Burlington Stores, Inc. Aktie

Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Burlington Stores Fiscal 2026 First Quarter Operating Results. [Operator Instructions].

I would now like to turn the conference over to David Glick, Group Senior Vice President, Investor Relations and Treasurer for Burlington Stores. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2026 first quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristen Wolfe, our EVP and Chief Financial Officer.

Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until June 4, 2026. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $7 million and $6 million during the fiscal first quarter of 2026 and 2025, respectively, and $10 million and $35 million for the full fiscal year 2026 and and 2025, respectively.

Now here's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 3 topics this morning. Firstly, I will discuss our first quarter results. Secondly, I will talk about our outlook for the rest of the year. And finally, I will comment on our new store opening program. After that, Kristin will walk through the financial details.

Okay. Let's talk about the first quarter. I will start with the headline. We delivered yet another quarter of very strong earnings growth with EPS increasing 26%. This marks our 14th consecutive quarter of double-digit earnings growth. This track record demonstrates our ability to consistently convert higher sales into margin expansion, thereby driving very strong earnings flow-through.

Moving on to sales. I will start with total sales growth. Of course, total sales is the most obvious and reliable proxy for retail market share. In Q1, we notched up 14% total sales growth. This was on top of 6% total sales growth in 2025 and 11% growth the year before that. This means that cumulatively, our business is now 34% bigger than it was 3 years ago.

We are taking retail market share through new store openings and comp store sales growth. And as I described a moment ago, we are achieving strong and consistent earnings flow-through on these incremental sales.

Let's talk about comp stores. Comp store sales increased 6% in Q1, well above our guidance of 2% to 4%. I was very pleased with our flexibility in chasing the sales trend while also managing our liquidity and inventory levels to drive strong merchant margin leverage on this comp growth. Our comp trends were broad-based across businesses and geographies with particular strength in ladies apparel, beauty and accessories.

One particular call out was the strength of our warm weather categories. Historically, we have not been happy with our seasonal transitions. Our legacy as an outerwear retailer means that our processes and systems have often been too slow in responding to weather variations, especially in early spring or in the fall. But this year, our upgraded allocation and localization capabilities enabled us to make faster smarter and more precise allocation decisions. This helped drive sales and merchant margin through more efficient use of merchandise receipts and inventory.

Okay. Let me turn to profitability. Our operating margin in Q1 expanded by 20 basis points. This was significantly ahead of our guidance. As a reminder, we had expected a decline of 60 to 100 basis points driven by headwinds specific to Q1. As it turned out, we rolled right over these headwinds and delivered operating margin expansion that was 100 basis points above the midpoint of our guidance.

The drivers of this margin outperformance were higher merchant margin and stronger supply chain productivity. This operating margin expansion, together with the head of plan sales drove an EPS gain of 26%. As I have just described, we faced specific margin headwinds as we lapped Q1 of 2025. We had expected EPS in the quarter to be flat. So 26% growth is an impressive peak. Again, this strong earnings flow-through is a consistent pattern stretching back many quarters.

Now let's move on to forward guidance. I will start with the full year. We are updating our full year guidance to pass along the entire sales and earnings favorability from the first quarter. We are now expecting full year comp sales growth of 2% to 4% and EPS growth of 13% to 16%.

For the second quarter, we are guiding comp growth of 1% to 3% and with discount growth we expect to drive an EPS increase of 19% to 28%. This second quarter guidance signals our confidence in driving strong margin leverage and EPS growth even in a quarter where we are guiding to modest i.e., 1% to 3% comp store sales growth. As a reminder, in Q2, we will be lapping our strongest quarterly comparison versus last year.

In terms of the back half, we continue to feel good about the comp outlook that we discussed in our March call. As a reminder, at that point, we called out potential comp upside in Q3 and maybe even in Q4.

Before I hand over to Kristin, I would like to briefly comment on our new store, our store relocation and our store downsize programs. In Q1, we opened 40 gross new stores. We relocated 6 stores and closed 4 for a net increase of 30 stores. We are very pleased with the pace and quality of these new store openings.

For the full year, we now anticipate 135 gross new stores. Stripping out relocations and closures, we expect this to yield 115 net new stores. This is slightly ahead of our prior guidance of 110 net new stores for 2026. Aside from our new store program, we are also very pleased with the progress we are making in transforming our legacy store base through relocations and downsizes.

Store relocations continue to perform well, typically delivering a sales lift of 5% to 10% as we upgrade the physical store and move into higher traffic centers with stronger cotenancy. Our downsized program is also driving very strong results. This program is targeted at older stores where we like the location, but the store is oversized. As a reminder, we downsized 20 stores in 2025 and and we are ramping this program to about 30 stores this year. In a typical downsize project, we cut the square footage in half, giving the excess space back to the landlord or subleasing to a cotenant.

On average, we are seeing a reduction in occupancy costs of about 200 basis points. The financial returns are very attractive and we plan to ramp this program in the years ahead. Taken together, new stores, relocations and downsizes have driven a huge step-up in sales productivity. In 2019, our sales per selling square foot was languishing around $220. Fast forward to today, and it is now around $350 per square foot. That's a 55% increase in sales productivity in a 6-year period.

We talk a lot about sales growth, but it is important to call out that our sales growth is happening in smaller, more productive stores. This is important because we expect that this higher sales productivity will drive leverage in occupancy expenses as new stores join the comp base and their sales ramp up over time and as we relocate or downsize many more of our existing stores to our smaller store format.

Looking ahead, we are on track to exceed 1,500 stores by the end of 2028. Of these, over 80% would have been opened or relocated or downsize since 2019. Our legacy of old oversized and low productivity stores is diminishing.

One last point to make. For the last couple of years, we have been retrofitting existing stores to Store Experience 2.0. This program is designed to make our stores feel more exciting, easier to shop and more off-price. Our retrofitted stores have received very positive customer feedback and have seen a nice sales lift. We anticipate completion of the Store Experience 2.0 program across the chain by the end of this year.

I would now like to turn the call over to Kristin to walk through the financial details of our first quarter results and our updated guidance. Kristin?

Thank you, Michael, and good morning, everyone. I will start with some additional color on our first quarter performance. Then I will share details on our guidance for Q2 and for the full year.

Starting with the first quarter. Total sales grew 14%, while comp store sales increased 6%, well above our guidance range of 2% to 4% comp growth. The gross margin rate for the first quarter was 44.1%, an increase of 30 basis points versus last year. This was driven by a 20 basis point increase in merchandise margin and a 10 basis point decrease in freight expenses.

Product sourcing costs were $216 million versus $197 million in the first quarter of 2025. Product sourcing costs decreased 30 basis points as a percentage of sales versus last year as we continue to execute on our supply chain productivity and cost savings initiatives.

Adjusted SG&A costs in the first quarter increased 20 basis points versus last year. Q1 adjusted EBIT margin was 6.3% and basis points higher than last year. This was well above our guidance range of down 100 to down 60 basis points.

In March, we spoke to a few discrete factors that we expected would pressure Q1 margin. But we were able to more than offset those with stronger-than-anticipated sales disciplined markdown execution and continued supply chain productivity. Our Q1 adjusted earnings per share was $2.10, which also came in well above our guidance range of $1.60 to $1.75. This represents a 26% EPS increase versus Q1 last year and our continued ability to turn strong top line growth into even stronger earnings growth. At the end of the quarter, comparable store inventories increased 11% versus the end of the first quarter of 2025.

Our reserve inventory was 41% of our total inventory versus 48% of our inventory last year. We are very pleased with the quality of the merchandise and the values that we have in reserve. We ended the quarter with approximately $1.7 billion in total liquidity. This consisted of $747 million in cash and $942 million in availability on our ABL. We had no outstanding borrowings at the end of the quarter on the ABL.

During the quarter, we repurchased $81 million in common stock. At the end of Q1, we had $304 million remaining on our share repurchase authorization. This expired in May of 2027.

Staying on capital structure. In March, we completed a repurchase of $111 million of our 2027 convertible notes. This transaction reduced the outstanding balance of the 2027 converts to $186 million. In Q1, as Michael mentioned, we opened 40 gross new stores, relocated 6 stores and closed 4 stores. This resulted in the addition of 30 net new stores in Q1, bringing our store count at the end of the quarter to 1,242 stores.

Now moving to our updated fiscal 2026 full year guidance. This guidance excludes approximately $10 million of costs associated with bankruptcy acquired leases versus $35 million in 2025. We are increasing our outlook for the full year 2026, passing through the entire Q1 upside to the full year. Total sales are now expected to increase 9% to 11% versus our original guidance of 8% to 10%. We are now expecting 115 net new store openings this year. This is up from our original outlook of 110 net new stores.

We anticipate that the majority of our 2026 new store openings will occur in the first half of the year. For the full year 2026, we're now forecasting comp store sales to increase in the range of 2% to 4%. And our adjusted EBIT margin to expand by 10 to 30 basis points versus last year.

Passing grew the entire Q1 EPS upside, results in adjusted earnings per share guidance in the range of $11.45 to $11.80, up 13% to 16% versus FY '25 and well above our initial 2026 full year guidance.

Moving now to our second quarter guidance, which excludes approximately $3 million of expenses associated with bankruptcy acquired leases versus $11 million in Q2 of 2025. For Q2, we expect comp store sales to be up 1% to 3% and total sales to increase 10% to 12%. We are guiding Q2 operating margin expansion to increase 30 to 60 basis points versus the second quarter of 2025. This translates to an adjusted EPS outlook in the range of $2.05 to $2.20 compared to last year's second quarter EPS and of $1.72.

Our sales trend for May month to date is tracking at the high end of our comp sales guidance range. That said, our month-by-month comparisons get more difficult as we move through the quarter. For the back half of fiscal 2026, our outlook remains unchanged. We expect comp store sales to increase 1% to 3%. Total sales to increase 8% to 10%. Adjusted EBIT margins to increase 10 to 30 basis points and earnings per share in the range of $7.30 to $7.50. Capital expenditures, net of landlord allowances, are still expected to be approximately $875 million in fiscal 2026.

I will now turn the call back over to Michael.

Thank you, Kristin. Before I hand it back to the operator for your questions, I would like to summarize the main points from this morning's call. Firstly, we are pleased with our Q1 results, 14% sales growth comp growth and an EPS increase of 26%. These results add to an already very impressive track record of consistently converting sales growth into strong margin expansion and earnings flow through.

Secondly, we have raised our full year outlook passing through the entire upside from Q1. Our expectations for the balance of the year remain unchanged from our commentary in our March call, including the potential for upside in Q3 and maybe even in Q4.

And lastly, we continue to be very excited about our new store, store relocation and store downsize programs. These programs have contributed to a remarkable growth in our sales productivity.

I would now like to turn the call over for your questions.

[Operator Instructions]. Our first question comes from the line of Matthew Boss with JPMorgan.

Congrats on the nice quarter. So Michael, in March, you said you were bullish about the outlook for 2026. That was pretty much before the outbreak of war in the Middle East and the subsequent run-up in gas prices. So have these factors caused you to feel less bullish on the outlook at all today?

Matt, thank you for the question. You're right, a lot has happened since early March. But the direct answer to your question is we still feel bullish, especially about the back half of the year.

As I recall back on that call in March, we described external and internal drivers of optimism. On the external side, we cited the resilience of our customer. Well, we just reported 6% comp growth in Q1, well ahead of guidance. And when we look at our underlying customer data, the key indicators continue to look positive across demographics and income bands. By the way, we estimate that higher tax refunds in Q1 were worth about 1.5 to 2 points of comp. So even if you strip those out, our comp growth in Q1 was still mid-single digit.

The other external factor that we cited back on the March 5 call was that we expected tariffs to be less disruptive to pricing and supply this year. Well, check, that is what we are seeing. The supply of off-price merchandise is excellent right now.

Now on that call, we also talked about internal drivers of optimism. And again, I would say those have not changed. We see potential upside in Q3 and perhaps in Q4 as we lap easier comparisons in Q3 and as we lap tariff-related assortment gaps in both quarters. So we continue to be excited about those opportunities. So with all that said, I would acknowledge that we're perhaps a little more wary now than we were in March, based on higher gas prices and the potential impact on inflation.

We're watching the trend very closely and looking for any change in consumer behavior, we haven't seen it yet. But as an off-price retailer, that is what we do. We watch to see how the trend changes. And the benefit of the off-price model, when it's well executed, is that we can tap the brakes or we can hit the accelerator if we need to.

The last point I would make is if the external environment does get more difficult and if the consumer becomes more focused on value, then we don't regard that as a bad thing. In fact, as a value retailer, it could turn into an opportunity.

Great color. And then, Kristin, as a follow-up, on your second quarter guidance, even with a relatively modest comp growth, you're projecting earnings growth of over 20% at the midpoint of the forecast. Could you walk through the bottom line drivers and just additional details?

Matt, yes, thanks for that question. So for Q2, we're guiding 30 to 60 basis points of operating margin expansion on comps of 1% to 3%. And that translates, as you said in your question, to EPS growth of 19% on the low end and 28% on the high end. A couple of drivers of the margin expansion in Q2. One is higher gross margin we're planning for we're planning for higher merch margin in the quarter. This is driven by anticipated markdown favorability, modestly faster turns and a favorable shortage accrual rate relative to Q2 of last year.

Partially offsetting this, the merch margin is some pressure, some modest pressure in freight expenses due to higher fuel rates projected for the quarter. So one driver is in gross margin from higher merch margin.

The second is leverage in product sourcing costs driven by supply chain. We're continuing to execute productivity initiatives across all our DCs. These savings are, of course, pressured slightly by the continued start-up cost of our new distribution center in Savannah, Georgia, which became operational late in the first quarter.

There are also some puts and takes in SG&A that we believe will give us some slight leverage in Q2, certainly on the 3 comps. And then I just close by reiterating, we've consistently demonstrated the ability to drive strong earnings growth even on modest comp sales growth and our plan -- our internal plans and our guidance reflect just that.

Our next question comes from the line of Ike Boruchow with Wells Fargo.

Michael, I wanted to ask you a bigger picture question. I think -- I guess as you look across retail, off-price and not off price, what do you see happening in terms of major competitive trends, I guess, just bigger picture? And how do any of those trends? Or do you see anything -- what are the ramifications of that on Burlington specifically.

Well, thank you for the question. It's actually good to talk about the big picture. Sometimes on these calls, it can get very easy to get caught up in the details of quarterly performance. So again, I appreciate the question.

When I look across retail, and this has been true for a long time now, I see a major restructuring going on. And the key driver of that restructuring is the consumers' desire for value. The retailers that can consistently offer great value are winning, and those that cannot offer great value are losing. I think perhaps the strongest evidence to that is the growth of off-price.

For Q1, we just reported 14% total sales growth. And this 14% was on top of 6% last year and 11% the year before. And when you look at our off-price peers, they are also driving terrific growth -- the customer is voting for value and off-price is delivering that value. The growth that we and our off-price peers are achieving, of course, is not coming out of 10 air is coming from traditional retail from full-priced retailers, if you like. I don't see any signs of that slowing down.

In fact, if the economic environment were to deteriorate in the next few months, I think that could further accelerate the growth of off-price.

So on the second part of your question, what are the ramifications for Burlington. Well, of course, it means we have a big opportunity. But I would say that for us to take advantage of that opportunity, we have to continue to improve how we execute the off-price model. we're very aware. We have 2 very successful off-price peers.

We've made a huge amount of progress, but we know that we're behind those companies in some key capabilities, capabilities like localization of the assortment or automation of our supply chain, but I regard that as good news. It means that we have a huge opportunity ahead of us.

I think it's also worth calling out that to go after that upside. At Burlington, we do not have to try new and radical things. For our off-price peers, I think it's different. At that stage in development, it makes sense for them to invest in new ideas. That might mean, I don't know, expanding internationally or making big changes to their model.

But for us, we're at an earlier stage in development. We need to stay focused on the basics of off-price, controlling liquidity, managing inventory, chasing the trend and delivering great value. And I guess I would wrap up my answer by saying that the proof of this strategy for me is in our numbers. For full year 2026, our guidance, our updated guidance is for mid-teens EPS growth, and that's on top of 22% EPS growth last year and 34% the year before that.

So I know the phrase focused on the basics does not sound very sexy, especially with the British accent. But it is working for us. Over the last few years, it's driven very strong and consistent earnings growth.

And I applaud the [indiscernible]. But I'll go to Kristin with the follow-up. Maybe, Kristin, just look back at Q1. Just remind us like what were the factors that were supposed to create the headwinds in 1Q for the margin contraction?

And then what basically happened outside of just the comp being better that was able to offset that and drive the margin expansion you ultimately put up.

Good question. First, let me step back and say, we're very pleased with the flow-through we saw in the first quarter. Operating margin expanded 20 basis points, but that was 100 basis points above the midpoint of our guidance. And when we guided Q1 in March, we embedded a few known headwinds that we expected would pressure operating margin and really disciplined execution coupled with stronger-than-expected sales drove better flow-through than we originally anticipated.

