EUR 850.00 For Business Accounts Only

Morningstar | Like Its Off-Price Peers, Burlington Should Post Strong Results Despite Retail's Woes; Shares Rich. See Updated Analyst Note from 28 Feb 2019

We are initiating coverage of Burlington Stores at a $145 per share valuation, assigning the off-price retailer a narrow-moat rating. With a value proposition that has shown enduring appeal despite turmoil in the broader retail sector as digital entrants grow, we contend that Burlington should post improving performance as it capitalizes on its cost and intangible advantages. Our valuation assumes mid-single-digit top-line growth against 10% average adjusted EBIT margins over the next decade. While we have a favorable view of Burlington (and the broader sector), we suggest investors await a more attractive entry point as we believe that prevailing sentiment assumes a degree of perfection with which we are uncomfortable.

In contrast to the full-price channel, we expect Burlington and its peers to continue their years of strong performance (with Burlington averaging 4% comparable-store sales over the last five years). We see Burlington's flexible supply chain and distribution network, relatively low-frills stores, and rapid inventory turnover as enabling the discounts it offers relative to full-price retailers (up to 65%), resulting in prices that are comparable to or lower than online retailers' offerings. With the stores offering a treasure hunt experience (as the assortment changes regularly and the brand mix on hand is determined by product availability) that is difficult to replicate online, we anticipate the off-price channel to be relatively sheltered from the floodtide of digital competition in retail.

Burlington is smaller than narrow-moat TJX and Ross, and we expect its performance to improve as it optimizes its assortment and shifts toward smaller stores through new openings and relocations. We see adjusted return on invested capital expansion into the low-20s from 13% in fiscal 2017 over our 10-year explicit forecast, despite comparable-store sales growth that we expect to normalize at 2%-3% as stores mature and competition constrains pricing.

We assign Burlington a stable moat trend rating, reflecting offsetting factors affecting its competitive standing.

Burlington's operating leverage and efficiency should improve as it scales, particularly as it optimizes its store footprint and assortment. Burlington capitalizes on a virtuous cycle. As it scales, it should become more valuable to vendors and better able to secure attractive inventory at favorable terms. Coupled with an increasingly efficient cost structure (enabled by reducing stores' size), the company should be able to better deliver high-quality items at low prices, boosting traffic that feeds the vendor relationships that constitute the firm's moat-worthy intangible asset advantage.

However, the retail sector remains intensely competitive, with digital retailers building leverage over shipping costs, easing returns, and using technology to improve customers' chances of finding a product that fits and meets their preferences. Taken together, we expect Burlington's competitive standing to hold steady, leading to our stable moat trend rating.