Last week, Burlington Stores (BURL -1.86%) reported solid results for the third quarter of fiscal 2021. While cost pressures caused adjusted earnings per share (EPS) to fall compared to the third quarter of 2019, sales grew significantly, as consumers continue to shift spending toward off-price retailers to save money.
Moreover, Burlington's management expects favorable industry conditions to create a huge runway for store growth. As a result, the company announced that it will dramatically accelerate its expansion plans over the next couple of years.
Strong sales trends continue
Burlington's net sales reached $2.3 billion in the third quarter: up 38% year over year. More significantly, sales surged 30% compared to Q3 2019 on a 16% comp sales gain.
This continued a streak of strong sales growth relative to pre-pandemic levels. During the first half of fiscal 2021, Burlington recorded a 34% sales increase over the same period two years earlier.
As expected, Burlington's profit margin contracted last quarter. High freight costs caused gross margin to decline compared to Q3 2019 (despite a higher underlying merchandise margin). Meanwhile, surging product sourcing costs and expenses associated with a big wave of store openings last quarter pressured operating expenses. Burlington's adjusted operating margin decreased by 1.8 percentage points from two years earlier.
Stronger sales offset Burlington's lower operating margin, leading to an operating profit of $140 million: flat compared to Q3 2019. Higher interest expense and a higher effective tax rate caused adjusted EPS to fall from $1.53 two years ago to $1.36 last quarter. That still beat the analyst consensus of $1.26.
Primed to win in any environment
During Burlington's earnings call last week, management acknowledged that it's impossible to predict how the retail environment will develop over the next year or two.
For example, freight costs and supply chain delays are likely to moderate eventually, but when that will happen is anyone's guess. The durability of the retail industry's recent discipline on discounting represents another key variable. Management is also unsure whether rising wage rates and high consumer savings will keep demand strong in 2022 despite the government phasing out various stimulus programs.
Fortunately, Burlington expects to succeed in any scenario. Strong consumer spending would benefit the entire retail industry, but even in a weaker demand environment, many consumers would trade down to off-price retailers to save money. Similarly, if full-price retailers keep a lid on discounting next year, Burlington would be able to gain market share or raise prices to expand its own profit margin. Conversely, if promotional activity resumes, it would force less-profitable retailers to continue closing stores, opening up longer-term market share opportunities.
Ramping up store openings
Highlighting its confidence about the long-term outlook, Burlington's management announced last week that the company will open new stores faster than ever in the years ahead.
Between fiscal 2018 and fiscal 2020, Burlington opened an average of about 54 new stores annually, offset by roughly 10 store closures or relocations each year. The company has already accelerated the pace of openings in 2021, opening 101 new stores while closing or relocating 24.
CEO Michael O'Sullivan says that Burlington plans to open 120 new stores in fiscal 2022 while closing or relocating 30. And starting in 2023, it hopes to open 130-150 new stores annually while closing or relocating about 30 older locations per year. Considering that Burlington ended last quarter with just 832 stores, this plan implies expanding the store base by 60% or more over the next five years.
Rapid expansion of the store base should help Burlington continue growing its revenue quickly. Equally importantly, a faster pace of store openings -- accompanied by a meaningful number of store closures and relocations -- will quickly transition Burlington's store base toward its newer store prototypes. These locations have proven to be much more profitable than the sprawling stores it operated a decade ago. Thus, Burlington appears well positioned to record extremely strong earnings growth over the next five years or so.