Thomas Kingsbury - President and CEO Marc Katz - EVP and CFO Robert LaPenta - VP, Treasurer.

Mathew Boss - JPMorgan Lorraine Hutchinson - Bank of America Merrill Lynch Kimberly Greenberger - Morgan Stanley Paul Lejuez - Citigroup Lauren Frasch - Wells Fargo John Morris - BMO Capital Markets John Kernan - Cowen and Company Dana Telsey - Telsey Advisory Group Pamela Quintiliano - SunTrust Robinson Humphrey.

Greetings, and welcome to the Burlington Stores Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bob LaPenta, Vice President and Treasurer for Burlington Stores. Mr. LaPenta, please go ahead..

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s third quarter fiscal year 2015 operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, our Chief Financial Officer.

Before I turn the call over to Tom, I’d like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available for seven days. We take no responsibility for inaccuracy that may appear in transcripts of this call by third parties.

Our remarks and the Q&A that follow 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 year 2014 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 Tom..

Thank you, Bob, and good morning, everyone. We are pleased that we’re able to continue our positive momentum from the first half of the year and deliver strong third quarter results. The quarter featured increased comparable store sales and a significant rise in adjusted net income per share.

Our performance continues to validate the strength and flexibility of our off-price operating model and the successful execution of our growth strategies by our teams. Let me share with you some highlights of the third quarter. We reported strong sales momentum with total sales rising 6.4%.

Comparable store sales rose 2.8% on top of a 5.2% increase in the same period last year. We believe the third quarter is a testament to the strength and diversity in our offering as we achieved the high end of our comp guidance, despite the headwind of unseasonably warm weather.

With the third quarter, we have reported 11 consecutive quarters of positive comp sales. In addition, we have reported comp sales increases in 20 of the last 23 quarters. Gross margin, net of product sourcing costs, expanded by 10 basis points and we leveraged our SG&A, exclusive of product sourcing costs, by 40 basis points.

Adjusted EBITDA grew $10 million or 14% from the third quarter last year. This led to adjusted net income per share of $0.25, a 56% increase from $0.16 per share last year. In addition, we are pleased to report the following accomplishments. The third quarter represented our fifth consecutive quarter with an increase in traffic.

Comparable store inventory decreased by 7% contributing to a 10% faster comparable store inventory turnover during the quarter. We repurchased 1.9 million shares of our common stock during the quarter for approximately $98 million. Overall customer satisfaction scores increased 12% versus last year.

And we entered the fourth quarter with a more current inventory position and sufficient open to buy liquidity to take advantage of the great buying opportunities we see in the marketplace. Fueling our comp store sales increase were strong performances in bath, cosmetics and fragrances, home, youth, men’s and juniors.

In terms of territories, the northeast and the southeast were the strongest and the southwest was the weakest on a relative basis. In addition, we continue to improve the quality and quantity of our vendor base. We continue to increase our better and best and branded unit receipt penetration.

I would now like to give an update on our three-stated long-term growth strategies. Our number one growth strategy remains driving comparable store sales growth. Continued execution of our off-price model is critical in all merchandising areas with an increased focus on ladies apparel, home and bath, cosmetics and fragrances.

In addition, we will drive comp store sales through our much improved store experience, our marketing testimonial campaign and our merchandised localization initiative. In terms of merchandised category growth drivers, we continued to see opportunity in ladies apparel. We have made nice strides in this area and have more room for growth.

We ended last year at a 24% penetration with our peer average closer to 30%. We recently added another divisional merchandise manager to Missy Sportswear to focus exclusively on special sizes and maternity, areas we believe warranted additional market coverage. We are very pleased with our home performance in the third quarter.

The home continues to be our biggest merchandising opportunity and we believe we are moving in the right direction. As we have stated before, we ended last year at a 9.5% penetration with our peer average around 26%.

We will continue to build this business by increasing our vendor base and adding more nationally recognizable brands, building assortment diversity to improve choice, freshness and value and investing in improved store presentations. Another merchandising area that we are very excited about is our beauty growth strategy.

This includes bath and body, skin care, hair care, accessories, cosmetics and fragrances. We believe this is another area in which we are underpenetrated and we are looking to increase our vendor base and add more identifiable brands, improve the quality of our product and enhance our store presentation.