Let me call out a few drivers. First, we saw strong merchandise margin performance, up 20 basis points, this was versus our expectation of lower merch margin in the quarter, really driven by disciplined markdown better, markdown execution, which was better than we expected. And also driven by the quality of our buys. This was a meaningful contributor to the upside. Freight also leveraged 10 basis points as we more than offset any fuel pressures in transportation.

And then the second major area is we continue to make great progress, really better-than-expected progress on our supply chain productivity initiatives. That drove 30 basis points of leverage in the quarter. And this is all despite start-up costs from our new Savannah DC, and this is what drove the leverage on the product sourcing line.

So overall for Q1, merch margin improvement on gross margin and on product sourcing more than offset some slight deleverage we saw in SG&A, and that was really driven by higher incentive comp compared to Q1 last year and higher marketing spend in the quarter.

And let me just final point, I like to make is that the flow-through we saw here really reflects the strength of the operating model, meaning when we deliver sales above expectations, we expect to see meaningful earnings leverage relative to our guide, and that's what we saw in Q1.

Our next question comes from the line of Lorraine Hutchinson with the Bank of Bank of America.

Michael, over the last 3 years, your EPS growth has typically exceeded 20%. Do you think that by driving earnings, you may have missed some comp growth?

Good to hear from you. Thank you for the question. It's a great question. And it's actually something that we wrestle with internally all the time.

In our business, the most direct way to drive sales is to turn on receipts and flow more merchandise to stores and then to run with higher inventory levels and more markdowns. Conversely, the way to consistently drive earnings is to carefully control the flow of receipts and to very tightly manage inventory levels.

Now I would say that at Burlington, historically, we were not good when it came to controlling receipts and inventory. But in more recent years, we've worked hard at this, and I think we've become very good at it. And the evidence for that is the huge increase in our merchant margin over the last several years.

Our inventory turns are much faster now, and our markdowns are much lower. We like those results. But going back to your challenge, I do think that we may have an opportunity to loosen our belts a notch and get slightly more aggressive on sales -- there are some high potential merchandise categories where it might make sense for us to take up purchase commitments and maybe run with a little more inventory, but let me be clear, let me reassure investors, I'm not signaling a major shift here. We are very focused on long-term earnings growth.

We strongly believe in discipline of the off-price model, control liquidity, manage inventory and chase the trend. That's the proven model. It works. In fact, it drives terrific earnings leverage 22% EPS growth last year, 34% the year before that.

And then, Kristin, sticking with that theme, your comp guidance for the full year of 2% to 4% is below some of your off-price peers, but your EPS growth guidance of 13% to 16% is in line. Can you talk about what's driving this leverage?

Thanks for the question. I'll walk down the P&L for the full year and really kind of give you the puts and takes on the earnings guidance. First, we're expecting overall leverage in gross margin. Higher merch margin is more than offsetting some slight deleverage in freight costs driven by higher fuel rates that are embedded in our guidance.

The anticipated higher merch margin is driven by disciplined control of inventory translating to efficient markdown execution, faster turns and better buying. And then as I move down the P&L, as I mentioned earlier, I'm really pleased with the leverage we're seeing in product sourcing costs driven by supply chain.

We anticipate supply chain cost levering in 2026 and this is all despite the opening of a brand-new distribution center in the year. In SG&A, there are also a couple of puts and takes, but one line item I want to call out is on occupancy. We expect occupancy costs to lever this year as we continue to drive up sales productivity, and we're starting to see some of the benefits of downsizing stores and reducing occupancy expenses.

And then the last point I'll make on the full year is that we expect 10 to 15 basis points of incremental leverage for every additional point of comp.

Our next question comes from the line of Brook Roach with Goldman Sachs.

Michael, in your opening statement, you talked about the increase in sales per square foot as you've opened new stores and relocated or downsized older stores. How much more opportunity do you see to drive the sales productivity ahead?

Well, Brook, thank you for the question. The direct answer is that we still have huge opportunity on sales productivity. And my goal over the next few years is to further significantly drive up sales productivity in terms of sales per square feet. As you said, in the prepared remarks, I talked about that, and I quoted the data. In 2019, we had sales productivity that was down in the $200 to $220 per square foot range. And we're now up around $350 per square foot. And I should add that with a lot of new stores in the base.

Now as with many key performance indicators, I think we've made huge progress, but when you look at our competitive benchmarks, it's still -- it's clear that we still have plenty of opportunity ahead of us. Now of course, part of that opportunity will come naturally from comp growth across all stores in the chain.

But at Burlington, we have a lot of new stores that have opened in the last few years that are going to ramp up over the next several years. So those stores are smaller format, 25,000 square foot boxes. And as those new stores ramp up, they'll have an outsized impact on our sales productivity.

Now add to that, the other programs, our downside and our relocation programs, they have a direct impact on sales productivity of older existing stores. These are large stores with existing sales volumes and essentially what we're doing is moving them into a smaller format location. So there are several reasons to think that our sales productivity is going to continue to move up.

Now of course, the reason that, that is important is occupancy expenses are a big part of our cost base. And by continuing to drive up sales productivity over the next few years, we should be able to leverage that expense and that should provide a nice tailwind to our operating margin over the next few years.

Great. And then as a follow-up, you mentioned the strength of the warm weather businesses in 1Q. Can you talk a little bit more about those businesses? I'd also be interested in hearing more about how your new allocation systems helped to drive the comp trend in those businesses this quarter.

Good. Yes. Thank you for that question. Warm weather categories account for about 25% of our sales in the first quarter, so very significant. And those businesses include all the categories you might expect, short sleeve tops, swimwear, sandals, sunglasses, and so on. In Q1, those categories achieved double-digit comp growth, so well ahead of the chain.

Now weather was a piece of that early in the quarter. But overall, the impact of weather in Q1 was somewhat mixed. It was helpful in February and March, but then it was unsettled and less favorable through April. Anyway, I'm very happy with how we were able to navigate those trends and drive our warm weather businesses in the first quarter.

Over the last couple of years, we've begun to roll out more sophisticated localization tools and processes. And that meant that in Q1, we were able to plan and allocate receipts between different regions in a much more granular and intentional way. and we were able to respond much more effectively in more detail to performance variations across regions. Now that helped drive sales, but it also helped drive merchant margin.

Now stepping back, I know that many investors have heard me say this before. We have terrific consistency when it comes to driving quarterly earnings growth, but we have -- we're much less consistent when it comes to quarterly comp growth. And that's especially true or it has been especially true in the first and the third quarters when weather variations tend to be the most impactful.

Our coat factory heritage means that our seasonal transitions historically just haven't been nimble enough. We know that we're never going to be able to control the weather, but we can get better at responding to it. And our localization initiative is going to be an important piece of that.

Our next question comes from the line of Adrienne Yih with Barclays.

Congrats on quarter, it full through. Michael, I was wondering if you can talk about some of the demographic trends that you're seeing by segment. Historically, you've made a little bit of comments on sort of the sub 40,000 category versus above category. So wondering if you can help us out with any changes that you're seeing there? Typically, we see sort of that inflationary pressure of gas, in particular sort of.

It's a good question. you say it's something that we look at all the time and often comment on. I would say the good news is that there's not a lot to call out in the data. I would say the only real headline is that our stores that are in lower income trade areas continue to outperform the rest of the chain. And I don't want to overstate it, but it is real.

In the first quarter, stores in trade areas with lower median household income had comp growth that was clearly above the chain. And now that said, stores in higher income areas still achieved mid-single-digit comp growth, but the key takeaway from that data for me is that we continue to see resilience among lower-income shoppers despite higher gas prices despite inflation creeping up.

Now as for other demographic factors, again, not much to call out. We pay very close attention, as you know, to trends among Hispanic shoppers. And in Q1, stores in high Hispanic areas had mid-single-digit comp growth. So more or less in line with the chain. So again, we continue to feel good about that important demographic.

Fantastic. And then my follow-up for Kristin. The topic of the year, I suppose, is tariffs and now tariff refunds. Can you talk about kind of how you are treating those throughout the rest of the year's guidance? I assume that you filed for them. So just any color or commentary on where they are and what you're assuming for the rest of the year?

Great. Adrian, yes, very topical. As you've heard from many other retailers, we have also filed for tariff refund it's really -- it's highly uncertain how much we will receive and when we could receive the refunds. So we have not factored any of that into our guidance.

Okay. And the assumption for current is the incremental 10%, I assume?

Correct.

Our next question comes from the line of Dana Telsey with Telsey Group.

Congratulations on the progress. Kristin, can you expand a little bit on the new store pipeline, how you're thinking about what is the smaller size of the box you're looking at regional growth and what the pipeline could look like and also along with that, the new store performance? And then I have a quick follow-up.

Great. Thanks, Dana. So for 26 for the full year, we now expect 135 gross new stores. And then once you strip out relocations and closures, we expect to yield 115 net new stores in 26. This is slightly ahead of the prior guidance we gave of 110 net new stores for we were able to pull forward the openings of several stores that were borderline 2026 openings, and we feel good about opening these additional 5 new stores by the end of the third quarter this year.

Given the timing of these additional new store openings did not really move the needle on the overall total sales growth guidance. Now turning to your question on the pipeline, we continue to feel very good about 2027 new store pipeline. And the 2028 pipeline is also robust. -- we are comfortable opening at least 110 net new stores in '27 and in '28, and we are well on our way to hitting or likely exceeding that 1,500 store mark by the end -- and I think you had -- in the last part of your question on new store performance, we continue to be pleased with the performance of new stores.

We continue to see stores open at about $7 million of sales in our first year -- full year and achieve a payback in just under 2 years. And lastly, after these new stores enter the comp base, we see them meaningfully outcome the chain for several years.

Got it. And then just higher freight and fuel costs, what are you seeing and how are you planning?

Yes, great question. We are, of course, seeing higher fuel costs and surcharges, driven by the higher diesel costs. In the first quarter, we were able to lever overall freight cost as transportation cost savings initiatives offset those higher fuel rates. The higher fuel and those incremental surcharges are baked into our full year guidance.

As I mentioned, I think in an earlier question on full year 2016 guidance, we are expecting modest deleverage in freight for the year, driven by higher fuel costs. We strive to -- or strive to manage the P&L proactively, and we found offsets to these surcharges, and that's all incorporated into our guidance.

Let me also call out kind of in the same vein. We recently locked in our ocean and domestic contracts for the next year at favorable rates. We've got great partnerships here, and this should help us control freight costs in 2026. And I guess, of course, if diesel fuel prices go up further from here and where they're projected, that could be an additional risk to our guidance.

Our next question comes from the log of Mark Altschwager with Baird.

Michael, first, I was hoping you could give us an update on the elevation strategy, just where you are in the rollout and what's working?

Sure. Well, Mark, thank you for the question. Yes. The elevation strategy has been a major strategy for us for the last couple of years, elevating the assortment to offer better more recognizable brands, higher quality and more fashion, all at great values within a good, better, best assortment.

Now our internal data shows that by elevating our assortments we've been able to drive higher customer perception scores, stronger comp growth in higher-priced buckets and ultimately, a higher average basket and unit retail I've said this before, but I'm especially pleased with how we've been able to successfully pursue this elevation strategy without hurting margins.

When you increase the mix of better brands, that can really pressure your merchant margin through lower markup or higher markdowns or higher shortage. So it's remarkable that over the last 2 years, we've increased the mix of better and recognizable brands in our assortment. But at the same time, we've actually increased our merchant margin. It takes a lot of skill to pull that off. The fact that we've been able to elevate the assortment at the same time, actually expand margins, demonstrates the strength and talent of our merchant teams.

That's great. And just a follow-up, Michael, on the consumer, you spoke to some of the demographic trends earlier. But I guess, have you seen any correlation between gas prices and the comp trends on a week-to-week, month-to-month basis? Just any insight there?

Thanks, Mark. Yes, it's a very good question. It's something that we've we've sliced and diced many different ways. In the past, actually, we've analyzed this, looking at, for example, we've looked at what's happened to comp growth historically when gas prices have gone up or down.

We've also looked at what's happened to comp growth by region or market. Where gas prices have hit different levels in different parts of the country or gone up at different rates in different parts of the country. The bottom line is that none of those analyses show any correlation. And similarly, in the first quarter, we saw no clear pattern. And we looked very, very closely. That said, we all understand that if gas prices remain high for a sustained period of time. And if that feeds into a higher general cost of living, then that's not good.

We saw what happened a few years ago when inflation went up, it squeezed the discretionary spending of shoppers, and that had a particularly negative impact on lower-income shoppers. So as I said earlier, we're watching the trends very closely for any change in consumer behavior, but we just haven't seen it.

Our last question for today comes from the late Michael Binetti with Evercore.

Krisitin, let me start with one. Could you just expand on the callouts you gave in the prepared remarks on some of the category performance metrics and any regional callouts? And then I'm also curious, any color you can provide on first quarter comp metrics like transactions versus basket AUR, UPT, -- anything on the build that would be helpful.

Yes. Great. Michael, Okay. Let me start regional performance. In terms of regional performance, the Northeast and Midwest were the top-performing regions. The Southeast and West were in line with the chain comps and the Southwest trailed the chain -- on category trends, Michael spoke to this -- some of this in the prepared remarks. It was really broad-based across businesses. We had particular strength in ladies apparel, beauty and accessories. We also did particularly well in warm weather categories in Q1.

We're really pleased with that transition. Those categories include sort sweep tops, swimwear, sandals, sunglasses, et cetera. So those are the call-out in the category. And then the last part of your question, components of the comp. So our first quarter comp was driven by both an increase in the number of transactions and by a higher basket size due to higher AUR.

Those 2 drivers, transaction volume and higher basket were about equal in terms of their contribution to our comp in the quarter.

Okay. And then, Michael, if I could just ask one. Really nice to see the SoHo store open earlier in the quarter, a nice store. Could you mind giving us an update on -- you touched on the store experience 2.0 in the prepared remarks, but just a little bit of an update on that initiative, what we'll see as we go on to the checks the rest of the year here.

Yes. Well, thank you for the question. Yes. You've heard me say this before. Historically, at Burlington, our store environment was quite undifferentiated. When you walked into our stores, it was just a sea of racks. It really hasn't changed since the company was founded in the 1970s. So a few years ago, we launched our store experience 2.0 initiative. And the goal was to reimagine the store environment to make it more exciting, more off-price, easier to shop, and more Burlington 2.0, if you like.

Now in 2024, we rolled that program out to new stores and we retrofitted approximately 120 existing stores. And we saw very good feedback from shoppers and from associates, and we also saw a nice sales lift in retrofitted stores. So last year, we rolled the program out to -- I think it was about 350 or so additional stores, and we'll complete the full chain rollout this year. Now again, we continue to see a nice sales lift on retrofitted stores. That said, we also believe that the benefits of Store Experience 2.0 will grow over time.

By the end of 2026, all stores will have been fitted with store experience 2.0, and that's important. We know from research that many shoppers have an outdated perception of Burton. Maybe they came into the store with their mother to buy a coat 20 years ago. Well, when they walk into our stores now, they tell us it feels completely different, fresh, more exciting and more off-price.

Thank you. And at this time, that concludes our Q&A session. I will now turn the call back over to Michael for closing remarks..

Before we close, I am very pleased to announce that Marissa Shake has recently joined Burlington as Senior Vice President of Investor Relations and Treasury. Marissa has tremendous experience and a strong track record of success in banking, consulting and retail, including off-price. We are very excited to have Marissa as part of our Investor Relations team. With that, let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in August to discuss our second quarter 2026 results. Thank you for your time today.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines.

Hello, everyone, and welcome to Burlington Stores, Inc. Fourth Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions]

I'd now like to turn the call over to David Glick, Group's Senior Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 fourth quarter operating results.

Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until March 12, 2026. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks for the Q&A that follows are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

As a reminder, as indicated in this morning's press release, all profitability metrics discussed in this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $8 million and $5 million during the fiscal fourth quarter of 2025 and 2024, respectively, and $35 million and $16 million for the full fiscal years 2025 and 2024, respectively.

Now here's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 3 topics this morning. Firstly, I will discuss our fourth quarter results. Secondly, I will review our full year 2025 results. And thirdly, I will talk about our outlook for 2026. Then Kristin will provide additional financial details.

Okay. Let's start with our fourth quarter results. Total sales increased 11%. This was on top of 10% total sales growth last year. The fourth quarter is by far our largest quarter of the year. So to grow total sales by double digits on top of double digits is especially impressive. It shows that we are continuing to take retail market share.

Comparable store sales increased 4%. We knew coming into the quarter that we were up against 6% comp growth from last year and that we had some tariff-related gaps in our assortment.

We expected our sales to be within our guidance range of 0% to 2%. So we were very pleased to handily beat this guidance and to deliver a strong 2-year comp stack of up 10% for the fourth quarter. Our buying, planning, supply chain, marketing and store teams executed very well to chase this trend. I am not going to spend a lot of time dissecting the details of our Q4 comp performance, but I would like to call out 2 important items. Firstly, our elevation strategy. This has been a focus over the last couple of years, elevating the assortment to offer better, more recognizable brands, higher quality and more fashion, all at terrific values.

