Puerto Rico. As we've discussed before, our seed (ph) point strategy is a critical tool that has helped drive the strong new store sales and EBIT performance versus our underwriting model, which was evident once again, as our new stores outperformed our underwriting model in fiscal 2018.

Having refreshed this dynamic seed point tool at the end of 2017, we are able to quickly evaluate real estate opportunities that are presented to us, such as the recent Toys R Us bankruptcy. This gives us great confidence that we can comparably reach our goal of 1,000 stores over time.

Given our 2019 plan to open 75 gross and 50 net new stores, along with 28 remodels, this means in just three years, 2017 through 2019 combined, we will have increased the number of stores in our brand standard by approximately 300 stores. We now have over 50% of our stores in our brand standard, and by the end of fiscal 2019, over 60% of our stores are expected to be in our brand standard. Looking out five years, at the current rate of a new store openings and remodels, we would expect a significant majority of our stores to be in our brand standard.

We also remain focused on our third growth priority, continuing to increase our operating margin. Over the last six years, we expanded our operating margin by 420 basis points, an average of approximately 70 basis points per year. In 2018, we increased our operating margin by 50 basis points, despite the negative impact of rising costs in both wages and freight. While we are very pleased with this progress, we continue to believe we have significant operating margin opportunity over time versus our peers. To accomplish that objective, we will execute the same strategies that we've deployed over the last several years, increasing total sales to leverage fixed cost, optimizing markdowns, continuing to focus on inventory management and maintaining an active profit improvement culture across all SG&A areas.

Now I'd like to turn the call over to Marc to review our fourth quarter financial performance and outlook in more detail. Marc?

Marc Katz -- Chief Financial Officer/Principal

Thanks, Tom, and good morning everyone. Thank you for joining us today. We ended the fourth quarter by reporting our 24th consecutive quarter of positive comparable store sales, and delivered a 28% increase in adjusted earnings per share.

First, I will turn to review of the income statement. Due to the 53rd week in fiscal 2017, our results are presented for the 13 weeks ended February 2nd, 2019, versus the 13 weeks ended January 27th, 2018. All of our results are presented on this fiscal basis with the exception of comparable store sales which we present on a shifted basis, comparing similar calendar weeks which are the 13 weeks ended February 2nd, 2019, versus the 13 weeks ended February 3rd, 2018.

For the fourth quarter, total sales increased 7.4% and comparable store sales increased 1.3% on top of last year's 5.9% increase. New and non-comp stores contributed an incremental $173 million in sales for the fourth quarter. Our Q4 comparable store sales performance was driven by increases in units per transaction and conversion, while traffic and AUR were down slightly. While traffic was down slightly in Q4, we have increased traffic in 13 out of the last 16 quarters. The gross margin rate was 42% flat as a percentage of sales versus last year. Excluding negative 20 basis point impact of freight on the fourth quarter, gross margin was up 20 basis points. In addition, we took physical inventories in 330 stores in January and our shortage results were in line with our expectations.

Product sourcing costs, which include the cost of processing goods through our supply chain and buying cost were flat as a percent of net sales. Supply chain costs were 10 basis points higher as a percentage of sales versus last year due to increased receipt flow, which included a higher level of movement in and out of our pack and hold and short stay storage locations due to the very strong buying environment. These increased costs, however, were offset by lower merchant incentive compensation accruals.

SG&A less product sourcing cost was 22.7%, approximately 10 basis points lower as a percentage of sales versus last year. Despite sales coming in below our expectations, our disciplined expense management and active profit improvement program enabled us to reduce costs across many areas of the Company with the biggest impact in marketing and utilities. Lower incentive compensation accruals also allowed us to offset deleverage in occupancy, business insurance and stock compensation expense.

Adjusted EBIT increased 7% or $16 million to $261 million. Deleverage on depreciation and amortization drove the 10 basis point reduction in adjusted EBIT margin in the fourth quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased $6 million to $51 million.

Interest expense decreased by $2 million versus last year's fourth quarter to $12 million, driven by the repricing and $150 million pay down of our term loan. The adjusted effective tax rate, excluding the revaluation of the 2017 deferred tax liabilities improved to 22.2% for the fourth quarter, primarily driven by the statutory reduction in federal tax rates. Combined, this resulted in adjusted net income, excluding the revaluation of the 2017 deferred tax liabilities of $194 million, a 26% increase versus last year.

