Burlington Sees the Future of Retail. It Looks Much Smaller -- WSJ

Dow Jones01-13

By Kate King

MILFORD, Conn. -- A vision for the future of retail is under way at this city's Burlington clothing store.

The one-year-old shop is nearly 80% smaller than the hulking big boxes that used to be standard for the brand. At 18,000 square feet of selling space, the store is barely larger than a professional ice-hockey rink.

All clothes are hanging on racks or stacked neatly on shelves in the brightly lit store. That's a big change from Burlington's older and larger locations, where fallen jackets and other merchandise often cluttered the aisles.

"You find what you want," said Michelle Ahmad, who found a pair of Skechers sneakers while browsing the shoe section on a recent Friday afternoon. "At a lower price."

It has been more than a decade since Burlington shed "Coat Factory" from its name, reinventing itself from an overstuffed, outerwear-focused discounter into a more nimble, broad-based purveyor of off-price apparel.

Now, with the discount sector outperforming most other types of retail, Burlington is aggressively expanding. It is taking aim at its larger competitors, Ross Stores and TJX, which owns T.J. Maxx and Marshalls.

Underpinning Burlington's transformation is an overhaul of its real estate, which is getting much, much smaller even as the company works to open 400 net new stores over the next four years.

"Burlington historically had stores that were way too big," said Lorraine Hutchinson, a retail analyst at Bank of America.

The 53-year-old company's evolution encapsulates how bricks-and-mortar retailers are adapting to changing customer habits and the rise of e-commerce. After decades of big-box domination, many companies now want smaller footprints in well-located, busy shopping centers. Inside, retailers seek to draw in shoppers by offering an experience they can't get online.

The playbook appears to be working. Retail availability has fallen to record-low levels since the pandemic, thanks in part to a dearth in new store construction. Rent prices are climbing in many places.

Off-price retail, which gobbled up both market share and real estate over the past two decades from declining department stores and bankrupt big-box chains, has only gained momentum since the pandemic. The sector benefits from a "virtuous circle" of growing customer demand convincing more brands to sell their inventory to discount stores, fueling more customer demand, said Paul Lejuez, senior analyst at Citi.

"It's the consumer seeking value, off-pricers doing a great job providing that value in a treasure-hunt environment, and brands being willing to work with off-pricers," Lejuez said.

Unlike Burlington, whose locations were historically the size of department stores, Ross and TJX brands have always operated smaller-format stores. Burlington's gradual downsizing accelerated under the leadership of its current chief executive, Michael O'Sullivan, who joined the company in 2019 after 16 years at Ross, where he ended his tenure as president and chief operating officer.

"Coming from Ross, he understood the economics of the smaller store," Hutchinson said.

Burlington is now opening mostly 25,000-square-foot stores, nearly 70% smaller than its prior big-box locations.

Revamping the company's merchandise mix and supply chain was critical to boosting sales in a smaller footprint. Burlington has reduced its inventory by about a third since 2019, and outerwear now accounts for less than 5% of annual sales. The retailer has added new product lines, including beauty and home goods.

"Yes, you can still find a coat at Burlington, but people walking into our stores today see a lot of other merchandise," O'Sullivan said in an interview.

Longtime Burlington shopper Natoya McGhie said she has noticed more brand-name sneakers in recent months, and recently snagged a pair of Adidas clogs for half-price. Her daughter, Virtuous, said she buys everything from hair-care products and special-occasion dresses to Hello Kitty apparel and decor at Burlington.

"You could do a whole lap and still do another one and find new stuff every time," Virtuous McGhie said. "There was one time we came and I bought a pair of roller skates."

That treasure-hunt experience has allowed Burlington and other off-price retailers to largely avoid e-commerce. Online sales account for less than 2% of TJX sales, and Burlington ended its e-commerce operations entirely after O'Sullivan took over.

"Our price points are very low," he said. "If you add free shipping and free returns to a $10 or $15 piece of apparel, as an e-commerce retailer you're going to lose a fortune."

Burlington, which has 1,103 stores today, plans to open about 100 net new locations and relocate a couple dozen annually through 2029. The company believes it can eventually grow to 2,000 total stores, O'Sullivan said.

To fulfill its aggressive expansion plans, Burlington often snaps up real estate from bankrupt retail chains. The company has spent $28 million on expenses associated with acquiring 64 locations from Bed Bath & Beyond, which closed all its stores in 2023. It also picked up locations formerly occupied by discounters Big Lots and Conn's, Burlington Chief Financial Officer Kristin Wolfe said.

In the past, Burlington often signed leases for real estate that was off the beaten path to afford the rent for its large footprints. Now the retailer wants to be in busy shopping centers near other national chains, including competitors.

Better real estate is more expensive on a per-square-foot basis, but the smaller stores are more profitable, O'Sullivan has told investors, outperforming the company's historic metric of $7 million in sales in the first full year at new locations.

Write to Kate King at kate.king@wsj.com

 

(END) Dow Jones Newswires

January 13, 2025 05:30 ET (10:30 GMT)

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