Burlington Stores Inc (BURL) Q4 2022 Earnings Call Transcript

Burlington Stores Inc (NYSE: BURL) Q4 2022 earnings call dated Mar. 02, 2023

Corporate Participants:

David 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 — JP Morgan — Analyst

Jesse Sobelson — Wells Fargo Securities — Analyst

Lorraine Hutchinson — Bank of America — Analyst

John Kernan — TD Cowen — Analyst

Mark R. Altschwager — Baird — Analyst

Adrienne Yih — Barclays — Analyst

Chuck Grom — Gordon Haskett — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Burlington Stores, Inc. Fourth Quarter 2022 earnings webcast. I would now like to turn the call over to David Glick, Group Senior Vice President, Investor Relations and Treasurer. Please go ahead.

David 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 2022 Fourth 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 March 9, 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 2021 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 fourth quarter results; secondly, I will talk about our 2023 guidance; and finally, I’ll offer some comments on our longer-term outlook. After that, I will hand over to Kristin to walk through the financial details of our fourth-quarter results and our 2023 guidance. Then we will be happy to respond to any questions.

Okay, let’s talk about our Q4 results. Comp-store sales for the fourth quarter decreased 2%. This was on top of 6% comparable-store sales growth last year. As we have done on previous calls, today when we are describing our comp trend, we will use a three-year geometric stack. This metric is defined in more detail in today’s press release. Our three-year geometric stack was positive 4% for the fourth quarter. As we said on our Q3 call, our three-year geometric stack for November was flat to the prior year. As the quarter progressed, our sales trend improved sequentially.

On a one-year basis and a three-year basis, our comp growth in both December and January was positive, with January stronger than December. We believe that there were two drivers of this improvement in our trend. Firstly, we took a number of actions in the back half of last year to sharpen our values. We described these in some detail on our November call, so this morning, I’m just going to summarize a couple of points.

Number one, we backed off our original plan to raise prices. The consumer and promotional environment changed rapidly last year and it became clear that this was not the right time to be raising prices. Instead in the fourth quarter, we sharpened our values on fresh receipts, and we aggressively used markdowns to drive faster turns on existing inventory. We focused especially heavily on expanding opening price points in our assortment.

Number two, we significantly raised receipt plans and inventory levels in our strongest businesses and focused this open-to-buy on great opportunistic deals. The off-price supply environment was very strong in Q4 and we were able to take advantage of some incredible buys, especially on branded merchandise. We flowed many of these receipts to stores to fuel the stronger trend and we also tucked away some of these goods in reserve for later release. These actions worked.

Shoppers responded to our sharper values, expanded opening price points, and great branded buys. This led to a significant improvement in customer conversion and in average transaction size. In other words, shoppers liked the values that they found when they walked into our stores. In Q4, we also saw an improvement in traffic. This points to the second driver of our stronger trend. We interpret this improvement in traffic as a sign that the macro headwinds may have started to abate. In particular, although inflation is still elevated, we are beginning to lap the significant spike that occurred in late 2021 into early 2022.

Let me move on now and talk about the outlook for the year ahead. As we said in November, we anticipate that in 2023, the economy will slow down. And then, inflation will continue to fall. We expect the inventory overhang across retail to diminish and this should lead to less promotional activity. If the external environment unfolds as I have just described, we believe that this could have three major implications for Burlington. First, the economic slowdown should create a greater consumer focus on value, potentially driving some trade-down activity from middle- and higher-income groups.

Second, our value differentiation versus other retailers could grow as promotions moderate, and this should be a tailwind for traffic, conversion and transaction size. And third, we expect that the external expense environment will improve compared to last year. We are already seeing this start to happen with freight rates.

There was one other factor that is important to call out and this one is specific to Burlington. We executed poorly in 2022 and this hurt our trend. Once we corrected these mistakes late in the year, we saw an improvement. Obviously, in 2023, we will be lapping these issues and we expect to drive stronger results. These are the major reasons why we feel optimistic about 2023. But with all that being said, we recognize that there are some uncertainties and potential headwinds ahead. In particular, we remain concerned about the lower-income customer, our core customer.

In 2022, this customer group bore the brunt of the impact of inflation on real household incomes. We think the impact of inflation will moderate this year but there are other factors that could hurt this customer, such as a rise in unemployment and the ending of expanded SNAP benefits. Putting all these factors together, we are guiding full-year comp sales growth in the range of positive 3% to positive 5%. We believe that there may be upside to this range and we are managing our business to chase potential upside.

Given this comp range, we expect to be able to drive 80 basis points to 120 basis points of margin expansion in 2023. As we said in November, we believe we can get back to pre-pandemic margin levels within the next few years. But there are two reasons to be cautious on our 2023 margin. Firstly, our number one priority as we developed our budget and operating plans for 2023, was to drive sales. This means keeping our values as sharp as possible. Given the strong supply environment, we expect an increase in merchant margin, but this is balanced by the need to pass along great value to our customers to drive the trend.