Another benefit of this business is that it lends itself well in gift giving, something we are excited about for the fourth quarter. Our much improved store experience continues to resonate with our customers. Last year, we converted from a customer phone survey to a Web-based survey that provides more detail, actionable customer feedback.

Store managers now have the ability to immediately review online feedback from his or her store and react accordingly.

As we have now anniversaried the start of this new survey, we are very pleased to see double-digit increases in not only overall customer satisfaction scores but in the major components including friendliness of associates, speed of checkout, interior cleanliness and ease of shopping.

This year, we completed 11 remodels and 13 refreshes and we will continue to remodel and refresh our store base as appropriate in order to continue to provide the best possible shopping experience for our customers. We continued to receive positive feedback about our marketing testimonial campaigns.

Again, these are real customers in our stores bragging about the great values they found. This campaign will continue in the fourth quarter and our overall marketing spend will be in line with last year. We continue to make progress in terms of tailoring our assortments across brands, lifestyle, sizes and climates.

Our localization efforts continue to improve the timing of our seasonal product deliveries by region allowing us to get the right products to right location at the right time.

In terms of the fourth quarter, we remain well positioned to capitalize on the key holiday selling season with great brands and products across categories and expanded offering of gifting options and compelling value. As our guidance suggest, we believe it is prudent to plan comp sales conservatively and drive optimal profitability.

Of course, the flexibility of our off-price model allows us to maximize sales opportunities in real time and we will certainly take advantage of these opportunities as they occur.

In addition, the disruption created by the increased inventory at many retailers and our sufficient open to buy should give us great pack and hold opportunities as we turn the corner into 2016. We expect to end the year at a low to mid single digit decrease in comp store inventory.

We’ve decided to advance approximately $50 million of Easter receipts into the fourth quarter to ensure we capitalize on our first quarter Easter opportunity. Our second growth strategy is expansion of our store fleet, which continues to be an important growth driver for us.

We remain pleased with the performance of our new stores that continue to perform in line with their underwriting model. During the third quarter, we opened a net of 20 new stores. In total, new and non-comp stores contributed an incremental $44 million to our third quarter net sales.

I am pleased to report that effective in November week one, we officially opened our final new store of the year bringing us to 25 net new stores with an average gross square footage of 54,000 square feet.

In addition, our pipeline for 2016 is ahead of where we were last year at this time and our approved deals have an average square footage of 52,000 square feet. We continue to believe that we have significant white space for growth to reach 1,000 stores over the long term.

Third, we expect to enhance our operating margins as we continue to optimize our markdowns, tailor our assortments by store and remain disciplined managing our receipts. Operating margins are also expected to benefit as we grow our top line and leverage fixed costs.

Now, I’d like to turn the call over to Marc to review our financials and outlook in more detail..

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We are pleased with our third quarter performance. Our earnings exceeded our expectations driven by growth in sales, gross margin expansion, leverage in operating expenses and lower interest expenses.

Additionally, we repurchased shares for the second quarter in a row to the benefit of our shareholders. Turning to a review of the income statement and starting with sales.

For the third quarter, total sales rose 6.4% and comparable store sales increased 2.8%, which follows two years of strong comp growth including a 5.2% comp increase in the third quarter of 2014 and a 3.9% comp increase in the third quarter of 2013.

In terms of comp metrics, our growth in comparable store sales was driven by increases in traffic and units per transaction, while average unit retail and conversion were down slightly versus the prior year. This represented our fifth consecutive quarter with an increase in traffic.

Our gross margin rate was 39.8%, an increase of 10 basis points versus last year. We remain focused on inventory management and continued to reduce the level of aged merchandise compared to the prior year.

Product sourcing costs, which include cost of processed goods through our supply chain and buying costs, both of which are reported in selling and administrative expenses were flat to last year as a percentage of net sales.

Selling and administrative expenses, exclusive of product sourcing costs and advisory fees, improved 40 basis points to 29.9% primarily driven by a reduction in incentive compensation, partially offset by an increase in stock-based compensation. Expense leverage was also achieved in advertising and store occupancy.

Adjusted EBITDA increased 14% or $10 million to 83 million representing a 40 basis point increase in rate for the quarter. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by 1 million to 37 million.

Interest expense decreased approximately 2 million to 15 million, primarily driven by the savings realized as a result of our 2014 refinancing. The adjusted effective tax rate was 37.7% versus 39.9% last year.