We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased approximately 354,000 shares of stock for $59 million. At the end of the fourth quarter, we had $298 million remaining on our share repurchase authorization.

All of this resulted in diluted earnings per share on a GAAP basis of $2.70 versus $3.47 last year. Excluding the impact of last year's 53rd week and the revaluation of 2017 deferred tax liabilities, adjusted diluted earnings per share were $2.83 versus $2.21 last year. The $2.83 per share result represents an $0.08 beat versus our top-end guidance, which was driven by a lower tax rate and the accounting for share-based compensation.

Despite the sales shortfall in the fourth quarter, our disciplined expense management enabled the Company to achieve the high end of our operating EPS guidance. We are pleased that we were able to achieve the same level of adjusted net income dollars on a 1.3% comp, as we had guided at a 3% comp.

Turning to our balance sheet. At quarter end, we had $112 million in cash, zero in borrowings on our ABL and had unused credit availability of approximately $543 million. We ended the period with total debt of $987 million and a debt-to-adjusted EBITDA leverage ratio of 1.2 times. We made significant progress strengthening our debt profile in 2018, including a term loan repricing, which resulted in a 50 basis point reduction in our applicable interest rate margin, as well as $150 million pay down on our term loan.

In addition, we extended the maturity on our ABL and received upgrades in our corporate credit rating from S&P and Moody's, as well as an initial BB+ corporate rating from Fitch. Currently, all three agencies maintain our corporate rating only one notch below investment grade, with S&P and Fitch both reading our term loan at investment grade.

Finally, because our term loan is a floating rate facility and our existing interest rate hedge expires at the end of May 2019, we entered into a new forward interest rate swap beginning May 31st, 2019 through December 29th, 2023. We were able to lock in one more LIBOR at 2.72% on a $450 million term loan, thereby fixing the rate on approximately half of our outstanding term loan facility. We believe we are appropriately balancing the benefit of fixing approximately half of our outstanding debt on our term loan and what is an attractive, historical interest rate of 4.72%, while potentially benefiting from a reduction in rates over the next few years on the unhedged portion.

Moreover, if rates do go higher, we believe our strong cash flow gives us the flexibility of paying down more of the term loan to manage our interest expense in the event that is the most accretive deployment of excess cash. As you know, the accounting for operating leases will change beginning in fiscal 2019. As a result, we expect to add approximately $2 billion of long-term liabilities and long-term assets to our balance sheet at the beginning of fiscal 2019, reflecting the capitalization of our operating leases. As a reminder, the lease accounting change is expected to result in incremental expense, impacting adjusted pre-tax income by approximately $5 million or $0.06 per share in fiscal 2019.

Merchandise inventories were $954 million versus $753 million last year. As Tom discussed earlier in some detail, this higher than usual increase was a function of the very strong fourth quarter buying environment, as well as our decision to accelerate tariff impacted receipts prior to January 1st. We are comfortable with the content of our pack and hold and short stay inventories as we enter 2019.

In addition, inventory levels were higher due to inventory related 46 net new stores opened between the end of the fourth quarter of 2017 and the end of the fourth quarter of 2018. Comparable store inventory turnover improved 2.5% for the fourth quarter, while comparable store inventory increased 1.8% due to sales coming in below our expectations. Overall, despite the higher levels, our inventory aged 91 days and older at the end of the fourth quarter was once again at record low levels.

Cash flow provided by operations increased $32 million to $640 million, driven by higher net income. Net capital expenditures were $254 million for fiscal 2018. During the quarter, we opened three new stores and closed seven stores, ending the period with 675 stores. For fiscal 2018, we opened 68 gross new stores and closed or relocated 22 stores, resulting in 46 net new stores for the year. As Tom mentioned earlier, we continue to be pleased with the performance of our new stores.

