Dive Brief:

• Sourcing and supply chain costs will stay elevated significantly above historic levels as Burlington Stores attempts to rebalance inventory to adjust to changing consumer preference, executives reported on an earnings call Tuesday. 
• Burlington reported $144 million in sourcing costs in Q3 — $54 million more than the same period last year. Chief Financial Officer John Crimmins defined sourcing costs as "the cost of processing goods through our supply chain and buying costs." 
• Recruiting costs, wage rate increases and added storage and inventory processing capacity also contributed to the $144 million, which the retailer expects to continue in Q4. 

Dive Insight:

Since non-essential retail reopened across the U.S. in May, off-price retailers like Burlington, TJX and Ross have struggled to get the right product in the right place — hitting the profitability of this previously bulletproof retail class. 

"Like most other retailers, we struggled at the end of the second quarter and into the third quarter as we tried to get our DCs fully staffed and operating effectively," Crimmins said Tuesday. "We prioritized inventory flow over cost efficiencies during the quarter as our teams work to get inventory back to appropriate levels in our stores."

Off-price retailers were stocked when they closed in March and April, but by the time they reopened in May, consumer priorities had drastically changed — shifting toward casual apparel and home goods and away from occasion and work wear.  Demand returned faster than expected and retailers struggled to change the product selection in stores as quickly as demand required. 

"The problem was that having written the orders, having bought the goods, we could not get the receipts to the stores as fast as we needed. Many vendors were struggling with their own warehouse operations and getting them up and running," said Burlington CEO Michael O'Sullivan in August. 

It was a refrain across off-price earnings calls in Q2. 

TJX reported logistical delays in getting product from vendors to stores in August, citing more general reopening friction and regional regulatory differences that hampered some regions in which stores could open but DCs could not — particularly in Canada.

"We continued to experience merchandise delivery delays due to continued bottlenecks in the supply chain," TJX CFO Scott Goldenberg said last week, emphasizing that supply is not the issue. (Despite reports to the contrary.)

Last week, Ross executives reported "industry-wide capacity constraints and congestion." Ross COO Michael Hartshorn said port congestion, along with elevated freight rates across modes, is an ongoing concern. 

In addition to satisfying shoppers' changing tastes, aggressive buys are part of Burlington's plan to up inventory turns beyond the pandemic. 

"We believe that we have a significant opportunity to turn our inventories faster than we have historically and thereby drive lower markdowns," said O'Sullivan Tuesday, adding that faster turns would enable "tight control of inventory levels."

Preparations for this strategy have decreased warehouse utilization across Burlington's network — contributing to some of the near-term pain intended to bring long-term margin improvement but necessary, Crimmins said, in order to get the Burlington supply chain up to speed for its new inventory strategy. 

"Now, as you would expect, we are looking at initiatives that we can pursue within our supply chain to try and offset some of these headwinds. But, some of these initiatives, especially as it relates to driving significant productivity, efficiency increases, they're going to have some lead time," Crimmins said. Other than new warehouses coming online, the CFO did not elaborate on other tactics to increase the velocity of the retailer's inbound logistics.