Burlington Stores Inc (BURL) Q1 2023 Earnings Call Transcript

Burlington Stores Inc (NYSE: BURL) Q1 2023 Earnings Call dated May. 25, 2023

Corporate Participants:

David J. Glick — Group Senior Vice President, Investor Relations and Treasurer

Michael O’Sullivan — Chief Executive Officer

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan — Analyst

Lorraine Hutchinson — BofA Global Research — Analyst

Ike Boruchow — Wells Fargo Securities — Analyst

Alex Straton — Morgan Stanley — Analyst

John Kernan — TD Cowen — Analyst

Chuck Grom — Gordon Haskett — Analyst

Mark Altschwager — Baird — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Burlington Stores, Inc. First Quarter 2023 Earnings Webcast. I would now like to turn the call over to David Glick, Group SVP, Investor Relations and Treasurer. Please go ahead.

David J. Glick — Group Senior Vice President, Investor Relations and Treasurer

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2023 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 express permission. A replay of the call will be available until June 1, 2023. 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 for fiscal 2022 and in 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.

Now, here’s Michael.

Michael O’Sullivan — Chief Executive Officer

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover three topics this morning. Firstly, I will discuss our first quarter results. Secondly, I will talk about our guidance for the second quarter. And finally, I will comment on the full-year outlook. After that, I will hand over to Kristin to walk through the financial details of our first quarter results and our 2023 guidance. Then, we will be happy to respond to your questions.

Okay, let’s talk about our Q1 results. Comp store sales for the first quarter increased 4% versus our guidance of 5% to 7%. On a geometric stack basis, this represents 3% comp store sales growth versus 2019. As I will explain in a moment, we believe that this weaker-than-planned comp growth was driven by two external factors. We started the quarter very strongly. In fact, until mid-March, our comp growth was running up double-digits. As we have described on the last couple of calls, we have had a very strong focus on delivering great value in our assortment, expanding opening price points and offering great brands at WOW values. This strategy has driven the improvement in the sales trend that we have seen since early Q4, and this strong momentum continued well into the first quarter. Our merchants and operators have done a nice job executing this value strategy.

The slowdown in our sales trend that we saw in the first quarter coincided with two external factors. Firstly, the timing of tax refunds. These had run ahead of last year early in the quarter, but in March, they began to fall off. Refunds ended the quarter well behind last year’s levels and also below 2019 levels. The reason this is important is that tax refunds are the main delivery vehicle for important federal benefits programs like the Earned Income Tax Credit and Child Tax Credit. So, lower-income customers are hugely sensitive to lower tax refunds. This is what happened in Q1. Based on our own historic experience, we estimate that lower tax refunds cost us about 1 point of comp growth in the quarter. I think you’ve probably heard very similar commentary from other retailers that serve lower-income shoppers.

The second thing that happened or didn’t happen was weather. In the important weeks leading up to Easter, temperatures across the country were cooler than last year. Our warm-weather businesses, which were doing well early in the quarter, softened versus the rest of the store in mid-March. So, to summarize, we believe that the compound effect of lower tax refunds and cooler weather leading up to Easter was the primary driver of the sharp falloff in our trend in mid-March.

Okay, let me move on and talk about the more recent trend. On a geometric stack basis, we began to see a pickup in the second half of April, and this momentum has continued May month-to-date. This recent pickup reinforces our belief that the slowdown that we saw in mid-March was driven by external transitory factors. We are guiding and managing our business to a comp growth range of 2% to 4% for the second quarter. If the momentum that we have seen since mid-April is sustained, then this guidance may turn out to be conservative. And if this current trend remains strong, then our merchants and operators are ready and able to chase it. There’s plenty of merchandise supply to support this chase.

Overall, as we look ahead to Q2, we feel good. We believe that our strong focus on value and our strategies to support this are working. But we need to stay very focused on these strategies, and we will. As I have described, we believe that the slowdown in the trend that we saw in Q1 is explainable and attributable to transitory factors, factors that should now be behind us. With that said, we recognize that this is a very uncertain environment, and we remain very concerned about the economic health of the lower-income customer. So, it makes sense to manage our business cautiously and be ready to chase a stronger trend.

Let me move on to the rest of the year. As we communicated in March, our guidance for the full year is for 3% to 5% comp store sales growth. And based on this comp growth, we expect to drive 80 basis points to 120 basis points of margin expansion. We are still comfortable with this guidance. We see plenty of risks and uncertainties, but we also see some potential tailwinds. Let me elaborate on three of these potential tailwinds.

Number one, last year, our industry was upside down with inventory, and this drove huge promotional activity, especially in mass retail. We think that the soft sales trends that many retailers have reported in Q1 are likely to drive higher promotional activity in Q2, but we still anticipate that this promotional activity will be below last year’s levels. This year-over-year lower promotional activity should help our comp trend.

