S&P Global Ratings has affirmed its credit ratings on Burlington Stores Inc. despite the off-price retailer facing lower consumer discretionary spending among its core customer base, while its value proposition relative to traditional retailers has weakened. is shrinking amid industry-wide clearance activities.
S&P affirmed its ‘BB+’ issuer credit rating on Burlington as it believes its high leverage and declining profitability reflect temporary performance issues that should ease over the next 12 months. At the same time, it affirmed its existing “BBB-” ratings on its recently increased $900 million ABL facility and term loan facility ($946.3 million outstanding as of July 30, 2022).
The stable outlook reflects S&P’s view that Burlington’s business model can withstand the temporary setback and its performance will likely recover in 2023, leading to approximately 3x deleveraging.
S&P said, “We expect many of the challenges Burlington faces will subside over the next 12 months. The stable outlook reflects our view that Burlington’s operational challenges will subside and our expectation that management may reduce debt if the weak performance persists. The company faced a challenging macroeconomic environment in the first half of 2022, with unfavorable consumer buying trends and growing competitive pressures from traditional retailers. We believe these headwinds are transitory and will improve in 2023, which should allow sales and profitability to recover.
“We believe Burlington’s weak sales performance in the first half of 2022 will persist through the second half and ease into 2023. The company reported comparable store sales declined 18% in the first quarter and 17% in the second quarter of 2022. We attribute the revenue contraction to two main factors. First, its customer base is facing increasing financial pressure in an environment of persistent inflation that is pushing more of consumers’ wallets toward the essentials. We believe the effect on Burlington’s financial performance is more pronounced compared to its closest peers due to its greater concentration of low-income customers. Second, excessive inventory across the retail sector has led to significant clearance activity this year. Efforts to resize inventory across the retail landscape, including at big-box retailers like Target and Walmart, have narrowed the value gap between Burlington’s off-price product offering and the merchandise of traditional retailers. We expect these pressures to continue through the end of 2022 amid ongoing clearance activities at traditional retailers. This leads to our revenue forecast down 7.7% in 2022.
“We expect cleaner retail inventory next year, which will lead to lower promotional activity and a normalization of the value gap between off-price retail and traditional retail. This should benefit traffic in Burlington. Meanwhile, we believe Burlington will benefit from the effects of lower trade as more consumers adopt an increasingly value-oriented attitude to their shopping habits in a weak macro environment (S&P Global forecasts a shallow recession in the first half of 2023). We also believe that management will improve its ability to react to sales trends and adjust in-store merchandise accordingly to capture more sales. We expect same-store sales to turn positive again in 2023, while new unit openings will contribute to double-digit sales growth.
“We believe the company’s profitability will begin to recover in the second half of 2022 thanks to an improved supply chain environment and tighter expense management. S&P Global’s adjusted EBITDA margin Burlington Ratings contracted more than 500 basis points (bps) in the first half of 2022 to 12.6% We attribute the weaker profitability to lower-than-expected sales, margin contraction on goods, as well as continued pressures on transportation and supply chain costs. In the second half of 2022, we believe that management efficiency initiatives and improved supply chain environment will lead to better profitability, which leads us to forecast an adjusted EBITDA margin by S&P Global Ratings of 14.2% for the full year. costs and the growth of sales should allow Burlington’s EBITDA margin to rebound to 16% or more.
“We expect Burlington’s leverage to fall below 3x over the next 12-24 months. We expect S&P Global Ratings adjusted leverage of 3.4x in 2022, down from 2.2x in 2022. fiscal 2021, due to limited EBITDA generation and lower cash leading to higher adjusted debt We expect a lower cash balance at year-end compared to 1.1 billion reported at the end of 2021, due to its growth-related capital expenditures, stock buybacks, reserve inventory purchases and weak earnings. Nonetheless, we believe the recovery sales and improved profitability will drive leverage down to around 3x in 2023 and approach the mid-zone of 2x in 2024. Additionally, while the company does not have a leverage target stated, we believe management will look to improve its credit metrics. rs pre-pandemic levels (its leverage adjusted by S&P Global Ratings was 2.6x in 2019). This could include debt reduction if performance does not rebound as quickly as expected. However, debt reduction is not currently included in our baseline forecast.
“Burlington’s stable outlook reflects our expectation that its performance will rebound over the next year. We expect revenue to decline 7.7% in 2022, followed by double-digit revenue growth in 2023. At the same time, we expect EBITDA margin of 14.2% in 2022 to increase by around 200 points base in 2023. This should lead to improved credit metrics with leverage decreasing to around 3x in 2023 from our projection of 3.4x in 2022. We do not expect to increase leverage above 3.5x above sustainably.