The second reason to be cautious relates to expenses. As described earlier, we expect the external expense environment, specifically freight rates to improve in 2023. But it is difficult to predict how significant an impact this might have over the full year. Also, as Kristin will explain, in Q4, we incurred higher supply-chain expenses as we pushed more aggressively into great opportunistic off-price buys. This merchandise drives sales and value, but it is typically more difficult and expensive to process. For the last couple of years, we have been taking actions to make our distribution centers more off-price and more efficient, but we still have work to do, and this work will take time.

So let me sum up our 2023 guidance. We are planning and managing our business to support positive 3% to positive 5% comp growth, but we are ready to chase the trend if it is stronger. As for operating margins, we believe that we can get back to pre-pandemic operating margins within the next few years. For 2023, we are planning 80 basis points to 120 basis points of expansion on 3% to 5% comp growth.

I would like to move on now and talk about our new-store opening plans for 2023. We continue to be very pleased by the relative performance of our new stores, especially our new store format. In 2023, we are planning to open 90 to 100 gross new stores. After relocations and closures, this should yield 70 to 80 net new stores. This is lower than we would like and reflects the current lack of high-quality real-estate locations, as well as supply issues within the construction industry.

That said, we believe that this situation could be about to change. Over the next couple of years, we think that there could be a wave of consolidation in bricks-and-mortar retail, and we anticipate that this could drive a significant increase in the number of high-quality new store locations. So once we get through 2023, we believe that we can grow our new-store program such that we will open 500 to 600 net new stores over the following five years.

Before I hand over to Kristin, let me make some high-level comments about the longer-term outlook for Burlington. As I said earlier, we are optimistic about 2023, but looking further out, we also see reasons to be bullish about the longer term. There are two factors in particular that I would like to highlight. Firstly, we anticipate that the external environment for full-price retail will remain difficult and uncertain over the next few years. We expect that many traditional retailers may struggle. This should drive strong off-price merchandise supply, and as I mentioned a moment ago, may lead to additional bricks-and-mortar retail consolidation.

In this environment, we believe that off-price retailers have a major opportunity to take share. Secondly, here at Burlington, over the last two years to three years, we have been busy investing in our business to transform ourselves into a stronger off-price retailer. For example, we have invested in our merchandising capabilities, we have made major changes in our stores’ organization to be more flexible and off-price, and we have changed our new-store prototype to be more productive and efficient.

As I acknowledged in November, some of these initiatives are work-in-process. But the overall strategic direction is clear, we are working to transform ourselves into a stronger off-price retailer. So as we look beyond 2023, we are very excited. We believe that the combination of these factors, firstly, the potential dislocation and consolidation of traditional retail; and secondly, the transformation of Burlington into a stronger off-price retailer, could drive significant growth in sales, earnings and shareholder value over the next several years.

I would now like to turn the call over to Kristin to provide more details on our Q4 results and our 2023 guidance.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Thanks, Michael, and good morning, everyone.

Let me start with some additional financial details for the fourth quarter. Total sales in the quarter grew 5% while comp sales were down 2%. As Michael mentioned, our three-year geometric comp stack was a positive 4%. Comp sales and adjusted EPS came in above our guidance range. For Q4, our adjusted EPS was $2.96, which was above our guidance range of $2.45 to $2.75. The gross margin rate was 40.7%, an increase of 90 basis points versus 2021’s fourth quarter rate of 39.8%. This was driven by a 130 basis-point improvement in freight expense. It was partially offset by a 40 basis-point decline in merchandise margin. The decline in merchandise margin was primarily driven by higher markdowns as we move to sharpen our values as Michael discussed earlier in the call.

Product sourcing costs were $187 million compared to $159 million in the fourth quarter of 2021, increasing 70 basis points as a percentage of sales. This deleverage was primarily driven by higher supply-chain costs. We worked a higher mix of true closeout merchandise which is more labor-intensive to process. In addition, the movement in and out of our reserve inventory to chase the trend was less efficient and drove higher supply-chain expense.

Adjusted SG&A was $593 million versus $578 million in 2021, decreasing 50 basis points as a percentage of sales. This was driven by strong expense control and a lower bonus accrual. Adjusted EBIT margin was 10%, 80 basis points higher than the fourth quarter of 2021. Relative to our Q4 2019 adjusted EBIT margin, 2022’s fourth quarter adjusted EBIT margin declined by 340 basis points, driven entirely by supply chain and freight deleverage.

All of this resulted in diluted earnings per share of $2.83 versus $1.80 in Q4 of 2021. Adjusted diluted earnings per share were $2.96 versus $2.53 in the fourth quarter of 2021. At the end of the quarter, our comparable-store inventories were 32% above 2021. As a reminder, last year, as we came into the spring season, our store inventories were too lean and this hurt our sales trend in Q1. So the significant increase in our comparable-store inventories was by design. I should also point out that this is still well below pre-pandemic levels.

At the end of the quarter, our reserve inventory was 48% of our total inventory versus 50% last year. We are very happy with the quality of the merchandise and the values we have in reserve. In the fourth quarter, we opened 34 net-new stores, bringing our store count at the end of the quarter to 927 stores. This included 39 new store openings, five relocations, and no closings. For the full year, we opened 113 new stores while relocating 22 stores and closing four stores, adding 87 net-new stores to our fleet.

