Wedbush Stays Bullish On Discount Retail, Prefers Burlington Stores

Morry Brown of Wedbush is bullish on off-price retailers and favors Burlington Stores Inc BURL due to its margin expansion potential.

“We retain our view that off-price appears generally Amazon.com, Inc. AMZN proof. Pricing at off-price remains largely below online pricing, providing significant value to customers,” Brown wrote in a note.

Wedbush Talks To Former Burlington Exec

Wedbush met with Paul Metcalf, former chief managing officer of Burlington Stores, who highlighted that online browsing has challenges replicating the in-store experience. Vendors also remain reluctant to promote their brands online at discount pricing given brand erosion concern.

In fact, Metcalf noted that online retailers could be more of a source of supply to off-price retailers in the near term as slow-moving goods accumulating in online warehouse are batched together and sold to off-price.

The Off-Price Sector

Meanwhile, vendors too benefit from the off-price channel, which is continuing to drive revenue growth, while department stores face sluggish sales.

On Burlington Stores, Metcalf is positive on the company’s margin expansion potential, given opportunities across nearly all line items. Notably, he called out localization and allocation as large opportunities to close the gap between Ross Stores, Inc. ROST and TJX Companies Inc TJX.

Metcalf believes the company could generate positive EBIT leverage even if the comp environment were to slow to the +1–2 percent range.

Analyst's Rating, Price Target

Brown maintains his Outperform rating and $107 price target on Burlington due to favorable industry dynamics, and meaningful opportunity to grow sales and margins. For the fourth quarter, the analyst’s EPS estimate of $1.77 is $0.07 above Street’s $1.70 estimate.

Burlington will report its fourth-quarter results on March 2.

"We continue to view the sector favorably, and view BURL as the name with the most earnings leverage to continue positive trends in off-price retail," Brown added.

Shares of Burlington Stores closed Tuesday’s trading at $82.68. In the pre-market hours Wednesday, the stock was down 2.64 percent to $80.50.