Burlington Stores Inc

NYSE:BURL

Earnings Call Analysis

Strong Q2 Results with Optimistic Full-Year Outlook

Burlington Stores reported a robust 13% increase in total sales for Q2, driven by 36 net new stores and a 5% rise in comparable sales, which exceeded guidance. Operating margin expanded by 160 basis points due to higher gross margins and supply chain efficiencies. Adjusted earnings per share surged by 98% to $1.24. The company raised its full-year guidance, now expecting comparable sales growth of 2-3% and adjusted earnings per share between $7.66 and $7.96.

Strong Sales Growth

In the second quarter of 2024, Burlington Stores reported a robust 13% increase in total sales compared to the same period last year. This growth came on the heels of a 9% increase in the second quarter of 2023, marking a significant upward trajectory for the company. The company also added 36 net new stores, bringing the total to 1,057 locations. Additionally, comparable store sales (comp sales) saw a 5% increase, exceeding the guidance of flat to 2% growth.

Improved Profit Margins

Burlington Stores experienced a notable improvement in profitability, expanding its operating margin by 160 basis points. The gross margin increased by 110 basis points, driven by faster inventory turns and reduced markdowns. Supply chain efficiencies contributed an additional 60 basis points of leverage, thanks to the faster-than-expected progress in various initiatives .

Earnings Surge

The company reported an impressive 98% increase in adjusted earnings per share, up to $1.24, well above the guidance range of $0.83 to $0.93. This strong earnings growth was attributed to ahead-of-plan sales growth and healthy margin expansion. The company also repurchased $61 million in common stock during the quarter, highlighting its commitment to returning capital to shareholders .

Positive Outlook for the Future

Based on its strong second-quarter performance, Burlington Stores raised its full-year fiscal 2024 guidance. The company now expects comparable store sales to increase by 2% to 3% and total sales by 9% to 10%. Adjusted EBIT margin is projected to grow by 50 to 70 basis points, translating to an adjusted earnings per share range of $7.66 to $7.96. For the third quarter, the company anticipates comp store sales growth of flat to 2% and total sales growth of 10% to 12%, while for the fourth quarter, it expects comp store sales growth of flat to 2% and total sales growth of 5% to 7% .

Operational Highlights

In addition to financial metrics, Burlington Stores made significant strides in its operations. The company relocated four older oversized locations and is on track to open 100 net new stores, along with 30 relocations, by the end of the fiscal year. New stores are performing well, with many exceeding the initial sales benchmark of $7 million in their first full year. The company also saw strong performance in full-price selling, contributing to lower markdowns and faster inventory turns .

Cautions and Considerations

While the outlook is positive, Burlington Stores remains cautious due to several factors that could impact consumer behavior in the second half of 2024. The company maintains a conservative comp growth guidance of 0% to 2% for both Q3 and Q4. Additionally, external conditions, such as the economic environment and inflation rates, could influence future performance. The company is prepared to adjust its strategies based on trends and remains focused on offering value to customers .

Strategic Initiatives

Burlington Stores' focus on efficiency and value continues to drive its strategy. The company has made significant improvements in merchandising and operations over the past few years, contributing to its current success. These initiatives are still in the early stages, and the company sees further potential for growth and efficiency gains. The environment for lower-income shoppers has improved as inflation has moderated, and there's a broader focus on value across different demographic groups, benefiting Burlington's business model .

Earnings Call Transcript 2025-Q2

[Operator]

Hello, and welcome to Burlington Stores, Inc. Second Quarter 2024 Earnings Webcast and Conference Call. [Operator Instructions]. You will have the opportunity to ask questions to our presenters later on during the Q&A session. [Operator Instructions]. I'd now like to turn the call over to David Glick, Group Senior Vice President, Treasurer and Investor Relations. Please go ahead.

[David Glick, executive]

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2024 2nd quarter operating results. Unless otherwise indicated, our discussion of results for the 2024 2nd quarter exclude the impact of certain expenses associated with the acquisition of Bed Bath & Beyond leases.

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 webcast without our expressed permission. A replay of the call will be available until September 5, 2024. 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 [indiscernible] include those that are described in the company's 10-K for fiscal 2023 and in other filings with the SEC, all of which are expressly incorporated herein by reference.

Please note that the financial goals 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. Now here's Michael.

[Michael O'Sullivan, executive]

Thank you, David. Good morning, everyone, and thank you for joining us. On this morning's call, we would like to discuss our second quarter results and our guidance for the rest of the year. Then we will be happy to respond to your questions.

Okay. Let's talk about our Q2 results. I'm going to start with total sales growth. Our total sales in Q2 grew by 13% compared to the second quarter of 2023. That was on top of 9% total sales growth versus the second quarter of 2022.

