Rather than holding onto tariff refunds to beef up margins and profits, Burlington plans to put the full amount it received in Q2— some $55 million — toward lower prices.
“No. 1, it feels like the right thing to do for our customers,” CEO Michael O’Sullivan told analysts Thursday. “Over the last few years, many households, especially moderate- to lower-income families, have struggled with the higher cost of living — higher prices on essentials like groceries, rent, gas prices, etc. So our goal is to use the tariff refunds to give our customers a break.”
The move reflects a concern that the financial squeeze from rising prices is lingering well past expectations from earlier this year, when fuel price spikes seemed temporary, he said.
O’Sullivan downplayed the impact of this decision on margins. With tariff refunds factored in, Q2 gross margin expanded by 250 basis points to 46.2%. Without that $55 million, merchandise margin expanded by 70 basis points, while freight expense increased by 10 basis points as a percentage of net sales. Net income doubled, reaching $184 million; excluding a $41 million after-tax benefit of tariff refunds, net income was $151 million.
Burlington’s refund is smaller than those going to other retailers because the company avoided buying inventory in highly-levied categories, which hurt sales a year ago but protected profits, according to O’Sullivan.
The company is confident it will hit its targets without factoring in refunds, he said. “The headline is that even after you strip out the favorable impact of tariff refunds, the underlying earnings momentum in our business is extremely robust.”
The plan to put tariff refunds toward discounts came as Burlington reported Q2 sales that disappointed some analysts. Total sales in the period rose 11% year over year to nearly $3 billion, with store comps up just 2%. A record 51 store openings in Q2, a net addition of 45 stores, helped stoke the top-line. (The retailer has opened nearly 150 net new stores in the last 12 months.)
However, Burlington’s Q2 comp growth, like that at TJX’s U.S. division in the comparable period, was in sharp contrast to Ross, where comps soared 10%. In short, Ross appears to be taking market share not just from department stores and other mainstream retailers, but also from its off-price peers.
“We fear [Burlington’s] revenue number was simply not high enough and separately have expressed a broader fear about the upcoming move to cut prices across the industry in the name of ‘refund reinvestment,’” Simeon Siegel, senior managing director at Guggenheim, said in a Thursday research note. “A promotion by any other name is still a promotion.”
Indeed, the move is also part of what O’Sullivan called Burlington’s off-price playbook, which is to ensure that it represents a good deal compared to other retailers.
“We also recognize that we are not the only retailer in America,” he said. “That there are other retailers who will be doing the same thing, and some of them much larger than us. So that further reinforces our decision to reinvest the tariff refunds in sharper values.”