There is clear evidence of the success of this strategy in our internal sales data. For example, when we analyze our sales by price point, we see that the highest comp growth rates are in the higher-priced buckets. In other words, despite the economic pressure she may be feeling, our customer is responding to the great values we are offering at these higher price points. These trends drove a mid-single-digit increase in our average unit retail in the fourth quarter.

The second point I would like to make is that although we are pleased with our ahead of plan comp growth, as we hindsight the quarter, we can see that there were important categories where we could have done more business. I will explain what I mean, and we'll talk more about this in a few moments when I discuss the full year. But before I move on to our full year 2025 results, let me just touch on Q4 earnings.

In the quarter, we achieved 100 basis points of operating margin expansion and 21% earnings per share growth. Again, this is the largest quarter of the year, so we are especially happy with this performance.

Now let's discuss our results for the full year 2025. For this discussion, I am going to read the headlines. But then I would like to spend most of the time talking about how in response to tariffs, our operating strategies shifted in 2025 and how this impacted these sales and earnings results.

The headlines are that in 2025, we delivered 9% total sales growth on top of 11% total sales growth last year. 2% comp sales growth on top of 4% comp sales growth last year, 80, that's 8-0 basis points of operating margin expansion on top of 100 basis points last year. And 22% earnings per share on top of 34% earnings per share growth last year. What really jumps out from these headline results is that we drove extraordinarily strong earnings growth on a relatively modest comp sales increase.

Let's talk about that. When we started the year 2025, as usual, we planned our business for low single-digit comp growth. So we believe or hoped that we might be able to chase to mid-single-digit comp growth for the year.

Our initial 2025 focus and operating strategies were consistent with this comp sales outlook. But then in April, things changed. The introduction of tariffs forced us to recalibrate. It was clear that if we ignored the margin impact of tariffs, then this would significantly reduce our earnings growth. Over the last few years, we have worked hard to build our operating margin. And in 2025, we decided that we were not going to allow tariffs to set us back.

So we took numerous actions to offset the impact of tariffs. We talked about these actions in our quarterly calls in May, August and November. They included pivoting away from and planning down receipts in categories which faced the greatest negative margin pressure from tariffs. These categories were mostly in our home businesses, reducing inventory levels across the store to drive a faster turn and thereby generate lower markdowns, raising retails in select fast-turning categories where there was limited resistance or pushback from the customer and aggressively going after expense savings across the P&L.

These actions were very successful. In May, despite the initial shock of tariffs, we were confident enough to reiterate our earnings guidance for the year. In August, we took this guidance up. In November, we took our guidance up again. And today, we are reporting actual full year results featuring 80, 8-0 basis points of operating margin expansion and 22% earnings per share growth. These numbers are well ahead of the original earnings guidance that we issued on this call in March last year. So let's talk about sales.

As I said a moment ago, at the start of 2025, we planned our business for low single-digit comp growth, but hoped we would be able to chase to mid-single digit. We didn't. We didn't because the actions we took in response to tariffs were a drag on sales. Of course, we knew this. We knew that cutting receipt plans for businesses most impacted by tariffs was the right thing to do for earnings growth, but that it would likely dampen our sales upside. This impact showed up in Q3 and Q4.

In Q3, unseasonably warm weather hurt our outerwear business. That can happen. We don't control the weather. But in the past, when this has happened, we have been able to lean on nonseasonal businesses, particularly home categories to pick up some of the slack. That did not happen because our home assortment was the most impacted by the shift away from businesses with the greatest margin pressure from tariffs. Without these assortment gaps in Q3, we would likely have driven more sales. That said, given tariffs, our earnings growth would have been lower.

My commentary is similar for Q4. I know it seems like an odd thing to say, given that we are reporting strong 4% comp growth on top of 6% comp growth last year. But I am convinced that we could have done even more sales in the fourth quarter. There are categories that are very important in Q4, for example, toys, gifting and housewares, where we could have done more business and driven higher comp growth across the chain. At the start of 2025, we had much higher full year sales plans for these businesses. But once tariffs were introduced, it made sense to pull back. We could have made a different decision. This would likely have delivered a stronger comp increase, but with lower earnings growth.

Wrapping up on the full year, let me reiterate that we are very pleased with our results. 80 basis points of operating margin expansion on top of 100 basis points last year, 22% EPS growth on top of 34% last year. One of the reasons why I have taken a few minutes to go through all this and to provide a full analysis of the drivers of our 2025 results is that it helps inform how we are thinking about the sales outlook for 2026.

In fact, this is a good segue to talk about that sales outlook. I tend not to use the word bullish very often, but I am going to use it now. We feel very bullish about our sales outlook in 2026. Barring some black swan event, we think that we have an opportunity to really drive sales this year, comp store sales and total sales. There are several external and internal factors that are driving this optimism. On the external side, based on our trends in the fourth quarter, our view is that our customer looks quite resilient right now.

Add to that, we expect that the current tax refund season is going to be more favorable than recent years. As we have said in the past, our core customer is very sensitive to tax refund payments. And the early signs and expert predictions are very positive. So we think there may be sales upside, especially in the first quarter.

Staying on external issues, we don't know what will happen with tariffs this year. It is very uncertain, but we believe that the industry and our supply base have now adjusted to them. And that tariffs are unlikely to represent the same margin challenge that they did last year.

Let's move on to the internal drivers of our optimism. There are 2 things to highlight. Firstly, in 2026, we will be up against our easiest comp sales comparisons for some years. In Q1, in Q3 and even in Q4, we look at the comp numbers that we posted last year, and we feel like we have tremendous opportunity.

As I explained a moment ago, in the back half of 2025, we had significant tariff-related gaps in our assortment, especially in our home businesses. These gaps held back our sales trend. Now that the industry and our supply base have adjusted to tariffs, we plan to go after these assortment opportunities in the back half of 2026.

Secondly, we expect continued progress on our Burlington 2.0 initiatives including the completion of our Store Experience 2.0 remodel for the balance of the chain. And we are also excited about the rollout of additional Merchandising 2.0 capabilities, especially regional and store level localization. Since our last quarterly call in November, these favorable external and internal factors have caused us to reconsider and take up our sales plans for 2026. That is why we are raising our comp guidance to 1% to 3% for the full year. This is modestly higher than our typical model.

That said, you can divine from my comments that we think there may be potential upside to this guidance, and we are positioned to chase the sales trend. There is one other important point to make. Although we are very excited by the sales outlook, we do not plan to go after this sales opportunity at the expense of margins. We have made huge progress expanding our operating margin over the last couple of years. We are confident that there is more to come, and we anticipate that any ahead of plan sales in 2026 will drive further operating margin leverage.

At this point, I would like to turn the call over to Kristin. Kristin?

Thank you, Michael, and good morning, everyone. I'll provide more details on the financials. First, starting with the fourth quarter. Total sales grew 11% and comp store sales grew 4%, well above the high end of our guidance. As Michael noted earlier, this Q4 growth is on top of last year's 10% total sales growth and 6% comp store sales growth.

Our Q4 adjusted EBIT margin expanded 100 basis points versus last year. This was 50 basis points above the high end of our guidance. The gross margin rate for the fourth quarter was 43.7%, an increase of 80 basis points versus last year. This was driven by a 60 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses.

Product sourcing costs were $232 million versus $217 million in the fourth quarter of 2024. Product sourcing costs levered 30 basis points as a percentage of sales, driven by supply chain productivity and cost savings initiatives. Adjusted SG&A costs in Q4 were 40 basis points lower than last year. The leverage in SG&A was primarily driven by leverage from store payroll and occupancy costs on higher sales in the quarter. Q4 adjusted EBIT margin was 12.1%, and our adjusted earnings per share in Q4 was $4.99. Both of these were well above the high end of our guidance.

Our Q4 adjusted EPS represents a 21% increase versus the prior year. At the end of the quarter, comparable store inventories were up 12% versus the end of the fourth quarter in 2024. Our reserve inventory was 40% of our total inventory versus 46% of our inventory last year. We are very happy with the quality of the merchandise, the brands and the values that we have in reserve. We ended the quarter in a very strong liquidity position with approximately $2.2 billion in total liquidity, which consisted of $1.2 billion in cash and $926 million in availability on our ABL. We had no borrowings outstanding at the end of the quarter on our ABL.

During the quarter, we repurchased $59 million in common stock, bringing our annual share repurchases to $251 million. At the end of Q4, we had $385 million remaining on our share repurchase authorization, which expires in May of 2027. In Q4, we opened one net new store, bringing our store count at the end of the year to 1,212 stores. In Q4, we had 2 new store openings and one closing.

I'll now move on to discuss our full year 2025 results. Total sales increased 9% on top of 11% in 2024. Comp store sales increased 2% on top of 4% in 2024. Our operating margin for the full year expanded by 80 basis points.

Merchandise margin increased by 40 basis points despite the negative impact from tariffs. Freight expenses improved by 20 basis points, and product sourcing costs levered by 20 basis points. We also achieved 30 basis points of leverage on adjusted SG&A. This leverage was offset by 20 basis points of deleverage and higher depreciation and amortization costs. In terms of store openings for the full year, we opened 131 new stores while relocating 18 stores and closing 9 stores, adding 104 net new stores to our fleet.

I'll now move on to our 2026 guidance. This guidance excludes expenses associated with bankruptcy acquired leases of approximately $8 million in 2026 versus $35 million in 2025. For 2026, we expect total sales growth in the range of 8% to 10%. This assumes 110 net new store openings. We anticipate that approximately 60% of these new stores will open in the first half of the year, with the balance opening in the fall. We are forecasting comp store sales for the full year to increase 1% to 3% and our adjusted EBIT margin to be in the range of flat to an increase of 20 basis points versus last year.

This results in adjusted earnings per share guidance in the range of $10.95 to $11.45, an expected increase of 8% to 13%. Capital expenditures, net of landlord allowances, are expected to be approximately $875 million in fiscal 2026.

I would now like to move on to guidance for the first quarter of 2026. This Q1 guidance excludes expenses associated with bankruptcy acquired leases of approximately $6 million each in 2026 and 2025. We expect total sales to increase 9% to 11%. Comp store sales are assumed to increase 2% to 4% for Q1. We are expecting adjusted EBIT margin to be in the range of down 60 to down 100 basis points over the first quarter of 2025, which results in an adjusted EPS outlook in the range of $1.60 to $1.75 versus last year's first quarter adjusted earnings per share of $1.67.

I would now like to turn the call back over to Michael.

Thank you, Kristin. Before I turn the call over to questions, I would like to reinforce a few of the key points that we have discussed this morning. Firstly, we are very happy with our Q4 performance, 11% total sales growth, 4% comp sales growth, 10% 2-year comp stack, 100 basis points of operating margin expansion and 21% increase in earnings per share.

Secondly, we are also pleased with our full year results. We achieved 80 basis points of operating margin expansion on top of 100 basis points last year and 22% earnings per share growth on top of 34% last year. In 2025, in response to tariffs, we had to adjust and make choices. We took actions to address the margin impact of tariffs and to drive earnings growth. The results are clear. This strategy was spectacularly successful.

And thirdly, we are feeling bullish about 2026. There are external and internal factors that are driving this optimism. We think there may be upside to our sales guidance, and we anticipate that any ahead of planned sales should help drive additional operating margin expansion.

I would now like to turn the call over for your questions.

[Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan.

And congrats on another nice quarter. So Michael, to break down the fourth quarter further, could you elaborate on what drove your ahead of planned sales? And in particular, what makes you think that you could have done even more sales in the fourth quarter than your reported results?

Well, thank you for the question. As I said in the script, overall, we were very pleased with our trend in Q4, a strong 4% comp growth on top of 6% comp growth last year, so a 10% 2-year stack. That said, the breakdown of this comp growth by business was very, very different to how we had originally planned it. Let me explain that.

Over the last few years, we have had enormous success growing our home businesses, especially in the back half of the year. Home has been a real engine of growth for us with categories such as gifting, home decor, housewares, bedding, toys and seasonal decor.

Now our original plan for 2025 was to significantly expand those areas starting in Q3 and then into Q4. We believed that we had a significant sales opportunity. Now with the introduction of tariffs in the spring, we faced a different set of economic choices. If we've maintained our original plans in those areas, we could have driven higher sales. But because of tariffs, we had to adjust.

The way I think about this is our mission is not just to chase sales, is to chase profitable sales. And looking back, I'm very pleased with how smartly and flexibly our teams responded in that situation. When tariffs were announced, we set about remixing our plans to focus on businesses that were less impacted by tariffs, certain categories in apparel, footwear, beauty and accessories. So not surprisingly then, coming back to your question, our comp growth in Q3 and Q4 was strongest in these specific businesses.

I would say that our merchandising teams in those categories did a great job delivering terrific assortments that drove our comp sales in the back half. The flip side, of course, was that our comp growth in our most important home and holiday categories was lower. Of course, it was. As I said, we deliberately lowered the mix of these businesses in response to tariffs. And it was that remixing that really enabled us to drive such extraordinary earnings growth in 2025.

Now the last part of your question, which businesses could have delivered more sales then? It's all the categories that I mentioned, gifting, home decor, housewares, bedding, toys, seasonal decor. Now despite the gaps in the assortments in those businesses, we still turned very fast. So that tells me that if we had more receipts, then for sure, we could have done more business. But those additional sales would have come with unacceptably low margins.

Let me wrap up my answer by looking forward though. We're excited for 2026. The math is different now. The industry has had the chance to adjust to tariffs. Tariffs are still here, but they're lower now than they were last summer. As I've described, last year, we started out with ambitious sales plans in our home businesses. But we had to shelve those plans in response to tariffs. That opportunity -- that sales opportunity has not gone away. And in 2026 unlike 2025, we see the chance to go after that opportunity aggressively and profitably.

Our next question comes from the line of Ike Boruchow of Wells Fargo.

First question for Michael. I think I have a question on the comp guidance just for '26, 1% to 3%. It is higher than you normally give us? I know it's relatively small. But it is a deviation from your typical guide. Can you give us a little bit more color on how we should interpret this along with your -- I can't help but hear the word bullish, and I think that's a change from you as well. So just how should we interpret this?

Yes. Ike, yes, growing up in the U.K. bullish isn't really part of the vocabulary. But yes, I'm using bullish this time around. So let me answer your question. As you know, we typically plan our business and guide to flat to 2% comp growth with the goal being to change any sales upside. In the fall, when we started to put together our 2026 budget, flat to 2% was our starting point. And that was the -- obviously, that was the initial guide that we discussed in November. So over the last few months, we've had a chance to sort of really look at the outlook for 2026. And obviously, we've torn apart and analyzed our 2025 performance.

Now based on all that, we see a lot of potential upside. Again, as I said in the prepared remarks, there are sort of external and internal factors that are driving our optimism. On the external side, based on our fourth quarter sales trends, our customer looks pretty resilient to us. We also -- we think that tax refunds are likely to create some momentum, certainly in the first quarter. And while we don't know what will happen with tariffs, we think they're unlikely to present the same margin challenge that they did last year.

Now on the internal side, specific to Burlington, if you like, as we look at Q1, Q3 and even Q4, we see an opportunity to drive sales as we lap issues in those quarters, especially tariff-related assortment issues in the back half. Now with all that said, let me reassure everyone that we're an off-price retailer. Our overall playbook has not changed. We're still going to plan sales conservatively, manage the business flexibly and then chase any upside. I should also make the point that although raising guidance to 1% to 3% is not a very significant change, it does matter. It gives our merchants a little more open to buy, so they can be more aggressive, especially as we start the year, as we start the quarter.

It gives them more of a head start, if you like, as they chase the sales trend. The other data point that I should call out is our inventory level. At the end of Q4, our comp store inventories were up 12%. Now that kind of increase is very unusual for us, but it was deliberate, and it's another indicator that we see potential sales upside in 2026, especially in Q1.

Got it. And then a quick follow-up for Kristin. On the margins, just the 1Q down 60% to 100%, can you just elaborate what exactly are the moving pieces there because the full year seems pretty solid, but what's going on in the first quarter that we shouldn't take note of?

Thanks for the question. It's a great question. Glad you asked. Let me start with the full year, and then I'll touch on the Q1 dynamics specifically. So for full year 2026, 1% to 3% comp store sales growth and operating margin flat to 20 basis points. Going down the P&L, we are assuming relatively flat merchandise margin as we invest and reinvest any favorability from cycling tariffs to better support, better brands, higher inventory levels in stores, all of this to drive sales.

Similarly, for the full year, we're expecting relatively flat freight and product sourcing costs, as our continued productivity and cost saving initiatives are still there, but mostly offset by new DC start-up costs this year. And then in SG&A for the full year, we expect to see about 20 basis points of leverage at a 3% comp. That's what's driving the full year guidance. And it's worth reiterating, we continue to expect 10 to 15 basis points of incremental leverage for every point of comp above the 3%.