Number two, last year, we made the mistake of taking up retail prices in Q2 and Q3. This backfired. Our core customer was and is under significant economic pressure, and those higher retails hurt us, especially in the face of the promotional activity that I have just described. This year, our values are sharper, and again, this should help our trend. And number three, last summer, there was some external headwinds, in particular higher gas prices, that hurt our customer and our trend. Gas prices are now much lower, and unless something happens to drive them back up, then this should become a tailwind for us over the next few months. So, based on these tailwinds, we feel very good about our full-year guidance. The supply environment remains very strong, and with our focus on value, we believe that we are well positioned.

In our remarks this morning, we have deliberately focused on the drivers of Q1 performance and the near-term outlook for Q2 and the full year. We recognize that given all the economic uncertainty, investors are trying to understand how the year might unfold across retail. So, appropriately, there is a strong level of interest in these near-term performance drivers.

With that said, I would like to talk for a moment about our Burlington 2.0 initiatives. Over the last couple of years, even as we have been dealing with the pandemic and its aftermath, we at Burlington have been pursuing a comprehensive program to transform ourselves into a more flexible, nimble and efficient off-price business with a much greater focus on delivering great value to our shoppers. We are not going to cover this in a lot of depth today, but let me say that I’m very pleased with our progress. We have made a lot of changes and improvements in buying and planning stores, supply chain and real estate.

In upcoming quarterly calls, I will have more to say about these initiatives, but the one call-out for today is the work we have been doing in merchandising. Over the last few years, we have significantly grown this organization. We have brought in tremendous talent at all levels, and we have also promoted great talent from within.

In parallel, we have been investing in and developing new tools, systems and processes to support and leverage this merchandising talent. Internally, we refer to this program as Merchandising 2.0, and it is designed to transform our buying and planning capabilities, enabling greater flexibility to respond to trends and providing clearer visibility through up-to-date and actionable business data and intelligence. We have just begun rolling out many of these new capabilities to the organization. We are excited, and the merchants are especially excited about the impact that these will have on our ability to drive improved and more consistent performance and execution over the next several years.

Now, I would like to turn the call over to Kristin, who will share more details on our first quarter financial results, as well as our outlook for Q2 and the full year. Kristin?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Thank you, Michael, and good morning, everyone. I will start with some additional financial details on Q1. Total sales in the quarter were up 11%, while comparable store sales were up 4%. We are disappointed with this outcome. We had planned and guided to stronger comp growth. But as Michael said, we believe that our weaker comp in Q1 was driven by external headwinds, lower tax refunds and cooler weather. If we are right, then these headwinds are temporary and they should abate as we move into the second quarter.

The gross margin rate in Q1 was 42.3%, an increase of 130 basis points versus 2022’s first quarter rate of 41%. This was driven by a 150 basis point decrease in freight expense, which more than offset a 20 basis point decrease in merchandise margin. This lower merchandise margin was driven by higher markdowns, which in turn were driven by the sudden slowdown in the trend that we saw during the quarter.

Product sourcing costs were $187 million versus $157 million in the first quarter of 2022, increasing 60 basis points as a percentage of sales. Higher buying and asset protection costs represented the majority of this deleverage. Adjusted SG&A was $565 million versus $514 million in 2022, decreasing 20 basis points as a percentage of sales, driven primarily by lower store-related costs.

Adjusted EBIT margin was 4.1%, 100 basis points higher than the first quarter of 2022. Adjusted EBIT margin was below the low end of our guidance, primarily due to the lower sales versus our guidance. To sum up, the lower-than-planned sales drove higher markdowns and lower SG&A leverage, and this led to the lower-than-planned expansion of our operating margin in Q1. All of this resulted in diluted earnings per share of $0.50 versus $0.24 in the first quarter of 2022. Adjusted diluted earnings per share were $0.84 versus $0.54 in the first quarter of 2022.

At the end of the quarter, our in-store inventories increased by approximately 10% on a comp store basis. This is slightly higher than we had planned, again driven by lower comp sales than planned. As a point of reference, at the end of May, our in-store inventories are now flat to last year on a comp store basis. At the end of Q1, reserve inventory represented 44% of our inventory versus 50% last year. As a reminder, our reserve inventory is still significantly ahead of pre-pandemic levels, up about 65% since 2019. This reflects the fact that compared with our history, we are making much greater use of reserve to chase off-price buying opportunities and hold for later release. During the quarter, we opened six net new stores, bringing our store count at the end of the first quarter to 933 stores. This included 13 new store openings and seven relocations or closures.

Now, I will turn to our outlook for the full fiscal year 2023 and for the second quarter. We are reiterating our full-year sales and earnings guidance, which includes a comp sales outlook of up 3% to up 5%. Based on this comp sales outlook, we still expect our adjusted EBIT margin to increase by 80 basis points to 120 basis points. This sales and margin outlook translates to an adjusted EPS range of $5.50 to $6.00. This is consistent with the outlook we provided on our Q4 call in March. As a reminder, this includes $0.05 of EPS from the 53rd week.