As we do every year at this time, I would like to provide an update on the annual performance metrics of our recent new store cohorts, as well as the productivity levels of stores under 60,000 square feet. First, I will address all the 2015 and 2016 new store cohorts performed in 2018 versus 2017 as compared to the chain average. The comp store sales increase for the 2015 and 2016 cohorts exceeded the chain average by 300 basis points, while the EBIT margins improved 150 basis points more than the chain average. In addition, stores under 60,000 gross square feet that have been opened at least 52 weeks were 21% more productive on a sales per square foot basis than the chain average.

Next, I will review our fiscal year 2018 performance. Please note that the following discussion of fiscal 2018 financial results will be on a 52 week non-GAAP basis, unless otherwise indicated. Total sales rose 10.7% and included a comparable store sales increase on a shifted basis of 3.2%, following a 3.4% comparable store sales gain in fiscal 2017. As a reminder, this excludes sales in the 53rd week of fiscal 2017, which were $82 million. Our 3.2% annual comparable store sales result was driven by increases in units per transaction and traffic, with conversion in AUR also up slightly.

Gross margin was 41.8%, representing an increase of 30 basis points versus fiscal 2017, primarily due to lower markdown rate and higher IMU, which more than offset higher freight costs. Product sourcing costs were approximately 10 basis points higher as a percentage of sales versus last year.

As a percentage of net sales, SG&A exclusive of product sourcing costs decreased approximately 30 basis points to 25.7%. Expense leverage was driven mainly by the strong 10.7% increase in total sales, disciplined expense management and our active profit improvement culture. Adjusted EBIT increased by 17% or $87 million to $600 million, representing a 50 basis point increase in rate versus fiscal 2017. This increase exceeded our original guidance, which called for an increase of 20 basis points to 30 basis points.

I would like to thank our entire organization for delivering this outstanding operating margin performance, particularly given the freight and wage pressures that we felt across the retail sector. Depreciation and amortization expense, exclusive of net favorable lease amortization, was flat as a percentage of sales versus fiscal 2017 and increased by $17 million to $192 million. Interest expense declined $2 million to $56 million.

The adjusted effective tax rate excluding the revaluation of 2017 deferred tax liabilities improved to 18.8%, primarily driven by the statutory reduction in federal tax rate. Combined, this resulted in net income on a GAAP basis of $415 million, an increase of 8% versus last year. Excluding the impact of the 53rd week last year and the revaluation of 2017 deferred tax liabilities, adjusted net income was $443 million, up 43% versus last year.

Our share repurchase program returned significant value to shareholders in fiscal 2018. During the year, we repurchased approximately 1.5 million shares of stock for $219 million. Over the last four years, we have repurchased just over $900 million of stock. We began fiscal 2019 with $298 million remaining on our share repurchase authorization.

Diluted earnings per share on a GAAP basis were $6.04 versus $5.48 last year. Excluding the impact of the 53rd week last year and the revaluation of 2017 deferred tax liabilities, diluted adjusted net earnings per share were $6.44, up 46% versus last year, well above our original 2018 adjusted EPS guidance of $5.73 to $5.83. Our fully diluted shares outstanding were 68.7 million shares versus 70.3 million last year.

Now, I will turn to our outlook. Before I get into the specifics of our guidance, I wanted to remind everyone of the cost headwinds that we're facing in 2019 that are incrementally higher than we faced in 2018. As we've discussed on prior calls, these headwinds continue to be driven by freight, wages, stock-based compensation, and new for this year, the new lease accounting standard. In total, these represent 22 basis points of incremental headwinds versus 2018.

In addition, I would like to remind everyone that in order to compare our 2019 EPS outlook to 2018 on an apples-to-apples basis, the 2018 adjusted EPS result of $6.44 should be reduced by $0.12, $0.06 for the 2018 second quarter New Jersey state tax benefit, and $0.06 for the new 2019 lease accounting standard.

Before we review our assumptions for first quarter guidance, I would like to update you on what we are seeing in our current business. Similar to what you've heard from other retailers, our trends have been and we believe could continue to be choppy during the first quarter. While we typically guide comp store sales with a 100 basis point range, we are expanding to a 200 basis point range for Q1. This is due to the uncertainty around the timing, aggregate amount and average size of IRS refunds this tax season coupled with Easter shifting back three weeks. Our EPS guidance reflects this wider range as well.

