Burlington Stores (BURL) is trading lower today after reporting strong Q2 (Jul) earnings this morning. In case you're not familiar with BURL, some background would help. It operates a national chain of off-price retail stores (651 current locations) offering women's, men's and children's apparel and accessories, home goods, baby products and coats, principally under the name Burlington Stores.
It was known for decades as Burlington Coat Factory. The company was taken private by Bain Capital in 2006. Once acquired, Bain began a restructuring program that streamlined operations, refocused their merchandise (de-emphasizing coats and becoming much more of a general off-price merchandise company), and returned the company to growth.
Its merchandise is deeply discounted, up to 60-70% off department store prices. The company's stores are very large -- two to three times larger than its competitors' stores -- which allows BURL to feature merchandise from over 3,500 vendors, although the focus is on nationally-recognized brands. The company's two main competitors are TJ Maxx (TJX) and Ross Stores (ROST). Big Lots (BIG) is probably in the mix as well.
Turning to the JulQ results, non-GAAP EPS rose 51% YoY to $1.09 from $0.72 in the prior year period. It was well above market expectations and well above BURL's prior guidance of $0.91-0.95. Revenue rose 9.9% year/year to $1.50 bln, which was also better than prior guidance of $1.47-1.49 bln.
Same store comps came in at +2.9% on a shifted basis, which was at the high end of prior guidance of +2-3%. However, that was down a bit from the +4.8% comps in AprQ and +5.9% comp in JanQ. For Q3 (Oct), comps are expected in the +2-3% range on a shifted basis. In terms of other guidance for Q3 (Oct), BURL expects non-GAAP EPS of $1.00-1.04, which was below market expectations. Revenue is expected to grow +11-12% YoY in OctQ. For the full year, BURL upped its non-GAAP EPS guidance to $6.13-6.20 from $5.90-$6.00.
On the call this morning, BURL said the key driver of results was the outstanding performance of its new stores. BURL opened four net new stores during JulQ and year-to-date it has opened 22 net new stores vs eight during 1H17. Based on the strength of its new store pipeline, BURL is increasing the number of net new stores planned for 2018 to 43 stores, up from previous guidance of 35-40. With regard to driving comp growth, BURL says it has been enhancing its assortment as it continues to improve its execution of the off-price model with particular focus on under-penetrated businesses.
BURL went on to says that JulQ results demonstrate that it's making significant progress growing some of its key under-penetrated categories, particularly home and beauty. With regard to home, BURL sees this as its largest category growth opportunity. BURL expects to expand upon the 2017 penetration level of 14% of total sales and get that up to 20% over time. Its beauty business continued its strong momentum in JulQ and BURL sees the beauty category as a multi-year growth driver. In addition, beauty remains an important element of BURL's gift strategy which will be a key sales driver in the upcoming holiday season.
In sum, investors have come to expect strong results/guidance every quarter from BURL as that has been their history. The JulQ results were actually pretty good although that +2.9% comp number is being viewed as a disappointment relative to the two prior quarters. In fairness, that comp was going up against BURL's most difficult multi-year quarterly comparison, so keep that in mind. Probably a more legitimate concern was the OctQ EPS guidance coming up short. BURL tends to be conservative with guidance but they usually do not guide below expectations. So we'll see how that turns out in late November. On a final note, the stock has been on a nice and steady uptrend over the past year.