Burlington Stores Downgraded at Cowen Based on Demand Fears

© Reuters.

By Sam Boughedda

On Wednesday, Cowen analyst John Kernan downgraded Burlington Stores (NYSE:BURL) to Market Perform from Outperform.

Kernan also reduced the firm's price target on Burlington to $175 from $209, telling clients in a research note that sector inventory levels and the health of the low-income consumer are deteriorating, and legislation regarding imports from China could cause additional issues for the company. The analyst added that cost inflation in labor, supply chain, and raw materials are not factored into the consensus estimates for 120bps of EBIT margin expansion into FY24 and 34% EPS growth off 2022's base.

"Our data suggests roughly 43% of BURL shoppers are on some form of EBT (food stamps) while 38% of ROST consumers are on EBT. Our May '22 collaborative survey data (COVID-19 survey) showed 47% are cutting or expect to cut spend given higher prices, up sharply vs. 42% the prior month," wrote Kernan. "As we enter summer and Back to School season pressure is rising on the low income consumer, raw materials costs are making new highs and AUC for brands and retailers are likely to reach decade highs into 2023 while higher cost inventory sourced in 2022 flows off the balance sheet."

Given the uncertainty over the competitive environment for off-price retailers, sourcing/freight costs, and cyclical concerns regarding lower-income consumers, Cowen said it sees little upside to valuation multiples.

"Our $175 target is 22x FY23E EPS a discount to the 5-year average of 25x."

Burlington closed Wednesday's session down 3.6%.