New stores are a key driver of this growth. In Q2, we added 36 net new stores and ended the quarter with 1,057 locations. The other driver of top line sales is comp sales growth. Comp store sales for the second quarter increased 5% and versus our guidance of flat to 2%. This 5% comp sales growth was on top of last year's second quarter comp increase of up 4%.

Let me move on now to profitability. In the second quarter, we expanded our operating margin by 160 basis points. versus last year's second quarter. In a moment, Kristin will provide more details. But for now, let me call out the 2 primary drivers of this expansion.

Firstly, our gross margin increased by 110 basis points. This was driven by faster inventory turns and lower markdowns. Secondly, we achieved 60 basis points of leverage in supply chain, driven by faster-than-expected progress in our supply chain efficiency initiatives. As Kristin will explain, our well ahead of planned sales growth, plus healthy margin expansion drove very strong earnings growth in the second quarter.

Now I would like to take a few moments to editorialize on our second quarter performance. Again, I will start with total sales. Of course, we are very happy with 13% total sales growth on top of 9% total sales growth last year. This means that on a compound basis, our business is 24% bigger now than it was 2 years ago. Given the volatility and uncertainty of the last couple of years, we are very pleased with this growth.

In Q2, we owed 36 net new stores, and we also relocated 4 of our older oversized [ locations ]. This means that for the fiscal year-to-date, we've opened 50 net new stores, plus 15 relocations. And for the year as a whole, we are on track to open 100 net new stores plus approximately 30 relocations.

As discussed in the past, on average, we expect our new stores to run at about $7 million in sales in their first full year. I am pleased to say that our new stores are running ahead of this benchmark.

We were also pleased with our positive 5% comp growth in Q2. Keep in mind that as we open new stores, there is some cannibalization headwind on comp stores. Our positive 5% comp sales increase in the second quarter was despite this headwind.

Another point to make, as I dissect this 5% growth. We continue to see very strong performance in full-price selling. Our merchants are focused on offering really sharp value out of the gate at the initial ticketed price. This is driving faster turns and lower markdowns. This means that there is less inventory making it to the clearance rank.

Our comp on clearance sales was down double digits in Q2. Meanwhile, our comp on full price selling was positive 7%. This, with the driver of our 110 basis points of gross margin expense [indiscernible] this quarter.

Stepping back a little, I was pleased with our execution in Q2. We have made a lot of changes and improvements to our business over the last few years, in merchandising and in operations. We are still in the early innings of many of these programs. And to be clear, we have a long way to go in terms of achieving full potential off-price execution, but we are gaining traction and making some good progress.

The other point to make is that over the past 18 months, the external environment has become more favorable. 2 years ago, our core low-income customer was under severe economic pressure from the higher cost of living. Since then, it feels as if 2 things have happened.

As inflation has moderated, the situation for lower-income shoppers has somewhat improved. In parallel, economic pressure and uncertainty are spread and broadened well beyond lower-income shoppers. There is now greater focus on value across demographic groups and [ in compounds ]. This greater focus on value is helping our business.

The factors that I have just described provide some grounds for optimism for the back half of the year. But as we've discussed before, our playbook is to manage our business cautiously and be ready to chase. We are maintaining guidance of 0% to 2% comp growth for Q3 and for Q4.

Let me comment on each quarter separately. For Q3, there are a couple of reasons to be cautious in planning and guiding comp sales. Last year, we ran 6% comp growth in the third quarter. This was our strongest quarter of the year.

Another point to make, and we have discussed this before, comp sales in the first half of Q3 are driven by back-to-school trends. but comp sales in the latter half depend critically on the web. As a company that used to be known as Burlington Coach factory, the weather in late September through October, can have a huge impact on our Q3 comp growth. If the weather in Q3 is unseasonably warm, it will suppress our comp trend. We hope [ but our ] flat to 2% comp guidance in Q3 will turn out to be conservative. If the trend is stronger, then we will take it.

For Q4, we are also maintaining our flat to 2% comp guidance. Over the next couple of months, we will monitor the trend and get an early read on the fall season. Depending on this read, we may revisit and adjust our Q4 plan. We will talk more about this on our third quarter call in November. Again, as an off-price retailer, our playbook is to wait, read the trend and then chase. Now I would like to turn the call over to Kristin to share more details on our second quarter results and our outlook for the rest of the year. Kristin?

[Kristin Wolfe, executive]

Thank you, Michael, and good morning, everyone. Let me start with our second quarter results. Total sales grew 13% and comp sales grew 5%, both well above the high end of our second quarter guidance. Our adjusted EBIT margin expanded 160 basis points versus last year. The drivers of this margin expansion were higher gross margin, higher-than-planned supply chain savings and leverage on above planned comp sales.

