Burlington Stores

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 4/5

Burlington Stores is an off-price retailer, offering brand-name apparel, footwear, home goods, and other merchandise at discounted prices.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Burlington Stores, Inc. (BURL), operates as an off-price retailer. Unlike traditional retailers, Burlington purchases merchandise opportunistically from manufacturers, typically at a fraction of the original wholesale price and in large volumes, and then offers them to consumers at discounted prices. This business model focuses on value and is significantly different from traditional retailers as the business focuses on buying opportunistic inventory, often in non-traditional ways.

Burlington operates in 45 states and Puerto Rico. It seeks opportunities across all demographics, age groups, and income levels. The stores offer apparel, accessories, shoes, home goods, and other related items. The company targets value-conscious customers who seek quality brand-name merchandise but prefer not to pay the full retail price. The core of the business is that they have become really good at sourcing branded inventory for a lot less than most retailers. This is why it’s able to provide discounts to the customers.

Burlington has transformed to an off-price retailer over the last few decades. The business was founded in Burlington New Jersey in 1972 as a family run business, and in 2006 it was acquired by Bain Capital. Before being a public entity the business operated under a different name, but they have kept their headquarters in Burlington New Jersey.

  • Revenue Distribution: BURL’s revenue comes from a wide variety of merchandise with a focus on apparel, footwear, and accessories, and a secondary focus on home, beauty and kids items. This gives the company a broad scope to drive revenue from different merchandise groups based on what’s in trend, and they can also benefit from seasonality or even excess manufacturing. A notable portion of their revenue is often made up of clothing, which contributes to the fast-changing nature of the company and the unpredictability of earnings.

  • Industry Trends: The retail industry, particularly the off-price sector, is subject to fluctuating consumer spending. It’s all about value. The rise of e-commerce has also forced brick-and-mortar retailers to adapt. However, off-price retailers are in a better place than other similar retailers because even in a rising ecommerce environment, the bargain element tends to attract customers, also because the customers can physically view the product before purchasing which isn’t a given with regular online merchants.

Consumers are increasingly seeking value, as they may not be interested in higher-end products in a particular industry, and are much more likely to choose heavily discounted goods, which gives companies like Burlington, a unique niche. Additionally, fast fashion makes trends move at a quicker pace, creating excess clothing and thus, better inventory to purchase at lower prices for these retailers.

  • Margins: Burlington, like other off-price retailers, operates with somewhat lower gross margins than traditional retailers. However, their lower operating costs, particularly in marketing and occupancy, help them maintain a healthy profitability level. Lower margins are a strategic point for these companies, where they sell low-priced items, and this allows them to draw a wider audience. This strategy is useful to increase both customer acquisition and retention.

  • Competitive Landscape: The off-price retail market is competitive, with major players like TJX Companies (TJX), Ross Stores (ROST), and others. Competitors also include department stores that offer discounts. Burlington’s success hinges on its ability to secure unique merchandise and offer a compelling value proposition to its target customers which can sometimes make it difficult for customers to pick. They also seek unique pricing strategy which attracts customers to specific products, as many may be interested in purchasing at a lower price.

All the key competitors are well established and are better at sourcing inventory than smaller retailers. However, Burlington is trying to establish a niche in larger cities in the northeast by having a higher proportion of urban stores. The company plans to grow significantly in the coming years.

  • What makes Burlington different: Burlington differentiates itself by having a large and changing assortment, by offering new brand names and items from week to week. It also targets certain urban and less-traditional markets that are not covered by other off-price retailers. In the recent earnings call, they also reiterated their strategy of having a large inventory of famous branded items with a smaller inventory of lesser known branded items, this helps to capture both quality seeking and discount seeking customers. They also have an emerging strategy of acquiring and developing their own brands, which increases the stickiness of the business with the customers.

Financials in Depth:

  • Revenues and Margins: BURL has shown a steady increase in revenue over the last few years. In the latest quarter, the revenue increased by 13.3% but there has been a fall in the operating profit. There’s some volatility in the revenue growth due to changing consumer patterns but that is usually limited. Gross margins are a bit lower than a conventional retailer, but Burlington compensates this with its low operating costs.

It is very important to note here that, although Burlington’s revenue has steadily grown and the company is focused on expansion, the operating margins have taken a huge blow due to external factors like high supply chain costs and inflation.

  • Operating Expenses: SG&A expenses has slightly increased in the recent period, again, owing to external factors like higher labor costs. They have also highlighted that the rent costs for new store openings will continue to be a drag on the company’s financials for a while, especially because they are opening in premium cities which have higher rent prices.

This further strengthens the narrative that if the costs don’t come under control, it will greatly affect the profitability of the company. The management have reiterated that they have begun to take countermeasures to limit the operating costs, by having lower supply chain and transportation expenses.

