Will Burlington Stores Get Stronger in 2020?

Burlington Stores (BURL) beat analysts’ earnings expectations in the first three quarters of fiscal 2019. The company’s sales also exceeded Wall Street’s forecasts in the first two quarters of fiscal 2019. But they fell a little short of third-quarter expectations.

On November 26, Burlington Stores’ stock surged 8.5% as its third-quarter adjusted EPS rose 28.1% to $1.55. The company’s adjusted EPS were way ahead of analysts’ estimate of $1.40.

Burlington Stores sells its merchandise at up to a 60% discount versus to other retailers’ prices. As of the end of fiscal 2019’s third quarter, Burlington Stores operated 725 stores in 45 states and Puerto Rico.

Also, Burlington Stores stock has risen 41.1% year-to-date as of December 30. In comparison, TJX Companies (TJX) and Ross Stores (ROST) have risen 36.7% and 40%, respectively.

Improvements in Burlington Stores’ adjusted operating margin drove the strong growth in its third-quarter adjusted EPS. And its adjusted operating margin increased by 90 basis points year-over-year to 7.9%. The company cited a higher merchandise margin, expense leverage on strong sales growth, and higher other income and revenue as the factors leading to its operating margin expansion.

Burlington Stores’ third-quarter sales grew 8.6% year-over-year to $1.77 billion but fell short of analysts’ estimate by just 0.4%. The addition of new stores and same-store sales growth of 2.7% drove the off-price retailer’s sales. The Home, Missy, Kids, and Accessories businesses performed well in the quarter.

Overall, Burlington Stores’ sales grew 8.8% year-over-year in the first nine months of fiscal 2019, with a 2.2% rise in same-store sales. The company’s adjusted EPS grew 15.2% year-over-year to $4.17 in the first nine months of fiscal 2019. Following the strong earnings growth in the third quarter, Burlington Stores raised its full-year earnings guidance.

The company expects its fiscal 2019 adjusted EPS between $7.28 to $7.33, compared to adjusted EPS of $6.44 in fiscal 2018. The company’s previous outlook was for adjusted EPS of $7.14 to $7.22. Also, it expects its fiscal 2019 sales growth in the range of 8.8% to 9.1%. It also expects same-store sales growth of 2.1% to 2.4%.

In comparison, larger off-price retailer TJX Companies’ sales grew 6.0% to $29.5 billion in the first nine months of fiscal 2019. Meanwhile, Ross Stores sales increased by 6.9% to $11.6 billion in the first nine months of fiscal 2019.

Off-price retailers are generating strong sales growth rate amid a challenging retail environment—in contrast to several retailers who are unable to thrive. Burlington Stores aims to further drive its top-line by focusing on underpenetrated categories like home, beauty, and women’s apparel. It’s also expanding its store base in existing as well as new markets.

The company plans to open four stores, relocate one store, and close three stores in the fourth quarter of fiscal 2019. With these additions in the fourth quarter, the company would reach its goal to open 76 new stores in fiscal 2019. It also plans to close or relocate 25 locations in fiscal 2019. Over the long term, Burlington Store sees an opportunity to operate 1,000 stores. The company is also improving its profitability by driving efficiencies in its corporate and in-store operations.

As of December 29, Burlington Stores was trading a 12-month forward PE ratio of 28.1x. Meanwhile, TJX Companies and Ross Stores were trading at lower forward PE of 21.5x and 23.4x, respectively.

Analysts expect Burlington Stores’ sales to rise 9.3% in fiscal 2019 and 8.9% in fiscal 2020. They also predict a 13.8% and 12.6% rise in the company’s adjusted EPS in fiscal 2019 and fiscal 2020, respectively.

Currently, none of the analysts covering Burlington Stores stock have a “sell” recommendation. Investors should note that 15 out of 22 analysts have a “buy” recommendation while the remaining have a “hold” rating. The average price target for the stock was $240.65 as of December 30. This estimate implies an upside potential of about 5% over the next 12-months.

Analysts expect the company’s sales to rise 10% in the fourth quarter of fiscal 2019 on expectations of a strong holiday season. Analysts are likely to revise their price target based on the company’s fiscal 2020 outlook, which it expects to announce along with its fiscal 2019 fourth-quarter results in March 2020.