An increasing focus on customer loyalty and improving its efficiency could push the Burlington Stores (BURL, Financial) stock price higher.
The off-price retailer is set to roll out a loyalty program that may improve customer engagement, while its operating margin is forecast to improve over the medium term. With an aggressive store expansion strategy and a shift towards underrepresented segments that could offer higher growth rates, the company’s competitive position is set to improve.
Having fallen 1% in the last year in line with the S&P 500, the stock could offer investment appeal over the long run.
Refreshed strategy
The company is seeking to widen its economic moat through a new loyalty program. This has been successfully piloted, and is now live in 140 stores. It is expected to be rolled out to all stores during the course of the current fiscal year, with customer responses having been positive. So far, it has contributed to increases in trip frequency and transaction size. It will enable the company to offer greater personalization to customers in order to improve the customer experience, while the use of data may enhance customer engagement and provide it with a competitive advantage versus peers.
Although higher labor and freight costs have contributed to increasing costs for the business in recent quarters, it has been able to increase its operating margin by 420 basis points in the last six years. It plans to introduce a number of changes to its business model in order to further enhance efficiency. For example, it is expected to optimize markdowns and maintain a disciplined stance on inventory management as it pivots to faster-growing segments.
Growth potential
Continued expansion in the size of Burlington’s store estate could catalyze its financial performance. It has increased the pace at which it is opening new stores from 2018 levels, expecting to open around 50 net new stores in 2019. At this rate of opening, it expects the vast majority of its total store estate to have been remodeled by 2024, which could improve the customer experience. It remains on track to reach 1,000 stores in total over the medium term.
Alongside increasing store numbers, the company is seeking to shift its focus toward under-penetrated segments. For example, the business is underrepresented in the beauty segment when compared to its sector peers. The beauty segment outperformed the rest of the business in the most recent quarter, and the company expects to increase penetration in the category over the medium term. Shifting the business toward higher growth and higher-margin areas could enhance sales and profitability without requiring major upfront investment.
Threats
The introduction of tariffs on a variety of imports from China could pose a threat to the wider retail sector. It may lead to higher costs being passed on to consumers, which could cause retail sales to come under pressure. Since retail sales have been weak in recent months, rising 1.1% since July 2018, increasing prices across the industry could cause investor sentiment to weaken in the short run.
While this may lead to a more challenging operating environment for Burlington, direct imports represent only 6% of its total orders. Tariffs are therefore only expected to be levied on around 1% of its goods, with further protectionist policies unlikely to lead to a change in its financial prospects.
Should higher prices be the end result of tariffs for mainstream retailers, Burlington could benefit due to its lack of exposure to imports from China. Its competitive position could even be strengthened by additional tariffs, with the company having stated that it will not be an industry leader in increasing prices.
Outlook
In the current year, Burlington is forecast to post a rise in earnings per share of 16%. This is due to be followed by growth of 15% next year. This helps to justify its price-earnings ratio of 25.5.
The company’s long-term growth outlook is set to be boosted by its continued store expansion, as well as its pivot towards under-penetrated areas such as beauty.
With the rollout of its loyalty program and an increasing focus on efficiency, the company could strengthen its competitive position versus sector peers.
While its stock price has performed in line with the S&P 500 over the last year, the stock could offer index-beating potential over the long run.
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