  • Debt and Liabilities: The company’s balance sheet is relatively healthy, with a moderate amount of long-term debt and sufficient working capital, but that has been affected by increased short term debt. This has lead to some reduction in equity and consequently, increase in risk. Overall however, their debt profile isn’t particularly concerning because of a good history of being profitable.
  • Recent Concerns/Controversies: In the recent earnings call, there has been an increased concern regarding the profitability of the business as well as a slowdown in the consumer spending. The company’s profit margins have drastically come down, due to inflated supply chain and transportation costs. The management has acknowledged those and taken countermeasures. A lot of the growth in the recent past has come from newer store openings, but the margins for the company have been severely hampered due to external market dynamics. They have also highlighted a slowdown in overall demand, and are trying to be more selective in their inventory selection.

Moat Rating: 2/5

Burlington’s moat is Narrow. While it has a good business model, a focus on discounted brand name items, and a good amount of customer retention, it lacks the true competitive advantage of having a wide moat. Burlington’s competitive advantage stems from its ability to identify and buy discounted branded goods, and then offer a compelling discount to the customers, and they have also been actively expanding the business in underserved areas. However, this isn’t something that is hard to replicate and can be easily overcome by their well-funded competitors like TJX. Furthermore, the switching costs for consumers are negligible, and it is easy to switch to competitors offering better discounts at times.

Here’s a detailed breakdown:

  • Strengths (Narrow Moat Factors):
    • Value Proposition: Burlington offers a unique value proposition of branded merchandise at discounted prices which makes their stores attractive.
    • Brand Recognition: The name “Burlington” has strong brand recognition and the company has created a reputation for offering good value, in the same space as companies like TJX and Ross.
    • Proprietary sourcing channels: The company’s ability to source goods from various avenues gives it a degree of competitive advantage, allowing them to get good deals when large suppliers have excess inventory.
  • Weaknesses (No Moat Factors):
    • Low Barriers to Entry: In the off-price retail sector, the barriers to entry are not extremely high. Other players with sufficient capital and connections can start up shop.
    • Imitable Business Model: Competitors can also leverage the business model, even though Burlington has a good supply chain, it isn’t particularly difficult for a company to do the same, given sufficient resources.
    • Low Switching Costs: As previously mentioned, there is little incentive for a customer to stick to Burlington for discounts; customers are always ready to take their business to a competitor if they get a better deal. In fact there’s no incentive for the customers to be loyal to any retailer in this space in particular.

Legitimate Risks to the Moat and Business Resilience:

  1. Economic Downturn: A recession would force the consumers to tighten their spending, and as off-price retail is discretionary spending, the revenue of the company would be impacted in the short term.
  2. Intensified Competition: Increased competition from existing players or new entrants, would threaten the company’s margins and market share, leading to a squeeze.
  3. Changes in Consumer Preferences: A shift away from the appeal of discounted branded apparel would hurt revenue.

Changes in the trends and overall consumer preferences are a particular issue for BURL as fashion changes pretty rapidly, and they need to have a very strong supply chain to quickly replace the products they sell.

  1. Sourcing Issues: A disruption to the supply chain, or inability to find discounted name brand goods, would hurt the ability to price correctly and keep up with their target audience.
  2. Higher Costs: Increased labor costs, rising energy prices and transportation costs, could significantly impact the margins and profitability of the company.

The recent drop in profitability has been an issue of concern as management has cited rising labor costs and high transport prices. All these factors continue to pose a great threat to the company.

  1. Inventory and Supply Chain Management: Inventory mismanagement, especially if it leads to a backlog of unsellable goods due to fashion trends changing, could hurt the financials of the business.

Business Resilience:

While Burlington operates in a competitive industry, its emphasis on value and ability to attract the customers, may give it resilience to the changes. The growing trend of value-conscious customers will continue to help the business. Also, the business has a very simple structure which makes it very easy to adapt to changing environments.

The company is taking actions to limit the damage caused by external factors and to keep driving growth, but there is no guarantee these will be enough to fully counteract these threats.

Understandability Rating: 1/5

BURL is very Easy to Understand. The company is a retail company that focuses on selling discounted branded items from a variety of industries. The core of the business and the business model is extremely simple.

However, although easy to understand, the execution is hard to mimic. Also, given the number of competitors in this space, one should proceed carefully before choosing to invest in this business.

Balance Sheet Health Rating: 4/5

BURL’s balance sheet is Healthy. The company has shown a strong and consistent increase in revenues, though some risks to profitability exist, due to increased input prices. However, given the company’s moderate debt and good revenue growth over the years, it’s a pretty stable company. They also have good positive cash flows, which help with expansion and acquisitions.

The increasing cost structure and negative implications it has on the margins is something to watch out for, as all the growth numbers would be meaningless if the company isn’t able to handle the external changes. The company is making steps in the right direction but its still early to tell.