Ladies and gentlemen, thank you for standing by, and welcome to Burlington Stores, Inc. Second Quarter 2021 Earnings Webcast and Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, David Glick, Senior Vice President, Investor Relations and Treasurer. Please go ahead..

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2021 second quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and John Crimmins, Chief Financial Officer.

Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded, or broadcast without our expressed permission. A replay of the call will be available until September 2, 2021. 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 2020 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 is Michael..

First, I will review our second quarter results; second, I will discuss the outlook for the second half of fiscal 2021; and third, I will share some comments on our ESG initiatives and our most recent corporate social responsibility report. After that, I will hand the call over to John, to walk through the financial details.

Then, we will be happy to respond to any questions. As a reminder, the results that we discuss today are being compared to the equivalent period in 2019. Given the impact of the pandemic last year, our 2020 results do not provide a good basis for comparability. Okay. So let's talk about our results.

Total sales grew 34% in the second quarter, which followed a 35% increase in Q1. Think about that. We grew our sales by over a third versus the first half of 2019.

This is compelling evidence that our Burlington 2.0 initiatives are working and that we are taking significant market share as the consumer and the broader economy begin to recover from the Covid-19 pandemic. Now, I will talk about comp store sales. Comparable store sales in the second quarter increased 19%.

We believe that there were several factors that drove this very strong comp performance. These factors included, number one, the residual impact of the Federal stimulus payments that were distributed in March. Number two, pent up demand as the Covid vaccines became more widely available during the quarter and consumer spending picked up.

Number three, the beginning of the monthly child tax credit payments in July. And number four, our own very strong execution of our Burlington 2.0 strategies. Turning to category and regional performance, once again, our strength in the second quarter was a very broad based. All of our major merchandise categories easily outperformed their plans.

And comp store sales in all regions of the country were well ahead of our expectations. Our gross margin in the second quarter increased by 80, that’s eight zero basis points. This was despite a 120 basis point increase in freight expense. Of course, this means that our merchandise margin grew by a very robust 200 basis points.

This increase was once again driven by lower markdowns. The buying environment in the second quarter was very favorable and we were able to find great merchandise values to flow to stores and to fuel our ahead of plan sales trend. At quarter end, our in-store inventory levels were down 7% on a comp store basis.

This is a relatively modest decrease compared to recent quarters and it reflects a deliberate strategy. In fact, we chose to accelerate back-to-school receipts to ensure that global supply chain challenges did not impede our ability to take advantage of the sales opportunity that we see for the back-to-school period.

To better understand how we managed our inventories during the second quarter, it is more instructive to look at our average weekly comp store inventories. These were down 25% during the quarter. For the balance of fiscal 2021, you should expect to see similar double-digit decreases in comp store inventory.

As you know, this is a core element of our Burlington 2.0 strategy to run with leaner inventories and to ensure a fresher assortment in front of the customer. Reserve inventory was 31% of our total inventory at the end of the second quarter versus 33% in the 2019 period. Again, this end of quarter metric does not convey the full story.

We have continued to significantly expand our use of reserve inventory as a tool to chase the sales trend. In fact, our reserve receipts during Q2 increased 86%, while our reserve releases increased 64%. In other words, there is a lot more movement in and out of reserve than that was in 2019.

In the second quarter, we were able to make some great opportunistic and strategic buys to put into reserve. But, at the same time, we moved up the release of other goods from reserve to fuel our strong sales trend. Moving on to new store performance. We are very pleased with the initial rollout of our new smaller store prototype.

During the spring season, we opened 16 stores that were 30,000 square feet or less and the earlier results are extremely encouraging. As you know, we expect this smaller format to become our main new store prototype over the next couple of years. As a point of information, one of these recent openings is in Patchogue, New York.

This is very close to those of you who live in the New York City area. So I encourage you to visit, walk the floor, spend some money, and of course, let me know what you think.

In a moment, I will talk about the outlook for the rest of the year, but before I do that, now that the results of the second quarter are in, I would like to briefly review our performance for the year-to-date, in other words, for the spring season, as a whole.

As a retailer, we break the year into two halves, building our plans and strategies for the first half of the year, the spring season, and then separately, building our plans and strategies for the second half of the year, the fall season.

