David Glick - Vice President-Investor Relations Thomas Kingsbury - President, Chief Executive Officer and Chairman Marc Katz - Chief Financial Officer/Principal.

Ike Boruchow - Wells Fargo Matthew Boss - JP Morgan Kimberly Greenberger - Morgan Stanley Lorraine Hutchinson - Bank of America John Kernan - Cowen and Company.

Greetings, and welcome to the Burlington Stores Fourth Quarter Fiscal 2017 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 turn the call over to David Glick. Please go ahead..

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s 2017 fourth fiscal quarter operating results. Our presenters today are Tom Kingsbury, our Chairman and Chief Executive Officer; and Marc Katz, Chief Financial Officer and Principal.

Before I turn the call over to Tom, I would 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 until March 22, 2018. 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 2016 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.

Finally, it should also be noted that unless otherwise indicated, the non-GAAP results we discuss today are reported on a 13-week and 52-week basis respectively.

Moreover, our adjusted net income and adjusted earnings per share for both the fourth quarter and full fiscal year of 2017 exclude any estimated impact from the Tax Cuts and Jobs Act, which was enacted in December 2017.

Any estimated impact triggered by the enactment of the Tax Cuts and Jobs Act on our financial results including the impact of rate reduction, changes in deductibility of certain items, as well as the revaluation of deferred tax liabilities are reflected in our GAAP net income and GAAP EPS results. Now, here is Tom..

Thank you, David. Good morning, everyone. We are extremely pleased to report strong fourth quarter results, driven by a robust 5.9% comparable store sales increase, which was on top of a strong 4.6% increase in fiscal 2016.

We passed several significant milestones in fiscal 2017 as we surpass $6 billion in total sales, expanded our adjusted EBIT margin or operating margin by 90 basis points to 8.6% and achieved record low aged inventory and record high comparable store inventory turnover levels.

We remain focused on elevating our off-price operating model and expect our initiatives to enable us to continue our favorable momentum in fiscal 2018.

Regarding the fourth quarter, on a 13-week basis, operating margin expanded by 50 basis points, a solid result driven by increased merchandise margin and SG&A leverage, which combined with our overall strong sales increase of 10% drove a 22% increase in adjusted earnings per share, significantly ahead of our guidance.

Turning to highlights of the fourth quarter, all on a 13-week basis, this was our 20th consecutive quarter of positive comp sales growth. Our comp sales growth was driven primarily by an increase in traffic, our 12th quarterly traffic increase for the last 14 quarters.

Inventory aged 91 days and older at year end was down 26%, while comparable store inventory turnover increased 10% during the fourth quarter.

We delivered a 20 basis point expansion in gross margin, while leveraging SG&A by 40 basis points, which drove a 50 basis point increase in both adjusted EBITDA margin and operating margin and adjusted earnings per share grew 22%. Our new store performance is once again a highlight of our quarterly results.

Our new and non-comp stores continued to outperform contributing to incremental $79 million in sales in the fourth quarter. I want to remind everyone that this incremental sales contribution was negatively impacted by approximately $25 million in lost sales from stores that were closed in the fourth quarter due to storm damage as we anticipated.

Excluding that impact, new and non-comp stores contributed an incremental $104 million over the last year during the fourth quarter. These results underscore our confidence in our site selection and underwriting process as we increase the number of net new store openings in our smaller store format.

Moving to category highlights, our top performing businesses were all areas of home, beauty, men’s sportswear, ladies better sportswear and men’s kids and athletic shoes. It is important to note that we made great strides in the fourth quarter further deweatherizing our business as non-cold weather categories comped ahead of the chain average.

Regarding geographic performance, the Southeast and Southwest performed above the chain average. While the Midwest posted a solid comparable store sales result, but was below the chain average. Moreover, 26 out of 27 regions had a flat or positive comparable store sales trend.

Moving to inventory management, we are pleased once again with how our merchandising team managed our receipt flow and inventory as we ended the quarter with comp store inventories down 7% on top of a 9% decline last year. The fourth quarter comp store inventory turnover improved a strong 10% on top of last year’s 13% improvement.

Our merchandising and planning teams once again drove down our aged inventory levels as inventory aged 91 days and older declined 26% as we focus on maintaining a fresh and exciting assortment for our customers.

Pack and hold as a percent of our total inventory was 25% versus 23% a year ago, as we continue to capitalize on a favorable buying environment. We see no change in the vibrancy of the marketplace for our buying teams and we are thrilled with the great assortment at amazing values that we continue to deliver to our customers.

I am also pleased with the value that we continue to bring our shareholders as we repurchased approximately 458,000 shares of common stock during the fourth quarter for $52 million. At the end of the fourth quarter, we had $217 million remaining on the $300 million share repurchase program authorized on August 16, 2017.

