WEBVTT - Burlington CEO Michael O'Sullivan Talks Growth, Consumer Sentiment

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news data just.

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<v Speaker 2>Out this hour showing that consumer sentiment hit a three

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<v Speaker 2>month flow as concerns about rising gas prices tied to

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<v Speaker 2>the war and around mounted. For more, we're joined by

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<v Speaker 2>Michael O'Sullivan, CEO of Burlington's Stores. Michael, thank you so

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<v Speaker 2>much for joining us, and I should just point out

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<v Speaker 2>that earnings out yesterday we're really strong for Burlington. I

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<v Speaker 2>wonder what behavior at your stores has been like over

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<v Speaker 2>the past two weeks as the war in Iran broke out. Michael,

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<v Speaker 2>have you seen any change in consumer behavior?

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<v Speaker 1>Well, let me start by saying good morning, thank you

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<v Speaker 1>for having me on the show. It's great, too great

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<v Speaker 1>to be here now. Of course, gas prices are a concern,

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<v Speaker 1>but you know, it's too early for it to really

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<v Speaker 1>have had much of an impact on retailers or consumers.

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<v Speaker 1>I suspect many consumers haven't filled their gas tanks recently,

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<v Speaker 1>so it's going to take a little while before any

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<v Speaker 1>impact really starts to be felt. Now, the long term

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<v Speaker 1>impact of higher gas prices, I think depends upon how

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<v Speaker 1>long the situation in the Middle East lasts. For sure,

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<v Speaker 1>if the situation lasts for a long time. Then consumers,

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<v Speaker 1>if they're spending more on gas, they're going to spend

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<v Speaker 1>less on other categories and that's not good for retail.

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<v Speaker 1>But you know, let me step back and say, look,

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<v Speaker 1>higher gas prices, they're just one more thing. Over the

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<v Speaker 1>last several years, there have been numerous headwinds, you know,

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<v Speaker 1>coming out of COVID. We had increases in freight costs,

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<v Speaker 1>we had higher wage rates, we had port issues and delays,

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<v Speaker 1>we had cost of living inflation, we had and more

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<v Speaker 1>recently tarifs. So just add gas prices to that list.

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<v Speaker 1>You know, as a retailer, we recognize that the key

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<v Speaker 1>thing across all of these events and issues is to

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<v Speaker 1>be nimble and flexible. We can't predict or control what's

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<v Speaker 1>going to happen externally, but what we can do, what

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<v Speaker 1>we have been doing, is making sure that our business,

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<v Speaker 1>our operations, buyers are well positioned to react to whatever happens.

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<v Speaker 3>Well, you also have in Burlington in your brand a

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<v Speaker 3>product that maybe consumers will flock to when gas prices

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<v Speaker 3>do rise. Right, if I'm paying more at the pump

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<v Speaker 3>and then I go shopping, I'm more likely to choose

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<v Speaker 3>a white label, you know, store brand or try and

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<v Speaker 3>buy more efficiently by maybe going to Burlington instead of

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<v Speaker 3>I don't know, some other you know, fancier mall department store.

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<v Speaker 3>Are you seeing that effect?

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<v Speaker 1>Well, certainly if I look at our results in Q four,

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<v Speaker 1>we had very strong performance in the fourth quarter. Our

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<v Speaker 1>total sales growth in Q four was eleven percent, and

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<v Speaker 1>that was on top of ten percent growth the prior year.

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<v Speaker 1>Our comp store growth was four percent, and that was

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<v Speaker 1>on top of six percent the prior year. Now, we

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<v Speaker 1>didn't just grow earning. We didn't just grow sales. We

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<v Speaker 1>also drove earnings. In the fourth quarter, we saw EPs

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<v Speaker 1>up twenty one percent, and for the full year, EPs

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<v Speaker 1>was up twenty two percent. Now, coming back to your point,

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<v Speaker 1>what's driving that. One of the things that's driving that

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<v Speaker 1>is that over the last few years we've focused heavily

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<v Speaker 1>on value. And the one thing I would correct in

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<v Speaker 1>your question is that we don't sell private label. What

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<v Speaker 1>we're doing. What we're selling is for the most part,

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<v Speaker 1>we're selling well known, recognizable brands. We're selling the latest fashions.