I will now move on to discuss our full-year 2022 results. Total sales decreased 7%, and comp-store sales decreased 13%. Our three-year geometric comp stack was flat. Our operating margin for the full year contracted by 370 basis points. Merchandise margin decreased by 110 basis points. Freight delevered by 10 basis points. Product sourcing costs delevered by 120 basis points, and adjusted SG&A delevered by 110 basis points versus full-year 2021.

Let’s now move to 2023 guidance. For the 2023 fiscal year, we expect total sales growth in the range of 12% to 14%. This includes an approximately 2% impact related to the 53rd week. We expect comp-store sales to increase in the range of 3% to 5% for fiscal 2023. And our adjusted EBIT margin to increase 80 basis points to 120 basis points versus last year.

Capital expenditures net of landlord allowances is expected to be approximately $560 million. This results in adjusted earnings per share guidance in the range of $5.50 to $6, an expected increase of 29% to 41%. This outlook includes an adjusted EPS contribution of $0.05 from the 53rd week. For the first quarter of 2023, we expect total sales growth in the range of 12% to 14%. Comp-store sales are assumed to increase between 5% and 7%.

We are expecting adjusted EBIT margins to increase in the range of 120 basis points and 150 basis points over the first quarter of 2022, which results in an adjusted EPS outlook in the range of $0.85 to $0.95.

I will now turn the call back to Michael.

Michael O’Sullivan — Chief Executive Officer

Thank you, Kristin.

Before we move to questions, let me recap some of the key points that we have covered this morning. We saw a significant and sequential improvement in our sales trend in Q4. We believe that this was partly driven by better execution, specifically our focus on sharper value, but also partly driven by an improvement in the external environment.

We are optimistic about the outlook for 2023. We are planning and managing our business for positive 3% to positive 5% comp sales growth, but we are ready to chase if the trend is stronger. Our number one priority in 2023 is to drive sales. On 3% to 5% comp sales growth, we expect to achieve 80 basis points to 120 basis points of margin expansion.

Longer term, beyond 2023, we are excited about the prospects for our business. We anticipate for the next few years we’ll see significant disruption and dislocation across retail. We are pushing forward with the transformation of Burlington into a stronger off-price retailer, and this should help us to take advantage of the opportunities this disruption may present.

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

Questions and Answers:

Operator

The floor is now open for your questions. [Operator Instructions]

Our first question comes from the line of Matthew Boss from JP Morgan. Please proceed.

Matthew Boss — JP Morgan — Analyst

Thanks and congrats on a great quarter. So, maybe first on your 2023 comp guidance, is there any additional commentary you can provide on the 3% to 5% comp range or how should we think about whether there’s potential upside to this range? And then I have a follow-up.

Michael O’Sullivan — Chief Executive Officer

Well, good morning, Matt. Thanks for the question.

As we developed our 2023 comp guidance, I would say that there was three — yeah, three main reference points that we used. Firstly, we looked at our own multiyear comparisons. I won’t drag you through all the numbers but we looked at our business on a one-year, a two-year, a full-year basis, and we then compared that data with the low-single-digit annual comp growth that we would historically have expected before the pandemic. So that was the first reference point.

Secondly, we looked at our off-price peers. Our comp performance last year was significantly inferior to theirs. Now, we recognize that that may have been partially driven by differences in customer demographics, but we believe that it was also driven by significant differences in execution. We know that we made mistakes last year. And in 2023, we certainly don’t intend to repeat those mistakes.

Thirdly, the third reference point, if you like, is that we looked at our most recent trend. Our Q4 comp sales were 4% ahead of 2019 levels. Our 2023 comp guide implies that comp sales this year would be 3% to 5% ahead of 2019 levels. In other words, our guide is consistent with Q4. And the one other data point that I would offer up though is that our quarter-to-date trend is running ahead of our Q1 guidance. And that trend gives us additional confidence in our comp guidance.

Now, the various points of reference that I’ve just described suggest that our comp guidance for 2023 is achievable. But it’s important to add that there are unknowns out there and there’s a lot of economic uncertainty, and we don’t know how that uncertainty will play out in 2023. I think I’ve said before that setting comp guidance is not an exact science, but in our business, that’s okay. If we manage our business flexibly, then if the sales trend is stronger, we know that we can [Technical Issues] by a trend.

So, I guess I’d sum it up by saying, we think our guidance is appropriate but we recognize there may be upside, and if there is, we are ready to chase it.

Matthew Boss — JP Morgan — Analyst

Great, thanks. And then maybe just a follow-up on your margin guidance. So, in the prepared remarks, I think you cited 80 basis points to 120 basis points of operating margin expansion on that 3% to 5% comp range, what are the key drivers of expansion? And again, is there a way to think about potential upside to this forecast as well?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Hi, Matt. Good morning. Thanks for the question.