Let me walk through the details. The gross margin rate for the second quarter was 42.8%, an increase of 110 basis points versus last year. This was driven by a 90 basis point increase in merchandise margin due to strong regular price selling, which generated faster inventory turns and lower markdowns.

Freight expenses leveraged 20 basis points, primarily due to lower freight rates and cost savings initiatives. Product sourcing costs were $192 million versus $183 million in the second quarter of 2023, decreasing 60 basis points as a percentage of sales. This was entirely driven by supply chain expense leverage from continued progress on our distribution center productivity initiatives.

Adjusted SG&A costs in the second quarter were 10 basis points higher than last year, driven by planned higher investment in store payroll. Q2 adjusted EBIT margin was 4.8%, 160 basis points above last year. We had guided to 30 to 50 basis points of improvement.

Our adjusted earnings per share in Q2 was $1.24. This was a 98% increase over last year and was well above the high end of our guidance range of $0.83 to $0.93. These results and the guidance that we provided exclude approximately $3 million of pretax expenses associated with the Bed Bath & Beyond leases.

At the end of the quarter, our comparable store inventories were up 4% above 2023. Our reserve inventory was 41% of our total inventory. We are very happy with the quality of the merchandise and the values that we have in reserve.

During the quarter, we repurchased $61 million in common stock. At the end of Q2, we had $380 million remaining on our share repurchase [indiscernible] that expires in August of 2025.

Now I will turn to our outlook for the full fiscal year as well as for the third quarter and fourth quarter of fiscal 2024. Based on our strong performance in the second quarter, we are increasing our full year fiscal 2024 guidance for comp sales, total sales, adjusted EBIT margin and adjusted earnings per share as follows: Comparable store sales are now expected to increase 2% to 3% with total sales to increase 9% to 10% for the full year 2024.

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% and for the balance of fiscal 2024.

We now expect our full year adjusted EBIT margin to increase by 50 to 70 basis points. This is up from our most recent guidance for an increase of 40 to 60 basis points and up from our original guidance for an increase of 10 to 50 basis points.

This updated margin outlook now translates to an adjusted earnings per share range of $7.66 to $7.96, up from our most recent guidance of $7.35 to $7.75 and up from our original guidance of $7 to $7.60. Included in this updated guidance is [indiscernible] ocean freight headwind of approximately $0.10 impacting the back half of the year which reflects the rapid increase in ocean container rates since we last updated our guidance in late May.

For the third quarter, we are guiding to a comp store sales growth of flat to plus 2% and a total sales increase of 10% to 12%. This would result in operating margin expansion of up 60% to up 80 basis points versus Q3 of 2023. This translates to earnings per share guidance for the third quarter of $1.45 to $1.55. We do not expect any incremental expenses associated with the leases we acquired from Bed Bath & Beyond last year.

For the fourth quarter of fiscal 2024, this outlook implies comp store sales growth of flat to plus 2%, total sales to increase 5% to 7%, EBIT margins to range from a decrease of 80 basis points to a decrease of 50 basis points and earnings per share in the range of $3.55 and to $3.75. Keep in mind that the 53rd week shift has a significant negative impact on Q4 in terms of total sales, adjusted EBIT and adjusted earnings per share. I will now turn the call back over to Michael.

[Michael O'Sullivan, executive]

Thank you, Kristin. Let me recap 4 key points. that we've discussed this morning. Firstly, we are pleased with our sales growth in Q2, 13% total sales growth for the quarter, 5% comp sales growth for the quarter.

Secondly, we are happy with our Q2 margin and earnings results. These were driven by higher merchandise margins from very strong regular price selling, faster turns and lower markdowns and also driven by faster-than-expected progress on our supply chain initiatives.

Thirdly, we are maintaining our flat to 2% comp guidance for the third and fourth quarters. We recognize that given our recent trends, there may be upside in the back half. If the underlying trend is stronger, then we will take it.

Finally, we are raising and updating our full year earnings guidance to reflect our strong ahead of plan second quarter results. With that, I would now like to turn the call over for your questions.

[Operator]

[Operator Instructions]. I'd now like to call over Matthew Boss from JPMorgan.

[Matthew Boss, analyst]

Congrats on a really nice quarter. Michael, maybe to kick off, near term, could you speak to back-to-school sales trends, maybe just the overall importance to your business? Or how best to think about the impact of back-to-school, what it maybe had on results as you exited the second quarter? And anything you can share on August trends, I think, would be great.

[Michael O'Sullivan, executive]

Thank you for the question. Back-to-school selling is very important to our business at this time of year. In fact, maybe it would be helpful if I define what back-to-school really means for us. At Burlington, back-to-school categories, of course, include its apparel, accessories and footwear, but they also include juniors and young men's. There are other specific categories within the footwear business. And in addition, there are other areas of the store, especially in accessories and in home, where we go after back-to-school and [indiscernible] campus opportunities.

