Katrina Wittkamp
Investment action
I recommended a buy rating for Burlington Stores (NYSE:BURL) when I wrote about it in June, as I gained more confidence that BURL can achieve its long-term targets, given the encouraging 1Q24 results and underlying momentum. Based on my current outlook and analysis, I recommend a buy rating. BURL continues to report solid growth momentum, with acceleration in comparable store growth [CSG] that makes me believe management’s guidance is overly conservative. My expectation is for BURL to beat its 3Q24 guidance and raise its FY24 guidance, which should drive a positive forward P/E rating.
Review
BURL reported 2Q24 earnings last week, where the business saw retail sales growth of 13.4%, beating the street’s estimates by 210 bps. Retail sales growth was supported by 5% CSG. Gross margin also came in better than the street’s expectations, at 42.8% vs. 42.3%, with the beat mainly driven by ~90bps of merchandise margin expansion largely due to lower markdowns, as well as ~20bps of freight benefit. This translated into a ~90bps EBIT margin beat (4.7% vs. the street’s estimate of 3.8%). Looking ahead, management raised its FY24 EPS guidance, now expecting adj. EPS of $7.66-$7.96 (vs. $7.35-$7.75 prior), and within the guide, management embedded an expectation for 2 to 3% FY24 CSG.
Overall, there really isn’t much to complain about this set of results, as BURL continues to grow as I expected. The uncertain macroenvironment continues to pressure consumer spending, as seen from various discretionary companies voicing out their concerns. This is music to BURL’s ears, as it benefits from the value-consciousness of consumers and lingering trade-down movements. I note that BURL is not the only one benefiting, as other value retailers are seeing this benefit too, so this is an industry tailwind.
Cycling back to BURL’s performance, there are no signs of weaknesses at all. CSG saw 5% on a reported basis, which represented a 9% 2-year CSG stack. This is noteworthy because it was a 300bps acceleration vs. 1Q24 that saw 6% 2-year CSG stack, indicating that underlying demand has gotten even better (further reinforcing my point that BURL demand momentum remains robust). Importantly, the reported 5% CSG included 2pts of clearance headwinds, which means like-for-like CSG is actually 7%, implying a 2-year CSG stack of 11%, which is the highest it has ever been since 2Q17 (excluding the COVID period). I have a strong view that CSG will continue to stay at this very robust level for the near term due to a couple of reasons:
- The consumer confidence index remains low, indicating they are still very value conscious and should continue to drive trade-down motions (which BURL is already seeing from mid- to high-income cohorts).
- 2Q24 strong CSG was largely organic (management noted there were no transitory tailwinds); CSG was driven by traffic growth and stable average transaction value.
- July saw very strong CSG growth on the back of back-to-school trends, and this momentum has continued into August (management noted a strong start).
- Easier sequential CSG comparison as the clearance headwinds fully taper off in mid-September, which implies potential for CSG acceleration.
- Relatively easy comps for 3Q24 (vs. last year) as October last year was negatively impacted by warm weather
Anyway, to answer your question, we were very pleased with our back-to-school trends in July. Comp sales growth, the categories that I described a moment ago were stronger than for the rest of the chain. And that helped to support our overall sales trend as we closed out the quarter in July. And on the last part of your question, how are things going in August? Our — our back-to-school categories have continued to perform well. I would say, obviously, we’re 3.5 weeks in at this point. We’re happy with our overall trend. We’ve made a solid start to Q3. 2Q24 call
With BURL already tracking at an average of 3.5% for 1H24, and there are no signs of demand slowing down at all, I continue to believe management is being cautious in its FY24 guidance. As a reference, management’s FY24 guidance implies 4Q CSG to come in flat to 2% (based on 3Q24 0 to 2% CSG), which seems to be a very low bar to hit. Firstly, 3Q24 is very likely to perform as well as 2Q24, if not just slightly lower, as I discussed above. Which means the implied 4Q24 guidance is much lower. Secondly, 4Q24 is going to see an easier comp base of 2% CSG in 4Q23, which means 4Q24 CSG has a ~400bps growth comp tailwind vs. 3Q24 (3Q23 CSG was 6%). In other words, 4Q24 CSG should do better than 3Q24 CSG if there is no major change in underlying demand. Thirdly, BURL should see acceleration in demand as merchants are focused on assorting into higher-quality brands through upfront buys into the holiday season, with even greater amplification of branded assortments vs. 2/3Q24. This should help BURL capture more trade-down demand.
Valuation
Therefore, I think there is a very good chance for BURL to see its forward PE multiple go beyond where it is trading today (30x) as it continues to report solid CSG and beat its 3Q24 guidance. Should this happen, my expectation is that management will raise its FY24 guidance, and this should trigger consensus to upgrade their earnings estimates. With the sold narrative of: great execution + favorable macro condition + beat & raise momentum, the market is likely to continue rerating BURL multiples upward (already on solid uptrend from ~27x in June to 30x today).
Furthermore, BURL is expected to grow the fastest compared to Ross Stores (ROST) and TJX Companies (TJX), which are expected to grow at mid-single digits, respectively. And I believe this growth premium should translate into a positive fund flow tailwind, in that investors looking to invest in this space will likely allocate capital to BURL because of the growth premium.
Risk
Depending on how fast the consumer spending environment recovers—more discretionary spending and trade-up motion, which will result in BURL losing wallet share—BURL may not be able to report the strong CSG that I am expecting. In that case, the equity story is less attractive as BURL, and the market may not attach a premium multiple to the stock.
Final thoughts
My recommendation is still a buy rating for BURL as it continues to show strong growth momentum, driven by robust CSG and favorable macro conditions. I believe BURL can beat its 3Q24 guidance, and when it does, we should see a strong upward movement in multiples.
