Burlington Stores Deserves Premium Valuation Despite Being Smallest Player, Analyst Says

Off-price retailer Burlington Stores Inc (NYSE: BURL) is the smallest and least profitable company in the category yet it warrants a premium stock valuation versus the group, according to Jefferies.

The Analyst: Janine Stichter initiated coverage of Burlington's stock with a Buy rating and $225 price target.

The Thesis: Burlington is underperforming its peers on nearly every financial metric but it continues to improve its business to bridge the gap, Stichter wrote in the note. For example, Burlington's peak operating margin of 9% in fiscal 2020 trailed rival Ross Stores, Inc. (NASDAQ: ROST) by 400 basis points.

Burlington has some clear catalysts ahead to improve its margins, including expectations for leaner inventory purchases from struggling retailers and benefits from enhanced size and scale. This should help the company achieve margins of 11% in fiscal 2023 and 12% over time.

Related: Recap: Burlington Stores Q2 Earnings

Meanwhile, Stitcher said Burlington has a path to increase its store count by at least 50% to 1,000 units, and when successful it would still be shy of rivals. The company also has an opportunity to gain incremental sales through category expansion like Home that is experiencing strong growth.

Burlington is led by Michael O'Sullivan who was named as CEO in September and is an "accelerant of change," the analyst wrote. His background as COO of Burlington for 16 years coupled with a "heightened sense of urgency" is another reason to be bullish on the stock.

The research firm's $255 price target is based on 26 times P/E and 15 times EV/EBITDA. This premium valuation is warranted given its "outsized opportunity" and acceleration of growth in the coming years.

Price Action: Shares of Burlington Stores were trading lower by 2.5% at $195.13.