In the second quarter, for the reasons Michael detailed earlier, we are planning and guiding to a comp increase of plus 2% to plus 4%. This will result in operating margin expansion of up 10 basis points to up 50 basis points versus Q2 of 2022. This translates to EPS guidance for the second quarter of $0.35 to $0.45. For the back half of fiscal 2023, this outlook assumes comp store sales of plus 3% to plus 6%, EBIT margins to increase 100 basis points to 150 basis points, and EPS in the range of $4.31 to $4.71, an increase of 27% to 39% compared to last year.

I will now turn the call back over to Michael.

Michael O’Sullivan — Chief Executive Officer

Thank you, Kristin. Before we open up the call to questions, I would like to summarize some key points from today’s call.

Firstly, we are disappointed with our Q1 results, especially given the strength that we saw early in the quarter. But we believe that the weakening of the trend that we experienced in March was driven by two external factors that are now behind us, specifically, lower tax refunds and cooler weather leading up to Easter.

Secondly, we feel very good about our underlying strategies and our focus on delivering strong value to our customers, and we are encouraged by the recent trend that we have seen in our business. We are being cautious in how we are planning Q2, but we are ready to chase if the sales trend turns out to be stronger than guidance. And lastly, we remain comfortable with our full-year guidance. We see plenty of uncertainty, and we remain concerned about the economic health of the low-income customer, but we also see some potential tailwinds.

At this point, I would like to turn the call over to the operator for your questions.

Questions and Answers:

 

Operator

[Operator Instructions] Our first question comes from the line of Matthew Boss from J.P. Morgan. Please go ahead.

Matthew Boss — J.P. Morgan — Analyst

Great. Thanks and good morning. So, Michael, could you elaborate or provide some additional commentary on the continued concern around the low-income consumer that you cited in your remarks? Do you see any improvement on the horizon? And do you think you’re seeing any signs of a trade-down customer in your stores?

Michael O’Sullivan — Chief Executive Officer

Good morning, Matt. Thank you for the question. We’ve said this before, but it bears repeating. The lower-income shopper is a core customer for us, and historically, has been a major driver of our growth. That low-income customer likes and needs the value that we offer. Now, over the last couple of years, our low-income consumer has really been on a roller coaster. In 2021, the federal stimulus program drove a surge in their spending, and then last year, they crashed back down to earth as food prices, gas prices and general inflation swallowed up their disposable income. So, since early 2022, the economic pressure on that customer has clearly been a major headwind for us.

Your question was, do we see any improvement on the horizon? And actually, we do. Unless there’s a major economic shock like the federal government shutting down or defaulting on its debt, we think there are a couple of factors that could ease the pressure on the lower-income customer over the next several months. Let me start with what just happened in Q1. One of the major headwinds that we faced in Q1 was lower tax refunds, which, as I described in the remarks, did have a huge impact on lower-income shoppers. Now, that impact should abate as we move out of tax refund season. And it’s true, there are some headwinds like reduced SNAP benefits that are going to persist. But compared with lower tax refunds, the dollar impact of these is fairly small.

The other factor that could help is that over the next few months, we’re going to be anniversarying the high gas prices of last summer. I mentioned this in the prepared remarks. The lower-income customer is very sensitive to higher gas prices. Those costs tend to represent a higher proportion of their household spending. Gas prices are now significantly lower than they were last summer. And again, unless some major event drives them back up, then it seems likely that that could become a positive tailwind this year.

Let me move on to the other part of your question, which was about the trade-down customer. And I want to be careful not to overstate this, but yes, I do think that we are seeing some, let’s call it, early evidence of a trade-down customer in our stores, and there are two pieces of data that I would offer up to support that. Firstly, when we look at our stores based upon the income profile of the trade area that we’re in, we’re seeing that stores in areas with higher household incomes are outperforming the rest of our chain. Now, by the way, it’s worth noting that that is the complete reverse of the historical pattern that we’ve seen over many years. Historically, our growth and performance has been driven by stores that are located in low-to-moderate income households. And we believe that that reversal just reflects the stage of the economic cycle that we’re in, and it suggests that we may be starting to see a trade-down shopper.

Secondly, when you look inside our assortment, as you’d expect, we’re seeing strength at our opening price points. Now, clearly, for all the reasons we’ve talked about, the need-a-deal customer appreciates those values. But we’re also seeing strength at higher price points, especially on great branded merchandise. It’s the middle price points that are the softest. Again, we think that the strength that we’re seeing at higher price points may be early evidence of more want-a-deal or trade-down shoppers coming into our stores.

So, I guess, I’d sum up, this is a long answer, but I’d sum it all up up by saying, we recognize that there are risks and uncertainties that the consumer is under huge economic pressure, but we also see some grounds for optimism. We believe that some of big headwinds that have affected lower-income customer will abate and others may even turnaround and in the coming months, turn into tailwinds. And separately, we think there may be some early evidence that we’re seeing a trade-down shopper in our stores.

