Burlington Stores, Inc. (BURL) Q3 2021 Earnings Call Transcript

Burlington Stores, Inc. (NYSE: BURL) Q3 2021 earnings call dated Nov. 23, 2021

Corporate Participants:

David J. Glick — Investor Relations

Michael O’Sullivan — Chief Executive Officer

John Crimmins — Executive Vice President and Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan Securities LLC — Analyst

Ike Boruchow — Wells Fargo Securities LLC — Analyst

Lorraine Hutchinson — BofA Global Research — Analyst

John Kernan — Cowen & Company — Analyst

Kimberly Greenberger — Morgan Stanley & Co. LLC — Analyst

Michael Binetti — Credit Suisse Securities (USA) LLC — Analyst

Adrienne Yih — Barclays — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to Burlington Stores Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. [Operator Instructions]

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

David J. Glick — Investor Relations

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2021 third quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer; and John Crimmins, Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded, or broadcast without our expressed permission. A replay of the call will be available until November 30, 2021. 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 2020 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. Our usual approach on these calls is to structure our remarks in a chronological order, starting with a review of the most recent quarter, then moving on to the next quarter and the year ahead. And finally, commenting on the longer-term outlook. Today, we’re going to take a slightly different approach. Rather than chronologically, we will cover these topics in order of their importance to our long-term shareholder value. I will begin with our longer-term expectations. The timeframe for these remarks will be the next five years. Then I will move nearer in and talk about 2022.

We think that 2022 is going to be very unpredictable. That said we believe it could provide the ideal setup for our business. Finally, I will comment on our Q3 results and the outlook for the rest of the year. Okay, the longer term, there are two aspects of the longer term that I would like to talk about: number one, the macroeconomic and competitive environment; and number two, progress we are making on our Burlington 2.0 strategy. On the macroeconomic and competitive environment, let’s start with the customer. For many years, there has been a growing consumer focus on value. It is possible that we are entering a period — a prolonged period of consumer price inflation, across the whole economy.

We believe that in inflationary periods, consumers trade down, not up. In an environment of rising prices, we think shoppers will be even more attracted to the great value that we offer. Our business is a third bigger now than it was in 2019. One reason for this is that our value differentiation versus other retailers has grown. The delta between the price of an item at Burlington and the price of a like item at a full price store has never been greater. Leaner inventories in the full-price channel have driven higher realized prices. It is not clear, that these higher prices will be sustained. If they are sustained, then, in the coming quarters, we think that we may have the opportunity to capture additional market share to take up our retail prices or, to do both.

If on the other hand, retailers return to more promotional habits and these higher realized prices in the full-price channel will come down. If that were to happen, then we think it would trigger yet another wave of consolidation of marginally profitable full-price bricks-and-mortar stores. We anticipate that the second scenario, a return to a promotional environment and a decline in realized prices is the more likely. But it’s going to take some time to see how this plays out. But in either scenario, we think that the long-term implications for Burlington are very favorable.

I would like to talk now about the progress we are making on Burlington 2.0. The core of this strategy is to make our business as flexible as possible, so we can chase the sales trends, take advantage of supply opportunities and deliver great value to our customers. So far this year, we have chased from a comp plan of flat to an actual year-to-date comp of 18% versus 2019. In addition to comp growth, we are very excited about our new store performance, especially our smaller store prototype. In 2021, we have opened 101 new stores. This translates to 77 net new stores after closures and relocations.

Our new stores are performing extremely well. And I am excited to announce, that we have decided to accelerate our new store opening program. In 2022, we expect to open 120 new stores, which after closures and relocations should yield about 90, net new stores. Beyond 2022, we now expect to open 130 to 150 new stores each year. About 30 of these will be relocations of older stores to newer, smaller prototype locations. So overall, from 2023 onwards, we expect to open 100 to 120 net new stores each year. Today, we have just over 800 stores. So in the next five years, this program will drive a very exciting transformation of our chain.

Moving closer in, I would like to talk now about 2022. We think that there are three factors that could make 2022 a very good year for Burlington. But all three factors are difficult to predict. Firstly, sales. This year, all retailers have benefited from one-time items like stimulus checks and pent-up demand. As we get into 2022 and lap these items, it seems likely that comp trends across retail will fall off sharply. On the other hand, it is possible that rising wage rates or further government spending will offset this decline. We have to be ready for either scenario.

Secondly, pricing. As I said a moment ago, we don’t yet know if higher realized prices at full price retailers will be sustained. This will play out in 2022. If these higher prices are sustained even as supply loosens up, then we think we will have a tremendous opportunity to drive sales or to take up retails or to do both. And if there is a general rise in inflation across the whole economy, then this opportunity could be even greater. Thirdly, we do not know if the issues with global supply chains will ease in 2022. If they do, then this could have a huge beneficial impact on off-price supply, and it could also drive significantly lower freight and supply chain expenses.

We don’t have great visibility on any of these three items, no one does, but in this situation, our playbook is always to plan our business conservatively and be ready to chase. So our initial buying and operating plans for 2022 are anchored on a mid-single-digit comp decline. This is not a prediction of what we think will happen. We do not have enough visibility for a reliable prediction. You should think of the minus 5% comp as a baseline, a starting point for the chase. In 2021, our baseline was a flat comp. Year-to-date we have chased sales 18 points above this baseline. As for our margins, so much depends on freight and supply chain expenses. Again, we can seek, but we do not know how these will play out. We think that these expenses should start to come down in 2022, but we don’t know if, when and how much this will happen.