Now let me update you on our long-term strategic priorities, which continue to be focusing on driving comparable store sales growth, expanding, modernizing and optimizing our store fleet, and increasing our operating margins.

First, with regard to driving comparable store sales growth, our underlying strategies remain, enhancing our assortments as we continue to improve our execution of the off-price model with particular focus on underpenetrated businesses.

Building our marketing initiatives to ensure we are continuing to engage both new and existing customers and improving the store experience for our customers. As our fourth quarter results demonstrate, we are making significant progress increasing our underpenetrated growth categories, particularly home and beauty.

These growth opportunities will allow us to continue to deweather our business, building the long-term sustainable foundation for Burlington.

Before we update our initiatives regarding these growth categories, I wanted to spend a few minutes on the progress we made in the fourth quarter growing the gift category across home, men’s, women’s and kids, a key deweathering growth strategy that will continue into 2018 and beyond.

We believe our strong sales increase in gifts in the fourth quarter help drive traffic and conversion and was a significant contributor to our sales increase in the fourth quarter. We still see incremental opportunity in gifts as we refine our assortments in merchandising strategies.

We view this opportunity as a key contributor not only to drive two of our key strategic growth businesses, home and beauty, but our assortments and gifts will continue to drive growth that spans the entire store across men’s, women’s, kids and accessories.

With regard to home, we made substantial progress in 2017, as we increased the home category to 13.9% of our annual sales versus 12.4% in 2016, an increase of a 150 basis points. Home still represents our largest category growth opportunity, as there remains a substantial gap between our penetrations of our peers who are north of 20%.

Specifically, we have more opportunity to expand the presence of highly recognizable national brands in home and still see several key underdeveloped categories that we have targeted for growth in 2018. Our beauty business had another very strong quarter and we expect this category to be a key growth opportunity for many years.

We will continue to broaden the number of brands in designer and prestige fragrances, expand existing categories in beauty accessories and chase trends while elevating the assortment in cosmetics and skincare.

In addition, beauty was a key element to our fourth quarter gift strategy and helped drive strong sales increases in this key underdeveloped growth category. Ladies’ apparel remains a significant opportunity as our penetration of 23.3% at the end of 2017 still remains well below our peer group at approximately 30%.

While our penetration in overall ladies apparel did drop 110 basis points in 2017 versus 2016, we continue to get strong growth in the largest component of ladies apparel, which is missy sportswear.

Strength in better and active sportswear helped drive a slight increase in missy sportswear penetration in 2017 versus 2016, though this growth was offset by a drop in penetration in some of our more developed heritage ladies apparel categories such as dresses, suits, juniors and intimates.

We are highly focused on stimulating growth in these other areas of ladies apparel and we feel we are well-positioned for improvement in 2018 as well as continued growth in missy sportswear and ladies apparel in total. We continue to add to the quality of our vendor base.

While we finished 2017 at a similar number of vendors as last year, we added approximately 1200 new vendors to the mix as we continue to edit out less meaningful brands. We carry approximately 5,000 brands and expect that number to increase over time.

In 2017, our branded unit receipt penetration increased over 200 basis points, while our better and best unit receipt penetration increased over 300 basis points versus the prior year. In terms of product availability, the buying environment remains very attractive and we would characterize product availability as very strong.

On the marketing front, our holiday advertising strategy built on the success of our testimonial campaign and featured our own customer shopping and finding great values in our stores, in particular, focus on gifts across the store was very effective in portraying Burlington as the gift destination and help drive our success in that category.

We continue to get positive feedback from our customers regarding our campaign and our research indicates very strong scores on both ad recall and brand recognition. Our store experience continues to be an important initiative for us. We are on track to get the significant majority of our stores to our brand standard over the next five years.

We made significant progress in 2017 modernizing our store fleet, remodeling 34 stores in addition to opening 48 gross new stores, adding 82 stores to our brand standard. Our customers have responded very positively to the improvements we have made to our store base including our increasingly smaller store footprint.

This has manifested itself in our customer service scores, which have increased significantly since we began tracking in 2008. We are committed to investing capital to continually improve our store portfolio and plan to remodel another 34 stores in 2018. The second growth initiative continues to be expanding our store fleet.

We opened 37 net new stores in 2017, averaging 45,000 square feet. We are a national retailer that operates in 45 states plus Puerto Rico. Yet we only operated 629 stores at year-end, most mature, national, all small retailers operate with well over a 1000 stores far more than our current footprint.

