Burlington Stores, Inc.
Q4 2019 Earnings Call Transcript

Published: 5 Mar 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Stores Incorporated Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to [indiscernible] conference call Mr. David Glick, Senior Vice President, Treasurer, Investor Relations. You may begin.

[David Glick:]

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2019 fourth quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer and John Crimmins, Chief Financial Officer.Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our express permission. A replay of the call will be available until March 12, 2020. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores.Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company’s 10-K for fiscal 2018 and in other filings with the SEC, all of which are expressly incorporated herein by reference.Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release.Now, here’s Michael.

[Michael O’Sullivan:]

Thank you, David. Good morning, everyone. And thank you for joining us on this morning’s fourth quarter earnings call. We would like to structure our discussion this morning as follows

[John Crimmins:]

Thanks Michael and good morning, everyone. Let me start with a review of the income statement. For the fourth quarter, total sales increased 10.5% and comparable store sales increased 3.9% new and non-comp stores contributed an incremental $151 million in sales for the fourth quarter. Our Q4 comp store sales performance was driven primarily by an increase in units per transactions with AUR and conversion up slightly while traffic was down slightly.The gross margin rate was 42.1%, a 20 basis point increase versus last year’s rate. Merchandize margins increased 40 basis points which was partially offset by an increase in freight cost. The merchandize margin increase was driven primarily by an increase in markup as well as a slight benefit from lower shortage. Products sourcing cost which include the cost of processing goods through our supply chain and buying cost were flat as a percent of net sales versus last year’s rate.Adjusted SG&A excluding management transition cost was 22.5% 20 basis points lower than last year as a percentage of sales. This improvement was driven largely by strong sales growth resulting in leverage on occupancy and marketing expense as well as corporate cost. Adjusted EBIT excluding management transition cost increased 14% or $35 million to $297 million. This translated to a strong basis 40 basis point increase in rate for the quarter.Depreciation and amortization excluding favorable lease cost increased $4 million to $55 million. Net interest expense decreased by $2 million versus last year’s fourth quarter to $11 million. The adjusted effective tax rate was 23.8% for the fourth quarter versus last year’s fourth quarter adjusted effective tax rate of 22.2% combined this resulted in adjusted net income excluding management transition cost of $218 million, a 13% increase versus last year.We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased approximately 376,000 shares stock for $83 million. We have $399 million remaining on our share repurchase authorization. All of this resulted in diluted earnings per share of $3.08 versus $2.70 last year. Adjusted diluted earnings per share were $3.25 versus $2.83 last year which excludes $0.04 of management transition cost which was not reflected in our guidance. The $3.25 per share result represented an $0.08 beat versus the high end of our original guidance. With $0.07 of that beat, a true operating beat and $0.01 of the upside attributable to the tax benefit related to share based compensation.Turning to our balance sheet, at quarter end we had $403 million. No borrowings on ABL, and had unused credit availability of approximately $502 million. We ended the period with total debt of approximately $1.0 billion and a debt to adjusted EBITDA leverage ratio of 1.1 times. On February 26, 2020 we completed the repricing of our senior secured term loan facility which lowered our applicable interest rate margin by 25 basis points from LIBOR plus 200 to LIBOR plus 175 which is expected to result an approximately $2.4 million in annualized interest savings.Merchandize inventories were $777 million versus $954 million last year. This decrease was due primarily to a 15% decrease in comp store inventory levels, as well as a decrease in pack and hold inventory which was 26% of total inventory at the end of the fiscal 2019 compared to 30% at the end of fiscal 2018. Comp store inventory turnover improved 13% for the fourth quarter. Moreover, we were pleased with our inventory content and freshness. Inventory aged 91 days and older at the end of the fourth quarter was down versus the prior year at record low levels.During the quarter, we added one net new store including one relocation and two store closures ending the period with 727 stores. In fiscal 2020, we expect to open 80 new stores and close or relocate 26 stores. This translates to 54 net new stores planned to be open in fiscal 2020. This projected store count factors in the closure of our e-commerce business which has historically been counted as one of our stores. Our average new store in fiscal 2020 will be 39,700 square feet. The first time our average new store will be last than 40,000 square feet.In terms of our fiscal 2019 full year performance. Total sales rose 9.3% and included a comparable store sales increase of 2.7% following a 3.2% comp store sales gain in fiscal 2018. Gross margin was 41.8% flat as a percentage of sales versus fiscal 2018 which included the offset of a 20 basis point increase in freight. Merchandize margin for fiscal 2019 was up 20 basis points versus the prior year. Product sourcing costs were flat as a percentage of sales versus last year.As a percentage of net sales adjusted SG&A improved 20 basis points to 25.5%. Expense leverage was driven mainly by strong sales growth which resulted in expense leverage on occupancy, marketing and corporate expenses. Adjusted EBIT increased by 12% or $73 million to $674 million representing a 20 basis point increase in rate for fiscal 2019. Depreciation and amortization excluding favorable lease cost increased by $19 million to $210 million. Net interest expense declined $6 million to $49 million.The adjusted effective tax rate was 20.1% as compared to last year’s adjusted effective tax rate of 18.8%. Combined this resulted in net income of $465 million, an increase of 12% versus last year and adjusted net income of $499 million exclusive of management transition cost versus an adjusted net income of $443 million last year. Diluted earnings per share were $6.91 versus $6.04 last year. Diluted adjusted net earnings per share were $7.41 versus $6.44 last year. This excludes a $0.06 impact of management transition cost incurred during this third and fourth quarters of fiscal 2019.Our fully diluted shares outstanding were 67.3 million shares versus 68.7 million last year. Cash flow provided by operations increased $252 million to $892 million for fiscal 2019 driven by higher net income and changes in working capital. Net capital expenditures were $269 million for fiscal 2019.Now I will turn to our outlook. As a reminder, as Michael discussed in his prepared remarks going forward, we will be rounding comp stores and total sales percentage changes for fiscal 2020. For the 2020 fiscal year, we expect total sales growth in the range of 8% to 9% as compared to fiscal 2019 on top of last year’s total sales increase of approximately 9%. This includes an approximately 0.5% decrease related to the closure of our e-commerce business as Michael discussed earlier in the call.Comp store sales to increase in the range of 1% to 2% for fiscal 2020 on top of last year’s approximately 3% increase. Depreciation and amortization exclusive of favorable lease amortization to be approximately $235 million. Adjusted EBIT margin rate to be approximately flat versus last year. Net interest expense to approximate $45 million and effective tax rate of approximately 21%. Capital expenditures net of landlord allowances expected to be approximately $400 million. This results in adjusted earnings per share guidance in the range of $7.97 to $8.12 and expected increase of 8% to 10%. This outlook excludes an expected $0.16 negative impact from management transition cost.For the first quarter of 2020, we expect total sales growth in the range of 8% to 9% on top of last year’s total sales increase of approximately 7%. Comp store sales assumed to increase between 1% and 2% on top of last year’s approximately 0% comp store sales result. Effective tax rate of approximately 15% and adjusted earnings per share in the range of $1.29 to $1.34, this compares to a $1.26 per share last year. This outlook excludes an expected $0.04 negative impact from management transition cost.With that I’ll turn it over to Michael for closing remarks.

