Burlington Stores Inc. (BURL, Financial) delivered its fiscal third-quarter 2016 and nine-month operations report in November. In the recent three quarters, Burlington stated it grew sales by 8.9% to $3.9 billion while delivering an outstanding 74.7% profit growth to $90.3 million. The remarkable growth in profits was made despite a 7.4% increase in business expenses.
“Our ability to execute our off-price model by delivering fresh product, compelling value and sought after brands continues to serve us well," CEO Tom Kingsbury said. "In the quarter, we delivered our 15th consecutive quarter of positive comparable store sales.”
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As a result, Burlington shares climbed 16% while the broader Standard & Poor’s 500 index market closed 0.22%.
Valuations
Burlington now has trailing 12-month price-earnings (P/E) ratio of 35 times (industry median: Ă‚ 20.8) and price-sales (P/S) ratio of 1 (industry median: 0.5) (1). Burlington has a negative book value. No dividend payouts were provided by Burlington in recent years.
Market performance
Burlington had a 45.7% total return in the past three years while the broader index returned 9% (2). The retailer continues to outperform the market year-to-date with an impressive 104.9% versus 9.8%.
(Investor Presentation)
Burlington
Burlington is a 44-year-old nationally recognized retailer of Ă‚ high-quality, branded apparel. The company claims that it provides products on sale at everyday low prices.
As of October, Burlington had 592 stores in 45 states and Puerto Rico. The company also has an online store, but as of Jan. 30, 98% of Burlington’s sales came from its Burlington Stores. Meanwhile, Burlington’s two-year store growth average was at 4.3%.
The company offers diversified product categories, including women’s ready-to-wear apparel (24% of total fiscal 2015 sales), footwear and accessories (22%), menswear (21%), youth apparel and baby (16%), home (11%) and coats (6%).
Burlington identifies its core customers as women between the ages of 25 to 49. These identified core customers are educated and reside in mid-to-large-sized metropolitan areas and are brand-conscious fashion enthusiasts.
Cash, debt and book value
As of Oct. 29, Burlington had $32.8 million in cash and $1.3 billion in debt. Burlington also had a negative shareholder equity of $135.4 million for the period, compared to negative $99 million in January 2016.
Cash flow
(Cash Flow, Quarterly Filing)
Nine months into fiscal 2016, Burlington grew its cash flow from operations by a whopping 176% to $286.5 million. Capital expenditures for the period was $137.5 million, compared to $149.5 million a year ago, leaving Burlington with a good amount of free cash flow at $148.8 million. This is compared to negative $50 million last year.
Burlington took in proceeds of $4.1 million net of reducing its debt from credit lines, long-term loans and interest rate caps. Burlington also allocated $151.8 million in share buybacks, which was 102% of its free cash flow for the period.
On average, Burlington used 99.5% of its free cash flow to purchase treasury shares during 2014 and 2015.
Conclusion
Burlington has been rewarded by the market for its impressive business operations so far this year, despite the company having negative shareholder equity value and recent free cash flow volatility. Prospective investors should expect Burlington to consistently deliver good cash flow growth and eventually turn its book value back to black.
(Google Finance)
However, some caution should be exercised prior to joining the all-time high market prices. Negative equity should shun most conservative investors, and almost 100% free cash flow payout may provide inconsistency in the treasury share repurchases whenever business operations experience a slowdown in the future. Burlington had a three-year average cash flow from operations growth of -7.8% (2).
After the earnings announcement, Telsey Advisory Group ranked Burlington shares as "Market Perform" and raised the price target to $91 a share from $86. Analysts at MKM Partners recommend the stock as a buy and raised the target price from $94 to $99 a share.
Nonetheless, with a current negative book value, I consider Burlington neither a buy nor a hold.
Notes
(1) Gurufocus data.
(2) Morningstar data.
Disclosure: I do not have shares in Burlington.
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