How Does Burlington's Off-Price Model Drive Resilient Margins?

Burlington Stores, Inc. BURL delivered a standout margin performance in the second quarter of 2025 despite a challenging tariff environment. Adjusted EBIT margin reached 6%, expanding 120 basis points from the prior year and far exceeding guidance that called for a decline of up to 30 basis points. Gross margin improved to 43.7%, up 90 basis points year over year, as merchandise margin rose 60 basis points and freight expense fell 30 basis points. Faster inventory turns, lower markdowns and improved shortage results helped offset the lower markups created by higher tariffs.

Product sourcing costs increased to $209 million from $191 million a year earlier, but stayed flat as a percentage of sales. Adjusted SG&A expenses provided another 30-basis-point boost thanks to cost-saving initiatives and leverage on higher comparable sales. The company also built a significant cushion of reserve inventory, which increased to 50% of total inventory from 41% a year ago, by purchasing large volumes of pre-tariff merchandise to protect future margins.

Based on this strength, Burlington raised its full-year 2025 outlook. Management now expects comparable store sales to increase 1-2% and total sales to grow 7-8%. The company anticipates full-year adjusted EBIT margin expansion of 20-40 basis points and adjusted EPS in the range of $9.19 to $9.59. For the third quarter, operating margin is expected to be flat to down 20 basis points year over year, while the fourth quarter is forecasted to deliver EBIT margin ranging from a 10-basis-point decline to a 30-basis-point increase.

To counter tariff-related cost pressure, Burlington is remixing assortments, negotiating with vendors, selectively raising prices, accelerating inventory turnover and pursuing aggressive expense controls. Management remains confident that these actions, together with its value-focused off-price model and strong reserve inventory, will help Burlington sustain and even expand margins despite ongoing tariff uncertainty.

How BURL’s Margin Strategy Compares With TGT, ROST & DLTR

Target Corporation’s TGT second-quarter 2025 operating margin contracted to 5.2% from 6.4% in the prior year. Gross margin was 29%, down from 30% a year ago, reflecting the impact of higher markdown rates, purchase order cancellation costs and category mix pressure, partially offset by lower inventory shrink and growth in advertising and non-merchandise sales. SG&A expenses were 0.1% lower than in 2024, but the SG&A expense rate rose to 21.3% compared with 21.1% last year, due to the deleveraging effect of lower sales.

Ross Stores ROST posted an operating margin of 11.5% in the second quarter of 2025, down 95 basis points from the prior year’s 12.5%, with tariffs accounting for about 90 basis points of pressure. Cost of goods sold increased 70 basis points, with distribution costs deleveraging 55 basis points, primarily from the opening of a new distribution center and tariff-related processing costs. Merchandise margin decreased 30 basis points, including the effect of tariffs, while occupancy deleveraged 10 basis points. These pressures were partially offset by lower domestic freight and buying costs of 15 basis points and 10 basis points, respectively. SG&A deleveraged 25 basis points, partly due to CEO transition costs.

Dollar Tree’s DLTR operating margin decreased to 5.2% in the second quarter of 2025, 20 basis points lower than the prior-year period. The gross margin increased 20 basis points to 34.4%, aided by higher inventory mark-on, favorable pricing and lower freight, along with a mix shift away from lower-margin consumables. The adjusted SG&A rate increased 50 basis points to 26.3%, reflecting higher payroll from stickering activity, wage increases, depreciation, incentive compensation, and repairs and maintenance.

Burlington’s Price Performance, Valuation & Estimates

BURL stock has gained 18.4% in the past three months compared with the industry’s 2.8% growth.

Burlington’s forward 12-month price-to-sales ratio of 1.40X indicates a lower valuation compared with the industry’s average of 1.72X. BURL carries a Value Score of B.

The Zacks Consensus Estimate for Burlington’s current fiscal-year sales and earnings per share implies year-over-year growth of 7.9% and 15.4%, respectively. 

Burlington currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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