In a moment, John will share our margin estimates, assuming that these costs remain at their current levels through mid-2022 and then begin to moderate. I’m going to wrap up my remarks with a few comments on our Q3 performance and our Q4 outlook. As described in today’s press release, comp growth in Q3 was 16%. We estimate that warmer weather from late September onwards, reduced our comp by about 3 points. In other words, we believe that our underlying weather-adjusted comp in Q3 was about 19%. For Q4, we are currently projecting our comp performance to be in the low double digits. Our month-to-date comp is running well ahead of this. What really matters is the next four to five weeks.

If the sales trend is stronger then we are ready to trace it. Let me move on now to talk about inventory levels. Comp in-store inventories were down 24% at the end of Q3. This means they were slightly above our plan coming into the quarter. Our plan was for in-store inventories to be down in the high 20s. The other promising news is that at the end of Q3, reserve inventory was 30% of total inventory versus 21% in 2019. It is usually the case that you drain your reserve inventory in the third quarter. You pull goods out of reserve to get prepared for holiday.

In fact, we built our reserve inventory in Q3. Reserve receipts in Q3 increased 174% versus the same period in 2019. We were able to make some great opportunistic buys during the quarter. It is too early to extrapolate, but we think that over the coming months, we are likely to see a very favorable buying environment as other retailers cancel late deliveries. One final point on inventories. At end of Q4, we are planning in-store inventories to be down in the mid-30% range. We believe that we can end the year more cleanly than we have in the past and thereby transition more effectively to the spring season.

I would like now to turn the call over to John to walk us through the financial details.

John Crimmins — Executive Vice President and Chief Financial Officer

Thanks, Michael, and good morning, everyone. I’m going to follow a similar approach to Michael. I’ll start by talking about our longer-term financial prospects. Then I will move in mirror in and make a few comments about 2022. And then finally, I will finish up with additional color on our Q3 results and our current expectations for the fourth quarter. On the longer-term, as Michael described, we are very excited to announce that we will be accelerating our new store opening program. We are now planning to open 90 net new stores next year and then from 2023 onwards, we expect to open between 100 and 120 net new stores every year.

Combining this faster pace of openings with a conservative comp assumption, should generate average annual top line sales growth over the next five years in the low double-digit percentage range. Over this period, and with these sales growth assumptions, we also believe that we can achieve 200 basis points to 300 basis points of operating margin expansion. We’ve made very good progress on margin expansion this year, but this has been masked by higher freight and supply chain expenses.

We expect that some of these expenses will moderate over time, but we also believe that we have the opportunity to drive further leverage, especially in occupancy costs and operating expenses. This combination of sales growth and margin expansion should drive average annual earnings growth in approximately the mid-teens. This growth estimate does not include any additional benefit from using available cash flow to repurchase shares or to pay down debt, thereby reducing interest expense. The numbers I’ve described are annual averages for the five year period. We anticipate significant variability in these results year-to-year.

In addition, as you know, we may not plan our business each year with this level of growth. Our model is to begin each fiscal year with a more conservative plan, manage inventories and expenses accordingly and then chase the trend and take advantage of ahead of plan sales. If we execute this model successfully, then we would expect to achieve the annual average performance metrics that have just described. Let me move on and make a few comments about 2022. As Michael described next year is very unpredictable in terms of top-line sales and bottom-line earnings. We look forward to the day when we can return to provide traditional guidance.

We are clearly not at that point yet. For 2022, we do not have enough visibility to provide meaningful guidance for the year. We are anchoring our initial buying and operating plans on a 5% comp decline. Think of this as the baseline that we are using to set up our merchants and operators so we could chase the trend and take advantage of merchandise supply opportunities. Given what we know at this point, we would expect a 5% comp decline to drive operating margin deleverage of about 150 basis points. This is based on the assumption that freight and supply chain expenses remain at their current levels through mid-2022 and then begin to moderate.

This estimate also assumes no material increase in retail prices and no other significant cost inflation. For reference, using these same assumptions, we would expect a flat comp to drive about 60 basis points of operating margin deleverage and a 3% comp to generate flat operating margins versus 2021. I would now like to talk about our Q3 performance and our Q4 outlook. As a reminder, our Q3 results are being compared to the third quarter of fiscal 2019. Total sales in the quarter grew 30%, while comp sales increased 16%. As Michael mentioned, we estimate that unseasonably warm weather in October in some of our most important regions, negatively impacted our comp sales growth by about three points during the quarter.

The gross margin rate was 41.4%, a decrease of 100 basis points versus 2019’s third quarter rate of 42.4%. This was driven by a 180 basis point increase in trade expense, which more than offset an 80 basis point increase in merchandise margin driven by lower markets. Product sourcing costs were $173 million versus $90 million in the third quarter of 2019, increasing 250 basis points as a percentage of sales. Higher supply chain costs represented most of the deleverage. The drivers of these higher costs were consistent with what we have discussed in prior quarters. Adjusted SG&A was $581 million versus $486 million in 2019, decreasing 210 basis points as a percentage of sales.