Matthew Boss — J.P. Morgan — Analyst

Great. And then, Kristin, to follow up on your second quarter operating margin, so the comp guide makes sense based on the rationale that you cited, but the margin expansion is lower than expected. Are there any drivers of this to explain? And on the back half margins now implied to be up more than the front half, what are the drivers than just your confidence in achieving this plan?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, Matt. Thanks for the question. So, for the second quarter, we’re guiding a plus 2% to plus 4% comp growth and modeling 10 basis points to 50 basis points of operating margin expansion. The operating margin leverage really comes from two main sources, higher merchandise margin and lower freight. We do expect to continue to benefit in the second quarter from lower freight, particularly lower ocean freight costs versus last year, and our merchandise margins should be more favorable in the second quarter, but of course, this will depend on sales in the quarter.

There are some headwinds built into the second quarter margin guidance. These include some transitory expenses and timing of certain expenses. These are collectively worth about 50 basis points and includes lapping one-time gains in Q2 of last year from real estate sales and insurance settlements and some timing of marketing expenses. In addition, we also have potentially higher supply chain costs, given the increased mix of true closeout merchandise, as well as the lower AURs, as we’ve expanded opening price points. Those are really the key puts and takes in the second quarter margin.

For the back half of fiscal ’23, our guidance assumes comp store sales of plus 3% to plus 6% and adjusted EBIT margins to increase 100 basis points to 150 basis points. This is higher than the first half, as you noted in your question. Like Q2, we expect leverage in the fall from higher gross margin, both from higher merchandise margin and lower freight costs. And in addition, I noted the transitory expenses we’re facing in Q2 that we do not expect to have in the fall. And depending on the sales comp, we should leverage on fixed expenses like occupancy in the fall. So, in light of these factors overall, we feel good about the second half guidance.

Matthew Boss — J.P. Morgan — Analyst

Great color. Best of luck.

Michael O’Sullivan — Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Lorraine Hutchinson — BofA Global Research — Analyst

Thank you. Good morning. Michael, you mentioned that the weakness in the sales trend across retail in the first quarter may lead to more promotional activity in the second quarter. Can you elaborate on this a little and whether you believe this could hurt your sales in the second quarter?

Michael O’Sullivan — Chief Executive Officer

Good morning, Lorraine. Thanks for the question. We think — actually we realize that the slowdown in traffic and in the trend that we saw in March was most likely also experienced by other discretionary retailers, and I think that’s coming through in some of the numbers that are being reported. We anticipate, as we get further into the spring season, this sales softness is likely to lead to some increased promotional activity versus where we are now. Retailers will want to clear their spring merchandise and make way for fall receipts.

Now, this kind of clearance process we regard as natural and similar to what we would have expected and experienced pre-pandemic. Those promotions are a headwind for us, of course, but they’re really just part of the normal course of business, and we should be able to compete just fine in that higher promotional environment. We think we’ve adequately reflected any headwind from this in our Q2 guidance.

Let me contrast that or this situation with last year. Last year, the imbalance between supply and demand was much more significant. There were many large retailers that were backed up with inventory that they had to clear, and this all came together at a time when we at Burlington were raising retail prices. So, fast forward to this year, yes, we’re expecting some external promotional activity, but we think most retailers are in much better shape, much cleaner shape than they were last year, and this should mean promotions are lower and less widespread.

And secondly, we at Burlington are in a much better position in terms of our own values. As I’ve described, over the last few quarters, we worked hard to sharpen our values. This is something we’ve been very focused on. And at this point, we feel like we’re very well positioned. So, to sum all this up, yes, we expect promotions to pick up in Q2, but we anticipate that the impact on our sales trend should be limited, and we believe that we’ve adequately factored that into our Q2 guidance.

Lorraine Hutchinson — BofA Global Research — Analyst

Thanks. My second question is about your new store opening plans. Last quarter, you talked about a goal of 70 to 80 new stores this year. Is there any update to this, especially in light of some of the retail bankruptcies that have been announced? Do you think these will have an impact on the availability of real estate?

Michael O’Sullivan — Chief Executive Officer

Back again, thank you for the question. In our fourth quarter call in March, we described that we expect to open 90 to 100 new stores this year. That’s a gross number. Once you pull out relocations and closures, you get to the number of 70 to 80 net new stores in 2023. The short answer is that our plan for this number of openings has not changed.

Now, on your point about retail bankruptcies, yes, we take these bankruptcies are likely to have a significant impact on the availability of attractive new store locations. The bankruptcy process typically is complicated and can take a long time. So, it’s hard to get specific, but we are confident that these bankruptcies will strengthen our new store pipeline. We have an ambitious program for the expansion of our store network and the relocation of some of our older, more tired and less productive stores. So, I think this new store pipeline — this stronger new store pipeline is really going to help us to execute on this program over the next several years.

The final point to make is that we have a very strong real estate team that has a lot of experience dealing with retail bankruptcies. Many of our most successful and productive stores today were once upon a time Circuit City, ToysRUs, Sports Authority, Linens ‘N Things. Some of our best stores were created from carved-out Kmart or Sears locations. My point is that we have a team with a lot of experience in assessing the suitability and evaluating the potential economics of locations that emerge from these types of bankruptcies and then negotiating for before going after those.

Lorraine Hutchinson — BofA Global Research — Analyst

Thank you.

Michael O’Sullivan — Chief Executive Officer

Thanks, Lorraine.

