Burlington Earnings: Sluggish End to Period, but Turnaround Work Should Pay Off; Shares Attractive

Our $211 per share valuation of narrow-moat Burlington BURL 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.

Comparable sales rose 4%, lagging our 5.5% target as results faded in March. Management attributed the slowdown to weather and lower tax refunds, the latter of which is particularly important for Burlington relative to off-price peers Ross and TJX as the chain caters to a lower-income consumer. The firm’s 4.1% adjusted EBIT margin was also below our estimate (4.3%), as lower-cost leverage led to more modest profitability than we expected. Management nevertheless maintained full-year guidance, calling for $5.50 to $6.00 in adjusted diluted EPS. We had believed guidance was conservative, but the sluggish period should lead our $6.02 estimate toward the middle of the range.

We are encouraged that Burlington continues to invest in tools, systems, and processes to bolster its merchandising capabilities, efforts that augment buyer headcount increases over the last few years. Although the firm is handicapped by its smaller size relative to Ross and TJX, we believe a stronger merchandising effort can help sharpen in-store values, reduce the chances of fashion missteps, and allow the company to better capitalize on what should continue to be an attractive product availability environment. Furthermore, the improved capabilities should enhance Burlington’s standing among vendors, giving it more access to high-quality branded merchandise at attractive prices, bolstering its value proposition.