Company Reports

We are dropping coverage of Burlington Stores. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our $211 per share valuation of narrow-moat Burlington should not change much after it announced first-quarter (ended April 29) earnings, with soft results offsetting a time value of money-related adjustment. We are encouraged that the firm’s turnaround efforts (particularly in bolstering its merchandising capabilities) continue and still believe they should support mid-single-digit top-line growth and high-single-digit adjusted operating margins, on average, over the next 10 years. We see the shares as attractive for long-term investors willing to stomach turnaround-related volatility.

With the pandemic giving way to economic uncertainty and inflation, Burlington faces a complex near-term environment that has been complicated by its ongoing turnaround efforts. The chain continues to optimize its merchandising efforts, bolster its assortment, and modernize its store footprint, efforts that we believe should deliver long-term benefits at the expense of near-term volatility. Burlington should fare reasonably well as economic uncertainty rises. The off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to fare better than full-price retailers.

We plan to raise our $204 per share fair value estimate for narrow-moat Burlington Stores by a low-single-digit percentage after digesting fourth-quarter earnings that trumped our forecast, more than offsetting a mildly lower fiscal 2023 profit outlook than we anticipated. The stock edged down by a low-single-digit percentage on the print, leaving shares fairly valued.

With the pandemic giving way to economic uncertainty and inflation, Burlington faces a complex near-term environment that has been complicated by its ongoing turnaround efforts. The chain continues to optimize its merchandising efforts, bolster its assortment, and modernize its store footprint, efforts that we believe should deliver long-term benefits at the expense of near-term volatility. Burlington should fare reasonably well as economic uncertainty rises. The off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to fare better than full-price retailers.

Although narrow-moat Burlington’s shares surged 20% after it posted third-quarter earnings, we believe the results are consistent with our view of the firm’s prospects, which were rosier than near- and long-term market expectations. As a result, our $195 per share valuation should not change much, and we still expect mid-single-digit top-line growth and high-single-digit adjusted operating margins, on average, over the next 10 years. We suggest investors seek a more attractive entry point.

Burlington has not escaped pandemic-related turmoil, but we believe it and its off-price peers are better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing environment and sharply higher inflation. Although the present environment poses unique challenges, the off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Burlington has not escaped pandemic-related turmoil, but we believe it and its off-price peers are better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing environment and sharply higher inflation. Although the present environment poses unique challenges, the off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

We plan to reduce our $219 per share valuation of narrow-moat Burlington by a high-single-digit percentage after its second-quarter earnings announcement (in line with the trading price’s reaction). The firm’s 17% comparable sales dip lagged our estimate by 2 points, with management attributing the sluggishness to an intense promotional environment, its core consumer’s struggles, and execution deficiencies, explanations we deem plausible. Management indicates that the top destinations for apparel among its core customers are wide-moat Walmart and no-moat Target, retailers that have aggressively discounted as a result of inventory excesses, diluting the value that Burlington’s prices represent. Burlington caters to a lower-income clientele than narrow-moat peers Ross and TJX, both of which outperformed it in the period (respectively down 7% and, in the U.S., down 5% on a comparable basis). In addition to being more likely to shop large general merchandisers, such consumers have borne the brunt of inflationary pressure thus far.

Although the pandemic and inflation have clouded recent earnings, we believe Ross and Burlington (both narrow-moat-rated firms) offer upside. Ross has a long history of strength in myriad economic conditions, and we believe Burlington’s turnaround should narrow the gap between its profitability and that of its large peers.

Burlington has not escaped pandemic-related turmoil, but we believe it and its off-price peers are better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing environment and sharply higher inflation. Although the present environment poses unique challenges, the off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Our $231 per share valuation of narrow-moat Burlington should not change much after it posted first-quarter earnings, with the time value of money offsetting a softer near-term outlook due to sluggish sales (comparable sales down 18% versus our 13% expected dip). Self-inflicted inventory shortages stemming from overly tight buying triggered the sales miss, with conditions improving by April. Management’s move to buy less inventory at the start of the season to preserve buying power for opportunistic purchases later was confounded by supply chain congestion. This led to bare racks in stores that cost around six points in comparable sales (by management’s estimate), accounting for the difference between our estimate and quarterly comparable sales results. With transportation networks decongesting, vendors are now looking to offload surplus or delayed merchandise quickly, presenting opportunities for Burlington and the rest of the channel. While our $7.20 fiscal 2022 adjusted EPS forecast (excluding share repurchases) should fall into management’s newly introduced $6 to $7 guidance range, we remain optimistic about the firm’s long-term prospects, and suspect our view that the firm should boost profitability and deliver solid economic returns over more than a decade underpins the remaining gap between our valuation and the shares’ trading price. Our long-term forecast remains intact (mid-single-digit percentage top-line growth, roughly 10% operating margins over the next 10 years).

Burlington has not escaped pandemic-related turmoil, but we believe it (and its off-price peers) is better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing environment and sharply higher inflation. Although the present environment poses unique challenges, the off-price sector has performed well in adverse economic conditions historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Our $252 per share valuation of narrow-moat Burlington should fall by a mid-single-digit percentage in the wake of its fourth-quarter earnings announcement. While the results lagged our forecast, we attribute the underperformance to transitory issues that do not suggest a different long-term outlook (high-single-digit percentage top-line growth, low-double-digit operating margins over the next decade). Our focus on Burlington’s largely unaltered long-term prospects is likely behind our more measured response to the news than the shares’ low-double-digit percentage pullback. We believe current trading prices offer an opportunity for patient investors willing to withstand near-term volatility as supply chain and demand conditions normalize and Burlington’s turnaround continues.

While no-moat Dollar Tree should benefit from a price increase at its namesake banner (to $1.25 from $1), with potential additional opportunity from activist investor Mantle Ridge’s involvement, we are unenthusiastic about the stock at its current trading price (around 20% above our revised $111 per share valuation, which is up from $106 mostly to reflect the time value of money). Instead, investors looking to capitalize on discount retailers’ appeal in an inflationary economy should look to off-price chains.

Burlington has not escaped pandemic-related turmoil, but we believe it (and its off-price peers) is better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing demand environment (as apparel sales rise with Americans increasingly returning to normal activities outside the home). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Burlington has not escaped pandemic-related turmoil, but we believe it (and its off-price peers) is better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing demand environment (as apparel sales rise with Americans increasingly returning to normal activities outside the home). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Our $234 per share valuation of narrow-moat Burlington should rise by a mid-single-digit percentage after it posted solid third-quarter earnings (including 16% comparable sales growth against the same period in fiscal 2019) and announced plans to accelerate its store openings. We expect near-term pressure from freight and supply chain costs to yield to a strong environment for Burlington and its off-price peers, but suggest investors await a more attractive entry point.

Burlington has not escaped pandemic-related turmoil, but we believe it (and its off-price peers) is better positioned than full-price sellers. With no imminent debt maturities and ample liquidity, Burlington has been able to successfully meet a changing demand environment (as apparel sales rise with Americans increasingly returning to normal activities outside the home). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Market sentiment regarding narrow-moat Burlington’s second-quarter earnings announcement is negative (shares down 9%), but our take is more neutral as our near-term expectations were conservative and we see little reason to doubt the firm’s long-term prospects in the light of the news. Neither our $220 per share valuation nor our long-term outlook (normalized mid-single-digit revenue growth and low-double-digit adjusted operating margins) are likely to change significantly. Nonetheless, we suggest investors await a more attractive entry point.