Given the strong performance we have experienced in our new stores and the real estate opportunities that continued to be presented to us, we expect to open 35 to 40 net new stores in 2018, which includes 60 gross new stores averaging 43,000 square feet, along with 20 to 25 store relocations and closings.

While the number of net new stores is similar to 2017, we are increasing the number of gross new store openings by 12 stores. This acceleration will translate to another 94 stores added to our brand standard including 60 new stores and 34 remodels.

This means that in just two years, 2017 and 2018 combined, we will have added 176 stores to our brand standard. Looking out five years, at the current rate of new store openings and remodels, we would expect the significant majority of our stores to be in our brand standard.

Moreover, we’ve remained confident in our ability to expand to 1000 stores over the long-term. We also remain focused on our third growth priority continuing to deliver operating margin expansion. Over the last five years, we expanded our operating margins by 370 basis points, an average of approximately 75 basis points per year.

While we are very pleased with this progress, there is still significant opportunity versus our peer group.

Going forward, we will continue to execute the same game plan that we have deployed over the last five years driving total sales increases to leverage fixed cost, optimizing markdowns, remaining disciplined with inventory management and maintaining an active profit improvement culture across all SG&A areas.

Before I turn the call over to Marc, I want to take a moment to discuss our approach 2018 planning. As of prior years, we work hard to balance CapEx and incremental OpEx investments at our business with continuing to deliver expansion in operating margin. As you know, our business model generates substantial cash flow.

Accordingly, we are pleased to announce the following CapEx and incremental OpEx investments in 2018 to drive sales growth, improve our infrastructure, and give back to our associates.

Number one, our company’s highest annual growth CapEx spend of over $300 million, which will include 60 new stores, 34 remodels, another $34 million of spend in our supply chain, and $11.5 million to complete the renovations of our corporate headquarters.

Number two, incremental hourly wages of $30 million on top of three prior years of similar increases. Number three, 10% increase in our merchandising team headcount and number four, an increase in employer contributions to our medical cost to keep employee costs flat for the second straight year.

Overall, we believe we are taking a balanced approach with investments in the business while simultaneously expanding operating margins. Now I would like to turn the call over to Marc to review our financial performance and outlook in more detail.

Marc?.

Thanks, Tom, and good morning, everyone. Thank you for joining us today. We ended the fourth quarter by recording our 20th consecutive quarter of positive comparable store sales.

In addition, we achieved strong contribution from new stores and expansion in adjusted EBIT margin, which combined delivered a 22% increase in adjusted earnings per share on a 13-week basis. Next, I will turn to a review of the income statement.

Please note that the following discussion of fourth quarter financial results will be on a 13-week, non-GAAP basis unless otherwise indicated. For the purposes of this discussion, we have excluded from adjusted net income and adjusted earnings per share, any estimated impact on our fourth quarter results triggered by 2017 tax reform.

For the fourth quarter, total sales increased 10%, and comparable store sales increased 5.9%, on top of last year’s strong 4.6% increase. In addition, the 53rd week added $82 million in total sales to this result bringing our Q4 total sales increase on a 14-week basis to 14.9%.

For the quarter, our comparable store sales performance was driven primarily by an increase in traffic, while conversion, average unit retail and units per transaction were all up versus last year.

It is worth noting that as anticipated, the eight storm damaged stores that were closed for the entire quarter reduced new and non-comp sales by approximately $25 million. As of the end of February, these eight stores were still closed. As of now, we anticipate one of these stores reopening by the end of Q1, with the balance by the end of Q3.

Gross margin rate was 42%, an increase of 20 basis points versus last year driven by a higher IMU and a slightly lower markdown rate, which more than offset a higher shortage rate.

We took physical inventories in approximately 350 stores in January and our shortage results came in as we had guided resulting in a 20 basis point negative impact versus last year. Remember that inventory shortage represented 65 basis points of gross margin good news in last year’s fourth quarter.

Therefore, excluding the impact of shortage, gross margin increased 40 basis points in the fourth quarter of 2017, versus a 15 basis point increase in the fourth quarter of 2016.

Product sourcing costs which were included in SG&A and include the cost of processing goods through our supply chain and buying cost were flat to last year as a percentage of net sales. We are once again very pleased with the continued productivity improvements in our supply chain and we’ll continue to focus on additional productivity gains in 2018.

SG&A, exclusive of product sourcing costs was 22.8%, 40 basis points lower than last year as a percentage of sales. These results were driven by leverage in occupancy, business insurance and marketing which more than offset deleverage in incentive compensation and stock compensation expense.

Other income and other revenue was $9 million, 10 basis points lower as a percentage of sales versus last year. Adjusted EBITDA increased 14% or $35 million to $290 million. Sales growth, gross margin improvement and SG&A leverage led to a 50 basis point expansion in rate for the quarter.

