Burlington Stores, Inc. ($BURL)

Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Burlington Stores Fiscal 2026 First Quarter Operating Results. [Operator Instructions]. I would now like to turn the conference over to David Glick, Group Senior Vice President, Investor Relations and Treasurer for Burlington Stores. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2026 first quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristen 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 expressed permission. A replay of the call will be available until June 4, 2026. 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 and in our 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. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $7 million and $6 million during the fiscal first quarter of 2026 and 2025, respectively, and $10 million and $35 million for the full fiscal year 2026 and and 2025, respectively. Now here's Michael.

Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 3 topics this morning. Firstly, I will discuss our first quarter results. Secondly, I will talk about our outlook for the rest of the year. And finally, I will comment on our new store opening program. After that, Kristin will walk through the financial details. Okay. Let's talk about the first quarter. I will start with the headline. We delivered yet another quarter of very strong earnings growth with EPS increasing 26%. This marks our 14th consecutive quarter of double-digit earnings growth. This track record demonstrates our ability to consistently convert higher sales into margin expansion, thereby driving very strong earnings flow-through. Moving on to sales. I will start with total sales growth. Of course, total sales is the most obvious and reliable proxy for retail market share. In Q1, we notched up 14% total sales growth. This was on top of 6% total sales growth in 2025 and 11% growth the year before that. This means that cumulatively, our business is now 34% bigger than it was 3 years ago. We are taking retail market share through new store openings and comp store sales growth. And as I described a moment ago, we are achieving strong and consistent earnings flow-through on these incremental sales. Let's talk about comp stores. Comp store sales increased 6% in Q1, well above our guidance of 2% to 4%. I was very pleased with our flexibility in chasing the sales trend while also managing our liquidity and inventory levels to drive strong merchant margin leverage on this comp growth. Our comp trends were broad-based across businesses and geographies with particular strength in ladies apparel, beauty and accessories. One particular call out was the strength of our warm weather categories. Historically, we have not been happy with our seasonal transitions. Our legacy as an outerwear retailer means that our processes and systems have often been too slow in responding to weather variations, especially in early spring or in the fall. But this year, our upgraded allocation and localization capabilities enabled us to make faster smarter and more precise allocation decisions. This helped drive sales and merchant margin through more efficient use of merchandise receipts and inventory. Okay. Let me turn to profitability. Our operating margin in Q1 expanded by 20 basis points. This was significantly ahead of our guidance. As a reminder, we had expected a decline of 60 to 100 basis points driven by headwinds specific to Q1. As it turned out, we rolled right over these headwinds and delivered operating margin expansion that was 100 basis points above the midpoint of our guidance. The drivers of this margin outperformance were higher merchant margin and stronger supply chain productivity. This operating margin expansion, together with the head of plan sales drove an EPS gain of 26%. As I have just described, we faced specific margin headwinds as we lapped Q1 of 2025. We had expected EPS in the quarter to be flat. So 26% growth is an impressive peak. Again, this strong earnings flow-through is a consistent pattern stretching back many quarters. Now let's move on to forward guidance. I will start with the full year. We are updating our full year guidance to pass along the entire sales and earnings favorability from the first quarter. We are now expecting full year comp sales growth of 2% to 4% and EPS growth of 13% to 16%. For the second quarter, we are guiding comp growth of 1% to 3% and with discount growth we expect to drive an EPS increase of 19% to 28%. This second quarter guidance signals our confidence in driving strong margin leverage and EPS growth even in a quarter where we are guiding to modest i.e., 1% to 3% comp store sales growth. As a reminder, in Q2, we will be lapping our strongest quarterly comparison versus last year. In terms of the back half, we continue to feel good about the comp outlook that we discussed in our March call. As a reminder, at that point, we called out potential comp upside in Q3 and maybe even in Q4. Before I hand over to Kristin, I would like to briefly comment on our new store, our store relocation and our store downsize programs. In Q1, we opened 40 gross new stores. We relocated 6 stores and closed 4 for a net increase of 30 stores. We are very pleased with the pace and quality of these new store openings. For the full year, we now anticipate 135 gross new stores. Stripping out relocations and closures, we expect this to yield 115 net new stores. This is slightly ahead of our prior guidance of 110 net new stores for 2026. Aside from our new store program, we are also very pleased with the progress we are making in transforming our legacy store base through relocations and downsizes. Store relocations continue to perform well, typically delivering a sales lift of 5% to 10% as we upgrade the physical store and move into higher traffic centers with stronger cotenancy. Our downsized program is also driving very strong results. This program is targeted at older stores where we like the location, but the store is oversized. As a reminder, we downsized 20 stores in 2025 and and we are ramping this program to about 30 stores this year. In a typical downsize project, we cut the square footage in half, giving the excess space back to the landlord or subleasing to a cotenant. On average, we are seeing a reduction in occupancy costs of about 200 basis points. The financial returns are very attractive and we plan to ramp this program in the years ahead. Taken together, new stores, relocations and downsizes have driven a huge step-up in sales productivity. In 2019, our sales per selling square foot was languishing around $220. Fast forward to today, and it is now around $350 per square foot. That's a 55% increase in sales productivity in a 6-year period. We talk a lot about sales growth, but it is important to call out that our sales growth is happening in smaller, more productive stores. This is important because we expect that this higher sales productivity will drive leverage in occupancy expenses as new stores join the comp base and their sales ramp up over time and as we relocate or downsize many more of our existing stores to our smaller store format. Looking ahead, we are on track to exceed 1,500 stores by the end of 2028. Of these, over 80% would have been opened or relocated or downsize since 2019. Our legacy of old oversized and low productivity stores is diminishing. One last point to make. For the last couple of years, we have been retrofitting existing stores to Store Experience 2.0. This program is designed to make our stores feel more exciting, easier to shop and more off-price. Our retrofitted stores have received very positive customer feedback and have seen a nice sales lift. We anticipate completion of the Store Experience 2.0 program across the chain by the end of this year. I would now like to turn the call over to Kristin to walk through the financial details of our first quarter results and our updated guidance. Kristin?