You’re right. For the full-year 2023, we’re guiding a 3% to 5% comp growth, 12% to 14% total sales growth, that includes the 53rd week. And on that 3% to 5% comp growth, as you said, we’re modeling 80 basis points to 120 basis points of operating margin expansion. This really comes from three main sources: Higher merchandise margin, lower freight cost, and leverage on fixed expenses.

So, let me speak quickly to each of these items. On merchandise margin, given the extremely strong off-price environment, we believe we should be able to see some increase in merchandise margin. But as Michael said in the prepared remarks, our number one goal this year is to drive sales and that will mean passing along values to our customers. So, in other words, while we do expect an increase in merchandise margin, we’re not intending to maximize this increase. Our intent is to prioritize sales comp growth.

The second item I mentioned is the lower freight expenses. So, we’re up against extraordinarily high freight costs from last year, particularly in the first part of the year, and we expect to see lower freight expenses, and especially in Q1 and Q2.

And the third source of margin expansion is the leverage on store fixed expenses like occupancy. Of course, some of this will depend on the level of comp sales, which is yet another reason why we’re focused on the top line. There are also headwinds built into our 2023 guidance. These include limited or less improvement in supply chain, given that increased mix of true closeout merchandise, and also the reset — resetting of incentive comp, assuming that we hit our plan.

For 2023, I would like to stay away from specific line item guidance, and the reason is, this year, our overriding strategy is to drive sales. We recognize that means we need to be flexible. So depending on how the year unfolds, there may be times in the year we might want to sharpen our values to further drive sales, which could drive a slightly lower merchandise margin but greater leverage on fixed expenses.

So to recap on the 3% to 5% comp growth, we expect to achieve 80 basis points to 120 basis points of operating margin expansion. We believe this will come from three primary sources: merchandise margin, freight and leverage on store fixed expenses. But the contribution from each of these will really depend on how the retail and competitive environment unfolds this year.

Operator

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

Jesse Sobelson — Wells Fargo Securities — Analyst

Good morning, everyone. This is Jesse Sobelson on for Ike.

Congratulations on your improved trend in Q4. I just have a couple of questions. Firstly, I’m wondering whether the improved trend means that the merchandising mistakes that you described back in November are now behind you? And then I’ve a follow-up for Kristin.

Michael O’Sullivan — Chief Executive Officer

Good morning, Jesse.

I think to answer that question and as much as I hate to do this, let me start by describing the specific execution mistakes that contributed to our performance last year. If I was to share our internal postmortem, I would say that there are — those mistakes fell into three main areas. Firstly, given the uncertain environment, as we came into 2022, we deliberately planned inventory levels conservatively. This was a year ago. And those conservative inventory levels backfired on us. Like many other retailers, in the first — certainly in the first quarter of last year and coming into the first quarter of last year, we experienced significant receipt volatility and delays. And those delays meant that we just ended up with too little on-hand inventory in our stores. And that really undermined our sales trend.

The second thing I would say is, in 2021, going back to 2021, we were reluctant to push up prices. Many other retailers at the time were talking about raising retails. We were reluctant to do that, but then as we came into 2022, I think we kind of questioned ourselves and said, well maybe we’re wrong, maybe we should start pushing up prices. So, we added higher retails into our 2022 plans to really sort of happen in the summer and into the back half of the year.

Now, in retrospect, with the impact of inflation on our core customer and with the higher promotional activity across retail, that was just not a good time to be raising prices. As we got into the fall season, we realized that, we began to unwind those increases. Now, we should have done that sooner. But anyway, it hurt our sales, especially in Q3, I would say.

Thirdly, in 2022, there were some huge shifts in the types of merchandise that the customer was interested in buying, and across our business, we didn’t do a good enough job reacting and responding to those trends and those shifts. So those were the three — sort of three big buckets of mistakes that we think we made last year.

And to answer your question on a tactical level, I would say, yes, we believe those issues are behind us. We worked to correct the inventory and the receipt issues that we ran into last year and we’ve significantly sharpened our values, and we’ve shifted our assortment into the categories that we believe the customer is most interested in buying. And I think all of those changes paid off and really contributed to our stronger trend in the fourth quarter.

I do want to just sort of go a little bit further though in answering your question and just sort of take a step back and maybe put those mistakes, if you like, in a bigger strategic context. And I talked a little bit about this on our call in November. I think it’s important to understand that over the last few years, we’ve been doing a lot to transform our business. In particular, we’ve invested heavily to strengthen our merchandising capabilities.

Since 2019, we’ve hired or promoted tremendous talent, and we’ve developed and we’re rolling out many, many new tools and processes for our merchants. Our buying team is now about 50% bigger in terms of headcount than it was in 2019. Now, we know that merchandising is how you win in off-price. So, we’ve assembled all the key ingredients, very experienced stock price merchant leadership, tremendous buying talent, improved buying and planning processes and new tools, training and reports. We’ve moved very fast, we had to, we were playing catch-up.

Now, as those — as they gel, those investments, in my view, are going to drive our growth and success over the next few years. But — I have to acknowledge the mistakes we made in 2022 demonstrate that this is a work-in-process. So I’m pleased that we corrected our mistakes and turned around our performance towards year-end. But we really need to be able to move faster and with greater consistency than we did last year.