The decrease in tax rate was primarily the result of state tax credits available to us for our new corporate headquarters and the benefit of federal hiring credits from prior years realized during fiscal 2015. Combined, this resulted in an increase in adjusted net income of 7 million to 19 million for the quarter compared to 12 million last year.

Adjusted net income per share increased to $0.25 versus $0.16 last year. In our fully diluted shares outstanding were 75.4 million compared to 76 million last year.

For the first nine months of fiscal 2015, total sales was 6.9% and included a comparable store sales increase of 3%, following a 4.2% comparable store sales gain in the first nine months of last year. Gross margin was 39.6% representing an increase of 90 basis points versus last year, which was primarily driven by a reduction in markdown rate.

This improvement more than offset a 40 basis point increase in product sourcing costs. As a percentage of net sales; selling, general and administrative expenses, exclusive of advisory fees and product sourcing costs, improved 20 basis points to 28.2% primarily driven by expense leverage in advertising and store occupancy.

Additionally, there was a reduction in incentive compensation, which was offset by an increase in stock-based compensation. Adjusted EBITDA increased by 16% or 36 million to 259 million, representing a 60 basis point increase in rate for the first nine months of fiscal 2015.

Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by 4 million to 109 million. Interest expense decreased approximately 25 million to 44 million driven by the August 2014 refinancing. The adjusted effective tax rate was 38.5% versus 40.1% last year.

The decrease in the effective tax rate is primarily driven by state tax credits available to us for our new corporate headquarters and the benefit of federal hiring credits from prior years realized during fiscal 2015. Combined, this resulted in an adjusted net income of 65 million versus 30 million of adjusted net income last year.

Adjusted net income per share was $0.86 versus $0.39 last year and our fully diluted shares outstanding was 76.1 million shares versus 75.7 million last year. Turning to our balance sheet. At the end of the quarter, we had 29 million in cash, borrowings of 276 million on our ABL and have availability of approximately 278 million.

At the end of the quarter, total debt was 1.4 billion. Merchandise inventories were 934 million versus 900 million in the prior year. The increase was primarily driven by increased pack and hold inventory levels and new store inventory, partially offset by a decline in comparable store inventory of 7%.

As Tom mentioned, our comparable store inventory turnover improved by 10%. Cash flow provided by operations was 104 million, primarily related to our improved operating results.

For the remainder of 2015 and beyond, we expect to generate the necessary free cash flow to fund all of our capital expenditures, business initiatives and to support any potential opportunistic capital structure enhancements. Capital expenditures, net of landlord incentives, were 135 million through the third quarter.

This includes approximately 57 million net per store expenditures and approximately 37 million to support continued distribution facility enhancements. We continue to return value to our shareholders through our share repurchase program. During the quarter, we repurchased 1.9 million shares of stock for approximately 98 million.

Today, we announced that our Board of Directors authorized a new $200 million share repurchase program. This brings total availability under the share repurchase programs to 277 million.

We remain on course for our debt leverage to be at or below 2.5 times at the end of 2015, which we believe will further decline in future years through continued growth in EBITDA.

Given our financial positioning, we are able to delever our balance sheet while also returning capital to shareholders as we opportunistically utilize our recent repurchase authorization. We ended the quarter with 566 stores and opened our final store of the year during the first week of November, bringing our total net new stores for the year to 25.

Turning to our outlook. For the fourth quarter of 2015, we expect net sales to increase in the range of 3.7% to 4.7%, comparable store sales to be in the range of flat to up 1% on top of last year’s 6.7% increase.

We believe it is appropriate to guide conservatively given the unseasonably warm November and our expectation of an extremely promotional Q4 given the high inventory position at many retailers.

Adjusted net income per share is expected to be in the range of $1.44 to $1.48 versus a $1.43 per share last year, utilizing a fully diluted share count of 74.4 million shares. As a reminder, last year’s EPS benefited from a $3.2 million one-time legal settlement or $0.03 per share. Turning to our guidance for full year 2015.

We expect net sales growth in the range of 5.8% to 6.3%, comparable store sales to increase 2% to 2.5%, adjusted EBITDA margin expansion of 20 to 30 basis points, interest expense to approximate 59 million and adjusted tax rate of approximately 37.8%; the decrease in effective tax rate includes the realization of federal hiring credits related to prior years at a rate higher than previously anticipated and the benefit of the implementation of other tax strategies that will be in effect during the fourth quarter; a share count of approximately 75.7 million shares.