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<v Speaker 1>Our proposition to the customer is it's the same item,

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<v Speaker 1>the same brand, the same great fashion, but we're selling

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<v Speaker 1>it at a retail price that's up to sixty percent

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<v Speaker 1>lower than traditional retailers. So that focus on value has

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<v Speaker 1>really helped to drive our business over the last few years.

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<v Speaker 1>And certainly, as you said, if gas prices remain high,

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<v Speaker 1>or if they get worse and the consumers really looking

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<v Speaker 1>for value, we think we could be a beneficiary of that.

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<v Speaker 2>I find that really interesting. Then, last week on the

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<v Speaker 2>earnings you mentioned that it would that you would likely

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<v Speaker 2>raise prices. You tested increases on some items and encountered

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<v Speaker 2>little pushback. Why do you think that is, let's feel

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<v Speaker 2>a little bit contrasting that people are looking for value

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<v Speaker 2>but can also maybe pay a little bit more.

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<v Speaker 1>Yeah, let me clear that up. It's a great question.

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<v Speaker 1>What we saw throughout last year is we were very

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<v Speaker 1>successful at trading the customer up to higher price points.

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<v Speaker 1>Now that does not mean that we raised prices on

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<v Speaker 1>the same item. What we did was we have a good, better,

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<v Speaker 1>best assortment. So we have at lower price points opening

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<v Speaker 1>price points. Maybe the brand is less recognizable. Bit of

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<v Speaker 1>higher price points, the brand would be more recognizable, the

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<v Speaker 1>quality might be better, the fashion might be more up

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<v Speaker 1>to date. What we were very successful in doing last

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<v Speaker 1>year was actually trading the customer up. The customer could

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<v Speaker 1>see that, yeah, it was worth paying an extra dollar

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<v Speaker 1>to get that particular brand or that better quality or

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<v Speaker 1>that more up to date fashion. And that's what caused

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<v Speaker 1>average retail to rise last year. Rather than we took

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<v Speaker 1>prices up, we were very careful on like items, not

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<v Speaker 1>to take prices up.

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<v Speaker 3>So have you not been increasing prices on even if

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<v Speaker 3>something that I buy at Burlington is less expensive than

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<v Speaker 3>something I would buy from a retailer like I don't know, Bergdorf,

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<v Speaker 3>Goodman or Varney's, have you not taken price at all? Because,

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<v Speaker 3>as you mentioned, you've got tariffs coming into effect, We've

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<v Speaker 3>got inflation coming through from now the oil spike. Aren't

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<v Speaker 3>you going to have to to protect margins move prices

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<v Speaker 3>at some point?

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<v Speaker 1>Well, we really try, going back to your earlier question

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<v Speaker 1>about the consumer looking for value, that's our focus. We're

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<v Speaker 1>really trying to make sure we're offering terrific value. We

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<v Speaker 1>know if we offer great value to the customer, whatever

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<v Speaker 1>happens in the external environment, we're going to things are

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<v Speaker 1>going to work out for us if we're offering trific value. Now,

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<v Speaker 1>let me take tariffs, because that was part of your

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<v Speaker 1>question I think tariffs we're a terrific example of what

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<v Speaker 1>we do when we're faced with, you know, a sudden,

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<v Speaker 1>unexpected event. Last April, we were basically faced with tariffs

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<v Speaker 1>at levels that no one had expected, and those tariffs

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<v Speaker 1>throughout the summer remained uncertain and very volatile. So what

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<v Speaker 1>we did in response to that, rather than taking prices up,

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<v Speaker 1>which we knew our customer wouldn't react well to, was

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<v Speaker 1>we went back and we looked at our assortment and

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<v Speaker 1>we said, well, let's understand which categories we sell are

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<v Speaker 1>the most impacted by tariffs, whether the margin pressure is

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<v Speaker 1>the greatest from tariffs, and let's actually plan those business down,

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<v Speaker 1>businesses down, and then there are other businesses that maybe

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<v Speaker 1>are sourced in lower tariff countries or sourced domestically that

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<v Speaker 1>we can plan up. Now, that kind of sort of