So I think it is helpful and instructive to step back and ask, how well did our strategies work in the spring season, and how well did we execute on these strategies? Also by looking at the season as a whole, this naturally flattens some of the timing issues that can affect or distort one quarter or another.

So, how did we do? Well, for the spring season, Q1 and Q2 combined, our top-line sales growth was 34%. Our comp store sales growth was 20%. Our operating margin grew by 240 basis points and our adjusted earnings per share was ahead by 73%. Look, we know this was not all us.

There were one-time factors such as the Federal stimulus payments and the release of pent-up consumer demand. There is no doubt that these one-time factors helped drive our results. They helped drive every retailer’s results. That said, we feel very good about our own performance on an absolute and on a relative basis.

With that said, let me turn to our outlook for the second half of fiscal 2021. Based on our stronger than expected year-to-date results, we have increased our baseline plan for comp store sales for the fall season as a whole from our previous plan of flat to a new plan of plus 10% comp growth.

We are already 3.5 weeks into the quarter, and I am happy to report that our August month-to-date sales trend is currently running well ahead of this. We are chasing the trend and we have growing confidence that we will exceed this 10% hurdle for Q3. As we get further into the quarter, we will update and adjust our baseline plan.

But for now, there are significant reasons to remain cautious. At this point, the surge in COVID cases driven by the delta variant shows no signs of letting up. And it is unclear what impact this may have on consumer spending in the weeks ahead. In this environment, it makes sense to plan our business conservatively and then adjust as we learn more.

Throughout this year, we have demonstrated our extraordinary ability to chase the sales trend. We will do the same in the fall season if the sales trend is there. Moving on from the sales outlook, I would like to spend some time talking about the extraordinary freight and supply chain expense pressures that we are seeing.

For several quarters now, there has been a significant imbalance in global transportation systems between demand and available capacity. This has caused unprecedented volatility and disruption in deliveries of merchandise across all sectors of retail and it has caused a significant spike in international and domestic freight rates.

As we move into Q3 and the peak period for retail deliveries, the situation is getting much worse. Again, this is not at all unique to Burlington. These conditions are affecting all retailers.

Based on our experience and success so far this year, we are confident that despite these issues, we will be able to get timely receipt of the merchandise that we need to support our trend. But in doing this, we expect to incur significantly higher freight and supply chain expenses.

As John will detail in a moment, we are anticipating some offsets to these higher expenses. In particular, continued lockdown savings driven by faster inventory turns and leverage on other expenses if we achieve our sales plans. But overall, these higher logistics costs will put significant pressure on our operating margins.

Before I leave this topic, it is important to make the point that the issue I have just described the huge imbalance between demand and available capacity in transportation systems is being driven by short-term factors.

On the one hand, the surge in consumer demand in the United States and on the other hand, the limited capacity of domestic and international transportation systems further hampered by labor shortages and restrictions associated with the pandemic. We do not believe that this imbalance or these factors are permanent.

It will not happen right away, but we expect these issues to normalize over time. As they normalize, we would anticipate that freight rates will come back down. We also believe that if the situation normalizes there could be a significant backlog of merchandise that makes its way into the off-price channel. Okay.

Before I turn the call over to John, there is one other very important topic that I would like to touch on. Earlier this week, we published our Third Annual Corporate Social Responsibility Report. We are very proud of this report and the accomplishments and progress that it describes.

As a company, we recognize that driving shareholder value is extremely important, but it should not be the only thing that we focus on and it cannot be the only objective that we measure ourselves against. We have a much broader set of responsibilities, to our associates, to our customers and to the communities that we serve.

These are all critically important stakeholders. We believe that by serving these stakeholders, we will build a stronger, better, and more sustainable company. And that in doing this, we will further enhance and drive shareholder value over the longer term.

The CSR report that we published earlier this week is intended to back up these words with specific details on the programs that we are pursuing and data on the progress that we are making. It covers important topics like inclusion and diversity, community outreach and support, and environmental sustainability.

To be clear, while we are proud of our commitment and our accomplishments, we regard this as a journey and we know that we have plenty of work still to do.

I would encourage you all to take a look at the report, which is available on our Investor Relations website and I invite you to follow-up with us if you have questions or would like more information. Now, I would like to turn the call over to John to provide more detail on our second quarter financial performance.