Net capital expenditures are expected to approximately 160 million and depreciation and amortization of approximately 148 million. This results in adjusted net income per share guidance to a range of $2.28 to $2.32, similar to our previously stated range of $2.27 to $2.32. As a reminder, our adjusted net income per share in 2014 was $1.83.

Please keep in mind as you model that our share repurchase activity began in Q2, therefore, you cannot simply add each quarter’s EPS to get to the full year EPS. Now, I would like to turn the call back over to Tom for concluding remarks..

In summary, the third quarter represented another period where we met or exceeded our goals demonstrating the power of our off-price operating model. We continue to see significant opportunity ahead to further enhance our execution and bring consumers great brands and great value.

While we believe it is appropriate to take a more conservative posture with regard to the fourth quarter sales, the flexibility of our operating model and our extremely liquid position should allow us to capitalize on opportunities and take advantage of inventory buys that will bolster our performance in 2016.

I believe we remain well positioned to capitalize on the significant runway that lies ahead for our company. Now, I would like to turn the call over to the operator to begin the question-and-answer portion of the call..

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Mathew Boss with JPMorgan. Please proceed with your question..

Hi. Thanks.

So I think it would be helpful, could you guys just elaborate a little on the puts and takes in the fourth quarter same-store sales guidance that you spoke to? I think first, how the flat to up 1 comp compares to what you saw in October exiting the quarter? Second, maybe any comments at all, if you could, just help us out on November so far.

And then third, just with the promotional backdrop that you commented on, your ability to maintain the value proposition from a price perspective I think would be really helpful to just walk through..

Hi, Matt. This is Tom. I’ll take that one. First of all, I’ve spent the last three weeks in stores and fundamentally I feel very, very good about where we’re positioned overall. Our assortment look extremely good. We built our national brand over this year. We’re up about – with the penetration we’re up about 240 basis points.

Going through the stores, our gift strategy is really strong. We increased the square footage. We gave the gifts overall because we know that’s an opportunity. That’s our third year of executing our gift strategies.

Our bath and body and fragrance business, as I’ve mentioned, is a big plus for us and you can really see the product rolling in and the quality of that assortment there. And also the home business, right now in the third quarter we had a very strong home business and the assortments there are really, really improving overall.

So fundamentally we feel very good about where we stand today. We just felt it was important to be conservative. November was warmer than we anticipated or currently is warmer than we anticipated.

And when we were obviously looking to see what was happening with other retailers, we were surprised at the level of inventory that they had as they exited the third quarter. So we just felt it was important to be prudent. Fundamentally, as I said, we feel very good about where we stand today.

We just felt that November was significantly warmer than last year. We talked about that on the earnings call last year. The good news is we feel that for the balance of the quarter, we should have a strong performance.

The coat business last year underperformed the company significantly, so we feel that even though we had a good November last year, we underperformed in the balance of the fourth quarter, so we feel good about that.

But the promotional activity, as you mentioned, with high inventory levels historically we see a lot more promotions happening just because people obviously need to liquidate goods. But for us to deliver value, we’ve continued to do that overall. We’ve utilized pack and hold, we delivered a lot of our pack and hold in October of this year.

We ended with 14% versus 12%. It’s a lower level than we have been at but because we delivered a lot of goods in October to be prepared for the fourth quarter to deliver really strong values overall. So we feel we’re really prepared to offset any kind of promotional activity but the scale of the promotional activity is still to be determined..

Great. And then if we just took a step back and we think beyond kind of this near-term malaise that I think we’re seeing out there and it’s clearly not just you.

If we think multiyear, is there any change or I guess can you talk about your comfort with still achieving that long-term 2% to 3% comps and 20% net income growth algorithm?.

As far as the comps go, we really feel confident that the 2 to 3 comps are definitely achievable. And we’re still saying our comps for this year are going to be 2% to 2.5%. So we just feel that the fourth quarter – fourth quarter, we need to be conservative. The flipside of all that to look at it from a positive perspective, the fact that it is warmer.

A lot of the department stores are overstocked, we feel it’s going to be a great buying opportunity for us to position us for a very strong 2016. When there’s any disruption in the market, as you know, we can take advantage of that.