And other income and other revenue were down by $8 million or 60 basis points, as we compare to the third quarter of fiscal year 2019, which benefited from $8 million of insurance recoveries. Adjusted EBIT margin was 6.1%, 180 basis points lower than the third quarter of 2019. Excluding the non-operating other income and revenue deleverage, our adjusted EBIT margin declined 120 basis points. Said another way, during Q3, we drove 310 basis points of operating margin expansion on merchant margin and operating expense leverage on our 16% comp, but this was more than fully offset by 490 basis points of deleverage on freight, product sourcing costs and our comparison to nonrecurring other income in Q3 of FY 2019.

All of this resulted in diluted earnings per share of $0.20 versus $1.44 in the third quarter of 2019, driven primarily by an $86 million debt extinguishment charge related to the partial redemption of our convertible notes. Adjusted diluted earnings per share were $1.36 versus $1.53 in the third quarter of 2019. During the quarter, we opened 40 net new stores, bringing our store count at the end of the third quarter to 832 stores. This included 56 new store openings, 15 relocations and one closure. In the fourth quarter, we have opened an additional eight new stores, and we expect to close two stores.

As a result, we should end the year with 838 stores. Now, I will turn to our outlook for Q4. We are projecting comp sales growth in Q4 to be in the low double-digit percentage range. We are expecting the extraordinary freight and supply chain expense headwinds to continue through Q4. This means that our low double-digit comp projection should translate to 250 basis points of deleverage in operating margin during the quarter.

With this outlook for Q4, we now expect our full year operating margin to be flat versus 2019. It is important to reinforce the point that this means that for the full year, we will have absorbed about 360 basis points of deleverage on freight and supply chain expenses with 350 basis points of offsetting favorability in other areas of the P&L, specifically much higher merchant margin and significant leverage on SG&A expenses.

With that, I would like to turn the call back to Michael for closing remarks.

Michael O’Sullivan — Chief Executive Officer

Thank you, John. Before we open it up for questions, I would like to recap and reinforce some key points that we have made this morning. Firstly, we think that our longer-term prospects are extremely bright. So we have decided to put our foot on the gas, and we are accelerating our new store program. Secondly, we believe an inflationary price environment could drive greater traffic to our stores. We need to see how this plays out, but we think that it could offer us the opportunity to take share, take up retails, or to do both.

Thirdly, we anticipate that 2022 will be very unpredictable. Our playbook is to plan and manage our business, so we can aggressively chase the very significant sales, margin and supply opportunities that we believe might emerge. Finally, our Q3 trend remained very strong. We chased $280 million in sales above our original plan, but we still ended the quarter with in-store inventories and reserve inventories in great shape. We are very well positioned, for the fourth quarter.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Boss with J.P. Morgan. Your line is now open.

Matthew Boss — J.P. Morgan Securities LLC — Analyst

Great. Thanks and really appreciate all the color. So, maybe first for Michael, on your long-term unit growth prospects, Michael, could you just speak to drivers behind the decision to accelerate this ramp of new store openings? What gives you confidence to expand the program now?

Michael O’Sullivan — Chief Executive Officer

Well, Good morning, Matt. Thanks for your question. As you know, at the beginning of this year, we raised our long-term potential store count to 2,000 stores. And it’s really since that time we’ve been looking at the pace of our new store openings, how many stores we should open each year. There are three factors that led into our decision to accelerate this pace. The first is financial. I’m sure many of the analysts on this call, have already done the math, looking at our press release this morning to estimate new store productivity. And then what you see with those numbers is our new store productivity this year has been extremely strong.

Now we know that this is partly due to the same tailwinds that have driven our comp growth over this year. But even if you adjust for those tailwinds, our new stores are still running well ahead of our internal hurdles. As a reference point, of the 100 or so stores that we opened this year, just over half, are under 30,000 square feet. So, this performance really gives us a lot of confidence in our new smaller store prototype. So that’s the first reason, financial. Secondly, the second factor is strategic. I talked about this in my earlier remarks, so I won’t beat a dead horse. But year-to-date our business is almost 1/3 bigger than it was in 2019.

That suggests to us that the customer is really responding very well to the great value that we’re offering and that we’re taking significant market share. Again, it gives us confidence, that as we open more stores over the next few years, we’ll be swimming with the tide, we will be taking share. The other major off-price retailers have two to three times the number of stores that we have. So this feels like an opportunity that’s really unique to Burlington. The third factor in making this decision was operational. Earlier this year, we put together an internal cross-functional team to look at what would it take to significantly accelerate our store expansion.

That cross-functional team included real estate, stores, supply chain, merchandising, planning, IT and other areas. And based on the plans and actions that, that team developed, we feel very comfortable that we can support the faster pace of openings that we described in the remarks. Now obviously, with new stores, you have a pipeline of new locations that goes out over the next two to three years. So, we can look at that pipeline. I have to say we’re very happy with the number and the quality of the store locations that we see ahead of us. So, you can tell, we’re very excited by this opportunity.

Matthew Boss — J.P. Morgan Securities LLC — Analyst

Great. And then maybe just a follow-up for John. On the multi-year top and bottom line growth target, that you laid out on the call, could you just share with us more of the building blocks to get to those levels of sales growth, margin expansion and EPS growth?

