Burlington Stores (BURL 0.25%) shares rallied at the end of 2023, but they remain roughly 40% below their 2021 highwater mark. The off-price retailer has big growth plans ahead of it and is benefiting today from financially concerned customers trading down to its stores. But longer term, it's still focusing hard on selling more off-price goods to more customers.
Here's what you need to know.
Burlington benefits from economic concerns
Like peers Ross Stores and TJX Companies, Burlington sells low-cost items to a core base of customers looking for deals. More recently, however, the mix of customers for this retailer has shifted somewhat. That's because wealthier consumers worried about the economy have started to cut back on their spending. Going to a Burlington store is one of the ways they're doing that.
The evidence comes from the company, which has explained that it's selling more recognizable brands at higher prices. The target for those products is wealthier customers, and it shows that the company's buyers have been able to pivot quickly to address the changes taking shape at the consumer level.
This is clearly good, but it pulls the company away from its core operations, which is selling off-price goods. That's what brings in core customers, the ones that will stick around after economic concerns subside.
Ross Stores, for example, has had its buyers out looking for ways to offer the most compelling value to its customers across the entire store. TJX, meanwhile, has been touting its experienced buyers and their ability to excite customers with an ever-changing collection of off-price merchandise.
The big takeaway here isn't that Burlington is stepping away from the core of its success, but that trade-down customers are potentially a temporary benefit.
Image source: Getty Images.
Burlington's future is growing the core
That's why it is important to note two trends for Burlington. The first is going to be store growth. The plan is to open around 500 new stores over the next five years. Although it probably won't be exact, 100 a year or so is what investors should expect.
At first, new stores are probably going to be a slight headwind, given that new stores will probably pull some customers away from existing locations. But over time, the company expects that headwind to subside as new stores start drawing in their own set of customers. The goal is to have more modern stores in busier locations.
NYSE: BURL
Key Data Points
That, however, is going to require living up to a core competence, which is selling a desirable collection of off-price goods at attractive prices. While TJX has touted the experience of its buyers and Ross discusses its great value across its entire store, Burlington has been talking about its efforts to strengthen its merchandising capabilities and increasing flexibility.
In fact, the ability to source more well-known brands to sell to trade-down customers is an example of Burlington's ability to adjust quickly. The key will be to see if it can shift quickly again when those customers start trading back up and the retailer needs to refocus on selling off-price to its core customer.
The interesting thing on Wall Street is that Burlington shares remain well below recent highs while Ross and TJX are both back at their highs. That suggests there could still be an opportunity for investors to buy Burlington even after its outsize rally at the end of 2023. But the key will be watching how well it executes on its store opening and merchandising plan, with the goal of off-price excellence to attract core customers.
A relative value?
Burlington's price-to-sales ratio has gone from roughly in line with TJX and Ross to well below those peers. Given the company's store growth plans, there's a reason to think there's a long-term opportunity here. And that will be more compelling if the company's buyers live up to its off-price focus, as is the goal. If you're looking at off-price retailers, Burlington is probably worth a deep dive even after the big share-price rally.
