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Key Drivers Behind Burlington Stores’ 2Q16 Margin Expansion

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Margins expand in 2Q16

Off-price retailer Burlington Stores (BURL) delivered impressive results in fiscal 2Q16, which ended on July 30, 2016. As we saw in Parts 1 and 2 of this series, the company reported strong growth in its 2Q16 earnings and revenue. Also, its gross as well operating margins increased in 2Q16 on a year-over-year basis.

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Improvement in gross margin

Burlington Stores’ gross margin, based on total revenue, improved by about 40 basis points to 39.9% in 2Q16 due to higher initial markup. However, this improvement was partially offset by a higher markdown rate and a slight increase in shrink accrual on a year-over-year basis.

The company’s operating margin improved to 4.1% in 2Q16 from 2.9% in 2Q15, primarily due to expense leverage on strong sales in the quarter. The expense leverage in 2Q16 was driven mainly by lower store payroll and occupancy as well as advertising expenses.

Margins of peer group

Leading off-price retailer TJX Companies (TJX) delivered an operating margin of 11.7% in fiscal 2Q17, which ended on July 30, 2016. This compares to 12.2% in fiscal 2Q16. This decline was mainly due to wage increases and growth investments.

Ross Stores (ROST) reported an operating margin of 14.4% in 2Q16 compared to 13.9% in 2Q15. This improvement was driven by a higher gross margin but partially offset by increased wages.

Nordstrom’s operating margin declined to 6.1% in 2Q16 from 10.2% in 2Q15. Nordstrom’s (JWN) 2Q15 operating margin included a $64 million benefit associated with the sale of the company’s credit card portfolio.

Burlington Stores, Ross Stores, and Nordstrom together constitute 1.2% of the iShares Russell Mid-Cap Growth (IWP).

Burlington Stores is focused on further enhancing its operating margin by optimizing its markdowns, tailoring assortments by store, and efficiently managing its receipts.

In the next part of this series, we’ll take a look at the company’s valuation.

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