Burlington Stores, Inc.
Q3 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Stores Incorporated Third Quarter 2020 Earnings Webcast Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Glick, Senior Vice President of Investor Relations and Treasurer. Please go ahead.

[David Glick:]

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2020 third quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer; and John Crimmins, Chief Financial Officer.

[Michael O’Sullivan:]

Thank you, David. Good morning, everyone, and thank you for joining us on this morning's third quarter earnings call. We are very glad that you could be with us. We are going to structure this morning's discussion as follows

[John Crimmins:]

Thanks, Michael, and good morning, everyone. Let me start with a review of the income statement. For the third quarter, total sales decreased 6%, while comparable store sales decreased 11%. As Michael described earlier, our comparable store sales improved significantly after our inventories recovered to more appropriate levels at the end of August. We believe this improvement was driven by our improved inventory position, the delay in back-to-school purchases, and the outstanding values offered to our customers from the great merchandise buys we were able to deliver in Q3. The gross margin rate was 45.0%, an increase of 260 basis points versus last year's rate of 42.4%. This improvement was primarily driven by lower markdowns and higher markup, which were partially offset by increased freight costs. We do not expect to be able to generate the same level of year-over-year gross margin improvement in Q4 that we were able to achieve in Q3. There are two reasons for this. First, while our clearance levels are down versus last year at the end of Q3, clearance inventory entering Q3 was extraordinarily low due to our aggressive Q2 clearance strategy. That significantly reduced our clearance markdowns in August, which we don't believe is repeatable in Q4. Second, while we significantly exceeded our planned sales in Q3, sales for Q4 remained very uncertain due to the impact of the pandemic, which would affect our inventory and markdown levels, depending on how sales play out during the holiday season. Product sourcing costs, which include the cost of processing goods through our supply chain and buying costs, were $144 million in the third quarter of 2020 versus $90 million last year, increasing 360 basis points as a percentage of sales. As we indicated on last quarter's call, we had expected significant deleverage in product sourcing cost for the third quarter for a number of reasons. Like most other retailers, we struggled at the end of the second quarter and into the third quarter as we tried to get our DCs fully staffed and operating effectively. We prioritized inventory flow over cost efficiencies during the quarter as our teams work to get inventory back to appropriate levels in our stores and then to chase the positive trends we were seeing as we experienced sales well above our planned levels during the quarter.

[Michael O’Sullivan:]

Thank you, John. As I wrap up my remarks, I would like to express my warm appreciation and gratitude to all our associates at Burlington. We continue to operate in the midst of a global health crisis, which is likely to continue to impact our lives in the months ahead. This is a challenging time, but it is also a very exciting time at the Company. There are a lot of very good things happening. The way that our associates have mobilized behind Burlington 2.0 has been particularly impressive and further reinforces my belief and confidence in our prospects over the next several years. With that, I will turn it over to the operator for your questions. Operator?

[Operator:]

Thank you. Our first question comes from Matthew Boss of JP Morgan.

[Matthew Boss:]

Great. Thanks, and congrats on the improvement. Michael, maybe any additional color that you can provide on the components of comp store sales in the quarter, traffic, basket size, average unit retail? I think, it would be very helpful if you could add any color.

[Michael O’Sullivan:]