Jesse Sobelson — Wells Fargo Securities — Analyst

Okay, great. Thanks for the detail there. My second question is for Kristin. Can you provide any more detail on the margin puts and takes for Q4, for example, what impacts did incentive comp have on the quarter? Thank you.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, Jesse. Thanks for the question.

Overall, we’re pleased with our fourth quarter results, particularly the improvement in our comp-store sales trend and that momentum that built during the quarter and continued into February. But as you noted, the flowthrough on those incremental sales was not as strong as is typical for us, and that was primarily due to higher supply-chain expenses.

At a high level, our gross margin was pretty much where we expected. As you look at the combination of 130 basis points of freight improvement, more than offsetting slightly lower merchandise margins, which was driven by higher markdowns as we moved to sharpen values, as Michael noted. Product sourcing costs did delever, somewhat more than we expected, which was primarily due to 60 basis points of supply chain deleverage.

Now, on adjusted SG&A, that leverage, 50 basis points, and excluding the incentive comp adjustment, the adjusted SG&A rate would have been flat to the fourth quarter last year, which is still fairly strong expense control given the negative comp in the quarter.

Jesse Sobelson — Wells Fargo Securities — Analyst

Great.

Operator

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

Lorraine Hutchinson — Bank of America — Analyst

Thanks. Good morning.

Kristin, in the prepared remarks, you called out supply chain expenses as unfavorable. What drove this? And how should we think about these costs going forward?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, Lorraine. Thanks for the question.

I’d like to separate out two different factors that have contributed to higher supply chain costs at Burlington over the last few years. The first is there is a big piece of our higher supply chain costs that we should call externally driven. So over the last few years, there has been significant inflation in distributions in our wage costs, and then of course, delays and volatility in global supply chains, which have caused DC operations to be less efficient.

This is not unique to Burlington. Other retailers, particularly those with lower average unit retails have faced these similar pressures. And we believe some of these higher costs, especially the higher wage rates are likely here to stay. But we expect as global supply chain conditions continue to normalize, we should be able to drive some efficiencies and savings here.

But the second factor is really on supply chain, it’s really more specific to Burlington. Over the last few years, we’ve changed the mix of type of buy in our business. We now buy a much higher proportion of true off-price goods. And this shift in that buy-type mix in Q4 was even more extreme as we took advantage of fantastic opportunistic off-price buys. And these deals, these buys are much more complex to process and have a higher work content in our DCs.

We also heavily utilized reserve inventory in the quarter as we took advantage of opportunistic buys and to chase the trend. So, those are the factors that drove up our supply chain expenses in Q4. And as we look forward, we do expect to maintain a higher mix of true off-price merchandise than we have historically, so it may not be as extreme as it was in the fourth quarter.

And the final point to make here is that we know we have opportunity in supply chain, we have work to do. Our distribution centers, the systems, the processes, were not originally designed, and really were never optimized with off-price in mind. So in the last few years, we are working hard to take actions to make our supply chain more flexible, more efficient, and more off-price. But we have more work to do here, and there are some of these changes that are going to take time.

Lorraine Hutchinson — Bank of America — Analyst

Thanks. And then, Michael, it sounds like the buying environment has been very strong. What do you think will happen to merchandise availability as we move further into the year? And how will that impact the business?

Michael O’Sullivan — Chief Executive Officer

Well, good morning, Lorraine.

I would say that the availability of off-price merchandise has been very strong over the last five months, six months. And — I think we’ve heard that reported elsewhere as well. I would also say that I think our merchants have done a really good job leaning into that availability. We’ve made sure that we’ve controlled liquidity, so we’ve been able to take advantage of some really great deals.

Now, it’s not difficult to understand why the off-price buying environment has been so strong in that period. In early 2022, we started to see a surge in supply as transportation bottlenecks finally began to clear, and that surge in supply then coincided with a weakening in consumer demand across retail as the year went on. Not surprisingly, too much supply, too little demand, equals off-price availability, and that’s what’s happened.

But there are couple of other points that I’d like to make about merchandise supply. Firstly, as the third largest off-price retailer, this supply environment has given us the opportunity to open up new vendors and resources, and to deepen relationships with existing vendors. We’ve worked very hard to partner with vendors to help them move excess inventory over the last few months. Our buyers have been very, very focused on that. We’ve been very responsive to vendors. And I think those new and expanded relationships are going to be very valuable to us, strategically, over the longer term.

The second point to make is, our expectation is that the buying environment is likely to remain fairly strong well into 2023, especially if the economy slows down and demand continues to soften. When you look at off-price availability over a longer time period, I think the real aberration is not how strong supply has been over the last six months. There have been plenty of times like this in the past. The real aberration is how constrained supply was between mid-2020 and early to mid 2022. Now — those constraints during that two-year period were driven by global supply chain issues coming out of the pandemic. We really hadn’t seen those before.

So, we think it’s possible that the strong merchandise availability that we’ve seen in the last six months, it may just herald a return to normal.

Lorraine Hutchinson — Bank of America — Analyst

Thank you.