John Crimmins — Executive Vice President and Chief Financial Officer

Good morning, Matt. Sure, I’m happy to take you through a little bit more detail on that. The top line is pretty straightforward, really. If you combine the new store program that we were talking about, with conservative low single-digit percent annual comp increase. This gets you to a low double-digit percent annual sales growth that I mentioned is basis of our model. And we’re confident that we can achieve this average annual growth. Moving on to margins, let’s just kind of revisit what happened with margins this year.

For the full year, which expecting freight and product sourcing costs to delever by about 360 basis points, but as I just said in my remarks, we’re projecting operating margin to be approximately flat versus 2019. So in other words, we’ve really driven 360 basis points of favorability in other areas, and that comes from a higher merch margin driven by lower markdowns and higher leverage on operating expenses. Looking forward, there may be some additional merch margin opportunity, but because we’ve seen such a significant increase this year, we haven’t assumed any further improvement there in our model. For store occupancy, we expect to capture additional leverage as we migrate towards our smaller store prototype. But we do see opportunities to drive further efficiency on store and supply chain expenses.

We think that over time, freight expenses will decline from this year’s historically high levels, though not necessarily all the way back to pre-pandemic levels. We’re assuming that supply chain expenses would probably be a bit stickier, but they, too, will moderate to some degree as receipt flows become more predictable and reliable. When you combine all of these different factors together, we think that we can capture the 200 to 300 basis points of operating margin in the next five years that we called out. Of course, there could be additional headwinds that move against us.

There could be tailwinds that move in our favor that could impact individual years during the period. But on average, we think these things should even out over time. And if we were to achieve significantly higher than the low-single-digit average comps we’ve modeled for this period, we would expect to drive more operating margin expansion. Now if you combine the low double-digit projection for annual top line growth with a margin expansion of 200 basis points to 300 basis points over the next five years, then to get to the mid-teens earnings growth that I described in my prepared remarks.

Operator

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

Ike Boruchow — Wells Fargo Securities LLC — Analyst

[Technical Issues] A couple of questions. My first question is on supply chain. Can you guys talk a little bit — excuse me, more about the issues and how they’re specifically affecting your company? And then I guess, for example, what impact has it had on store level inventory levels? And then I have a follow-up.

Michael O’Sullivan — Chief Executive Officer

Yes, I’ll take that. Good morning, Ike. I think that’s a great question. I know there’s been a lot of reporting and some concerns about inventories. So I think it might be helpful to draw a distinct merchandise availability and supply on the one hand and the timely delivery of receipts on the other hand. Firstly, the availability of merchandise has been — continues to be very good. Of course, there are certain categories and brands where there might be constraints, but that’s always true. As an off-price retailer, we’re not dependent on a single rack category or brand.

We’re very good at moving money from businesses where there’s either a weak trend or poor supply to businesses where there’s strong sales and good supply opportunity. That’s off price. That’s kind of what we do. I think the data for Q3 provides a pretty good illustration of this. And in Q3 we chased 16% comp growth on an original plan of flat. That represents about $280 million of ahead of plan sales, but our in-store inventory levels still ended Q3 ahead of plan. And at the same time, we were able to build up our reserve inventory. So we were very happy with supply in Q3, and we continue to be happy.

We think there’s a good chance that supply is about to get even better. So that’s supply. But let me move on and talk a little bit about receipts, specifically to the timely delivery of receipts. As I just described, when you look across the whole store, we really have not had an issue with merchandise availability this year. We found great merchant [Technical Issues] spent our open to buy. Where there have been challenges, and we’ve had these challenges along with everyone else is in the timely delivery of receipts. In other words, with good showing up late. This isn’t the vendor’s fault. The problems are global and very widespread. But it has created inefficiencies in our transportation and supply chain network.

Ironically, those headwinds become stronger, the more you try to chase the business and respond to the trend. So there’s definitely been a challenge, and it’s cost us money. But we’ve been able to get the goods that we need and we’ve been very happy with the inventory levels in our stores. So to recap, merchandise availability and supply have been very good, and we think they’re going to get better, but navigating the receipt flow has been an issue. And frankly, it’s been expensive, but we’ve done it. So that’s how I would describe that.

Ike Boruchow — Wells Fargo Securities LLC — Analyst

Super helpful. And then just a quick follow-up. On retail prices, Michael, you were alluding to. Just what do you see happening with prices across the industry? Do you think higher prices are sustainable? And then do you believe that you guys can raise prices? Is this something the company has done in the past? Just kind of curious how you frame all that up.

Michael O’Sullivan — Chief Executive Officer

Yes. It’s a great question, Ike. I think this situation has really evolved over the last few months and actually continues to evolve. I see two things going on right now. Firstly, full price retailers this year have been getting much higher realized prices. And it’s clear why that is, it’s because of much leaner inventories. Now initially, I have to say, I was skeptical on this. My view was that as soon as supply loosened up, promotions would come back. And then these higher prices would just come back down. But now I’m not sure.

These retailers are clearly enjoying the stronger margins. So maybe — and I want to underline the word ‘maybe’. The environment will be less promotional going forward, maybe these retailers will control their inventories more tightly so they can preserve the higher margins. But again, I’m going to repeat it. I’m underlining the word ‘maybe’. We really need to see what happens as supply constraints fees. Do we go back to promotions or not, but if the environment really is less promotional going forward, I think that would be great for us. When we talk about value and offering value to customers, our reference point for value is the pricing at full price stores.