John?.

first, ocean freight; the capacity versus demand imbalance for all imports has continued to worsen and has driven related costs well past what we have been anticipating. These higher rates affect our margin on all merchandise. The small portion of our business that we directly import and the merchandise that is imported by the vendors we buy from.

Second, domestic freight. A very similar story. Demand far exceed supply for all modes of transportation and as the situation is continuing to worsen rates have continued to escalate well past what we have been anticipating. And third, supply chain costs. This demand has far exceeded what most retailers have planned for.

The competition to increased staffing levels to meet the higher volumes has driven wages higher again. Our expected increase in supply chain costs is driven partly by additional base wage increases, partly by temporary incentives and partly by inefficiencies caused by the overall disruption in the global supply chain.

With that as background, let's move to some specifics. As Michael mentioned earlier, we will continue to plan sales conservatively and adjust our business to the trends that we see just as we did in the first half of fiscal 2021. Our current baseline comp sales plan for the second half of the year is a 10% increase.

As Michael mentioned earlier, given our strong start to the quarter, we have growing confidence that Q3 may exceed this hurdle, but we will keep our fall baseline comp sales plan at 10% until we are further along that had better visibility as to what to expect in the fourth quarter.

Based on this revised comp store plan for the fall season, combined with our better than expected Q2 comp sales results, we are now planning for our full year comp store sales increase of 14% versus our previous plan for a 7% increase.

As you think about total sales growth for the full fiscal year versus FY 2019, remember to factor in two years of new stores over this time period. We opened 31 net stores during the first half and we expect to open 44 net new stores in the second half of this year, primarily in Q3.

The growth in new store and non-comp sales, combined with our updated full year comp baseline assumption of 14% would potentially deliver approximately 28% total sales growth for the full fiscal year. Given the dynamic and volatile cost environment, we are facing, it's difficult to provide specific margin metrics for the balance of this year.

However, we thought it might be helpful to share some of our internal modeling assumptions for Q3. If, we were to hit our baseline top sales plan of 10% in Q3, then our modeling suggests that our EBIT margin would decline by approximately250 basis points, driven by 450 basis points, combined freight and product sourcing cost deleverage.

Offsetting that cost pressure, we would expect 200 basis points of combined merchandise margin expansion and SG&A expense leverage.

On our last earnings call, we shared that with the Q1 results and our planning assumptions of the10% comp in Q2 and flat comp in Q3 and Q4, we would expected a full year EBIT margin decline of 20 to 30 basis points, compared to fiscal 2019.

Now, after factoring in our Q2 results, our new 10% comp sales planning assumption for the fall season and the significant incremental freight and supply chain cost pressures our modeling assumptions result in relatively flat EBIT margins for fiscal 2021.

We do expect most of the deleveraging impact of freight and supply chain cost to be temporary and the global supply chain capacity in demand are more imbalanced, we would expect to see an operating margin tailwind, but it’s not yet clear when to expect that to happen. Two final points before I turn the call back to Michael.

First, please keep in mind that these comments we are making on our planning assumptions are intended to help you understand how we are modeling our business. As we said earlier, we expect the business environment in the second half of the year to continue to be very difficult to predict for sales demand and for freight and supply chain costs.

Our planning assumptions are based on estimates that may not be accurate. Second, we wanted to reinforce a point we made on last quarter's call.

As you update your model for 2022, it'll be very important to back out the impact of one-time sales benefits from external factors such as the Federal stimulus checks in Q1, the pent-up demand we saw in Q2 and the additional benefit from the Child Tax Credits for the balance of 2021.

Of course, we will provide more information on our 2022 sales outlook later this year or early next year. With that, I will turn it over to Michael for closing remarks. .

Thank you, John. Let me wrap up my remarks by congratulating the entire Burlington family for our exceptional performance in the second quarter and the first half of fiscal 2021. As I’ve said before, this is a really exciting time to be at the company. We have very strong momentum.

We are building and strengthening our team and we are achieving results that are at the top of our retail peer group. Our 34% total sales growth year-to-date reinforces our confidence and our ability to take significant market share over time.

Meanwhile, despite the temporary expense headwinds that we are placing, we remain very excited about our ability to significantly expand operating margins over the next few years. With that, I will turn it over to the operator for questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Matthew Boss. Your line is now open. .

Great. Thanks and congrats on another nice quarter. Michael, maybe first on the top-line.