Operator

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

Ike Boruchow — Wells Fargo Securities — Analyst

Hey, good morning, Michael, Kristin, David. I guess, first question really just big picture on merchandise availability. Clearly, off-price merchandise has been pretty strong for the last couple of quarters. I guess, Michael, do you have any concerns? Are you seeing any signs that this may be tightening in anyway? Then, I do have a follow-up for Kristin.

Michael O’Sullivan — Chief Executive Officer

Good morning, Ike. The headline is that the availability of off-price merchandise remains exceptionally strong. Our merchants have been making some great buys, and we really haven’t seen any real tightening of supply. When I contrast this to the back half of last year, I would say that the — when supply was also very good, I would say that the main difference is that the drivers of availability may have changed. Last year, the retail industry was awash with inventory, mainly because vendors and retailers had just ordered too much. When they originally placed those orders back in late 2021, they were facing huge supply chain delays and constraints, so they built a volume and a time cushion into those orders. Then of course, as the supply chain constraints unraveled, everything showed out all at once.

So, there was far too much supply in the back half of 2022. This year, this spring, we’re still seeing plenty of off-price availability. In other words, we’re seeing a similar outcome. But this time, I think it’s different. I think instead of being driven by too much supply, it’s being driven by too little demand. The customer is pulling back, sales trends have softened, and because of this, we’re still seeing great merchandise coming into the off-price channel. Now, whatever the root cause, in this environment, the key thing for us is to manage and control the buying process, so we get the very, very best deals. We’re not really worried about availability right now. We’re focused on control. Our buyers know that our open-to-buy, our liquidity is an extremely valuable currency in this environment, and we need to make absolutely sure that every hanger on the rack deserves to be there.

Ike Boruchow — Wells Fargo Securities — Analyst

Got it. And then, a follow-up to Kristin. Just on the comp characteristics, could you kind of dig into the components of comp growth, traffic, conversion, transaction size? And especially, I would love some color in particular on average ticket price, what you saw in Q1 and maybe expectations for Q2. Thank you.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, Ike. Thanks for the questions. In the first quarter, traffic was up modestly. It started strong but then meaningfully decelerated in mid-March. Typically, lower traffic is not driven by anything happening within the stores. It’s driven by external macro factors. And this drop-off in traffic really supports our hypothesis that external factors were the primary driver of the weakening comp trend in mid-March. The biggest drivers of the first quarter comp were higher conversion and higher units per transaction. Again, this data supports our belief that our strong values are resonating with the consumer. Once she comes into the store, she is more likely to buy and she is buying more.

For the quarter, AUR was down modestly. This lower AUR reflects our strategy of expanding our opening price points. We expect our AUR to be down somewhat throughout the year, as we focus on sharp values. And this lower AUR does pressure our supply chain expenses, as I mentioned, and we’ve built this into our guidance.

Ike Boruchow — Wells Fargo Securities — Analyst

Great. Thanks so much.

Michael O’Sullivan — Chief Executive Officer

Thanks, Ike.

Operator

Our next question comes from the line of John Kernan from TD Cowen. Please go ahead. Your line is open. Please go ahead.

Michael O’Sullivan — Chief Executive Officer

John, are you there? Operator, let’s go to the next question.

Operator

Our next question comes from the line of Alex Straton from Morgan Stanley. Please go ahead.

Alex Straton — Morgan Stanley — Analyst

Great. Thanks so much for taking my question. My first one is really for Michael on the assortment strategies and the buying organization. Definitely sounds like you’re happier with the level of execution than maybe you were last year. Could you just provide some additional color on maybe what has changed and also updates on some of the investments you’re making in the buying organization? I do have a follow-up for Kristin after that.

Michael O’Sullivan — Chief Executive Officer

Yeah, good morning, Alex. Thanks for the question. In the back half of last year, we spent a lot of time tearing apart the drivers of our performance and redirecting and refocusing our assortment strategies to deliver much stronger and sharper value to the customer. I feel very, very good about the progress that we’ve made since then. If I look at the time frame between October and mid-March, the improvement in our sales trend was quite significant.

On previous calls, we’ve shared details on some of the strategies that we’ve been pursuing. So, just to call these out at a high level, we’ve seen a significant expansion of our opening price points, really focused on the need-a-deal customer. Secondly, our focus on recognizable brands to go after sort of the want-a-deal or trade-down customer; thirdly, a more aggressive approach to shifting liquidity to stronger trending businesses; and then lastly, a much more ruthless approach to pulling back on weaker trading businesses. So overall, I feel like we’ve executed well against those strategies. Now, we need to stay focused, very focused, and we will.

The other point to make is that although we’re pleased with the overall execution, there’s always opportunities for improvement. That’s the nature of the business we’re in. There will always be some areas where we make mistakes or we make a buy that we shouldn’t have made or we price a buy at a level that’s too high. Now, at Burlington, I think that culturally, we’re very, very good at recognizing and facing up to our mistakes and then correcting and learning from them. I think that’s very important. But let me take a step back and address your question about investments we’ve made in our buying and planning organization.