So if that reference point moves up, if those higher realized prices really become permanent, then that could be a huge opportunity either to drive sales or to drive margin or to do both. And frankly, that decision might depend upon the specific category that we’re talking about. But I think we’ll have plenty of opportunities there if that reference price is permanently higher. Anyway, that’s one thing that’s going on. The other thing that’s going on, and this has really changed over the last few months, the prospects — it feels like the prospects for generalized price inflation across the economy have really grown.

As I said in my remarks, this isn’t just in the sectors that we compete in, it’s also food, its gas prices, it’s the cost of living. Again, we have to see what happens over the next couple of quarters. But we believe that in an environment of rising prices, we should do very well. Our value proposition is already very strong, but it would become even stronger in that environment. And again, we think this could present us with an opportunity to drive higher sales and higher margins. Now when you look back at the transcript to this call, you’ll see that there were a lot of ifs in what I just said, a lot of maybes and a lot of ifs. So we don’t really know how this will play out.

We think that these trends could be very favorable to us or for us, but at this point, it makes sense to be cautious and a little patient. That said we are making some adjustments. We’ve looked at our fast — very fast turning businesses and we started to push prices up in those businesses. We’ve looked at businesses where we think our pricing may be sharper than it needs to be and we’ve been testing some higher retails. And so far, the things we’ve tested, the prices we’ve pushed up, it’s worked. It’s worked well. But it’s fairly modest at this point.

The other thing is that, as you’d expect, we’re also watching competitors very closely. Our merchants visit competitor stores all the time, there are no trade secrets with pricing. Their price is displayed on the ticket. And actually, by looking at the clearance rack, you can also see if those higher prices are working or if they’re describing markdowns. I guess, I would finish up by saying, we’re mindful in all this that we are the third largest off-price retailer. So clearly, it wouldn’t make sense for us to take the lead on raising retail prices, but we’re not proud. If we see something and we believe something is working. There’s really nothing to stop us from evolving.

Ike Boruchow — Wells Fargo Securities LLC — Analyst

Thanks a lot.

Operator

Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is now open.

Lorraine Hutchinson — BofA Global Research — Analyst

Thanks. Good morning. I wanted to follow up on the freight and supply chain pressures. John, are you seeing any sign of easing here? And when do you think it’s reasonable to see that? Or is it possible that this is a more permanent situation?

John Crimmins — Executive Vice President and Chief Financial Officer

Good morning, Lorraine. Thanks for your question. Good question. As you’ve heard me say in the last couple of calls, we think that this record-breaking freight expenses that we’ve seen so far this year are mostly temporary that we still believe that it’s driven by an imbalance in supply and demand. And we think that over time, it should correct itself. So we think that’s the case. But like everyone else, we don’t really know when that’s going to happen. And we certainly haven’t seen anything yet that would indicate that things are starting to improve.

As we said previously, we think that some of the higher supply chain expenses that we’ve seen this year, particularly the wage rate piece are going to be more permanent, but we expect that the wage incentives and the operating efficiencies we’ve seen this year are going to get better and as the supply chain situation improves. Again, we just don’t have the visibility into when any of this stuff is going to actually happen. Let’s just consider the other side of it. Suppose it doesn’t work out that way, suppose that these higher expenses are mostly here to stay, but they become a permanent part of the expense base.

We think the only way that happens is in an inflationary scenario. And so, I’d refer to what Michael was just talking about. If costs are permanently higher, then we would expect that prices would rise permanently across all of retail. It’s the only way that most retailers would be able to absorb the costs. And so, that would certainly apply to us as well. In an inflation where — inflationary situation, we’d certainly be able to raise prices, while continuing to maintain our value proposition. And in this scenario, that our value proposition would likely be even more important to our customers.

Lorraine Hutchinson — BofA Global Research — Analyst

Thanks. And then you’ve been pretty proactive about paying down debt, but you added back the share repurchase this quarter. What should we expect in terms of capital allocation going forward?

Michael O’Sullivan — Chief Executive Officer

John, I’ll take that question. Thanks, Lorraine. That’s a good question. Yes. We have paid down a considerable amount of debt over the last year. And I think it may be helpful to kind of provide kind of a recap of our debt pay down as well as our debt outstanding and leverage ratios. If you go back to the height of the pandemic, we borrowed $400 million on our ABL, and we raised about $1.1 billion in public market debt. But given our strong recovery over the last year, we have been able to pay down about $860 million out of the $1.5 billion we borrowed during 2020. We paid down our ABL to zero.

As you may recall, we executed a make-whole call on our high-yield notes, and we recently repurchased in last quarter, $160 million in convertible notes. So — so, where does that leave us? We have about $1.6 billion in total gross debt, a little over $950 million on our term loan and a little under $650 million in our converts. And on a net debt basis, given the $1.2 billion in unrestricted cash we had at the end of the quarter, that’s about $400 million. So, what all those numbers mean? I think it just leaves us at a much more comfortable place, from a leverage perspective. And if you look on a trailing 12-month basis, excluding capitalized operating leases, our gross leverage is down to 1.6 times gross debt to EBITDA, and our net debt ratio is down to 0.4.

And we would expect to continue to reduce those leverage ratios. So given that progress and reducing our leverage, we were comfortable resuming our share repurchases during the past quarter. We repurchased around $150 million of stock, and that leaves us $250 million remaining on our authorization. So what do we do from here? We’re going to evaluate it through the lens we always use. First and foremost, we’re going to invest in our growth. And secondly, we’ll utilize excess cash in the most accretive way for our shareholders. And that’s what we’ll continue to do.

