Rising competition from new and existing competitors will limit additional upside. Furthermore, Burlington's aggressive financial accounting, and declining disclosures are signaling a slowdown of earnings and cash flow growth. The Company's management team has been associated with numerous retail failures and accounting debacles including Kohl's, A.

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Newly uncovered financial documents received from FOIA requests support our suspicion that Burlington's financials reflect extremely aggressive accounting and declining unit economics. Spruce Point Capital Management is pleased to announce it has released the contents of a unique short idea involving Burlington Stores, Inc. We have conducted an extensive forensic financial review of the Company, and have obtained unique documents obtained from Freedom of Information FOIA requests, which suggest accounting irregularities and deteriorating unit economics.

As a result, we have a "Strong Sell" opinion detailed extensively in our presentation, which due to its size, is only fully accessible on our website. We also encourage all of our readers to follow us on Twitter Sprucepointcap for exclusive research updates.

Please carefully review our Disclaimer at the bottom of this email. Burlington "BURL" or "the Company" Is An Old School Retailer Now Being Spun As A Sexy New Growth Story Amidst An Intensifying And Ultra Competitive Retailing Environment.

Burlington Has Been Touting Impressive Comparable Store Sales "CSS" , Gross Margin, And EPS Gains, While Shrinking Same Store Inventory.

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We Don't Think It Can Last. Spruce Point Has Identified Numerous Financial Presentation, Accounting, And Business Issues That Could Be Signaling A Slowdown in Future Financial Results. Our average store size is approximately 80, square feet, occupying significantly more selling square footage than most off-price or specialty store competitors.

Major landlords frequently seek us as a tenant because the appeal of our apparel merchandise profile attracts a desired customer base and because we can take on larger facilities than most of our competitors.

In addition, we have built long-standing relationships with major shopping center developers. CEO on Q3'13 Earnings Call: CEO on Q4'14 Earnings Call: As far as what our future looks like in terms of 60, square foot stores or less, we opened 11 in Our average was slightly over 60, square feet. In '14, we're looking at an average of around 61, square feet. So just to remind you, the average was around 80, square feet, and we're really looking at stores that are 50, to 60, square feet in terms of size.

We just feel that they're going to be much more productive. CEO on Q1'16 Earnings Call: Yes, we're really comfortable with stores in the 40, to 50, range.

Last year, as I said in prepared remarks, so this year, as I said in the prepared remarks, the average is around 51, square feet, it will be less than 50, square feet in terms of the new stores that we will open in ". BURL's decision to shrink its sqft is noteworthy. According to old SEC filings, it considers modified stores as "new stores" which could inflate its comp store sales metric by allowing it to drop mature stores from the comp base, and then re-include them as new.

Its comp base will have an apples-to-oranges problem a mix of different format stores. Source , Q, p. It then dropped its discussion about how it treats modified stores from SEC filings post January , but did not conclusively say it changed its treatment of modified stores. As a result, our definition of comparable store sales may differ from other retailers. As an indicator of potential strain, recent sales growth rates have rapidly diverged from accounts receivables growth.

This type of divergence is a classic red flag.

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Burlington also bought-in its fragrance category, which allowed it to boost its comps. Burlington presents its gross margin, a key performance indicator, in a non-standard way, by excluding store occupancy costs and depreciation of certain fixed assets. There are other subtle indicators that support the view that management is obfuscating store unit economics.

Former CFO Weyhrich , Dec In every single SEC filing since its IPO, Burlington made the statement that a vast majority of stores had positive Adjusted EBITDA. Recently, Burlington changed its position and no longer makes this affirmative statement in its SEC filings. Maintaining Focus on Unit Economics and Returns. We have adopted a market-focused approach to new store openings with a specific focus on maximizing sales while achieving attractive unit economics and returns.

By focusing on opening stores with attractive unit economics, we are able to achieve attractive returns on capital and continue to grow our margins. We believe that as we continue to reduce our comparable store inventory, we will be able to reduce the square footage of our stores while continuing to maintain our broad assortment.