Depreciation and amortization expense, exclusive of net favorable lease amortization, increased $4 million to $45 million, and interest expense increased $1 million to $14 million. The effective tax rate prior to the estimated impact of 2017 tax reform and the change in accounting for share-based compensation was 36.6% for the fourth quarter.

The change in accounting for share-based compensation reduced the rate for the quarter by 180 basis points. The changes in rate and deductions resulting from 2017 tax reform reduced the fourth quarter rate by an additional 100 basis points.

Finally, 2017 tax reform triggered a one-time estimated revaluation of the company’s deferred taxes, which created a $93 million or 41.8% benefit that was recognized during the fourth quarter. All of these changes resulted in a GAAP tax benefit of 8% and an adjusted tax benefit of 5.9%.

Combined, this resulted in an adjusted net income of $151 million, a 19% increase versus last year. As a reminder, this adjusted net income result includes the change in accounting for share-based compensation, but excludes the benefits of 2017 tax reform. We continue to return value to our shareholders through our share repurchase program.

During the quarter, we repurchased approximately 458,000 shares of stock for $52 million. At the end of the fourth quarter, we had $217 million remaining on our $300 million share repurchase authorization that was approved this past August. All of this resulted in earnings per share on a 14-week basis of $3.47 versus $1.77 last year.

Note that this 14-week result includes $0.04 in earnings per share for the 53rd week. Adjusted earnings per share on a 13-week basis excluding the estimated impact of 2017 tax reform was $2.17 versus $1.78 last year. The $2.17 per share result represents a $0.15 beat versus our top-end guidance.

This beat was split between $0.12 of true operating outperformance and $0.03 due to the adoption of the new share-based compensation accounting. As a reminder, we guided to no benefit in Q4 for the adoption of the new share-based compensation accounting.

Turning to our balance sheet, at quarter end, we had $133 million in cash, no borrowings on our ABL and had unused credit availability of approximately $456 million. We ended the period with total debt of $1.1 billion and a debt-to-adjusted EBITDA leverage ratio of 1.6 times.

On November 17, 2017, we closed on the repricing and extension of our $1.1 billion term loan B. Our new rate is LIBOR plus 250 basis points with the maturity extended out to November 2024. Our previous pricing was LIBOR plus 275 basis points with the term loan maturing in August 2021.

This transaction moved out our term loan maturity date over three years to November 2024, as well as providing $2.8 million in cash interest savings per year for the next seven years.

As a result of this transaction, the company recognized a non-cash loss on the extinguishment of debt of $3 million and incurred fees of $2 million, which were reflected in the fourth quarter GAAP results. As a reminder, $800 million of our $1.1 billion term loan is capped with an interest rate hedge of LIBOR at 1.65% through May of 2019.

Merchandise inventories were $753 million versus $702 million last year.

This increase was driven primarily by inventory related to 37 net new stores opened during fiscal 2017 and an increase in pack and hold inventory, which was 25% of total inventory at the end of the fourth quarter of fiscal 2017 compared to 23% at the end of the fourth quarter of fiscal of 2016.

Comparable store inventory decreased 7% and comparable store inventory turnover improved 10% during the fourth quarter. As indicated earlier, we were very pleased that inventory aged 91 days and older at the end of the fourth quarter was down 26% versus the prior year. Cash flow provided by operations decreased $9 million to $607 million.

Improved operating results and an increase in deferred rent incentives were offset by changes in working capital primarily related to inventories and other current liabilities. Net capital expenditures were $213 million for fiscal 2017. During the quarter, we closed three new stores and opened one new store ending the period with 629 stores.

We opened 37 net new stores for the year including 48 gross new stores, five relocations and six store closures. As we indicated earlier in the call, due to weather-related damages, eight stores remain closed for the entire fourth quarter of 2017. Next I will review our fiscal year 2017 performance.

Please note that the following discussion of fiscal 2017 financial results will be on a 52 week non-GAAP basis unless otherwise indicated. But again, as in the discussion of fourth quarter results, we have excluded from adjusted net income and adjusted earnings per share the estimated impact of 2017 tax reform.

Total sales rose 7.8% and included comparable store sales increase of 3.4% following a strong 4.5% comparable store sales gain in fiscal 2016. Total sales results were negatively impacted by approximately $42 million related to weather impacted stores during the year.

In addition, the 53rd week resulted in an additional $82 million in sales taking our sales increase on a 53 week basis to 9.3% for fiscal 2017. Gross margin was 41.5% representing an increase of 75 basis points versus fiscal 2016 primarily due to a lower markdown rate and higher IMU. Product sourcing costs were flat versus last years’ rate.