Lorraine Hutchinson — BofA Global Research — Analyst

Thank you.

Operator

Our next question comes from the line of John Kernan with Cowen. Your line is now open.

John Kernan — Cowen & Company — Analyst

Good morning. Thanks for taking my question. Michael, John, David, thanks for all the guidance through next year. It’s quite a bit more than we’re getting from many of your peers across the sector. I guess, John, new store growth is now a bigger part of the narrative. It would be helpful if you could provide just some high-level modeling assumptions around new store productivity, particularly given the new store prototype? And then, I have one quick follow-up.

John Crimmins — Executive Vice President and Chief Financial Officer

Thanks, John. I’d be happy to do that. So let’s start with, as you think about sales volume for our new stores. On average, we expect new stores to have initial sales volumes that are around 70% to 80% of our chain average as they open up. Obviously, there’ll be some variability for each individual store. But if you use this average, it should be a reasonable assumption for modeling. Actually, this year, we’re seeing a slightly stronger performance than that as our new stores are outperforming their plans. They’re being driven by the same tailwinds that have helped us deliver our strong comp store performance.

So from there, you should anticipate comp store sales growth for the new stores that’s faster than the chain for several years after opening, which would be consistent with what we’ve now seen for the last several years. Across the next five years, you should expect more than 75% of our new stores will be less than 30,000 square feet. So really moving to the smaller store formats in a big way. In terms of profitability and capital returns, you can rely on what we continue to say. We’ve been saying in the past that EBIT margins for each store are expected to be accretive to the company in their second year. And each store is expected to deliver return on invested capital that’s also accretive to the company’s return on invested capital.

In 2019, our average sales per store, is about $10 million. With the growth that we’ve seen this year, our 2020 on average sales per store is going to be north of $11 million per store. Sales of the new store, is 75% of our average. That means that the store should do over $8 million and then comp above the chain average for several years. So, from a productivity perspective, in our 25,000 to 30,000 square foot stores, we’re expecting over $300 a foot on a gross square foot basis and $400 a foot on a selling square foot basis. So, a big step forward on productivity at the store level.

And even as we’re paying a little more rent per foot and many of these better high-traffic locations, this level of productivity, combined with a smaller footprint and the lower operating expense structure should really help us to drive operating margin expansion while growing the top line faster and delivering the terrific returns that we expect from these stores. So, we’re really excited about our new stores, but we’re also excited about the relocation opportunity that we have.

The net new store numbers that we laid out to date in the next five years include an average of 30 relos per year. In most cases, these are going to be moved from oversized boxes with low sales productivity. Many of them older and need at least refreshing moving into fresh, new, highly productive, smaller boxes with lower occupancy costs relocations for us usually result in a pretty healthy sales lift and improved four-wall profit.

John Kernan — Cowen & Company — Analyst

Got it. It sounds like productivity is planned to move significantly higher. Just my follow-up is just on Q4, a lot has happened since the last call in August. Could you just walk us through what changed in the Q4 outlook versus the outlook you gave us on the last call? Thank you.

John Crimmins — Executive Vice President and Chief Financial Officer

Okay. All right, John, great. Thanks. So for Q4, we said we’re comfortable with our sales forecast, we’re actually running ahead of our low-double-digit sales forecast. But there’s still some risk and some really big weeks in front of as we move into December. On the margin front, it just really comes down the line to be a bit more conservative on our EBIT forecast. Our implied outlook for Q4, if you look at what we gave last quarter, was down around 200 basis points. So now on a low-double-digit comp, we’re forecasting down about 250 basis points.

Though, I would remind you that we’re still maintaining our flat EBIT margin forecast for the full year. The reason for this, the reality that we’re dealing with is that the cost pressures in supply chain and freight and wages to some degree, along with the volatility of timing of receipts, it’s just really difficult to forecast with any precision. So we really wanted to recognize the difficulty forecasting these expenses and add a bit more conservatism just to protect against the volatility that we see.

John Kernan — Cowen & Company — Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Your line is now open.

Kimberly Greenberger — Morgan Stanley & Co. LLC — Analyst

Great. Thanks so much. I wanted to follow-up on — Michael, on your inventory comments. You mentioned when you were talking through inventory that you think there’s a good chance that supply is about to get better. I just wondered if you could expand on that for us.

Michael O’Sullivan — Chief Executive Officer

Sure. Good morning, Kimberly. Good to hear from you. Yeah. So I feel like the congestion and the delays in global supply chains and transportation systems have been fairly well reported. I’ve lost count of the number of ships that are waiting off the coast of Southern California at this point. But it seems like it just keeps hitting new records every day. The containers — some of the containers on those ships have merchandise, the vendors and retailers had ordered with the expectation that they would be delivered for the holiday period, the holiday selling period or for the full season.

And it’s clear that some of that merchandise is not going to get here on time. Frankly, if it hasn’t landed by now, it’s already too late. Then there’s no point for a retailer, there’s no point in taking receipt of holiday merchandise in January, for example. So our expectation is that that merchants should find itself to find its way into the off-price channel. And we think that’s likely to be a big opportunity, especially for our reserve inventory. Now I mentioned that we’ve started to see some early signs of that. It’s — I think it’s too early to project where that’s going to lead, but our hunch is that the next couple of months could be a very good buying opportunity for off-price.

