Investors Warm Up To Burlington Stores, Inc Shares of Burlington Stores (NYSE: BURL) experienced a bit of volatility in the wake of the Q3 report that had the first down 5.0% in premarket action and then up...

Pricing Power Lifts Burlington Stores

Shares of Burlington Stores (NYSE: BURL) experienced a bit of volatility in the wake of the Q3 report that had the first down 5.0% in premarket action and then up more than 8.0% by the close of the session. The move was driven by inflationary woes that were offset by what appears to be significant pricing powers. The company says it's been gaining market share in the face of its competition's higher prices and sees that as an opportunity to drive further market share gains and increase their own prices as well. In our view, this is a win-win that has the company set up for significant earnings leverage and margin expansion in the coming year.

Results Are What's Driving Burlington Stores Higher

Burlington Stores reported a mixed quarter to be sure but that is only relative to the analyst's consensus estimates and really only in regard to the GAAP earnings. The GAAP EPS of $0.20 missed the analyst's consensus by $0.97 but there is a mitigating factor to be aware of. The company paid down some debt unexpectedly and that accounts for $1.22 per share in GAAP earnings. While we don't like to see earnings miss, we love to see debt coming down and for companies like this to go net cash on the balance sheet.

That aside, the company produced $2.3 billion in revenue for the quarter or up 37.7% from last year and 30% from 2019. The revenue also beat the consensus estimate by 220 basis points and it looks like margins are holding up as well. On a comp basis, comp-store sales are up 16.6% in the two-year stack and on an upward trajectory.

Moving down the report, the company experienced some margin pressures but was able to offset it somewhat via reduced promotional activity. The company's gross margin shrank 100 basis points, a small amount for a company not raising prices, on an 80 basis point improvement in merchandise margin, and a 180 basis point increase in freight costs. In addition, there was some pressure at the operating level as well with the cost of securing and procuring products rising 92% on a YOY basis. Despite this, SG&A expenses rose only 0.1% as a percentage of revenue and left bottom-line results well above the Marketbeat.com consensus.

On the bottom line, the company's GAAP EPS of $0.20 missed by $0.97 but, when adjusted for debt repayment, comes in well above the average target. On an adjusted basis, the company reported $1.36 in earnings to beat the consensus by $0.09.

The Analysts Like Burlington Stores

At least three major sell-side firms have come out with positive commentary on Burlington since the release of earnings. The consensus is a firm Buy with upward pressure on the Marketbeat.com consensus price target. The consensus price target is up nearly 50% in the last 12 months and 3% in the last 90 days with the trend in revisions still upward. The consensus price target implies about 25% of upside for the stock and is far short of the high-price target of $427. The high price target was set by JP Morgan after the previous earnings report and implies about 50% of upside is still available.

The Technical Outlook: Burlington Stores Is Bottoming

Shares of Burlington Stores hit support a few weeks ago and now appear to be reversing. Price action shot up more than 8% on the Q3 earnings news and is now above the short-term moving average. The move appears to be a double-bottom but it is still early in the pattern. Resistance is at the baseline of $300 and it may be strong. A move above the baseline would be very bullish and confirm a reversal in the stock bringing targets in the range of $340 into the play.