Burlington (BURL -1.3%) saw its stock decline after reporting Q3 earnings. Despite a strong Q2 performance with significant EPS, comps, and adjusted EBIT margin beats, Q3 results were less impressive. The stock had been gaining ahead of this report, but warm weather affected Burlington's Q3 performance. Additionally, BURL provided Q4 EPS guidance below analysts' expectations.
- Comps for the off-price retailer were +1%, aligning with prior guidance of +0-2%. However, Burlington is known for conservative guidance, making this result somewhat disappointing. The company faced challenges, including a tough comparison to last year's +6% comps. While Q3 started strong, warmer temperatures from mid-September onwards slowed sales momentum.
- Cold weather categories, which account for about 15% of Q3 sales, were impacted by the warmer fall. Excluding these categories, Q3 comps would have been +4%. Typically, Q3 is driven by back-to-school sales until mid-September, after which comp trends depend on weather conditions.
- Burlington is particularly sensitive to warm weather in Q3. As a former Burlington Coat Factory, outerwear remains a key product. Cold weather items make up nearly a quarter of annual sales, significantly more than peers. Warm temperatures not only affect cold weather merchandise comps but also reduce overall store traffic.
- Looking ahead to Q4, Burlington reaffirmed comp guidance at +0-2%. The company is optimistic about the holiday season, with November sales currently ahead of plan. However, the late Thanksgiving results in a compressed holiday calendar, potentially posing a challenge.
- Q3 margins were less impressive compared to Q2. The adjusted EBIT margin was 5.6%, improving by 80 bps year-over-year, at the high end of the +60-80 bps guidance. This contrasts with Q2's 160 bps improvement against +30-50 bps guidance. For Q4, BURL anticipates a margin decrease of 50-80 bps.
Following Burlington's strong Q2 and positive reports from peers ROST and TJX, expectations were high. However, these results highlight Burlington's higher exposure to cold weather compared to its off-price retail peers. Weather conditions will be crucial for Q4 performance. A cold November to January could benefit Burlington, especially as it compares to last year's mild winter. Cold weather might be a better predictor of performance than peer comparisons.