Kimberly Greenberger — Morgan Stanley & Co. LLC — Analyst

Fantastic, Michael. And it sounds like you feel really good about the inventory position here for holiday. I just want to make sure that I understand you correctly on that. And then I just wanted to follow up quickly, if I could, on the 30,000 square foot stores. It sounds like you’re seeing well above plan results in particular this year. And I wondered if you care to share how those stores, in particular, those smaller stores as a subset of your new locations, how they’re delivering on annual volumes this year? Thanks so much.

Michael O’Sullivan — Chief Executive Officer

Okay. I’ll take the first part of that, Kimberly, on the inventory levels, and I’ll let John respond on what we’re selling with the prototypes. But on holiday inventory levels, at this point, obviously, we’re sitting in the third week of November. So I’m in a good position to judge. I’m very confident that we will have the inventory in our stores and that we have enough receipts on the way to stores to support our sales projection, that low double-digit number. Now if sales were to run well ahead of low double-digit, then we might start to see some gaps in some very high trending businesses. But that just means that the sales in those businesses were very, very strong. So it’s a high-class problem. It’s — I think the risk to us right now in some ways is that sales outpaced our expectations, not that we have an issue with inventory or receipts. And then John, do you want to talk about the smaller stores?

John Crimmins — Executive Vice President and Chief Financial Officer

Yes. Sure, sure. So first of all, as far as the performance of all of our new stores this year, not surprisingly, they’re running well above the way that we had planned them as we’ve underwritten them. I think everybody in retail has a strong tailwind this year. So that’s certainly a big part of it. But it also does give us some confidence to see the new stores, which include a large percentage of smaller stores not as big as what we’re moving toward. But they’re all performing the way we would expect them to perform understanding that we have these kind of tailwinds behind us.

Within the group of smaller new stores, we’re very pleased with their performance. It’s become less about the size and more about the strength of the trade area if you’re looking at individual stores. We’ve got some of the smaller format stores that are really blowing it out of the water and then others that are performing well. But overall, as far as proof of concept, we’re very pleased with what we’ve seen from the smaller stores that we’ve opened so far.

Kimberly Greenberger — Morgan Stanley & Co. LLC — Analyst

Great to hear. And thanks for all of the color on the long-term strategic outlook. It’s really helpful. Thank you.

John Crimmins — Executive Vice President and Chief Financial Officer

You’re welcome.

Operator

Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.

Michael Binetti — Credit Suisse Securities (USA) LLC — Analyst

Hi, guys. Thanks for all the details today. I’ll repeat the comments earlier, it’s very, very helpful to hear you think through the 2022 and longer term. Maybe this one is for John, but I think important, it seems like you’re drawing a — a pretty hard line between first half and second half next year. Is that really lapping stimulus and the costs rolling in such that obviously, we understand from your language today the first half is really tough. Is second half closer to that algorithm that you spoke to for the longer term.

And then, Michael, what really — as you think about the AUR and retail comment, what really is the governor to raising that to you. Today, I think one of your dollar store competitors said they’re raising to $1.25, your off-price competitors are raising AURs. You point to the value in your stores being historically wide versus the full price channel. Do you need to be that wide? And how do you think about whether your share gains have come from continuing to widen that relative value spread versus the better operations we’ve seen from you in the stores, moving to higher traffic locations, operating the in-store inventories better. How do you gauge when you may let that value spread widen too far based on your comment that it’s pretty wide right now.

Michael O’Sullivan — Chief Executive Officer

All right. So Michael, I’ll start with the question on the kind of time and cost pressures next year. So as I said before, we really don’t have a crystal ball here. What we can see today is we haven’t seen anything that indicates that improvement, particularly on the freight side has started. So it’s a modeling assumption that we’re using. It’s not something that we have this inside information. But so — but I think it’s a fair way to think about next year that if you didn’t see any improvement for the first half, and you started to see some improvement in the second half.

That’s really as deep as our thinking goes there. So — and it’s based on if that improvement does start to happen, that’s the impact that we see on our margins. If it doesn’t start to happen, it goes back to the comments that we had, this may be more of an inflationary environment, and there may be more room to take price than we’ve modeled. So that’s kind of the way we think about how we modeled the scenarios for next year.

John Crimmins — Executive Vice President and Chief Financial Officer

Okay. And then, Michael, your question on what’s the — what are the governors on AUR and taking up retail? So I think it’s a really good question. And I think it’s important — It’s important to understand that an off-price, what really matters is sort of the reference points for price. And what I mean by that is when the customer walks in the store — when the customer walks in the off-price store, they’re walking into that store because they’re expecting a deal. They’re expecting the values to be great.

And actually, we encourage that. So when you look at a price ticket at Burlington, it shows our price, but it shows a compare at or a comparable price. And that compare-at price is based upon the out-the-door price at another retailer. So we’re saying, look, you can buy this price of Burlington, here’s what it would have cost you had you gone to this other place. So that’s kind of what the off-price customer proposition really is. So bringing that back to your question then, how should we think about the differentiation in our prices versus the competitors if the competitors move up prices?