So now to your specific question about the first quarter, it is an outlier for the year. We're guiding lower margin in Q1, but we absolutely expect margins to increase Q2, Q3 and Q4. We have some unique factors going on in the first quarter. First, we have some pressure on gross margin. We will not have anniversary tariffs, so that puts some modest pressure on markups. And we also have a markdown timing shift into Q1 from Q2.

Secondly, as it relates to our supply chain costs, we're anticipating some deleverage specifically in Q1 that's related to the start-up costs from our new Savannah distribution center, which we plan to open in the second quarter.

And then the last thing going on in Q1 is we're lapping a few onetime favorable items from Q1 last year. Michael talked about how aggressively we went after expense savings across the P&L in response to tariffs. And there were some levers that we pulled specifically in April of last year to drive savings that we're now lapping in Q1. These are the primary deleverage items that drive the down 60 to 100 basis points for Q1.

And again, just to reiterate, we do expect EBIT margins to increase to varying degrees for each of Q2, Q3 and Q4 to offset the lower operating margin in Q1 and net out to that flat to plus 20 basis points for the full year.

Your next question comes from the line of Lorraine Hutchinson of Bank of America.

Michael, we're expecting tax refunds to be much higher than last year. In 2021, you saw a significant sales lift from these stimulus checks. Should we think of higher refund checks in the same way?

Lorraine, thank you for the question. At a very high level, I would say that the answer is yes, whether it's a tax refund check or a stimulus check, it puts extra money in our customers' pockets, and that's always a good thing and helps to drive comp sales. That said, there are a couple of very important differences, I think, firstly, the stimulus checks back in 2021 were much more significant and more expansive. They went to everybody. For the One Big Beautiful Bill, it looks like there are many different pieces to it, and it doesn't affect everybody equally.

So it's difficult to tell how much it will impact our customers. Our expectation is that the impact will be much less significant than the 2021 stimulus checks. The second point to make is that the 2021 stimulus checks, they were a onetime thing. So in 2022, you'll remember, we were up against them. The One Big Beautiful Bill is a change in the tax code. And in that sense, it's permanent. So any sales lift that comes from it should be sustained rather onetime event. Anyway, I guess boiling it all down, it's difficult to know how big an impact it might have. We've built in some upside to our plans, and we're ready to chase.

And then I wanted to follow up on inventory. You spoke earlier about the comp store inventory up 12%, but your reserve penetration was lower than last year at the end of the fourth quarter. Are you happy with your inventory levels? And maybe more broadly, how are you feeling about merchandise supply and off-price availability?

Lorraine, this is Kristin. I'll take the first part of your question on inventory. Michael kind of spoke to it on the higher inventory levels in an earlier question, talking about our approach for 2026 sales guidance. But at the end of Q4, our comp store inventories, as you noted, were up 12%. This was deliberate, and we feel very good about the amount of inventory and the freshness of that inventory. The primary driver of the higher inventory is we wanted to be prepped and stock for higher traffic and sales anticipated in Q1 due to the higher tax refunds as well as the underlying trend of our business.

In addition, the other dynamic is we did a great job delivering transitional receipts in Q4 such that our assortment was fresh. There's newness in the store as we move from holiday and into spring. And we're continuing to improve our capabilities to better localize assortments by geography and climate, and these strategies contributed slightly to slightly higher comp store inventory levels at the end of Q4 versus last year. So that's on in-store inventory.

On reserve inventory, our reserve penetration was lower than last year. But at 40% of total inventory, it's really more in line with historical levels at the end of Q4. In 2023, for example, it was slightly higher than the -- we saw 39% at that time, at the end of 2023. And as we look at that inventory that we have in reserve, we really feel good about the quality and the values in the brand that will help support sales and support our ability to chase in 2026.

And then let me jump in on the last part of the question on off-price merchandise availability. I would describe the buying environment for off-price right now as excellent. I think you've probably heard the same thing from other off-price retailers. There is plenty of supply in the market across most categories. I mentioned in the prepared remarks that we think there may be sales upside in 2026.

Well, it's important to add that we see plenty of off-price merchandise availability to help fuel that sales trend.

Your next question comes from the line of Brooke Roach of Goldman Sachs.

Firstly, I have a quick question about the monthly cadence of comp sales in 4Q. In particular, I'm wondering how your business performed in January and your comp trend exited the quarter.

Brooke, it's Kristin. I'll take the question. It's a good question. As we look at it, it makes the most sense given the timing of holiday to look at and speak to November and December combined. And for that 2-month period in Q4, our comp sales increased mid-single digits. And as we got closer to Christmas, that trend accelerated. So we were really pleased with the holiday performance and the sales trend we saw, particularly given the strength of our holiday season last year.

Then as we moved into January, that strong trend and momentum continued. January also ran a mid-single-digit comp. And I'll point out that our comp in January would have been even stronger if not for the significant winter storm that impacted many of our major markets late in the month.

It was widespread and led to several hundred store closures. This disruption cost us about 1 point of comp on the full quarter and several points for the month of January. Now to the last part of your question, once we dug out from the winter storm, we resumed that strong comp store sales trend. Momentum has continued into February, such that Q1 is off to a very strong start. We have a lot of the quarter ahead of us, of course, but so far, so good.

That's great to hear. As a follow-up, I was hoping you could speak to sales trends by customer demographic. What are you seeing in terms of sales trends by different income groups? And are there any call-outs on trends for other demographic groups that we should be aware of?

Yes, Brooke, it's Michael. I'll take that. It's a good question. It's something we look at all the time. We slice and dice our internal sales data just to see if there's any -- if there are any pockets of weakness or pockets of strength. So let me tell you what we're seeing. On sales trends by different income segments, as we analyze the performance of stores based on median household income of the surrounding area, our comp sales trends in the fourth quarter were very broad-based. It's true that our stores in lower-income trade areas had a slightly higher comp than the rest of the chain, but it was very close.

In other words, all income cohorts performed well in the fourth quarter. So when you segment our customers based on household income, every segment is looking fairly resilient right now.

On the second part of your question, other demographic groups, again, there's not much to call out. When we look at the performance of our stores based on ethnicity of the surrounding area, again, the trends look fairly broad-based. For example, stores in high Hispanic trade areas, if I exclude the Southern border, those stores are pretty much right in there with the rest of the chain in terms of comp performance. So overall, as we look across demographic segments, income and ethnicity, et cetera, we're not seeing any major pockets of weakness at this point.

Your next question comes from the line of Adrienne Yih of Barclays.

It is really nice to see Burlington 2.0 kind of really coming into its own. Michael, a little bit more color on the elevation strategy. How should we be thematically thinking about the pyramid of sort of good, better, best, where it was, where it's going to? You have other off-price competitors that are doing a similar strategy, and they're also opening stores in your market. So just how do we think about how you're differentiated the product?

And then, Kristin, a little bit more on the supply chain, but maybe more from a qualitative benefit over a multiyear horizon, how do you think about productivity, capacity utilization? And are you running anything in tandem? Like are you running legacy DCs or something that we can roll off in the next 12 to 18 months.

Adrienne, thank you for the questions. Obviously, I'll take the first one on the elevation strategy. Yes, we're very pleased with what we're seeing in our elevation strategy. It's been a major focus for us for the last couple of years elevating the assortment to offer better, more recognizable brands, higher quality and more fashion, all at great values. We're very encouraged by the results.

And our internal data shows us that by elevating our assortments, we've been able to drive higher customer perception scores, stronger comp growth in higher-priced buckets and ultimately, higher average unit retail and higher transaction size, which is what you should be seeing if you have a successful elevation strategy.

Now one aspect of this that I'm especially pleased about is that we've successfully pursued this elevation strategy without taking a hit to margin. That's always been the major challenge in off-price. When you increase the mix of better brands or you raise the quality or you take more fashion risks, then that can really pressure your merchand margin.

When you elevate the assortment like that and the AUR goes up, the typical pattern is that markup is pressured and markdowns increase. It takes skill to elevate the assortment without hurting merchand margin. So the fact that we've been able to elevate the assortment and at the same time, we have actually expanded our margins is, I think, a clear testament to the strength and the talent of our merchand teams.

By offering a terrific assortment with great value at higher price points, we've been able to convince the customer to trade up and to spend more. And yes, as I say, over the past couple of years, we've elevated the assortment, but it's really important to point out that we, at the same time, have expanded our margins.

And Kristin, do you want to take the second question?

Yes, Adrienne, on supply chain, I appreciate the question. I'll speak to both qualitatively and quantitatively. We do continue to make significant progress, reducing supply chain expenses as a percentage of sales. That's certainly been a focus. We're doing this through numerous productivity initiatives in our DCs and cost savings projects across supply chain. So for 2025, supply chain costs levered 20 basis points and this was on top of 50 basis points of leverage in supply chain in FY '24. So we are seeing that leverage.

This spring, 2026, we're going to go live in our newest DC in Savannah, Georgia. We're really excited about this new asset. It's more than twice the size of our current largest DC. It's highly automated. It's built for off-price processing. Now kind of near term, as you would expect, there's significant start-up expenses associated with opening a new facility of the size, and that will drive some deleverage in 2026. And for 2026 overall, we expect supply chain costs as a percentage of sales to be relatively flat for the year as these new DC start-up costs are then offset by our continued efforts around productivity and cost savings initiatives elsewhere in the supply chain.

You see this dynamic more in Q1 where we're expecting about 10 to 20 basis points of deleverage on this line. And then as the year goes on, we expect that deleverage to moderate as we offset with these cost savings initiatives.

Now sort of on the qualitative point in your question, it does typically take 2 or so years for DC to be fully ramped up. Over time, we absolutely expect this state-of-the-art design for off-price DC to drive cost efficiencies for us, notably significantly faster processing times.

And additionally, based on the physical locations of our vendors and our store bases, we believe over time, we can see some modest leverage in freight related to this new DC. So we're continuing to invest in new distribution centers. And over time, we'll modify our DC footprint to be -- to have the majority of our supply and processing go through our more efficient DCs. That will take time, but that's the plan that we're continuing to execute.

Your next question comes from the line of Mark Altschwager of Baird.

Michael, can you talk about the pipeline for new stores and relocations?

Yes. Mark, yes, I'm glad you asked this question. I am really very excited about our new store program and our new store pipeline over the next couple of years. When we -- going back a little bit, when we laid out our long-range plan back in November 2023, we said at the time that we thought we could open roughly 500 net new stores over the next 5 years or approximately 100 net new stores per year on average. Now we're running slightly ahead of this.

And not only are we ahead in terms of number of stores, number of new stores, we're also very -- it's important to say we're also very happy with how those stores are performing. We expect new stores to achieve about $7 million in sales in their first full year. Our new stores are running in line with that. We then expect them to comp above the chain for their first few years in the comp base.

And again, recent cohorts are actually performing -- outperforming these expectations for comp growth. That means that our overall investment returns for new stores are very strong, well above our hurdle rates. The other aspect of our new store program that I'm excited about and I want to call out is our store relocation and downsizing programs. As you know, we have a lot of older oversized stores in the chain. In 2025, we relocated 18 of those stores to smaller format locations, mostly in busier nearby strip centers.

Now with those relocations, we're seeing a good sales lift and a reduction in occupancy costs, so driving much improved earnings. In 2025, we also physically downsized about 20 existing stores. Now this is a new and growing program for us. When we downsize the store, we reduce the footprint of the store, and we either return the excess space to the landlord or we sublease it to a co-tenant. Now as we reduce the footprint, we refurbish, modernize and improve the reduced space.

Now with our downsized projects, we're seeing very strong returns, driven by significantly lower occupancy costs. And in many cases, we're also seeing a sales lift. We have many stores in the chain that are candidates for our downsizing program. So we expect that program to grow over time and become more important.

Now wrapping up my answer, we have -- obviously, we have a much, much smaller store base than our off-price peers. And we, therefore, have much, much more room for growth. So we're very excited about our new store program and our new store pipeline, including the 110 net new stores that we plan to open in 2026. And we're also excited by our relocation and downsize programs, as I described. These programs are not only going to help us expand our store base, but they're going to help us transform it.

That's very good color. And just a follow-up, in the prepared remarks, you talked about some of the localization initiatives and how that seems to be ramping up. Can you give us a little bit more detail there?

Yes, sure. It's actually another really great question. Localization, it's hard to overstate this, but I think localization is a major opportunity for us. It's a capability that our off-price peers have had and have invested in for many, many years. And it's an area where we, frankly, are a long, long way behind. There have been times over the last several years, there's even times now when I walk into one of our stores, say, in a beach community or in the South in the summer, I look around, and it looks like Burlington Coat Factory has come to town. So we need to -- we have a huge opportunity to improve and get better at customizing and localizing our assortment, not just based on the region and the climate, but also based on income levels and demographics of the trade area.

Now this is a business problem where people, process and technology, including, by the way, artificial intelligence can make a huge difference. And we've known for some time now that it's a major opportunity for us. Indeed, we've talked about it with investors, but we also recognized that it would be difficult for us to make significant progress on localization until we had really strengthened and upgraded sort of our foundational merchandise planning and allocation systems.

Over the last couple of years, through Merchandising 2.0, that's what we've done. And we're now in a position to really start going after localization. Now I know from experience that this is not a capability that we can build overnight. But I'm very excited about some of the initiatives that we've begun to roll out. Better store and class level planning and forecasting, much stronger localization analytics, new store assortment planning and trending, seasonal flow and event planning, assortment distortions based on income and demographics and an expansion and redesign of our merchandise planning regions.

If you go back and look at the history and the growth of our off-price peers over time, you'll see that localization was a major unlock in their evolution and growth. And as I say, we're a long way behind. We have a lot of work to do, and it's going to take some time. But I think that over the next several years, localization is going to be a key driver for us.

Our last question comes from the line of Dana Telsey of Telsey Group.

Nice to hear the progress. Your operating margins were very strong in the fourth quarter as well as for the fiscal year? Can you just walk us through the puts and takes of the margin drivers?

Dana, thanks for the question. I'll start with Q4, and then I'll go into full year. As Michael has discussed, and we've talked about on this call today, we took deliberate actions in 2025 to drive our operating margin and earnings growth. In Q4, the biggest contribution was an increase in gross margin. It was 80 basis points versus last year. 60 of that 80 basis points came from merchandise margin. Merchandise margin was driven by lower shortage as well as the actions we took to mitigate tariffs, as Michael has talked about today. The other 20 basis points came from lower freight expenses.

Similarly on product sourcing costs, supply chain cost savings helped us lever 30 basis points in the quarter. And then we achieved 40 basis points of leverage in SG&A. This was mostly driven by sales leverage in store payroll and occupancy expenses. And all of these items more than offset deleverage we saw from higher depreciation expenses in the quarter. For the full year, many of the same levers drove the 80 basis points of improvement in EBIT margin. And as a reminder, this 80 basis points of improvement was on top of 100 basis points of improvement in '24.

Gross margin for the year increased 60 basis points that was made up of merch margin, 40 basis points, freight expenses, 20 basis points. Supply chain savings drove a 20 basis point of leverage for the year with cost savings initiatives and SG&A drove 30 basis points due to many of the cost savings initiatives we put in place earlier this year that we described. These improvements more than offset 20 basis points of deleverage we saw in depreciation for the year.

And just one last point on margin. I want to reiterate that we believe the margin gains we achieved in 2025 are absolutely sustainable, and we believe we have further margin expansion opportunities ahead of us. We'll be laser-focused on driving sales in 2026, but we have opportunities over time to drive faster turn, generate more supply chain savings, leverage SG&A expenses, particularly as we deliver a stronger comp store sales increase.

That concludes our question-and-answer session. I'd now like to turn the call back to Mr. Michael O'Sullivan for final remarks.

Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in May to discuss our first quarter 2026 results. Thank you for your time today.

Thank you for attending today's call. You may now disconnect. Goodbye.

Hello, everyone, and welcome to Burlington Stores Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions]

Thank you. I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer.

Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores.

Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release.

As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and 0 million, respectively, during the fiscal third quarter of 2025 in 2024, and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024.

Now here's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details.

Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter, at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year.

Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather.

As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength, but this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive; in some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November.

Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs.

Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter and, in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance passing along all of our beats to earnings in Q3 and factoring in our higher Q4 earnings outlook.

I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026.

We are early in the budget process, but as a starting point, we're planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings.

For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger.

In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year. Then 10 to 15 basis points higher for each point of comp above 2%.

Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making towards this goal. We are tracking in line with where we thought we would be at this point.

We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite negative headwind from tariffs.

Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104; and in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings.

The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth, so in the nearer term, as we always do, we will plan our business conservatively, and then chase.

Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin?

Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3. Then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026.

Starting with the third quarter. Total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period driven by warmer weather, but then picked up to mid-single digits in mid-October.

The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses.

Moving down the P&L. Our Q3 product sourcing costs were $214 million, versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives.

Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives.

Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year.

At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our Merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter.

Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory, versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October.

We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter.

During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization.

In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores.

Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter.

We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year.

For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%; total sales to increase approximately 8%; and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end. And this is despite the significant pressure from tariffs.

Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025.

Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores. And we're planning comp store sales in the range of flat to up 2%.

