Burlington stock drops 9% after profits: is it a buying opportunity?
Retail spending in the United States has increased this year, with traditional chains driving most of the industry’s growth. Low-cost retailers were among the biggest winners.
Thusday, Burlington Stores (NYSE: BURL) joins its two biggest rivals – TJX companies and Ross Stores (NASDAQ: ROST) – posting stellar second quarter sales and a big profit beat. Still, Burlington stock plunged 9% after the results were released. While the retailer faces headwinds on margins in the near term, this pullback could be a good buying opportunity for long-term investors.
Another excellent quarter
Like many physical retailers, Burlington stores suffered in 2020. The COVID-19 pandemic forced it to temporarily close its stores and slowed traffic after they reopened. However, its activity has returned in force this year.
In the first quarter of fiscal 2021, comparable store sales increased 20% over fiscal 2019. Including the two years of store openings, total sales increased by 35%. Adjusted earnings per share (EPS) more than doubled to $ 2.59 as the high demand environment boosted gross margin and allowed Burlington to spread operating expenses over more sales.
Burlington’s momentum continued into the second quarter. Comp’s sales jumped 19%, resulting in a 34% increase in total sales from the second quarter of 2019. Gross margin improved again, helping Burlington to post a 55% increase in profit from operations and a 43% increase in Adjusted EPS from two years ago.
The company’s revenue of $ 2.21 billion far exceeded analysts’ consensus of $ 2.05 billion. Likewise, its adjusted EPS of $ 1.94 crushed the average analyst estimate of $ 1.38. However, even with these good results, Burlington stock has failed to maintain its strong gains since the start of the year after the results were released.
A cautious outlook scared off investors
On Burlington’s recent earnings conference call, management said it expects double-digit commodity sales growth to continue in the second half of fiscal 2021. Nonetheless, Executives have adopted a cautious tone regarding short-term profitability, due to soaring freight and supply chain costs. This matched the pessimistic profit forecast provided by Ross Stores a week earlier.
Indeed, CFO John Crimmins estimated that if compositions sales increased 10% this quarter, Burlington’s operating margin would decline by about 2.5 percentage points from 2019. This forecast likely helped. to the sharp drop in Burlington shares on Thursday.
Of course, if Burlington can maintain its first-half revenue growth rate for the remainder of fiscal 2021, it may be able to absorb the current cost pressure while keeping margins stable. However, as the US government begins to withdraw its fiscal stimulus, management expects sales growth to slow in the coming months.
A strong increase compensates for a high valuation
Even after the recent pullback in Burlington stocks, stocks are trading around 30 times earnings forward. This compares to 22 times the futures profits for Ross Stores. Indeed, Burlington stocks have consistently had a higher valuation than other large low-cost retailers in recent years.
However, Burlington has more long-term potential than its larger, more established peers. First, it has huge potential for expansion. The company plans to eventually operate 2,000 stores in the United States, up from just 792 at the end of the last quarter. This would represent an increase of 153%. In contrast, Ross Stores’ long-term goal of 3,000 locations implies an increase in the number of stores of only 58% over time.
Second, Burlington has significant margin expansion potential. In fiscal 2019, it recorded an adjusted operating margin of 9.3%, compared to Ross Stores’ 13.4% operating margin in the same period. Management has developed a clear plan to close this gap by moving the store base to smaller stores with higher sales per square foot and faster inventory turns.
Burlington stocks are still pretty expensive, that’s for sure. But between its track record of success, its potential for expansion, and management’s plans to increase its operating margin, it holds promise for patient investors. This makes the recent pullback a tempting buying opportunity.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.