Could you just help quantify or provide any additional color around some of the factors that drove your second quarter comp growth?.

Sure. Well, good morning, Matt. Thank you for the question. As you'll probably recall, in the - for the first quarter, we estimate that the impact of the Federal stimulus checks as being worth 10 to 15 points of comp growth. That analysis was fairly straightforward.

The checks were sent out over a very short time period in March of this year and we could see the sales lift in the days and the weeks that followed. So the analysis wasn't hard and we're fairly confident about that estimate.

For Q2 As I said in the script, there were several factors that drove – what we think drove our comp growth including probably a residual impact from those stimulus checks, plus pent-up demand as life started to get back to normal in Q2. And then the Child Tax Credit payments that were made later in the quarter.

We certainly tried to quantify the impact of each of those, but it was much more difficult. For example, how do you quantify pent-up demand. So, we don't really have an estimate that we can share for Q2. But nevertheless, I would say, we are fairly sure that the impact of those items was pretty significant.

The reason that that's important is that, is that all of those items are non-recurring. This year, these factors have been like a rising tide. They've lifted all retailers. In 2022, we would expect that that tide is going to recede.

And so, as John said earlier, as you think about sales models for 2022, it will be very important to back out the significant impact of those one-time items, not just for us but for every retailer. .

Great. And then, maybe just a follow-up on freight and supply chain expenses for John.

Could you just help provide some color on the higher freight and supply chain expenses that you are seeing today and then maybe more so, what makes you think that these costs are temporary?.

Well, thanks, Matt. Good morning. It's a really good question. I think it's worth taking a couple of minutes to explain in some detail what we're seeing.

Coming into this year, we and really all other retailers were tentative and somewhat conservative in our sales plans, nobody was really sure what to expect driven by the government stimulus payments, pent-up consumer demand and other one-time factors, sales levels across the retail industry have gone well beyond what anyone would have expected six months ago.

Faced with this surge in demand, all retailers have been competing with each other for capacity along really every link of the global supply chain. The competition for that capacity has driven rates at unprecedented levels.

Just as an example that the spot rate for shipping a container from China to a West Coast port shortly before the pandemic has been running around $1,500 bucks. To do that now, it cost $15,000 and the rates are still increasing. There aren't enough containers. There aren't enough ships. There aren’t enough trucks or trains.

There is more volume now than any part of the supply chain pipes can adequately handle. Every piece of the pipe is slower and that our backlogs to work through every step of the way. To work around these issues most retailers have increase their orders and tried to accelerate them ahead of the fall and holiday season.

This has even further increased the pressure on the supply chain, helping to drive even higher rates. The companies that can afford to, the additional costs are worth incurring temporarily because even after covering these costs, the added operating profit is accretive even if it temporarily hurts operating margins.

Temporarily, maybe the keyword in this situation we believe and most economists seem to agree that this situation will moderate over time as demand subside and as capacity is added.

So, like many others, we think the global supply chain issues will likely carry into next year, but at some point the imbalance between demand on the one hand and capacity in the other will start to correct itself.

When this happens, we would expect freight and the rest of the temporary cost related to the disruption and the DC labor shortage to become a tailwind for most companies including us. And remember, while it continues, we do expect the disruption to help us to be able to continue to find plenty of terrific merchandise values for our customers. .

Thanks for all the color and congrats again on the continued momentum guys. .

Thanks Matt. .

Thanks Matt. .

Thank you. Our next question comes from the line of Lorraine Hutchinson. Your line is now open. .

Thank you. Good morning. John, you achieved similar comp growth in the first and second quarters. But your operating margin expansion was much stronger in 1Q.

Can you take us through the factors that drove this difference between the quarters?.

Sure, good morning, Lorraine. Thanks for the question. Let me just frame the question a little bit and then I'll answer it. So, EBIT margin expanded 350 basis points in the first quarter and only 110 basis points in the second quarter. So that's about a 250 basis point difference, obviously on a very similar comp level.

So why is that? Well, gross margin was really the key driver of the difference, expanding only 80 basis points in the second quarter versus 230 basis points in the first. So, that's a 150 basis points of the difference. Markdowns was a big driver of the gross margin difference. And this wasn't unexpected for us.