[Michael O’Sullivan:]

Thank you, John. In summary, we’re pleased with our solid results for Q4 and fiscal 2019. These results demonstrate that we’re in a strong position as a business and that we have a great platform for growth. But despite these results, we believe that we still have a long way to go to achieve our full potential as a business. We have an amazing team here at Burlington and it has been remarkable to watch this team over the last few months develop and start to mobilize behind our full potential strategy. I’m very excited about what we are going to achieve together over the next several years.Before I turn the call over to the operator for your questions. I would like to make a few comments about the Coronavirus. The situation is evolving very rapidly and there are a lot of unknowns. Our guidance for the first quarter does not and cannot incorporate the full set of risks that we along with other retailers maybe exposed to in the coming weeks.That said we’re taking steps to prepare as best we can for a range of possible outcomes. Our number one priority in these preparations is to ensure the safety of our associates and our customers. Secondarily, we will manage our business so it can flexibly respond to whatever situation we’re faced with.With that, I would like to turn the call back to the operator to open it up for questions. Operator?

[Operator:]

[Operator Instructions] our first question comes from Matthew Boss with JP Morgan.

[Matthew Boss:]

Michael, you described in detail how the approach you’re taking will set the company up to better chase this sales trend going forward. Maybe could you elaborate on what happens if the external environment were to weaken and sales trends were to flow?

