Story Stocks^®

Burlington (BURL -1.3%) is heading lower following its Q3 (Oct) earnings report this morning. Following a huge beat on EPS, comps and adjusted EBIT margin in Q2 (Jul), this result was more pedestrian. Also, the stock had been running into this report, especially over the last few days. We think investors were looking for a repeat of Q2, but warm weather this fall stifled Burlington's Q3 results. Also, BURL guided Q4 EPS below analyst expectations.

• Starting with comps for this off-price retailer, they came in at +1%. This was in-line with prior guidance of +0-2%, but BURL tends to be conservative with guidance, so we view this as a letdown. The company was facing a couple of headwinds, which included a tough hurdle from +6% comps in the year ago period. Also, while Q3 comps started out very strong, warmer temperatures from mid-September onwards slowed its sales momentum.
• Notably, cold weather categories represent about 15% of sales in Q3 and Fall 2024 was significantly warmer than Fall 2023. Excluding these categories, Q3 comps would have been +4%. BURL's Q3 is typically dominated by back-to-school sales, which lasts through mid-September. After that, comp trends rely on weather.
• Importantly, Burlington is particularly sensitive to warmer weather in Q3. Remember that BURL was once called Burlington Coat Factory, so warm outerwear is still a key part of its assortment. For the full year, BURL's cold weather businesses represent almost a quarter of sales. This is significantly higher than its peers. Also, unseasonably warm temperatures do not just impact comps for cold weather merchandise. They also are also a drag on overall traffic, which affects every category.
• Looking ahead to the all-important Q4 (Jan) holiday season, BURL reaffirmed comp guidance at +0-2%. BURL is optimistic about the holidays and thus far in November, sales are ahead of plan. However, big sales weeks are still ahead of it. Also, given the late Thanksgiving, the holiday calendar is more compressed this year, which may be a headwind.
• Margins were also a bit lackluster in Q3 after huge upside in Q2. Adjusted EBIT margin in Q3 was 5.6%, an 80 bps improvement yr/yr, at the high end of +60-80 prior guidance. That pales in comparison to Q2's 160 bps improvement vs +30-50 guidance. For Q4, BURL expects a decrease of 50-80 bps.

Following Burlington's huge Q2 upside and strong reports last week from peers ROST and TJX, expectations were running high heading into this report. But these results are a reminder that BURL has much more exposure to cold weather than its off-price retail peers. At Briefing.com, we often roll our eyes when companies blame the weather because everyone is facing the same weather, but we think there is merit here. When it comes to Q4 expectations, keep an eye on the weather. If we have a cold Nov-Jan, that is good for BURL and could mean upside, especially because BURL is lapping a winter that was pretty mild last year. Cold weather might be a better predictor that peer performance.