Thank you, Michael, and good morning, everyone. I will start with some additional color on our first quarter performance. Then I will share details on our guidance for Q2 and for the full year. Starting with the first quarter. Total sales grew 14%, while comp store sales increased 6%, well above our guidance range of 2% to 4% comp growth. The gross margin rate for the first quarter was 44.1%, an increase of 30 basis points versus last year. This was driven by a 20 basis point increase in merchandise margin and a 10 basis point decrease in freight expenses. Product sourcing costs were $216 million versus $197 million in the first quarter of 2025. Product sourcing costs decreased 30 basis points as a percentage of sales versus last year as we continue to execute on our supply chain productivity and cost savings initiatives. Adjusted SG&A costs in the first quarter increased 20 basis points versus last year. Q1 adjusted EBIT margin was 6.3% and basis points higher than last year. This was well above our guidance range of down 100 to down 60 basis points. In March, we spoke to a few discrete factors that we expected would pressure Q1 margin. But we were able to more than offset those with stronger-than-anticipated sales disciplined markdown execution and continued supply chain productivity. Our Q1 adjusted earnings per share was $2.10, which also came in well above our guidance range of $1.60 to $1.75. This represents a 26% EPS increase versus Q1 last year and our continued ability to turn strong top line growth into even stronger earnings growth. At the end of the quarter, comparable store inventories increased 11% versus the end of the first quarter of 2025. Our reserve inventory was 41% of our total inventory versus 48% of our inventory last year. We are very pleased with the quality of the merchandise and the values that we have in reserve. We ended the quarter with approximately $1.7 billion in total liquidity. This consisted of $747 million in cash and $942 million in availability on our ABL. We had no outstanding borrowings at the end of the quarter on the ABL. During the quarter, we repurchased $81 million in common stock. At the end of Q1, we had $304 million remaining on our share repurchase authorization. This expired in May of 2027. Staying on capital structure. In March, we completed a repurchase of $111 million of our 2027 convertible notes. This transaction reduced the outstanding balance of the 2027 converts to $186 million. In Q1, as Michael mentioned, we opened 40 gross new stores, relocated 6 stores and closed 4 stores. This resulted in the addition of 30 net new stores in Q1, bringing our store count at the end of the quarter to 1,242 stores. Now moving to our updated fiscal 2026 full year guidance. This guidance excludes approximately $10 million of costs associated with bankruptcy acquired leases versus $35 million in 2025. We are increasing our outlook for the full year 2026, passing through the entire Q1 upside to the full year. Total sales are now expected to increase 9% to 11% versus our original guidance of 8% to 10%. We are now expecting 115 net new store openings this year. This is up from our original outlook of 110 net new stores. We anticipate that the majority of our 2026 new store openings will occur in the first half of the year. For the full year 2026, we're now forecasting comp store sales to increase in the range of 2% to 4%. And our adjusted EBIT margin to expand by 10 to 30 basis points versus last year. Passing grew the entire Q1 EPS upside, results in adjusted earnings per share guidance in the range of $11.45 to $11.80, up 13% to 16% versus FY '25 and well above our initial 2026 full year guidance. Moving now to our second quarter guidance, which excludes approximately $3 million of expenses associated with bankruptcy acquired leases versus $11 million in Q2 of 2025. For Q2, we expect comp store sales to be up 1% to 3% and total sales to increase 10% to 12%. We are guiding Q2 operating margin expansion to increase 30 to 60 basis points versus the second quarter of 2025. This translates to an adjusted EPS outlook in the range of $2.05 to $2.20 compared to last year's second quarter EPS and of $1.72. Our sales trend for May month to date is tracking at the high end of our comp sales guidance range. That said, our month-by-month comparisons get more difficult as we move through the quarter. For the back half of fiscal 2026, our outlook remains unchanged. We expect comp store sales to increase 1% to 3%. Total sales to increase 8% to 10%. Adjusted EBIT margins to increase 10 to 30 basis points and earnings per share in the range of $7.30 to $7.50. Capital expenditures, net of landlord allowances, are still expected to be approximately $875 million in fiscal 2026. I will now turn the call back over to Michael.