[Michael O’Sullivan:]

Good morning, Matt and thank you for question. Yes, you’re right in my remarks I described how the actions we’re taking, controlling liquidity, running with leaner inventories, planning comp growth slightly more conservatively and carefully managing expenses. I described how these actions could put us in a better position to flex up and chase the sales trend, if the trend is there. By taking this approach, we can more effectively execute the off-price model and that should help us to drive our sales momentum and profitability overtime. But the advantage of the off-price model is not just in chasing the upside; the off-price model is also advantaged versus other retail formats when it comes to absorbing the downside.There will be times when the external sales trend will weaken. There could be macroeconomic, political, weather, numerous other external issues and could cause consumer confidence, consumer spending to soften. When this happens, it affects all retailers. The difference with off-price is if we can carefully control our liquidity and tightly manage our inventory and expenses and plan our comp sales, somewhat conservatively then we’ll be in a better position to absorb and recover from any downturn in sales. Maybe the best way to sum this up, I think is to say that, the off-price model when it’s managed provides the flexibility to chase the sales trend up or to absorb and recover from a decline in the sales trend. It’s able to do that because it doesn’t suffer from the sales long lead times and rigidities that other retail formats suffer from.

[Matthew Boss:]

That’s helpful. So, John and then can you help us walk through with the components of your 2020 guide? Maybe specifically if you could help breakdown the growth between gross margin expansion, SG&A leverage and share repurchases and then just any help with the margin rate puts and takes in your first quarter guidance. I think would be really helpful.

[John Crimmins:]

Sure, Matt. Thanks for your question. So, let me start with our full year guidance. So, as you know, we’re taking a little bit more conservative approach in terms of planning the top line with our comp sales at 1% to 2%. Total sales at 8% to 9% which includes our 54 net new stores and the wind down of our e-com business which is going to hurt us by about 25%. We planned our inventory and expenses to be consistent with these sales assumptions as Michael said in our prepared remarks, we believe this more conservative approach is going to give us a chance to chase more opportunistic buys. So, if the sales trend is there, we are going to chase them. We hope that would drive incremental sales which in turn would drive more favorable leverage from a mark down and from an expense standpoint. But back to the assumptions in our guidance, from a gross margin perspective, we expect to get some merch margin expansion as we would expect our inventory strategy to drive lower mark down.In addition, we do expect a little bit of improved leverage on freight. Partially driven by the elimination of our e-com shipping cost. As Michael discussed earlier, we’re making investments in our business some of which will be in our merchandizing capability and in our supply chain which we include in our product sourcing cost. So, we do expect some deleverage and product sourcing cost this year as we spend in advance with the expected benefits.We do expect a little bit of leverage on SG&A at two [ph] comp, but we’ll have some deleverage this year in other income, while we’re lapping significant insurance recoveries in 2019 and in depreciation as we’ve accelerated our CapEx both this year and last year primarily driven by investments in stores and in supply chain to support our planned growth. All this nets out to an EBIT margin rate it will be approximately flat to last year.So, for a quick recap, gross margin less product sourcing cost which includes some investment, nets to some slight leverage, SG&A provides slightly more leverage. The total of the two are offset by deleveraging other income and depreciation resulting in the flat EBIT margin rate for the year. Now our guidance also assumes share repurchases similar to the amount we repurchased in FY 2019 which was $300 million and finally, our tax rate includes the same EPS benefit from the impact of share-based comp that we saw in 2019 which is about $0.46.As we’ve talked about previously, we can’t really control this and it’s a very difficult to forecast or plan the share-based comp impact on a tax rate, so what we’ll do is update you on this factor each quarter as we’ve done this year. As for our first quarter guidance both our EPS growth rate of 2% to 6% and our EBIT margin rate for Q1 will be less than our full year expectations as we delever and product sourcing cost and SG&A during the quarter. As we begin some of the incremental investments, we’ve mentioned in support of our full potential strategy during what the first quarter which is our smallest sales quarter of the year.And finally, just a reminder as Michael mentioned earlier our guidance does not include any adjustment for the risk we and other retailers face as the Coronavirus situation continues to evolve.

[Matthew Boss:]

That’s great color. Best of luck.

[Operator:]

Our next question comes from Ike Boruchow with Wells Fargo.

[Ike Boruchow:]

Michael, first question in the prepared remarks. You mentioned the Coronavirus. I’m just curious it’s coming up a lot on these conference calls. Can you provide any additional color on the possible impacts of this may have on the business? I guess I’m just wondering if you think the bigger impact might be on supply or on demand of the business.

