Expanding Stores, Enhancing Margins, And Overcoming Economic Hurdles

Key Takeaways

• Expansion through new store openings and relocations is set to elevate sales and revenues, backed by a strategic focus on better brand offerings.
  
• Enhanced operating margin and supply chain efficiency signal improved profitability, alongside strong comp sales growth indicating effective merchandising and store operations.
  
• The reliance on new store openings, comp sales growth amid uncertainty, and rising freight costs alongside investments in payroll may challenge revenue and margins amid stiff competition.

Catalysts

Operates as a retailer of branded merchandise in the United States.

• Continuous expansion with the opening of new stores is expected to boost total sales and revenue, as the company is on track to open 100 net new stores and approximately 30 relocations for the year.
  
• Strong comp sales growth, reported at 5% for the second quarter, outpacing guidance, suggests successful strategies in merchandising or store operations that could enhance future revenues.
  
• Improved operating margin, driven by faster inventory turns and lower markdowns, indicates better gross margin performance which could positively impact net margins.
  
• Leverage in supply chain efficiency, resulting from faster-than-expected progress on initiatives, implies potential for reduced operational costs and improved profitability.
  
• The strategic focus on offering a higher mix of better brands satisfies customer demand for value, possibly leading to increased traffic and conversion rates, which can boost both top-line sales and profit margins.

Assumptions

• Analysts are assuming Burlington Stores's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $794.6 million (and earnings per share of $12.6) by about October 2027, up from $428.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.7x on those 2027 earnings, down from 37.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Risks

• The reliance on a significant number of new store openings for growth might prove challenging if market saturation occurs or if these new stores do not perform as expected, potentially impacting revenue growth.
  
• The dependency on comp sales growth amid unpredictable economic conditions could result in fluctuating revenues, especially if consumer spending tightens.
  
• Increases in freight expenses, particularly from ocean freight headwinds, could negatively affect merchandise margins, impacting net margins.
  
• Investments in store payroll to improve service levels, while beneficial for customer service, could lead to SG&A deleverage if sales growth does not outpace these increased costs.
  
• The potential for increased competition in attracting value-conscious consumers, including from other off-price retailers and e-commerce platforms, could lead to challenges in maintaining or growing market share, potentially affecting earnings.

Valuation

• The analysts have a consensus price target of $312.39 for Burlington Stores based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $354.0, and the most bearish reporting a price target of just $270.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.6 billion, earnings will come to $794.6 million, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 7.4%.
• Given the current share price of $254.63, the analyst's price target of $312.39 is 18.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.