I should also call out that as a company, we [ index ] much higher with younger shoppers and young families than many of our competitors. So the businesses that I've just listed represent a relatively high penetration of our store. Anyway, that all adds up to saying that back-to-school is a very important business driver for us.

In terms of timing, back to school as an event really starts in early July and then continues through early September. And of course, the timing depends on the region. Now as an aside, I would say that there's part of merchandising 2.0, we have gotten much better planning and managing timing of back-to-school receipt flows based on the specific timing of back-to-school in different regions.

Anyway, to answer your question, we were very pleased with our back-to-school trends in July. Comp sales growth for the categories that I described a moment ago were stronger than for the rest of the chain and that helped to support our overall sales trend as we closed out the quarter in July.

On the last part of your question, how are things going in August. Our back-to-school categories have continued to perform well. I would say, obviously, we're 3.5 weeks in at this point. We're happy with our overall trend. We've made a solid start to Q3.

But with that said, let me add just one note of caution. Back-to-school will wind down pretty soon. So although we're happy with how the quarter started out, it would be unwise just to extrapolate off that solid start.

[Matthew Boss, analyst]

That's great color. And then maybe just to follow up, Michael, on your mix of better brands initiative. So you called out earlier this year the potential to increase the mix of better brands as a comp driver. Was this a key driver in second quarter comps? Or how should we think about this as a potential comp driver in the second half of the year?

[Michael O'Sullivan, executive]

Well, again, thanks for the question, Matt. Yes. As we described earlier this year, we do see an opportunity to increase our mix of better brands. And actually, we see an opportunity more generally to elevate our assortments. We've been shifting in that direction for a while now. And we've seen good selling on those better brands, and we're seeing good selling at higher price points.

We believe but increasing the mix of better brands accomplishes 2 things. Firstly, those brands themselves drive increased trade down traffic to our stores. Our trade down shoppers are looking for better more recognizable brands. Secondly, though, those brands also help to validate and reinforce the whole store even if a shopper does not buy the specific items, the fact that they see the brand reinforces the off-price value proposition. It provides a halo, if you like, to our business.

So in the coming months, you will see a higher mix of better brands in our runs. That said, I don't want to overstate this opportunity. I see this as an evolution rather than a revolution. Our [ breadth ] has always been important to us. But our merchants understand that brands really just one reference point the customer uses to assess value. Quality, fashion and price are also important. And depending on the category, their relative importance can vary a lot.

For example, brands are very important in sportswear, but much less important in Juniors, where data styles and fashions are critical. Another point to make is our merchants are very good at building the assortment to offer great value across price points. And it's critical in doing that. It's critical to manage brands within the context of our good, better best assortment strategy.

One last point to make on this. Better brands carry a lower markup. As we increase the mix, it puts pressure on gross margin. Now that impact is built into our guidance. It hasn't changed since our last call. As Kristin mentioned earlier, we are making a small adjustment to our gross margin guidance for the back half, but that adjustment is related to higher ocean freight rates rather than the mix of better brands.

[Operator]

Our next question comes from Ike Boruchow from Wells Fargo.

[Irwin Boruchow, analyst]

Actually, 2 questions for Kristin. Kristin, first question is on the supply chain. It's encouraging to see another quarter of [indiscernible] up leverage in the P&L. Can you maybe walk us through some of the drivers of that leverage specifically, what kinds of operational improvements have been made? And then I think one of your peers has actually talked about more automation and technology in their [indiscernible] have these types of initiatives also been part of your program? Would love for some more color there.

[Kristin Wolfe, executive]

Hi, Ike. We continue to be pleased by the faster-than-expected progress we're making in driving productivity gains and cost savings in supply chain. As we shared in the prepared remarks, supply chain leveraged 60 basis points in Q2. And this was despite the start-up of a new distribution center in the second quarter and the receipt shift that we talked about from Q1 into Q2, we referenced this on last quarter's call.

We do have a number of productivity initiatives. These are more within the 4-wall process improvements that streamline our DC operations, reduce touches, reduce steps, reduce time to process and ultimately save labor dollars in the DC, and we're harvesting these savings a little bit faster than we'd originally planned. On previous calls, we had described supply chain productivity improvement as driving potentially 100 basis points of the 400 basis points of margin improvement we laid out last year in our long-range model. And we'll see how the rest of this year plays out, but expect supply chain to continue to drive leverage in the back half.

And getting to the second part of your question, longer term, probably beyond the long-range model we've laid out, we do have an opportunity to drive incremental leverage as we modernize our supply chain with new, larger, much more automated DCs that we expect to open. As I mentioned, we recently opened a new DC this year, and we have another much larger under construction, which we expect to open in 2026. And with these new DCs we have an opportunity to design these 4 off-price and with much, much more automation.