For the first quarter of 2019, we expect total sales growth in the range of 7% to 9%; comparable store sales to increase between 0% and 2%; effective tax rate of approximately 18.5%; and adjusted earnings per share expected to be in the range of $1.21 to $1.31, compared to $1.26 per share last year.

For the full 2019 fiscal year, we expect total sales growth in the range of 9% to 10% as compared to fiscal 2018. Comparable store sales to increase in the range of 2% to 3% for the second, third and fourth quarters of fiscal 2019, which translate to an annual comp guidance of 1.5% to 2.8% on top of last year's 3.2% increase. Depreciation and amortization, exclusive of favorable lease amortization to be approximately $210 million; adjusted EBIT margin expansion of 0 to 10 basis points; interest expense to approximate $53 million; and effective tax rate of 21%, capital expenditures, net of landlord allowances expected to be approximately $310 million. This results an adjusted earnings per share guidance in the range of $6.93 to $7.06.

Excluding the 2018 impact of the revaluation of deferred tax liabilities resulting from the 2018 change to New Jersey state tax law, as well as the 2019 change in accounting for operating leases, this represents EPS growth of 10% to 12%.

With that, I will turn it over to Tom for closing remarks.

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Thanks, Marc. In summary, we believe our results this quarter and in fiscal 2018 demonstrate once again the flexibility and strengthening foundation of our business model. We drove financial results in fiscal 2018 well above our original guidance and expect the execution of our strategic initiatives and store growth plans to enable us to continue our growth. We remain laser focused on refining our off-price model and our ability to capitalize on the rapidly changing retail landscape. This positions us well to bring more great brands, styles and value to customers and increase values -- value for our shareholders. I'd like to thank the store, supply chain and corporate teams for their contributions to our solid fiscal 2018 results.

Before I turn the call over to the operator to begin the question-and-answer portion of the call, I'd like to take a moment to say a few words about Bob LaPenta, who is retiring from the Company on May 1st. Many of you have worked with Bob over the last several years in his role running Investor Relations and as our Treasurer. But not all of you may know is that Bob has dedicated most of his professional life to Burlington, having spent over 34 years at the Company in a variety of finance roles. Bob has been instrumental in helping guide the Company through our take private transaction, the financial crisis, the IPO process through several debt refinancing and ultimately help strengthen our balance sheet and dramatically improve our credit rating. Bob will leave the Company and our balance sheet in a great place and we wish Bob nothing but the best for a fantastic retirement.

At this point, operator, we are ready for the question-and-answer session portion of the call. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Matthew Boss of JP Morgan. Your line is now open.

Matthew Boss -- JP Morgan -- Analyst

Great, thanks. So, Tom, maybe any additional color on why comp store sales came in below your guidance that you could provide. Some are like colder weather and heritage and ladies apparel were the primary culprits, but anything you could add would be helpful?

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Sure, Matt. I know that you are aware of the tough compares we faced in the fourth quarter. So let's put those to the side and just focus on the other issues. As I said in my prepared remarks, our sales shortfall was not broad based as it really focused in two areas of our business. Excluding those two categories, our comps would have been above our guidance. That said, we were disappointed in the performance of our ladies apparel and cold weather businesses, and will give you some additional color on each of these businesses.

Frankly, we've been talking about ladies apparel now for too many quarters. We have taken a step back and reevaluate our approach. While we've been doing, we hasn't generated the results we expect. To move the needle to increase the penetration of ladies apparel, we have to get outsized growth in missy sportswear, more than we have been getting. So we've decided to really go after the missy sportswear business much more aggressively and plan the heritage business more conservatively. We believe this process will take multiple quarters to get the results we think that we candidly were owed.

Now specific to the fourth quarter. We did struggle again at ladies and heritage apparel. We have one category that was clearly off trend that we just need to fix period. In addition, as I just said, we plan -- we'll plan overall heritage and ladies apparel conservatively, while we address the category, classification and content issues in these businesses. As I've stated before, by having two GMMs in ladies pro, one solely focused on missy sportswear, we believe that will add to the specialization oversight necessary to capitalize on this over -- opportunity over time.