Thank you, Kristin. Before I hand it back to the operator for your questions, I would like to summarize the main points from this morning's call. Firstly, we are pleased with our Q1 results, 14% sales growth comp growth and an EPS increase of 26%. These results add to an already very impressive track record of consistently converting sales growth into strong margin expansion and earnings flow through. Secondly, we have raised our full year outlook passing through the entire upside from Q1. Our expectations for the balance of the year remain unchanged from our commentary in our March call, including the potential for upside in Q3 and maybe even in Q4. And lastly, we continue to be very excited about our new store, store relocation and store downsize programs. These programs have contributed to a remarkable growth in our sales productivity. I would now like to turn the call over for your questions.

[Operator Instructions]. Our first question comes from the line of Matthew Boss with JPMorgan.

Congrats on the nice quarter. So Michael, in March, you said you were bullish about the outlook for 2026. That was pretty much before the outbreak of war in the Middle East and the subsequent run-up in gas prices. So have these factors caused you to feel less bullish on the outlook at all today?

Matt, thank you for the question. You're right, a lot has happened since early March. But the direct answer to your question is we still feel bullish, especially about the back half of the year. As I recall back on that call in March, we described external and internal drivers of optimism. On the external side, we cited the resilience of our customer. Well, we just reported 6% comp growth in Q1, well ahead of guidance. And when we look at our underlying customer data, the key indicators continue to look positive across demographics and income bands. By the way, we estimate that higher tax refunds in Q1 were worth about 1.5 to 2 points of comp. So even if you strip those out, our comp growth in Q1 was still mid-single digit. The other external factor that we cited back on the March 5 call was that we expected tariffs to be less disruptive to pricing and supply this year. Well, check, that is what we are seeing. The supply of off-price merchandise is excellent right now. Now on that call, we also talked about internal drivers of optimism. And again, I would say those have not changed. We see potential upside in Q3 and perhaps in Q4 as we lap easier comparisons in Q3 and as we lap tariff-related assortment gaps in both quarters. So we continue to be excited about those opportunities. So with all that said, I would acknowledge that we're perhaps a little more wary now than we were in March, based on higher gas prices and the potential impact on inflation. We're watching the trend very closely and looking for any change in consumer behavior, we haven't seen it yet. But as an off-price retailer, that is what we do. We watch to see how the trend changes. And the benefit of the off-price model, when it's well executed, is that we can tap the brakes or we can hit the accelerator if we need to. The last point I would make is if the external environment does get more difficult and if the consumer becomes more focused on value, then we don't regard that as a bad thing. In fact, as a value retailer, it could turn into an opportunity.