So as we expand this additional capacity, there also may be an opportunity to go back and look at modernizing some of our existing legacy DC network as well. But again, the benefits of this are longer term, not necessarily baked into the long-range model that we shared. So the CapEx to support these new DC investments is embedded in our long-range model. And I think you said you had a follow-up for me as well.

[Irwin Boruchow, analyst]

Yes, I was going to switch over to freight, if that's okay. Just elaborate the second half ocean freight headwinds, I think you called out in the prepared remarks. What's driving it? How long, how [ impactfully ] negative will that be? And I guess how does this impact domestic freight, if at all? I know you talked about ocean. And can you still kind of lever domestic freight in the third and fourth quarter? Or is that changing as well?

[Kristin Wolfe, executive]

Great. Yes. Thanks for the question. It's a very good question. So as I mentioned, we factored in about $0.10 of higher ocean freight in our back half guidance, and this ocean freight negatively impacts merchandise margin. And so on ocean freight, we do have some contracted capacity at favorable ocean freight rates. But the spot market rate, as you know, increased significantly since we reported in Q1 in May.

And we do have some exposure to the spot market, even though the majority of our containers are contracted. So we're hopeful this ocean freight, the spot market is a transitory pressure point. And we're starting to see ocean freight spot rates come down modestly. But of course, there are always risks here, and this is difficult to predict.

And turning to the second part of your question on domestic freight. On the other hand, domestic rate continues to be a source of modest leverage. We saw domestic rate leverage in Q2 as we negotiated favorable rates, diesel fuel rate has also been slightly favorable here. So on domestic freight, we expect to continue to see modest leverage in the back half of the year on that.

[Operator]

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

[Lorraine Maikis, analyst]

Michael, can you elaborate on what you're seeing in terms of the health of the consumer? You've talked previously about the potential for trade down traffic in your stores. Is that what's driving your comp and any other callouts in terms of consumer behavior?

[Michael O'Sullivan, executive]

Good morning, Lorraine. Good to hear from you. Thank you for the question. On our last call back in May, I think I described the external situation and the health of the consumer as being hard to read. At the time, it felt like they were conflicting data, some positive, some negative on discretionary spending trends.

I would say in the last few months, it feels to us that the situation has become a lot clearer. In our view, there are really 2 things going on. Firstly, the economic pressure and uncertainty that was felt by lower-income shoppers starting 2 years ago has spread to other income bands and other demographic groups. And it feels like that has driven much greater focus on value across the board. And I think that recent earnings reports from other retailers are all pointing in the same direction. Retailers that are offering the best value are winning and driving comp sales.

So I think a big part of what we're seeing is that value-conscious customer is trading down into our stores. The second thing that's going on is that the pressure on the lower income customer hasn't gone away, but it feels to us like it may have moderated that low-income shopper is still very well. But as inflation has come down, that situation has improved somewhat. We see evidence of that in our own data. So 2 years ago, our comp sales trend for stores -- for our stores that are in lower income trade areas was below the rest of the chain. Stores are -- we watch them very closely. They're very important to us. We have a lot of stores in lower-income trade areas, and they tend to be relatively high volume.

So when they're not comping well, we pay a lot of attention. This year, their trend has improved and is actually running in line with the chain. So up mid-single-digit comp in Q2. And a data point suggests to us that the lower income customer is at least starting to recover.

So let me recap and also add a note of caution. To recap, we're seeing some positive signs for our business with consumers in general, being more focused on value and the lower income shopper, in particular, starting to recover from the spike of inflation in 2022 and 2023. But my other caution is that there are a lot of factors and risks that could affect consumer behavior in the back half of 2024 and [indiscernible] into next year. So to sum up, we feel good about our business, but it makes sense to be a little cautious.

[Lorraine Maikis, analyst]

And Michael, my follow-up question is about the second quarter. Just curious if there were any unusual tailwinds to the comp trends that might not carry over into the fall.

[Michael O'Sullivan, executive]

Yes, it's a good question. I think the only thing like that, that I would point to was weather in Q2. I know the rule among retailers is that we'll mention weather when it's unfavorable, but I'm going to violate that rule and say that I think that weather probably helped most apparel retailers in Q2 in June temperatures across the United States than last year. And I suspect that most apparel retailers benefited from that in their in their seasonal businesses, especially in categories like short sleeve tops, and ores and swimwear.

I would estimate that this strong seasonal performance was worth 1 to 2 points of comp to us for the quarter. And again, to be clear, that benefit cannot have been unique to us. It must have affected other retailers as well. So your question was about specific drivers that might not carry over to the fall season.