For operating margin, as Michael said, we are assuming that, at a 2% comp growth, our operating margin will be flat to this year. And we expect leverage of 10 to 15 basis points for each additional point of comp.

And now I will turn the call back over to Michael.

Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call.

Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start for Q4 with comps up mid-single digits for the first 3 weeks of November.

Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%.

Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program.

Now I would like to turn the call over for your questions.

[Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan.

So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor. But how concerned are you by this change in your relative comp versus peers?

Matt, thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3; our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap.

I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers.

Now in September and October, cold weather merchandise ballooned to more than 20% of our assortment. In the third quarter, our comp sales for ladies' and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold, but by then, it was too late to really drive the quarter.

Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers.

Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they prefer the value and the assortment that they found elsewhere. In the second quarter when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. Now we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference.

But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter.

Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp?

Yes. First, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes, starting with gross margin.

First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions, such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies.

Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs.

On product sourcing costs, moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs.

And moving on to SG&A. We showed about 20 basis points of leverage here on a 1% comp. And this was driven by efficiency initiatives in stores, such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter.

Next question comes from the line of Ike Boruchow of Wells Fargo.

I guess my question, kind of piggybacking off of Matt's, is, so the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales?

Well, I'll take that, Ike. Thank you for the question; it's a good question. I think the direct answer is yes, there were decisions or choices that we made that helped drive our margin in Q3 but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points.

Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs.

Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp.

So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe 2 specific examples.

Firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories, the sales were lower.

Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision. And it worked. It may have hurt sales, but it drove our earnings in Q3.

Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4.

But a second example. As Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4 so we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales.

So for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage.

Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently.

Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share?

Yes. Great. Ike, we're still somewhat early in the process. We're actively working through the budget for 2026. So let me give some headlines on how we're thinking about it.

The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger.

In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales.

On the operating margin side, as we've said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2 comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the startup costs and the initial ramp-up of our new Southeastern distribution center which we plan to open in the first half of 2026.

And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point.

Your next question comes from the line of Lorraine Hutchinson of Bank of America.

Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share?

Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually we like innovation and fresh ideas. We believe in off-price retail, and anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results.

But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate, isolated, ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where shale likes the assortment. She doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for.

Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time.

So I mean just to bring it up to -- just to throw in some numbers. Today we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point.

The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us. But we need to be open to new ideas that could help drive our business and actually drive off-price retail in general.

Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are, by any metric, those are very healthy numbers.

I anticipate that our off-price peers are going to be successful too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well.

And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter?

Yes. It's a good question. I would sum up our pricing strategy in 3 words: be very careful. We recognize that because of tariffs, prices are going up across the retail industry. But we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases.

We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low.

Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases but still to grow margin and earnings this year.

Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward.

Your next question comes from the line of John Kernan of TD Cowen.

Happy almost Thanksgiving. Michael, it sounds like you see -- thanks. It sounds like you're seeing an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline both from a real estate perspective and also potential new store productivity?

John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board. They've been delivering results that are in line or better than expectations, as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets.

And it's worth pointing out just some data. Our Q3 comp, of course, is at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%. And this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new.

Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really 2 things. First, the ability to pull forward some openings that were originally slated for 2026. And secondly, the strength of our real estate pipeline.

Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year.

And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026.

Got it. Maybe as a follow-up. Obviously, all 3 off-price retailers are resonating strongly with consumers. I'd like to have Michael frame the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about?

Great. Yes, John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making towards this goal. We're tracking in line with where we thought we would be at this point.

And we're especially pleased with the progress we made in driving operating margin. At the high end, Michael said this earlier but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs.

So really to sum up, we're pleased with the progress. But the way you characterize the long-range model in your question is about right. It's true we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan. But we recognize that there is external uncertainty, so we are slightly more cautious here.

Question comes from the line of Brooke Roach of Goldman Sachs.

Michael, I'd like to ask you about the trends that you're seeing with the lower-income customer. How did these customers perform in the third quarter? And are there any other call-outs in terms of customer demographics that are worth sharing?

Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer, we've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers.

But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength in -- with lower-income consumers.

There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. Well, in Q3, the trend in those stores flipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last.

Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter both in terms of comp sales and for earnings?

Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2%, and total sales growth 7% to 9%. We do, as we said, feel really good about our recent trend in Q4. But it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales.

On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4, but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year.

And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year.

Next question comes from the line of Alex Straton of Morgan Stanley.

Great. Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up.

Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very strong. Earlier in the year when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home, also housewares and toys, have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve.

Perfect. And then just on the cold weather merchandise in the quarter, is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there?

Sure. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots, and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp.

Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses. Because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket too. So if because the weather is mild she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well.

Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold.

Your last question comes from the line of Mark Altschwager of Baird.

Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3?

Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain.

On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3.

In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. For the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she likes what she saw.

Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter?

Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year. So 6%. If you take our 0 to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3.

I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments, we're not anticipating significant upside to our Q4 comp sales guidance at this point.

I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks.

Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today.

Thank you for attending today's call. You may now disconnect. Goodbye.

Hello, everyone. My name is Eli. I'm going to be your operator, and welcome to the Burlington Stores, Inc. Second Quarter 2025 Earnings Conference and Webcast Call. Please note that this call is being recorded. [Operator Instructions]

I'd now like to hand the call over to David Glick, Group Senior Vice President, Treasurer and Investor Relations. You may now go ahead, please.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 2nd quarter operating results.

Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristen Wolfe, our EVP and Chief Financial Officer.

Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until September 4, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed in this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $3 million, respectively, during the fiscal second quarter of 2025 and 2024, and $17 million and $9 million, respectively, for the first half of 2025 and 2024.

Now here's Michael.

Thank you, David. Good morning, everyone. Thank you for joining us.

I would like to cover 3 topics this morning. Firstly, I will briefly review our second quarter results. Then I will discuss our third quarter and updated full year guidance. And lastly, we believe that our exceptional performance in the second quarter can be directly attributed to Burlington 2.0 initiatives that we have pursued over the last few years. So I would like to spend some time this morning providing additional color on some of these initiatives.

Okay, let's talk about our second quarter results. We are pleased with our very strong sales performance in the quarter. Total sales grew 10% on top of 13% total sales growth last year. These double-digit growth rates demonstrate the power of our business to consistently take market share even in an uncertain retail environment. In Q2, these market share gains were driven by new store openings and by a very strong comp store sales growth. Comp store sales increased on top of $0.05 comp sales growth last year. The trend in Q2 started out slowly with weather in the Midwest and Northeast in May being cooler than last year, but then our trend picked up in June and July as the weather normalized. We are also very pleased with our strong earnings performance in Q2. Our operating margin expanded 120 basis points versus last year. This was a very high across the P&L. Our EPS of $1.72 was $0.42 above the high end of our guidance range.

Let me move on to the outlook for the rest of the year. Despite our very strong performance in the second quarter, we remain concerned about the external outlook for the back half. We are maintaining our comp guidance of 0% to 2% for Q3 and Q4.

Let me comment on Q3 specifically. As we have discussed in the past, our strong heritage in outerwear means that we are more sensitive than most retailers to seasonal weather variations in the third quarter. Temperatures in late September through October turned out to be warmer or cooler than last year, this can have a big impact on our trend. We have terrific outerwear buys in reserve inventory, so we are well positioned to chase a stronger trend if that happens. We will manage the business cautiously and see how the trend develops. I am not planning to comment in detail on the fourth quarter at this point. We'll have more to say in November. But it is worth calling out that in Q4, we will be up against 6% comp sales growth from the fourth quarter of last year. So the upside in Q4 is probably limited.

Moving on to earnings. We are raising our full year guidance and passing along most of the Q2 earnings feet. We are not flowing through the entire earnings feed. This is because of incremental tariff pressure in the back half. Tariffs for most countries are higher now than when we last discussed earnings guidance on our Q1 call in May. Our updated full year guidance assumes that we will be able to offset most, but not all of this incremental tariff pressure.

I would like to move on now and talk about the direct link that we see between our very strong Q2 sales and earnings results and the key Burlington 2.0 initiatives that we have pursued over the last few years. Many of these initiatives are in the early stages of their potential impact. We are excited because we expect this impact to grow over time and to drive our longer-term performance. I will focus on 3 items: Merchandising 2.0, Stores 2.0 and the impact of recently opened stores once they join the comp base. I will start with Merchandising 2.0. As you know, Merchandising 2.0 is our collective name for the new systems, processes and tools, so we have developed and rolled out to enable our buyers and planners to more effectively and rapidly respond to changes in the external environment and the sales trend. The last several months and the uncertainty created by tariffs have provided a showcase for the power of these capabilities. In the weeks leading up to the tariff announcements in early April, we began to make multiple detailed revisions to our assortment plans for Q2 and the fall season, pivoting away from categories with the greatest tariff exposure to those with less tariff impact and with stronger, more reliable supply. These forecast provisions and scenarios also involved remixing and remodeling our margin plans to find offsets to the impact of tariffs. It seems like a long time ago now, but in April and early May, the tariff on imports from China was 145%. This rate represented an effective embargo on Chinese imports, and it created an interruption or an air pocket, if you like, to the flow of receipts across the retail industry. There are some merchandise categories, for example, decorative bedding, cookware and toys, but there are very few alternative sources of supply outside of China. In these merchandise categories, the interruption in imports in April and May impacted inventory levels across the retail industry in the second quarter. These categories were a drag on the sales trend in our home business during the quarter. But what I am really excited about is that despite this headwind, we were able to deliver 5% comp growth across the store. Our buyers and planners deserve huge credit. They did an amazing job rapidly responding and pivoting into other businesses. The key point, though, is that Merchandising 2.0 gave them the visibility and the tools to do this.

Let me move on to Stores 2.0. Historically, the customer perception of Burlington was a big, old difficult-to-shop stores consistent with our coats factory heritage. But that is not who we are anymore. Over the last few years, you have heard us talk a lot about the actions we are taking to drive incredible value. We've talked less about stores, but in parallel, we've also been working very hard to improve the shopping experience. This starts with the standards that we set for ourselves, our store managers and our field teams. It also involves new systems, processes, tools and reports to drive consistency and efficiency. In the past year, we have seen the impact of these programs really start to take off. Our customer service stores are running at historical all-time highs, and we have seen improvements across all major operational metrics. Our store teams have really embraced these changes and our associate engagement levels have risen sharply. In addition, as I mentioned during our call in May, we have reimagined and redesigned our store layout, signage and fixed ring. The objective of this redesign is to make our stores feel new and more exciting, easier to shop, more fun, more off-price and more Burlington 2.0. At this point, we have retrofitted about half of the chain to this new design. Customer feedback has been very positive, and we are seeing a nice sales lift in these stores. This list helped drive our 5% comp growth in the second quarter. There is more to come as we retrofit the rest of the chain in 2026.

Okay, let me move on to new stores. In fact, I want to talk specifically about the impact of recently opened stores once they turn comp. Our new stores join our comp base 15 months after opening. As we've discussed in the past, we expect new stores to ramp up over time and to comp ahead of the chain for their first few years. That is indeed what is happening. When we analyze comp stores that were opened over the last several years, we see very strong comp sales growth rates, well ahead of our original expectations. Again, these recent new store cohorts helped drive our very strong 5% comp sales growth in the second quarter. This is very exciting because as we look ahead over the next few years, the mix of younger stores in our comp base is going to grow. So we anticipate that the impact of this comp tailwind will increase over time.

Okay. At this point, I would like to turn the call over to Kristin. Kristin?

Thank you, Michael, and good morning, everyone.

I plan to cover a couple of topics this morning. I will start with some additional color on our second quarter performance. Then I will share details on our updated guidance.

Starting with the second quarter, total sales grew 10%, while comp store sales increased 5%, well above the high end of our guidance range. Traffic was flattish in the quarter. Our comp was driven by a higher transaction size. Our average unit retail was up mid-single digits versus last year. The gross margin rate for the second quarter was 43.7%, an increase of 90 basis points versus last year. This was driven by a 60 basis point increase in merchandise margin and a 30 basis point decrease in freight expense. On merchandise margin, the 60 basis point expansion was driven by improvement in shortage and lower markdowns, which more than offset the lower markup due to tariffs. While there was significant pressure on markup from tariffs in the quarter, we took several effective offsetting actions to reduce the impact. The net result of these actions was that our Q2 markup was only modestly lower than last year. The second quarter product sourcing costs were $209 million versus $191 million in the second quarter of 2024. Product sourcing costs were flat as a percentage of sales compared to last year.

Adjusted SG&A costs in Q2 decreased 30 basis points versus last year, driven by savings initiatives, primarily in stores and leverage on higher comp sales. Q2 adjusted EBIT margin was 6%, 120 basis points higher than last year, which was well above our guidance range of down 30 basis points to flat.

Our adjusted earnings per share in Q2 was $1.72, which came in significantly above our guidance range. This represents a 39% increase versus the prior year. At the end of the quarter, comparable store inventories were down 8% versus the end of the second quarter 2024. Our reserve inventory was 50% of our total inventory versus 41% of our inventory last year. In dollar terms, our reserve inventory was up. 43% compared to last year, reflecting the great deals we were able to make to get ahead of tariffs. We are very pleased with the quality of the merchandise and the values and brands that we have in reserve. As Michael said earlier, we are well positioned to chase if the sales trend in Q3 turns out to be stronger than guidance.

During the quarter, we raised $500 million in additional term loan debt, primarily to fund the purchase of our highly automated West Coast distribution center. Additionally, we upsized and extended our ABL facility in Q2, which is now a $1 billion line that matures in July of 2030. We ended the quarter with approximately $1.7 billion in total liquidity, which consisted of $748 million in cash, and $946 million in availability on our ABL with no outstanding borrowings at the end of the quarter on the ABL.

During the quarter, we repurchased $26 million in common stock. And at the end of Q2, we had $632 million remaining on our share repurchase authorization. In the second quarter, we opened 23 net new stores, bringing our store count at the end of the quarter to 1,138 stores. This includes 30 new store openings, 4 relocations and 3 closings. We continue to expect to open 100 net new stores in fiscal 2025.

I will now move on to discuss our outlook for the full fiscal year as well as for the third quarter and fourth quarter of fiscal 2025. Based on our strong performance in the second quarter, we are increasing our full year fiscal 2025 guidance for comp sales, total sales, adjusted EBIT margin and adjusted earnings per share as follows: Comparable store sales are now expected to increase 1% to 2%, with total sales to increase 7% to 8% for the full year 2025. This revised full year guidance factors in our year-to-date comp store sales as well as our guidance for comparable store sales to increase 0% to 2% for the balance of fiscal '25. We now expect our full year adjusted EBIT margins to increase by 20 to 40 basis points. This is up from our most recent guidance for an increase of flat to 30 basis points. This updated margin outlook now translates to a full year 2025 adjusted earnings per share range of $9.19 to $9.59, up from our original guidance of $8.70 to $9.30.

For the third quarter, we expect comparable store sales growth of flat to 2% and a total sales increase of 5% to 7%. This would result in operating margin of down 20 basis points to flat versus the third quarter of 2024. This translates to earnings per share guidance for the third quarter of $1.50 to $1.60. Our third quarter guidance excludes approximately $10 million of expenses associated with bankruptcy acquired leases.

For the fourth quarter of fiscal 2025, we expect comparable store sales growth of flat to 2% and total sales to increase 7% to 9%. EBIT margins to range from a decrease of 10 basis points to an increase of 30 basis points and adjusted earnings per share in the range of $4.30 to $4.60. Our fourth quarter guidance excludes approximately $7 million of expenses associated with bankruptcy acquired leases.

I will now turn the call back to Michael.

Thank you, Kristin.

Before I turn the call over to the operator for your questions, I would like to emphasize 3 key points from this morning's discussion. Firstly, we are very pleased with our exceptional performance in Q2. These very strong results demonstrate the power of our business to profitably gain market share even in an uncertain retail environment. Secondly, based on our very strong Q2 performance, we are raising our full year guidance. But the external outlook remains uncertain, and we see risks in the back half. We are managing our business cautiously, but we are ready to chase the sales trend if it turns out to be stronger. Thirdly, we believe that our exceptional performance in Q2 can be attributed to Burlington 2.0 initiatives that we have pursued over the last few years. We are excited because the impact of these initiatives is still in the early stages, and we anticipate that it will grow over time.

Now I would like to turn the call over for your questions.

[Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan.

Congrats on a great quarter. So Michael, on your 5 comp in the second quarter, which is a 10 on a 2-year stack, how best to think about your back half guide, which implies a material drop off from there? Should we think of this as your usual playbook to plan conservatively and chase, or are you seeing something that's causing you concern about sales in the back half of the year?