Q1' Q , p. We have adopted a market focused approach to new store openings with a specific focus on maximizing sales while achieving attractive unit economics and returns.

This focus is demonstrated by the fact that the vast majority of our existing stores had positive Adjusted EBITDA for Fiscal By focusing on opening stores with attractive unit economics we are able to achieve attractive returns on capital and continue to grow our margins. Source 10K , p. Spruce Point Has Analyzed Burlington's Real Estate Strategy, Its Accounting Implications And Has The Following Observations: Our recent store visits left us with the impression that stores were unoptimized.

With comp store inventory declining, existing and new competitors rapidly entering the discount segment, Burlington may be challenged to sustain recent performance. In Our Opinion, The Crux Of Burlington's Financial Stains Can Be Seen By Closely Evaluating Its Inventory Accounting, Pack And Hold Inventory Strategy, And Inventory Turnover. Annual Report , Fiscal Year Ended May Inventory Turnover Definition Changed April before IPO Source: The calculation is based on a rolling 13 month average of inventory and the last 12 months' sales.

Our annualized comparable store inventory turnover rate exclusive of warehouse inventory increased to 3. Post IPO, the Company stopped disclosing turnover inclusive of warehouse inventory very important given increase in pack and hold strategy shift: The calculation is based on a rolling 13 month average of inventory and the last 12 months' comparable sales. Our comparable store inventory turnover rate exclusive of warehouse inventory increased to 4.

Through Q3 , Burlington regularly disclosed inventory turnover calculations on a quarterly basis: Our annualized comparable store inventory turnover rate exclusive of warehouse inventory as of November 1, and November 2, was 4. The decrease was primarily driven by a comparable store inventory decrease of One Year Later, in the Q3'15 Press Release , Burlington Revised Pack And Hold Percentage Downward Without Explanation.

Here's why the math doesn't add up: Spruce Point Has Obtained Bona Fide Documentary Evidence Which Suggests Extremely Aggressive Accounting At Burlington, And May Explain Why Its Audit Committee Recently Adopted A Clawback Provision Covering Acts of Fraud.

Significant Recent Turnover In Management, While Remaining Members of Burlington's Management Team In Key Financial, Accounting And Operational Roles Have Worked At Retailers Plagued With Accounting And Operational Issues. With Burlington's Share Price Near All-Time Highs, And Bain Capital Cashed Out, Management Is Selling Stock Fast. Burlington's Shares Are Priced For Perfection, Leaving Little Room For Error If We Are Even Remotely Correct.

Goldman Sachs Conf Sept 9, Next year is probably going to be higher than that only because we continue to add capacity and efficiencies to our distribution centers. So, we see a little bit more next year. But that's the one area that we see a continual spend in. Burlington's Operational Efficiency Vastly Lags Peers And We Believe It Will Be Costly To Bridge The Gap.

This research expresses our investment opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in our complete research presentation report on our website.

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Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained herein may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC's control.

This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC's research is at your own risk.

Any historical performance achieved from any idea or opinion from Spruce Point Capital Management should not be considered an indicator of future performance. You should do your own research and due diligence before making any investment decision with respect to any of the securities covered herein.

Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC.

However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of Burlington Stores, Inc.

Therefore, such information contained herein is presented "as is," without warranty of any kind - whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

This document may not be reproduced or disseminated in whole or in part without the prior written consent of Spruce Point Capital Management LLC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.

I have no business relationship with any company whose stock is mentioned in this article. Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks. Spruce Point Capital Management. Report Entitled " Broken Heart, No Love For Burlington " Spruce Point Capital Management is pleased to announce it has released the contents of a unique short idea involving Burlington Stores, Inc.

Our Report Will Critically Analyze The Historic Price Rise In Burlington Current Valuation And Leverage - High For A Commodity Retailer Burlington "BURL" or "the Company" Is An Old School Retailer Now Being Spun As A Sexy New Growth Story Amidst An Intensifying And Ultra Competitive Retailing Environment Burlington Stores formerly Burlington Coat Factory is an "off-price" discount retailer based in Burlington, NJ that sells men's and women's clothing, home furnishings, and accessories.