Now cold weather. As we've done for several years now, we have strategically planned cold weather down again in an effort to build a more stable long-term foundation for our business. Second, we didn't have enough pack and hold as we began the season, which made it difficult to react to a strong sales trend in October and early November. We've modified our approach to next year. We increased our pack and hold cold weather by significantly, which we'll use to increase our in-store inventory levels going into fourth quarter next year. And we're going to plan cold weather less conservatively than we had over the last couple of years. Obviously, we saw a lot of cold weather product in general and we just feel that we've been too conservative over the last couple of years.

Matthew Boss -- JP Morgan -- Analyst

Great. And then just a follow-up for Marc. So on the '19 guide, any additional detail on the headwinds you're facing, maybe how the incremental cost impact merch margin, product sourcing and SG&A. I think it would be helpful in understanding why the EBIT expansion this year in the outlook is less than prior years? And then maybe last, just any larger picture, any change to the SG&A leverage point would be great?

Marc Katz -- Chief Financial Officer/Principal

Okay. Good morning, Matt. A lot there, all important stuff. We'll start with the headwinds, then I will move into the geography and SG&A algorithm. The headwinds, 22 basis points of incremental headwinds in 2019, it's driven by things that we've talked about before, freight, wages and stock-based compensation ,and new for this year, as we've discussed is the lease accounting standard.

In terms of freight rate now, Matt, we're forecasting 22 basis point headwind in 2019. We believe springs actually going to run higher than that and then we're going to moderate somewhat in fall and the primary driver there is really contract rates that we have in effect through spring that we're counting on being able to negotiate lower in fall.

From a wage point of view, we continue to be pleased with our wage competitiveness strategy. Once again, in 2018, our market by market approach to wages resulted in another reduction in our non-exempt turnover rate versus the prior year. In the net other metric, we look at that open positions percent remained at a very low level. This was actually the third year in a row that we had a reduction to our non-exempt turnover. So it makes us just feel very comfortable with our market by market approach.

I think I may have stated on the last call, the headwinds this year for wage pressure is going to be $21 million and that does reflect both the stores and the distribution center. So that's $12 million in the stores and $9 million in the DCs, and of course the DC number, Matt, as you know is in product sourcing cost.

Stock-based compensation is going to be $11 million higher than last year, but the incremental piece of that is another $2 million higher than it was in ' 18. And then the last one is the lease accounting standard, as we've talked about $5 million of OpEx. Two drivers for that, one is non-cash timing adjustments related to tenant improvements. So those are the dollars that we received from landlords as we build out new stores. Those are going to be spread over a longer time period. And then, there's going to be the expensing of certain payroll where we used to be able to capitalize. So that's $5 million.

All of those headwinds baked into our geography which was your other question, Matt, we can think about on a full year basis just rounding to 10 basis points. Our expectation is for merch margins to be up 40. Freight to be down, as I just said 20. Product sourcing, higher by 10 basis points. So the net loaded margin that -- you know our merch margin less the freight and product sourcing up 10. From an SG&A point of view, at the two comp, we're saying, minus 10 basis points, and in a three comp, it will be flat on SG&A. So as you roll through that, the EBIT margin, they're on a 2% comp, we expect to be flat from an EBIT margin point of view, 3% comp up 10 basis points.

Last part of your question was our SG&A algorithm. You're right. In terms of the SG&A flow through being different than prior years, and what I'd say to you, Matt, is out of the 22 basis points of incremental headwind, 12 of that is in SG&A. I'm not ready to sign up that this is our new long-term algorithm, Matt, to use for future years, not ready to go there yet, but it certainly is our algorithm for 2019. And you know future years will just depend on the business trends and impact to our business.

Matthew Boss -- JP Morgan -- Analyst

That's great color. Best of luck guys.

Marc Katz -- Chief Financial Officer/Principal

Thanks, Matt.

Operator

Thank you. And our next question comes from Ike Boruchow with Wells Fargo. Your line is now open.

Ike Boruchow -- Wells Fargo -- Analyst

Hey, good morning everyone. And Bob, if you're there in the room, congrats on the retirement. I guess...

Robert L. LaPenta, Jr. -- Vice President and Treasurer

Thanks a lot.

Ike Boruchow -- Wells Fargo -- Analyst

(inaudible) Tom, so first question for you on the inventory. So just can you explain a little bit more of the inventory per store increases you're seeing now, and I think you said that should continue in Q1 and just why exactly that should transition back to mid-single digit declines? And then into next year, I think you said we should be back to mid-to-high single digit per store decline, I'm just kind of understand -- trying to understand what's going on from an inventory perspective right now?

