Burlington CEO Michael O’Sullivan says the company plans to use $55 million in tariff refunds to cut prices rather than boosting profit margins. The decision comes after the retailer reported that its merchandise margins expanded by 70 basis points, while freight costs rose 10 basis points, according to the filing.
Passing refunds to customers
O’Sullivan told analysts that the full amount of the refunds will go toward lower prices. He called it “the right thing to do” given that households have struggled with higher costs over the last few years.
“No. 1, it feels like the right thing to do for our customers,” O’Sullivan said. “Over the last few years, many households, especially moderate- to lower-income families, have struggled with the higher cost of living — higher prices on essentials like groceries, rent, gas prices, etc. So our goal is to use the tariff refunds to give our customers a break.”
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The company avoided buying inventory in highly-levied categories, which protected profits a year ago but resulted in a smaller refund compared to other retailers. With the refunds factored in, Burlington’s Q2 gross margin expanded by 250 basis points to 46.2%. Net income reached $184 million, double the previous year, though excluding the $41 million after-tax benefit from the refunds, net income was $151 million.
The plan to reinvest the money in discounts comes as Burlington reported sales that disappointed some analysts. Total sales rose 11% year over year to nearly $3 billion, with store comps up just 2%. A record 51 store openings in Q2, a net addition of 45 stores, helped drive the top-line growth. The retailer has opened nearly 150 net new stores in the last 12 months.
Despite the lower comparable sales growth, O’Sullivan said the company is confident it will hit its targets. “The headline is that even after you strip out the favorable impact of tariff refunds, the underlying earnings momentum in our business is extremely robust,” he said.
Rival concerns about price cuts
Burlington’s comp growth in Q2 was in sharp contrast to Ross, where comps soared 10%. Simeon Siegel, senior managing director at Guggenheim, noted that Ross appears to be taking market share not just from department stores and other mainstream retailers, but also from off-price peers.
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Siegel said the fear is that Burlington’s revenue number was simply not high enough and that the move to cut prices across the industry could hurt the sector. “We fear [Burlington’s] revenue number was simply not high enough and separately have expressed a broader fear about the upcoming move to cut prices across the industry in the name of ‘refund reinvestment,'” Siegel said in a Thursday research note. “A promotion by any other name is still a promotion.”
O’Sullivan acknowledged that other retailers are likely to make similar moves. “We also recognize that we are not the only retailer in America,” he said. “That there are other retailers who will be doing the same thing, and some of them much larger than us. So that further reinforces our decision to reinvest the tariff refunds in sharper values.”
The decision to return the money to consumers highlights the competitive pressure within the retail sector. Analysts have warned that industry-wide price cuts could compress margins across the board, even for companies that have successfully managed their costs over the last year.