Great color. And then, Kristin, as a follow-up, on your second quarter guidance, even with a relatively modest comp growth, you're projecting earnings growth of over 20% at the midpoint of the forecast. Could you walk through the bottom line drivers and just additional details?

Matt, yes, thanks for that question. So for Q2, we're guiding 30 to 60 basis points of operating margin expansion on comps of 1% to 3%. And that translates, as you said in your question, to EPS growth of 19% on the low end and 28% on the high end. A couple of drivers of the margin expansion in Q2. One is higher gross margin we're planning for we're planning for higher merch margin in the quarter. This is driven by anticipated markdown favorability, modestly faster turns and a favorable shortage accrual rate relative to Q2 of last year. Partially offsetting this, the merch margin is some pressure, some modest pressure in freight expenses due to higher fuel rates projected for the quarter. So one driver is in gross margin from higher merch margin. The second is leverage in product sourcing costs driven by supply chain. We're continuing to execute productivity initiatives across all our DCs. These savings are, of course, pressured slightly by the continued start-up cost of our new distribution center in Savannah, Georgia, which became operational late in the first quarter. There are also some puts and takes in SG&A that we believe will give us some slight leverage in Q2, certainly on the 3 comps. And then I just close by reiterating, we've consistently demonstrated the ability to drive strong earnings growth even on modest comp sales growth and our plan -- our internal plans and our guidance reflect just that.

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

Michael, I wanted to ask you a bigger picture question. I think -- I guess as you look across retail, off-price and not off price, what do you see happening in terms of major competitive trends, I guess, just bigger picture? And how do any of those trends? Or do you see anything -- what are the ramifications of that on Burlington specifically.

Well, thank you for the question. It's actually good to talk about the big picture. Sometimes on these calls, it can get very easy to get caught up in the details of quarterly performance. So again, I appreciate the question. When I look across retail, and this has been true for a long time now, I see a major restructuring going on. And the key driver of that restructuring is the consumers' desire for value. The retailers that can consistently offer great value are winning, and those that cannot offer great value are losing. I think perhaps the strongest evidence to that is the growth of off-price. For Q1, we just reported 14% total sales growth. And this 14% was on top of 6% last year and 11% the year before. And when you look at our off-price peers, they are also driving terrific growth -- the customer is voting for value and off-price is delivering that value. The growth that we and our off-price peers are achieving, of course, is not coming out of 10 air is coming from traditional retail from full-priced retailers, if you like. I don't see any signs of that slowing down. In fact, if the economic environment were to deteriorate in the next few months, I think that could further accelerate the growth of off-price. So on the second part of your question, what are the ramifications for Burlington. Well, of course, it means we have a big opportunity. But I would say that for us to take advantage of that opportunity, we have to continue to improve how we execute the off-price model. we're very aware. We have 2 very successful off-price peers. We've made a huge amount of progress, but we know that we're behind those companies in some key capabilities, capabilities like localization of the assortment or automation of our supply chain, but I regard that as good news. It means that we have a huge opportunity ahead of us. I think it's also worth calling out that to go after that upside. At Burlington, we do not have to try new and radical things. For our off-price peers, I think it's different. At that stage in development, it makes sense for them to invest in new ideas. That might mean, I don't know, expanding internationally or making big changes to their model. But for us, we're at an earlier stage in development. We need to stay focused on the basics of off-price, controlling liquidity, managing inventory, chasing the trend and delivering great value. And I guess I would wrap up my answer by saying that the proof of this strategy for me is in our numbers. For full year 2026, our guidance, our updated guidance is for mid-teens EPS growth, and that's on top of 22% EPS growth last year and 34% the year before that. So I know the phrase focused on the basics does not sound very sexy, especially with the British accent. But it is working for us. Over the last few years, it's driven very strong and consistent earnings growth.