As a percentage of net sales, SG&A, exclusive of product sourcing cost improved 25 basis points to 25.9%. Expense leverage was driven mainly by rate reductions occupancy; business insurance and advertising spend, partially offset by increases in wages and stock-based compensation. Adjusted EBITDA increased by 18% or $104 million to $688 million.

This represents 11.5% as a percentage of sales driving a 95 basis point increase in rate for fiscal 2017. Depreciation and amortization expense, exclusive of net favorable lease amortization, increased by $15 million to $175 million, and interest expense increased by $2 million to $58 million.

The effective tax rate for fiscal 2017 prior to the estimated impact of 2017 tax reform and the change in accounting for share-based compensation was 37%. The share-based compensation activity provided a 440 basis point benefit bringing our effective tax rate to 32.6% before the estimated impact of 2017 tax reform.

The change to the January tax rate deduction rules triggered by 2017 tax reform resulted in a 60 basis point benefit bringing our effective tax rate to 32% for fiscal 2017.

2017 tax reform also triggered an estimated revaluation of the company’s deferred tax liabilities, creating a $93 million one-time benefit resulting in a GAAP tax rate of approximately 10% and an adjusted net tax rate of approximately 12%. Combined, this resulted in net income of $385 million, an increase of 78% on a 53-week basis.

Adjusted net income was $307 million versus an adjusted net income of $232 million last year, an increase of 32%. As a reminder, this adjusted net income result includes the change in accounting for share-based compensation but excludes the benefits of 2017 tax reforms. Earnings per share on a 53-week basis, was $5.48 versus $3.01 last year.

The 53rd week added $0.04 in additional earnings per share for fiscal 2017. Adjusted earnings per share on a 52-week basis excluding the estimated impact of 2017 tax reform was $4.37, inclusive of a $0.23 per share benefit related to the accounting change for share-based compensation versus $3.24 last year.

Excluding the $0.23 benefit related to the accounting change for share-based compensation, as well as the 53rd week, adjusted earnings per share grew 28%. Fully diluted shares outstanding were 70.3 million shares versus 71.7 million last year. Now I will turn to our outlook.

For the 2018 fiscal year, we expect total sales growth in the range of 9% to 10% as compared to fiscal 2017 excluding the 53rd week. Comparable store sales increased in the range of 2% to 3% on top of last year’s 3.4% increase.

Adjusted EBITDA margin expansion of 30 to 40 basis points, depreciation and amortization exclusive of favorable lease amortization to be approximately $200 million.

Adjusted EBIT margin expansion of 20 to 30 basis points, interest expense to approximate $60 million and effective tax rate of approximately 23% to 24%, capital expenditures net of landlord allowances are expected to be approximately $250 million. This results in adjusted earnings per share guidance in the range of $5.73 to $5.83.

The company expects adjusted EPS excluding the impact of 2017 tax reform and the accounting for share-based compensation to be in the range of $4.71 to $4.81 representing an increase of 14% to 16% over the comparable 52-week 2017 adjusted EPS of $4.14.

For the first quarter of 2018, we expect total sales growth in the range of 9.5% to 10.5%, comparable store sales to increase between 2% and 3%, adjusted earnings per share to be in the range of $1.05 to $1.09 compared to $0.79 per share last year.

Excluding the estimated impact of 2017 tax reform and the accounting change for share-based compensation, we expect adjusted EPS growth to be in the range of 16% to 21%. With that, I will turn it over to Tom for closing remarks. .

Thanks, Marc. In summary, we believe our results this quarter demonstrate the agility and increasingly strong foundation of our business model.

We drove operating results above our expectation, and expect the continued implementation of our growth initiatives and store expansion plans to enable us to continue our positive performance in 2018 and beyond.

We are confident in our outlook and believe in our focus on evolving our off-price model and our ability to capitalize on the rapidly changing retail landscape. This positions us well to bring more great brands, styles and value to our customers and increased value for our shareholders.

Again, I’d like to thank the store, supply chain, and corporate teams for their contributions to our strong fiscal 2017 results. With that, I’d like to turn the call over to the operator to begin the question-and-answer portion of the call.

Operator?.

[Operator Instructions] Our first question today is coming from Ike Boruchow from Wells Fargo. Your line is now live. .

Hey, good morning everyone. Great holiday and thanks for all the color on the call. .

Thanks..

I guess, so, I guess the first question, Tom; you mentioned that the non-cold weather business has performed above the chain average which I guess implies the cold weather categories underperformed a bit.

I guess, that’s just a little bit surprising given the favorable weather and some of the strength in cold weather categories that we’ve heard from some other retailers.

