A focus on underrepresented product categories could boost Burlington Stores’ (BURL, Financial) financial outlook. It is seeking to increase its exposure to areas such as home and beauty, where it may be able to develop a competitive advantage.
The company is also increasing its rate of new store openings. Alongside a refurbishment program on its wider estate, this could improve the customer experience.
Although there are cost headwinds and its operating margin is lower than that of its main rivals, the company has a clear focus on improving efficiency and financial discipline. After rising 58% in the last year versus a gain of 3% for the S&P 500, the stock could have investment appeal.
Changing focus
An increasing focus on underpenetrated categories could deliver improving stock price performance for Burlington Stores. In its Home category it is on track to move from a penetration of 14% of total sales to 20% over the medium term. It sees opportunities to expand its branded portfolio in the home category, and is targeting several sub-categories that are currently underdeveloped.
Its exposure to ladies’ apparel is also lower than that of its peer group. It is aiming to improve the sales performance in its heritage businesses within the category. Its penetration in beauty is also increasing, being a key part of its holiday gift strategy.
There is also a new opportunity in baby and toys. It has a long track record of exposure to this area which has enabled it to develop strong vendor relationships. Following the bankruptcy of Toy “R” Us, the company sees scope for outpaced growth over the next few years. It will therefore dedicate greater floor space and invest in additional marketing and inventory in this area.
Increasing its range of brands could also lead to higher sales growth. At the moment it includes around 5,000 brands, but will seek to increase that number as it moves into new businesses and invests in underdeveloped categories. Alongside this, it will focus on improving the quality of its brand portfolio, offer a wider availability of items and grow its vendor network.
Store development
An improved store experience may improve customer loyalty and increase repeat business. The company is in the process of modernizing its stores after completing the remodels of 40 stores. It is also seeking to expand its store fleet. It is planning to open 68 gross and 46 net new stores in 2018, which is ahead of the rate of growth from the previous year when 48 gross and 37 net stores were opened.
A disciplined approach to new store opening has been in place since 2015. The company has seen an improvement in new store sales and Ebit versus existing stores. It believes that it has the potential to increase the size of its store estate from 675 to 1,000. Combined with a comprehensive remodelling strategy, this will lead to a significant majority of its stores being in its brand standard within the next five years. This could help to further differentiate it from rivals and may improve its competitive advantage.
Potential threats
The company faced cost headwinds in its most recent quarter. Freight expenses and product sourcing costs combined to provide a 40 basis-point headwind to the company’s margin. This is a trend that is affecting the wider retail sector and may continue in the future. Burlington already has an operating margin below that of its rivals. For example, TJX Companies Inc. (TJX, Financial) had an operating margin of 10.8% in the 2017 fiscal year, while Burlington’s operating margin was 8% in the same year.
Burlington, though, continues to make improvements to its operating margin. Over the last five years it has increased 370 basis points at an average growth rate of 75 basis points per year. Further improvements could be ahead, with the company’s sales growth leveraging fixed costs. It is also optimizing markdowns and remaining disciplined with inventory management as it seeks to embed a profit improvement culture across all of its divisions.
Outlook
Focusing on underpenetrated categories such as home and ladies’ apparel could act as a catalyst on the Burlington stock price. The company is also seeking to increase its range of brands, while refitting its stores to enhance the customer experience. A faster growth rate in new store openings could continue, with company management aiming for an increase in store numbers of 48% over the medium term.
With a track record of increasing its operating margin, the business may be able to overcome continued cost headwinds. Although it may have a lower operating margin than its rivals at the moment, it looks set to narrow the deficit under its current strategy. Having outperformed the S&P 500 in the last year, further capital growth could be ahead.
Read more here:Ă‚
Why Further Gains Could Be Ahead for Carvana After 170% Stock Price Rise