[Michael O’Sullivan:]

Good morning, Ike. Thank you for your question. I’d say the honest answer is that we really don’t know what impact the Coronavirus might have on the retail industry or on our business. Situation is evolving very quickly and we’re walking it on fold [ph] along with everyone else. We’re fortunate though in the sense that we don’t have any overseas operations and we directly import very little of the merchandize that we sow [ph]. And for now, we see no impact at all. But of course, there is a risk that the situation will worsen and that could affect either supply or demand.As we thought about this, there are range of possibilities, a wide range of possibilities on what could happen over the next few weeks and months. So, like any responsible company we’re preparing as best can for the multiple different scenarios. In those preparations, I would say our number one priority by far is the safety and well-being of our employees and our customers. We will be guided by whatever the relevant agencies and relevant authorities tell us. But we’ll take whatever steps necessary to protect employees and customers.Secondarily, as far as the business is concerned, we’ll make sure that we’re as flexible as possible so we can navigate the business through whatever issues that we need to, that means tightly controlling liquidity, inventory and expenses. As I said, a few moments the off-price model is more resilient and more flexible than other retail models. That does not mean that we’re not exposed to external risks and shocks. But it does mean that we should be able to more rapidly react to and recover from whatever situation we’ve faced.

[Ike Boruchow:]

Got it and then this is second question, if I may. On the e-commerce, the shutdown is not a big surprise but I guess could you provide more color on what drove this decision of yours and will there be any kind of savings from this shutdown, was there any type of crossover traffic between e-commerce and stores, was just wondering if there’s a little bit more color you could share? Thanks.

[Michael O’Sullivan:]

Good question let me address that. There were really three factors that went into the decision to shut down, our e-commerce operations. Firstly, we’re a moderate off-price retailer. I would underline the word moderate in that sentence; our average unit retail is about $12, that’s the average price per unit in our stores. E-commerce when you fully account for the cost of merchandising, processing, shipping, accepting returns. It’s very difficult, impossible to make at those price points in the businesses that we compete in.There are also very significant constraints on recreating the off-price Treasure Hunt in an online environment, so that’s a reason number one. Secondly, this isn’t just a conceptual argument, the data shows that over the last several as e-commerce in general has grown bricks and mortar moderate off-price retail has continued to power ahead and to gain share. You can see that just in our own results. Our top line growth in the last three years has averaged about 8% per year driven by our bricks and mortar stores. We’re clearly taking market share. Off course, we expect we anticipate e-commerce is going to continue to grow in many sectors of retail, but in the moderate off-price business. We believe growth is going to be driven by physical stores.The third point to make is that we at Burlington we’re the smallest of the three major off-price retailers and we have significant potential for further growth in our bricks and mortar network. We have about 720 stores today. Our off-price peers each have double or triple at, so our focus is to drive increased sales through our existing bricks and mortar stores and through our new store opening program and our store relocation program.On the other parts of your question. Given that it was only not 0.5% of sales the impact of the shutdown of e-commerce on our overall sales and earnings is not material and as for the cross-over traffic between e-commerce and stores. We think we have other more cost-effective ways to engage with customers digitally and thereby driver traffic to our stores.

[Ike Boruchow:]

Thanks everyone. Good luck.

[Operator:]

Your next question comes from John Kernan with Cowen.

[John Kernan:]

Your potential strategy I’m just wondering how big of a change this strategy is for the company in total. How difficult you think it will be to get the organization moving in this direction?

[Michael O’Sullivan:]

Thank you, John. It’s good to hear from you. It’s a very good question. I think I would answer that by saying, as you look at Burlington over the 10 years, certainly over the last five years. The company has developed and evolved as an off-price retailer. All the major elements that I described in my prepared remarks liquidity, chase, inventory turns, opportunistic buys, merchant capabilities these have all been part of the language here for a long time. They are all critical components of the off-price model.All we’re really doing now is committing the business to much more aggressively executing this model. In other words, our full potential strategy is a more aggressive, enhanced, stepped up version of the same strategy that the company has been pursuing for many years. Now it’s true that we are making some significant changes. But those changes feel very natural. In fact I would say that there’s a lot of excitement and energy in the organization behind this full potential strategy.One of our senior executives here at Burlington is a football fan, I should be clear, an American football fan, of course. Anyway his description is that, he says that over the last five years we’ve been running the same plays. These plays have worked well for us and have driven some very nice results. But now, we’re making some improvements to these plays and we also have some very interesting new plays. So as a team we’re feeling very good about the opportunity here to raise our game. Look I’m on shaky ground when it comes to American sports metaphors, but I think that’s a good description of how the organization feels right now about our full potential strategy. There’s a lot of energy and excitement here about what we can achieve.