And I applaud the [indiscernible]. But I'll go to Kristin with the follow-up. Maybe, Kristin, just look back at Q1. Just remind us like what were the factors that were supposed to create the headwinds in 1Q for the margin contraction? And then what basically happened outside of just the comp being better that was able to offset that and drive the margin expansion you ultimately put up.

Good question. First, let me step back and say, we're very pleased with the flow-through we saw in the first quarter. Operating margin expanded 20 basis points, but that was 100 basis points above the midpoint of our guidance. And when we guided Q1 in March, we embedded a few known headwinds that we expected would pressure operating margin and really disciplined execution coupled with stronger-than-expected sales drove better flow-through than we originally anticipated. Let me call out a few drivers. First, we saw strong merchandise margin performance, up 20 basis points, this was versus our expectation of lower merch margin in the quarter, really driven by disciplined markdown better, markdown execution, which was better than we expected. And also driven by the quality of our buys. This was a meaningful contributor to the upside. Freight also leveraged 10 basis points as we more than offset any fuel pressures in transportation. And then the second major area is we continue to make great progress, really better-than-expected progress on our supply chain productivity initiatives. That drove 30 basis points of leverage in the quarter. And this is all despite start-up costs from our new Savannah DC, and this is what drove the leverage on the product sourcing line. So overall for Q1, merch margin improvement on gross margin and on product sourcing more than offset some slight deleverage we saw in SG&A, and that was really driven by higher incentive comp compared to Q1 last year and higher marketing spend in the quarter. And let me just final point, I like to make is that the flow-through we saw here really reflects the strength of the operating model, meaning when we deliver sales above expectations, we expect to see meaningful earnings leverage relative to our guide, and that's what we saw in Q1.

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

Michael, over the last 3 years, your EPS growth has typically exceeded 20%. Do you think that by driving earnings, you may have missed some comp growth?

Good to hear from you. Thank you for the question. It's a great question. And it's actually something that we wrestle with internally all the time. In our business, the most direct way to drive sales is to turn on receipts and flow more merchandise to stores and then to run with higher inventory levels and more markdowns. Conversely, the way to consistently drive earnings is to carefully control the flow of receipts and to very tightly manage inventory levels. Now I would say that at Burlington, historically, we were not good when it came to controlling receipts and inventory. But in more recent years, we've worked hard at this, and I think we've become very good at it. And the evidence for that is the huge increase in our merchant margin over the last several years. Our inventory turns are much faster now, and our markdowns are much lower. We like those results. But going back to your challenge, I do think that we may have an opportunity to loosen our belts a notch and get slightly more aggressive on sales -- there are some high potential merchandise categories where it might make sense for us to take up purchase commitments and maybe run with a little more inventory, but let me be clear, let me reassure investors, I'm not signaling a major shift here. We are very focused on long-term earnings growth. We strongly believe in discipline of the off-price model, control liquidity, manage inventory and chase the trend. That's the proven model. It works. In fact, it drives terrific earnings leverage 22% EPS growth last year, 34% the year before that.

And then, Kristin, sticking with that theme, your comp guidance for the full year of 2% to 4% is below some of your off-price peers, but your EPS growth guidance of 13% to 16% is in line. Can you talk about what's driving this leverage?

Thanks for the question. I'll walk down the P&L for the full year and really kind of give you the puts and takes on the earnings guidance. First, we're expecting overall leverage in gross margin. Higher merch margin is more than offsetting some slight deleverage in freight costs driven by higher fuel rates that are embedded in our guidance. The anticipated higher merch margin is driven by disciplined control of inventory translating to efficient markdown execution, faster turns and better buying. And then as I move down the P&L, as I mentioned earlier, I'm really pleased with the leverage we're seeing in product sourcing costs driven by supply chain. We anticipate supply chain cost levering in 2026 and this is all despite the opening of a brand-new distribution center in the year. In SG&A, there are also a couple of puts and takes, but one line item I want to call out is on occupancy. We expect occupancy costs to lever this year as we continue to drive up sales productivity, and we're starting to see some of the benefits of downsizing stores and reducing occupancy expenses. And then the last point I'll make on the full year is that we expect 10 to 15 basis points of incremental leverage for every additional point of comp.