Sure. Well, good morning, Matt. Thank you for the question. I'm going to start by reading the actual data, and then I'll provide some editorial commentary. So, let's see. Traffic for the quarter was off by more than 20%. Our average basket size in units was up by more than 20%. Our average unit retail, so the average price per unit, was down about 10%. If you combine those items, the average transaction size in dollars was higher by about 10%, low double digits. And if you mix all of those variables together, of course, you get minus 11% comp decline for the quarter. So, that's the data. Let me sort of offer up some conclusions that I would draw from this data. The first point I would make is that the decline in traffic versus last year is disappointing. It improved as we came out of August, but it was still weak in September and October. I think, there are really two factors that drove that weakness. First, most obviously, if you like, we're in a pandemic. There are shoppers who just are not going to be comfortable coming back into a bricks and mortar environment until we get through this. We have very robust safety and social distancing programs in our stores, and we've marketed these. But we realized that despite those measures, realistically, traffic is going to remain depressed until we get through the pandemic. So, that's the point number one. Point number two, I think we have to acknowledge that compared with our peers, we at Burlington, we're not necessarily a top-of-mind destination for some of the key merchandise categories that shoppers are most interested in right now. As I'll describe in a moment, we've made huge progress in areas like home and casual apparel. But we recognize that in these businesses, we are starting from further behind versus peers. The second conclusion that I would draw from the data though is much more positive. And it's that I think we are doing -- I think, we're doing an excellent job driving business with the traffic that is coming into our stores. We've shifted our assortment and we're offering great values, actually great values in many of the same categories that I just mentioned, categories that the customer wants to buy right now. We've significantly expanded our home, active, casual, essentials and basics merchandise assortments. This enabled us to chase the trend in September and October. Now, I think, you can actually see the stronger value in the lower AUR. And the higher basket size shows that the customers that are coming into the store are responding very well. They're buying many more items, and they're spending more during each visit. So, I think, these are encouraging indicators, encouraging indicators of what might happen if and when traffic levels pick up, once we get through the COVID-19 pandemic.

[Matthew Boss:]

That's helpful. And then, as a follow-up. On the industry supply chain, so on the August call, you talked about delivery delays from vendors and how these then impacted your in-store inventory. I'm curious where we stand today and if these delays have dissipated.

[Michael O’Sullivan:]

Sure. Yes, it's a good question. That was a big part of the story on our last call. Let me chunk out my answer a little bit. I'll start with an update on our own internal supply chain, our own distribution centers. You'll recall that in August, we explained that along with many other retailers, we'd run into significant staffing issues in our distribution centers and that those issues had really hampered our ability to get in-store inventories up to planned levels as fast as we would have liked. The simple update here is that those issues have been resolved. In Q3, we took a number of actions, including higher wage rates and on-boarding incentives. And these actions worked. We've been very happy with how our distribution centers have been able to ramp up for peak holiday production in October and November month-to-date. And right now, obviously, we're at that peak processing level. So, that's the update on our own internal supply chain. But, the broader sort of industry-wide issues has not gone away. There are chronic delays in merchandise deliveries across the retail industry. I'm sure that you've heard this elsewhere. These delays are being driven by, I would say, a number of factors, including ongoing staffing issues at vendor distribution facilities, timing issues kind of associated with the surge of orders that took place following the lockdown earlier this year. And then, I would also say import delays, specifically related to congestion at the West Coast ports. Now, we took a number of steps in the third quarter to sort of navigate our way around these issues. Remember, we've seen this movie before in Q2. So, we were aware of the risks. Our planners and buyers, I think, did a very good job juggling purchase orders and delivery dates. So, at the end of the third quarter, our in-store inventory levels were pretty much right on plan, but down 20% on a comp store basis. The last point I would make is just stepping back, and Matt, I'm sure you realize this. There is potentially a very important silver lining in the delays I've just described. In the coming weeks, these delivery delays across the industry are likely to translate into off-price supply. This could become an attractive off-price buying opportunity. And that's actually one of the reasons why we pushed some of our reserve inventory purchases to later in the fourth quarter.

[Operator:]

And our next question comes from Ike Boruchow of Wells Fargo.

[Ike Boruchow:]

Hey. Good morning, guys. Thanks for all the information. That was super helpful. I guess a couple of questions. The first one is about if we could talk about the operating margins. I guess it sounds like there's aspects to the Burlington 2.0 that should help drive margins higher over time, but I think there's also some expense headwinds. You guys are alluding to supply chain and product sourcing cost sounded like a big one that can offset some of these gains, especially in the near term. Just how should we think about the different factors and their impacts on margins? And then, I have a follow-up after that.

