Burlington Stores Stock looks like a bargain

The name is not the only thing that has changed. Burlington (ticker: BURL) has grown from a single point of sale in its hometown to a $ 11.3 billion company with $ 6.6 billion in annual revenue and 675 outlets in 45 states and Puerto Rico. It is the third largest non-price retailer in the United States, behind
TJX

(TJX) and
Ross Stores

(ROST). Since the company re-entered the public markets in 2013, its shares have grown at an annualized rate of 51%, which is well above the 8.3% annual increase in the Russell 2000 Index and up 12.5% ​​of the S & P 500.

Even if low prices remain the main theme, "it's not your grandfather's Burlington," D.A. John Morris, an analyst at Davidson, tells Barron.

Known for its countless displays of clothing, narrow aisles and cavernous outlets, Burlington is modernizing its stores to appeal to more budget-conscious consumers. It already occupies a rare bright spot in the retail trade that has been largely immune to
Amazon.com
of the
lower prices and benefits for designers and suppliers looking to offset the drop in department store sales. Because Burlington is the smallest of the three non-price leaders, it has the most growth potential and has recently expanded to several new product categories. Two weeks ago, she appointed Michael O'Sullivan, former chief operating officer at Ross Stores, as CEO, effective September, as CEO. (The company refused to make O'Sullivan available.)

After falling nearly 12% as a result of a shortfall in the fourth quarter ended Jan. 31, Burlington shares recovered to $ 170. They are now up about 5% this year, well below the 16.4% gain in the market and well below the 2019 double-digit increases of TJX and Ross Stores.

Equities are trading at about 21 times the 2021 fiscal profit estimates, lower than the five-year average of 24. If stocks were to return to this multiple price / earnings and reach consensus earnings estimates of $ 7.98 per share in the next financial year, the shares could trade above US $ 190, an increase of 11%.

The fourth quarter deficit (same store sales grew 1.3%, which is below expectations) is similar to a temporary decline. Chad Bruso, associate portfolio manager at Neuberger Berman, focuses on growth stocks. Burlington does not have enough (rather than too much) of products when consumers go to the stores – and has suffered a fashion failure in women's clothing. The quarterly profit of $ 2.83 per share, up from $ 2.17 last year, still exceeds expectations.

Bruso is ready to give Burlington the benefit of the doubt: "These guys are going to solve this problem; they usually do it. As a result, all eyes will be on the results of the first quarter of Burlington, expected in a few weeks. The company is expected to earn $ 1.26 per share, unchanged from last year. Same store sales are expected to increase by 0.8%. If Burlington could reach these numbers, the report could be a catalyst for equities to soar.

The discounter will have a number of out-of-price opportunities. "This is the focus of the retail business, the farthest from Amazon.com," says Bruso. "The consumer is looking for this valuable product, it is those who deliver it. The Holy Grail of the retail trade brings people to your stores, and [with few exceptions] off price [outlets] are the only ones to have it again. As Ross Stores notes on its website, customers want to "scavenger hunt" for bargains.

Burlington and its peers also benefit because they can buy leftovers at even lower prices. High-end brands and designers are increasingly willing to develop relationships with Burlington and its peers as the distribution power of department stores declines. While some designers have offset this pressure with direct-to-consumer companies, discounters hide brand names on online offers and therefore the extent of their discounts.

"Excluding the price, the designer-seller has an invisibility cloak to clear these products," he says, adding that discounts that could tarnish the brand can easily be found online.

As it is smaller, Burlington has more new areas to explore than TJX or Ross. Burlington has recently begun to focus on beauty products and household items for the first time. Both categories have succeeded for others.

By targeting lower-income buyers, Burlington has developed smaller, more user-friendly store formats. The new and refurbished sites have sales comparable to the average of the company. Stores are often located in higher-income areas, with brighter formats, less huge in terms of the number of products, and include high-end brands such as Michael Kors and Calvin Klein. "These are not the best lines at Neiman Marcus," but well-known names, says an analyst.

"Everything in new stores should improve productivity," says Cowen & Co.'s John Kernan, "and the efficiency of the entire store (…) will continue to improve with the new standard."

These types of initiatives should help maintain or accelerate revenue and profit growth. Analysts estimate that Burlington's profits will grow 8.2 percent in fiscal year 2020 and 14.4 percent in 2021, while revenues will grow by 8.9 percent and 8.4 percent, respectively. This compares favorably with TJX and Ross, which are expected to record single digit earnings per share growth this year and next, and sales growth of just over 6%.

Burlington also has room for improvement operating margins: at 9% they are below Ross and TJX at about 14% and 11% respectively. Improving margins – one thing O'Sullivan has proven adept – could be another catalyst for stocks.

Wall Street applauded the hiring of Mr. O'Sullivan, who will succeed Thomas Kingsbury, long-time CEO who is retiring. Bruso, who also owns Ross shares, said he watched O'Sullivan "play an important role in helping this company improve its operations, accelerate its growth and dramatically increase its margins and profitability. . It's perfect for Burlington, where we see a lot of similar opportunities.

Certainly, O'Sullivan has some work to do, especially after the absence of the last quarter. Burlington faces tough comparisons, ambitious guidelines and constant changes in fashion. But if he can meet these challenges, the action could be the kind of market that my grandfather would like to adopt.

Write to Teresa Rivas at [email protected]