Operator

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

John Kernan — TD Cowen — Analyst

Good morning, Michael, Kris and David.

So, [Speech Overlap] first question’s just on [Technical Issues] your operating margin. Previously, you said that you thought you get back to the 2019 operating margin of 9.4% within the next few years. Can you just talk to the path we’re getting back to those levels? And I just have a follow-up after that.

Michael O’Sullivan — Chief Executive Officer

Yeah, good morning, John.

It’s a good question. Once we get through 2023, we plan to provide an update on our long-range financial plan and that will include a multi-year forecast for operating margin. Frankly, for that update to have credibility, we have to get through 2023 first. But in the interim and to try and answer your question, let me offer up some comments to illustrate what kind of things might be in that plan and how are we thinking about operating margin.

So I’ll start with the data. So, our operating margin in 2022 was 430 basis points below our 2019 levels. If you — you can break out that variance into four main components, four main buckets. Firstly, merchandise margin. Now, merchandise margin in 2022 was actually about 50 basis points higher than it was in 2019. And that was driven by a higher mix of off-price merchandise, and faster, much faster inventory turns.

Now, the environment in 2022, as we said, was very promotional. And that meant that we really had to sharpen our values. And that negatively impacted merchandise margin in 2022. In fact, not to confuse everyone, but although our merchant margin was up 50 basis points in 2022 versus 2019, it actually fell by about 110 basis points versus 2021. So, we look at that term [Phonetic] numbers and we think there’s upside to margin over the next couple of years, and we believe we have an opportunity to get back closer to the 2021 levels.

Now that said, and Kristin emphasized this point, in the near term, we want to be very careful about how aggressively we go after that. As we’ve said on this call, our priority in 2023 is really to drive sales rather than to maximize margin. Anyway, that’s the first sort of driver of variance versus 2019. The second driver of margin variance in 2022 versus 2019 was higher freight expense. Those expenses were 180 basis points higher than 2019, and the lion’s share of that increase was driven by external freight rates.

Now, we expect to recover a significant proportion of that deleverage as freight rates normalize in the next couple of years. And as we mentioned earlier, we’re starting to see some of that. The third source of variance is higher supply chain expenses. Again, in 2022 versus 2019, those were 230 basis points worse. As global supply chains begin to normalize, we fully expect that the timing of receipt flows will become more predictable and more reliable. And we believe that a slowing economy will dampen labor costs and turnover in our distribution centers. And those two factors could drive some savings in supply chain expenses.

But we’re being a little cautious there, because as Kristin said a moment ago, some of the higher-cost versus 2019, we believe, have been driven by the shift in our business to becoming more off-price, and it’s going to take a bit longer to address those costs.

The fourth sort of source of operating margin variance since 2019, I’m going to call all other expenses. Now, all other expenses delevered by about 70 basis points in 2022 versus 2019. Now, that bucket includes some areas of the business where we’ve actually driven greater efficiency, but those savings have been more than offset by deleverage on fixed expenses, especially fixed store expenses like occupancy. And that deleverage is not a surprise it’s — is the result of a flat comp, essentially flat comp sales over a three-year period.

So that’s another reason why our priority in 2023 is to drive the top line. The more we can drive sales and the more leverage we can [Technical Issues] on those [Technical Issues] at this. So, I guess to bring my answer back into one place, I guess, our path back to 2019 margins is likely to have four main components. Number one, a focus on higher sales, especially in 2023. Higher sales drive leverage. Number two, lower freight expenses as external rates normalize in the next couple of years, and we’re starting to see that happen. Number three, higher merchant margin as the highly promotional environment of last year begins to recede. Number four, supply chain efficiencies, but for the reasons we’ve outlined. Some of those may take a little bit of time.

And let me sort of finish up with just one final point. The question you asked was, how will we get back to 2019 margins. Now, we feel good about the levers I’ve just outlined, but we don’t regard 2019 margins as our final destination. We still believe that we can drive operating margin beyond 2019. Now, also the key premise of Burlington 2.0 is that we can drive stronger sales productivity with lower inventory levels and in a smaller store format. By doing all those things, we believe we can drive our operating margin above historic levels, and thereby start to close the gap versus our off-price peers.

John Kernan — TD Cowen — Analyst

That’s a lot of detail and great color, Michael. Thank you. I guess, Kristin, inventory levels at the end of January were up a decent amount versus last year, but you may have been under-inventoried last spring. Is there any additional commentary you can provide on inventory? And how should we think about inventory levels as we get further into 2023?

Kristin Wolfe — Executive Vice President and Chief Financial Officer

Good morning, John. Thanks for the question.

Yes, you’re right. Our comp-store inventories were up 32% at the end of January. And as you noted, and I think Michael responded to Jesse’s question, last year, we were under inventory at this time, at the end of Q4. At the end of Q4, last year, we were down 30% versus 2019. And so when you adjust these numbers for compounding, this means our comparable-store inventories are still well below pre-pandemic levels.