[Michael O’Sullivan:]

Well, good morning, Ike. Good to hear from you. I think, I'll break down the question into two different time periods. In the short term, what are our expectations for operating margins, specifically in 2021? In a moment, I'm going to ask John to address that. But first, let me talk about the longer term, what is the operating margin opportunity for Burlington over the next several years? Internally, as we've modeled the impact of Burlington 2.0, we've identified and sort of zeroed in on three main drivers of margin improvement. And, we believe that these three drivers represent the lion's share of the margin gap versus our peers. The first is sales. Of course, the higher sales, productivity drives leverage. The steps that we're taking to drive sales are the things that we've talked about, in particular, controlling our liquidity so we can chase trends and take advantage of opportunistic buys and heavily investing in merchandising capabilities, so we can deliver even stronger value across all categories and in particular, develop under penetrated categories. That's the first lever. The second lever is gross margin. We believe that we have a significant opportunity to turn our inventories faster than we have historically and thereby drive lower markdowns. One aspect of this, of course is as I've just mentioned, to drive higher sales, but the other critical enabler is tight control of inventory levels and also greater urgency in getting fresh receipts to the sales floor. If we do those things, I'm actually very confident we can drive faster inventory turns and significantly lower markdowns, and I kind of feel like we demonstrated that to some degree in the third quarter. The third driver of margin improvement is lower occupancy costs. Our stores are bigger and less productive than our peers. Again, driving higher sales will help. But, as I mentioned in the prepared remarks, we believe we have an opportunity to reduce the size of our store prototype, thereby reducing our occupancy expenses over time. Now, as part of Burlington 2.0, we have specific initiatives in place to go after each of the levers I've just described. Over the next several years, we expect, I expect to make significant progress in driving improvements in our operating margin. But that said, these things never necessarily work in a straight line. There are going to be short-term headwinds. And certainly, until we get through the pandemic, there will be challenges, either from deleverage on lower sales volumes or higher operating expenses, such as supply chain or COVID-related costs. On our fourth quarter call in March, we'll provide an updated view on these headwinds for 2021, but it might make sense. But now, maybe for John to provide some initial comments on what we think we may face next year.

[John Crimmins:]

Sure. Thanks, Michael, and good morning, Ike. Obviously, we still got a lot of work to do on our plan for next year. But I think we can share a little color kind of how we're thinking about it as we put it together this year. Usually, when we start to build an annual plan, we're going to set objectives based on what we want to achieve compared to the current year. But since 2020 has been such a unique unusual year, we're going to look back to 2019 as the base year for our 2021 plan. So, we'll focus on how 2021 is going to differ from 2019. Again, normally, one of the first assumptions that you'd lock in on would be comp sales growth. But we still have the pandemic going on. It seems to be getting worse before it's likely to get better. We're optimistic that there may be an end in sight. But yes, it's going to continue to impact all of retail, and that's going to make -- sales is likely going to be a little bit of a roller coaster as it's been this year. So, this means we're going to have to plan conservatively and then we're going to look to flex to the business trends that as we see them develop. Now, the good news on that is we've had some pretty good practice at doing that this year. So, that means we're going to have conservative comp assumptions. Whenever you have conservative comp assumptions, it's going to be difficult to drive operating margin expansion. And it's going to be even more difficult in 2021 because we're building a plan from a base year of 2019. So, if you think about it, we will have experienced two years of fixed expense inflation increases. So, ignoring any other cost headwinds, we'd have to cover that with adequate sales growth before we begin to see our normal expense leverage. And while we do expect some of the temporary COVID-related expenses to end when the pandemic ends, we could see that we will have some headwinds that are still going to be there. So, what we can see now, we've seen supply chain wage pressures that we had to respond to in this year. And we've seen a lower AUR trend, as we -- Michael just talked about for what we've seen in the third quarter. We do expect the lower AUR to drive sales, as Michael described. But it also means that there is more units to process per dollar of sales. While we're confident that over time we can mitigate these expense pressures, we've got a history of kind of always been able to figure that out. But, some of our mitigating actions, like reengineering production processes or automating others are going to take a little longer. They're going to have some lead time. So again, compared to 2019, we're expecting to see pretty significant deleverage of supply chain expenses in 2021. As I said a moment ago, we still have a lot of work to do over the next few months. And we're going to be in a much better position to share more detail on our sales and our expense plans during our March call.

[Ike Boruchow:]

Got it. And then, just one quick follow-up on AUR. I think, you guys talked about lower AUR in the quarters. Can you help -- can you expand on that a little bit? It sounds like you expect this to continue into '21. Just a little bit more detail on that topic would be great.

