Burlington Stores Downgraded to Neutral by Citi on Valuation Concerns

Citigroup has downgraded Burlington Stores (NYSE: BURL) to Neutral from a previous Buy rating, citing a less compelling risk/reward profile as the off-price retailer's stock approaches the firm's price target.

Valuation Drives Downgrade

In a note to investors on Wednesday, Citi analysts explained that the stock is now trading less than 5% below their price objective, making the valuation less attractive. The downgrade follows a period of significant outperformance for Burlington, whose shares have surged 18% over the past three months.

This rally has outpaced gains from competitors Ross Stores (NASDAQ: ROST) and TJX Companies (NYSE: TJX), which rose 11% and 2% respectively over the same period, according to the note. Citi stated that the stock's risk/reward is no longer skewed to the upside.

Strong Quarter Expected, But Priced In

Despite the ratings change, Citi anticipates a strong second-quarter earnings report from Burlington, which is scheduled for August 27. The bank's analysts project earnings per share (EPS) that are notably higher than both market consensus and the company's own guidance.

Ad

• Citi EPS Forecast: $2.33
• Visible Alpha Consensus: $2.16
• Company Guidance: $2.05 to $2.20

The firm also forecasts comparable store sales growth of 4% but cautioned that this level of performance may already be priced into the stock. Citi believes the market's expectation, or "hurdle rate," is already at the +4% level.

Sector Outlook Remains Positive

Citi maintained a constructive long-term view on the off-price retail sector as a whole. Analysts believe Burlington and its peers are well-positioned to continue gaining market share from struggling traditional retailers closing stores.

However, with investor expectations already high for the third quarter and beyond, Citi stated it prefers to "move to the sidelines" on Burlington at its current valuation. The bank is maintaining its full-year EPS forecast for the company at $12.65.