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Okay, IKe. Yes, our comp-store inventory and our turnover, both up low-single digits. Those were numbers that candidly didn't meet our expectations. It basically came down to missing our sales plan. If we did not miss our sales plan in the fourth quarter, our inventories would have been more in line with the historical numbers. You know, as I said in the prepared remarks, on maintaining our discipline of planning comp store inventories down mid-to-high single digit is critical for us. We can and should turn our inventories faster, which should eventually result in lower markdowns going forward.

Obviously, we are starting the year a little bit higher as I just stated than we would have liked. What our good days, 91 days and older are at record lows. So not -- this won't be a real hangover as we go into the first quarter or as we've entered the first quarter. So we are also planning the first quarter sales conservatively as I mentioned. So starting higher, having a more conservative sales plan, we're going to end up at the end of the first quarter similar to how we ended the fourth quarter overall.

Let me try to give you some color, because we really feel confident that the second and fourth quarters will be more in line with how we've performed previously, but the third quarter, we're going to plan -- we're going to plan it up slightly, because we want to be really well prepared in cold weather as we get into the fourth quarter. So we don't experience the decline in cold weather as we did this year.

So this is -- this is going to be sort of a sawtooth in terms of comp store inventory this year, but we think it's the right thing to do to run the business and we should get good results, but after 2019, through our disciplined inventory management that we've done for a long time now, we're going to get back to mid-to-high single digits. We think it's an imperative.

Ike Boruchow -- Wells Fargo -- Analyst

Got it. Thanks, Tom. And then so to dovetail that into the inventory for Q1, Marc, appreciate the color on the quarter-to-date, and I understand your rationale there, but the implied guidance I think is for EBIT margins to be down. I'm just kind of curious, is there any gross margin pressure that we should expect in Q1? Is there any markdown pressure from the inventory, just how should we be thinking about the gross margin line?

Marc Katz -- Chief Financial Officer/Principal

Sure. Just to take a step back on the Q1 guidance and make sure everybody is clear on to the two different things that we have going on in Q1 right now, that really resulted us in being more conservative in having that wider range versus our typical two to three. First again, as a number of retailers have pointing out, tax refund quantities, delays, have created a choppy sales environment. And not only the total amount of refund dollars impact our business, it's the timing, it's the type of refund, i.e., the different credits that are there and how they apply to our customer base. All of that weighs in and creates noise.

Secondly, a really big deal for us. As you know, a differentiator for us is our special occasion dress up businesses, and you know how we overpenetrate in youth. Easter is a really important holiday for us. In this year, having a three-week delay in timing is just adding more complexity to forecasting sales. As we think about it, as we look at daily sales, for example, we view Easter as a six-week period. So in last year at this time, we were in week two of that Easter period. This year it hasn't started yet. So when you put all that together with the tax refunds, it really just kind of results in us having less clarity to our overall business than we'd like to have and that's why we're guiding the zero to two.

So in terms of your margin question, obviously that guidance implies a lower total sales base. So there is overall deleverage. It's going to come with that. As I mentioned to Matt earlier, freight is going to be higher in springs, and now with a lower sales base in Q1, I mean, I would expect freight to be probably at least a 25 basis point headwind in Q1.

From a merch margin point of view, due to the inventories and where we ended last year, no, I would not expect to decrease the merch margins. We are still expecting our merch margins to be up in Q1. I don't think they're going to be up as much as that full year guide I just gave, but we do expect them to be up. We've talked about aging our inventories at the end of every quarter and year-end are appropriately valued. So we feel good about how we came out. In the markdowns, we think we're going to need to take in the quarter are baked into our guidance.

Ike Boruchow -- Wells Fargo -- Analyst

Got it. Thanks everyone.

Operator

Thank you. Our next question comes from Lorraine Hutchinson of Bank of America. Your line is now open.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thanks, good morning.

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Good morning.