Apart from weather, there were no other factors or tailwinds that I would describe that way. There were no other factors or tailwinds that were unique to the second quarter. Now of course, it is possible that the weather will be favorable in the fall if temperatures are unseasonably cold. But I guess other than the [ farmers ] almanac, we have no visibility to that at this point.

[Operator]

Next question comes from the line of John Kernan with TD Cowen.

[John Kernan, analyst]

Congrats on the momentum. A couple of questions here. Kristin, first one on your back half earnings guidance, it looks like there's margin improvement year-over-year in Q3, quite a bit of it, but margin deterioration in Q4 year-over-year. Can you walk us through the factors that are driving this? I would assume the 53rd week has an impact, but how do we think about gross margin and SG&A profile in Q3 and Q4?

[Kristin Wolfe, executive]

John, thanks for the question. It's a very good question. I'm glad you asked. There are really 4 primary factors that impact our back half margin outlook. So I'll kind of dissect each of these. First, as you alluded to, Q3 and Q4 have very different total sales growth plan due to the way the 53rd week calendar impacts as well as the timing of new store openings this year as compared to last year.

So let me clarify the 53rd week. I'm not referring to the extra week, but actually how the calendar shift. So we're about 1 week ahead of last year. We're coming in the quarters year-over-year. Now for comp store sales, we adjust for this, and we line up the week. But for total sales growth, there's an impact on sales and earnings in the quarter.

So the 53rd week shift means that in Q4, we lose a high-volume week in November, and we gained or pick up a low volume week in January. So this translates into lower total sales growth in Q4 versus last year, resulting in guidance for the fourth quarter for total sales to grow 5% to 7%.

Now on the -- for the third quarter, we're guiding to 12% total sales increase. Q3 has actually boosted by the 53rd week calendar shift and also benefits from an increased number of new store openings in the third quarter of this year relative to last year.

So that difference in total sales growth driven by the calendar shift, the new store in timing really impacts the expansion and the leverage in Q3 favorably and then unfavorably in the fourth quarter. That's really the primary difference between Q3 and Q4.

But as I mentioned, I said there were 4 factors. The other 3 are headwinds to the fall, so headwinds for the back half. First, our back half comp guidance is a conservative flat to plus 2%. This is below, obviously, our year-to-date comp trend provides less leverage on fixed expenses. And then secondly, in the back half on the gross margin side, we do not expect to see the same benefit from lower clearance levels like we saw in the first half of this year.

This means we have a lot less merchandise margin expansion opportunity in the back half relative to the first half of this year. And then lastly, the higher ocean freight that we detailed in the prepared remarks and in an earlier question, that's about $0.10 or $9 million of pretax. That represents about 20 basis points of [ merch ] margin headwind in the back half. And I want to add that the only change to our previous back half guidance is that $0.10 negative impact from ocean freight. So those are really the key factors impacting Q3 and Q4 margin guidance.

[John Kernan, analyst]

Got it. That's very helpful for the model. David or Kristin, just as it relates to the balance sheet, cash flow and share repurchases. You've given guidance for CapEx to be elevated in the next few years, I'm assuming around the 7% of sales level you fund the unit growth. But how should we think about share repurchases and potential impact on the balance sheet? What's the optimal level of cash in the balance sheet?

[David Glick, executive]

I'll take that, John. Thanks for the question. We're still working through our budget for next year. So it's a little early to be sharing specifics on that. But philosophically, our goal is to return capital to shareholders on a consistent an opportunistic basis through buybacks.

Inside of the pandemic years, we have a pretty consistent track record of doing. And as we've shared with you all previously, the first few years of the 5-year plan that we shared does have elevated CapEx at about 7% of sales. As you know, this year, we're guiding to $750 million in CapEx. It's still early, but I think you should probably anticipate that 7% ballpark of sales next year for CapEx.

And then towards the back half of the last 3 years of that 5-year plan, CapEx should average in the mid-single-digit range as a percent of sales. And just kind of as a reminder, why we're stepping up CapEx this year and next year. We're opening a lot more stores. We're at net 80 in 2023 and this year's net 100. Also, we have more closures and [indiscernible]. So the gross number of new stores is higher than prior years.

In addition, Kristin referenced this in an earlier answer to a question, we've signed a lease -- a 2 million square foot DC in the Southeast. That's 2x our largest existing DC. And the CapEx required for that building will peak this year and next year. And we have included in that agreement a purchase option next year for [indiscernible] the buildings. We view our DCs as strategic infrastructure that we want to have more control relative to leasing. So we've included in that sort of high-level outlook for CapEx next year we've assumed that we would exercise the option to purchase the land and buildings for that DC in the Southeast.

And also, as Kristin mentioned earlier, those are much larger and more automated DCs and therefore, require more capital investment. So I know that's a long prelude to actually answering your question. We think our conservative leverage ratios and cash flows and kind of a similar liquidity, you asked about cash a similar liquidity levels we've had ending the last few years.

