One of the most successful investment strategies is to buy great businesses at a deep discount to fair value, but it’s often much easier said than done.
From an emotional standpoint, investors must often buy when the headlines are the worst and plug their noses to the stench of rotten earnings revisions. From an application standpoint, cheap often gets cheaper, and this strategy often comes with sharp drawdowns.
One way to improve this strategy to make buying easier is to think of oneself as an owner of a share in this high-quality business so that the short-term gyrations are less damaging to one’s conviction.
The other is to avoid rushing in to catch a falling knife and instead wait for some signs of a trend reversal before diving in.
The latter condition is now in place for one off-price retail name, making it an ideal time to scoop up shares.
On The Sale Rack
Burlington Stores (BURL) is a $10.8 billion off-price retail company, better known as Burlington Coat Factory, founded in 1924 as a wholesaler of women’s coats and junior suits before starting its retail business in 1972.
Since then, Burlington has grown like a weed, sporting 866 stores, with plans to hit the 1,000 store milestone in 2024.
The company’s sales are dominated by apparel (80%), but it has made a large and successful push into Home, where it generated $1.8 billion in sales last year.
Unfortunately, while Burlington has a near-flawless track record and has performed phenomenally across all economic environments (even in the past decade of consumers trading up), its Q1 results missed the target by a country mile.
Revenue slipped 12% year-over-year to $1.93 billion, and earnings per share [EPS] fell off a cliff, diving 79% from Q1 2021 levels.
Burlington’s track record is highlighted by a 13.4% compound annual growth rate for adjusted EBITDA and eight consecutive years of comp sales growth (excluding 2020 with COVID-19 headwinds).
On the surface, these headlines look horrific, but it’s important to dig into the details.
For starters, Burlington was lapping near-record sales in the previous period, with sales up over 34% vs. Q1 2019 levels. This was helped by a significant tailwind from the wardrobe refresh period following a year of lockdowns and government stimulus.
So, with this significant one-time boost in sales, it’s no surprise that sales would moderate in 2022.
From an earnings standpoint, this sales boost provided considerable leverage for the bottom line, helping the company report quarterly earnings per share of $2.59.
To summarize, while the results were ugly on a year-over-year basis compounded by delayed receipts and unbalanced inventory in Q1 2022, sales were still up over 18% vs. 2019, and gross margins were flat at 41.0% despite a significant increase in freight expenses vs. pre-COVID-19 levels.
However, with supply chain headwinds remaining in place, annual EPS could slip to $6.00 in FY2022, down over 30% year-over-year.
The good news is that Burlington’s business model has not changed despite the temporary speed bump, and it’s actually improved with the company upgrading its long-term outlook for 2,000+ stores and ~70% store growth over the next five years.
Meanwhile, the company should see a tailwind in a tougher economic environment. This is because we often see a trade-down from department stores to off-price retailers where the same goods are available at 25% to 50% lower prices.
So, while Burlington’s earnings trend has taken a negative detour, the company has the potential to double annual EPS from FY2022 levels by FY2026.
The Fundamental Case
While much of the Retail Sector is on sale currently, Burlington may look more expensive at first glance, trading at 25.6x FY2022 earnings estimates ($6.00). This is because its price-to-earnings ratio compares unfavorably to Ross Stores (ROST) and TJX Companies (TJX) at 19x and 22x earnings, respectively.
However, with BURL having a much stronger earnings growth rate and being on track to generate annual EPS of $10.10 in FY2024, I actually see the stock as very reasonably valued (15.1x FY2024 estimates).
Since BURL’s IPO debut, it has only been this undervalued once in March 2020.
The Technical Picture
From a technical standpoint, BURL may not appear to be the most attractive long idea, trading below its 100-day and 200-day moving averages. However, the stock is back up its 50-day moving average after a violent 60% decline from its highs.
We have also seen its volume profile improve, with larger volume days dominated by buying, not selling.
Two hammer candlesticks evidenced this on July 5th and August 1st with larger ranges, showing that while sellers took the price down towards new lows, the buyers took over to close the stock near its highs.
While there are no certainties, the stock looks like it may have finally bottomed at $135.00, pointing to an attractive reward/risk setup vs. its old highs of $357.40.
The Bottom Line
Based on BURL’s FY2023 annual EPS estimates of $7.80 and a fair earnings multiple of 25 (10% discount to its historical multiple of 27.9), I see a fair value for Burlington Stores of $195.00.
This points to a 17% upside from current levels, but this assumes that annual EPS stays at depressed levels after significant downward revisions.
Given that BURL has historically under-promised and over-delivered, I would not be surprised to see these estimates revised higher, with fair value increasing to $200.00 per share.
The above analysis of Burlington Stores (BURL) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Burlington Stores (BURL) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Burlington Stores (BURL) is moving in a sideways pattern and is unable to gain momentum in either direction. Beware of choppy movement and consider a sidelines position until a stronger trend is identified.
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