Matt, thank you for the question. The direct answer to your question is this is just our standard playbook. We are planning and managing our business cautiously, and we are ready to chase a stronger trend. I should add that we are especially confident in our ability to do this right now because merchandise supply is very strong. And we also have some great deals packed away in reserve inventory. And add to that, we've just demonstrated in the second quarter that we are very good at flexing up and chasing a stronger asset trend. So with all that, it makes sense to stick with our standard playbook and we're very confident in our ability to execute it. With that said though, I want to be careful in answering your question. I don't want to understand the external risks. We've just reported an extraordinarily strong Q2, but as you know, in our business, you can't just extrapolate from that. External headwinds can emerge in individual quarters to throw off the trend. As I mentioned in the remarks, the most obvious risk is weather. Until recently, coats were literally our middle name. I love this [Audio Gap] when September and October are colder than last year, but not so much when they were unseasonably warm. Now on a multiyear basis, the weather averages [Audio Gap], but in an individual quarter in an individual year, it matters. Now of course, the risk in the back half are not just limited to weather. There are plenty of macroeconomic and other external variables that can have an impact on retail sales, higher employment, rising inflation, changes in consumer outlook. For the back half of this year, all of those risks are real. At a high level, I would say there are many experts and analysts who are predicting the tariffs are going to have a significant and potentially negative effect on the economy. Those effects have not really happened yet, and they're highly, highly unpredictable. The good news for us is that as an off-price retailer, we don't have to take a position on these risks. We don't have to predict the future. What we have to do is manage our business to be nimble and flexible so we can react no matter what happens. That is our standard playbook. It's what our standard playbook is designed to do. So at the risk of sounding like a broken record, we will manage our business cautiously and aggressively chase the trend.

Great. And then a follow-up for Kristin to stay on guidance. So it looks like you passed most of your second quarter upside through to the updated annual guide. Could you walk us through the puts and takes on your new fall guidance, impact of tariffs, offsets you have in place? And just any color on the difference between the third and fourth quarter operating margin year-over-year.

Matt, it's a very good question. Let me split the answer into 2 parts. First on tariffs. As Michael mentioned in the prepared remarks, we do have incremental tariff risk in the fall. Tariffs for many countries are at a higher rate now than they were when we left the [Audio Gap] back in May. And our updated guidance assumes that we will offset most of but not all of this additional tariff pressure. Essentially, our fall guidance reflects our best estimation of the net impacts of tariffs. So tariffs put significant pressure on markup, but we've worked very hard to identify offsetting actions. These offsets include continuously working and negotiating with our vendor partners on costs, adjusting, remixing our assortment selectively raising retails driving a faster inventory turn to drive lower markdowns, accelerating planned savings initiatives and then aggressively going after incremental expense savings across the P&L. On the second part of your question, I can provide some additional color on the specific quarters. For the third quarter, we are assuming gross margin rate to be lower year-over-year due to the impact of tariffs on [ merch ] margin. This should more than offset modest year-on-year favorability in freight. And product forcing costs, we are expecting supply chain savings initiatives to drive leverage. And in SG&A, we expect that our savings initiatives will enable us to show some modest leverage on the [Audio Gap] flat to 2% comp outlook. And finally, for Q4, the [ straight ] line is similar, but there are a couple of line items that are more pronounced, we're expecting more pressure on [ merch ] margin from tariffs in the fourth quarter. And offsetting that pressure, we do expect supply chain savings initiatives to drive leverage and product sourcing costs, and [Audio Gap] SG&A leverage due to savings initiatives, but also the lapping of last year's higher incentive comp accrual in the fourth quarter '24. So because of that, we expected EBIT expansion to be somewhat higher in Q4 relative to Q3.

Next question comes from the line of Ike Boruchow of Wells Fargo.

I think just first question, a bigger picture for me, is about pricing. At an industry level, maybe Michael or Kristin, I'm curious, what have you guys seen in terms of competitors taking up AURs? What are you expecting in the back half, and I guess, what's the potential to raise prices in the fall as a way to offset some of this tariff pressure you're talking about?

Ike, thank you for the question. On the first part of your question, industry-level pricing, the answer is, yes, we are hearing and in some cases, we are seeing that competitors are taking up retail prices. So far, though, I would say that those price increases have been quite selective and quite restrained. I suspect there are a few reasons for that. Part of it may just be the time lag between imports arriving in the country. and those goods showing up in stores. But also my sense is that wholesalers and retailers have been reluctant to make decisions on raising prices until they know what the final tariff rates are going to be, it does feel like there is more clarity on this now than there was a couple of months ago. So it wouldn't be surprising if retail prices were to go up across the industry in the back half of the year. Now of course, we know that our customer is very, very price sensitive. We saw what happened with their discretionary spending levels when the cost of living increased in 2022, it was not good for us. So the prospect of higher inflation especially if it spreads to nondiscretionary caters like groceries, makes us very nervous. And it's another reason to be cautious on the rest of the year. I think that's a good segue to the second part of your question, how are we thinking about the potential to raise our own retail. Now of course, as a business, we need to deal with economic reality. But as a retailer that is focused on delivering value, we also need to tread very, very carefully. The important thing, I think, to understand is that in our business, as an off-price retailer, there is a broader competitive reference set. Our strategy is to offer significantly lower prices than traditional retailers if those retailers raise prices, then this could provide some relief for us. It could potentially drive additional traffic to our stores or it could take some pressure off our own retails. So the answer to your question is I think we're going to have to wait and see what impact tariffs have on price levels across the retail industry and then make a decision about our own prices.

Got it. And then maybe, Kristin, a follow-up. On the 1Q call in May, I think you described some expense timing shifts into 2Q, but -- and I think you guided margin flat, but you did really well. I think it was up 120 bps. Just could you walk us through the drivers of the Q2 margin, what you saw in the quarter and basically the drivers of upside?

Great. Yes, Ike, thanks for the question. We're really pleased with the margin performance in the quarter. The drivers of that expansion were really broad-based, and I think the team did a really nice job executing and tightly managing costs in the quarter. So let me walk through the key drivers. On the top line, the 5% comp, which was 300 basis points above the high end of the guide, this helped drive a faster inventory turn, which drove lower markdowns in the quarter. And secondly, we took physical inventory in Q2 and the results better than we had planned. This meaningfully contributed to the [ merch ] margin increase in the quarter. So lower shortage, combined with lower markdowns from faster turns, more than offset market pressure from tariffs in the quarter to drive the 60 basis points of [ merch ] margin expansion. And as I mentioned in the prepared remarks, markup was only modestly lower than last year because we took several effective actions to reduce the impact of tariffs. So additionally, in gross margin, freight levered 30 basis points. This was really due to savings initiatives in transportation as well as operational efficiencies helped by a higher AUR. Product sourcing costs were slightly better than what we had embedded in our guidance to savings initiatives and supply chain. And finally, SG&A. SG&A levered 30 basis points despite those Q1 expense timing shift you referenced. The drivers of the SG&A were twofold; first, leverage on the higher comp sales; and then two, operational savings initiatives we put in place to offset some of the tariff pressures. So taking all these on ends together, drove 120 basis points of EBIT expansion in the quarter.

Next question comes from the line of Lorraine Hutchinson of Bank of America.

Michael, I'm wondering what trends you're seeing with different demographic groups. The second quarter was very strong, but is there any additional color you can share about lower income consumers, Hispanic customers or any other segments that stand out in the data?

Sure. Well, Lorraine, thank you for the question. Overall, I would describe our comp performance in Q2 as broad-based. Now as usual, in Q2, we monitored and we analyzed the sales trend of our stores based on the demographics of their local trade area. And between the first quarter and the second quarter, we saw an improvement in trend in all demographic trade areas. Now let me talk specifically about the lower-income customer. The lower-income customers, you know, is especially important to us. When we look at stores in lower-income trade areas, they continue to perform very well with comp sales growth just above the chain average. Now lower-income stores have performed well for us for the last few years, and that strength is continuing. Let me move on to the Hispanic customer. Hispanic customer also, as you know, very important to us. My answer here is a little more nuanced. When you look at stores in high Hispanic trade areas, to make the data meaningful, it's important to pull out Puerto Rico. Our Puerto Rico stores have been performing very, very strongly. So they kind of distort the number a little bit. It also makes sense to pull out our stores on the southern border. In contrast, those are high-volume stores. But given the issues at the border, they've been comping below the chain this year. So what you're left with is still a large group of stores that are in high Hispanic trade areas, but exclude Puerto Rico and the southern border. And the bottom line is in Q2, the trend in those stores was also slightly above the chain. Now the data I've just described, I think is very encouraging. I know that investors have been concerned understandably about lower-income shoppers and about Hispanic shoppers, those shoppers are very important to us, and they're very sensitive to economic headwinds such as inflation. But based on our second quarter data, we are not seeing any issues at this point.

And then if you characterize off-price availability overall, do you have any concern about merchandise event in the second half? And what are you seeing from the vendors in terms of tariff-related cost pressure. Does that pressure create risk to merchandise supply or to merchandise margin in the second half?

Yes, it's a good question, Lorraine. I'll start with availability with merchandise availability. Overall, merchandise availability in the off-price channel is very strong right now across the store. As I mentioned in the prepared remarks, there were a few specific categories in home where inventory levels across the industry dipped in Q2, and that was driven by tariff disruption back in April and May. But the situation even in those categories has caught up and is largely back to normal now. More broadly, across the store, I would say that we are seeing plenty of merchandise. And we've been able to take advantage of some great deals that we've packed away in reserve, and most of that reserve inventory, by the way, was bought at pre-tariff pricing. So we're looking forward to flowing those great values to our stores in the back half. Leaving aside reserve there's strong availability across the board. As evidence of that, actually, I would point to the fact that we were able to chase from our guidance range of 0% to 2% comp in Q2 to an actual comp of 5%. We had no problem finding great deals to fuel that trend. Let me move on to the second part of your question. The cost pressure from tariffs. I know we just crushed margin guidance and earnings expectations in Q2. But I want to emphasize that the cost pressure from tariffs is real. We were only able to drive earnings in Q2 because we rapidly and aggressively took actions to offset that cost pressure. Now as Kristin described earlier, those offsetting actions included a number of things, working closely and negotiating with our vendor partners on cost, adjusting and remixing our assortment, selectively raising retails, driving faster turns to reduce markdowns, accelerating planned savings initiatives and aggressively going after other expense savings across the P&L. As you can see in the numbers, that approach worked very well for us in Q2. So for the back half, assuming tariffs don't increase from their current recently announced levels, we are confident that we can meet or beat our updated guidance. As Kristin said, that updated guidance builds in the additional pressure from tariffs and the impact of numerous offsetting actions and savings that we've identified for the back half.

Question comes from the line of John Kernan of TD Cowen.

Nice job on the quarter. Couple of questions about inventory following your comments to Lorraine's question. I think the remarks you said that comp store inventory was down 8% at the end of the quarter, but the reserve inventory was up significantly year-over-year. I think it was up to 50% of total inventory. Can you provide any additional commentary on these inventory levels and the composition?

Sure. John, it's Kristin. I'll take that question. Comp store inventory was down at the end of -- down 8% at the end of the second quarter, as we noted. And I'll just provide a little more commentary on comp store inventory. Comp store inventory is what is available to sell in stores. So we manage this inventory level very tightly. It's obviously important for sales and markdowns. We made the deliberate decision in the March, April time frame to plan faster inventory turns in Q2 and for the rest of the year. This is driving lower markdowns and is helping to offset margin pressure from tariffs. And this strategy worked very well in the second quarter. The most important thing about in-store inventory is not necessarily the level, it's the content. So in Q2, we had the right content, and we were able to drive higher sales, faster turns and lower markdowns. And our in-store inventory levels on a comp store basis are planned down for the rest of the year as we continue this strategy. Now to your question about reserve and Michael spoke to it a few minutes ago, we approached reserve differently, we buy reserve merchandise knowing we're going to pack it away and release it at a later date. And the level of reserve inventory really depends on the deals we find in the market. this year, to get ahead of tariffs, we encouraged our merchants to buy up great pre-tariff merchandise. And this is what's really driven up the level of reserve inventory. We're really happy with these goods in terms of quality, values and brands that we have in reserve. And apart from enabling great deals, reserve inventory also gives us more flexibility in the case. We know that if we plan our business cautiously, but then the sales trend takes off, we have goods in reserve that we can flow.

That's helpful. Just a second question on the balance sheet again. David, Kristin, it looked like you were busy in Q2 from a capital structure perspective. Can you walk us through the changes to the debt structure whether you expect any additional changes in the near and intermediate term? And how should we think about the direction of interest expense?

Sure. I'll take that one. John, thanks for the question. We took several steps during the quarter to strengthen our balance sheet and enhance our liquidity. First, we raised $500 million in additional term loan debt, primarily to fund the purchase of 1 of our most automated West Coast DC, we call the Cactus DC as well as to retire the 2025 converts, which matured back in April. And in addition, we also extended and upsized our ABL in July. It's now a $1 billion line, up from $900 million, and we extended the maturity by 5 years out to July 2030. Given our growth, we now have the borrowing base to support a bigger line and enhance our liquidity. Now as a reminder, we paid down the ABL to 0 during Q2, and there were no borrowings on the ABL at the end of the quarter. And we don't anticipate borrowing on the ABL for the balance of the year. Related to the term loan, we hedged $300 million of the $500 million issued, and that's keeping our hedge -- total hedge ratio around 65%, and we're able to lock in rates below current SOFR. And given the level of activity in the quarter, we aren't expecting any changes in the near term and continue to expect to return excess cash to shareholders. in the form of share repurchases. And we did update our interest expense forecast to $50 million in the quarter. It's a little bit lower based on the decision to purchase our Cactus DC and there was some capitalized interest. And a lot of puts and takes, we can certainly take that offline or in follow-up to to walk you through that. But our updated forecast is at $50 million.

Next question comes from the line of Alex Straton of Morgan Stanley.

Perfect. Congrats on a great quarter. I've got a couple and first 1 for Michael. Can you maybe provide some color on the improvements that you made in store standards and conditions? And then I have a quick follow-up for Kristin.

Well, Alex, thank you. I'm glad you asked this question. I would describe the improvement in standards in our stores over the past couple of years as extraordinary. As I mentioned in the script, customer service scores are running at historical all-time highs, and we've seen significant improvements in all major operating metrics in stores. We've also seen a recent improvement in shortage. And at the same time, our productivity levels in stores have improved. In other words, we're leveraging store payroll. That combination of outcomes, higher store standards and lower store payroll is a remarkable accomplishment. Let me explain how we've done it. It starts with leadership, and I don't mean me. I mean our head of stores, she's assembled a terrific team, a combination of internal promotions and external talent. Over the last couple of years, he and his team have set higher expectations for our field leaders, store managers and associates. Those expectations, together with improved tools, better reporting, greater process discipline and a much stronger sense of accountability have driven these great results. I would also add that our store managers and associates have embraced these higher expectations and standards. As we've communicated and rolled out this approach, we've seen significant increases in our associate engagement scores across the chain. The final point I would like to make is that for all the progress that we've made, we know there is still a lot of opportunity we want every store to be consistently neat, clean and organized. We want them all to enable and bring to life the treasure hunt. That's the core vision that our head of stores and her leadership team are going after. We have a long way to go, but it's already clear from the data that our customers like this vision, and they appreciate the improvements that we've made.

Perfect. That's great color. Maybe for Kristin. Can you just provide a little bit more detail on the shortage favorability to gross margin in the quarter? And also how that dynamic may evolve into the back half?

Alex, yes, it's a good question. The external environment, it still is challenging, continues to be challenging. We're obviously very focused here with great leadership, as Michael just described, and we have made and will continue to make significant investments to mitigate shortage. As I mentioned earlier, we took physical inventory in the second quarter. This showed lower or better shortage performance than we had planned and better than last year, driving the [ merch ] margin favorability in the second quarter. We're obviously pleased with this result, although it is only 1 measurement at 1 point in time. For the back half, we plan to take another physical inventory in the fourth quarter to get the full year measurement for 2025. And we're hopeful that we continue to see the progress on shortage that we saw in Q2, given the high level of focus on the initiative across the organization. We'll plan to continue our intensified focus on reducing shortage and continue our shortage mitigation investments as well.

Next question comes from the line of Brooke Roach of Goldman Sachs.

Michael, could you provide additional color on back-to-school trends? What are you seeing in July and August so far?

Brooke, thank you for the question. We've been very pleased with our back-to-school business this year. Early back-to-school selling in July was especially strong. Now that momentum has moderated somewhat since then. But still for August month-to-date, I would describe our sales trend for back-to-school businesses as solid, one of the call out. When we look at our back-to-school businesses on a multiyear stack basis, we're very pleased with the growth that we've seen over the last few years. that was driven by a deliberate strategy by our merchants. We know that compared to other retailers, our customers tend to have a larger family size and more kits in the household. And these customers are very focused on value. They've been particularly hard hit by the higher cost of living over the last few years. So our merchants have been pursuing a deliberate strategy to increase our market share of back-to-school. I think the team has done a nice job meeting the needs of that customer by offering great value, meaning strong fashion, recognizable brands, terrific quality and unbeatable prices. If you look at the 2- or 3-year stack, it shows that this has worked. We've gained significant market share in back-to-school over the last few years.

Great. And then just a follow-up for Kristin. Can you talk a little bit about regional and category performance strengths and weaknesses that you saw in the second quarter?