We feel very comfortable with that. We also feel like we have sufficient cash flow to not only invest in our growth, but to return capital to shareholders in the form of buybacks. And I think you should probably expect kind of a similar pace next year to the pace that you've seen in 2023 and 2024.

[Operator]

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

[Brooke Roach, analyst]

Michael, can you speak to the performance trends that you saw by merchandise category in the second quarter?

[Michael O'Sullivan, executive]

Sure. On category performance, the strength, I would say, was fairly broad-based across the quarter. Our comp growth in both apparel and in home was in line with the overall chain, so mid-single digit. Other than that, the only other call out were that we saw strong sales trends in our seasonal classifications, I kind of referenced that earlier.

I was talking about the weather. We also saw strong sales trends in our back-to-school business in July. And then again, throughout the quarter, we saw strong sales trends in beauty and in accessories.

[Brooke Roach, analyst]

Great. And then as a follow-up, Kristin, can you elaborate on the drivers of the comp growth? How did trends fare by geography? And what trends did you see regarding traffic and basket?

[Kristin Wolfe, executive]

Sure. From a geographic or regional perspective, the comp strength was really broad-based. All regions comped positively. Looking at the top-performing regions that was the Southwest and the Northeast in the quarter. And then you asked about the drivers of comp growth.

Q2 comp was entirely driven by higher transactions as both higher traffic and conversion, both were higher. Our average basket was flattish, slightly higher AUR, offset by slightly lower units per transaction.

[Operator]

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

[Alexandra Straton, analyst]

I've got one for Michael then one for Kristin. So maybe just for Michael. I think other retailers have talked about attracting younger shoppers. And I think in a prior answer where you mentioned that Burlington [ overindexes ] to this demo compared to peers. So maybe can you elaborate like what tells you that? And can you talk about this opportunity generally as well as what you guys are doing to successfully attract the shopper?

[Michael O'Sullivan, executive]

Alex, thanks for the question. Yes, the Burlington, we've always had a stronger position with younger customers and young families, stronger than most of our competitors. And you see that in our customer research. We also see it in our mix of businesses. So -- and I would say we regard younger shoppers and young families as a core customer group for us.

When you walk into our stores, you can kind of see it physically. We have a stronger presentation, I would say, and certainly a greater penetration of Juniors, young men's, kids apparel, is accessories, kids footwear, again, than most of our competitors.

Moving on to the part of your question about what are we doing to attract those customers. Well, even though that customer segment is a strength for us, we absolutely do not take them for granted. We know that young shoppers and young families are really going to be important to us as we drive growth over the next several years. And we also know that they are financially stretched so they need value.

Our merchants are very focused on providing great value for those customers, offering a combination of fashion, quality, brands at great prices within a good, better, best assortment. I also -- I talked earlier about the strength that we've seen in back-to-school and back-to-campus businesses in the last couple of months. So overall, I feel pretty good about the success we're having about the strong trends that we're seeing with our customer group.

[Alexandra Straton, analyst]

Great. That's super helpful. Maybe for Kristin. Super helpful comments in an earlier question on the puts and takes on the back half, probably by major line items. I'm just wondering, how has that changed? Or has anything changed meaningfully compared to our view 3 months ago. It seems like sales hasn't, but maybe back half EPS is a little bit lower. So just trying to understand those dynamics and what's driving that.

[Kristin Wolfe, executive]

Alex, thank you. So kind of to answer the last question first. The only thing that's changed in our back half guidance is the additional ocean freight headwind that we spoke to. But it's worth reinforcing that 53rd week and the higher sales increase in Q3 versus Q4 really drives a lot more leverage on SG&A and fixed costs in the third quarter versus the fourth quarter. So there's a big difference there.

Gross margin is a more difficult comparison in the fall versus the spring. Again, this has not changed from 3 months ago, but we do not have the same opportunity with lower clearance levels that we saw in spring. And then what has changed is the ocean freight headwind. If I -- just going down the P&L in the back half, we do expect some modest leverage in supply chain continued in the back half, probably more in Q3 than in Q4. And given the flat to 2% comp guidance, we'll have some slight deleverage in SG&A and depreciation there from that.

[Operator]

Next question comes from the line of Adrienne Yih with Barclays.

[Adrienne Yih-Tennant, analyst]

Really nicely and well done. So congratulations to everybody at the team -- at the firm. Kristin, I guess my question is twofold on inventory. I'm going to ask, comp inventories are up for the first time in, say, 4 consecutive quarters. So relative to the forward comp guidance, can you just kind of reconcile the up 4% comp inventory against the comp guidance for the third quarter?

But on the other hand, the total sales are up 13%. So it looks like you're actually a little light on inventory. So can you just help us kind of think about those 2 different pieces of it?