[John Crimmins:]

Sure, Ike. Yes. First, let me kind of talk about what we saw in the third quarter a little bit in AUR. Yes. I think that the biggest driver of this, our mix of merchandise. Consumers are interested in different things now than they were prior to the pandemic. Our strongest merchandise category is right now things like casual, apparel, active, athletic, basics, essentials, palm merchandise, all the ones that you think of when people are not back to their normal lives. On average, these have a lower AUR than the merchandise categories that haven't been as strong. So, we kind of traded off sales in these lower AUR categories, and we're not -- we're seeing not as strong sales in things like career where structured apparel, tailored clothing, the more dressy categories. And in general, more dressy tends to means higher price; and in general, less dressy tends to mean lower price. So that's one of the drivers. The second driver would be our pricing. We've been working across all our merchandise categories to have sharper, more competitive pricing. As Michael has been talking about, we believe that in off-price, the most effective way to drive sales is to offer the best possible merchandise value. That's what the customer really cares about. The last couple of quarters, that's what our merchants have been focused on, offering great value, and it's been working. As Michael mentioned, the number of units per basket rose by more than 20% in the quarter, and we think that's directly related to the better values that we've offered. Looking ahead now, we think the merchandise mix might at some point shift back in the other direction when the pandemic's over. You'd certainly expect trends to go back to some degree of normal, maybe a different new normal. But, at some point, people will have a desire to dress up a little more again. If that does happen, then we'd expect that mix impact in our AUR. It may come back the other way. But, if it does happen, there's a good chance that that potentially good news would be offset by the downward pressure on AUR as we continue to execute the Burlington 2.0 strategy, looking to drive sales by offering that great merchandise value at great prices. So, that would likely mean our AUR would stay below historical levels, netting the two together as we look forward.

[Operator:]

Thank you. And our next question comes from John Kernan of Cowen.

[John Kernan:]

Good morning. I hope everyone's ready for Thanksgiving and the holiday season. I have a question for Michael and then one for John, if I can. So, just first, Michael, what's your assessment of merchandise availability? I think, everyone's interested in what you're seeing right now, but also on the longer term outlook, some of the publicly -- public vendors have talked about taking a more conservative approach going forward as it relates to inventory going into the off-price channel. Are you concerned that this is constraining to your growth overall?

[Michael O’Sullivan:]

Good morning, John. Good question. John, you've followed off-price retail for a long time. So, I think, you'll know that availability has always been the age-old question in off-price, certainly if you go back -- if you would go back 30 years and the concern has always been that off-price retailers will run out of supply. Clearly, that has not happened. Off-price has achieved huge growth over that period. Let me talk about the reasons why. But before I do -- let me address the short-term availability first, and then I'll talk about longer term. Short-term availability, I would say that the quick answer is that in the short term, overall, the availability of off-price merchandise has been and continues to be very strong. We're pleased with the opportunities that we're seeing. We're happy with the assortments and the values in our stores. Now, that's not to say that there aren't some gaps, some brands, some categories where we'd like more supply, there always are. That's the nature of off-price. It's always -- the off-price supply is always a little lumpy. But overall, I would characterize availability now -- right now as very good. But, I think, the more important part of your question was the longer term. We have -- here at Burlington, we have ambitious growth plans over the next several years. We believe, as I described in my prepared remarks, that we have an opportunity to take significant market share in the years ahead. So, it's a good question. Do I think we will be constrained by merchandise supply? No. No. I really do not think that. As you'd expect, over the years, I've spent quite a lot of time looking at this issue of off-price supply. And when I hear concerns about supply in off-price, I understand what triggers those concerns. But I have to say, I'm very skeptical about those concerns. And my skepticism is really based on two factors. Number one, I think, it's very important to understand that our relationship with our vendors is very strong. It is a partnership. It's not transactional. It's a long-term relationship. For the categories that we sell, the SKU count, the complexity, the lead times, all of those factors make it very difficult for vendors to precisely forecast how many units of the styles are produced. Now, because of the off-price channel, they actually don't have to get this right. They have an outlet, a partner for excess merchandise for overruns. They have a partner for canceled orders. So, the way to think about this is we lower the risk for them. Now, we want them to be successful, and we can help them grow their businesses. So, those relationships really are partnership. The second point I would make, and this is very important, is that we compete in many different categories. We have thousands of vendors and brands that we do business with. We aren't reliant on any single and only one vendor. Our largest vendor is no more than a small percentage of our sales. So, it could absolutely be true that an individual vendor might cut back, but that wouldn't really make much of a difference to us in the bigger scheme of things. In fact, as we grow our vendor base -- sorry, as we grow, I think, our vendor base is likely to increase significantly as well. In some of our most important underpenetrated businesses, businesses like home or beauty, the underlying vendor base is actually very fragmented. You have a lot of very small vendors. So, as we grow those businesses in particular, I would expect the vendor count will increase actually at a much greater rate than it has in the past. With all that said - with everything I've just said, my expectation is that there will be times when there are specific brands or specific vendors that have more or less availability. That's always going to be true. As an off-price retailer, we recognize that that means that there will be gaps in our assortment. But, to come back to your main question, am I concerned that this will constrain our growth? No, for the reasons I've described it, I'm really not.