It competes with the likes of TJX Companies NYSE: Maxx, Marshalls , Ross Stores NASDAQ: ROST , Wal-Mart NYSE: WMT , Target NYSE: TGT , Stein Mart NASDAQ: SMRT , Kohl's NYSE: KSS and countless other retailers offering shoppers a discount to the M.

Toys R'Us , Guitar Center , Gymboree , Michaels Stores , Bain Capital seized the opportunity to re-IPO Burlington in Its IPO prospectus touted various growth opportunities to excite new investors including: However, in the brutally competitive retail business fortunes can change fast, and we believe investors are under-appreciating risks being signaled Burlington is planning to open just 25 stores per year, and is competing with bigger and new entrants looking to grow faster.

Traditional dept stores are now going down market to compete with the off-price retailers. Of course, Amazon continues to take share from all traditional apparel retailers, and the ones with limited ecommerce strategies are particularly exposed.

Spruce Point Has Identified Numerous Financial Presentation, Accounting, And Business Issues That Could Be Signaling A Slowdown in Future Financial Results At IPO, Burlington touted the advantages of its large stores 80k sqft. Now, the story keeps changing; it repeatedly talked down its optimal store size format k, now k.

In our opinion, this may create and apples-to-oranges problem for its comp store base "Our larger store size has allowed us to offer more categories and substantially more breadth in each product category than our off-price competitors and to establish ourselves as a destination for select categories , including coats, youth and baby, special-occasion dresses and men's tailored apparel. Last year, as I said in prepared remarks, so this year, as I said in the prepared remarks, the average is around 51, square feet, it will be less than 50, square feet in terms of the new stores that we will open in " BURL's decision to shrink its sqft is noteworthy.

Burlington also bought-in its fragrance category, which allowed it to boost its comps Burlington presents its gross margin, a key performance indicator, in a non-standard way, by excluding store occupancy costs and depreciation of certain fixed assets.

Former CFO Weyhrich , Dec In every single SEC filing since its IPO, Burlington made the statement that a vast majority of stores had positive Adjusted EBITDA. Recently, Burlington changed its position and no longer makes this affirmative statement in its SEC filings Recent Statement on Unit Economics Since May Maintaining Focus on Unit Economics and Returns. Pre-IPO, Burlington touted the benefits of its large store format.

It appears to have benefitted from the ability to negotiate large lease incentives from landlords. Deferred lease incentives accrue on the balance sheet, with incentive amortization running as a credit against rent expense, ultimately benefitting EPS. Burlington also runs changes in deferred rent incentives as an increase to operating cash flow.

Burlington's move towards a smaller store format, and a more competitive real estate environment may hinder its ability to secure lease incentives. Its accounts are signaling a slowdown of EPS and cash flow benefits from incentives. Accrued deferred lease incentives bottom chart are now declining, and net operating cash flow benefits from rent incentives recently turned negative top chart Warning: Burlington Doesn't Disclose Pre-Opening Expenses Pre-opening costs of new stores should be expensed to the income statement.

Burlington does not disclose these expenses, and we worry they are being capitalized on its balance sheet to inflate its earnings Recent Store Visits Show Unoptimized Space Our recent store visits left us with the impression that stores were unoptimized. In Our Opinion, The Crux Of Burlington's Financial Stains Can Be Seen By Closely Evaluating Its Inventory Accounting, Pack And Hold Inventory Strategy, And Inventory Turnover The Company uses the retail inventory method, which is open to significant management judgment and estimates including merchandise markon, markups, markdowns and shrinkage aka loss of inventory from theft which significantly impact the ending inventory valuation as well as the resulting gross margin Source: Burlington's definition of inventory has changed frequently and it currently uses a non-standard inventory turnover calculation, stopped disclosing turnover inclusive of warehouses where pack and hold inventory resides , and recently stopped disclosing the annualized quarterly metric mid Annual Report , Fiscal Year Ended May "Inventory turnover is calculated by dividing the retail sales by the average stock for the period being measured" Inventory Turnover Definition Changed April before IPO Source: In our opinion, the strategy provides management opportunity to manage gross margins and boost turnover.