Last year, the combination of conservative sales and inventory plans, plus significant receipt disruptions and delays meant that our in-store inventories in February and March were well below where they needed to be. But by April, they hadn’t recovered but this situation undermined our sales in Q1, as Michael described earlier.

So this year we deliberately increased inventory levels coming into the quarter. That’s what’s driving that 32% increase. And as we get into April, our comparable-store inventory should be more in line with 2022. And as we move through the rest of this year, there may be variations by month that inventories will be similar to last year.

And that was store inventories but let me shift quickly to talk about reserve inventories. A moment ago, Michael described how over the last couple of years, we’ve become more off-price in terms of the types of merchandise we buy, and a key enabler of this is how we used and expanded our reserve inventory. This provides us with the ability to take advantage of great opportunistic deals. Even on merchandise, this does not make sense to flow to stores right away.

At the end of 2022, our reserve inventory was significantly higher in dollar terms than it was last year. And this reflects the great — the great buys our buyers have found. We feel very good about the values in the branded content we have in reserve. And this should help us fuel our sales trend this year.

John Kernan — TD Cowen — Analyst

Got it.

Operator

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

Mark R. Altschwager — Baird — Analyst

Good morning. I appreciate the question and great to see the improvement.

Are there any particular categories that drove the upside that you delivered into the fourth quarter? And as the sales trends have continued into January and February, just any underlying shifts you’re seeing in consumer behavior? Thanks. And then I have a quick follow-up.

Michael O’Sullivan — Chief Executive Officer

So, good morning, Mark.

Yeah, in terms of categories, I would say for the fourth quarter as a whole, our footwear and our accessories businesses were our strongest performers. But I think it’s important to call out that the improvement — the sequential — month to month sequential improvement that we saw through Q4 actually was fairly gold based and happened across all of our major businesses. Everything got better.

And I think that’s mainly because when I — when I go back and think about the key merchandising strategies that we really turned towards in the back half of last year, in particular, the focus on value, we did that across all businesses. So that’s why I think we saw the improvement across all businesses.

Mark R. Altschwager — Baird — Analyst

Thank you. And then with respect to the store opening plans, a bit lower than you had signaled previously, how quickly do you think you can ramp new stores as availability increases? And are you seeing or hearing any indications that availability could increase more than you’re currently expecting through 2023? Thank you.

Michael O’Sullivan — Chief Executive Officer

Sure. So we — our real-estate process is fairly rigorous. We have a very strong real estate team. And we have — like I said, a very rigorous process for identifying and evaluating new store locations. We look at hundreds of potential sites to build up our pipeline for the year ahead. And as we looked at the sites that are available to open in the next 12 months, we believe that there are 70 to 80 net-new store locations that sort of meet or beat our hurdles. And our hurdles in terms of being EBIT accretive and having a strong return on investment are pretty high.

So, as I said in the remarks, that 70 to 80 net-new stores, is it lower than we would like, but — obviously, we’re not going to compromise our hurdles to hit a number. Ideally, we’d like to open another 20 or 30 or even more if we had the locations. Now, I would say that the — [Technical Issues] outlook for the next 12 months, but with new store openings, it’s important to look further out, and that’s where we see significant opportunity.

As I mentioned in the remarks, we think that over the next few years, there could be a wave of retail consolidation among bricks-and-mortar retailers. You know that wave was kind of happening pre-pandemic. And then, I think, in the last three years, it’s been slightly dampened by the sort of — by the rollercoaster that’s happened in terms of retailer sales and margins going up and then down. I think as things normalize, we may get back to additional retail consolidation.

Now, the reason why I’m focusing on retail consolidation, and I think most investors probably realize this, but for us, the biggest source of new store locations comes from other retailers closing stores. So, many of our most productive locations were formerly Stuck at City [Phonetic] or ToysRUs or Sports Authority, or Linens ‘N Things. In other words, if there’s an increase in retail bankruptcies then that’s going to drive real-estate opportunities and new store opening opportunities for us.

Mark R. Altschwager — Baird — Analyst

Thanks for all the color.

Michael O’Sullivan — Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Adrienne Yih from Barclays. Please proceed.

Adrienne Yih — Barclays — Analyst

Great. Let me add my congratulations. It’s great to see the progress.

Michael, most of my questions have been asked, but I did not notice a return to pretty aggressive primetime television in January and then February quarter-to-date. So, I’m wondering kind of what the advertising strategy is within the outlook for 2023? And clearly, it seems like it is converting and driving traffic to the stores to get a quick thought there.

And then on the — for Kristin, on the reserve inventory, is that more short-stay that can be deployed sort of intra-season, Q1, Q2? Or is that more kind of long-stay — winter to winter. Thank you so much.

Michael O’Sullivan — Chief Executive Officer

So, Adrienne, on the marketing question, we are very excited about our marketing programs. We — in the last — in the last few years, I would say, we’ve been moving to a much harder-hitting value message with our advertising. And we think that that value message is going to really resonate in 2023. If we’re right that the economy is going to slow down and that the consumer is going to be more value-conscious, then I think our marketing is really going to speak to them, and it’s really going to help to further enhance the traffic coming into our stores.