Yes. In terms of regional performance, the Southeast and the Northeast were the strongest regions in the quarter. All regions compositively, the Midwest was the weakest region in the quarter. And as Michael noted in the prepared remarks, weather was a modest headwind earlier in the quarter. In terms of category performance, our strength was broad-based across the store. We saw the strongest performance in beauty, accessories and shoes, but apparel was also strong across ladies, men's and kids, all comping in line with the chain. In the quarter, home performance was softer for us, comping below the chain.

Last question for today comes from the line of Mark Altschwager of Baird.

Michael, a couple for you relates perhaps a bit to your commentary just a moment to going back to school. But I was hoping you could update us on your elevation strategy and also speak to the opportunity and trends you're seeing with younger consumers.

Well, Mark, thank you for the those 2 questions. Obviously, I'll start with an update on our elevation strategy. Yes, we continue to be very pleased by the success that we've seen in our strategy to elevate the assortment. As a reminder, we launched that strategy about 1.5 years ago. The core idea was to elevate the assortment by raising the fashion content, the quality of the merchandise and the mix of better and more recognizable brands. The objective was to trade the customer up by offering better value at higher price points, but still to do that within a good, better, best context. I think our merchants have done a terrific job delivering great value at all price points within that elevated assortment. And that's clearly resonated with the customer. You can see it in the results in our comp growth and in our stronger merchandise margins. It's benefited us both in terms of sales and profitability. I'm very excited about our assortments for the back half, especially for holiday. We want -- our goal is to be proud of every hanger and proud of the value that we're offering on every hanger in the store. So when we developed our plans for the fall, our merchants really focused on ways to further reinforce this elevation strategy Okay. I'm going to pivot now to the second -- your second question about our opportunity and any key trends with younger customers. Now my answer here is going to overlap a little bit with my earlier comments on back-to-school. But let me offer a little more context and color. At Burlington, we've always had a strong position with younger customers and young families, stronger than most other retailers. Parents, younger shoppers and young families are core and very important segments for us. When you walk into our stores, you can see it. You can see it when you look at the customers in our stores. A lot of young people, a lot of families with kids. You can also see it in the assortment. We have a stronger presentation and a greater penetration of juniors, young men's and kids apparel, accessories and footwear than most of our competitors. Now we're doing a lot of things to attract and meet the needs of these shoppers, but they already boil down to 1 word value. Young shoppers are often financially stretched and very value conscious. Now our merchants understand value does not mean cheap. Value is much more complex and depends on a mix of fashion, quality, brand and price. So for a shopper in our juniors department, for example, the key driver of value is likely to be fashion and style. In contrast for a young mother buying clothes for her toddler, quality or brand might be more important. I think our merchant team -- especially in these businesses is very skilled at building the assortment with the right mix of those value drivers. And that more than anything explains our growing strength with these younger shoppers.

That concludes our question-and-answer session. I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks.

Thank you, Eli. Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in November to discuss our third quarter 2025 results. Thank you for your time today.

Thank you for attending today's call. You may now disconnect. Goodbye.

Hello, everyone, and welcome to Burlington Stores, Inc. First Quarter 2025 Earnings Call. Please note that this call is being recorded. [Operator Instructions]. I'd now like to hand the call over to David Glick, Group Senior Vice President, Investor Relations and Treasurer. You may now begin, sir.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 first quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer.

Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until June 5, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed in this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $6 million each during the fiscal first quarters of 2025 and 2024. Now here's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will briefly discuss our first quarter results. Secondly, I will talk about our forward-looking guidance. Thirdly, I will comment on the 2 biggest drivers of uncertainty right now, the impact of tariffs and the state of the consumer. Finally, I will share some thoughts on our longer-term prospects. After that, I'll hand it over to Kristin to walk through the financial details. Then we will be happy to respond to your questions.

Okay. Let's talk about our Q1 results. Total sales grew by 6% on top of 11% growth last year. Meanwhile, our comp sales were flat on top of 2% comp growth last year. Both metrics were at the midpoint of our guidance. As we discussed in our Q4 call in early March, the quarter started off slowly with the trend in February being negatively impacted by unfavorable weather and a slower pace of tax refunds versus last year. We were pleased that the sales trend picked up in the March and April period once these factors began to normalize.

Moving on to Q1 earnings. Our EBIT margin increased 30 basis points, and our adjusted EPS was up 18% over last year despite a flat comp. There were 2 drivers of this ahead of plan earnings performance. Firstly, there was some timing favorability between Q1 and Q2, mostly related to receipts. We expect this favorability to flip around in Q2. Secondly, in early Q1, in anticipation of the margin pressure that we are likely to feel from tariffs later in the year, we began to aggressively go after margin and expense savings opportunities across the P&L. We were able to capture some of these savings during the first quarter.

Okay. Let's talk about the rest of the year. Our comp guidance for Q2 and for the full year 2025 is flat to up 2%. In fact, our full year comp sales and earnings guidance has not changed from the outlook we shared in early March. We feel good about our ability to achieve this guidance, but we recognize that the level of external uncertainty has increased over the last couple of months. So we are reaffirming our full year guidance, subject to a few key assumptions that Kristin will describe later in the call. I would now like to discuss the major drivers of external uncertainty, specifically the impact of import tariffs and the state of the consumer. I will start with tariffs.

As I have said previously, disruptions in supply for the retail industry often turn out well for off-price. Events like financial crises, disruptive weather, economic downturns, port strikes and other forms of disruption often lead to excess supply, which off-price retailers can benefit from. That said, we think that the potential impact of tariffs is more complex and carries greater risk than other types of disruption. The tariffs that were announced in early April were of a scope and a scale well beyond the expectations of most analysts. The initial effect of these tariffs was to effectively shut down the flow of merchandise from China.

If that had continued, then it would have been bad for consumers and bad for retailers, and that includes off-price retailers. For the past 2 weeks, since the tariffs on imports from China were cut from 145% to 30%, merchandise vendors have been scrambling to catch up. This stop-start surge volatility is likely to lead to shortages in some merchandise categories, but it might also create excess supply in others. We see both risks and opportunities in the months ahead, and we are managing our business accordingly. In this situation, we need to be flexible and nimble.

One last point, we think it is very important to look through the short-term disruption caused by tariffs. Whatever level these tariffs settle at, the vendor base will adjust. Production capacity will migrate to countries that have the lowest all-in costs, the lowest all-in costs, including the tariff. In some cases, vendors are already making these sourcing shifts. In other categories, it may take a year or 2 to adjust. My point is that the way to think about tariffs is that they are just one more thing. Yes, they are going to create uncertainty in the short term, which we will navigate, but they are not likely to affect the longer-term structural trends in our industry. As we have discussed in the past, we see these longer-term trends as being favorable for off-price and our business. So the next 6 to 12 months could be challenging. But when we get to the other side, if we navigate this well, we should be in good shape. In fact, we expect to come out ahead.

Okay. Let me talk about the other major source of uncertainty, the state of the consumer. Clearly, we saw a deceleration in our comp trend from Q4 to Q1. Our comp growth in the first quarter was flat. This was the midpoint of our comp guidance range, but please do not infer from this that we are happy with a flat comp. We are not. We expect to do better. To understand this trend, we have analyzed our own internal sales data. This shows that the slowdown from Q4 to Q1 was broad-based across trade areas with different demographic characteristics. This is just one quarter, so it is too early to say if the slowdown that we saw in our trend from Q4 to Q1 is the start of a broader pullback in consumer spending.

In addition to this trend, we are also somewhat concerned about macroeconomic indicators. Many economists have raised their probability estimates for a recession later this year. And there are also concerns that inflation will go up as tariffs work their way through the economy. The good news is that we have a playbook for these situations. It's our standard playbook. We will manage our business carefully and flexibly, and we will be ready to chase the sales trend if it turns out to be stronger.

I would like to wrap up with some comments on the longer-term prospects for our business. The 2 items that I have just discussed, the impact of tariffs and the state of the consumer are front and center for us and for investors right now. They create risks and opportunities in the short term that we need to navigate. But we are also focused on driving to our full potential over the longer term. As discussed before, we believe that there are longer-term structural and competitive factors that will continue to be favorable for off-price versus other forms of retail. And we believe that at Burlington, in particular, we have the opportunity to significantly grow our market share, sales and earnings over time.

With that as a setup, there are 2 aspects of our Burlington 2.0 full potential strategy that I would like to comment on. Firstly, we have talked a lot over the last couple of years about merchandising 2.0, the new systems, processes and tools that we have rolled out to enable our buyers and planners to more effectively and rapidly respond to changes in the external environment. These new capabilities have been very important over the past couple of months as we have made multiple revisions to our assortment plans for the fall season, pivoting from categories that may face shortages to those with stronger supply and remixing and remodeling our margin plans to find offsets to the impact of tariffs. A couple of years ago, we would not have had the transparency and the agility to make these kinds of adjustments. We expect that as the year goes on, the environment will continue to be volatile and dynamic. Our merchandising 2.0 capabilities are going to be very important for our buyers and planners to manage through this external volatility.

Secondly, I would like to comment and provide an update on our new store pipeline. Our sales guidance for 2025 is predicated on opening 100 net new stores this year. We remain very confident in our ability to hit this number of openings. We have also been active over the last few months in building out the pipeline for 2026. We were recently able to acquire 46 leases through the bankruptcy process for Joann's Fabrics. We are very excited about these locations. Adding these stores to the 2026 pipeline, we are optimistic about hitting our 100 net new store target for next year. The silver lining of the current volatile environment is that it is likely to drive further consolidation of bricks-and-mortar stores, and these closures should provide more opportunities to expand our store footprint.

Okay. At this point, I would like to turn the call over to Kristin. Kristin?

Thank you, Michael, and good morning, everyone. I plan to cover a few topics this morning. I will start with some additional color on our first quarter performance. Then I will share details on our guidance for the second quarter and for the full year. And finally, I will finish up by discussing 3 critical assumptions that underpin our 2025 sales and earnings guidance.

Starting with the first quarter. Total sales grew 6%, while comp store sales were flat, which was at the midpoint of our guidance range. The gross margin rate for the first quarter was 43.8%, an increase of 30 basis points versus last year. This was driven by a 20 basis point increase in merchandise margin and a 10 basis point decrease in freight expense. Modest IMU pressure was more than offset by the benefit of faster inventory turns. Product sourcing costs were $197 million versus $183 million in the first quarter of 2024. Product sourcing costs increased 10 basis points as a percentage of sales versus last year as 10 basis points of supply chain leverage driven by productivity improvements and the timing of receipts was more than offset by increased asset protection investments. The timing of receipts benefited Q1 but will negatively impact Q2.

Adjusted SG&A costs in Q1 decreased 30 basis points versus last year. A portion of this leverage on a flat comp was due to favorable timing of store expenses that will shift into Q2. The balance of the SG&A leverage was due to the expense savings opportunities that Michael described earlier. Q1 adjusted EBIT margin was 6.1%, 30 basis points higher than last year, which was well above our guidance range of down 90 to down 50 basis points. Our adjusted earnings per share in Q1 was $1.67, which came in above our guidance range. This represents an 18% increase versus the prior year.

At the end of the quarter, comparable store inventories were down 8% versus the end of the first quarter of 2024. Our reserve inventory was 48% of our total inventory versus 40% of our inventory last year. In dollar terms, our reserved inventory was up 31% compared to last year, reflecting the great deals we were able to make to get ahead of tariffs. We are very pleased with the quality of the merchandise and the values we have in reserve. We ended the quarter with approximately $1.1 billion in total liquidity, which consisted of $371 million in cash and $748 million in availability on our ABL. We had $100 million outstanding in outstanding borrowings at the end of the quarter on our ABL. During the quarter, we took advantage of the volatility in our stock price and repurchased $105 million in common stock. At the end of Q1, we had $158 million remaining on our share repurchase authorization, which expires August 2025.

In addition, our Board of Directors just approved a new 2-year $500 million share repurchase authorization. In Q1, we opened 7 net new stores, bringing our store count at the end of the quarter to 1,115 stores. This includes 14 new store openings, 4 relocations and 3 closings.

I will now move on to discuss our outlook for the second quarter and for the full fiscal year. Our second quarter guidance excludes approximately $11 million of expenses associated with bankruptcy acquired leases. We expect total sales to increase 5% to 7%. Comp store sales are assumed to be flat to plus 2%. We are expecting adjusted EBIT margin to be in the range of down 30 basis points to flat versus the second quarter of 2024. This results in an adjusted EPS outlook in the range of $1.20 to $1.30 versus last year's second quarter adjusted earnings per share of $1.24. Excluding the roughly $12 million pretax timing shift, which positively impacted the first quarter, we believe second quarter earnings per share guidance would otherwise be about $0.14 higher.

I will now review fiscal 2025 guidance. This guidance excludes approximately $33 million in 2025 associated with bankruptcy acquired leases compared to $16 million in 2024. For 2025, we still expect total sales growth in the range of 6% to 8%. This assumes 100 net new store openings this year. We anticipate that most of these stores will open in the latter half of the year. We are still forecasting comp store sales to increase in the range of flat to 2% and our adjusted EBIT margin to be in the range of flat to an increase of 30 basis points versus last year. All of this results in adjusted earnings per share guidance in the range of $8.70 to $9.30. This is consistent with our initial FY '25 guidance. Capital expenditures, net of landlord allowances are still expected to be approximately $950 million in fiscal 2025.

Let me wrap up by reinforcing the point that our sales and earnings guidance for fiscal 2025 is unchanged from the outlook that we provided in March. But we recognize that the level of uncertainty in the external environment has significantly increased since then. Of course, guidance is always subject to risks and uncertainties, but it is important to call out that our FY '25 guidance is contingent on 3 specific assumptions. First, the current tariff rates, 30% on imports from China and 10% on imports from other countries do not increase through year-end. Secondly, that the inflationary impact of tariffs across the retail industry is modest and does not trigger a significant deterioration in retail sales trends, especially among our core lower-income customers. And thirdly, that the volatility in imports does not drive a material or sustained increase in ocean freight expense above our contracted rate.

I will now turn the call back over to Michael.

Thank you, Kristin. Before I hand it back to the operator for your questions, I would like to summarize the main points from this morning's call. In the first quarter, our total and comp store sales growth were at the midpoint of our guidance, while our earnings were well ahead. We are maintaining our full year 2025 guidance, but we recognize that the external environment has become more uncertain. The 2 major sources of this uncertainty are tariffs and the state of the consumer. Tariffs are likely to create volatility in off-price supply, and we anticipate that they will pressure our merchandise margin. But at their current levels, we are well positioned to navigate these issues.

Add to that, we see reasons for caution on the state of the consumer, especially if there is a slowdown in the economy or a significant pickup in inflation. The good news is that in these situations, we have a playbook. And as the last couple of years have demonstrated, we have gotten better at executing this playbook. We're managing our business cautiously, focusing on offering great value to the customer, and we are ready to react if we see supply opportunities or stronger sales trends. I would now like to turn the call over for your questions.

[Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan.

So Michael, maybe larger picture, I'm interested in whether you think the disruption caused by tariffs is good or bad overall for off-price? And separately, any initial reactions to the recent news that tariffs have been struck down by the Court of International Trade.

Matt, thank you for the question. I think I should answer the last part of your question first. I think probably like everybody else on this call, we read the news last night that the tariffs have been struck down. It feels like another curveball that demonstrates the importance of being flexible and nimble. But candidly, we don't yet know what it means. Is the judgment temporary or permanent? Does it cover every category? Does it cover every country? It certainly doesn't feel like the end of the matter. But I guess we'll get more information in the coming days. Until we know more, it's -- I think it's probably better for me not to speculate. So for now, our planning assumption for our guidance comments and our answers this morning is that tariffs remain at current levels. In other words, 30% on imports from China and 10% on imports from other countries. Once we better understand the court decision, obviously, we'll adjust and update our plans.

So with that said, let me move on to the first part of your question. Is the disruption caused by tariffs good or bad for off-price? Our view, I think, is that disruption is usually good for off-price. But with tariffs, it kind of depends. And let me explain what I mean. Until a couple of weeks ago, tariffs on imports from China were 145%. At that tariff level, production and shipping of imports from China pretty much shut down. China is still an important source country across the retail industry. So if that had continued, it would likely have led to shortages in many, many import categories. At that point, it was very difficult to see how that shutdown was going to be good for off-price.

Now in the last 2 weeks, things have changed. Things have changed a lot. The 90-day reduction in tariffs for China from 145% to 30% has completely reversed the dynamic. There's now a huge rush on production and shipping across the industry. Now the court decision last night could add to that rush. Now as an off-price retailer, this is starting to feel like much more familiar territory. Instead of shortages, this topsy-turvy stop-start surge has the potential to create attractive buying opportunities. Now it's very -- the situation is very dynamic. So it remains to be seen if that will happen. But yes, I would say, compared with 2 weeks ago, it's starting to look like the disruption caused by tariffs could turn out very well for off-price.

That's great color. And maybe just a follow-up on an assumption that tariffs don't go away and remain at current levels, can you elaborate on the work that you've done and just why you feel confident in still hitting your original guidance despite margin pressure from tariffs?