Any help – just help us understand what drove the underperformance in the cold weather goods?.

Yes, Ike, just to reinforce what I said previously, we are really pleased that we made tremendous progress to weathering our business. Among our strong non-colder weather businesses, it wasn’t just gift that outperformed, home, beauty, athletic apparel and footwear among many other businesses were very strong.

These are businesses that tend to stick with you and become part of the foundation of our business and typically have less volatility. There has – that has long been an important objective for the company as you know, we couldn’t be more thrilled with the performance of our non-cold weather categories in the fourth quarter.

Now to talk about the cold weather performance, we did exceed our plan nicely, though we’ve did planned the category down. That was a strategic decision to plan the business down, because number one, you just can’t count on the weather and number two, we have such a significant opportunity to develop our non-cold weather businesses.

Ike, it’s probably fair to say that we could have done more cold weather business if we bought more upfront in earlier in the season. But will take the trade-off all day long to build the penetration of sustainable non-weather sensitive businesses and to have added with such clean inventories from an aging perspective.

Maybe next year, the weather is similar, we may be less conservative, but, we are meeting our objectives and our objective is to grow our non-cold weather businesses and we feel very, very good about what we achieved in the fourth quarter and in turn, we’ll continue to reduce the volatility in our business. .

Got it. Thanks so much, Tom. And then, Marc, just one for you. There is a lot of moving pieces, I think in the guidance in terms of the tax rate and the share-based comp and headwinds like the wages.

Can you just walk us through the outlook and help us understand how we should think about the guidance on an apples-to-apples basis including the – basically the entire P&L, gross margin, SG&A, et cetera?.

Hey, good morning, Irwin. Let me go ahead and unpack that one question with 70 parts to I hear. I think we will start with EPS on an apples-to-apples basis. You’ve got headwinds, so we’ll talk about wages and that will give you the component to the operating margin increase.

So, our starting point is a 52-week 2017 EPS base of $4.37, that was I think the last table of our press release. And you saw that that excludes the benefit of tax reform in the 53rd week. So, what that does include is, $0.23 for the accounting change for share-based compensation.

So, we are going to back that out and I guess, I’ll get it more into that a second, but if we back out that $0.23 benefit, you get what we refer to as a base EPS of $4.14.

So, that’s one of the reasons we provided guidance before the accounting change and before tax reform of $4.71 to $4.81, which represents a growth rate of 14% to 16% on top of that $4.14 and that’s consistent with the mid-teens growth that we talked about on our Q3 call.

As far as the accounting change for share-based compensation, we are really assuming the same level of underlying activity this year. Right, I mean, it’s a complex thing. We have options that vest and clearly are exercised throughout the year. We’ve got one year of good history with that. We are assuming it’s the same level of activity.

But due to the tax rate change, that activity is worth less from an EPS point of view. I guess, technically it’s worth 60% of what it was in the prior year. So going forward, that accounting change for share-based compensation will be baked into our tax rate just because it’s too complicated to undo it with the old one.

So, if you add back the benefit of 2018 tax reform and the accounting change, that’s when you get it to our – really our all-in guidance of $5.73 to $5.83, okay. With headwinds and wages, so, as far as headwinds in total, we have $13 million in incremental wages.

We have $9 million in incremental stock-based compensation expense, the expense side of that and then of course, the biggest one, which is $25 million in depreciation, which obviously is driven by our higher gross CapEx spends in 2017 and what we are projecting now for 2018.

In terms of wages, similar to prior years, our store apps and our HR teams performed their annual market-by-market review of our hourly wages. That resulted in an incremental $9 million of wages for stores, that’s versus $7 million last year and $4 million for DCs also versus $7 million last year.

We are very confident in this competitive approach to wages. We have two metrics that we focus on as it relates to our hourly workforce. Turnover, ending up open jobs percent and we were pleased with both of those metrics at year end and we remain pleased today.

Quite frankly, Irwin, we believe, we would not be able to achieve the results that we have, if we didn’t have the right people in our stores in our DCs. With that said, wages are a dynamic part of our business and as we’ve done for the last few years, we’ll continue to monitor it throughout the year.

If at some point in time we reach a point that requires to us to adjust, we will and then of course, we will leverage our profit improvement culture to offset as much of that as possible.

I guess, speaking about our profit improvement culture, I’ll tell you, I just continue to be so impressed by all of our sales support teams who continue to find ways to become more efficient not only that we can overcome the headwinds that I just talked to you about, but also allow us to guide EBIT margin expansion, which I think was the final part of your question.