Our next question comes from the line of Brook Roach with Goldman Sachs.

Michael, in your opening statement, you talked about the increase in sales per square foot as you've opened new stores and relocated or downsized older stores. How much more opportunity do you see to drive the sales productivity ahead?

Well, Brook, thank you for the question. The direct answer is that we still have huge opportunity on sales productivity. And my goal over the next few years is to further significantly drive up sales productivity in terms of sales per square feet. As you said, in the prepared remarks, I talked about that, and I quoted the data. In 2019, we had sales productivity that was down in the $200 to $220 per square foot range. And we're now up around $350 per square foot. And I should add that with a lot of new stores in the base. Now as with many key performance indicators, I think we've made huge progress, but when you look at our competitive benchmarks, it's still -- it's clear that we still have plenty of opportunity ahead of us. Now of course, part of that opportunity will come naturally from comp growth across all stores in the chain. But at Burlington, we have a lot of new stores that have opened in the last few years that are going to ramp up over the next several years. So those stores are smaller format, 25,000 square foot boxes. And as those new stores ramp up, they'll have an outsized impact on our sales productivity. Now add to that, the other programs, our downside and our relocation programs, they have a direct impact on sales productivity of older existing stores. These are large stores with existing sales volumes and essentially what we're doing is moving them into a smaller format location. So there are several reasons to think that our sales productivity is going to continue to move up. Now of course, the reason that, that is important is occupancy expenses are a big part of our cost base. And by continuing to drive up sales productivity over the next few years, we should be able to leverage that expense and that should provide a nice tailwind to our operating margin over the next few years.

Great. And then as a follow-up, you mentioned the strength of the warm weather businesses in 1Q. Can you talk a little bit more about those businesses? I'd also be interested in hearing more about how your new allocation systems helped to drive the comp trend in those businesses this quarter.

Good. Yes. Thank you for that question. Warm weather categories account for about 25% of our sales in the first quarter, so very significant. And those businesses include all the categories you might expect, short sleeve tops, swimwear, sandals, sunglasses, and so on. In Q1, those categories achieved double-digit comp growth, so well ahead of the chain. Now weather was a piece of that early in the quarter. But overall, the impact of weather in Q1 was somewhat mixed. It was helpful in February and March, but then it was unsettled and less favorable through April. Anyway, I'm very happy with how we were able to navigate those trends and drive our warm weather businesses in the first quarter. Over the last couple of years, we've begun to roll out more sophisticated localization tools and processes. And that meant that in Q1, we were able to plan and allocate receipts between different regions in a much more granular and intentional way. and we were able to respond much more effectively in more detail to performance variations across regions. Now that helped drive sales, but it also helped drive merchant margin. Now stepping back, I know that many investors have heard me say this before. We have terrific consistency when it comes to driving quarterly earnings growth, but we have -- we're much less consistent when it comes to quarterly comp growth. And that's especially true or it has been especially true in the first and the third quarters when weather variations tend to be the most impactful. Our coat factory heritage means that our seasonal transitions historically just haven't been nimble enough. We know that we're never going to be able to control the weather, but we can get better at responding to it. And our localization initiative is going to be an important piece of that.

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

Congrats on quarter, it full through. Michael, I was wondering if you can talk about some of the demographic trends that you're seeing by segment. Historically, you've made a little bit of comments on sort of the sub 40,000 category versus above category. So wondering if you can help us out with any changes that you're seeing there? Typically, we see sort of that inflationary pressure of gas, in particular sort of.

It's a good question. you say it's something that we look at all the time and often comment on. I would say the good news is that there's not a lot to call out in the data. I would say the only real headline is that our stores that are in lower income trade areas continue to outperform the rest of the chain. And I don't want to overstate it, but it is real. In the first quarter, stores in trade areas with lower median household income had comp growth that was clearly above the chain. And now that said, stores in higher income areas still achieved mid-single-digit comp growth, but the key takeaway from that data for me is that we continue to see resilience among lower-income shoppers despite higher gas prices despite inflation creeping up. Now as for other demographic factors, again, not much to call out. We pay very close attention, as you know, to trends among Hispanic shoppers. And in Q1, stores in high Hispanic areas had mid-single-digit comp growth. So more or less in line with the chain. So again, we continue to feel good about that important demographic.