You may remember that during the first quarter call, we said that the markdown improvement in Q1 would not be sustainable. Q1 was kind of unique. We were comparing to the first quarter of 2019 that had quite a bit of clearance activity. Historically, first quarter had been a weak gross margin quarter for us.

We often carried over holiday clearance merchandise from the fall, which dragged our first quarter margin down and this did happen to us in the first quarter of 2019. But in the first quarter of 2021, we started with incredibly fresh and lean inventory.

And then, with the well above planned 20% comp in the first quarter, our inventory turns increased nearly 60%, which we also said would not be sustainable. And it turns out we are right, our inventory turns did slow down in Q2, but they still improved by a very respectable 49%.

Aside from gross margin, the remaining 100 basis points difference was largely driven by less SG&A leverage. Most of that was driven by less advertising leverage in Q2, compared to Q1, and more deleverage from incentive comp in the second quarter. .

Thanks. And then, my second question is for Michael related to pricing. Several retailers have talked recently about taking up prices to offset some of these cost pressures.

What are you seeing in terms of pricing in the market? And could this be an opportunity for Burlington as well?.

Well, good morning, Lorraine. Great to hear from you. I would say that we are very skeptical about the ability of retailers to sustainably raise prices across the categories that we can compete in. There are really two reasons for that skepticism.

Firstly, it's important to grow a distinction between higher realized prices in the short-term versus permanently higher prices longer term. It's clear the inventory levels across the retail industry have been very lean this year and as a consequence, there has been very little promotional activity.

That means, that realized prices have been higher for many retailers. But we just don't think that's sustainable. The realized prices are higher up because inventories are lean but the only reason that inventories are lean is that there has been a huge surge in consumer demand at the same time as supply chains have been constrained.

So, we think that when the situation normalizes, it's likely realized prices will come back down to more like historical levels. That's the first reason we're skeptical. The second the second factor that maybe feeding into this is that the - is a spike in freight and supply chain costs.

If you believe that those costs are permanent and I think you could make a good case that retailers may try to pass those costs on in the form of higher prices, but as we said in the remarks and as John just described, we think those costs are mostly about a moment in time, a short-term imbalance between demand and capacity.

It is just picking up on one of the data points that John shared earlier, ocean freight rates are about ten times higher now than they were in 2019. That is not because operating a ship or paying a dock yard worker is ten times higher. It's because demand exceeds capacity. That imbalance won't last. It will normalize.

So, we think any price increase that's based on those short-term costs, again it's just not likely to be sustainable. So that's our assessment. Now, let me wrap up my answer by saying, we could be wrong.

Maybe prices across retail really will move up in the next year or two and to be clear, we wouldn't mind at all for an off-price retailer like us that would be terrific. It would help to further expand our value differentiation.

Through the lens of Burlington 2.0, we would see this as a great opportunity to drive sales, not to drive margin, but to drive sales. .

Thank you..

Thanks, Lorraine.

Thank you. Our next question comes from the line of Ike Boruchow. Your line is now open. .

Hey. Good morning, Michael, John, David. Michael, a question for you to start. Just couple long-term questions actually. Just, I guess, based on the comments today, I am curious if you could help us on how you are thinking about 2022, given what you are up against in 2021.

Is there a way you could help us understand how you are planning the business next year in anyway?.

Well, good morning, Ike. Yes. Thank you. It's a very good question. Having just done a 20% comp for the spring of 2021, it is pretty challenging to think about well, how should we plan spring of 2022.

We are getting to a point where we are starting to work on that, because typically, as we move into October November, we start working on our plans for the following spring. I don't have a lot of details to share. But let me do this. Let me offer up a possible scenario to 2022 in terms of what the year could look like.

We think that it's possible that 2022 will be a very difficult and turbulent year across the retail industry and I'm not saying that with any sense of doom or pessimism on the contrary difficult turbulent years in retail are often very good for off-price.

So as I sort of lay out why we think the year could be difficult and you should interpret this as me feeling upbeat and not the opposite. So, really two reasons why I am saying I think 2022 could be a difficult year in retail.

But the first reason we kind of touched on earlier, in 2021, every retailer has benefited from significant one-time items that have driven much higher sales levels than they otherwise would have achieved. When retailers anniversary those items in 2022, comps could welfare negative that mathematically that seems very lightly.

Secondly, in 2021, that surge in sales was accompanied by global supply chain constraints and very lean inventory levels, which means that many retailers have seen just a remarkable recovery in margins. Again, if you scroll forward to 2022, if consumer demand does falloff and it's likely that those supply chain constraints are going to ease.

So you could see an increase in the flow of merchandise into the country. At the very time the comp sales trends have turned negative. Now the scenario I've just described, a negative sales trend across retail and a loose out supply of merchandise could create huge disruption.

But the consequences for off-price and for Burlington 2.0 in particular, we think it'd be very favorable. It could offer the potential to further accelerate our ability to take share. Now, I don't want over tell the scenario I've just described for the past eighteen months have demonstrated that there are serious hazards to anyone making predictions.

So, but that’s actually - that's kind of the point. For 2022 given the uncertainty, we think that we're going to need to be very flexible and very nimble. So we can respond to any scenario we face including the scenario I just described and if there is an opportunity, so that we can - we're in position to take advantage of it. .

Got it. So a follow-up, actually, just you heated it up pretty well, to take advantage, it seems like having a lot of with the Burlington 2.0 strategy.

Are there aspects of the strategy that you could accelerate or leverage you guys could pull or accelerate going forward you get this is in fact, how the environment actually shakes out?.

Yes. So, it's a really good question. In fact, for the last several months, I've been working with the executive team on exactly this question. Can we move faster? Again, I don't have a detailed answer, but let me offer up a few comments.

Number one, we're mindful that we're building a company for the long-term here where everything we do needs to be done in a very high quality way. So we are not going to accelerate anything if we have to compromise how well we do it. That's point number one.

Point number two, I would say that there are there are areas where if the opportunity presents itself, then we will absolutely move faster. The best example of this is the investment we're making in our merchandising organization. If we see strong talents in the market or strong flow talent in the market, we'll move on it very quickly.

We won't be held back by existing hiring plans or budgets. And then, I guess, the third point is that there are or there may be some other initiatives that we can accelerate. But we need to do more homework first before we make a decision to formally adjust our plans.

The key thing, I guess, bringing it back to this year, the key thing is that, for the balance of 2021, we need to focus heavily on doing what we've been doing, offering great value, planning the business conservatively and being ready to change.

So, we'll certainly in parallel, sort of work on some of those longer term opportunities and possibly accelerating some of those longer term opportunities. But then our main focus for the next six months needs to be to keep doing what we are doing. It's been a winning game for us, so far of this year. .

Got it. Thanks so much. .

Thank you. .

Thank you. Our next question comes from the line of John Kernan. Your line is now open. .

Good morning, Michael, John, David. Congrats on strong execution and huge market share gains here. I have a couple of questions for John.

First, can you just give us more color on the operating margin outlook based on the freight and supply chain cost? It sounds like for the full year 2021, you expect operations - operating margins to be flat on a 14 comp.

How do we think about the margin structure going forward? Do you still see the same opportunity you saw several months ago to increase margins over time?.

That’s okay. Well, first of all, good morning, John. Thanks for your question. I'll start with the first part, this year's is EBIT margin. Back in May, when we spoke, we shared that freight and supply chain costs were rising faster than what we had originally planned for.

And while we had planned for these costs to continue to increase, we underestimated the magnitude of the increase. It looks considerably worse now than it did then. So, today, we shared our Q3 adjusted EBIT margin outlook is down 250 basis points on a ten comp.

Our updated full year adjusted EBIT margin plan implies a similar decline for Q4, based on our updated fall comp plan of 10%.

Our strong first half margin rate performance is being roughly offset in the back half as we do expect operating margins to be down by over 200 basis points if we perform in line with our 10% comp planning assumption for the fall. And yes, assuming a 10% comp performance for the fall, we would expect our operating margin rate to be flat.

This full year performance is driven by 450 points of deleverage, mostly from freight and supply chain costs and to a lesser degree by the incentive comps cost. We expect to be able to fully offset these costs with about 450 basis points of combined gross margin expansion, driven by lower markdowns and leverage on SG&A cost.

So while the impact of these incremental costs and this year's operating margin is disappointing, there are few other things to keep in mind. Our updated planning assumptions that we shared today, if realized would deliver 28% total sales growth with the flat operating margin that would mean 28% EBIT dollar growth also.

And as we've mentioned a few times today, we think that with the exception of some permanent changes in DC wage rates, the rest of the drivers, the 450 BPS of deleverage are temporary, we estimate the DC wage deleverage impact in these estimates to be less 100 BPS of that 450.

So, for the second part of your question, how do we think about operating margins going forward? Well, we still see fundamentally the same long-term operating margin opportunity that we've been describing. We expect freight supply chain cost to improve. We expect to continue to drive faster inventory turns, which should result in lower markdowns.

We expect to see occupancy leverage increase accelerated by our new smaller stores and we see opportunities to drive better operational efficiency creating other expense leverage. So, yes, we still see the same path to the continued operating margin expansion that that we've been talking about. .

Got it. That was a lot of detail. Thank. I have another one for you, John. It sounds like you're excited about what you're seeing with the new smaller prototype.

Is there any more you can tell us about the new store format? Any detail on how the unit economics of these stores compare to the older larger format?.

Thanks, John. We are really excited about the performance of all of our new stores. But particularly, the 16 stores we opened this spring that are 30,000 square feet or smaller. Most of them are about 25,000 feet - 25,000 square feet. Some of them are actually a bit smaller.

On average, this group of new stores that we opened this spring are running well ahead of our underwriting targets. And this is - it's also true for the group of smaller stores. One of the most exciting things about this smaller store format is the potential it has to help us improve leverage and occupancy costs.

As I just mentioned, it's a big part of our long-term margin opportunity. But the hypothesis there is always been that we can drive similar sales volumes in smaller, less expensive boxes, that's going to help us drive operating margin expansion.

Still early days, but what we've seen so far with the new batch of smaller stores is really encouraging and it only strengthens our confidence in the potential of the new format.

And now that we have several of these stores open, we should have enough of this sample to begin to work through the learning curves of how to best operate in the smaller size.

The economics in the new stores should be a great operating margin tailwind and the availability to boxes in the size range should provide plenty of very attractive sites for future new stores. So, yes, we're really pleased with what we've seen so far this year. .

Awesome. Thank you..

Thank you. Our next question comes from the line of Kimberly Greenberger. Your line is now open. .

Okay, great. Thanks so much. Very nice quarter here. I wanted to just come back to one of the comments that you've made on the call today that August here is running well ahead of the 10% comp plan here for the third quarter. I am wondering, if you can just give us a little more color on trends here for Q3.

What are you seeing in your business? And as you look out to the balance of Q3, I know you'll monitor the business, but what are the risks and opportunities as you see them for the quarter?.

Sure. So, good morning, Kimberly. It's Michael. I'll take that question. It's a good question. And I can see ordinarily after such a strong start to the quarter, we would have taken up the plan for the quarter by now. But in this particular situation, we're being a little cautious, I think for two reasons.

The first I kind of mentioned in the remarks that the surge in COVID cases related to the Delta variant. Now so far, there is absolutely no evidence that that had any impact on our business. But if the situation deteriorates, then obviously that could change. So that's one reason to be in a little bit cautious.

The second reason we're being a little bit cautious is the third quarter, much more so than any other quarter of the year weather that really matters.

Given I know we've talked about this before, given our legacy of as Burlington Coat Factory, I would say that the good or bad, weather affects us in the third quarter most - more than it does most other retailers. When weather turns cooler, shoppers naturally think of outerwear.

And so, if the weather turns cooler, earlier in the quarter, and that really helps us versus other retailers, if on the other hand, it remains warm until later in the quarter, then that can hurt us. Right now, most of the long range forecasts, weather forecasts are saying that October and even November could be unusually warm.

We never really know how much face to place in those forecasts. So that they could be wrong, but it makes sense for us given that outlook to be cautious in Q3. If the forecasts are wrong, we know that we can chase and actually, in our reserve inventory, we have a pretty good outerwear position.

So, if the weather did turn cool out sooner, then we would chase the trend. .

Fantastic. That's great color, Michael. Thank you for that. And John, just a follow-up on that.

If in the third quarter, for example, you were able to deliver a 15 comp instead of your 10 plan, how would that change your outlook for the - and maybe just take it to the second half of the year? How would that change your outlook for the operating margin decline?.

Sure, Kimberly. A good question. So I'm going answer the question in two pieces. So, if we were to perform that at 15 comp, obviously, yes, that would give us an opportunity to get some additional leverage on our fixed cost base that component of SG&A and which we're already showing really good leverage.