Good. Yes. Yes, let me talk through what we've done in the last few months. The starting point was actually the initial round of tariffs on China. If you recall, I think it was in early February, the U.S. announced a 10% tariff on all imports from China. That was then raised to 20% in early March. Now at that early stage, we began to look for ways that we could absorb and offset the impact of those tariffs. Obviously, the size of the challenge grew enormously as the tariffs ramped up to 145% in April. Then 2 weeks ago, they suddenly dropped back down to 30%. And then based on last night's court judgment, now maybe there'll be less. We don't know for sure. Anyway, as I said, in early March, we began to identify and pursue numerous actions we could take that might help offset the potential impact of tariffs on our merchandise margin. So let me provide some examples of those actions.

Firstly, as you might expect, we started by looking at opportunities to switch away from products or brands or categories that have more sourcing exposure to China to those that have less exposure to China. Now there are limits to that. But because we, Burlington, directly import very little of the merchandise that we sell, we actually have a lot of flexibility. It depends on the merchandise category. Now as part of that exercise, we worked very closely with our vendors. We have thousands of vendors, and I would describe our vendors as being very entrepreneurial. It helps that at Burlington, we're growing rapidly. So our vendors know that they have the opportunity to win a larger slice of our business if they work hard to absorb the impact of tariffs.

Another action that we started to take in early March, and Kristin referenced this in her remarks, is that we worked with vendors to find buying opportunities in the inventory that they already had here in the United States. Now of course, this is merchandise that did not incur any tariff. In the first quarter, we were able to make some great buys, and we've packed those goods away in reserve with a plan to release them later in the year. So in addition to remixing our sales plans and working with vendors, in early March, we also began a cross-functional effort to build a war chest. That is actually what we're calling it internally. And that war chest is comprised of numerous margin and expense actions.

For example, we've tightened up our inventory plans, looking for places where we can drive a faster turn and squeeze out some margin dollars. We've taken up plans for businesses that are naturally higher margin where we think that we may have incremental sales opportunity. We've accelerated some of the savings initiatives that we are pursuing in our supply chain organization. We've gone after productivity and process improvements in stores, and we've pursued numerous savings opportunities in other SG&A line items. As I said earlier, we don't yet know the implications of last night decision by the Court of International Trade. But no matter how that turns out, I think the work that we've done over the last few months has put us in a pretty good position. Even if the tariffs stay at current levels, 30% on imports from China and 10% for other countries, with the offsetting margin and expense savings I've just described, we still feel like we have a pretty good path to our original guidance.

Your next question comes from the line of Ike Boruchow of Wells Fargo.

Michael, a couple of non-tariff questions, if that's okay. Curious if you could maybe dig into a little bit the cadence of the monthly comp sales trend through the first quarter, February, March, April? And also any color you can provide maybe on the trend you've seen May month to date would be super helpful.

Ike, it's Kristin. I'll actually take the non-tariff question. Back in February, our comp sales were down about 2%. And as we discussed on our Q4 call in early March, we were fairly confident that the weakness in February was really attributable to 2 factors. The disruptive weather versus last year in our key regions in the Northeast and the Midwest. And then secondly, the timing of tax refunds versus last year. Our core customer is very sensitive to the timing of tax refunds, specifically as it relates to the earned income tax credit in mid- late February. But sure enough, as we got into March, our sales trend began to pick up.

Our stores are closed on Easter Sunday. So with the timing of Easter this year, we had 1 more day in March and 1 less day in April. So from a comp sales perspective, we look at both months combined. And our comp growth for the March, April combined period was up 1%. So this is certainly better than February, but we would like to be doing better than that. And as for the last part of your question, May month-to-date, the trend in May has been fairly similar to that of the March and April combined trend at about the middle of our Q2 guidance range.

Got it. And then maybe just one more. Can you walk us through this first quarter sources of upside as well as the expense shift details into Q2?

Great. Yes. So Q1 adjusted EBIT margin increased 30 basis points despite a flat comp. Earnings per share was $1.67. That represents about a $0.30 beat to the midpoint of our guidance. And there were 2 drivers of that beat or that higher earnings performance. First, as you said in your question, there was a timing shift between the first and second quarter. This was primarily in supply chain, receipt timing as well as some store-related and SG&A expenses. This favorability will negatively impact Q2 and is worth about half of that $0.30 beat or about $0.14.

And the second, as Michael referenced just a moment ago, early in the quarter, we began to aggressively go after savings opportunities across the P&L. We did this in anticipation of the potential impact from tariffs, and we were able to capture some of these savings during the first quarter, and that makes up the balance of the Q1 beat. Those savings are across the P&L and will be used to help offset the anticipated cost impact of tariffs later in the year.

Your next question comes from the line of Lorraine Hutchinson of Bank of America.

Michael, you said that the comp performance in Q1 was broad-based. Others have said lower income consumers have actually been an area of strength for them. Are you seeing this? And I'd also be interested in any other call-outs in terms of comp trends for different demographic groups.

Lorraine, thank you for the question. Yes, as I said in the prepared remarks, our slowdown in comp growth from Q4 to Q1 was fairly broad-based, affecting stores in all demographic trade areas. Now when we look at our stores that are in lower income trade areas, those stores outperformed the rest of the chain in Q4 and throughout 2024, and that relative outperformance continued into Q1. In other words, yes, they slowed down from Q4 to Q1, along with the rest of the chain. But relatively speaking, their comp sales trend continued to be stronger than the chain as a whole. Now we've seen that relative strength in lower-income trade areas for a couple of years now. Now of course, for us, this is something that matters a lot. These are our core customers. And these shoppers were badly impacted in 2022 by the loss of pandemic era benefits and by the higher cost of living. But we've seen a nice recovery with these customers in the last couple of years. As you'd expect, we're watching the trend for those customers very closely.

On the other part of your question, other call-outs on demographics. I know that many investors have questions about Hispanic consumers. So let me talk about what we're seeing in the data there. In addition to segmenting our stores based on income of the trade area, we also analyze our stores based on the mix of households in the trade area that are Hispanic. Again, this is a very important customer for us. And again, the data tells quite a similar story. In 2024, our stores in high Hispanic trade areas had a slightly higher comp trend than the chain. And that slight outperformance continued in Q1. So from Q4 to Q1, those stores slowed down along with the rest of the chain. But again, their relative outperformance continued. So no specific or unique concerns based on the data at this point.

Now the only exception to what I've said is actually stores along the southern border. In 2024, stores along the southern border, and we have quite a few, had a significantly higher comp trend than the chain. But in Q1, they underperformed the chain. In other words, those border stores fell off significantly versus other stores. The same thing, I think, has been repeated or reported by other retailers. And I think the reasons are probably obvious and specific to the border.

One last point. Let me just talk about trade-down customers. As I've said previously, a trade-down shopper for us is not necessarily a high-income customer visiting our store for the first time. They're just as likely or more likely to be a middle-income customer who's coming to our store more often. So it's difficult to assess trade-down activity just based upon income demographics. It's easier for us actually to see trade-down activity by looking at sales trends by price point in the store. So in Q1, we continue to see strong comp trends at higher price points. In other words, the customers voting for elevated merchandise, especially for key brands. And we see that data as evidence of potential trade-down traffic in our stores.

Kristin, in dollar terms, reserve inventory is 31% higher than last year. It seems a little high. What has driven this increase?

Lorraine, thanks for that question. At the end of the quarter, our reserve inventory was 48% of total inventory, and that compared to 40% last year. So you're right. In your question, in dollar terms, reserve was up 31% compared to last year, as you said. The increase is due to the great deals we were able to make to get ahead of tariffs. The goods we have in reserve are highly branded and include spring, back-to-school and fall merchandise. And importantly, Michael referenced this earlier, these goods did not incur a tariff as they were already in the country when we acquired them.

So reserve is a very important lever we have as an off-price retailer, especially in this environment. It allows us to be more flexible, acquire branded, high-quality merchandise that we can pack away and release later when it's seasonally appropriate. So overall, we feel very good about the merchandise we have in reserve, both from a quantity as well as a quality standpoint.

Your next question comes from the line of John Kernan of TD Cowen.

I think that comp guidance for the full year, obviously, no change there, flat to 2%. I'm wondering what you see as the potential drivers of risk to this guidance. It sounds like the macro is your biggest concern. And are there any potential drivers of comp sales upside? Are there any categories or opportunities -- buying opportunities you're most excited about?

John, thank you for the question. Yes, it is the macro that we're most concerned about. But I would say in this environment, we actually see both potential drivers of risk and potential drivers of upside. I'll start by discussing the major risks. Firstly, the economy. There are numerous external indicators right now that seem to be pointing negative. And also, many experts have raised their probability estimates for a recession. So we are a little worried about the macro environment. My view is that typically, economic slowdowns hurt the rest of retail more than they hurt off-price. But in the short term, they also hurt off-price. Historically, again, I think the pattern is that all retailers are hurt in the short term as the trend slows down. But then the off-price retailers are better able to bounce back by moving quickly to take advantage of buying opportunities and turning those deals into great value for customers.

Now if that pattern -- that historic pattern holds, then an economic slowdown could hurt us later this year. Then, of course, we would hope to bounce back in 2026. So that's the macro economy. The other major risk is an increase in inflation. If tariffs continue, and it seems likely that inflation will pick up as those tariffs work their way through the economy. Of course, there's a lot of uncertainty here. We don't know what the tariffs will settle at. But we do know that our core customer is very sensitive to inflation. And we saw what happened when inflation spiked in 2022. Our customer -- our core customer does not have savings that they can use to cushion the impact of higher prices. Our strategy is to offer great value to the customer. So we plan to resist on raising our own retails. But even if we keep our own prices low, our sales trend could still be impacted if a higher general cost of living squeezes the discretionary income and spending of lower-income households.

Okay. So those are the risks, the economy and inflation. Let me -- I think there also are some potential sources of optimism. And 3 things that I think could drive upside to sales. Firstly, let me go back to the point on inflation. Our focus and our strategy are to find ways to offer great value to customers. If prices rise across retail because of tariffs, then I would expect the price differentiation between us and the rest of retail to grow in our favor. And if that happens, then it might drive higher traffic to stores or it might, in some cases, give us an opportunity to adjust their own retails. Secondly, and I hesitate to bring this up, but there are items in the bill that's currently working its way through Congress that could help our customers and be a tailwind for our trend. In particular, no taxes on tips and overtime income would be a nice benefit for our customers.

Let me add a third point. The macro environment is very important, but we know that our success does not just depend on the macro environment. We have agency, too. We're doing things at Burlington that should help to drive our sales trend. For example, we continue to go after opportunities to elevate our assortment in merchandising. We're pleased with the progress we're making to improve the localization of our assortment at a store level. And we're very excited about the initiatives that we're rolling out to improve customer experience and service levels in our stores.

So let me wrap up by reiterating, we feel good about our flat to 2% comp guidance for the year. We see some risks to that comp range, but we also see some potential tailwinds. And right now, I think those risks and those tailwinds feel fairly well balanced.

Understood. Maybe just a quick follow-up question about freight. Kristin, in the prepared remarks, I think you mentioned your full year guidance is contingent on being able to hold ocean freight costs to contracted rates. Can you just expand on that? And how much of a swing factor is this in your guidance? And then any commentary on the domestic freight cost picture also helpful given there's been some volatility there as well.

John, thanks for that question. It's a good question. Maybe I'll take the last part first. On domestic freight, we recently secured truck and intermodal capacity at rates we feel very good about. In addition, diesel fuel rate could potentially be an expense tailwind, but that's obviously hard to predict or count on. On international freight, to the crux of your question, this is primarily captured in our merchandise margin. We've locked in our contracted ocean rates through the first quarter of 2026, and we feel good about those rates and our ability to meet our capacity needs. However, given the potential volatility of shipments and potential spikes as China comes back online, there is potentially a risk of spot market exposure. And so as I mentioned in the prepared remarks, our guidance assumes we do not see an increase in ocean freight expense above our contracted rates.

Your next question comes from the line of Alex Straton of Morgan Stanley.

I just have a couple for Kristin. Maybe first, can you just walk through first quarter comp performance by region as well as address if weather impacted performance at all? Then I have a just quick follow-up after that.

Great. In terms of regional performance, the Southeast region was outperformed the chain, was above the chain, while the Midwest region trailed the chain. This was likely due to the unfavorable weather in that region. In the first quarter, weather certainly had an impact on comp and traffic, particularly in February. And it had a significant impact in February on 2 important regions of ours, the Northeast and the Midwest. But once we got into the March, April time period, weather pretty much normalized and was neutral to our March and April trend.

Great. Maybe just secondly, can you also discuss comp performance in the quarter by category, if any, were weaker or stronger?

Great. Yes, it's a good question. Although performance across categories was fairly broad-based in the first quarter, the only real call out I'd make is that the best-performing category in the quarter was our beauty business.

Your next question comes from the line of Brooke Roach of Goldman Sachs.

Michael, in response to an earlier question, you talked about some of the actions you're taking to drive continued comp momentum on an idiosyncratic basis. Along those lines, can you provide an update on your marketing programs?

Sure. Thank you for the question. Actually, I'm really glad that you asked that question. It gives me a chance to describe some of the things that are going on in marketing. I would say that over the last few years, our marketing programs have evolved to play a really important role in supporting Burlington 2.0. Our marketing and strategy teams are much more integrated now in driving our business than they ever used to be. Maybe the best way for me to illustrate that is to talk about a few things. Firstly, our marketing message. Secondly, I'll talk about external marketing. And then thirdly, our in-store marketing.

Let's start with our marketing message. Our marketing message is now focused on one thing, value. I would say it used to be that our marketing message was broader, more diffuse and less clear. But our marketing team has done a really nice job building excitement around and really focusing the message on great value. Now if you see any of our marketing, it's all about deals, brands wow. Secondly, external marketing. We know that our customers are passionate about finding a great deal. When our customers find a great brand, a great fashion, a great deal in our runs, they don't keep it a secret. They tell all their friends. That's much more powerful than traditional broadcast advertising. Our marketing team, again, has found some really great ways to encourage and amplify this word-of-mouth advertising in social media and elsewhere.

Thirdly, let me talk about in-store marketing. If you walk into one of our new or recently remodeled stores, you will see an environment that's very different to historic Burlington. We call this Store Experience 2.0. And about half of our stores have now been converted to Store Experience 2.0. The other half will be converted by the end of 2026. Now instead of a difficult to navigate and endless sea of racks, you'll find a store layout that's much more welcoming, inviting, exciting and off-price, a layout that's much more deals brands wow. Our stores -- our store team, our merchandising team and our marketing teams all collaborated on this new layout and design for our stores. We're really excited about it. It reinforces who we are. It reinforces Burlington 2.0.

Great. And then just one follow-up for you, Michael. As you contemplate mitigation actions for current tariffs, are there any useful lessons from 2018 when tariffs on China were initially introduced during the first Trump administration?

Yes. It's a good question. I remember living through that. And actually, I remember being quite worried at the time. But as it turned out, those tariffs really had very little impact on the supply or the cost of off-price merchandise. The key difference, of course, is that those tariffs were on a much smaller scale than the tariffs we've been contemplating over the last couple of months. And they covered -- I want to say that the tariffs back then ran from 10% to 25%, that order of magnitude. And they were on a limited number of categories, mostly in the home business. Now for sure, they were a big headache for the merchants in those categories. But overall, the impact was fairly modest, and we were able to find offsets.

Now in contrast, the tariffs that were announced in April were on everything from everywhere all at once. Now again, last night's court judgment, we don't know if the tariffs will continue or not. But clearly, their potential based upon the rates that were set in April is much more significant than it was in 2018. That said, there's lesson from back then. I think it's that as an off-price retailer, we have a level of flexibility that other retailers do not have. So tariffs are likely to -- if tariffs continue, they're likely to be a challenge for all retailers. But we are in a better position to react and adjust, and we really need to play to those strengths in this environment.

Your next question comes from the line of Dana Telsey of Telsey Advisory Group.

As you think about real estate and Michael, that's exciting about the new layout, Kristin, when will the 100 stores in 2025 open spring versus fall? And given the landscape where you acquired, I believe, around 46 stores from Joann's, how are you thinking of those openings? And will they be in the new layout also?

Thanks for the question. For 2025, we still have a lot of confidence in our 100 net new stores. That assumes 100 net new and about 130 or so growth new store openings. We expect about 25% of stores to open in the first half of the year and 75% or the majority will be opening in the second half, but those will almost all be in the third quarter in 2025. And then you mentioned in your question, yes, we're excited. We recently acquired the leases of 46 former Joann's stores. Because we recently acquired those leases, we're paying rent on those stores now. So we're focused on getting them open as quickly as possible. Right now, we're expecting those stores to open in spring of 2026, and most will likely open in the first quarter of next year.

I would now like to hand the call back to Michael O'Sullivan for final remarks.

Let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in August to discuss our second quarter 2025 results. Thank you for your time today.

Thank you for attending today's call. You may now disconnect. Goodbye.