Marc Katz -- Chief Financial Officer/Principal

Good morning.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

You spoke in the prepared remarks about significant opportunity to increase operating margin, but either it seems like 2019 is somewhat on hold. I just wanted to ask about any potential offsets that you may have for this year and then if you could just talk about, and maybe flush out your longer-term operating margin goals? That would be very helpful.

Marc Katz -- Chief Financial Officer/Principal

Yeah. good morning, Lorraine. I guess, it started out with, we feel pretty good about 420 basis points of expansion in the last six years. And I'd remind you, our guide last year was 20 to 30 and we picked up 50. So we do have a conservative start, it's 0 to 10 this year. We don't have a goal. We just think that we still have significant opportunity to expand our margins. And Lorraine, it's going to be the exact same game plan that we've run for the last six years that garnered the 420, right. We're still going to drive top line, top line sales and our under-penetrated categories as Tom has talked about.

Tom has been through in detail, but how we're going to plan our comp store inventories which will continue to learn to -- in turnover improvements and a lower markdown rate and we're still going to maintain profit improvement as the number one goal and objective for all of our sales support teams here. So we still believe we have meaningful opportunity with our peer group, and I think our history shows we're doing a pretty good job narrowing that gap.

David J. Glick -- Vice President, Investor Relations

Operator, we're over time, but we'll take one more question.

Operator

Thank you. And our final question comes from Kimberly Greenberger of Morgan Stanley. Your line is now open. Kimberly, please check your mute button.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Thank you so much. Sorry about that and excuse the cold here. I wanted to ask about the ladies merchandising challenges, and I'm wondering Tom, do you think there are any brand issues there? Is there an issue with inventory availability, for example, or maybe a lack of trend I'm just wondering. The color you provided earlier was very helpful but if there's any additional insight you have that would be helpful. And the second leader in that group, how are you thinking about the ramp and the past forward for the category? Thanks.

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Well, first of all, there isn't any -- there aren't any brand issues to speak of. It's more, as I mentioned, I think we've been going about it the wrong way. Yeah, we really feel that you know we need to just distort the missy sportswear business, the better business, the active business. Businesses that are really good and we need to continue to -- we need to plan the heritage businesses much -- more conservatively, because we have -- we haven't been trending well there overall, but there were -- there were category issues. One category, which just really off the trend and that hurt us in the heritage business. And we had some classification issues where we didn't maximize some key classifications during the fourth quarter overall. So most of the things that have occurred have been really self-inflicted and strategically we weren't really going at it the way we think we need to go after it in the future. Hopefully we can get it turned around quickly, but it's going to take awhile. I mean, it's going to take some time in order to reposition all the businesses for success. So -- and that can just -- it's not going to be immediate. This is going -- it's going to take time, but overall, we're still committed to hit the penetration levels that we should have in that business.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Great. And then just one follow-up on the store fleet. The color you gave was really helpful. I'm wondering, how many stores here at the end of 2018 were in the brand standard, and at the end of 2019, what do you expect there? And is there a store profit differential that you can share with us in terms of the newer sized fleets on the under 60,000 stores, you gave us some sales metrics. I'm just wondering if you have any profit metrics you might like to share. And before I forget, congratulations to Bob on a very, very nice career, and I will miss you.

Robert L. LaPenta, Jr. -- Vice President and Treasurer

Thank you.

Marc Katz -- Chief Financial Officer/Principal

Kimberly, that's going to go right to his head -- right to his head, Kimberly. It'll take us two days to get past that. All right. Fiscal '18 meets brand standard store count 353 out of the base of 675. And our expectation with the 75 gross new stores and the 28 remodels that Tom talked about, we're looking to end '19 around 456 on a base of 725. And we don't give operating margin stats on brand standard stores, but fair to assume, our brand standard stores out comp our chain average.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Thank you so much.

David J. Glick -- Vice President, Investor Relations

Hey, operator.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Tom Kingsbury for any further remarks.

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Thanks everyone for joining us today. We look forward to speaking with you when we report our first quarter results in late May. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.

Duration: 62 minutes

Call participants:

David J. Glick -- Vice President, Investor Relations

Thomas A. Kingsbury -- President, Chief Executive Officer and Chairman

Marc Katz -- Chief Financial Officer/Principal

Matthew Boss -- JP Morgan -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Robert L. LaPenta, Jr. -- Vice President and Treasurer

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

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