[John Kernan:]

Got it. Looking forward to seeing some of these new plays. Just as a follow-up to that, have you tried to quantify the financial impact of the full off-price potential strategy? Is it possible to grow the sales productivity towards $400 per square foot level that yours peer operate and move the operating margin posted [ph] at 13%?

[Michael O’Sullivan:]

That’s a good - direct question. And actually, I’d like to ask me that question again in a couple of years because right now I don’t know enough to offer a meaningful quantification of our full potential strategy. Let me offer up a couple of things that we do know, things that I’m confident off. Firstly, we know that there are a lot of improvements that we can make and how well we deliver value to our customers and how effectively we execute the off-price model. Of course, it will take time for all of the initiatives that I described to take hold, but we’re excited about our strategy and we’re confident that we’ll have a major impact on our performance.Secondly, we also know that there’s a very significant sales productivity and profitability gap between us and our off-price peers. Now for sure, there are some structural differences between us and those companies. But still this data provides a useful reference point. It gives us confidence that we improve our execution of the off-price then we should be able to drive significant improvements in our financial results.The final point I’d make, is that progress never happens in a straight line. We’re confident in our strategy and we know what we need to do. But things will go wrong, we will make mistakes and there will be external factors that will temporarily get in the way. As we move forward with our full potential strategy, we need to overcome and navigate those issues. But this is the right direction of travel and it should overtime drive stronger financial performance.

[John Kernan:]

Got it, thank you.

[Operator:]

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

[Lorraine Hutchinson:]

Michael, I was hoping to get your assessment of the fleet and then as you think through the long-term, what’s your potential for store counts over the years?

[Michael O’Sullivan:]

Well Lorraine thank you for your question. Our new store opening program has been very successful. We’ve increased significantly over the last several years. As John mentioned in his prepared remarks in 2019, we opened 76 new stores, we closed 24 stores for a net addition of 52 stores. Now as you’d expect the stores that we’re closing are older and less productive. So, the program represented a significant upgrade as well expansion and as John also mentioned, I won’t go back over the number but as John also mentioned in 2020, we’ll be following a very similar phase of activity.So, we’re excited about the potential to add new stores. We think there’s a plenty of runway there. We’re also going to be experimenting with our prototype, looking opportunities to make that more flexible. As John mentioned we’ve been on a run now for the last several years of making the prototype a bit smaller. We’ll continue to push the envelope there. So overall, we think there’s plenty of additional opportunities, we’ll expand the store base.

[Lorraine Hutchinson:]

Thank you.

[Operator:]

Our next question comes from Kimberly Greenberger with Morgan Stanley.

[Kimberly Greenberger:]

Michael, thank you for sharing your full potential strategy. This has been a very helpful call. I wanted to just ask about the strategy and I appreciate the glide pass that you offered with some modest benefits, this year and more progress next year and far greater impact by 2022. I’m wondering, if you can help us understand which of the five or maybe two or three of the five you would start to see modest benefit from and I would imagine that particularly item number two investing in the merchandizing team. I would imagine that those will be some expenses that will perhaps ramp earlier maybe then some of the benefits I think you alluded that earlier. So, what would be - which elements of this strategy would you expect us to sitting here a year from now will you expect to be able to say, we made progress on X and Y while we invested on A and B, that would be helpful.

[Michael O’Sullivan:]