In the last few years, we’ve significantly grown this organization. Our merchandising head count is about 50% bigger than it was in 2019. We’ve brought in tremendous talent at all levels, and we promoted great talent from within. As I mentioned in the prepared remarks, in parallel with that headcount growth, we’ve been investing in and developing new tools, systems and processes to support and leverage this merchandising talent. Now, all of that — that program is called Merchandising 2.0.

Now historically, the tools, processes and systems that have supported the merchants at Burlington have been very rigid, somewhat department store like, I would say, especially with regard to the visibility to data and responsiveness to in-season trends. Merchandising 2.0 is really designed to transform our buying and planning capabilities to enable greater flexibility to respond to trends and to provide clearer visibility to up-to-date and actionable business intelligence. This year, we’re rolling out many of those new capabilities to buying and planning organization. We’re very excited. And as I said in the remarks, the merchants are extremely excited about the impact that those capabilities are going to have in terms of driving improved performance and execution over the next few years. So, the main message to take away from my answer is that, yes, we are pleased with how our merchandising organization has performed over the last couple of quarters, but we still think we have a lot of upside and a lot of opportunity ahead of us.

Alex Straton — Morgan Stanley — Analyst

That’s super helpful. Thanks so much. Maybe one more for Kristin on inventory and specifically reserve. I think you said that it was about 44% of inventory at the end of the quarter, and I think that compares to 50% or so last year. Should we be at all concerned about reserve inventory being below last year? Or how should we think about that in general? Thanks a lot.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, Alex. It’s a good question. So, let me offer a few points to contextualize the inventory data. First, we have more inventory in our stores than we had last year, as we were under-inventoried last year. However, if you compare to 2019, our first quarter comp store inventories are actually down about 10%. So, we’re still running leaner and turning faster versus our 2019 baseline.

Secondly, reserve is made up of great buys that we’re holding until the season or the next season. We buy reserve opportunistically. So, the level of reserve we carry anytime will typically fluctuate depending on the supply. But there is a factor here that’s important to note, last year, given some of the receipt delays that we had experienced, we brought some goods in earlier than we normally would have. Now that these receipt delays are behind us, this is freeing up some of the reserve capacity and putting a little downward pressure on reserve levels.

So, the implication is that assuming we continue to see great buying opportunities this year, the level of our reserve might trend down slightly relative to last year. And at the end of Q1, our reserve levels are about 11% lower than last year, and this is really more of a reflection of the point I just made rather than a reflection of the merchandise supply or the buying environment. And lastly, finishing up on reserve, it’s important to reiterate that our reserve levels are still about 65% higher than they were pre-pandemic. This really represents a strategic and structural shift in our business as we’re more focused on great off-price opportunistic buys.

Alex Straton — Morgan Stanley — Analyst

Thanks a lot. Good luck.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Thanks, Alex.

Michael O’Sullivan — Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of John Kernan from TD Cowen. Please go ahead.

John Kernan — TD Cowen — Analyst

Alright. Good morning, Michael, Kristin and David. I have a couple questions for Kristin. Firstly, on the merch margin in Q1, just given the sales slowdown and more focus on AUR — lower AURs, I suppose I’m a little surprised that merch margin was only down 20 basis points. Are there any other drivers you can share in terms of the merch margin performance?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Sure. Good morning, John. Thanks for the question. Overall, our merchandise margin was below last year than our internal plan, and this was really driven by the higher markdowns due to the change in the sales trend that we saw during the quarter, as we described in the prepared remarks. But you’ll also recall, our markdowns were artificially low because our stores were under-inventoried early in the quarter last year in 2022. And while our markdown levels this year were higher than last year, it’s worth noting that our markdown levels are well below 2019 and our inventory is still turning much faster relative to 2019.

And while I don’t want to get too specific on the merch margin breakdown, I do want to share that due to the strong buying environment, we did see higher year-over-year markup, while still passing along strong values to our customers. So, we feel good about our inventory position exiting the quarter. We think it’s seasonally appropriate, and we’re well positioned to deliver great value.

John Kernan — TD Cowen — Analyst

Got it. Maybe shifting to freight, I think 150 basis points of favorability, is there any other color you can add on this? How should we think about freight margin recapture in the rest of the year, both on gross margin and SG&A?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Great. So, as you know, external freight rates are moderating, particularly, ocean freight. This is the primary driver of the Q1 freight favorability, which was 150 basis points lower than last year, as you noted. And to put this in perspective, in Q1 of ’22, freight expenses were about 270 basis points higher than Q1 of 2019. But in the first quarter of ’23, we’ve recaptured more than half of this deleverage. So, Q1 ’23 freight costs are about 120 basis points higher than 2019. Our teams have worked really hard to renegotiate our freight contracts and take advantage of a softening freight market for both ocean and domestic freight. And so, for the balance of the year, we expect continued leverage due to improved ocean freight rates, along with much fewer surcharges. That’s primarily benefiting the first half of the year, while improved domestic rates will drive lower freight costs in the back half of the year.