And we feel this is going to be a really unique opportunity for us to continue to build our pack and hold inventories, continue to deliver great value in 2016. So we’re looking at it from a fourth quarter. It may be headwinds but long term, we really feel that’s going to garner a lot of great opportunities for us..

Great..

I think your second question, Matt, was more geared towards our financial objectives that we stated at our IPO and how we feel about that going forward. We’re still working on our 2016 financial plan, Matt. We have not completed that yet.

We are in the middle to late innings of getting through that, still have some big questions as it relates to wages and decisions that we’re going to make. But let me help you here a little bit. Given that we’re not complete with it yet, EPS will be our driver going forward in terms of the financial objective obviously.

And while we haven’t completed the plan yet, there are consensus EPS numbers that are out there for '16 and beyond. And at least at this point, we can tell you we are not uncomfortable with the consensus EPS increase that’s baked into 2016 right now..

That’s great. Thanks a lot for that incremental color. Best of luck..

Thank you..

Thank you. [Operator Instructions]. Our next question today is coming from Lorraine Hutchinson from Bank of America. Please proceed with your question..

Thank you. Good morning. Just to be clear when you think about the fourth quarter guidance, do trends have to improve from where they are today to hit that.

And then separately, how are you thinking about coming up against last year’s very strong January results?.

Ladies and gentlemen, we’re expecting some technical difficulties. Just give me one second while I get management back on line. Please continue to hold. Do not close your lines. Thank you. Okay, Ms. Hutchinson, please continue with your question, start from the beginning please..

Thank you. As you look at the fourth quarter, do you need trends to improve versus where they are today to hit that guidance? And then secondly, you’re up against a very strong January from last year. Can you talk about strategies to comp that number? Thanks..

Well, our guidance includes where we are currently today, it includes everything, the 0% to 1% comp is inclusive of what we feel is going to happen in every single month.

We feel that just to talk a little bit about January, which we really want to get into each individual month but we feel that we have an opportunity in general in cold weather products because of our quick sell through we had last year, which we feel can help offset that strong January..

Thank you..

Thanks, Lorraine..

Your next question today is coming from Kimberly Greenberger from Morgan Stanley. Please proceed with your question..

Okay, great. Thank you so much. Good morning. I wanted to ask a question about margins. As I recall, the sourcing costs, buying and distribution had actually been rising over much of the last year to year and a half.

It looks like you’ve finally reached a point where that’s hitting an inflection, I think they were flat here as a percentage of net sales in the third quarter.

I’m wondering if you can talk about your efforts to improve either productivity at the distribution center or anything else that sort of helped you get to that result this quarter? Secondarily, the SG&A looks like it’s leveraging here and that was helped at least in part by some store occupancy.

What comp do you all need in order to leverage store occupancy? And then thirdly, I think this is the first quarter where there was some movement to a $9 an hour wage rate and even with that, SG&A leveraged very nicely.

So I’m wondering if you were able to find other offsets or some productivity gains and just how you’re managing through the wage piece? Thank you so much..

All right. Kimberly, this is Marc. I’ll take that one. I think we’ve talked before about product sourcing costs and how we look at those with reported margins.

So we kind of always look at the net of the two of those and we really kind of manage that on an annual basis, on a full year basis and we expect that reported margin to slightly outpace our product sourcing costs, which incidentally is exactly what happened in Q3. You’re absolutely right though.

It was really the – Q3 was the first quarter where we did have a pretty sizable increase in those costs.

And we don’t know that one quarter makes a trend but to the extent that it does and over the course of the next few quarters here, it does stay leveled off then that really puts us in a great position to where we can then start making decisions about whether we let gross margin rate continue to flow to the bottom line or pass on that much more value to our customers.

So time will tell on that one. As far as the SG&A lever rate, it’s really mid to high 2s. It’s typically where we’ll see that. And you’re absolutely right on the wage rate. The $5 million incremental in wage dollars this year started in July, had a full quarter of it in Q3.

We were able to find offsets for the entire 5 million all the way through to the end of this year and that’s why we’re able to cover it. So we’re happy with the SG&A performance on top of the 2.8 comp..

Thank you..

You bet..

Thank you..

Thank you. Our next question today is coming from Paul Lejuez from Citigroup. Please proceed with your question..

Thanks, guys.