That gives us an umbrella to move up prices, too. There’s no doubt about that. But where else is the customer going to go? The uncertainty that we have, and the reason we’re being a little patient here is because those higher realized prices at full-price stores, you got to be sure that they’re going to stay where they are. They’re going to stay high before you start moving up your own prices. I’ve been in retail pretty long time. And I would say, over the years, the department stores have been very, very promotional.

So you’d have to believe now that that’s going to stop that they’re going to stop being promotional. So if that were to happen, if it really were the case, the department stores were going to stop promoting and they were going to hold on to those higher realized prices, then yes, we could move up our prices. But, if actually, this is just a short-term thing and the higher realized prices are being driven by the fact that we happen to have supply chain constraints this year and leaner inventories.

And then actually, as supply loosens up next year, those realized prices will come down, then it would have been a mistake had we raised our prices. So that’s the reason we’re hesitating. Now this will all play out in the next couple of quarters, I think. So we won’t have to wait long, but that’s really the key driver for us. Now, there is this other issue that I mentioned in the script about what happens if inflation across the whole economy takes off? Well, if that happens then obviously, we’re all raising prices, but that’s a different driver, I think. So that’s how we’re thinking about it.

Michael Binetti — Credit Suisse Securities (USA) LLC — Analyst

Thanks a lot for the help.

Operator

Thank you. Our final question will come from the line of Adrienne Yih with Barclays. Your line is now open.

Adrienne Yih — Barclays — Analyst

Good afternoon and — good morning and thank you, again, for all the detail. A couple of quick questions here. Michael, can you talk about the perceived health of your core target customer? If you can remind us what the target household income is knowing that about 50% of U.S. households are under $75,000. And then what percent of your customers are non-credit or cash buyers. And then my follow-up is for John. It’s on the structural wage inflation embedded in the long-range plan. Obviously, we’re hearing of 15 minimums going to 17? And just some color there. Thank you very much.

Michael O’Sullivan — Chief Executive Officer

Yeah, Adrienne, I’ll start with the first question, the — our customer. We think our customer — we think our customer is very healthy right now. We think, certainly, when you look at the — at our comps throughout this year, we feel very good about the trend that we’ve been able to sustain, the underlying — the customer is clearly responding very well to the values that we offer. Now in terms of how our customer differs from other retailer customers, one thing we know about our customers, is they shop at every retailer, because our customers — the off-price customer cares more than anything about value.

And the way they find value is they cross shop a lot. So we know that we have a huge overlap with other retailers’ customers, which is why I say if other retailers raise retails, we’re probably going to have a chance to take market share or raise our own retailers, because we know that there is cross shopping between us and other retailers. Now, to answer your question more specifically, our customers tend to skew younger larger family size, more moderate income.

And I think those customers right now, as we say, are pretty healthy and spend the sales trend has been very strong. If I project forward to next year and just sort of add a thought about, if inflation really does take off in this economy, we actually think we may have a lot of new customers going up, new customers who are perhaps on slightly higher incomes, but they’re getting squeezed by higher price inflation. So that’s the reason why we feel somewhat optimistic that if there is inflation across the economy, consumers at different income levels are going to be more interested than ever in the value that we offer.

Adrienne Yih — Barclays — Analyst

Yeah.

John Crimmins — Executive Vice President and Chief Financial Officer

Okay. So I’ll take the wage part of your piece — your part of your question, Adrienne. So first of all, just a reminder, we’ve used this kind of market-by-market analysis where we make wage adjustments as we see that they’re necessary. We’ve been using it for several years. And we’re pleased with the way that it’s been working. This year, it turned out much different than the way we had planned at the start of the year. We’ve made some very significant changes on the DC side to remain competitive and ensure that we can attract the workers that we need to operate our distribution centers, most of which are in New Jersey and California, very competitive markets.

So, we brought wages up quite a bit there. And that’s the part of our supply chain costs that we refer to as being a little bit stickier. That’s now a permanent part of our wage base and of course, it’s included in our outlook this year and in our modeling. On the store side, it’s been a little bit of a different story. It hasn’t been quite as — hasn’t been nearly as competitive as the DC situation. Although in the second half of the year, we have seen it get a little bit tighter.

And we’ve had to make some adjustments a little bit higher than what we had expected at the start of the year to remain competitive, but it’s very different kind of market-by-market. So we’re still very comfortable with our market-by-market approach. So I would say, we taken a bigger step forward than we would normally have in a single year as far as the market adjustments. And then, modeling going forward, we’ve modeled in what an assumption for what we expect, we’ll need to do to continue to remain competitive and it’s informed by what we’ve learned about this year.

Adrienne Yih — Barclays — Analyst

Thank you. Great color and best of luck for holiday, thank you.

John Crimmins — Executive Vice President and Chief Financial Officer

Thank you.

Operator

This concludes today’s question-and-answer session. I will now turn the call back to Michael O’Sullivan, CEO, for closing remarks.

Michael O’Sullivan — Chief Executive Officer

Before we hang up, I would like to take this opportunity to thank everyone at Burlington for their hard work in the third quarter and throughout the year. I know that the entire Burlington team, shares my sense of energy and excitement around the sales, margin and supply opportunities that we see ahead of us. Finally, I would like to wish everyone on today’s call a very happy and peaceful Thanksgiving. We look forward to sharing our fourth quarter results with you in March. Thank you.

Operator

[Operator Closing Remarks]