In addition, we’re working to optimize our outbound and inbound transportation processes and are actively focused on several initiatives that drive transportation efficiency. And finally, through our contracting process, the spring freight rates came in modestly better than we had forecast, and this is built into our guidance.

John Kernan — TD Cowen — Analyst

Alright. Thank you.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Thanks, John.

Operator

Our next question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead.

Chuck Grom — Gordon Haskett — Analyst

Hey, good morning, and thanks for all the color this morning. Michael, I was wondering if you could give us an update on some other aspects of Burlington 2.0. You touched on merchandising in your prepared remarks. Wondering if you could give us some updates on real estate and supply chain fronts.

Michael O’Sullivan — Chief Executive Officer

Sure. Good morning, Chuck. Yeah, let me provide some sort of — some headlines in terms of the progress we’ve been making with Burlington 2.0 initiatives. I’ll break it into stores, real estate and supply chain. So, in terms of stores or store operations, we’ve done a lot of things over the last few years to make our stores more flexible. It’s very important in the off-price model to be able to chase sales, not only at a top line level, but also within the assortment, if footwear is doing well, to expand footwear; if home is doing well, to expand home, etc., and also to pull back in certain areas based upon trends. We’ve also had a lot of focus on getting receipt out to the floor. Let’s make sure we get receipts out in as rapid a way as possible. And we’ve introduced multiple new processes to make our stores more efficient, and that’s all been during a time over the last couple of years where the labor market has been very tough.

So, we’ve had to sort of make all those changes while facing headwinds in terms of labor availability. We’ve also been developing a number of improved tools and systems to help drive efficiency and consistency in stores. Now, some of those systems improvements, which are going to be very important to us, obviously have a slightly longer lead time. And I think the most important of those systems upgrades, we’re probably going to be piloting in the back half of this year but probably won’t rollout to next year. So, we’ve made a lot of progress. We’ve done a lot of things. I’m very happy with what we’ve been able to do in stores.

Let me move on to real estate, so new stores. We’ve ramped up our new store opening program with a focus on being — on our new smaller store prototype. We’re very happy with the relative economics of that prototype, and that’s allowed us to ramp up the number of new stores over the last couple of years. And as I said in my remarks, this year, we expect to open 70 to 80 net new stores. Now, we’d like to open more. And we hope in 2024 and 2025, some of the availability that we’re seeing from bankruptcies — from retail bankruptcies will give us the opportunity to open more. But we’ll have to see. And obviously, we will provide more updates on that as we get closer to the end of the year.

Let me finish up with supply chain. There are a number of number of things that we’ve been working on in supply chain to increase flexibility and efficiency. Again, we’ve been working on those things in an environment where the labor market, especially in areas that have large warehouses and distribution centers, has been tough, and also frankly, receipt volatility has made efficiency tough. But there are a number of actions that we’ve been taking, some of which we’ve been able to execute in the short term, for example, making adjustments to shift schedules or work processes, etc., but there are others that have a longer lead time, things like systems changes and automation. So, again, happy with the progress we’ve made, but I feel like there’s a lot more we can do. And our supply chain teams are very focused on those opportunities.

So, let me sort of take a step back and sort of sum up with an overall assessment. When I look across the organization, I’m very happy with the progress that we’ve made on our Burlington 2.0 initiatives, especially given the external environment in the last couple of years. I feel like we’ve moved fast, and because of that, I’ll conceive that we’ve made some mistakes. But the changes that we’ve made are going to make us a much more effective off-price retailer and are really going to drive our success in the next few years.

Chuck Grom — Gordon Haskett — Analyst

That’s very helpful. Thank you. And then my follow-up is for Kristin. Could you talk about your degree of confidence in your back half guide, particularly after missing some of the numbers here in the first quarter? And then, can you help us out on the sequencing of both comps and margins? I think you said up over 100 basis points, 150 basis points on EBIT, but just a sequencing of comps and margins in both the third and the fourth quarter.

Michael O’Sullivan — Chief Executive Officer

You know what Chuck, let me let’s break that question into two. Why don’t I start — I’ll start with the sales confidence, and then maybe Kristin can address the margin and expense outlook. So, on sales, we — first of all, we recognize we can see that the environment this year is very uncertain. There are lots of things that could happen, recession, banking crisis, government shutdowns, etc. But given what we know at this point, I think there are a few things that sort of give us confidence in our back half guidance.

I would say there were really three things in particular that allowed us to sort of triangulate on our full-year guidance. Number one, our comp in Q1, even though we were disappointed with that comp, we just reported 4%. Our full-year guidance is 3% to 5%. For the reasons I described in the remarks, we think that that 4% was partly driven by transitory headwinds. If you just strip out the tax refund impact, we think it would have been 5%. So again, just based upon the first quarter trend, we feel like we’re moving in the right direction to hit our full-year comp guidance of 3% to 5%.

Second thing to triangulate on that 3% to 5% was when we look ahead here, we feel like we’re up against some things from last year. We’re anniversarying some negative things from last year, in particular a very, very high promotional activity in mass retail that happened really from mid-Q2 onwards throughout the summer and into the fall. The mass retailers now are in much better shape in terms of control of their inventories. So, we’re not expecting the same level of promotional activity, and we think that will help us. The other thing that we will anniversary, I mentioned in the remarks, is higher gas prices. Last summer, gas prices were much higher than they are now. So, as we move over the next few months, as long as gas prices stay where they are, we think that’ll be a tailwind.