Fantastic. And then my follow-up for Kristin. The topic of the year, I suppose, is tariffs and now tariff refunds. Can you talk about kind of how you are treating those throughout the rest of the year's guidance? I assume that you filed for them. So just any color or commentary on where they are and what you're assuming for the rest of the year?

Great. Adrian, yes, very topical. As you've heard from many other retailers, we have also filed for tariff refund it's really -- it's highly uncertain how much we will receive and when we could receive the refunds. So we have not factored any of that into our guidance.

Okay. And the assumption for current is the incremental 10%, I assume?

Correct.

Our next question comes from the line of Dana Telsey with Telsey Group.

Congratulations on the progress. Kristin, can you expand a little bit on the new store pipeline, how you're thinking about what is the smaller size of the box you're looking at regional growth and what the pipeline could look like and also along with that, the new store performance? And then I have a quick follow-up.

Great. Thanks, Dana. So for 26 for the full year, we now expect 135 gross new stores. And then once you strip out relocations and closures, we expect to yield 115 net new stores in 26. This is slightly ahead of the prior guidance we gave of 110 net new stores for we were able to pull forward the openings of several stores that were borderline 2026 openings, and we feel good about opening these additional 5 new stores by the end of the third quarter this year. Given the timing of these additional new store openings did not really move the needle on the overall total sales growth guidance. Now turning to your question on the pipeline, we continue to feel very good about 2027 new store pipeline. And the 2028 pipeline is also robust. -- we are comfortable opening at least 110 net new stores in '27 and in '28, and we are well on our way to hitting or likely exceeding that 1,500 store mark by the end -- and I think you had -- in the last part of your question on new store performance, we continue to be pleased with the performance of new stores. We continue to see stores open at about $7 million of sales in our first year -- full year and achieve a payback in just under 2 years. And lastly, after these new stores enter the comp base, we see them meaningfully outcome the chain for several years.

Got it. And then just higher freight and fuel costs, what are you seeing and how are you planning?

Yes, great question. We are, of course, seeing higher fuel costs and surcharges, driven by the higher diesel costs. In the first quarter, we were able to lever overall freight cost as transportation cost savings initiatives offset those higher fuel rates. The higher fuel and those incremental surcharges are baked into our full year guidance. As I mentioned, I think in an earlier question on full year 2016 guidance, we are expecting modest deleverage in freight for the year, driven by higher fuel costs. We strive to -- or strive to manage the P&L proactively, and we found offsets to these surcharges, and that's all incorporated into our guidance. Let me also call out kind of in the same vein. We recently locked in our ocean and domestic contracts for the next year at favorable rates. We've got great partnerships here, and this should help us control freight costs in 2026. And I guess, of course, if diesel fuel prices go up further from here and where they're projected, that could be an additional risk to our guidance.

Our next question comes from the log of Mark Altschwager with Baird.

Michael, first, I was hoping you could give us an update on the elevation strategy, just where you are in the rollout and what's working?

Sure. Well, Mark, thank you for the question. Yes. The elevation strategy has been a major strategy for us for the last couple of years, elevating the assortment to offer better more recognizable brands, higher quality and more fashion, all at great values within a good, better, best assortment. Now our internal data shows that by elevating our assortments we've been able to drive higher customer perception scores, stronger comp growth in higher-priced buckets and ultimately, a higher average basket and unit retail I've said this before, but I'm especially pleased with how we've been able to successfully pursue this elevation strategy without hurting margins. When you increase the mix of better brands, that can really pressure your merchant margin through lower markup or higher markdowns or higher shortage. So it's remarkable that over the last 2 years, we've increased the mix of better and recognizable brands in our assortment. But at the same time, we've actually increased our merchant margin. It takes a lot of skill to pull that off. The fact that we've been able to elevate the assortment at the same time, actually expand margins, demonstrates the strength and talent of our merchant teams.