[John Kernan:]

All right. Thanks, Michael. Second question is for John, just on the 25,000-square-foot prototype. It seems like a big opportunity. Interested in hearing more about the thinking and the financial planning that led to the smaller format. And then, in particular, any early information or expectations around productivity, profitability and then, the potential store numbers over time?

[John Crimmins:]

Well, sure, John. Thanks for your question. Good question. John, you've been following us since the beginning. So, I don't think I have to tell you that we've got a pretty good history of continually reducing the amount of inventory we've had in our stores. It's been going on for many years now. And as we've been doing that, we've been able to reduce our store size each year for the last however back -- however far back you want to go. To the point, at this year, our average store size is just under 40,000 square feet. So, this has really been kind of a learning opportunity for us. We've been continually reducing the box size, operating with leaner inventories and learned quite a bit on the operating side. And then, now, we've got our Burlington 2.0 off-price full potential strategy, where one of the main principles is to run with even leaner inventories. So, this leaner inventory is -- and the confidence that we have in that is, I guess, you'd call it an enabler really of how much farther we think we can take our smaller box size. We've been really pleased with the initial progress we've seen as we started to work on these initiatives. So, this stuff altogether just gives us added confidence in our ability to do this and a little bit of a clearer path to further in-store inventory reductions. So altogether, kind of higher confidence and better visibility to how we can get to this 25,000 square-foot prototype. So, while this stuff has been going on, particularly in the past year, our real estate team, our store design, inventory planning and store operations teams have been working on actual prototype for the 25,000 square-foot store. And we feel really good about the detailed merchandising and operational plans that they've been developing. So, we're really excited about the potential that we see for the smaller stores. In terms of the actual store-level economics and our opening plans, I'm going to wait until our next call in March to get more specific on that. But, we do believe the smaller prototype offers potential for higher sales productivity and better expense efficiency. And we think that over time, it's likely to become a central element of both our new store and our existing store relocation plans as we kind of sort through our portfolio.

[Operator:]

Our next question comes from Lorraine Hutchinson of Bank of America.

[Lorraine Hutchinson:]

Thank you. Good morning. So, Michael, you spoke about traffic declines in the quarter. How concerned are you that shopper behavior may have changed during the pandemic? Do you think some of the business that has moved to online won't come back to bricks-and-mortar?

[Michael O’Sullivan:]