Yes, well good morning, Kimberly. That’s a good question. As an executive team, we’ve actually spent quite a bit of time of working through the timing and pacing of the strategy. We want to make sure that we’re biting things off in digestible chunks and that we can make progress on the things that are the closest in, that are the easiest to sort of start with. And as we work through the various initiatives, I would say that fell into three segments.Number one, initiatives that we’re moving forward with right away. Number two, initiatives that we need to test or to pilot or that will take a little bit longer to get underway and number three, initiatives that, frankly we need to study a bit more they’re not for implementation in 2020, but maybe in 2021. Now the things that where you’re getting at, are in that first bucket and they’ll be obvious things.The strongest sales pace. We’re already in a strongest sales chase [ph] right now. Planning the business more conservatively, controlling liquidity, much more tightly than we have in the past. So that’s something we’re doing out of the blocks. Leaner inventories making sure that our inventories - the content of our inventory is as high quality as possible and that we’re turning as fast as possible. Again, out of the blocks. That’s a key initiative, we’re moving forward on. Also, within that first bucket, we’re making investments in the merchant team. So, we’re moving forward on that. But I think the benefits of that will come later because obviously it takes time to build headcount, to build talent and to actually have an impact on the business. Now the other things, the things that fall into the other bucket.The initiatives we need to test or to pilot and the initiatives we need to study for later implementation. I won’t get into for competitive reasons, but they’re all designed to help us more effectively and fully execute your price role, they’re all under that umbrella. Includes initiatives in merchandizing planning and supply chains, stores, lost prevention, real estate, marketing and other areas. But overall I feel like, as an executive team we feel good about the amount of activity that we have going on in 2020 and as I said in my remarks, we think there will be some early beneficial impacts this year and that will cascade overtime in the way that you mentioned in your question.

[Kimberly Greenberger:]

Great, thank you so much.

[Operator:]

Our next question comes from Michael Binetti with Credit Suisse.

[Michael Binetti:]

Thanks for all the detail; this has been very helpful today. I want to ask another way, the 15% comp inventory reductions is one of the big standouts. Michael, I think John mentioned that there is some best and to start to flow in, in the first quarter. Did you also mentioned that the inventory initiatives are area where I thought you said you’d see results a little more quickly versus some of the other initiatives you mentioned that will pay off more overtime, how does that factor into the first quarter guidance and can you help us understand how much some of those investments you did mention impact the guidance for the first quarter. And so, you can maybe think a little bit more about the underlying trends in the business as you start the new strategy?

[Michael O’Sullivan:]

Sure. Let me sort of answer your question more broadly. The faster inventory turns in our business should drive lower mark downs and actually should drive lower operating expense. So, we’ve included some portion of that in Q1 and then more as we get through the year. The reason why we say we can turn faster is, we’ve been carrying a lot of inventory overtime and compared with our peers, we turn more slowly, we carry more inventory and that’s why we’re very confident that we can turn this business faster than we have.We also believe that, as we reduce inventories by doing that, we’ll actually increase the mix of fresh receipts in the rack and that will help to drive sales especially as we chase the business that’s trended there. So, John I don’t know, if you’d add anything else to that.

[John Crimmins:]

So, I think, the only thing I’d say is, if you look at our full year guidance. What we tried to do this year was ensure that the incremental investments that we’re making in the business over the course of the year would be mostly offset by expense savings that we’ve also built into the plan. Michael talked in his opening remarks about our planning process being a little more rigorous this year and we had some difficult discussions and all of our expense managers, manage the - our expense targets for the year, which has allowed us to make some of these incremental investments over the course of the year. We have a little bit of a bigger impact in the first quarter partly because it’s our smallest sales quarter and just the timing of how the expenses kick in.

[Michael Binetti:]

Got you. And if I could follow that, you mentioned that I think traffic was slightly down in the quarter. I know there’s a lot of new initiatives coming up obviously [indiscernible] comp inventory, you started to pull back and there’s a lot going on in stores. But with the traffic down in fourth quarter generally traffic across off-price has been positive for several years. Michael, how do you frame the traffic you saw in the quarter versus industry trend and how you think about the comps in the business going forward? And again, we understand there’s a lot going on in stores in fourth quarter.

[Michael O’Sullivan:]

No, I think it’s a fair question. It’s actually - since I’ve been at Burlington one of the things that I’ve realized is our business for lots of legacy reasons our business the traffic in our business tends to be more affected by the weather than I would say our peers. And we haven’t used that as an excuse actually we’re very happy with our comp performance for Q4 and what it tells you because it was very warm winter, traffic into our stores was lighter. But the traffic that came into our stores liked what they saw and bought more of it and that’s what [indiscernible] drove back half, that’s how I interpret those numbers.

[Michael Binetti:]

Thank you very much for all the help.

[Operator:]

Our next question comes from John Morris with Davidson.

[John Morris:]

Questions on the - perhaps a little bit more about where you see the opportunity with the merchant team? And it sounds like you said that there is potential to increase the team wondering if you can share with us, to what degree I guess in terms of ads has that already started and particularly within the merchandizing where is the opportunity? Thanks.