Now, I do think that the most important thing in our business is when the customer comes into the store, we can’t disappoint them. We have to have the value in the store. And if you’d asked me last summer, I would have said I’m less confident about that. As we move into 2023, I feel like what we have — have to offer in the store is much more compelling. And I think our marketing, if we’re able to drive more traffic into the store, is really going to sort of — is really going to work well for us in 2023.

Kristin Wolfe — Executive Vice President and Chief Financial Officer

And then on your question on reserve inventory, as I noted, we feel really good about the values and the content in our reserve. It’s certainly a mix of short-stay and pack-and-hold, and we also measure it in terms of the percent of wow value and branded penetration, so we feel really good about the contents of the reserve from kind of all of those measures.

Adrienne Yih — Barclays — Analyst

Very helpful. Thanks so much and best of luck.

Operator

Our final question comes from Chuck Grom from Gordon Haskett. Please proceed.

Chuck Grom — Gordon Haskett — Analyst

Hey. Thanks very much. Great execution.

My one question is on the buying team. I know you’ve increased the organization a lot over the past few years and I’m curious if the team now is in a good place, or are you still upgrading talent and new capabilities? And as a follow-up, given there’s a natural learning curve to adding somebody, new employees to the team, how should we think about the benefits of improved sales and profitability from that asset over the next couple of years? Thank you.

Michael O’Sullivan — Chief Executive Officer

Sure. Well, good morning, Chuck. Thanks for the question.

Yeah, we — as I mentioned in the earlier comments, we’ve really ramped-up investment in our merchandising organization over the last three years. Just the raw numbers, our headcount — our merchandising headcount is about 50% bigger now than it was in 2019. Now — and actually, if you peel back the onion on that — there — it wasn’t — it’s not 50% higher in every business. There are some businesses, especially our fastest-growing opportunity businesses where the headcount growth is higher than 50%. And obviously, some businesses where it’s less.

So that’s a lot of newness, that’s a lot of — newness, a lot of investment in the organization. Now, I should add that it’s actually pretty consistent with what we’ve said for years now. I think on — on a similar call like this, three years ago, I probably would have said that we would have increased merchant headcount by about 15% a year for the next three years, and that’s kind of the way it’s worked out. Now — to pivot to being forward-looking for a minute, I would say that most of the heavy lifting in terms of expanding our merchant team is now behind us. That’s not to say that we won’t add talent opportunistically, we will. And there’s certainly some areas of our business where we see some opportunities for that. But the big increase — the big expansion has already happened.

But let me move away from headcount and just talk about — how our merchandising organization operates because I feel like, in the last few years, we’ve added headcount and we’ve definitely leaned into the main principles of off-price, more so than we ever had in the past. So, we’re turning inventory much faster, we’re chasing sales much more aggressively, we are controlling liquidity much more tightly, we’re buying opportunistically. Things that maybe we did historically, but we’re doing them to a much greater extent now. But I would say that we’ve leaned into being off-price without necessarily having all the tools and the processes that our peers have and we’ve been addressing that.

Over the past couple of years, we’ve been developing a lot of those off-price tools, reports, capabilities. And we’re rolling out many of those and we’ve started rolling them out, and over the next 12 months, 18 months, we’ll roll more of them out. So, I do think that there is a dividend that’s yet to come in terms of the investment we’ve made in merchandising. I feel like we should be able to drive sales growth and margin growth over the next few years. I’m very confident that this strategic asset that we’ve built in merchandising is going to pay dividends for us.

Chuck Grom — Gordon Haskett — Analyst

And then, Michael, just as a quick follow-up, can you touch on the technology investments? I guess, what have you done and what’s left? Because I think that’s a key part of the ingredient being able to leverage the buying team that you’ve added over the past couple of years.

Michael O’Sullivan — Chief Executive Officer

Yeah, no, it’s absolutely right, Chuck. We — I — when I joined Burlington, I was very nervous that I was going to walk in and find lots of antiquated systems in Burlington. And actually, that wasn’t the case. What I found was systems that were pretty up-to-date. What I did find though that those systems hadn’t necessarily been configured with off-price in mind. They’d been configured with a much more department store sort of pre-planned approach to buying.

So what we’ve really done over the last three years is sort of change how we can configure those systems, but also that drives how — our planning processes and our buying processes, and it drives the need for those systems to generate different reports that look at different aspects of the business. So that’s really the path we’ve been on.

Thankfully, as I say, we haven’t had to sort of tear out the old systems and bring in new systems, it’s been more about re-configuring the systems that we have. Now obviously, to do that right, you have to take a step back, and you have to sort of say, well, let’s understand our business needs, what are we trying to do. So there was a lot of sort of user requirements, business requirements work that was required. But that’s all behind us now, and we — we’re at the stage where we are actually rolling out new tools, new processes across the buying and planning organization.

Operator

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

Michael O’Sullivan — Chief Executive Officer

Let me close by thanking everyone on this call for your interest in Burlington Stores. We really look forward to talking to you again in May to discuss our first-quarter fiscal results. Thank you for your time today.

Operator

[Operator Closing Remarks]