Hi, Lorraine. Yes, I think, it's a very good, very important question. There's no doubt we could all see that e-commerce has grown significantly because of the pandemic. And my guess is that some of the share gain will be permanent. I think, some of this share shift would likely have happened anyway over the next few years, but the pandemic accelerated it. And I don't think -- as I said in my remarks, I do not think that as we get through the pandemic, shopping patterns will just go back completely to the way that they were. No, I actually think that that share shift though, that share gain by e-commerce is going to have the effect of critically undermining full-price bricks-and-mortar retailers, especially mall-based retailers. It seems likely that that will drive a wave of rationalization and store closures in the retail industry. I think, we're just really seeing the start of that. The most important question for us is where do these customers go when a physical department store or a specialty retailer store closes? Now, for sure, some of that business will go online permanently, as I said in my prepared remarks. That seems especially likely for more affluent, time-starved shoppers, if you like. But, our hypothesis is that many of the more value-oriented shoppers will find their way to off-price. If we can offer them great assortments at great values, then I actually think we can grow and take market share once we get through the pandemic. Now, the underlying premise of what I've just said is that we can satisfy these value-oriented shoppers more effectively and more competitively than e-commerce. And actually, I've had this conversation with many of the investors on this call. We operate an $11, $12 average unit retail business with a very broad fashion assortment. It is economically and strategically very difficult for an e-commerce business to compete with us at these price points in the categories where we compete. The other point that I would make is that this isn't just a conceptual argument. It's actually what has been happening for several years now. E-commerce has been growing for some time. And the full-price bricks-and-mortar department store and specialty store channels have been shrinking for some time. Meanwhile, off-price retail has been growing and taking share. We at Burlington, for example, have been growing our top line in the high single digits each year for the last several years. So, bringing it all back together, we believe that in the aftermath of the pandemic, we could see an acceleration of the trends that I've just described and not a reversal of them.

[Lorraine Hutchinson:]

Thanks. And then, for John, I appreciated the breakdown of product sourcing cost that you gave in the comments. I was just curious, what proportion of these costs do you think might be permanent?

[John Crimmins:]

Yes. Okay, Lorraine. Thanks for the question. So, it's complicated. So, I'll kind of go through some of the stuff I said on the call and then maybe put it in kind of a go-forward context as well. So, let me just start reminding what's in product sourcing cost. For us, that includes all the cost of our supply chain and all the cost of our merchandising operations. And as I said in the -- in our prepared remarks that overall, the product sourcing costs all together delevered by 360 basis points during the third quarter. So, supply chain drove 280 bps of that deleverage. About 100 basis points or $16 million of that we consider to be temporary COVID-related costs. And in this bucket, we'd include the temporary recruiting costs and wage incentives that we had to use to get our DCs properly staffed quickly to get our store inventories back to appropriate levels, along with some costs related to the safety protocols that we've put in place to protect our DC associates. About 70 basis points of the supply chain piece of the deleverage were related to the wage increases that we've had to do, actually since the third quarter. We had some wage increases that we had planned for this year and actually put in place earlier in 2020. But then, we had some incremental costs. It was in response to changes in the DC labor market during the pandemic as the market became so much more competitive. So, the adjustments we've made, we think have been successful in getting our DCs properly staffed. And we believe our DC labor rates are now properly positioned. But, of course, this piece, it's a permanent wage increase. So, that is going to be part of our expense structure as we think about moving forward. The other factor that's causing the remaining 100 bps or so of supply chain deleverage were occupancy deleverage, the decrease in AUR, changes in product mix and an increase in receipts processed versus sales we had during the quarter as we rebuilt our inventories back to appropriate levels. So, first, the occupancy deleverages. We opened a couple of facilities that aren't yet fully utilized. So, that's a piece that we would expect this to get better over time as we move toward full utilization. One was for processing and one was for -- more for storage. But longer term, as you would expect, we're -- periodically, we do bring in other new facilities online. So, you kind of go through a cycle deleverage that may hit kind of capacity. And then eventually, if they're efficient as we expect them to be, they would actually help leverage. Of the other components, the one that from a go-forward standpoint, think about the most is the decrease in AUR. But as we've said, it's not necessarily all bad news. While a smaller AUR does translate to more units and higher supply chain costs, one of the drivers of the decrease is our focus on delivering better value to our customers, which of course, should help drive sales and lead to fewer markdowns. Now, as you would expect, we are looking at initiatives that we can pursue within our supply chain to try and offset some of these headwinds. But, some of these initiatives, especially as it relates to driving significant productivity, efficiency increases, they're going to have some lead time. We're going to finalize our financial plan for 2021, as I said earlier, over the next couple of months. But we've still got a lot of work to do. Having said that, we are expecting significant deleverage headwinds on supply chain compared to our 2019 expense structure, as I've shared a little earlier. So, that's the supply chain piece of product sourcing cost. In addition to that 280 basis points, we had 80 basis points of deleverage from lost sales leverage on our fixed merchandising organization costs and from Burlington 2.0 investments, we continue to make -- to improve our merchandising capabilities that we think are going to be well worth it when we get to the other side of the pandemic. So, typically, we'd look to offset incremental investments in the year that we're making them with efficiency savings, but we really didn't push that this year. We had so much going on with COVID that we wanted to be sure we're spending adequately in some of the places like store payroll, where we may have pushed for efficiency in a different year.