So, as far as the planned EBIT expansion of 20 to 30 basis points there, when we kind of break it down this way. A merch margin plus of 50 basis points, less a freight headwind of 10 basis points, a product sourcing cost headwind of 10 basis points, that kind of gets us to what we refer to as loaded margin of 30 basis points.

That depreciation number I spoke to earlier is also a ten basis point headwind and then SG&A similar story to prior years. SG&A at the 2% comp we expect to be flat and our SG&A at 3% we expect to pick up ten basis points of leverage..

Super, helpful. Thanks so much. .

You got it. Take care. .

Operator?.

Operator, we think we are ready for the next question..

Yes, our next question is coming from Matthew Boss from JP Morgan Chase & Company. Your line is now live. .

Thanks. Congrats on a nice quarter. .

Thanks, Matt..

So, Tom, it sounds like your gifting strategy was a big win this fourth quarter. Could you speak to the strong performance in guests and provide any color on the underperformance in ladies apparel? That would be helpful. .

Yes, I’d be happy to Matt. Okay, well, let’s start with gifts, which were a key part of our progress made in deweathering our business as I stated before. We are very pleased with this category’s performance and it really, really helps us build a less weather-sensitive foundation for the company.

We are extremely pleased with both our gift assortments as well as our store execution, the strong performances across home, accessories, men’s women’s and kids as I stated previously. We still see significant growth in the category going forward.

I’d add that gifts and home were big contributors to our success in the overall gift business, but there are a lot of great home growth categories, gifts certainly help drive home penetration to 14% in 2017.

Between Thanksgiving and Christmas, I visited hundreds of stores and I have to say that our stores team really did a great job in terms of the overall presentation of the product within our stores and our merchants teams did an outstanding job of product selection and it was really a compelling assortments for our customers.

So, let’s move to ladies apparel, moving further to ladies apparel, we are not only talking about missy sportswear, ladies apparel also includes juniors dresses, suits and apparel. Missy sportswear is the largest and most important business from ladies apparel.

We are really pleased with the growth of that business, which did increase in penetration modestly versus last year driven by better and active sportswear as I mentioned before. But some of the other businesses in the ladies apparel have not been as strong.

Some of our heritage businesses like dresses, suits, juniors, and intimates were not as strong as we would have liked. Would you have strategies in place to improve those businesses and these areas will be a focus for 2018. So overall, our penetration totally is apparel did dropped by approximately 100 basis points to 23% from 24%.

But we are optimistic that we can reignite growth and capture market share that we believe we are old in ladies apparel given our penetration at 23% versus our peers around 30%. But Matt, we have a talented team in place in these areas with one more year of experience.

We feel confident that we have the right strategies in place to have a successful 2018. .

Great.

And then, just a follow-up, Marc, can you update us on how your new stores are performing, maybe in terms of sales and EBIT? I think you provided us statistics last year versus the chain and I was just hoping maybe for an update?.

Sure, Matt. We continue to be very pleased with the performance of our new stores, both from a sales and a profitability perspective. They continue to perform in line or better than our underwriting models.

In terms of the stats that we typically give at the end of the year, at the end of 2017, our stores that were under 60,000 gross square feet ended up being 22% more productive than the chain average. That’s the first one.

And then I think the other one you are referring to, Matt is, last year we gave a stat on our 2013 and 2014 cohorts in terms of how they performed in 2016 versus the chain. So we’ll go ahead and update you there.

So our – this year, our 2014 and our 2015 cohorts in terms of how they operated in 2017 versus the chain, the comp sales increased for those two cohorts exceeded the chain average by 240 basis points and their EBIT margin expansion was 200 basis points higher than the chain. .

Wow, that’s great. Excellent. .

Paybacks still remains inside of three years, Matt. .

Okay, great. Thank you. .

You bet..

Thank you. Our next question today is coming from Kimberly Greenberger from Morgan Stanley. Your line is now live..

Thank you so much and I’ll add my congratulations as well for very fine quarter. Marc, my question is on the 2018 revenue guidance. We are trying to understand some of the drivers of the acceleration in total revenue growth, thinking about the 9% to 10% on a 52 to 52 week basis.

Maybe you could just go through new store openings gross this year and last year. Are there any changes in timing of those store openings? And then, secondarily, maybe there is a change in closures and any other assumptions that would drive that acceleration. Thank you so much..

Yes, sure, Kimberly. You hit the nail on the head. So, 60 gross new store openings, 27 in spring, 33 in fall, and out of that 27 in spring, just to – little bit Kimberly, but in terms of what’s in our guidance right now, we’ve got 17 March openings, and five in April, five in May.

So that’s the key driver and the only thing I’d mentioned to you on the – in terms of the closures to, just remember that our closures are typically very small volume stores. So they are much, much less in annual volume than the new stores that we are opening up. Those are really the drivers. .

