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In a world where retailers are taking the fight for market share online, Burlington Stores Inc. says it’s going to end its e-commerce operation and focus on growing its bricks-and-mortar business.
Burlington’s BURL, +0.34% Chief Executive Michael O’Sullivan said on the company’s Thursday earnings call that e-commerce only accounts for 0.5% of sales, and the company’s efforts would be better spent on stores.
“In our business, which is a moderate off-price business, the nature of the treasure hunt and the average price point that we operate at mean that bricks-and-mortar stores have a significant competitive and economic advantage over e-commerce,” he said, according to a FactSet transcript.
“We intend to focus our energy and resources on driving profitable sales growth in our bricks-and-mortar stores. We will also continue to aggressively expand and upgrade this store network through our new store opening and remodel programs.”
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Burlington’s average unit retail (AUR) is $12, which O’Sullivan said makes it impossible to make money in e-commerce when you factor in shipping, returns and other costs.
Moreover, Burlington is the smallest of the off-price retailers, according to O’Sullivan, who says there’s room to grow the company’s network of 720 stores.
The new stores that Burlington has planned will be smaller. The company aims to open 54 net new stores in fiscal 2020 with an average size of 39,700 square feet, the first time the average will be less than 40,000 square feet.
Burlington reported fiscal fourth-quarter earnings that beat estimates, but guidance was soft. However, that’s also part of Burlington’s growth strategy. O’Sullivan said that the company will take a number of steps going forward, including planning “comp sales slightly more conservatively,” in order to better position itself to take advantage of buying opportunities when they become available.
This “actually puts us in a stronger position to drive momentum in our comp store sales growth,” O’Sullivan said.
Wells Fargo analysts rate Burlington Stores stock as overweight with a $250 price target, that’s about 13% above its current price, calling it a “top pick.”
“As cautioned on the last call, management is taking a much more conservative approach to guidance going forward,” analysts led by Ike Boruchow said. “With the fiscal year ending on a high note and guidance now out of the way (‘beat and raise’ set up now highly visible), we see Burlington grinding higher from here.”
The off-price sector could be at a disadvantage because it relies so much on stores and so little on e-commerce, wrote MKM Partners in a note for Ross Stores Inc. ROST, -7.13% published Wednesday. Ross Stores reported a sales beat on Tuesday.
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“Our base case is that Ross Stores and others will fare better as it relates to the impact of the coronavirus,” analysts wrote, citing “minimal” disruption to inventory access.
“In a more dire scenario where U.S. consumers don’t leave their homes to go shopping, off-price and in particular Ross Stores could fare amongst the worst given their reliance on the in-store experience for the treasure hunt, and no online buying capabilities for Ross Stores.”
MKM rates Ross Stores shares buy with a $124 price target.
Burlington stock is up 1.3% in Thursday trading and has rallied 32.3% over the last year. The S&P 500 index SPX, -3.65% has gained 8.8% for the last 12 months.
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