And then, the third thing that we used to triangulate on that 3% to 5% for the full-year guidance was that we’re up against our own mistakes from last year, and In particular, the decision we made to raise retails in the sort of second and third quarter of last year. As we described, especially on our third and fourth quarter call, we feel like that really hurt us. We’re in much better shape now, much stronger focus on value. So, again, I’ll go back to what I said at the beginning of my answer. There’s plenty of uncertainty out there, but we think — we feel pretty good about our full-year guidance of 3% to 5% comp. But let me pass it over to Kristin just to comment on the margin aspects of that.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Sure. So, for the back half of fiscal ’23, for the fall, as you noted, we’re — EBIT margins are planned to increase 100 basis points to 150 basis points. And similar to the first half of the year, we do expect higher gross margins, both higher merchandise margins and — but also lower freight costs, lower freight costs particularly on the domestic side in the back half of the year. In addition, the transitory expenses that we — that hurt us in Q2, we obviously don’t have in the fall. And given the sales comp we are planning for the fall, we should leverage on fixed expenses like occupancy. So, those are the big puts and takes for the fall on the margin side.

Chuck Grom — Gordon Haskett — Analyst

Okay, great. Helpful color. Thank you.

Michael O’Sullivan — Chief Executive Officer

Thanks, Chuck.

Operator

Our next question comes from the line of Mark Altschwager from Baird. Please go ahead.

Mark Altschwager — Baird — Analyst

Good morning. Thank you. Curious how you would assess your performance this quarter relative to the other major off-price retailers. Thanks. And then I have a quick follow-up.

Michael O’Sullivan — Chief Executive Officer

Sure. Thank you, Mark. A good question. Yeah, I think let me start by saying that we feel like we’re lucky in our business. We have two very successful analogs, companies that have been in the off-price business for a long time; companies, if you like, that demonstrate what’s possible, what full potential looks like. Now, of course, there are differences between each of us, especially when it comes to the demographics of our core customers. Our core customer tends to skew lower-income, younger, higher ethnicity, larger family size, more urban. We love this customer. They have been a major driver of our growth over many years, and they will be again. But over the past year, that customer in particular has been under severe economic pressure.

The other major difference between us and the other larger off-price retailers is that I would say we’re newer to the off-price business and we’re less mature, if you like. Our peers have been executing and refining the off-price model for decades, we haven’t. Compared to them, we’re a relative late comer to the off-price business. And that lack of maturity shows up in our systems, processes and sometimes in our execution. But look, that’s why I’m here. That’s why the whole executive team is here. That’s why Burlington is an exciting place to be in, exciting place to invest. We’re the smallest, least productive and least profitable of the major off-price retailers.

We believe that the off-price retail channel will continue to take share over the next several years. And as that happens, we at Burlington feel like we have a tremendous opportunity to drive growth in our sales and profitability. So, yes, the last year has had its challenges for sure, but we think the longer-term outlook is very, very exciting.

Mark Altschwager — Baird — Analyst

Thank you. And attraction of younger shoppers has been a theme among some of your competitors. Can you frame up the opportunity you have there and with perhaps other demographics to broaden Burlington’s reach?

Michael O’Sullivan — Chief Executive Officer

Yeah. I think it’s a very good question. Let me start on the younger shoppers. We’ve always had a stronger share of younger customers compared to department stores, but also compared to our off-price peers. When you walk into our stores, you can physically see that the customer base and the assortment cue younger. We have a stronger penetration of kids — of the kids business, juniors, young men. Our shoppers aren’t just younger, they tend to be — obviously, we’ve talked this morning about the fact that they tend to be lower-income. They tend to be more ethnic. They tend to be more urban. Those are the — those demographic segments, not only are they a core strength for Burlington, but they are, over the long term, growing segments in the United States. And as I said earlier, given where we are in the economic cycle, those consumers are struggling right now. But over the long term, that’s an attractive set of demographics to have strengthened.

Let me expand to the second part of your question. Are there other — can we expand and broaden our demographics? We — in order to get to our 2,000 stores, which is the long-term goal for Burlington, we need to be able to operate in a range of different store locations and attract a wide range of demographics. Even though — the core group that I just described, younger, more ethnic, urban, etc., even though that’s a large segment of the population, we still need to be able to operate effectively in other areas. So, there are a number of things that we’re doing in our business to sort of improve what I would say is the customization of our assortment by store and therefore to appeal to a broader demographic, not only the need-a-deal customer, but the want-a-deal customer. So, I feel pretty good about our ability to do that over time, but it’s definitely something that we’re aware that we need to work on over the next several years.

Operator

I would now like to turn the call over to Michael O’Sullivan for some closing remarks.

Michael O’Sullivan — Chief Executive Officer

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

Operator

[Operator Closing Remarks]