That's great. And just a follow-up, Michael, on the consumer, you spoke to some of the demographic trends earlier. But I guess, have you seen any correlation between gas prices and the comp trends on a week-to-week, month-to-month basis? Just any insight there?

Thanks, Mark. Yes, it's a very good question. It's something that we've we've sliced and diced many different ways. In the past, actually, we've analyzed this, looking at, for example, we've looked at what's happened to comp growth historically when gas prices have gone up or down. We've also looked at what's happened to comp growth by region or market. Where gas prices have hit different levels in different parts of the country or gone up at different rates in different parts of the country. The bottom line is that none of those analyses show any correlation. And similarly, in the first quarter, we saw no clear pattern. And we looked very, very closely. That said, we all understand that if gas prices remain high for a sustained period of time. And if that feeds into a higher general cost of living, then that's not good. We saw what happened a few years ago when inflation went up, it squeezed the discretionary spending of shoppers, and that had a particularly negative impact on lower-income shoppers. So as I said earlier, we're watching the trends very closely for any change in consumer behavior, but we just haven't seen it.

Our last question for today comes from the late Michael Binetti with Evercore.

Krisitin, let me start with one. Could you just expand on the callouts you gave in the prepared remarks on some of the category performance metrics and any regional callouts? And then I'm also curious, any color you can provide on first quarter comp metrics like transactions versus basket AUR, UPT, -- anything on the build that would be helpful.

Yes. Great. Michael, Okay. Let me start regional performance. In terms of regional performance, the Northeast and Midwest were the top-performing regions. The Southeast and West were in line with the chain comps and the Southwest trailed the chain -- on category trends, Michael spoke to this -- some of this in the prepared remarks. It was really broad-based across businesses. We had particular strength in ladies apparel, beauty and accessories. We also did particularly well in warm weather categories in Q1. We're really pleased with that transition. Those categories include sort sweep tops, swimwear, sandals, sunglasses, et cetera. So those are the call-out in the category. And then the last part of your question, components of the comp. So our first quarter comp was driven by both an increase in the number of transactions and by a higher basket size due to higher AUR. Those 2 drivers, transaction volume and higher basket were about equal in terms of their contribution to our comp in the quarter.

Okay. And then, Michael, if I could just ask one. Really nice to see the SoHo store open earlier in the quarter, a nice store. Could you mind giving us an update on -- you touched on the store experience 2.0 in the prepared remarks, but just a little bit of an update on that initiative, what we'll see as we go on to the checks the rest of the year here.

Yes. Well, thank you for the question. Yes. You've heard me say this before. Historically, at Burlington, our store environment was quite undifferentiated. When you walked into our stores, it was just a sea of racks. It really hasn't changed since the company was founded in the 1970s. So a few years ago, we launched our store experience 2.0 initiative. And the goal was to reimagine the store environment to make it more exciting, more off-price, easier to shop, and more Burlington 2.0, if you like. Now in 2024, we rolled that program out to new stores and we retrofitted approximately 120 existing stores. And we saw very good feedback from shoppers and from associates, and we also saw a nice sales lift in retrofitted stores. So last year, we rolled the program out to -- I think it was about 350 or so additional stores, and we'll complete the full chain rollout this year. Now again, we continue to see a nice sales lift on retrofitted stores. That said, we also believe that the benefits of Store Experience 2.0 will grow over time. By the end of 2026, all stores will have been fitted with store experience 2.0, and that's important. We know from research that many shoppers have an outdated perception of Burton. Maybe they came into the store with their mother to buy a coat 20 years ago. Well, when they walk into our stores now, they tell us it feels completely different, fresh, more exciting and more off-price.

Thank you. And at this time, that concludes our Q&A session. I will now turn the call back over to Michael for closing remarks..

Before we close, I am very pleased to announce that Marissa Shake has recently joined Burlington as Senior Vice President of Investor Relations and Treasury. Marissa has tremendous experience and a strong track record of success in banking, consulting and retail, including off-price. We are very excited to have Marissa as part of our Investor Relations team. With that, let me close by thanking everyone on this call for your interest in Burlington Stores. We look forward to talking to you again in August to discuss our second quarter 2026 results. Thank you for your time today.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines.