Improvement in 1Q16
Burlington Stores (BURL) reported strong results in 1Q16, which ended on April 30, 2016, backed by the strength of its off-price business model. As we discussed in parts 1 and 2 of this series, the off-price retailer reported impressive earnings and sales growth in 1Q16. The company also saw growing margins. Burlington Stores’ gross margin—based on total revenue—increased by 30 basis points to 40.4% in 1Q16.
What drove 1Q16 gross margins?
The increase in 1Q16 gross margins was driven by higher initial markup. However, this difference was partially offset by higher markdowns and a slight increase in shrink accrual compared to 1Q15.
Operating margin expansion
Burlington Stores’ operating margin expanded by 100 basis points to 5.8% in 1Q16. This increment was driven by lower selling, general, and administrative (SG&A) expenses as a percentage of sales. SG&A expenses, exclusive of product sourcing costs, as a percentage of sales improved due to leverage in occupancy and advertising spending on strong same-store sales. The first quarter also benefited from the deferral of approximately $2 million in expenses from 1Q16 to 2Q16.
The iShares Russell 2000 ETF (IWM) has 0.3% exposure to Burlington Stores.
TJX Companies (TJX) recorded a 20 basis point decline in its operating margin in the comparable first quarter. The fall was driven by higher wages and investments to support the company’s growth plans. Ross Stores’ (ROST) operating margin in 1Q16 declined by 30 basis points to 15.4%. This decline was caused by the deleveraging of expenses on weak same-store sales and increased wages. The Nordstrom’s (JWN) 1Q16 operating margin fell to 3.3% from 7.6% in 1Q15 due to higher credit chargebacks and severance charges.
Burlington Stores aims to further enhance its margins by optimizing its markdowns, tailoring its assortments by store, and managing its receipts with a disciplined approach. The company believes its increasing size and West Coast buying office will help it capture incremental buying opportunities and realize economies of scale in its merchandising and non-merchandising purchasing activities.
We’ll discuss the company’s initiatives to improve its top line in the next part of this series.