And it would also help our gross margin performance because we would expect to drive even lower markdowns on a higher sales demand. So that part of – the way that we would typically think about we our flow through on incremental sales is very much in place. It's even there.

If you look at the 10 comp, even though it's a flat margin, you were getting 450 basis points of leverage on a full year performance on our SG&A and on our gross margin. It's just all been eaten up by the product sourcing cost, supply chain cost and some incentive comp. So, we're very comfortable with that part of our algorithm.

But the freight and supply chain costs are very difficult to predict. So, I don't want to give you an exact how it would flow through, because we just don't know. We think we have some pretty conservative assumptions in here realistic.

But, it's just not clear how that situation is going to play out and that's why we’ve stayed away from giving specific guidance. .

Understood. Thank you so much. .

Okay. Thanks, Kimberly. .

Thank you. Our last question will come from the line of Michael Binetti. Your line is now open. .

Hey guys. I would add my congrats on a nice quarter and thanks for all the detail here today. So the merch margins were 200 basis points lower in 2Q. Sorry, up in 2Q, but were low – I am sorry, they were up - less than 1Q. I am curious, Michael, if you just maybe give us some comment on what drove that moderation.

And then I think you said 3Q would be 200 basis points from both merchandise margin and SG&A leverage.

So it seems like you are baking in further moderation of the merch margin in the third quarter in the second half, but given how tight supply chains are and inventories that you spoken to are getting back up into the market, I am trying to think what - what would be some of the incremental headwinds to merch margin as you look at to the plan in the second half?.

Sure. So, good morning, Michael. Yes, everything you said is correct in terms of the comparisons of the quarters. So, we saw a nice merch margin improvement in Q2, but it wasn't as big as the improvement in Q1. That's really driven by the point that John was making earlier that Q1 was with the anomaly.

Q1 we were much cleaner coming into Q1 than we've been historically. And as a result, we took off fewer markdowns in Q1. So that was really - that was really what drove that difference between Q1 and Q2. Looking forward to the back half, obviously, our back half baseline comp assumption is a 10% percent comp.

If we do a 20% comp in the back half of the year, I would be hoping or I would be expecting much stronger inventory turns, much stronger markdowns and as it drives a stronger, merch margin performance than we've indicated.

Just linking this though to the point you’re making about availability of merchandise, I would say that so far this year, availability has been pretty good - pretty good. We've had no problem - across our business, we had no problem overall chasing our receipts here.

We've gone from a - we started the year with a flat comp as a plan and we've obviously at 20. So we’ve been quite nimble to find the goods. As I think about the backlog in supply chains, I think the availability is going to get better, much better even than the pretty good availability we've seen.

But I think that improvement in availability may not happen for a few months. We are going to get into a point here probably in October, something like that when goods that have been ordered that haven't arrived in the United States aren't going to make it for holiday.

And I think at that point, it could be a good - a good buying opportunity for off-price. But, we'll see. And a lot of that merchandise we would end up putting in reserve anyway. But, we do think there is going to be some opportunities in the months ahead. .

Is it safe - thanks for that, Michael. Is it safe to say that the - even on the pathway and the inventory in the channel as you spoke about I think earlier in the remarks you mentioned the reserves - your intake of reserves inventory was up, I think 86%.

Do you - would that suggest that in August you are seeing the ability to continue bringing in reserve flows at a bit of a slower pace and then - but you have confidence that it picks up through the quarter? Or what kind of a pace relative to that 86 that you assume as you thought about the 10 comps?.

Yes. It's a good question. We are kind of assuming that that reserve inventory over the next month or two is going to kind of come in at a similar rate to what we've been experiencing. But we do think that there is a buying opportunity down the road, probably though for merchandise that we wouldn't necessarily flow to stores.

So it wouldn’t necessarily hit the 10 comp. Some of it might, but most of it might be packed away for the next year, because it would be seasonal merchandise. .

Okay. Thanks a lot again guys. .

Thanks, Michael. .

Thank you. This concludes today’s Question-and-Answer Session. I will now turn the call over to Michael O'Sullivan for closing remarks. .

Thank you everyone for joining us on the call today. We appreciate your questions and your interest in Burlington Stores. We look forward to talking to you again in November to discuss our third quarter results. Thanks again. .

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