[Operator:]

Thank you. And our last question comes from Kimberly Greenberger of Morgan Stanley.

[Kimberly Greenberger:]

Great. Thank you. And thank you so much for all the detail today. It's been extremely helpful. Michael, I wanted to just reflect back on the Burlington 2.0 strategy that you laid out roundly a year ago and particularly focused on the inventory journey, because this year has obviously brought an unprecedented opportunity, let's say, to maybe accelerate what you had thought might be a three or four, or I'm not sure, maybe even a five-year journey toward ever more efficient levels of inventory in store with faster turns. COVID perhaps accelerated the journey. And I'm wondering if you can reflect on that and if you can share with us the way you're thinking about the impact of 2020 on that inventory journey. And do you think in some ways that it's accelerated your learnings; your insight and it will allow you to get to those leaner in-store inventories with faster turns maybe a year or two in advance of those original targets? Thank so much.

[Michael O’Sullivan:]

Good morning, Kimberly, nice to hear from you. You're right. Actually, I joined Burlington just over a year ago. So, I just celebrated my one-year anniversary. And maybe I should start out by saying it's been a heck of a year. But it's -- joking aside, let me sort of address the progress that we've made over the past 12 months versus what my expectations might have been back then. The first thing I'd say is that I'm very pleased. The thing I'm most pleased about is that we have -- at Burlington, I feel like we have a very clear direction. We have a what I'm going to call a transformational strategy. It's a strategy that's well understood and has a huge amount of support and traction within the Company. So, I feel like we know where we're going. Secondly, and this kind of gets to your question, despite everything that's happened this year and the challenges we faced, I think, we've been able to make pretty significant progress against this strategy, and some of that progress has come from -- has come in the form of real changes that we've made to the business, greater focus on value; faster turns; more liquidity; more aggressive chase; greater urgency; and getting receipts to the sales floor. Well, all of those things are real, and in some ways, they've been accelerated by the pandemic and by the issues and challenges we've faced. We've also been able to make progress in some other areas like some of the initiatives that I talked about earlier that are at a sort of earlier stage of development and implementation. Those are important. Those are going to be important in the years ahead. But, if I narrow it down to your specific question on inventory, I mentioned -- in response to an earlier question, I mentioned that as we think about margin opportunity with Burlington 2.0, we really think about that margin opportunity in 3 buckets, lower markdowns; higher sales; and lower occupancy. And if you were just to, at a very high level, say where is the margin improvement, quantify the margin improvement across those three, I would say, it's a third, a third, a third. So I think a third of the improvement can come from greater sales productivity, a third from lower occupancy and a third from lower markdowns. I feel like we've made a lot of progress on that lower markdowns piece this year, but I want to temper my answer a little bit. There have been some very unusual circumstances that have helped us get there this year. We've ended up turning inventories faster than we ever would have planned. So, I think we've made progress this year, but we really need a year or two to consolidate that progress and to make sure that the gains that we've made are captured over the longer term. But, that's how I would characterize that. I feel like we've made much more progress on that inventory piece than I would have expected in a relatively short period of time. But, it's too early to declare victory. It's too early to take back to the banks just yet. We need a bit of time to really consolidate around that.

[Operator:]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Michael O'Sullivan for any closing remarks.

[Michael O’Sullivan:]

Thank you, everyone, for joining us on the call today. We appreciate your questions. We look forward to talking to you again in early March to discuss our fourth quarter results. Meanwhile, I know that it's going to feel different and maybe a little subdued this year, but I would like to wish you and your families a very happy Thanksgiving. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.