We identified a misstatement of its pack and hold inventory value in Q3'15; at best an error, at worst accounting manipulation Pay very close attention to the text below. Burlington retroactively revised its disclosure for pack and hold inventory; at best an error, at worse evidence of weak controls over financial reporting and accounting manipulation.

Also, remember that Burlington excludes buying and distribution costs from gross margin and that it stopped disclosing inventory turnover inclusive of warehouses which is where pack and hold inventory resides. In July , Burlington received state tax incentives to retain and create jobs in NJ, and to build a new , sqft corporate office. To our disbelief, we found that Burlington legally sold the credits to Citigroup in August Q3'15 , yet booked the transaction to income in Q1' This appears to be a blatant violation of GAAP, which dictates recording transactions in the period they occur In our opinion, Burlington's motivation appears clear: In February , Burlington's Audit Committee added a compensation clawback provision for management, " in the event of a financial restatement or significant financial harm to the Company arising out of willful actions, including without limitation fraud or intentional misconduct to cover fraud and financial misstatement.

Proxy Statement , p.

CFO Todd Weyrich in Jan for "personal reasons" while guidance was increased, EVP and Chief Merchandising Officer quietly resigned via an 8-K filing in March to "pursue other interests" and long-time General Counsel Paul Tang quietly departed in July He was replaced by Janet Dhillon as learned from her employment agreement filing.

CEO Kingsbury's track record deserves close scrutiny. He was CEO of Filene's through , which suffered declining sales each year. At Kohl's he was quietly removed from store operations, administration, and merchandising.

Source 1 , Source 2 Kohl's warned its SEC filings could not be relied upon in and restated results to for a material weaknesses and issues with "complex" lease accounting.

What role, if any, did he play with leases as head of store ops and admin, and why does Burlington also have aggressive operating leases? CFO Marc Katz previously was CFO at A. Moore , a retailer that disclosed substantial inventory accounting and supply chain challenges. Its earnings restatement resulted in the company changing its FY results from earnings to losses.

Katz is joined by other key A. Moore executives such as Mike Metheny EVP of Supply Chain and Dennis Hodgson SVP and CIO. According to a Philadelphia Inquirer article "A. Moore Crafting a Turnaround," an analyst said, " The stores, and especially the supply-chain infrastructure, had really been neglected by the prior management team for a long time. Crimmins was Timberland's Corporate Controller, Chief Accounting Officer, and later promoted to CFO.

In April , Timberland delayed its Q1 earnings, and its audit committee said its financials from could no longer be relied upon. With Burlington's Share Price Near All-Time Highs, And Bain Capital Cashed Out, Management Is Selling Stock Fast In addition to the recently added clawback provision noted earlier, a subtle change to management's Annual Incentive Plan for also may signal the unsustainability of its earnings growth Proxy Statement , p.

In Feb , the Board approved replacing the "Adjusted Net Income" portion of the Financial Component with "Adjusted Net Income per share.

In effect, management can mask a declining earnings growth rate by accelerating repurchases and earning a bonus for repurchasing shares! CEO Kingsbury and EVP Supply Chain Metheny implemented 10b stock sale programs in March shortly after the clawback provision , followed by the EVP of HR also initiating a program in June Source: Management's alignment with shareholders continues to diverge Proxy , p.

EBITDA and EPS, respectively, and is among the most levered retailers at approximately 2. However, Spruce Point believes that Burlington's vast operational inefficiencies and margin gap will be difficult to reach in the absence of substantially more capital investment. Not surprisingly, Burlington is quietly ratcheting up spending for "supply chain" initiatives, which are susceptible to aggressive cost capitalization, which embellishes EPS FY Disclaimer This research expresses our investment opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in our complete research presentation report on our website.

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