Just curious, what set of results are you seeing on pack-away merchandise and what sort of margins do you see on that product relative to the rest of your assortment? Do you look at that as more of a sales driver or margin driver or both? And then can you just fill us in on what categories were weaker for you guys and I’m just curious about CapEx next year, Marc, as you’re getting through that planning process? Thanks..

Okay. I’ll take that Paul and I’ll let Marc talk about CapEx. I’ll take the first part of that. Pack and hold is our fastest turning highest margin product we have in our assortment because by definition it’s great values – great brands, great values. We have a very rigorous process in order to approve anything that goes into pack away.

As far as categories, as I mentioned, the home business was very good, the bath and body business was really good. We had a strong total shoe business overall.

The categories in the third quarter that were weaker outwear coats and outwear were weaker just because of the weather as we’ve talked about, but fortunately we were able to offset a lot of that. But our performance was pretty broad based in terms of how well we did in the third quarter.

One thing I should mention is Baby Depot continues to underperform, as I mentioned multiple times on different calls. It’s a business that is in transition. We’re working really hard to fix it and we anticipate the fix to be in place in 2016. We should have improvements throughout 2016.

Marc, do you want to talk about your CapEx?.

Sure. Paul, we’re going to end this year at about 160 million in CapEx. Some of that is related to a campus renovation here at corporate. We are not done yet with our 2016 capital planning but what I can tell you Paul is I expect it to be down slightly..

That’s great. Thanks, guys. Good luck..

Thank you..

Thank you. Our next question today is coming from Ike Boruchow from Wells Fargo. Please proceed with your question..

Hi, everyone. This is Lauren Frasch on for Ike Boruchow. Congratulations on a great quarter.

Given how important weather has been, could you maybe illuminate on the penetration of coats and outwear in the business in Q3 versus Q4?.

Well, we really haven’t broken it out but I’ll talk to it on a total basis. Coast and outer have roughly been 7% of our business on an annual basis, which we’ve talked about before. Obviously, it’s come down over time and that’s because we’re building everything else around it. We like our coat business.

We’re trying to maintain the volume but build everything else around it. As we get into colder months, the penetration grows. So it’s less important in the third quarter, it’s more important in the fourth quarter and that’s just obviously weather driven..

Great. Thanks so much..

Thank you..

Thank you. Our next question today is coming from John Morris from BMO Capital Markets. Please proceed with your question..

Thanks. Good morning, guys. And let me add my congratulations to everybody as well..

Hi, John. Thank you..

The inventory buying opportunity that you guys see currently that is so attractive coming from the off-price channel, are those goods – clearly you’ll pack some of those goods away.

I’m wondering how quickly you would put those goods back out on the floor? Tom, you talked about as you turn into next year, is it potential that those cancellation goods that you’re able to take advantage of could help with the fourth quarter, the first quarter and/or into next year? I’m wondering kind of how that would flow and work.

And I’m wondering thinking back to the opportunity a year ago from the port disruption, are we through most of that benefit or are you actually in a position to release some of those goods into the stores currently now as well? Thanks..

Well, most of the pack and hold we’ve already delivered on the selling floor, as I mentioned earlier.

Some of the goods that we’ll find we’ll deliver this year but I think the majority of the goods will be goods that will pick up later in the season and we will pack and hold those goods for next fall to continue to deliver value in the third quarter of 2016 and the fourth quarter of 2016.

So, there may be some that we’ll deliver but the majority is really going to be for next fall, which is a good thing because obviously we’ll have a lot more ammunition for next year overall. The port disruption, that’s pretty much over.

We delivered a lot of the stuff that we picked up last year in October and some of them will be delivered in the fourth quarter, because we still have 14% of our inventory in pack and hold. Some of the goods from the port disruption will be delivered in spring 2016, but that’s behind us.

And again, now the weather – the headwinds of the weather and the over inventories, that’s just another opportunity for us to buy and we have worked really, really hard on managing our inventories. Obviously, you saw how we ended on a comp store basis at the end of the third quarter. We’re anticipating the end of the fourth quarter to be similar.

So we always have money in our pocket. We’re always looking for great deals and we have the flexibility to take advantage of things that are currently happening. So even though it’s a headwind, as I mentioned in the fourth quarter, we’re excited about 2016 and the opportunities that this disruption is causing..

Great, thanks. Good luck for the holiday..

Thank you..

Thank you. Our next question today is coming from Brian Tunick from Royal Bank of Canada. Please proceed with your question..