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<v Speaker 1>remixing mid year is very complex for a retailer, and

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<v Speaker 1>only certain retailers who are very nimble, very flexible, and

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<v Speaker 1>actually I think the off price retailers in particular have

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<v Speaker 1>that kind of ability, and it's a it's a capacity,

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<v Speaker 1>and it's a strength that we've been investing for several

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<v Speaker 1>years now. So in twenty twenty five, we really put

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<v Speaker 1>that muscle to work. We remixed our assortment. Now, it

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<v Speaker 1>did mean that when we got into the back half

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<v Speaker 1>of the year, there were some categories that we'd planned

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<v Speaker 1>down where we could have done more sales, but those

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<v Speaker 1>sales would have been unprofitable because of the tariff impact.

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<v Speaker 1>But we still ended up based upon the remixing of

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<v Speaker 1>our business, driving total sales by nine percent for the

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<v Speaker 1>four year last year and more importantly, driving earnings per

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<v Speaker 1>share by twenty two percent. So what we did. What

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<v Speaker 1>we did was basically pivot away from the impact of tariffs,

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<v Speaker 1>rather than saying, oh, taris to here, let's take up prices,

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<v Speaker 1>because we know our customer would not react well to that.

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<v Speaker 3>So, Michael, you had strong sales growth and your boosting

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<v Speaker 3>earnings as well in the fourth quarter. But if I

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<v Speaker 3>look at the stock over five years, it's relatively little changed,

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<v Speaker 3>actually down four percent, whereas TJ max is up one

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<v Speaker 3>hundred and thirty three percent, And I would put you

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<v Speaker 3>in a similar category. What are they doing that you

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<v Speaker 3>are not or why do you think there's that massive difference?

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<v Speaker 1>No, I think it's a great question. I think there

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<v Speaker 1>are two aspects of that question I'd like to get at.

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<v Speaker 1>The first is that we share similar characteristics to the

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<v Speaker 1>other major off price retailers, but there are also some differences,

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<v Speaker 1>and I would say our core customer base is somewhat

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<v Speaker 1>different to the other off price retailers. Our core customer base,

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<v Speaker 1>which actually over the long term has been a source

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<v Speaker 1>of strength. Our core customer base tends to be younger,

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<v Speaker 1>tends to have a larger family size, tends to be

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<v Speaker 1>more ethnically diverse, tends to be low to moderate income.

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<v Speaker 1>That particular customer really struggled in twenty twenty two as

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<v Speaker 1>the cost of living spite it was a really difficult

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<v Speaker 1>time for them, and we saw that in our business

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<v Speaker 1>we offered better value to try and support our salves,

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<v Speaker 1>but it was hard. Our core customer was really under pressure.

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<v Speaker 1>Now in the last few years, I think if you

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<v Speaker 1>looked at our stock price over the last two or

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<v Speaker 1>three years, you'd see a different story. In the last

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<v Speaker 1>two or three years, that core customer has really been

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<v Speaker 1>fairly resilient. We've seen pretty good strength and that's continued

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<v Speaker 1>through the fourth quarter of last year now. And I

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<v Speaker 1>think you've heard you've heard other retailers recently talk about

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<v Speaker 1>how they're seeing some pullback of the low end. We're

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<v Speaker 1>not seeing that. Now, let me pivot to the second

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<v Speaker 1>part of my answer, which is compared with the other

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<v Speaker 1>off price retailers, There's something that's particularly unique about Burlington

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<v Speaker 1>from an investment point of view, and that's what we're

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<v Speaker 1>much smaller. We have twelve hundred stores, about half less

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<v Speaker 1>than half of what our off price paers have, so

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<v Speaker 1>we have huge growth potential ahead of us. We're opening

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<v Speaker 1>many more stores than they are, and we also, I

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<v Speaker 1>would say, have some catch up in terms of operational

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<v Speaker 1>and execution capability. That's also driving our operating margin.

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<v Speaker 3>Sorry, Michael, I got to excite you off there. Unfortunately

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<v Speaker 3>we're running up aga to heartbreak. Michael O'Sullivan, the CEO

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<v Speaker 3>of Burlington Stores,