How’s this for an elevator pitch: We’re the smallest, least productive, and least profitable of our peer group.
Um … congratulations?
Yet that’s exactly the message Burlington Stores (BURL) is conveying to investors — and it’s working.
Since late September, shares of the off-price retailer have soared nearly 90% to nearly $220. While other retailers are forecasting flat to negative comparable sales this year, Burlington expects same-store sales to grow a solid 3% to 5%.
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“Beyond 2023, we are excited about our longer-term prospects,” Chief Executive Michael O’Sullivan said in a statement.
“We believe that the next few years could present significant opportunities to drive improved results. We are pushing ahead with the transformation of Burlington into a stronger off-price retailer, so we can take advantage of these opportunities.”
Speaking to investors, O’Sullivan almost gleefully admits Burlington has underperformed its off-price competitors, including Ross Stores (ROST) and TJX. (TJX).
For example, in fiscal 2021, Burlington generated sales of $299 a square foot and an adjusted operating-profit margin of 8.6%. That compares with $539 in sales per square foot and margin of 12.9% at a top competitor.
O’Sullivan didn't specify the competitor in question. But he said the figures mean simply that Burlington has more room to grow and improve.
Off-Price Retail Is Booming
Normally, such a pitch sounds like someone trying really hard to spin a bleak situation into a glass-half-full story.
But what makes Burlington’s story so compelling is the simple fact that off-price retail is booming.
Off-price retailers’ business model consists of very cheaply buying brand-name clothes, shoes and accessories from retailers that are desperate to get rid of excess inventory and then selling the items to consumers at big discounts.
And since last year retailers have been unloading a lot of inventory.
During the pandemic years, retailers enjoyed robust sales and stocked accordingly. But now sales are falling back to Earth and retailers are scrambling to match supply with weaker demand.
For example, Target (TGT) has aggressively slashed inventory and canceled orders. The retailer said inflation and a slowing economy had weakened consumers' appetite for discretionary items like apparel and accessories. The company predicts comparable sales for 2023 to grow in the low-single digits percent or decline in low single digits.
Macy’s (M) said its gross-profit margins last year took a hit because the retailer needed to reduce inventory.
“Merchandise margin declined largely due to planned markdowns and promotions,” the company said in its recent earnings report. Those margins “were higher year-over-year as a result of the impact in the shift of consumer demand from pandemic related categories.”
“Elevated industrywide inventory levels also contributed to a heightened competitive retail landscape,” it said. The company predicts comparable sales this year will fall 2% to 4%.
And Kohl’s (KSS), which has also been trimming inventory, expects 2023 comp sales to drop 2% to 4%.
'Burlington Can Seize on That Merchandise': Analyst
Such inventory markdowns are sweet music to off-price retailers.
“Burlington can seize on that merchandise,” said Carol Spieckerman, president of the consulting firm Spieckerman Retail. “It has a right to be bullish. Other retailers' pain is their gain. When Burlington is bullish, other retailers should be concerned.”
In many ways, off-price retailers have proved immune to a slowing economy because consumers, even if they cut back on overall spending, still love the thrill of the hunt, Spieckerman said.
According to Placer.ai, foot traffic at Burlington in January rose 11.5% compared with the year-earlier month. At two of Burlington's peers, the TJX units T.J. Maxx and Marshall’s, traffic grew 14.6% and 15.2% respectively in that period.
“The positive traffic trends highlight off-price’s promise in the current economic climate,” Placer.ai said in a recent blog post. “The sector was on the upswing before the pandemic, and despite the obvious challenges posed by lockdowns, the period was hugely successful for the segment.”
“Now, a year after the last Covid surge and as many consumers continue to pull back on spending, off-price is proving it can not only withstand the challenges but thrive despite them.”