Good morning. Thanks for taking the question. This is Susan [indiscernible] for Brian. I guess the first question on the AUR declines this quarter, was that mostly mix shift or incremental promotions? And I guess looking into fourth quarter, how you’re planning the AURs? And the second question on --.

I’m sorry.

Can you repeat your first question please?.

Yes.

For the AUR declines I guess you mentioned this quarter, was that mostly due to mix shift amongst product categories or more incremental promotions?.

Okay.

What’s your second question?.

And then the real estate strategy, I guess you’re looking to open stores around, say, 2,000 square feet this next year.

So when you look at your existing store base, do you have any material opportunities to get out of leases of larger stores given the good results you are seeing with the new smaller store concept?.

Okay, I’ll take the first part and Marc can take the second piece of this. From an AUR perspective, yes, there are mix differences. As we enter bath and body and cosmetics that drives down the AUR to a certain degree. The reduction in Baby Depot that also has an impact on the AUR.

Also, we look at delivering a lot of value in areas year-over-year, we have reduction in AUR because we’re getting better at what we do and we’re delivering more and more value on the selling score. But it’s a balance between mix, better values and more pack and hold going in, which are values in general.

So as far as real estate goes, we’re going to continue to reduce the size of our stores, as you mentioned, 52,000 square foot parameters for 2016 and we’re always evaluating our real estate portfolio and we’re always looking at our leases. And as they come up for renewal, we decide if we want to relocate into a smaller box or a different location.

So we’re always looking at that in general. We’ve taken some of our stores and we’ve reduced the size, we call it optimization where we’ve taken a bigger box and made is smaller. The customers really voted, they want a smaller box. So we’ve worked on all of that.

So I don’t know, Marc, do you want to elaborate on that?.

I think that I’ll add to that, Tom, is that 98% of our stores are for a while even [ph] profitable and have very, very nice EBITDA rates. So if we can do something with a larger store when it comes up with lease expiration, as Tom talked to in terms of getting back space to the landlord would be fantastic or there’s a relocation.

But if those two things cannot happen, these are still very profitable stores. We’re not going to get out of them..

All right. Thanks very much..

Sure..

Thank you. Your next question today is coming from John Kernan with Cowen and Company. Please proceed with your question..

Hi. Good morning, everyone. Thanks for taking my question and congrats on strong results in a tough environment..

Hi, John. Thanks..

Just wanted to go back to the gross margin line one more time, the year-over-year increase just from a basis point perspective was much less than it had been in the first half of this year and throughout 2014.

So I’m just wondering were markdowns higher this quarter or did you just pass along some of the product sourcing costs for the consumer?.

No, actually the 10 basis point improvement was a slight improvement in markdown rate to be honest with you, John. And again, we really manage reported margin and product sourcing costs together. Over the course of the year, we say that reported margin will slightly outpace.

I would tell you if you’re looking at that net over the first two quarters, it was more of a story with the first two quarters that we had that drove a lot of that margin expansion with Q1 of course as we ended the prior year with so much less aged inventory. That was mainly the story there and then a different story in Q2.

But to the extent this is – again one quarter doesn’t make a trend on product sourcing costs but again if we do see it level out over the next few quarters and we are at the “high point” then it’s a great place for us to be in terms of letting more of this margin rate flow through or pass along that much more value to customers..

Okay, that’s helpful. And then can you just talk about home a little bit. I know this has been an initiative that you’ve been looking at.

How big of a percent of the mix is home? Where can this go – how do you think that will ultimately affect your store experience?.

Well, as we said we have just a big opportunity in home. Last year was 9.5% of our business. Some of the people in the same space were in excess of 20%. So we really feel that home is going to continue to grow consistently for many years until we get to the same level.

What’s really great about it is all the businesses in home are performing very, very well. The home textile business is very good, the home décor business is good, house ware, food, luggage, toys, et cetera, those are all very good. So the improvement is really broad based and we feel really good about where we’re headed.

It really won’t impact our store experience negatively. It will be actually positive because obviously more choices for the customers. What we brought in so far has resonated with the customers based on our current performance. I think it only helps the experience overall.

And as we continue to improve our dollar per square foot and reduce inventories and other categories, obviously it will make room for an expansion of the home. So I think all-in-all, it’s very positive..