And then secondly, I guess, also for Kristin, 2025 and '27 convertible notes are now in the money. Can you help us with the accounting treatment of these and the dilutive impact on EPS?

[Kristin Wolfe, executive]

Great. Adrienne, I appreciate the question. I'll start with inventory. So you kind of -- in your question tied it to the comp growth. I'm going to muddy the water even a bit more because at the end of Q2, comp store inventories were up 4% versus last year. Again, that's a point in time snapshot that a little bit deceiving. First, that 53rd week calendar shift changes the comparison point. So once you adjust for this, it reduces that 4% increase in comps inventory down to a 2% increase.

And then secondly, if I look at the quarter of Q2 as a whole, on average during the quarter, comp store inventories were down 5% to 6% across stores across the second quarter. So the reason for that point in time difference versus the average is that we were really building our July back-to-school receipts versus last year and really trying to drive back-to-school readiness. So that was kind of the driver of that increase as opposed to the sales trend.

We're still seeing -- we saw a much faster turn in Q2. So opportunity with leaner inventory levels. And over the medium term, we still think there's opportunity to manage store inventories lower and to continue to drive a faster turn. But given the progress we've made so far on that front, the pacing is much more modest. And then on the convert, I'm going to turn it over to David or [ Daniel ].

[David Glick, executive]

Dan, why don't you take that one?

[Unknown Executive]

Yes. Adrienne, it's [ Dave ]. So on the convert, we used the if-converted method of accounting and that means that we assume the principal is paid in cash and that any amount above par sales stock. So from a quarter-to-quarter share count perspective, if the converts are in the money, which both the [ 25s and 27s ] are. And as a reminder, the strike on the '25 is 220 and the strike on our 2027 is 206, will include any dilution in the share count.

So to answer your question, for the second quarter, the converts added about 163,000 shares to our diluted share count. So just to round out my answer. So obviously, the 2025 is mature in April next year. At which point in time, will net share settle, meaning that we'll pay the $136 million principal in cash. and then we'll issue any additional shares to cover the premium if there is one.

So as David mentioned earlier, we've been consistently buying back stock. So we'd expect to continue to do so. And be able to mitigate any potential dilution at that time. I mean you'll know, for example, this quarter, we repurchased about 270,000 shares. So we more than offset the dilution from the converts.

[Operator]

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

[Dana Telsey, analyst]

Nice to see the results. I have one for Michael and Kristin. Michael, how do you think about the potential for international expansion and what the opportunity could look like? Then Kristin, in terms of labor availability and wage rates, what are you seeing there along with the investment that you've been making in store payroll relative to deleverage?

[Michael O'Sullivan, executive]

Dana, thank you for the question. So on international expansion, I guess, let me start by saying that I believe that the off-price retail model has huge potential and application in a number of overseas markets. My belief is that everyone, everywhere in every country, love the deal -- loves a great deal. So I think it makes a lot of sense where our larger off-price peers to expand their international footprint.

They have the know-how and the resources to go after those overseas opportunities. And if and when those competitors run out of expansion opportunities in the United States, they can use those overseas investments to drive continued growth and shareholder value. So that makes sense.

But the reality is that we at Burlington, I would say, are in a very, very different boat. We barely have 1,000 stores in the United States. Our peers have 2x to 3x that number. So we still have huge potential to expand right here in the U.S.A. So for us, that's job #1, job #2 and job #3.

One day, maybe it will make sense for us to divert resources to an international opportunity. But right now, and I would say for the foreseeable future, our complete focus and our resources have to be on the full potential and driving the full potential of our core U.S. business.

[Kristin Wolfe, executive]

Great. And then Dana, on your second question around store labor and wage rates as well as investments in, in-store payroll. So first on wage rates, we've certainly absorbed meaningful wage rate increases over the last few years, particularly in DC, but also in stores.

In terms of distribution centers, we're comfortable with where we are. They are located in very competitive labor markets for DC workers in New Jersey and California, and our wages are appropriate and competitive. And for stores, our philosophy has been and remains to be to approach wages on a market-by-market basis. So we build in incremental dollars, obviously to cover legislative wage increases, but also competitive wage increases in select markets, and this is how we address this.

And then on the investment in terms of store payroll, you may recall that in the third quarter of 2023, we made a deliberate investment in store payroll to improve service levels and improve store conditions. We're pleased with that investment and those results as we've seen improvement in customer service scores. So from a financial impact standpoint, we'll have fully lapped this investment in the third quarter.

[Operator]

That concludes the question-and-answer session. Mr. O'Sullivan, I'll turn the call back over to you.

[Michael O'Sullivan, executive]

Thank you. 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 2024 fiscal results. Thank you for your time today, and please enjoy the holiday weekend.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.