[Michael O’Sullivan:]

Thank you, John. As I described in my prepared remarks. The core premise of our full potential strategy is that the off-price customer cares above all else, about great merchandize value, so that’s where we need to invest. The key enabler of delivering great merchandize value to our customers is the strength of our merchandizing capabilities. Those are critical to building vendor relationships, sourcing great merchandize and to developing new and existing businesses. We’re lucky; we have a terrific merchant and planning team today. But over the next few years we’re going to be investing heavily to further strengthen that group and the plan includes several important elements. Number one, significant investment in growing our own, this means more training, coaching and professional development for our merchants and planners so they can become even more effective. They can develop their skills and capabilities and they can build their careers at Burlington.Secondly, a major increase in merchant and planning headcount at all levels of experience and seniority. So, we can add more coverage and debt across categories and vendors and that’s going to include growth in all of our major buying offices, New Jersey, New York and Los Angeles. Certainly, investments and improvements in our merchandizing systems, IT tools and reports. The merchandizing teams have done a very good job over the last several years upgrading and updating our systems.We believe we can further enhance those systems to enable our full potential strategy and actually to drive competitive advantage and then fourthly, there’s a whole bunch of other programs that we’re working onto leverage the capabilities that we have and to provide greater operational support if you’d like to our merchant group.Now I would say that we’ve already - significantly ramped up activity across all four of those buckets. It’s already started and that activity is going to continue for the next few years. In my earlier comments, all I really meant was it will take time for those investments to significant payback as we sort of expand existing businesses and develop new businesses, but we’re certainly well underway with increasing the investment.

[David Glick:]

Operator, we have time for one more question.

[Operator:]

Last question comes from Roxanne Meyer with MKM Partners.

[Roxanne Meyer:]

I have a question regarding the change in inventory strategy that you have and how you think about pack and hold is part of that strategy going forward and second I’m just wondering, if you can comment on the performance of new store performance over the last few year relative to prior clauses. Thanks a lot.

[Michael O’Sullivan:]

Sure, so Roxanne. On the pack and hold question, we mentioned in today’s press release that pack and hold inventory had declined from 30% of total inventory a year ago to 26% at the end of Q4. But I would caution you not to read too much into that. Last year’s number was somewhat inflated because we had bought merchandize ahead of the tariff deadlines that we had back then. This year’s number of 26% is more in line with historical levels. I would say two other things, one is, it’s important to understand the pack and hold inventory is, it’s comprised of opportunistic buys, so by definition the level can fluctuate based on the opportunities of the merchant sees, so it’s hard to predict quarter-to-quarter.Secondly, I would also say that, we like pack and hold inventory and I think it’s possible to overtime we’re going to want to grow our pack and hold strategically, that’s more of a longer-term burn. But I think I just wanted to get across there that we believe pack and hold as an important way of bringing in great merchandize value to our inventory.

[John Crimmins:]

So, I’ll take the new store’s performance question. So, we continue to be very pleased with the performance for our new stores from the sales perspective and from a profitability perspective. They’ve continued to perform in line with or better than our underwriting models. As we said previously, our new stores have been and are going to continue to be a driver of our comp store sales growth and operating margin expansion margin. So, let me just kind of walk you through a few nuggets, if you will.It starts with we have, some pretty rigorous financial hurdles for all of our new stores. First of all, they’re underwritten to be EBIT accretive in their second year and they’re underwritten to be accretive to the company’s ROIC, return on investment capital obviously and we’re pleased that on average our recent store cohorts have been outperforming their underwriting models. Second, the newer cohorts the stores that have opened 2015 through 2017 that are passed to their year two which is our underwriting base of year have been nicely outcomping [ph] the chain in 2019.We also had EBIT margin increases that [indiscernible] exceeded the EBIT increase for the chain. So, what we think we’re seeing there’s an indication of a longer maturity curve than we used to see in our newest stores going back several years and that’s particularly encouraging since we underwrite to them to be accretive to company’s EBIT in year two.

[Roxanne Meyer:]

Terrific. Thanks for all the color.

[Michael O’Sullivan:]

Thanks for joining us on the call today. We appreciate your questions. We look forward to speaking with you again end of May to discuss our first quarter results. Thank you very much.

[Operator:]

Ladies and gentlemen, that’s conclude today’s presentation. You may now disconnect and have a wonderful day.