Okay. If I can just sneak one more question. I think either Marc or Tom, you mentioned you’re accelerating Easter delivery.

Should we expect inventory to be up a certain percentage in the fourth quarter?.

No, no, John, you’re absolutely right. We said that in our prepared remarks. It’s about $50 million of Easter receipts into Q4 of this year so that we can really capitalize on our Easter opportunity in Q1. But we still expect our comp store inventory to be down low to mid single digits..

All right. Thanks..

The reason we’re doing is obviously Easter moves up a week from last year, so it’s earlier than last year. We want to make sure that we’re really well prepared as we go into the first quarter to take advantage of the opportunity that we have in the first quarter of 2016..

Thank you. Our next question is coming from Dana Telsey from Telsey Advisory Group. Please proceed with your question..

Good morning, everyone..

Hi, Dana..

Hi. Can you give a little update on supply chain enhancements, how that’s progressing and the impact on pack and hold? And then complexion to comp, what did you see as the drivers this quarter and how it differed from last quarter? Thank you so much..

Yes, in terms of our supply chain we’re spending $160 million in CapEx this year, 50 of that is really for our supply chain. And it’s everything from additional storage for pack and hold to fragile lanes within our distribution centers to be able to handle this beauty product in home décor.

And we’re through all of that at this point and happy with the progress that it’s made. The second part of your question, Dana..

On complexion of the comp, the drivers?.

Yes, so the units per transaction was the biggest piece of the driver, then it was traffic and then we had two that were slightly down; conversion and AUR..

Got it.

And marketing spend, how does it differ this year from last year for the fourth quarter? And testimonials, any new things we should be watching for?.

In terms of the overall spend, it’s in line with last year. And we’re going to continue to move forward with the testimonial campaign. We actually saw some of those commercials just this week and are very excited about them..

Sure thing. Thank you very much..

Thank you. Our next question today is coming from Pam Quintiliano from SunTrust. Please proceed with your question..

Thanks so much for taking my question, guys, and congratulations on a great quarter..

Thank you..

So just a few quick ones for you.

Can you remind us what percent of pack and hold you had at end of Q4 LY? And then when we think about regional performance, can we get into that just a bit more? Was there a wide range of results or was it pretty close together and what do you attribute the relative weakness in the southwest to? And then just a last one, the smaller store formats, is there anything you’re emphasizing or deemphasizing in those in terms of particular departments relative to what we’re seeing in a broader base? And are there any learnings that you could take from these smaller store formats to apply it to the broader base? Thanks so much..

Okay, let me take the smaller format piece of it and I’ll move into the regional performances. First of all, our smaller formats, they are 22% more productive than the chain balance. So what we’re learning from that is we can have the entire Burlington assortment in a smaller box.

We feel that the experience for the customer is more intimate and obviously it’s resonating with them. We really don’t have to really deemphasize any categories in the smaller box. Based on the fact that we’ve taken a lot of inventory out of our stores, the need for that is really not necessary. So we feel very good about it.

We’re going to continue to go smaller, we’re going to continue to reduce our inventories, we’re going to continue to turn faster, improve the productivity of our stores. So we feel very, very good about that.

As far as regional differences, there are pretty close in terms of when you look at it, one of the areas where we had a little bit of contraction in the business was in Texas based on the border stores, what’s going on there. But in general, our regions performed pretty consistently across the board..

And Pam, our pack and hold inventory level at the end of 2014 was 27% of inventory..

Okay, great. And then just one quick follow up.

Number of vendors that you currently have versus last year, is there any way to frame either actual number or how many more incremental you have versus last year at this time?.

Well, we have talked about this before and we feel it’s more prudent to talk about that at the end of the year, because it’s a fluid situation. We’re getting out of vendors, we’re adding vendors throughout the year and we feel that the best way to really talk about that is at the end of the year.

So in our fourth quarter earnings call, we’ll give you an update as to the number of vendors we have..

I’m assuming you’re getting more people excited to be working with you..

Yes, absolutely and we also are building out our California buying office, which helps us obviously to interact with more manufacturers..

Great. Best of luck in 4Q..

Thank you..

Thank you..

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to management for further closing comments..

Thanks again for joining us today. We wish all of you a happy and healthy holiday season and look forward to speaking with you at the ICR Conference in January and when we report our full year results in March. Thank you. Happy Thanksgiving, everybody..

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..