Great. Thanks so much, Marc. And my follow-up is just on the stock-based compensation that is set to EPS last year. This is obviously a super complex this year I think for us to understand.

But maybe you can just talk about the factors that would drive a similar benefit in 2018 versus 2017, and if there were things that would change that would cause a headwind or tailwind what would those factors be that would cause a differential in the benefit? Thanks so much. .

Yes, just a lot of moving pieces there.

Everything from the number of restricted shares that vest, the number of options that vest, where the stock price is, and how people, what’s factors, all our executives go through in terms of their decision-making process in terms how and when they exercise which of course you would think has a lot to do with where the stock price is.

So, a lots of moving pieces there and not something that obviously you can get all the data and to know exactly what it is.

But just in terms of the overall population of shares that are vesting and when in the fact, we made some guesses in terms of what we think the stock price is going to do, we think that underlying activity will be similar to last year, but again it’s - anything could happen. .

Great. Thanks, Marc..

You bet. .

Thank you. Our next question today is coming from Lorraine Hutchinson from Bank of America. Your line is now live. .

Thank you. Good morning. .

Good morning, Lorraine. .

Good morning. .

I think you said, AUR was up in the fourth quarter.

Can you talk about what drove that and if you expect that to continue as a comp driver in 2018?.

Yes, Lorraine. So, we had AUR up in – little bit in Q3, also a little bit in Q4. So I had to tell you what the drivers were. I’d probably look to a higher, better, best penetration. I’d look to higher percent of full price sales, versus markdown sales.

And I guess some of those areas, Tom called out as being very strong as you think about better sportswear, men’s, kids, athletic shoes, those are all – those are areas that typically have a higher AUR.

And in terms of going forward, I’d probably tell you, last few months is probably the best indicator, but you don’t know, we did not have a strategy to move AUR from x to y. We have lots of merchandizing strategies that drove – to grow traffic and to grow comps. But, AUR is really a byproduct to that. .

Yes, we really just want to focus on delivering great values. And we really don’t want to have a roadmap to grow the AUR because, if you have a roadmap and you plan it, then it happens.

But our number one goal is and has been delivering great values to our customers and we really feel that that has contributed to the kind of sales performance that we been delivering. .

Operator, we have time for one more question, please. .

Certainly. Our final question today is coming from the line of John Kernan from Cowen and Company. Your line is now live..

Good morning everyone. Thanks for taking my questions. Congrats on a really strong holiday. .

Thank you. .

Thanks, John..

Just on that theme of AUR, Tom, I think you mentioned branded unit receipt penetration was up 200 basis points and better best was up 300 basis points. We can obviously see the expansion of the vendor base as we go into the stores.

Can you just talk about how much further the better best can go in terms of mix and how much better – or how much higher the branded unit receipt penetration can go in terms of the mix obviously, that’s an AUR and comp driver?.

Right. Well, as far as branded goes, we are on a pretty steady track of a couple hundred basis points every single year. We’ll see how that expands, we still have opportunities to add even more brands. As far as better goes, again it all depends on what kind of values we can deliver our customers, but I anticipate that that will continue to grow.

We really haven’t said, okay, we wanted to be x percent over the next five years, because again, we want the value that to be the number one focus of what we do every single day. And things will happen over time.

One of the things that we are very proud of is the fact that, we’ve been growing our customers who makeover $75,000 a year at a much higher level than the customers we have in our base. And I think a lot of that has to do with, A, delivering the better product and also, the way our stores are looking today.

The more we improve our store, the look of our stores, as we stated, we’ve made some significant progress in 2017 and we will again in 2018 that all help generate a different customer..

Got it. Thanks and just one follow-up. You’ve had a long history of reporting upside to your guidance as you’ve been a public company. I am just wondering, the Q1 comp guidance does assume a deceleration point you were running in the fourth quarter and the two year stack trend is decelerating as well.

I am just wondering, was gift giving so robust in the fourth quarter that trends have moderated a little bit in Q1 or is there is some type of conservatism here in terms of the guidance? Thanks. .

John, I think you know how we guide and work typically a 2% to 3% comp guidance and the reason for that is, we are able to plan our receipt base and our expense base accordingly.

And we certainly feel and we think we’ve certainly proven over time that to the extent there is more business to be had that will be all over that and have a lot of confidence in our merchandizing team to beat it if it’s there. .

Thank you. We reached the end of our question and answer session. I’d like to turn the floor back over to Mr. Kingsbury for any further or closing comments. .

Thanks for joining us today everybody. We look forward to speaking with you when we report first quarter results in late May. Thanks you. Have a good day..

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