BURL: NYSE

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

BURL: NYSE

Burlington Stores is off-price apparel and home product retailer. The firm offers women’s ready-to-wear apparel, accessories, footwear, menswear, youth apparel, baby and home goods. Burlington sells a broad selection of merchandise acquired directly from nationally recognized manufacturers and other suppliers. The company was founded in 1972, taken private by Bain Capital in 2006 and listed again in 2013. The firm is headquartered in Burlington, NJ. [1]

Investment Thesis

We believe that Burlington, like its closest peers, TJX and Ross Stores, will continue to benefit from thematic shift from conventional departmental stores towards off-price shopping. It is our belief that Burlington will continue to grow business at a high single digit rate by increasing its share of their customer’s wallet and adding new stores. Burlington is underpenetrated in areas like ladies apparel, home and beauty, where competitors have higher market share. In our opinion, the strategic initiatives under new leadership are likely to narrow the profit margin gap between Burlington and its peers.

Burlington stock has underperformed the market this year as sales have been severely impacted in the current pandemic. But we believe this impact is temporary and shoppers will come back to Burlington stores as it offers high-quality merchandise at attractive prices and is well insulated from the trends towards online shopping.

Confirmation through Research

Off-price retail industry is dominated by three main retailers: TJX, Ross Stores and Burlington Stores, who together account for more than 80% of market share. Burlington Stores is the smallest of 3 with roughly 13% market share.[2]
Off-price retailers have been taking market share from other retailers, most notably the department stores. For perspective, the total dollar sales for large department stores has roughly remained flat since 2013, at around $78 billion, while the big three off-price retailers have seen their combined sales rise to $61 billion in 2018 from $42 billion in 2013. [3]

The big three off-price retailers have essentially the same strategy: Sell merchandise at 20-60% below the department stores prices. They are excellent at sourcing merchandise and consumers love the treasure-hunt aspect of the stores.

Off-price retailers are also well insulated from e-commerce competition as small size of average ticket item and reliance on constantly changing inventory make it unviable for ecommerce giants to make much money in this category. [4]

But unlike TJX and Ross Stores, Burlington has fewer stores and lower margins. [5] Company’s new CEO, Michael Sullivan, was previously the President and COO of Ross Stores. We believe that the new CEO can make a meaningful impact in narrowing the gap with its closest peers, allowing the stock to rerate.

Variant Perception

We believe that with a strong balance sheet and free cash flow generation, Burlington is not only well positioned to withstand the current macroeconomic uncertainty but increase its market share gains from department stores.

As a smaller, lower margin version of TJX and Ross Stores, we believe Burlington has the potential to catch up to its larger peers. Which would set the company up for high single digit topline growth for many years to come and we believe that the market doesn’t fully appreciate this potential.